USA: is the natural foods retailing dream over?

Stewart Samuel
Program Director - Canada
@RetailAnalysis

Date : 03 February 2020

With the natural and organic specialists, Lucky’s Market and Earth Fare, announcing plans to close almost all their stores, we look at what’s driving the exodus of retailers from this segment.

Experiential retail

Lucky’s Market and Earth Fare were often held up as retailers showcasing what the future of food retail could look like. Smaller format supermarkets, compelling in-store design, service orientated and offering an expansive range of often unique natural, organic and better-for-you products. Their trading strategy was considered as one way to successfully compete with the growth of online retail. You could visit their stores to discover local ranges, engage with knowledgeable team members and in the case of Lucky’s Market, to sip beer and wine as you shopped.

However, following Lucky’s Market's announcement last month to close 32 of its 39 stores and Earth Fare starting inventory liquidation sales at all 50 stores this month, is the natural foods retail dream over? We look at some of the challenges which these retailers have faced.

Source: IGD Research

1. Increasing competition among specialists and mainstream retailers

The natural foods segment has become increasingly congested, especially in the south west where both retailers operated several stores. Florida has been a focus for the expansion plans of Lucky’s Market and Earth Fare. Publix defended its territory well and has countered with the relaunch of Publix Greenwise 2.0, a format that blends elements of conventional and specialist food retailing. Against this backdrop, it became harder for Lucky’s Market and Earth Fare to differentiate themselves.

2. Constrained catchment areas

Both retailers may also have under-estimated the size of catchment areas required to sustain their operating models. Although both concepts were very much on-trend and aligned with growing shopper interest in health and wellness and natural and organic food ranges, location specialists have suggested that some of their stores were developed in catchments which were too small to sustain this type of operating model. Also, while both had created density in some areas, they were also geographically fragmented, adding a layer of supply chain and operational complexity.

3. Challenging operating model

With the stores mainly catering for the top-up shopping mission, the high-service operating model is challenging without significant volumes. To offset the high labour costs associated with this model, strong volumes are required across packaged groceries. Higher basket spend or increased visit frequency can help drive this, but the model was always going to be challenged by the increasing level of competition and catchments areas that may have been too small.

Market outlook

Whole Foods Market’s position as the largest specialist retailer in the segment seems assured. There is no retailer with the scale to challenge it, and the experiences of Lucky’s Market and Earth Fare may curb the enthusiasm of others to consider expansion on a similar scale. However, smaller, locally-focused specialists will continue to thrive. In terms of larger operators, Sprouts Farmers Market is resetting under the leadership of new CEO, Jack Sinclair, which should create a stronger platform for future growth while Fresh Thyme Farmers Market continues to see opportunities to expand. While also in the natural foods segment, both these retailers operate with stronger value credentials, especially in fresh produce, and operate with lower service-orientated labour models.

However, for many product suppliers, the significant growth opportunities will come through the major retailers, including Walmart, Kroger, Albertsons and Ahold Delhaize, all of which are actively growing their private label and branded ranges, expanding in-store space for natural, organic and better-for-you items.

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