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2010 Natural Market Overview

2010 Natural Market Overview

Natural products retailers continued to battle a slumping economy in 2009, posting lower profit margins while continuing to eke out sales increases. But retailers expect a rosier though only slightly 2010. Independent products retailers surveyed in Natural Foods Merchandiser's annual Market Overview reported that, on average: Net profit margins fell to 5% in 2009, from 8% in 2008. Revenues remained

Natural products retailers continued to battle a slumping economy in 2009, posting lower profit margins while continuing to eke out sales increases. But retailers expect a rosier — though only slightly — 2010.

Independent products retailers surveyed in Natural Foods Merchandiser's annual Market Overview reported that, on average:

• Net profit margins fell to 5% in 2009, from 8% in 2008.

  • • Revenues remained in the $1.2 million to $1.5 million range.

  • • Net sales grew 8.9% in 2009, but when corrected for store closings and weighted based on the number of stores per category, sales grew only 3.4%.

  • • Total natural products store sales were $33.9 billion in 2009, compared with $32.7 billion in 2008.

  • “These are actually very positive numbers,” said Jim Hertel, managing partner at Chicago-based retail consultant Willard Bishop. Jay Jacobowitz, president and founder of Retail Insights, a Brattleboro, Vt.-based consulting service for natural products retailers, said the bad news — the continuing recession, slow consumer spending, low job growth and high unemployment — was offset by a handful of positive factors.

    Among them:

    • Households reallocated their food budgets from dining out to dining in.

  • • Workers who had lost their jobs and their health insurance — or were afraid they would and couldn't afford to get sick and miss work or go to the doctor — took out “multivitamin insurance policies” to maintain their health and well-being.

  • • Conventional markets cut back on fringe categories such as natural products, increasing the supply and lowering prices for naturals retailers.

  • Corinne Shindelar, chief executive officer of Minneapolis-based Independent Natural Food Retailers Association, called 2009 both challenging and rewarding. “Generally, independents managed to retain their current level of sales, and a number even experienced double-digit growth despite the economy.”

    Shindelar also noted that “while overall food sales growth was down in percentage points, and profit margins were down, it's as much due to a maturing market alongside the economy. More retailers purchased and sold at tighter margins. Being smart at promotional purchasing and pricing correctly was extremely important in 2009 and will continue to be in 2010 and beyond.”

    However, tighter margins do not necessarily mean less profit. “It really depends on the retailer having a strong balance of margin, turns and labor percentages. Those who manage those numbers well are doing great,” she said.

    Seattle-based PCC Natural Markets, with nine stores in Washington, reported sales increased 3.5% and profit margins were steady. Natural Grocery Co., with stores in Berkeley and El Cerrito, Calif., reported that sales grew 2.2% in 2009, while profit margins were at 5%. “We're kind of stagnant,” said President Bob Gerner.

    Industry experts point to a couple of reasons for flat profit margins: significant price discounting — which isn't always wise — and investing profits back into stores — a smarter move. Hertel said price discounting “allows you to get a very fast response,” but that a quick rise in sales isn't enough to offset costs, so profits will fall. And, as Jacobowitz pointed out, “some stores are cutting into the bone on pricing.”

    With Costco, Trader Joe's and another natural food store nearby, Natural Grocery Co. made a decision “not to compete on price because we wouldn't be able to lower prices as much as they could. Instead, we rely on customer service, ambience and quality. And that's done well for us,” Gerner said.

    Hertel said that's a good strategy: “People who are successful have gotten a lot more promotional.” Daniel Fabricant, vice president of scientific and regulatory affairs for the Washington, D.C.-based Natural Products Association, agrees. “Independents are doing what they have always done. They're not as cheap as the mass merchandisers. So they offer information.”

    That information took a variety of forms last year. Shindelar said members of Independent Natural Food Retailers turned to social media to get the word out. PCC Natural Markets distributed coupon books, launched a “Taste the Season” campaign focusing on the best seasonal local and organic food, promoted the cost benefits of buying items in bulk and redesigned its website, said Diana Crane, PCC's director of sustainability.

In 2009, as expected, natural retailers' capital remained tight and expansions slowed. However, the Market Overview also shows that 11.5% of respondents remodeled their stores last year.

“This is a particularly challenging environment for capital expenditures,” Hertel said. While 5.2% of retailers opened a new store in 2009, 5.4% closed a store, according to the Market Overview. “As a result, the total number of U.S. independent natural retail stores shrank by 1% in 2009,” the report states.

“There's a long-term trend where you're going to see a reduction in units but an increase in footprint,” Jacobowitz said. “There are going to be fewer, but larger, stores. Weaker stores are going to close. Stronger stores are going to have better real estate opportunities.”

PCC has no plans to add stores, but in 2009 it completed an extensive remodel of one store and made improvements to several others, Crane said. It expects to complete another major store remodel this year.

Gerner said Natural Grocery Co. used the slowdown “to retrench. It's a good time to repaint, put in new floors, install a new refrigeration system. One of our stores is 40 years old. The other is 22. We put money back into the business to keep it fresh, keep it relevant, make it a viable business going forward.”

Phoenix-based Sprouts Farmers Market is the exception to the slowing expansion rule. President and Chief Operating Officer Doug Sanders said 2009 started strong but got tougher during the second half. In addition to the faltering economy, “conventional grocery stores got much more competitive,” he said. Still, Sanders said the company, which does not release metrics, finished 2009 in positive territory.

Sprouts opened 11 stores last year, nearly all of them in the second half of 2009. It has opened six stores so far in 2010 and had 50 stores in Arizona, Colorado, Texas and California by the first week in June, Sanders said. The company plans to open six more by the end of the year.

“We stay true to what we do,” he said. “We offer value. We focus hard on customer service.”

Sprouts saw double-digit growth in its supplements sales. Most other retailers also saw impressive growth in that category. The Market Overview reports supplements sales led all subcategories, with growth of 4.1% in 2009, outpacing food sales, which grew 3.9% last year.

Fabricant of the Natural Products Association said in addition to people wanting to stay healthy during hard times, the graying population contributes to the supplements increase by buying more calcium and vitamin D, for example. PCC reports first-quarter 2010 supplements sales were up 6%. Vitamins C and D, fish oil and probiotics lead the category, Crane said.

With the worst behind them, 2010 looks to be a better year, though still uneven, for retailers. PCC, Sprouts and Natural Grocery Co. report strong starts to the year and look forward to solid, steady growth. Analysts and consultants see a few buying opportunities.

“We're in a good place,” said Fabricant. “We'll start to see some repositioning, some merger and acquisition activity. We may see some M&A at the local level with independent chains.”

Stephen Tardio, managing partner at HT Capital Advisors in Chicago, also sees acquisition activity picking up this year. “A lot of people were sitting on the sidelines. Owners couldn't get a decent price for their businesses,” he said. But now, “demand is really building. We had a nice six months of uptick. We're going to start to see some activity; I expect to see some smaller deals.”

Tardio expects the entire retail sector — public stock, mergers and acquisitions, growth — to improve. “2010 will end up being better than 2009,” he said. “And 2011 will be a little better than that.”
Jane Hoback is a writer and editor based in Denver


Natural Products Store: Less than 40% of sales from supplements.

Health Foods Store: More than 40% but less than 80% of sales from supplements.

Supplements Store: More than 80% of sales from supplements.

Charts are courtesy of retailer surveys conducted by Natural Foods Merchandiser and Nutrition Business Journal; and market research by SPINS, a natural products consulting firm based in Schaumburg, Ill.