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Are Specialty Retailers Falling by the Wayside?
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Are Specialty Retailers Falling by the Wayside?

While organic and gourmet foods were once only available at small and specialty grocers like Whole Foods Market and Fairway, all retailers are seeing the benefits of offering them. Consumers can now go to almost any supermarket and find aisles and aisles of organic products, in many cases at similar prices as traditional items. Even department stores and discounters like Walmart and Target are getting in on the action.

Back in June, we noted that Costco and Kroger were poised to surpass Whole Foods Market as the top organic food sellers, as Costco reported $400,000 more in organic sales than Whole Foods, and Kroger reported that its private label organic and natural foods line is the country’s largest natural and organic food brand. Now Kroger is taking it one step further and launching its own specialty foods store called Main & Vine, in Gig Harbor, WA. The store will offer locally grown and organic produce, meats, and local craft beer and wine. It will also offer many gourmet prepared foods and possibly home delivery service, which Kroger has tested on a limited basis. This is not much of a surprise, as just a few months ago it also launched its own gourmet, imported food line called HemisFares, and acquired specialty chain Hiller’s Market in Detroit.

This shift may be good news for traditional retailers, but it is anything but that for specialty grocers. Whole Foods Market, Fairway, and Sprouts Farmer’s Market are struggling, as Whole Foods’ sales are down by 34% this year, and sales at Sprouts are down by 25%. Analysts at Piper Jaffray predict these stores will need to either cut their prices or focus more on prepared foods, which have higher margins. Chris Carter, co-portfolio manager of Buffalo Discovery fund, says it won’t be enough for Whole Foods Market to compete based on price, but rather it will need to identify new gourmet brands and stock them before competitors, helping to continually draw in shoppers focusing on selection. Sean Naughton, an analyst at Piper Jaffray, notes “We’re definitely in a little bit of a shakeout right now, and I don’t expect that all of these specialty grocers are going to survive.”

Carter concurs with Naughton, saying “Five years from now, I would expect the largest sellers of organic foods will be Costco, Walmart, Whole Foods, and probably Amazon.” I think those retailers would agree, as they are all continually increasing their efforts in the organic sector, making specialty food more accessible to the masses.

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However, Mark Wiltamuth, an analyst at Jefferies, believes specialty grocers mostly have themselves to blame for declines in sales, not traditional retailers. He contends that between 60% and 70% of both Whole Foods and Sprout’s same-store declines are because they opened new stores within 10 miles of existing stores, effectively cannibalizing their sales.

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