Organic food stores are on a natural high

By John Gapper

Published: September 16 2004 03:00 | Last updated: September 16 2004 03:00

Organic and natural foods are arrayed alluringly on shelves in the Whole Foods Market store at Columbus Circle in New York. There is Pecorino Pepato sheep's milk cheese and chicken fed on a vegetarian diet ("No antibiotics ever!"). In the wine section, Manhattanites listen to Billie Holiday while picking bottles from small vineyards across America.

It all comes at a price. Whole Foods Market, the fastest-growing US food retailer, is known as Whole Paycheck, after what it costs to shop there. That has not held it back. Retail spending is sluggish and Wal-Mart's sales have suffered as low-income families face higher petrol prices. But lawyers, bankers and other professionals still have money to spend.

Despite its elite fare, the Whole Foods Market in Columbus Circle is 10 times the size of world's first supermarket, the King Kullen store that opened in the New York borough of Queens in 1930. Michael Cullen, its founder had worked at Kroger, then a neighbourhood chain, and realised the opportunity that lay in mass food retailing. King Kullen's slogan was "Pile it High. Sell it Low."

In recent years, US supermarkets have suffered at the hands of Wal-Mart, which has piled it higher and sold it lower. Chains such as Albertsons, Kroger and Safeway have struggled against the growth of Supercentres - Wal-Mart's combined food, clothing, furnishing and hardware outlets. The supermarkets have cut prices and their efforts to reduce wage costs have led to labour disputes.

Now they are being attacked from the top end. Sales of organic food are rising at 20 per cent a year and there is an appetite for fish, meat, fruit and vegetables that taste good. The stock market has noticed: although Whole Foods Market has only 150 stores compared with Safeway's 1,800 outlets, its market capitalisation of $5.3bn (£3bn) is over half of Safeway's $9bn.

Whole Foods Market owes its rise to a shift in wealth and spending power in the US. Households with income of more than $100,000 a year represent 22 per cent of aggregate income, compared with 18 per cent a decade ago. That has helped retailers such as Neiman Marcus, the luxury store group, to expand rapidly while mid-market and discount retail groups have faced slower sales growth.

John Mackey, chief executive and co-founder of Whole Foods Market, told a Goldman Sachs investor conference last week that the company was at a tipping point. "We are no longer just appealing to crunchy granola types. Soccer moms are starting to shop in our stores. We actually have some Republicans shopping in our stores these days, which is very upsetting to many of our core customers."

He was only half-joking. The writer

David Brooks has lampooned the latte-drinking inhabitants of the "blue states" that voted Democrat in the last presidential election. Whole Foods Market is doing for food what Starbucks did for coffee: it has mixed ingredients and service in a way that appeals to professionals who fancy themselves as gourmets.

The company knows which side its wholemeal bread is buttered. The company comes from Texas, but the college town of Austin rather than the oil cities of Dallas or Houston. Eighty per cent of its customers have degrees and it judges markets by the density of university-educated people: its first store outside Texas was in Palo Alto, home of Stanford University.

The result is that supermarket chains are falling down the gap between red and blue America. Their packaged goods have not been cheap enough to compete with Wal-Mart and their fresh produce has not been of sufficient quality to satisfy those who will pay for the best. Indeed, they have been slower to respond to such trends than their counterparts in Europe, particularly the UK.

The supermarkets are scrambling to catch up. Safeway has emerged from a gruelling labour dispute in southern California and is trying simultaneously to cut prices on its packaged goods and improve the quality of its fresh food. It has been remodelling its stores to make more space for delicatessens and bakeries: "Safeway will become synonymous with quality," says Steve Burd, its chief executive.

Well, maybe. It is possible for supermarkets to span the gap between discount and premium goods. Tesco has shown that it can be done in the UK: it offers everything from low-price staple foods to organic meat and fish in the same stores, as well as selling clothing. But US supermarkets have conceded too much for comfort at both ends of the business.

Furthermore, while Wal-Mart is a more obvious threat than Whole Foods Market, it at least is a familiar one. Since the first King Kullen was built, supermarkets have grown steadily bigger in order to compete: Kroger soon adopted its former employee's format when it worked. It is less clear that supermarkets can change into high-quality speciality stores simply by adding some more departments.

By offering more of everything, they are in danger of becoming the food equivalent of department stores, which struggle against clothing and hardware speciality outlets. Even in the UK, Tesco flourishes but rivals such as J. Sainsbury are still caught between their upmarket customers and those who demand low prices.

Meanwhile, Whole Foods Market surges onward with its organic fruits and rare cheeses. It now has eight outlets in west Los Angeles, some less than a mile apart. If Michael Cullen were alive, he would recognise what Wal-Mart is doing to his invention. But what would he make of a store that is beating supermarkets by piling it low and selling it high?

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