SFM Sprouts Farmers Market Inc

By Jaewon Kang | Photographs by Theo Stroomer/Redux for The Wall Street Journal 

Gourmet grocers are losing their edge as natural foods become mainstream.

Supermarket chains and discounters are selling more fresh, natural and organic foods at lower prices, drawing shoppers who used to seek out those products at specialty grocers. Kroger Co. has said it is now one of the nation's largest sellers of organic produce, meat and other goods, while discounters Aldi and Lidl are adding more fresh food and opening more U.S. stores.

Meanwhile, Whole Foods Market has cut prices on hundreds of items including organic produce since Amazon.com Inc. acquired the company three years ago.

As a result, specialty grocers are having a hard time convincing customers to pay a premium to shop in their stores. And without the revenue and reach of bigger chains, they have also been hesitant to match price cuts or to invest in new services like delivery.

Regional chains Earth Fare, Lucky's Market and Fairway Market have filed for bankruptcy in recent weeks. Shares in Sprouts Farmers Market Inc. and Natural Grocers by Vitamin Cottage Inc. are down respectively about 30% and nearly 50% over the past year.

"Differentiation can be ephemeral. Retail is an open book of copycats," said Scott Moses, managing director at investment bank PJ Solomon who is advising Lucky's and Fairway.

Fairway saw same-store sales slip 5% and lost $69 million over the past year, according to court filings. The chain of 14 supermarkets in the New York area said competitors selling more natural, organic and hard-to-find foods hurt demand for its gourmet fare.

Lucky's recorded a same-store sales decline of 10% and a net loss of $100 million over the past year, according to bankruptcy filings. The Niwot, Colo.-based operator of 39 stores said rising competition hurt its profitability, particularly in Florida, where it was seeking to expand.

Earth Fare said in court documents that competition and spending on store improvements had strained its business.

Mike Brewer, a 44-year-old business consultant who has shopped at an Earth Fare store in Huntersville, N.C., since it opened in 2011, said he appreciated its relatively affordable selection of natural products including veggie-pop snacks and grass-fed beef.

"For a store closing, I'm pretty upset," he said.

He said he would turn to a Kroger-owned Harris Teeter supermarket in his neighborhood when Earth Fare closes at the end of February.

"What was special 10 years ago isn't special anymore," said Don Fitzgerald, who teaches marketing at DePaul University and until last year was a merchandising executive at Kroger's Mariano's chain. Kroger owns more than 40 Mariano's stores in Illinois.

Some natural chains continue to add stores and enter markets to find new customers. Lakewood, Colo.-based Natural Grocers by Vitamin Cottage has added or relocated 11 stores in each of the past two years, bringing its total to more than 150. But sales growth has slowed to 1.9% during the latest quarter, down from 4.7% in that period two years earlier, in part due to pressure from bigger chains, Chief Executive Kemper Isely said.

"It's not growing as fast as it used to," he said in an interview.

New Seasons Market, based in Portland, Ore., is trying to stand out from the competition with hyperlocal products, Chief Operating Officer Mark Law said. The chain of more than 20 stores in the Pacific Northwest works with local chefs to prepare oven-ready meals and buys dairy products from nearby farmers. Same-store sales growth rate nearly doubled last year.

"Organic has been commoditized," Mr. Law, a former Whole Foods executive, said. "You can't differentiate with your product mix alone."

Other specialty grocers also are emphasizing services to stand out. But offering better services can push up costs, executives said.

"You not only have your cost of goods but you're trying to provide a higher level of customer service to differentiate yourself," Steven Mortensen, an adviser to private-equity firm Yucaipa Cos., an investor in grocery chains. Yucaipa bought up West Coast chains Ralphs, Quality Food Centers and Smith's under the Fred Meyer banner, which it sold to Kroger in the 1990s. More recent investments haven't fared as well. Yucaipa invested in Fresh & Easy and Great Atlantic and Pacific Tea, chains that filed for bankruptcy in 2015.

Some executives said Whole Foods became a tougher rival after the chain started offering rapid delivery via Amazon. Green Aisle Grocery closed its two Philadelphia stores in January after sales decreased 30% over the past two years, co-owner Andrew Erace said.

"I can't compete with that. I don't have the technology to implement for our small shops," Mr. Erace said.

Write to Jaewon Kang at jaewon.kang@wsj.com

(END) Dow Jones Newswires

March 01, 2020 05:44 ET (10:44 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.