H F O OD S E R V I C E Whole Foods brings a restaurant experience to prepared foods By Abbie Westra [email protected]

ow does an international corporation capture that community feel? It re-creates an entire city inside its store. Austin, Texas-based Whole Foods Market exceeds even its standards for going local with its new Chicago store, where the focus is on foodservice. Rounding the store’s perimeter resembles a high-end saunter through many classic Chicago neighborhoods. The Pilsen Taqueria, named after the city’s largely Hispanic neighborhood, serves up al pastor and barbacoa tacos. Taylor Street Italian pays homage to Little Italy with locally produced, fresh pastas. And the River View Diner serves up burgers, patty melts, malts and breakfasts to diners seated at red vinyl stools.

“They’re running 35% margins in their store because of the blend of departments, vs. 27% for a typical supermarket.”

CORNUCOPIA: The foodservice offerings at the new Whole Foods in Chicago’s Lincoln Park are bountiful, including pastas and pizzas at Taylor Street Italian.

There’s also Wicker Park Subs, Chicago Smokehouse, Asian Express, Da Vine wine and cheese bar and a chowder stand. And that’s just the perimeter, a veritable food court encasing the grocery store, where shoppers walk the aisles sipping beer from pint glasses and kids munch on house-made gelato. Not here to shop? Grab one of the 200 seats scattered along the riverfront, at the long, wooden “community table,” or in the mezzanine overlooking this 75,000-square-foot behemoth. Saddle up to the coffee/beer bar with the locals, tap into the free WiFi, and watch the White Sox game on the big screen. D e c e m b e r

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Whole Facts Whole Foods Market

Chicago’s Lincoln Park Store

䊳 More than 280 stores in North America

䊳 75,000 square feet—the third-largest in

and the United Kingdom 䊳 51,100 employees 䊳 9 distribution centers 䊳 9 regional bakehouses 䊳 5 commissaries 䊳 Existing stores average 36,700 square

feet; stores in development average 46,500 square feet 䊳 10th largest food and drug store chain in the United States 䊳 No. 369 on Fortune 500 list 䊳 $8.0 billion in sales in fiscal year 2008 䊳 $1.9 billion in sales in Q2 2009 䊳 19 acquisitions, including Wild Oats, Fresh & Wild, Select Fish and Harry’s Farmers Market

the world 䊳 Mezzanine café and outdoor river walk 䊳 Seven culinary venues 䊳 A coffee bar that roasts onsite daily 䊳 Do-it-yourself trail-mix bar 䊳 Mix-and-match, by-weight International

Cookie Club 䊳 Wine and cheese flight “tasting station” 䊳 Homemade-gelato bar 䊳 Music stage for live music, open mike and

karaoke 䊳 400 parking spaces 䊳 Automated express lane system—a first

in Chicago

Make that the Cubs—you are on the North Side, after all. Eight years in the making, this flagship store is in a bustling shopping corridor of Lincoln Park, speckled with the scaffolding of high-rise condo developments. As Whole Foods stores have always done, it transforms food shopping into a recreational experience. But the foodservice is really the crowning point, further prompting nontraditional foodservice retailers to remember that only a portion of foodservice is about the food. The rest is about the experience.

Building Volumes

WOK THIS WAY: Asian Express serves up noodle bowls, sushi and stir-fries.

Whole Foods has managed to do something few other grocers have: build big volumes on its foodservice. In the 1990s, when the industry began buzzing about “home meal replacements” (HMR), retailers attempted to make a go at foodservice. But for many, it failed to be realized. At the time, there wasn’t a supplier community to help with product, so retailers installed full kitchens. But they found they couldn’t get high enough volumes to sustain the higher labor, equipment and shrink costs. Since then, the traditional grocer has scaled back in-house production and partnered with suppliers for a foodservice program more in fitting with their volumes. Meanwhile, Whole Foods has managed to build monster volumes on its foodservice. “The biggest success factor for Whole Foods is volume,” says Neil Stern, partner with Chicago-based McMillan Doolittle LLP, just a mile from the new Whole Foods. “In order to support the kind of offer they have— particularly at their new flagship in D e c e m b e r

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Scoping Out the Competition

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or Debbie Sharpe, owner of The Goddess and Grocer in Chicago, small is her big vantage point. She runs three of these grocery/delis around the city, with another en route. The small shops are in high-traffic areas and feature more than 30 sandwiches as well as soups, salads and entrées. At first glance, Whole Foods’ new store might be considered competition for Sharpe. But while she does watch the store’s prices, she hasn’t felt much pain from its arrival in the city. “I think that the individual or couple on the way home is still going to shop with us,” she says. “Mine is really grabbing something for the night; theirs is grabbing something for three days.” Sharpe’s small storefronts allow for street-level accessibility. They are in neighborhoods with a lot of foot traffic, near public transportation. “We’re a walking store; you have to drive to Whole Foods, and I think that is a really big difference,” she says. Meanwhile, Elaine Gartner, deli/prepared foods category manager for St. Louis grocery chain Schnuck Markets, believes any supermarket that has a Whole Foods positioned in its area should view it as a “formidable competitor.” Schnucks’ more than 90 Midwest stores feature hot foods, salads and soups that are a destination for the lunch crowd. “The emphasis that they place on their prepared foods is impressive,” she says. But just as much as Whole Foods uses its offer as a point of differentiation, so does Gartner. “There are customers who are drawn only to the types of food that Whole Foods merchandises, and some that will purchase those items on occasion but tend to want a more well-rounded selection,” she says. As gas-conscious consumers consolidate trips, Gartner feels confident it’s the traditional grocers such as Schnucks that will make the cut.

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BACK IN THE DAY: Shoppers can dine in at the retro River View diner.

Chicago and their stores in Austin or New York—they have to get a lot of retail business, but they also have to get a lot of dedicated people who are there to eat.” Stern, nicknaming Whole Foods a “grocerant,” explains that the traditional grocer gets about half of its volume in the center store, and half in perishable. Whole Foods sees about 70% of its volume in the perimeter, which gives it high costs, but also higher margins. “They’re running 35% margins in their store because of the blend of departments—and because of the high prices—vs. 27% for a typical supermarket. The new Lincoln Park store probably runs closer to 40%,” says Stern. Meanwhile, traditional grocers still struggle with the labor (30% vs. a grocer’s 10%), shrink and capital that come with foodservice. “You have to blend together the skills to run a successful grocery store along with the skills to run a successful restaurant, and they are two very different 2 0 0 9

skill sets,” says Stern. “But it is possible to put them together in the same box, and Whole Foods has done that.” Whole Foods is also at a natural advantage because it uses a third-party distributor, Dayville, Conn.-based UNFI (as well as Sysco for foodservice). “When Tesco came into the United States, they built their own distribution system, so now they need enough stores to make it work,” says Paul Weitzel, managing partner with retail consulting firm Willard Bishop, Barrington, Ill. The British company has had to deal with trucking-system logistics and fuel costs. “That’s a very expensive distribution system to maintain,” he says. With a third-party distributor, “Whole Foods can open up just two stores in Chicago and be OK. It’s still not the most desired position; you want more stores. But you’re able to do some things that other stores can’t.” Yet while this model allows Whole Foods the flexibility to use local suppli-

NOODLE-RONI: Customers can build their own pasta dishes, choosing among vegetables, sauces and fresh noodles.

ers, it also costs more, which is reflected in the prices. “When the economy was good, people didn’t care as much. When things get tough, that business model doesn’t look so good,” says Stern.

The Two Faces of Value For nearly 30 years, Whole Foods has

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built a business based on values: health and wellness, sustainability and the pleasures of food—all things that take a hit when the economy suffers. The company, used to seeing 7% to 10% increases like clockwork, has watched compstore sales drop two quarters in a row as consumers continue to trade down. Its 2009 second-quarter profit fell 32%. Same-store sales fell 4.8%. Suddenly, the company nicknamed Whole Paycheck is adding “value” to its set of values. So it ramped up the promotion of its private label, 365 Organic. Last July, it launched the “Whole Deal” flier, which

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offers coupons, discounts and moneysaving tips and recipes. Among sale items and healthy recipes are pointers such as, “Wednesday night is no-cook night: Pick up soup and salad at our soup bar.” “It’s an interesting tactic, where they’re using multiple parts of the store to drive this value-driven, meal-planning solution,” says Jennifer Halterman, senior consultant for Columbus, Ohio-based TNS Retail Forward. And even as the company slows down growth plans and makes notable corporate and store-level cost cuts, it continues to stick to its core values. It’s a decision that will no doubt continue to hurt Whole Foods so long as the economic woes continue, says John Rand, director of retail insight and team leader, grocery channel, for Management Ventures, Cambridge, Mass. “I think that’s a very legitimate point of view if you can do it,” Rand says. “If you have solid financial footing and run into a bad year, you don’t come apart. “Whole Foods’ conundrum is not, ‘How do I change myself to be part of a recession?’ It’s, ‘How do I survive the recession until the values I stand for become more important again to more people?’ ” Whole Foods is also reacting to the growth of natural and organic products in conventional grocery stores. It is minimizing the number of branded products that can be found in other stores and, as CEO John Mackey laid out in the company’s 2008 annual report, “differentiating our product selection in ways that speak to our core customers and to our authenticity and leadership role within natural and organic products.”

The Foodservice Experience The value of experience is one that Whole Foods has mastered. It’s what makes even those who grumble about their prices continue to shop there. And as any good restaurateur will tell you, nowhere is the experience more paramount than in foodservice. Notice how the floor plans in many Whole Foods call for eating areas in the front of the store for passers-by to see the foodservice potential inside. “They’ve done a pretty good job teaching people how to spend more money. And one way to do that is to make it look like fun,” says David Livingston, principal with DJL Research, Waukesha, Wis. The new Chicago store replaces a cramped store that shared a small parking lot with Best Buy, Ulta and a few other retailers. Its eat-in area was up a flight of dark stairs in the back of the store. “I see more people go into it than they did the old one, for sure,” says Scott Waguespack, alderman of Chicago’s 32nd Ward, where the new and old Whole Foods are located. Waguespack has noticed a lot of area businesses using the new store as a destination spot for lunch and dinner, “whereas with the old one, they didn’t have that opportunity.” “I think the key there is it’s not so much the actual overall products, but it’s the convenience of having those restaurants there,” he says. A walk through the prepared-foods section of any Whole Foods yields a bounty of hot dishes, grab-and-go meals, service counters and more. But what there isn’t is a heavy emphasis on natural and organic. Read your labels in the center-store, the company is saying; the perimeter is all about sensory D e c e m b e r

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appeal and the love of food. This creates an inroad for traditional grocers. “I think what they’ve learned from Whole Foods is making food fun, that experience of shopping at a Whole Foods, and they can leverage some of that even if they’re not in the natural and organic business,” says Weitzel. “But keep in mind the Whole Foods experience is different—you’re never going to get that at the supermarket.” While the HMR of the ’90s focused on re-creating a family dinner that could be taken home and eaten at the table, traditional grocers are learning that their consumer wants convenient meals meant to be eaten on the go. Breakfast and lunch are strong dayparts today, as are small parties. “It’s realizing the key consumer

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needs that I’m solving—convenience, variety and price—probably more than I’m solving for a dining experience,” says Michele Schmal, vice president, CREST Product Management for The NPD Group, Port Washington, N.Y.

“It’s not so much the actual overall products, but it’s the convenience of having those restaurants there.” If the Space Fits The Whole Foods “grocerant” concept does make location tricky. Where you put a restaurant is not necessarily the ideal place for a grocery store, and vice

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versa. And the large size of Whole Foods stores requires volumes to stay up—which they have not. The Chicago store is not the new norm. In the company’s 2008 annual report, Mackey explained, “While the really large stores are very powerful in limited markets and circumstances, we expect the majority of our new store leases to fall within a range of 35,000 to 50,000 square feet going forward, and we are actively working to drive down our average development cost per square foot.” Stern says,“When Whole Foods can find a Lincoln Park, and they can find a place where there is residential traffic, there’s work traffic, there’s shopping traffic, then it works really ■ well.”