Saturday, January 5, 2008

Whole Foods' Exec Shruggs Off Fresh & Easy as Competitor

In an article about Whole Foods Market, Inc., published in tomorrow's (Sunday, January 6) Austin-American Statesman newspaper, Whole Foods' executive vice president for growth and business development Jim Sud shrugged off Tesco's Fresh & Easy Neighborhood Market as a competitor, especially in California, where the British grocer is establishing its primary retail food store presence in the USA.

Asked in the piece (titled: A humbling year for Whole Foods) by reporter Lilly Rockwell about Fresh & Easy as a competitor, with its rapid store development program in California particularly, Sud said: "There is competition everywhere. Our goal is to be the best food retailer in every market we operate. One of the strengths of Whole Foods Market is its ability to innovate and grow and evolve. And, our new stores are a testament to that," he adds.

Our Analysis and View:

We agree about 75% with Sud. Fresh & Easy grocery markets are dramatically different than Whole Foods' food and lifestyle stores. Whole Foods stores are huge and upscale. Fresh & Easy markets are small format and fairly no-frills. Whole Foods' focuses on selling a huge variety of natural and organic groceries, fresh foods and perishables. And although the grocer offers some good promotional deals, price competition isn't a key element of the supernatural retailer's positioning.

On the other hand, Fresh & Easy's focus is on offering a limited selection of private label and national brand basic grocery items, along with an extensive selection of fresh, prepared foods.

Fresh produce, meats and specialty and natural groceries are secondary (and limited in assortment) for Fresh & Easy.

Price also is key in the British grocer's positioning. Fresh & Easy offers the private label and national brand basic grocery items at low, everyday retail prices (often lower than supermarkets), and has extremely reasonable prices on its extensive line of fresh, prepared foods.

But, it is in the area of prepared foods where we depart (at least 25% worth) from agreement with Sud. One of Whole Foods' biggest growth areas is in fresh, prepared foods. These in-store prepared items aren't cheap. The quality is high, the taste generally excellent, and all the ingredients are natural or organic.

While we see this area continuing to be a major growth area for Whole Foods, we also believe that in places like California, where Fresh & Easy is building scores of stores, that the grocer will have a competitive effect on Whole Foods' prepared foods sales.

Why? First, food prices (including prepared foods) are rising dramatically in the U.S. Additionally, the outlook for the 2008 economy is poor--high energy prices, loss of jobs, credit crunch, soaring food prices and more. Many economists, and even U.S. government-affiliated agencies, are predicting a 50% chance of a recession in the U.S. this year. And these same experts are predicting inflation if an all out recession is avoided.

Second, although Fresh & Easy's fresh, prepared foods are produced in a central kitchen in Southern California and shipped daily to its stores, they are of high quality, especially based on the retail prices the grocer is currently selling the items for.

They aren't of the quality level, or taste level, of Whole Foods' in-store prepared foods items in our opinion. However, they taste good, use high-quality ingredients, and are clean from an additive and preservative standpoint. Many also are organic. In other words, high quality plus reasonable prices equals excellent value. All shoppers love value, regardless of their income or educational level.

This fact, combined with the rising food prices and cost of living (not to mention possible recession), will drive many consumers to Fresh & Easy stores for some of their prepared foods' purchases we believe. Many of these shoppers will be Whole Foods' customers who will shop Fresh & Easy as a secondary market--with a primary focus on buying the prepared foods items.

Since Tesco is building and plans on opening so many Fresh & Easy stores in California especially, Whole Foods' will see some erosion in its overall prepared foods sales, especially this year, due to the poor economy. This will of course depend on the particular Whole Foods store and neighborhood, and how close a Fresh & Easy grocery market is to that store.

Whole Foods' need not worry much overall about the competitive effect from Fresh & Easy however. It is true what Sud says--the supernatural grocer is an innovator. New concepts like gourmet restaurants, wine bars, mini day spa's--all innovations incorporated in many of the new stores the grocer opened in California and elsewhere last year--will keep Whole Foods fresh and important for shoppers. We are bullish on the chain, and believe it has much growth ahead.

However, not realizing that Fresh & Easy, which will have over 50 stores in Southern California alone by the end of this year, isn't going to exert some competitive pressure on Whole Foods is wrong, in our opinion. And, as we said, this competitive pressure will come primarily in the fresh, prepared foods category.

No comments: