Whole Foods sees stores tripling with embrace of produce

When Whole Foods Market Inc. announced last year it was opening a store in downtown Detroit, the reaction was predictable: Whole Foods? In Detroit?

The move reflects a new direction for America’s largest purveyor of natural goods, according to Walter Robb, the chain’s co-chief executive officer.

“We’re accelerating growth,” Robb said in an interview at the company’s Austin, Texas, headquarters. “That’s going to take us places we have not been to before.”

As Whole Foods prepares to open the Detroit store in May, it’s planning to triple its store count to 1,000 and boost sales by opening locations in underserved areas and smaller markets. Whole Foods is just the latest grocer to see opportunity in so-called food deserts and other areas where finding fresh fruit and vegetables is a chore.

A chain known for selling organic bok choy and mushroom-infused brie seems an odd fit for neighborhoods dominated by discount grocers, said Jack Horst, a partner at Kurt Salmon, a consulting firm.

“How successful are you going to be when you’re in a neighborhood that skews toward more middle-class or to people who shop more at a Save-A-Lot?” said Horst, who’s based in Atlanta. “Maybe they don’t need five different kinds of kale.”

Supermarkets are fighting for share as Americans eat out more and grocery-store sales stagnate. Industry revenue will grow an estimated 0.4% to about $491 billion this year, according to a June report from researcher IBISWorld Inc. Sales at Whole Foods may rise 16% to $11.7 billion in the company’s fiscal 2012, according to data compiled by Bloomberg. Its “niche product lines and loyal customer base” will help propel continuing sales growth, IBISWorld said.

The company has been talking to the mayors of Chicago and Newark about opening its doors in areas with few or no grocery stores, Robb said. Mayor Rahm Emanuel “wants to bring more food service to the south side of Chicago,” he said.

“It’s an effort for us to stretch ourselves” and it’s generating interest across the U.S., Robb, 58, said.

The Detroit store – the site is in the city’s Midtown neighborhood – will be near Wayne State University and the College for Creative Studies, aligning with Whole Foods’ strategy to open units in areas with educated populations. Still, only 27% of Detroit residents have a bachelor’s degree or higher, compared with 34% in Chicago and 36% in New York, according to the U.S. Census Bureau’s 2010 American Community Survey.

Whole Foods is also planning to open more stores in smaller markets – those with populations of about 75,000 are up for consideration. Whole Foods has recently opened locations in Glen Mills, Pennsylvania; West Des Moines, Iowa; and is targeting Wichita, Kansas, for another.

These smaller units have to slim down their food options, Robb said.

“Instead of having an eight-foot rice section, you might have a four-foot rice section, maybe just a few less varieties,” he said.

Whole Foods faces plenty of competition. Chains including Bentonville-based Wal-Mart Stores Inc. and Supervalu Inc. have announced plans to open hundreds of stores in food deserts in partnership with First Lady Michelle Obama and her efforts to bring fresh produce to low-income Americans.

And traditional grocers are “raising their game” with fresh fruits, vegetables and meats, which is Whole Foods’ specialty, Horst said.

Supervalu, based in Eden Prairie, Minn., is lowering fruit and vegetable prices and has trained its employees to help shoppers pick and cook fresh foods. Wal-Mart, which recently began selling and advertising USDA Choice steaks in the U.S., has also said it’s reducing produce prices to make healthier food more affordable.

Even pharmacy Walgreen Co. has promised to open or convert at least 1,000 so-called food oasis stores in areas with little access to grocery stores in the U.S. These locations are carrying 750 more food items such as Greek salads, cantaloupe and frozen tilapia.

Whole Foods will also look to boost revenue by opening more locations in its existing strongholds, Robb said. “We’re nowhere near saturated in Chicago or Boston or Los Angeles or San Francisco.”

People in major Whole Foods markets spend more on food than in less-populated areas, according to data from Census Bureau. Households in San Francisco spent $4,214 on food to eat at home in 2010 and Chicagoans spent $4,250, on average, compared with $3,300 in Baltimore and $3,690 in Phoenix.

Whole Foods may open stores as small as 15,000 square feet and as big as 75,000 square feet, according to company filings. The company will need to shrink its average store size to scale to smaller markets, said Scott Van Winkle, an analyst at Canaccord Genuity Inc. in Boston who advises buying the shares.

“The question is: Can they properly size their investment for that market?” Van Winkle said. “You know they can operate and you know they can attract consumers.”