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| Source: | LOHAS Weekly Newsletter |
| Published: | Monday, December 01, 1997 |
Not only is 365 converting consumers, but its existence may mark the start of a competitive shakeout in the industry some say is long overdue.
“The 365 brand has exceeded our expectations in the amount of product we’re selling,” WFMI President Peter Roy says. “In some cases it’s put us in businesses that we weren’t in before.”
WFMI launched its 365 label in May. It promises low prices 365 days a year on such commodities as cooking oil, soft drinks, macaroni and cheese, tuna, cereals, paper products, and dog and cat foods, among others.
The line is all-natural but is not organic and is priced about 20% lower than WFMI’s Whole Foods organic private-label line. WFMI expects 365 eventually will grow to 700 grocery SKUs.
The company isn’t releasing 365 sales figures, but Roy says WFMI’s total grocery sales currently are about 10% private-label. The 365 line and WFMI’s Whole Foods organic brand account for between 4% and 5% of all company sales.
“The goal is to take [private-label sales] to about 20%,” he says. Private-label sales in conventional supermarket chains generally run between 20% and 25%.
WFMI is not the only “super-natural” planning to increase its total private-label sales. Boulder, CO-based Wild Oats Markets Inc. (OATS) reported plans to double its private-label SKUs from 500 to 1,000 by the end of 1997. OATS’ private-label line, Wild Oats, currently accounts for less than 5% of company sales.
On the supplements side, General Nutrition Cos. Inc. (GNCI) has long pursued a multiple private-label strategy in its retail stores. Private-label products account for about 54% of GNCI’s $1.13 billion in sales.
The two leading natural products distributors that operate nationwide, Tree of Life and United Natural Foods (UNFI), also generate significant sales from private-label products. Tree of Life offers 1,000 products under its own brands. Private-label sales are growing for UNFI as well, with the company recently introducing Organic Baby, its own branded organic baby foods line.
In a $146 million deal, WFMI recently acquired Boulder, CO-based supplement manufacturer Amrion to grow its private-label supplement sales to $25 million over the next three years.
But while consumers are buying more private label, the move toward specifically price-based private label is of concern to some.
Since its introduction, 365 has sparked rumors about product quality, loss of shelf space for branded products, and loss of the customer-centered service ethic that historically has been the hallmark of natural foods stores.
There is also disagreement among manufacturers about which of these concerns are valid.
Gil Pritchard, president of Petaluma, CA-based Barbara’s Bakery, says WFMI would only hurt itself if it short-changed 365’s quality.
“The Whole Foods [private label] is very high quality,” he says. “One would assume they have not compromised 365’s quality.”
However, Paul Nardone, president of Boston-based Annie’s Homegrown, says quality concerns may be justified.
“We were considered as a [365 private-label] supplier and were a little surprised with the results. The decision seemed to be motivated by a more aggressive price from a mainstream supplier,” he says.
Roy says concerns about quality are unfounded. “We are constantly testing the quality of these products. We are just using our buying power to leverage price. We are not cutting corners on the quality of our products.”
But there is little doubt that since 365’s introduction some brand-name manufacturers have been hurt.
According to brokers and distributors, certain food and cooking oil and macaroni-and-cheese brands already are suffering. On those items, branded products are selling for up to $1 more than their 365 alternative, they say. They note that programs like 365 may force more competitive pricing and lower margins overall.
If its price-based strategy is to work, however, WFMI needs to recruit new customers with its 365 program, rather than only attract current natural foods shoppers, manufacturers say.
“Right now it appears they are converting current shoppers. Their 365 product selection would indicate that,” Pritchard says.
He believes failure to attract new customers could negatively impact comp store profits and even comp stores sales.
According to Roy, however, converting current shoppers to 365 products is, indeed, what WFMI wants to do. “There is definitely a segment of our customer base looking for quality natural products at a lower price.”
Roy also affirms that there is truth to the worry that nonprivate-label brands will lose shelf space to 365 in WFMI stores. “Obviously, we haven’t made our stores bigger. The slowest-moving items in those categories are being displaced, and we believe the shakeout is long overdue.”
Concern over the potential demise of the tradition of customer-centered service has been sparked by WFMI’s decision to base some employee compensation on 365 sales. Compensating employees on private-label products sales is institutional among some supplement retailers.
Roy says that stores receive incentives to promote both 365 and Whole Foods brand products. However, he is adamant that incentives to promote private-label have not affected customer service. “I don’t see that as a departure from customer service. If you ask for a recommendation, the majority of the time you are not going to get taken to the private-label product,” he says.
However, one source close to the industry says that because 365 products are stacked at eye level and on endcaps, consumers are more likely to purchase 365 than a branded product.
Finally, because WFMI, at FY97 sales of $1.1 billion, is the largest player in natural foods retailing, there also is concern that the company plans ultimately to redefine itself as a natural foods version of the price-based specialty foods chain Trader Joe’s. Roy says no.
Despite industry concerns, however, there is a general sense that with 365, WFMI is doing what makes business sense.
“There is plenty of consumer research that confirms that one of the reasons more people don’t buy natural foods is because of price. This industry must improve value,” says Bill Voss, CEO of Health Valley Foods.
“365 is a necessary competitive response,” Barbara’s Bakery’s Pritchard says. “There is not a grocery store in this country that doesn’t do private label.” He also maintains that in a private-label environment, strong brands do well.
Heretofore, the lack of brand recognition in the industry has not been a large issue. But with programs such as 365, and with about 14% of the U.S. population now buying natural foods or supplements, brand names are beginning to mean more, according to Pritchard.
According to the 1997 HealthFocus Trend Report, Earth’s Best, Arrowhead Mills, Health Valley and Fantastic Foods all had significant brand-name recognition among shoppers familiar with health-food logos.
Some brokers says 365 also will force natural foods manufacturers to more aggressively market their brands through increased vendor education and mass-market advertising.
What is clear to all is that low-cost private-label brands now are a feature in the natural foods marketplace. As one source puts it, “Unless other stores and manufacturers do something to counteract their high-priced image, they are going to be facing tough times.”