Chews Wise

Rice Rationing, Freeze in California

By now you've probably seen the news that Costco and Sam's Club are limiting sales of rice, seemingly to discourage hording now that prices are skyrocketing and Vietnam and India are placing bans on some rice exports due to shortages.

"There is no rice," said Rita Patel of San Jose, a native of India who couldn't find any at Costco on Hostetter Road in northeast San Jose on Tuesday night, the San Jose Mercury News reports.

This applies to Jasmine and Basmati rice, though there is no shortage of US-grown rice. Costco is also limiting soybean oil sales, according to the Wall Street Journal:

Food hoarding appears to be driven as much by budget worries as concern of shortages. Consumers, feeling pinched by inflation, are loading up before prices rise again. A Queens, N.Y., Costco limited sales of soybean oil several weeks ago. The store had noticed customers buying up flour and placed a brief limit on purchases. The oil limit is still in effect.

Meanwhile, a freeze on Monday and Tuesday in California has damaged organic crops. Organic Partners reports:

Heavy hit are: Prunes, peaches, apricots, walnuts and other tree crops.  Vegetable crops will not show the full extent of the damage until there is some hot weather to accelerate the decay in the plants.

Starbucks Identity Crisis: It's Not the Coffee

The Hartman Group has an interesting take (Part II of a series) on the Starbucks crisis, arguing that it has nothing to do with coffee or competition from McDonald's or Dunkin' Donuts. It has to do with the experience of the stores itself and the way its growth trajectory on Wall Street's behalf hijacked the company's soul. Interesting. Do you buy it?

The Beginning of the End of Plastic Bags?

BYOB: Bring Your Own Bag. Simple idea. Difficult to execute. I've got several reusable shopping bags and about half the time I run out the door to go shopping and forget to take them to the market. But I'm getting better. And so are some retailers.

Whole Foods announced today it's going to stop using plastic shopping bags by Earth Day, April 22. And for one day only, today, it is giving away reusable bags. I hope it keeps a spotlight on that goal, so that this doesn't just lead to a spike in the use of paper bags as replacements. What percentage of people bring their own bags to the market? I'd take a wild guess and say it's probably under 2 percent, but maybe this will help it grow. It's an easy fix, even though behavior is hard to change.

"...We estimate we will keep 100 million new plastic grocery bags out of our environment between Earth Day and the end of this year alone," Whole Foods President A.C. Gallo said.

- Samuel Fromartz

Will Starbucks Pull an Apple out of a Latte?

With news that McDonald's is entering the premium coffee biz with its own McLattes and baristas, Starbucks says "Basta!"

The company fired its CEO, who presided over a precipitous stock slide, and brought back Howard Schultz, the visionary who built the company.

This is reminiscent of Apple, where Steve Jobs came back on board in the dark days of a steep slide when the company's very existence was in question. The rest is history. Jobs not only managed to turn the company around but do something much more difficult: he transformed Apple into something new, a media company whose products fly off the shelves and commands hefty market share in addition to sex appeal.

So can Schultz pull off something similar with Starbucks? Lattes have gone mainstream, Starbucks sales are stagnant, and now it faces McDonald's. Or does it? The Wall Street Journal, which published the McDonald's story, notes that Dunkin' Donuts might take the bigger hit in this coffee war and makes another good point: The entry of the mainstream companies presents new competition but it also enlarges the market in a way that might ultimately benefit Starbucks.

According to Schultz's statement, Starbucks lost its way. It opened too many stores, became too bureaucratic and lost touch with the experience that was at the heart of its success. (Schultz had touched on these points nearly a year ago in a highly revealing memo -- nod to Romenesko's Starbucks Gossip blog). 

Schultz says "he will bring a “laser-like focus” to improving the customer experience and in making sure that the 'Starbucks experience' is markedly different from rivals..." the Times notes.  

Another interesting point: So many highly successful companies lose their way when the founding CEO steps down. Managers, often from outside the company, are recruited and too often they just don't get it. It's not in their blood. It happens time and again. This is a case study of that process. But Apple is the rare exception where the founder came back and brought focus and purpose to the company again.

Odds on Schultz succeeding: I'd say 7-to-3. But I'll stay loyal to DC's rockin' Murky Coffee whose high quality brew is only exceeded by its long lines. Yep, Starbucks grew the market too in a way that made it possible for independents to steal the frothy high-end. May the macchiato's always be strong, damn strong.

- Samuel Fromartz

The British Are Coming...

Britain's Tesco, the world's third-largest supermarket chain, raised $2 billion in debt for its Fresh and Easy grocery stores in the United States -- aiming to open three per week. Citigroup analysts said Tesco's U.S. launch could "potentially go down as a genuine turning point in the industry, possibly comparable with Wal-Mart's decision to start opening Supercenters in the 1980s."

The Economist earlier this year said: "If Tesco gambles small and wins, competitors will have time to copy it before it reaches critical mass. Placing a big bet is more dangerous, but it may be the best way to exploit a model that can be scaled up rapidly into thousands of stores across a market." Check out the Economist article for more details about the venture.

Wegmans Launches Organic Research Farm in NY

The Rochester Democrat and Chronicle has an in-depth look at Wegmans' organic research farm in upstate New York. "The farm's mission ... is to provide locally grown fruits, vegetables and honey to nearby Wegmans stores and, eventually, to serve as an educational model for local growers, employees and consumers who want to learn about organic food production," the newspaper says. (The family-owned Wegmans chain has 70 stores from New York to Virginia).

Photo of CEO Danny Wegman, linked from Rochester Democrat and Chronicle slide show

Supermarket Wars Part Deux

Whole Foods, confounding regulators who argued the retailer would do otherwise, announced it was lowering prices at Wild Oats stores in the Rocky Mountain region.

While this might be seen as a way to calm anxious customers (or thumb its nose at regulators), it is also informed by something else: competition. On that score, Whole Foods said it was rolling out a smaller store format, called Whole Foods Market Express at a test site in Boulder, which will focus on value-priced products and items for shoppers in a hurry.

This smaller format store (the initial one located at the original Wild Oats location in Boulder is 18,500 square feet) might eventually be used in the battle against Trader Joe's and  Britain's Tesco. The latter is opening "Fresh & Easy" markets in the United States that will be around 10,000 square feet, with ready-to-eat meals and fresh produce (among the most profitable aisles in the grocery biz). Whole Foods lately has been focusing on giant format stores of around 80,000 square feet but now it seems to be protecting the lower flank as well. So much for monopoly....

One note: In yesterday's item on Aurora Organic, I failed to mention that Wild Oats stocks private label milk from Aurora. With Whole Foods takeover, it will be interesting to see how that contract progresses. Currently, Whole Foods relies on Organic Valley for its private label organic milk and has not been exactly quiet about criticizing Aurora's practices.

(Picture link from Wikipedia)

- Samuel Fromartz

Naturally, Whole Foods Wins

I'm surfacing from my self-imposed Internet vow-of-silence to take note that a judge has ruled in Whole Foods favor (WSJ $) and allowed its acquisition of Wild Oats to proceed. On its face, this supports the position that I've articulated before -- that Whole Foods does indeed face competition from others besides Wild Oats and that the merger does little to alter that reality.

The organic, natural food, and grocery market is fast-changing and to think anyone has a hammer lock on consumer choice when it comes to this food is myopic. The competitive advantage presented by Whole Foods and Wild Oats stores does not mean shoppers have no other choices. Indeed, I wonder how others will now respond to this merger, if it goes ahead. I doubt they will sit still or give up on organics.

I would also note that the FTC, in an improperly redacted court filing, actually presented evidence of that broader competitive market. It argued that Whole Foods was muscling organic suppliers to keep them from selling directly to Wal-Mart -- instead forcing Wal-Mart to buy through distributors. That way, Wal-Mart would not be able to pursue its favored tactic of demanding lower prices from suppliers and passing on those savings to customers.

The FTC was arguing that Whole Foods was stamping out a competitor -- an especially ironic argument considering how Wal-Mart's entry into grocery sales has vastly reduced consumer choice by driving other supermarket companies out of business. Also, regardless of what you think of these strong-arm tactics (if one can actually strong-arm Wal-Mart), this suggests that Whole Foods was worried about competition from the retail giant. So then Wal-Mart is the competition?

Every company wants an edge, a distinctive way to stand out to consumers, but that alone does not make for a unique market or wipe out competition from other vastly different-looking companies selling the same  things. Whole Foods understands that, which is why it is consistently paranoid about losing customers to the competition, whatever their size or shape. Apparently, that point was lost on the FTC, which seemed to take John Mackey's chest-thumping at face value. It was not, however, lost on the judge.

Finally the ruling was sealed but if anyone wants to leak it, I'd be interested in reading it and commenting further...

One More Hole in FTC Case on Whole Foods

The FTC, in making its case that Whole Foods would quash competition by buying Wild Oats, relied on Boulder, Colorado, as an example. That town, ground zero for the natural and organic foods business, is also the headquarters of Wild Oats. And in Boulder, Wild Oats had planned to open a flagship store in March but then put it off.

The FTC asserted, "The Boulder store, the leading edge of Wild Oats competitive initiative, would have opened months ago but for the proposed acquisition. Whole Foods projects that by heading off that store opening, it is avoiding more than $150,000 in lost revenues per week that would have been diverted to the new Wild Oats store in Boulder." (Emphasis added).

Well, the facts are somewhat different. The Boulder Daily Camera reports that the Wild Oats store was not delayed by the proposed acquisition, or by Whole Foods.

Wild Oats revealed this week in a court filing that it has suspended opening its Twenty Ninth Street store because of "a host of significant" design and operational problems, and not the pending acquisition by rival Whole Foods.

But the Boulder-based natural foods grocer said it still plans to open the 40,000-square-foot location feted as the company's flagship store and prototype for future expansion. It just needs to work out the kinks.

"We're still evaluating how we go to market with this store," said Sonja Tuitele, a Wild Oats spokeswoman. "How do we overcome those challenges and enhance the current design and construction of the store and make it profitable?"

The "opening of the Twenty Ninth Street store was unilaterally delayed and then suspended by Wild Oats due to a host of significant design, construction and operational problems unrelated to the pending transaction," Wild Oats' attorneys said in the filing.

- Samuel Fromartz

A Muzzled Mackey Apologizes for Postings

"I sincerely apologize to all Whole Foods Market stakeholders for my error in judgment in anonymously participating on online financial message boards. I am very sorry and I ask our stakeholders to please forgive me," Whole Foods CEO John Mackey said. Just last week, he tried to explain the issue by saying he was just posting for "fun."

In a sign of how seriously the company is finally taking the matter, the board also stepped up and announced it was forming an independent committee to investigate the matter. It received formal word on Monday that the Securities and Exchange Commission had launched an investigation.

Given all the issues this company has promoted - organic farming, humane animal husbandry, natural and healthy foods - it's ironic that anonymous self-promoting postings by its CEO on a message board are what has gotten the most attention.

Since the company has taken a lofty position on food and other issues, it's no wonder that any perceived ethical lapse would lead to a maelstrom of criticism. And now the company is obviously in deep damage control mode, as the SEC investigates whether any laws were broken.

Whole Foods also shut down Mackey's blog and all previous postings were briefly removed, then reposted. "... It is in the best interest of the company to temporarily hold off on posting on my Company blog. I look forward to resuming our conversations and plan on being in touch with you again soon," Mackey wrote.

Clearly, the lawyers are reviewing every utterance out of his mouth.