Small natural-food stores feel pinch of Whole Foods

After years of delivering organic produce to health-food enthusiasts in Washington, D.C., Scott Nash amassed enough money to open a small storefront in nearby Rockville, Md., in 1990.

But a few months later, Mr. Nash's elation with the opening turned to misery when a giant health-food store opened just a mile away. The rival - called Fresh Fields, and later bought by Whole Foods in 1996 - lured customers into its supermarket-size store with advertising and a wide selection of fresh meats and seafood.

Nash's store struggled. Two months after Fresh Fields' opening, he had to sell his motorcycle for $500 to pay his sole employee. Yet he managed to keep the store afloat thanks to what he calls his "scrappy" management style, two expansions that tripled his floor space, and an obsession with matching or beating Whole Foods' prices.

Since opening his first My Organic Market, Nash has seen many of the area's small natural-food stores vanish. Whole Foods Market Inc. now operates 13 stores in and around Washington, and at least 145 nationwide. "They've pretty much stomped down all the competition," he says.

The struggle of local shops to eke out profits in a megachain age is a classic retailing story. It was played out in the 1990s as Starbucks, Barnes & Noble, and Home Depot blanketed the country, forcing thousands of mom-and-pop coffee, book, and hardware stores to shut down. But in the natural-foods industry, this story line has more twists and turns.

Demand for natural foods and nutritional supplements has skyrocketed over the past decade. The market for organic produce and vitamins is growing much faster than, say, books or two-by-fours, says Frank Lampe, editorial director of Conscious Media, publisher of a healthy-lifestyles magazine.

The upshot: Small independent store owners like Nash can survive - and even thrive. The number of independent or small chain natural- and health-food stores in the US has grown by nearly a quarter since 1998, according to the Nutrition Business Journal (NBJ). Some 8,200 such stores now operate in the US.

Some industry observers believe the Washington health-food market is an anomaly. "Whole Foods' coverage in the D.C. area is higher than pretty much anywhere else," says Grant Ferrier, editor of the NBJ.

Yet the fate of Washington independents is a cautionary sign to small natural-food stores elsewhere. Whole Foods plans to enlarge its average outlet from 35,000 to 43,000 square feet over the next few years. "Our stores are getting bigger and bigger," says Whole Foods executive vice president A.C. Gallo. "We want people to feel that we offer everything."

Whole Foods expects to open at least 26 stores over the next three years, Mr. Gallo adds. The nation's second-largest natural-foods chain, Wild Oats Markets Inc. in Boulder, Colo., operates at least 100 stores and has expanded at a slower clip.

Industry analysts credit Whole Foods and Wild Oats with luring legions of affluent urban customers into their stores. Shoppers rave about the stores' fresh produce, fine cuts of meat, and prepared foods such as Ed's Tantalizing Tofu and Cranberry Couscous.

Whole Foods' growth also parallels the rise in consumer interest in organic and natural foods. Organic-food sales have nearly doubled over the past five years, according to the Organic Trade Association. Nash says this is no coincidence: "They've educated the masses ... and brought natural food into the mainstream."

Whole Foods sprang up in 1980, when John Mackey, the company's current chief executive, helped open its first store in Austin, Texas. A string of health scares in the 1990s - from E. coli to mad cow disease - raised concern about where produce and meats came from, says Katherine DiMatteo, executive director of the Organic Trade Association.

Whole Foods capitalized on rising demand for organic products, gobbling up regional natural-food stores. Today it's one of the 100 largest companies listed on the Nasdaq.

Some consumers perceive the super-sizing of natural-food stores as a betrayal of the organic-food movement's "small is beautiful" roots. They prefer to shop at small neighborhood stores because they can be assured that all the produce is grown locally.

Such sentiments have not slowed Whole Food's expansion in Washington. After it opened a store 1-1/2 miles away from People Garden Market, a two-room health-food store in Washington, the smaller store's business "drastically" declined, says owner Jeffrey Brechbuhl.

Although he knew the names of most customers, his 1,500-square foot store was unable to compete with Whole Foods on price or selection. Last month, Mr. Brechbuhl closed the store. He now sells organic produce on the Internet. "I felt I did everything I could. But the neighborhood didn't [support me]," he says. "The way the American economy is working, Whole Foods is the way to go."

Nash, who now runs three stores in suburban Washington, has little patience for small-store owners who bemoan Whole Foods' expansion.

"These independents aren't entitled to survive; they're just entitled to compete," he says. "I think anyone that has a problem with [Whole Foods] is really just whining."

Whole Foods insists that its focus is to woo away customers from traditional supermarkets, not put little guys out of business. "[Small stores] are not in our business model, conversation, or consciousness," says Gallo.

The chain has penetrated 30 of the 50 largest US markets. But it hasn't finished building in the Washington area. Gallo says Whole Foods plans to reopen a bigger store in Alexandria in the next few years - just two miles from Nash's newest location.