Whole Foods and Instacart end partnership, 56 workers let go

Whole Foods and Instacart announced earlier this month that the two companies have "mutually agreed" to end their delivery services partnership, effective May 15. As a result, 56 Philadelphia-area workers have been laid off.

The end of the Whole Foods - Instacart relationship did not come as a surprise to industry analysts, many of whom predicted the change since Amazon purchased Whole Foods in 2017. Whole Foods currently offers Prime Now, a one- and two-hour delivery service in more than 60 U.S. cities, including Philadelphia.

Instacart remains a strong presence in the Philadelphia market, as it has relationships with Reading Terminal Market, CVS, Aldi, Sprouts Farmers Market, Sam's Club, Wegmans, Acme, and Costco. Overall, the company is in 5,500 cities and delivers from nearly 20,000 stores.

"The U.S. is nearly a $1 trillion grocery market, and last year we saw almost every major grocer in North America bring their delivery business online in a significant way," said Instacart CEO Apoorva Mehta in a statement last year. "We believe we're in the early stages of a massive shift in the way people buy groceries, and we expect that one in five Americans will be shopping for their groceries online in the next five years."

Grocery store openings increased 30 percent in 2018

New grocery store openings were up 30% in 2018 as compared to the prior year, according to a report by JLL. More than one-quarter of the new stores were in Florida, California and Texas as a result of expansion by Publix, Sprouts Farmers Market, Aldi, Kroger and H-E-B.

"Grocery is one of the strongest retail sectors, with nearly twice as many new stores opening than closing last year," according to JLL Director of Research James Cook.

Cook also pointed out that shopper habits have shifted to more frequent, shorter trips, and as a result, food retailers are focusing on developing smaller format stores.

"In 2019 we expect to see even more grocery stores rolling out their smaller-format stores as they battle razor-thin margins in prime locations, while still serving evolving consumer needs," said Cook.

Aldi, which accounted for 16% of total new stores by square footage, continues to expand at a rapid pace. And new formats, like Giant's 9,500 square foot Heirloom Market in Philadelphia, were recently introduced.

Sprouts to open 30 new stores in 2019

Sprouts Farmers Market announced earlier this month that it plans to open nine new stores in the second quarter of 2019. Overall, the company expects to open about 30 new stores for the year, the same as in 2018.

The stores opening in the second quarter are in New Jersey (Marlton), Louisiana, Virginia, Florida (2), California (3) and Arizona.

Eight stores opened or are slated to open in the first quarter of the year. They are in California (2), Texas, Florida (3), Washington and Nevada.

Sprouts currently operates 320 stores in 19 states.

Trader Joe's tops annual Retailer Preference Index

According to Dunnhumby's second annual Retailer Preference Index (RPI), Trader Joe's was the top grocery retailer, followed by Costco, Amazon, H-E-B and Wegmans. In a survey of 7,000 U.S. households, the RPI examined 56 grocery retailers to determine which companies have the strongest combination of consumer emotional sentiment and financial performance.

Market Basket finished 6th, followed by Sam's Club, Sprouts Farmers Markets, WinCo Foods, Walmart, Aldi, Peapod and The Fresh Market.

Dunnhumby said the rankings focused on seven "pillars": price; quality; digital; operations; discounts, rewards and information; convenience; and speed.

The company concluded that the top retailers on the index are mostly nontraditional grocers that have developed a highly targeted offering to bolster the value perception for their customer base.

"More traditional, regional grocery banners with a long history are hurting because of it, having relatively poorer-performing financials and/or emotional bonds," Dunnhumby said. "The reason: These traditional banners have inferior price perception and/or quality."

Trader Joe's also finished atop the rankings last year.

Sprouts opens in Philly

Sprouts Farmers Market opened its first Pennsylvania store last month at Lincoln Square in Philadelphia. At 32,000 square feet, the store carries about 19,000 products, 90% of which are natural or organic, according to the company. In addition, 6,100 products are non-GMO and 7,100 are gluten free.

Sprouts currently operates 316 stores in 19 states. The company plans to open about 30 new stores per year, according to Chief Financial Officer Brad Lukow.

Grocery store openings fell sharply in 2017

According to an annual "Grocery Tracker" report from JLL, grocery store openings dropped 28.8% in 2017 compared to the previous year. The report states that the decline reflects chains' efforts to reexamine their current footprints and rethink strategies to deal with new online and brick-and-mortar competition.

JLL said that California led the way in 2017 with 1.6 million square feet of new grocery store space. Virginia and North Carolina combined for 2.7 million square feet of new space, and Texas was described as "still one of the hottest states for grocery expansion."

Sprouts, Grocery Outlet, Aldi and Lidl were mentioned as notable chains that are expanding.

JLL's report said that investment in grocery-anchored centers grew 5.3% in 2017, and the company expects supermarkets to retain high interest as anchor tenants for shopping centers.

"It (grocery-anchored centers) was one of the only retail sectors to see growth in a year of low transaction volume," the study said. "Grocery-anchored centers remain a safe bet for investors, as overall transaction volume for retail has been down, indicating the asset remains a stable sector."

The study mentioned that the increase in smaller footprint stores is a clear trend - for more compact formats like Aldi and Trader Joe's, as well as for traditional supermarket chains and mass merchants like Walmart and Target.

"The grocers that can deliver the right in-store experience, combined with the right online pickup or fulfillment plan... are the ones that will thrive, whether their stores are 15,000 square feet with limited products or take up a footprint four times as large," said James Cook, JLL director of retail research.

Sprouts confirms South Philly store but isn't coming to South Jersey

Sprouts Farmers Market announced that its first Pennsylvania store, under construction in South Philadelphia, will open before the end of the year. The 32,000 square foot store will be part of Kimco Realty's Lincoln Square development that includes Target, PetSmart and approximately 350 apartments.

It had been reported since last spring that Sprouts was coming to South Philadelphia and the vacant Macy's space at the Moorestown Mall in New Jersey. However, a spokesperson for PREIT, the mall's owner, said the company is moving forward with another grocer for the site.

Sprouts operates 280 stores in 15 states.

Investments in grocery-anchored centers grew in 2017

Investments in grocery-anchored shopping centers grew by 5.3% last year compared to 2016, according to a report issued by Chicago-based Jones Lang Lasalle (JLL). The increase makes the grocery-anchored segment one of the few retail sectors to see real growth.

The report also stated that grocery store openings declined by 29% in 2017, with several retailers cutting back on expansion plans and others shutting stores as they attempted to avoid bankruptcy.

"Grocery is considered to have a moat around it to defend against e-commerce, and because of that, these assets are seen by retail property investors as a safe investment," according to JLL.

A Supermarket News article points out investing in supermarket-anchored centers is not 100% safe, as Amazon and other e-commerce firms make inroads into the market. As a result, many shopping centers run the risk of dying, like their regional mall counterparts anchored by weak department stores.

Tops Friendly Markets (upstate New York) filed for bankruptcy last month, and Southeastern Grocers (Bi-Lo, Winn-Dixie, Harveys) may file this month. A&P, once a major player in the grocery industry, filed for bankruptcy and liquidated in 2015.

Not surprisingly, shopping centers anchored by strong operators like Whole Foods, Sprouts, Trader Joe's, Kroger, ShopRite, Wegmans and Publix are among those that have the greatest investment potential.

Sprouts willing to acquire or be acquired

Sprouts CEO Amin Maredia said earlier this month that the company is open to acquisition talks, and at the same time is open to purchasing another business.

"This is an interesting time to be looking at M&A from both perspectives," said Maredia. "There's certainly one element we can control, which is looking for interesting opportunities that would fit well in our portfolio. The second is to the extent we get a gesture, we'll put our fiduciary hat on and look at the Sprouts brand, and evaluate it and do the right thing for shareholders."

Sprouts is seemingly on a crash course with Amazon, which since its Whole Foods acquisition has promised to make organic products more affordable. However, Maredia says Sprouts' sales have accelerated since Whole Foods started discounting certain products.

For now, Sprouts main focus is on conventional grocers. Maredia believes most grocery stores have not kept up with the consumer. And although some conventional grocery stores (Kroger, for example) have slowed growth, Sprouts plans to expand by about 30 stores next year, with the goal of eventually increasing from 285 to 1,200 stores.

The company's plan is to fuel its growth by leveraging its advantages in fresh foods (which account for about 25% of their total sales) while investing in private label, technology and an enhanced deli offering.

Supermarkets in malls proving to be a win-win

Here in Greater Philadelphia, we are getting used to having supermarkets at the mall (Wegmans in Montgomeryville, Whole Foods in Plymouth Meeting, Sprouts coming to Moorestown...), but it's still a new concept in many parts of the county. Industry analysts believe we will see several more supermarkets lease space in malls in the coming years.

"With the fast-paced nature of America, shoppers want to be as efficient as possible when running errands," said Displaydata Marketing Director Paul Milner. "Grocery stores in malls could give Americans the benefit of a one-stop shop for all of their needs... This transition is another step towards providing shoppers with the advanced and friction-less shopping experience that the American consumer demands."

Milner also sees supermarkets in malls as a winning proposition for landlords. Mall owners, often stuck with a declining retail property, can transform their asset into a destination allowing consumers to complete all of their shopping in one place. He warns, though, that parking could be a deterrent if shoppers have to carry their groceries too far.

Whole Foods price reductions hit competitors hard

Thasos Group, a New York-based research firm, issued a report based on mobile phone location data that showed that Amazon's lower prices at Whole Foods contributed to a 17 percent rise in foot traffic for Whole Foods stores the week of August 28, and that traffic remained modestly higher by mid-September. Amazon officially merged with Whole Foods on August 28.

According to the report, the data also indicated that the largest percentages of new customers for Whole Foods during the first week of price reductions were regular customers of Walmart (24%), Kroger (16%) and Costco (15%). When adjusted for the size of the customer base, Trader Joe's (10%), Sprouts (8%) and Target (3%) saw the highest percentage of shoppers defect to Whole Foods during that period.

Thasos Group reported that by September 16, Whole Foods traffic was up 4 percent on a year-over-year basis.

"We all know that Amazon's acquisition of Whole Foods has the potential to be a game-changer in the grocery space, and in the bricks-and-mortar versus online battle more broadly," said Thasos Group CEO Greg Skibiski. "It will be extremely interesting to watch the winners and losers emerge from the data over the coming months."

Sprouts expands relationship with Amazon

Despite speculation that Amazon's partnership with Sprouts Farmers Market may end due to the online giant's pending acquisition of Whole Foods, last week Sprouts confirmed plans to expand its relationship with Amazon Prime Now.

"Our partnership with Amazon Prime Now continues to grow," said Sprouts CEO Amin Maredia. "We will be delivering Sprouts products through the Prime Now service to over 20 locations across many of our major markets by year end."

Sprouts operates 260 stores in 15 states.

The impact of the Amazon - Whole Foods deal may be far-reaching

Several media outlets and industry experts have weighed in recently with their thoughts on Amazon's planned $13.7 billion purchase of Whole Foods, including The Washington Post, in which its "On Leadership" column cited several "telling comments" made by Whole Foods CEO John Mackey. Sample comments include the following.

• Mackey admitted that Whole Foods may be too employee-focused, and although he didn't back down from the importance of treating employees well, he said that Amazon is "more customer-centric than we are... we're gonna become as customer-centric as Amazon."
• In a sharp contrast from when Zappos was purchased by Amazon and pledged to remain independent, Mackey said that "when this deal closes, we're all Amazon people."
• Mackey acknowledged that his company has been a little behind in technology as compared to Amazon, and pledged that "we'll go to the front of the class, eventually, in the grocery business."

A subsequent article in The Washington Post  reported on the deal's potential impact on small farmers and food producers, who are worried that Amazon will use its market power to further centralize production and boost larger, industrialized organic operations. In addition, industry activists and farmers advocates are fearful of the pressure Amazon may put on producers for price concessions, which could cause them to compromise on environmental and formulation standards.

According to an article written by CNBC's Chantel McGee, a data scientist claims that the merger is less about stores and more about data. Specifically, Boston College Professor Kenneth Sanford said that one of Amazon's goals should be to combine the data it already collects online and via Echo and Alexa, with Whole Foods' customer transaction data.

The data collected would enable the company to predict what customers need and automatically send it to them. "Amazon will know what's in your refrigerator already and be able to deliver extra turmeric when you need it," said Sanford.

Grocery e-commerce retailer Instacart is already working towards this goal. According to Jeremy Stanley, the company's vice president of data science, Instacart uses customer behavioral data and search activity to anticipate what a customer wants or might like.

"One of the wonderful things about groceries is that compared to other e-commerce purchases, groceries are habitual and frequent," Stanley said. "Groceries are really personal... and I think data can really change the way people buy food."

Supermarket News reported on the deal's potential impact on competitors, including Instacart, whose service generates more than $200 million in sales annually for Whole Foods. Should Amazon decide to pull out of the deal in favor of its own delivery service, it could harm Instacart, and perhaps Instacart's other customers as well. Furthermore, rather than replacing Instacart, Amazon could attempt to purchase it.

Sprouts Farmers Market has been competing successfully against Whole Foods in certain markets, and has made plans to partner with Amazon Prime Now for e-commerce. Perhaps the Amazon - Whole Foods deal could kill this partnership, or even make Sprouts an attractive Amazon target. Having Whole Foods and Sprouts under the same ownership could save Whole Foods from spending on its 365 format since Sprouts could fulfill the small format need.

Walmart's success integrating physical and digital assets, which has led to strong sales results in recent years, has not gone unnoticed by Amazon. And grocery, which generates frequent and habitual trips, has been central to Walmart's strategy, not to mention the company's expanded offerings in grocery pickup and delivery strategies. As the Supermarket News article points out, Amazon and Walmart are gunning for each other.

Lastly, natural and organic food consumers have seen big retailers like Costco and Kroger catch on to the trend that Whole Foods pioneered, and these retailers have hurt Whole Foods on price. With Amazon's buying power, that price advantage may eventually disappear - or at least lesson - resulting in Whole Foods recapturing sales at the expense of others.

Eight US companies make "world's fastest growing retailers" list

Recently 24/7 Wall St. analyzed data from the National Retail Federation and released a "World's 25 Fastest Growing Retailers" list. Eight U.S.-based retailers made the cut, three of which are grocers.

Here are the eight American companies on the list:

• Albertsons Companies (5-year annual growth: 74.1%)
• Sprouts Farmers Market (47.4%)
• Southeastern Grocers - BI-LO, Harveys, Winn-Dixie, Fresco y Mas (34.6%)
• Apple/Apple Retail Stores (23.4%)
• NIKE/Direct-to-Consumer (22.3%)
• Ulta (22.1%)
• Dollar Tree (21.4%)
• Amazon (20.8%)

Sprouts Farmer's Market coming to Philly, South Jersey

Sprouts Farmers Market, an organic and natural foods grocer with 268 stores in 15 states, is reportedly planning on a new store in Philadelphia, PA and Moorestown, NJ. Both stores would represent the first in each state.

The Philadelphia store is planned for Lincoln Square at Broad Street and Washington Avenue in South Philadelphia, a mixed-use development that Kimco is involved in. The Moorestown store would inhabit part of the space in the Moorestown Mall that Macy's recently vacated.

Sprouts expansion to the northeast comes at a time when sales of organic food has been soaring in the U.S. Until recently, Whole Foods has owned most of the organic market in Greater Philadelphia. However, Mom's Organic Market and bFresh have recently entered the market, and several traditional and discount grocery stores - like Aldi and ShopRite - have been increasing their organic and natural foods offerings. Newcomer Lidl is expected to offer a significant variety of organics, as well.

What this all leads to is "a price war of unprecedented proportions," according to Burt Flickinger III, managing director at Strategic Resource Group.

Nationally, Sprouts had reported that they have 63 sites approved for new stores and 43 signed leases "for the coming years."

As reported previously, Albertsons (Acme) is exploring an acquisition of the Sprouts chain.

Albertsons in talks to acquire Sprouts

It was reported last week that Albertsons is considering a deal to acquire Sprouts Farmers Markets, and an industry source told me that he thought the likelihood of such a deal was 50-50.

Sprouts, based in Phoenix, is the largest farmers' market-style food retailer in the country. It operates more than 250 stores in 15 states, not including Pennsylvania, where a Philadelphia store is planned. There are no stores currently in New Jersey either, and it has been rumored that the company is looking for a site in South Jersey.

According to reports, Sprouts has plans to open 32 stores this year, following 36 new stores last year and 27 in 2015.

Jefferies Anlyst Chris Mandeville said last week that "the logic of a deal makes sense in our view," but added that it would be very expensive.

Albertsons, which is owned by Cerberus Capital, acquired Safeway and Supervalu in recent years. Reports said that the company was in talks to acquire Price Chopper late last year, but the deal never happened.

Whole Foods to layoff 1,500 employees

Whole Foods said last week it would eliminate 1,500 jobs, or 1.6% of its workforce, as part of a commitment to invest in technology and lower prices. The company anticipates that many of the reductions would come from natural attrition, and that it expects other affected employees to find jobs elsewhere within the company via open positions or in new stores.

Whole Foods says it added about 9,000 jobs in the past year. An analyst from RBC Capital said the company's selling, general and administrative expenses are currently well above peers like Kroger and Sprouts.

Competition gaining on Whole Foods as organic and natural markets grow

Whole Foods officials told analysts last month during the company's earnings conference call to expect profits to be under pressure for the next couple years. The company cited growing competition for sales of natural and organic products, and what could be a prolonged period of price investments and internal cost reductions.

"I think it's important to understand that competition has accelerated, there's no question about it," said Co-CEO John Mackey. "We've seen the conventional supermarket companies like Kroger and Wegmans and H-E-B, they certainly have upped their game in natural and organic foods. We've seen new entrants get public money such as Sprouts, Fresh Market, Natural Grocers, and they're expanding more rapidly. Trader Joe's continues to expand."

"We still remain the market leader in this category, I think by a significant margin," he added. "And the market continues to expand, which is why all these guys are jumping into it... I think for a long time Whole Foods had the field to ourselves pretty much. That was nice. But we don't any longer."

It should be noted that Whole Foods is still gaining market share and same-store sales continue to climb. However, their market share gains are at half the rate they used to be, and same-store sales have gone from high single digits to mid-single digits. Wall Street doesn't like that, nor do Whole Foods executives.

Perhaps most disturbing to Whole Foods, although they won't admit it, is Walmart's entrance into the organic food arena. Walmart's buying power and value-pricing may bring lower prices to natural and organic foods overall, and could lead to price competition typically reserved for the conventional supermarkets.

As Analyst Neil Stern of McMillan Doolittle pointed out, "even Aldi has a private label for natural and organic."

Despite these challenges, Mackey pointed out that Whole Foods has a record 114 new stores in its development pipeline and was poised to approach 500 stores by 2017.

Analyst Chuck Grom of Sterne Agee believes a more tepid store development approach is required, and expressed concern over Whole Foods' ability to communicate a lower price image, stating that the company "will need to get very loud with its price message, which would almost certainly lead to lower operating margins."