Photo: Earth Fare
Why are so many organic grocers landing in bankruptcy court?
Reckless expansion and heightened competition for natural and organic foods were factors behind the recent bankruptcies of Fairway, Earth Fare and Lucky’s Market, but each chain faced unique challenges.Â
Fairway, a New York institution known for its wide selection of cheeses and cheap produce, filed for Chapter 11 on Jan. 23. The bankruptcy was attributed to debt taken on from a leveraged buyout (LBO) in 2007, an ensuing aggressive and unsuccessful expansion into the suburbs, and newer competition ranging from Costco to Whole Foods. The chain reached a deal to sell to five of its locations to Village Super Market, which operates stores under the ShopRite and Gourmet Garage banners. Fairway is seeking buyers for the remaining nine locations.
Lucky’s, a Colorado-based chain with an ambition to make organic foods affordable, filed for bankruptcy on Jan. 27. In 2016, Kroger became Lucky’s majority shareholder and its store count more than doubled. The collapse was blamed on an aggressive expansion into Florida, where it faced Publix and other newcomers such as Sprouts, Fresh Thyme and Earth Fare. A greater focus on natural and organic foods by Walmart, Aldi and others further reduced differentiation. In December, Kroger said it would divest its investment. Plans call for shuttering 32 of its 39 stores and selling the rest to the chain’s original founders.Â
Earth Fare, a North Carolina-based chain known for its commitment to clean eating, filed for bankruptcy on Feb. 4, a day after announcing plans to close all its 50 stores. Earth Fare also faced increasing competition against organic and conventional chains, and with aggressive expansion, the chain opened locations in overly-competitive markets. The failed stores, expensive modernization efforts and significant capital improvements on legacy stores “caused a strain on liquidity,” according to court documents. Owned by Oak Hill Capital Partners since 2012, the chain was unable to refinance its debt.Â
The filings come as Sprouts is slowing growth to focus on profitability. Whole Foods, meanwhile, has reduced produce prices since being acquired by Amazon.com to spur growth. Amazon recently reported a lack of sales growth at physical stores for its 2019 fourth quarter and full year.
- Fairway Market Secures Financing For Voluntary Chapter 11 To Facilitate Sale Of Assets – Fairway Market/PRNewswire
- NY grocer Fairway files for bankruptcy protection, will close some stores – CNBC
- Fairway, Unable to Fend Off Rivals, Files for Bankruptcy – The New York Times
- Fairway Market braces for another bankruptcy filing – New York Post
- Kroger-Backed Lucky’s Market Files for Bankruptcy – The Wall Street Journal
- This grocery store wanted to compete with Whole Foods. Now it’s going bankrupt – The Mercury News
- How a beloved organic grocery chain collapsed – CNN
- Earth Fare files for Chapter 11 bankruptcy – Supermarket News
- This is how much money Earth Fare owes some of its biggest creditors – Asheville Citizen-Times
Discussion Questions
DISCUSSION QUESTIONS: What common themes do you see behind the bankruptcies of Fairway, Lucky’s Market and Earth Fare? Should the filings call attention to new pressures or growth concerns facing organic and natural food categories?
Poll
BrainTrust
Ben Ball
Senior Vice President, Dechert-Hampe (retired)
Patricia Vekich Waldron
Contributing Editor, RetailWire; Founder and CEO, Vision First
From a sales perspective (not a survey perspective) organics and naturals have not fared nearly as well as was predicted. We saw this as far back as the ’80s in Europe, where the whole green movement began – there were lots of people saying they would buy green, but few actually paid the upcharge. Tom’s writing says it best – reckless expansion based on hopes rather than solid data is behind the problems.
This is a good point. My first serious job was for a nutrition advocacy group that made its revenue from a “self help” newsletter. It repositioned from a newsletter and program that was “policy oriented.” It maxed out then at about 60,000 subscribers. With the repositioning it maxed out at about 900,000 (depending on how much it was willing to invest in direct mail.) Even so there was a hard limit to circulation numbers because ultimately, that level of interest in health and nutrition was pretty narrow.
If you look at Everett Rogers’ diffusion of innovation theory, you can surmise that the ultimately market for “hard core” health is limited, that most people will be satisfied by being able to buy such goods at a regular supermarket, where they can also buy toilet paper and other standard goods, and cheaper besides.
With crushing debt, it’s not enough to have a vision of making it easy to live a healthy lifestyle, be in a growing natural and organic segment, offer friendly, knowledgeable full-service in-store and a superior shopping experience or promote high food quality standards.
Desire for rapid growth drove significant store count growth and the need to take on unsustainable debt with onerous terms. This was aggravated by increased competition which puts a lid on any ability to pass through higher prices to consumers. Bottom line, it’s just bad sector dynamics and company capitalization decisions.
Each of these chains entered a highly competitive channel at just the wrong time. Organic foods can be had at Kroger and Walmart, often for less money. None of them provided a compelling differentiator to customers in terms of service or offering. And all were victims of financial overreach through growth or leveraged debt.
Here’s the main reason – the mainstream retailers – Kroger, H-E-B, Wegmans and even Target have caught up. They have developed a wide private label portfolio and can procure organic and natural foods at a lower cost to the customer.
The key now is what is the differentiation in shopping at a Whole Foods, etc. to make it a value-added proposition for the customers they want to service?
Whole Foods differentiation is super high quality prepared foods and higher quality perimeter departments — seafood, deli, produce — and also restaurant style food options.
I haven’t been to Central Market (H-E-B) or Market District (Giant-Eagle), but outside of small independents (like Harmon’s in the Salt Lake City region), I haven’t seen a mainline supermarket, including various Kroger banners, compete at anywhere near that level (haven’t been to Mariano’s, Harris-Teeter is good, but nowhere near as good as Whole Foods). (I haven’t been to the new Market Street Albertsons stores in Idaho and I don’t know if the United Supermarkets versions in Texas are comparable.)
Wegmans stores are good. But in my experience they don’t compare to Whole Foods either on that dimension. (Haven’t been to one of the stores that has German bakery ovens and grinds its own grains…)
Each of the failures is attributable to a failure of strategy and is not about the attractiveness of organic grocery as a category. In fact, demographic trends point to organic grocery being more attractive. But bad strategy and unsupported expansions will take down even the most attractive businesses.
In a word? Costco. One trip through the produce aisles at Costco tells me all I need to know about why smaller specialty organic markets are struggling. Costco shoppers typically profile as consumers who desire organic foods, and Costco’s assortment of organic foods continues to expand, earning a larger share of wallet. Thus Costco has now set the bar for what people expect to pay for organic produce, and smaller markets (heck, even Whole Foods) simply can’t compete with Costco on price.
The most obvious thread is mismanagement. Over-expansion, pouring too much into decor, and trying to cut margins are hardly, independently or collectively, paths to corporate sustainability. And while mainstream retailers are now taking organics “more seriously” as opposed to actually seriously, I think the mass consumer market has yet to emerge outside of marketing surveys and tweets. So there is obviously not enough of a consumer sector in those markets to support them, let alone heady expansion plans. As to the second question, yes, with the caveat that “organics” and “natural” products (whatever those loosely used terms actually mean) are here to stay. I think these failures do suggest food retailers need to reexamine and rethink their approach to the category. The first “hook” was stocking the products. Today that’s not enough. The second “hook” was to lower prices. Today, that too is not enough. So the real question ought to be, “What’s the third hook going to look like?”
The primary premise of “healthier eating” chains has been usurped by the better mainstream grocers. The clean eating premise simply isn’t a sufficient differentiating benefit anymore.
Classic marketing strategy asks, who are your target customers? What are their need states that you are going to fulfill? What is their consideration set to fulfill those needs and what are your points of differentiation?
The target customer base may not have been as substantial as anticipated and/or the need for organic foods at the price points offered was not as large. However I believe the underlying issue was the that the point of differentiation dissipated as other food retailers got into the organic game.
As a business, marketers over-value the impact of purpose-based or ethic-based marketing. Given the drop in income for so many Americans, we need to build strong respect for their individual struggle just to get by.
As much as I try to ignore Maslow, maybe the triangle is a good way to look at this: These stores all attempt to appear at a higher location in Maslow’s famed hierarchy of needs than the vast majority of consumers can afford to consider.
I agree that hasty expansion and heavy debt contributed to the bankruptcies. But most mainstream supermarkets began offering attractively priced organics, eliminating the need for shoppers to go to specialty stores.
It is very hard for small specialty grocery retailers to compete with major players who have efficient supply chains and significantly bigger buying power. Starting out you are different, interesting places to shop and with one or two stores the supply chain can be kept very simple and direct. As the chain develops and grows, the complexity of the business becomes greater, sourcing product has to be more widespread and the ability to maintain quality fresh product and good prices becomes harder. Also, the competition will have taken notice and slightly changed their offering to take you out of the game.
Like in any business, starting is relatively easy — growing and becoming sustainable is much harder especially in the ultra-competitive world of grocery.
The simultaneous demise of Fairway, Lucky’s Market and Earth Fare is not exactly a coincidence. All three took on too much leverage in pursuit of a rapid-expansion strategy. We’ve seen this tragic movie many times before: Its signature plot line is debt service that exceeds net profits.
Why the rush to expand? Well, a few years ago organic grocery looked like the place investors wanted to be. If they could grow a chain’s category share fast enough, it could be flipped to a much larger acquirer for a nice return.
There were bound to be some casualties along the way. Major food chains with stronger financials stepped up with their own expanded organics lines. Price competition ensued. Even Kroger-backed Lucky’s was on a slow path to negative ROI.
Seems like these investors did the math at about the same time.
Bottom line, the vast majority of shoppers do not think of “organic” as a priority in their food, regardless of surveys. Actions speak louder than words. Salty, high-carb snacks are doing better than ever.
Convenience, cost and experience still drive purchase decisions. With wide availability of organics at competitive prices, the experience at these niche chains did not sufficiently inspire shoppers to make a special trip.
As many grocery stores have included and expanded their organic offerings, it is now easy for consumers to purchase organic items along with the rest of their shopping. That makes it unnecessary to go to an organic-only store.
Online ordering and delivery is still a difficult hurdle for perishable items like produce and meat. Expansion without diversification was premature given the expansion of organic items by competitors.
Without going on a rant, suffice it to say a company that seeks to expand rapidly has no business being in an LBO (or, since the LBO actually came first, it was really in no position to undertake the expansion).
The others are garden variety — no pun intended — business failures: too many people trying for a limited market. The category will only grow, but as is usually the case, the share of business going to larger, and existing players will also increase. Size has its advantages and the proportion of buyers interested in “authenticity” will decrease as organics become more mainstream.
The cleaner eating differentiator is not as prevalent as it once was. The smart shopper can get what they want from most conventional grocery chains thus avoiding the extra trip to the organic grocer. We do not need to have to say we bought X from the organic grocer to impress our neighbors.
The answer is pretty simple. The mega stores are more involved in these categories, and with their enormous assets, they can choose to wait and see which category is hot and strike back with better prices, and much more variety.
There are very few categories of food that the big players haven’t taken over, and the startups that made clean eating popular are now staggering towards the abyss of bankruptcy. The same thing has already happened to independent grocery stores in small rural towns. They are closing up as well, being replaced by Aldi, Dollar General, and an ever expanding Walmart Supercenter. These stores know how to crush traditional stores, and more closures are forthcoming.
Is this a good thing? Maybe not, but unless an independent can run a superior perishable store, they will not survive as any common commodity now belongs to the big stores.
Retail in general is way over stored. The thinning of the herd will level off someday and what is left will mostly be the large players. Personally, I hope I’m wrong.
Medicare and SSI is looking better all the time, but for the younger generation of store owners, I wish you the very best.
One difference is strong grocery business cooperatives. To me, Shoprite stores aren’t all that special, but the individual operators can succeed because of the support they get “from the buying group.” Similarly, here in the Intermountain West, Associated Food Stores enables independents to succeed in the face of Smith’s, a successful Kroger banner. In Greater Salt Lake, the cooperative operates some stores and supplies others. Harmons is truly distinctive in its positioning as a specialty grocer. That they are growing in the face of Smiths is remarkable. But part of it is that they are willing to deploy a variety of store sizes and locate in places that are differentiated, whereas Smiths only opens stores that are their standard 65,000 s.f. or greater.
The DC area where I lived for 30+ years, doesn’t have an independent small regional chain comparable to Harmons. While there are wholesalers, it doesn’t have an independent grocery cooperative.