Can local natural/organic grocers still compete?

BOULDER — Boulder County was eating natural and organic before it became cool.

The region has been a cradle for the industry for decades, first with long-time community chains like Alfalfa’s Market Inc. and later with home-grown national upstarts like Lucky’s Market.

But in early 2020, Lucky’s Market went from a rapidly-expanding name with 39 stores across the country to hurtling down to Earth after filing for bankruptcy and selling off locations back to original owners or to other chains.

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Just more than a year later, Alfalfa’s shuttered its almost 40-year old store in Boulder and its Longmont location after that was open for just under six months, followed by its final location in Louisville. BizWest has also reported that the store was saddled with millions of dollars worth of debts to its vendors as those stores were closed and was ordered by a judge in late March to pay more than $1.4 million left on a defaulted credit line with co-founder Mark Retzloff.

The collapse of two natural and organic chains in the country’s natural and organic hub is partially due to bad bets on debt: The Kroger Co. (NYSE: KR) pulled more than $301 million in investments in Lucky’s and seemingly knee-capped the Niwot chain, while Alfalfa’s struggled for months to pay back vendors that delivered goods on credit.

However, as big grocers add more natural and organic products to their shelves and manufacturers increasingly use the internet to reach niche customer groups amid the pandemic, locally-focused organic grocers may struggle to stay relevant.

Bigger names barge into natural foods

Local markets generally did well in the latter half of the 20th century due to their ties with local growers and less interest, in general, in organic produce. 

Major corporations established themselves in the industry through the 2010s, with the most notable deal being Amazon Inc. (Nasdaq: AMZN) buying Whole Foods and its approximately 400 physical locations for approximately $13.7 billion in 2017.

While the deal was partially about Amazon stretching its dominant e-commerce platform into an existing brick-and-mortar infrastructure, it was also a warning shot for the grocery industry: There’s market share to be won in natural and organic.

More mainstream grocers such as Kroger Co. (NYSE: KR) and Costco Wholesale Corp. (NASDAQ: COST) have gotten into the game with their own private-label offerings in recent years.

In an email interview, Amanda Lai, a senior manager at retail consultancy McMillanDoolittle LLP, said that specialty grocers faced added pressure during the pandemic because shoppers consolidated their shopping to stores with broader selections.

“Early on in the pandemic, consumers consolidated shopping trips and focused on one-stop-shops, which often left out the specialty and natural and organic players who could not offer a full basket,” she said.

E-commerce accelerated

Grocery stores have tended to avoid the tide of e-commerce in the broader retail landscape, but the pandemic put curbside pickup and delivery from the supermarket far further in front. That led to an acceleration of e-commerce integration alongside existing stores at a break-neck pace. In an earnings call last year, Target Corp. (NYSE: TGT) said it would compress its three-year e-commerce timeline to a matter of months to keep up with online demand.

Building a similar online presence isn’t nearly as feasible for small, independent grocers.

“Unsurprisingly, the largest players with the greatest resources have been able to rollout and expand their omnichannel efforts more efficiently and seamlessly than smaller competitors. Those who were slower to implement delivery … and curbside pickup capabilities lost sales to those who were quicker to adapt to pandemic shopping behaviors, many of which will linger even after the pandemic ends,” Lai said.

The manufacturers of natural products and organic foods are also looking online to shore up their growth.

Naturally Boulder Executive Director Bill Capsalis told BizWest that almost all of the manufacturers in the trade group have been focused on building out their online presence, whether it’s through a third-party market like Amazon’s website or through their own direct-to-consumer channel.

The trend toward direct-to-consumer sales in the industry was already underway before the pandemic, but its onset sped up the adoption, he said.

The online world is also more efficient for marketers, as they aren’t subject to a retailer’s promotional fees eating into their margins and can use influencers and direct marketing to reach a targeted audience.

“When you sell at retail, you don’t know who buys your stuff in retail. It’s just historical scan data,” he said. “But you don’t know that I went in and bought Schick razor blades, and my name is Bill Capsalis, and here’s my credit card number, and here’s how you’d find me. You don’t know that when you sell it retail, but you do know it when you sell it on your own website to consumers.”

Can the hyperlocals survive in the digital age?

In its 1992 song “When I Grow Up,” the Boulder jam band Leftover Salmon called Alfalfa’s a “Birkenstocks, Spandex, necktie pitchuloui grocery store” in a tongue-in-cheek joke about the culture of people working there.

But after several whimsical lyrics about pesticide-free produce and dairy-free cheese, singer Vince Herman breaks into spoken-word as if he was a radio announcer and asks the listeners to vote for their favorite items in the store not available anywhere else.

“You know folks, it’s a cultural thing, it’s a thing that a community can be based on,” Herman sings. “And I think that soon, people in Des Moines/ hell, maybe even Detroit/ will be singing this song.”

While Herman’s prediction is about 29 years late, his lyrics are ringing truer as natural and organic products grow in availability nationwide.

The dominant natural and organic products distributor United Natural Foods Inc. (NYSE: UNFI) is in the process of launching a marketplace where manufacturers of any size can sell their goods to any retailer or food-service customer already buying through UNFI’s traditional wholesale channels.

That option widens up the market for small startups to build their names without having to rely on solid sales at the local market.

Lai said there’s still room for small and regional natural grocers to grow, particularly within the sector of grocers that charge premium prices for hyperlocal goods, product expertise and long ties to their local area.

“It is important to carve out and own a defensible niche that conventional and discount grocers are not targeting,” she said.

Capsalis echoed that point, noting that there are still small, family-operated grocers with small footprints and community co-ops that are doing well during the pandemic.

However, he noted that from his home in Boulder, he can visit three natural and organic-focused grocery chains within a two-mile radius.

“[Boulder is] relatively small geographically, but to have so many options in such a small community, it’s just inevitable that there’s going to be a cannibalization of sales,” he said.