What makes specialty grocers special?

The answer used to be found in the very existence of these natural, gourmet and health-focused retailers. Two decades ago, the only place you could find a wide assortment of organic drinks, locally procured meats and sustainably sourced chocolate was at the local specialty shop. Then Whole Foods Market scaled this concept, posting eye-popping comps in the process and inspiring numerous other chains to follow in its footsteps.

Many readers know what happened next: Mainstream retailers, from Albertsons to Walmart and Aldi, started elbowing their way into the space. Nowadays, shoppers can find not only organic name brands but organic private label products, as well. Simple Truth, the brightest feather in Kroger’s store brand cap, is now a $3 billion business.

Specialty grocers, and particularly the ambitious natural and organic chains, have struggled over the past several years to overcome this competitive challenge. Just before the pandemic hit, Lucky's Market and Earth Fare — two companies that once seemed destined to become national competitors — went bankrupt, while others, like Fresh Thyme Market and The Fresh Market, have struggled mightily to grow.

During the pandemic, natural and organic grocers suffered as consumers directed more of their spending toward one-stop supermarkets. Sprouts Farmers Market and Whole Foods, two of the fastest growing specialty operators in the industry, saw significant traffic declines that they labored to overcome.

The problem is that, for years, many natural and organic grocers have been stuck running a 20-year-old strategy. They seemed to think that yelling words like local and natural louder and louder would get shoppers to pay attention — and that folksy initiatives like showcasing the faces behind their products and doubling down on farmstand-inspired merchandising and store design would somehow convey enough value to justify their comparatively higher prices.

But specialty and health-focused consumers have moved beyond wooden crates, bulk bins and hay bales. Target shoppers for these retailers — think young, affluent and health-focused consumers — are increasingly concerned about environmental sustainability and diversity initiatives. They’re looking for health solutions and innovative, functional products that feel hand-selected for them and not included as part of a preselected assortment from a distributor.

And these days, they’re looking for deals and better prices wherever they can find them.

Natural and organic grocers have badly needed to evolve, to dig deeper and really think about what they can do to live up to their promise of being a better, healthier alternative for food shopping.

A renewal takes root at Sprouts

Sprouts, the Arizona-based grocer that now has close to 400 stores, has embodied many of the challenges that I’m referring to. It took off as a lower-priced alternative to Whole Foods, and for the past several years has maintained an ambitious growth pace of around 30 stores per year.

But Sprouts has spent too much time focusing on the “Farmers Market” side of its name. Its key point of differentiation is a produce department that sits at the center of each store, projecting a “fresh” halo that radiates into other departments that haven’t been nearly as inspiring. During a weeklong vacation in Arizona a few years ago, I did a full-basket shop at a local Sprouts and left feeling like I could have bought most everything from the Fry’s store down the road. The company’s prolonged pandemic sales hangover and subsequent prodding from investors indicate I’m not the only one that felt this way.

I give Sprouts a lot of credit, however, because the company has taken a hard look at how it operates and is rolling out new initiatives aimed at boosting its value for shoppers. Under CEO Jack Sinclair, the Walmart veteran who took over in 2019, Sprouts has slimmed down its new stores, stocked more exclusive products and begun offering more interactive experiences in stores, like sampling.   

Sprouts stores now stock more fresh meals, including many plant-based options. They also have an “innovation center” in most locations where exclusive products rotate on a monthly basis, Sinclair said during the company’s most recent earnings call.

The grocer is employing some clever promotional tactics, too. To boost interest beyond its four walls in the new products its selling, Sprouts recently hit the road in Florida with a mobile truck that’s stopping in cities throughout the state to party with shoppers and give away items like coconut water and overnight oats.   

Sprouts’ overarching strategy here is key: It’s targeting health-focused shoppers and not trying to go after the broader specialty market. During the earnings call, Sinclair said more than 60% of its business comes from high-frequency shoppers.

“Our goal is to drive our current core customers to shop more often and to encourage trials from new customers who are also within our target audience,” he said.

Inflation takes a bite as specialty retailers find new ways to differentiate

Natural and organic grocers have long understood the need to stand out from the conventional chains. Some, like Sprouts, have also begun to dig even deeper and forge unique identities within the specialty retail industry, as well.

While Sprouts has been positioning itself as a more efficient health-focused store with unique products, The Fresh Market, which grew too fast for its own good a few years back, has pivoted to a format that hews close to a European-style gourmet market. Natural Grocers, the Colorado-based chain that operates more than 150 stores in the western U.S., has continued to deepen its identity as a health-focused grocer, and now claims nearly two million members in its {N}power loyalty program.

Whole Foods, the country’s largest specialty grocery chain, has streamlined its operations to be more in line with the largest retailers in the industry. Yet it has continued to build new sharply designed stores that combine restaurants, bars and cafes with natural and organic groceries. The result is a chain that is defining what contemporary specialty retailing looks like — and it’s not slowing down any time soon. 

But with inflation continuing to drag down shoppers’ wallets, natural and organic grocers as well as gourmet operators overall are struggling to get people to pay attention to these narratives. PCC Community Markets, which operates more than a dozen stores in the Seattle area, posted a total operating loss of nearly $7 million in 2022 as it faced lower sales than anticipated. 

Likewise, while Sprouts recently posted solid financial results, those sit in comparison to fairly weak results from last year as the chain struggled against the pandemic and rising inflation.

Inflation is loosening its grip on the industry, and that bodes well for specialty retailers in the months ahead. But at a time when even Walmart is welcoming more high-income shoppers, these companies are hopefully learning some lessons about conveying value to their shoppers. They probably need to stock more private label products than they currently do. And they need to know, if they don’t already, that red tag sales, meal deals and other discounts won’t cheapen their image. 

Also: If specialty grocers can’t beat conventional retailers on price — and most of them can’t — then they need to offer value in other ways. They need to make shoppers feel like they’re getting more for their dollar.

When I spoke with PCC Community Markets’ CEO Krish Srinivasan a few weeks ago, he said the company plans to deepen its focus on philanthropy and community engagement. It’s always been something the grocer’s members have cared about — and it’s becoming a competitive advantage, he believes, as Gen Z shoppers’ spending power grows.

“Gen Z cares more and more about where their dollar goes and they want to know that they’re investing in organizations that care about labor practices, that care about commitment to equity and inclusion, and the list goes on. And those are all core to how we operate,” he said.

Companies like PCC may also have an inside track on recruiting and hiring workers, which has been an operational challenge for retailers ever since the pandemic spurred many people to leave their jobs manning cash registers and stocking shelves. During Natural Grocers’ most recent earnings call, co-President Kemper Isely estimated that more than half of the company’s workers are with the company “because of the ethos and the quality lifestyle that they're able to live because of working” at Natural Grocers.

If these grocers can once again redefine value for the next generation of shoppers and employees, we could see specialty grocers once again outperform their traditional competitors.