Behind the checkout counter

The Fresh Market’s slip in same-store sales won’t spoil the grocer’s expansion plans.
By Erin Dunn

https://asoft10294.accrisoft.com/businessnc/clientuploads/Archive_Images/2013/05/Fresh-Market.jpgCraig Carlock doesn’t mean to come across as a Pollyanna. The 46-year-old CEO of The Fresh Market Inc. knows there are challenges facing the Greensboro-based specialty grocer. The company’s stock took a beating after same-store sales slowed during the holidays. Its westward march also faces perils: introducing a new brand to new customers, finding the best locations, establishing distribution networks. Still, it must be hard for him not to take the long view.

When he joined Fresh Market as a marketing executive in 1999, it had 25 stores in six states. Not bad for a family-owned business that opened its first location in the early 1980s with no idea if it would last a week. But the company has been transformed during his 14 years there — and not just from private to public. It has 130 stores in 25 states and 10,000 employees. Net sales topped $1.3 billion last year. Carlock believes in Fresh Market’s brand. He preaches customer service and thinks it — combined with top-shelf, fresh products — will make the grocer a national name. “Our job is to deliver a great store experience, provide great food, and then customers will come. The stock will take care of itself. Day in and day out, that’s what motivates us.”

The notoriously competitive grocery-store industry is navigating a sea change. Traditional chains such as Matthews-based Harris Teeter Supermarkets Inc. and Salisbury-based Food Lion Inc. face more competition as the sector becomes increasingly fragmented. On one end, specialty grocers such as Fresh Market and Austin, Texas-based Whole Foods Market Inc. attract higher-income customers and those more discerning about the origin of their food. On the other, dollar stores and Bentonville, Ark.-based Wal-Mart Stores Inc. offer low prices to bargain hunters, many struggling in the aftermath of a recession. “I think the whole makeup of what a supermarket is and what the shopping experience is will change,” says Phil Lempert, an industry expert who contributes food-trend analysis to NBC’s Today Show and edits the SupermarketGuru.com website. “The traditional store needs to wake up.”

Natural and organic products account for between 9% and 13% of the country’s $584 billion annual grocery-store sales. That slice narrows further if you add convenience, drug and dollar stores to the mix. But though U.S. food sales rose 4% in 2011, those of natural products increased 10%, and organic offerings gained 9%, according to Natural Foods Merchandiser, a trade publication. That tailwind is pushing Fresh Market forward. This year, it plans to open a record 19 to 22 stores, including four in Houston — its first foray into Texas. It’s expected to add several more in California after making its debut there last year. “We want to grow on the East Coast and grow on the West Coast. If we have the ability to look at potential sites east and west, then we can continue to be selective and pick the best of the best. For us, it’s a matter of widening the funnel so we can see more and more [real-estate] deals and continue to be selective about the ones we accept,” Carlock says. “We want to be a national retailer, so the sooner we start poking and looking around the West Coast, the better off we’ll be.”

The store on Lawndale Drive opened March 5, 1982. Its owners, Ray and Beverly Berry, were from California, but he had been vice president of stores for Dallas-based Southland Corp., running about 4,000 7-Elevens before leaving after a disagreement with management two years earlier. They set their sights on the Southeast, confident its growth would support the kind of grocery store they planned to spend their savings to create.

They packed their two children and dogs into the car and scouted cities, including Atlanta, Greenville, S.C., and Charlottesville, Va., choosing Greensboro after meeting some nice people and finding a suitable site. They based the store on a European market, incorporating loose produce, fresh meat and an open floor plan. At the time, grocers sold mostly bagged fruits and packaged meats, while hiding the bakery and deli operations. The idea was risky. “What’s interesting is a fresh, perishable food concept had to work in five to seven days, otherwise you throw all of the food away. It wasn’t like they had months to figure it out. It had to work the first week,” Carlock says. Work it did, averting the Berrys’ fears they would have to ask their few Greensboro friends to pick up unsold food. The next year, the company was expanding, opening stores in High Point and Asheville. By most accounts, the then-novel format has been successful. “The reason they’re doing so well is they don’t have a direct competitor at the moment. No one does fresh produce as convincingly as they do,” says Jay Jacobowitz, president of Brattleboro, Vt.-based Retail Insights LLC, a natural-products industry consultant.

Fresh Market is often compared with Whole Foods, though the larger chain, which has about 345 stores, puts a larger emphasis on organic. And you can still pick up Cheerios or Ritz crackers at Fresh Market — though they’re often displayed on the bottom shelf. “In produce, most of the vegetables are organic, but we don’t make a big fuss about it,” Carlock says. “Our vegetables are organic because we think those are the ones that taste the best, look the best, are the freshest. Most of our fruit sales are conventional because conventional fruit tends to bruise less easily, grow a little larger, taste a little sweeter, look better and last a little longer.”

The average store is 21,000 square feet, small compared with Whole Foods’ 38,000 and a traditional grocer’s 48,000. While the exteriors vary to fit local neighborhoods, interiors are uniform. Customers are greeted with soft lighting, classical music, flower displays and baskets of seasonal merchandise such as candy and gifts. The produce section flows into the meat department, styled like a butcher shop, followed by prepared foods and fresh breads, rolls and pastries. Dairy items, frozen foods, wine and beer round out the outer ring. The center, stocked with shelf-stable items such as pasta, olive oil, cereal and soda, is small. Those are typically less profitable than the perishables, which make up 65% of Fresh Market’s offerings. “One of the things that’s fascinating about The Fresh Market is that it is truth in advertising,” says Jacobowitz, who estimates the company turns its inventory 50 times a year, compared with 15 to 20 times for a traditional supermarket.

Customers pay a premium for that freshness. When St. Petersburg, Fla.-based Raymond James & Associates Inc. conducted a pricing study in late 2012 and early 2013 at stores in the Atlanta market, Fresh Market’s basket of about two-dozen items rang in at $148, same as Whole Foods. Similar products cost $128 at Lakeland, Fla.-based Publix Super Markets Inc. and $121 at Cincinnati-based Kroger Co. “The pricing philosophy is twofold. The first is on staple items where our item is fairly similar to another grocery store’s — flour, sugar, those kinds of things — we want to be very competitive because it’s essentially the same item,” Carlock says. “Other items where we feel like we have a quality difference because it’s a different specification, it’s a different grade, we feel we need to price commensurate with the quality of the item.”

Locally sourced products, from sweet potatoes to granola, contribute to that ethos. Take Sarah Ward, a Greensboro speech therapist who started making salsa for friends and family in the early 1990s. In May 2005, she began selling it on weekends at the farmers market in downtown Greensboro. A Fresh Market employee came across it a month later and brought a jar into work. Sarah’s Salsa Inc. was born soon after. Two Fresh Markets in downtown Greensboro started carrying it and, a few months later, 34 were. It’s in 63 now and will be introduced into all in June, a move Ward expects will double her company’s $250,000 yearly sales. Fresh Market helped develop packaging, new flavors and its $3.99 price point. Though grocers including Harris Teeter and Asheville-based Ingles Markets Inc. temporarily carried the salsa, Fresh Market offered a better model. Others wanted it shipped to large warehouses that their stores could order from. That didn’t work because the salsa has a short, 30-day shelf life. “Someone small like us needs someone who will take care of you and handle the small issues that come up for you so they don’t become big issues.” Ward knows Fresh Market’s customers are looking for what she offers. “People want things in that natural state, and when they go there, it’s what they’re expecting.”

https://asoft10294.accrisoft.com/businessnc/clientuploads/Archive_Images/2013/05/Fresh-Market-Carlock.jpgRaised in the suburbs of Atlanta, Craig Carlock attended Davidson College, near Charlotte, where he captained the golf team. After two years as an analyst with the Federal Reserve Bank of Richmond, he went to the University of Virginia in Charlottesville to get his MBA. After graduation, he landed in the laundry-detergent division at Cincinnati-based Procter & Gamble Co., where he worked in financial management. “I still remember hydrophilic and hydrophobic molecules. People always ask me how laundry detergent works, and I still remember.”

After six years as a small fish in a huge pond, he was ready for something different. He believed manufacturing or a smaller consumer-products company might be the right fit. When a family acquaintance told him Fresh Market was hiring, he demurred but had a change of heart a couple weeks later. “As I thought about what would professionally motivate me, The Fresh Market was growing, The Fresh Market had a great culture, it was headquartered in the Southeast, where I am from, and The Fresh Market had a chance for me to be in a decision-making position.”

Eventually promoted to senior vice president of operations and then chief operating officer, he became CEO in January 2009, the third person to lead the company and first outside the Berry family. Founder Ray Berry filled that role until 2007, when he handed the reins to son Brett. Both are still directors — chairman and vice chairman, respectively. By diversifying its leadership, the company created a governance structure that is more attractive to outside investors. It had briefly considered a sale, retaining New York-based Goldman Sachs & Co. in 2008 to consider offers, but nothing came to pass. “Simply put, as we went through the process of courting potential buyers and investors we fell in love with the company all over again,” Brett Berry said in a statement at the time.

Instead, Fresh Market went public in November 2010, raising $290 million to fuel a rapid expansion. But it’s also brought increased scrutiny. In March, the grocer reported a key metric — sales at stores open at least a year, or same-store sales — increased just 1.9% during the fourth quarter. That’s close to what traditional grocer Harris Teeter reported but below what analysts expect from a high-growth company. The slowdown dragged same-store sales growth in 2012 down to 5.7%, compared with 7.3% after the first three quarters. Fiscal 2013 predictions — 2% to 4% — were even less rosy.

That led to an uncomfortable exchange between Carlock and Ken Goldman, an analyst at New York-based JPMorgan Chase & Co., during a conference call to discuss year-end results. Fresh Market blamed sluggish holiday sales on fewer customers coming into its stores, but Goldman wasn’t satisfied. “Isn’t this a genuine structural change in your growth rate that you’re pointing us to when you talk about only 2% to 4% [same-store] sales? I know, Craig, you have a difficult comparison, but you are still guiding to a full year of slowing growth, so it’s not just one period. I’m not sure why you aren’t suggesting that a slowdown like this needs perhaps some stronger reaction rather than just stay the course.”

Carlock defended the company’s strategy, saying there was no need for a “knee-jerk reaction” and he expected sales to pick up. “I think our view is that over the long haul, we expect the [comparable sales] in the 3 to 5 range, but based on the trends we saw in the fourth quarter, we should come out of the gate more conservatively in the 2 to 4 range. I wouldn’t characterize this as a structural change.”

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The company’s push west presents its own set of challenges. Fresh Market outsources distribution, contracting with several companies, the largest of which is in Atlanta. Its emphasis on perishable products makes supplier relationships crucial. There’s also the possibility it won’t find the kind of real estate it wants. Its success is predicated on being near affluent neighborhoods. “The question is will the next 100 locations be as productive as the first 100 locations. As their numbers increase and they enter new trade areas, that challenge will increase in its intensity,” says Jacobowitz, the natural-products consultant.

But believers abound. Benjamin Brownlow, a financial analyst at Raymond James, called it a “strong buy” in March. He said the drop in stock price — reaching a 52-week low of about $36.50 a share from a previous high of more than $65 — presented a buying opportunity. “Ultimately, we believe a long-term opportunity exists for nearly 100 Fresh Market stores in California and Texas alone, being the two most populous states in the nation. For context, while Florida is home to approximately 34 Fresh Market stores (including four planned openings in fiscal year 2013), total population count in California and Texas combined more than triple Florida,” he wrote to clients. Lempert says Fresh Market is poised to attract younger shoppers who want to know where their food comes from but don’t have the money to eat out every night. “If I was in charge of their real-estate plan, I would want to be within a mile of a Whole Foods. I think when consumers shop at both of their stores, they win.”

Though grocers such as Harris Teeter and even Wal-Mart adopted Fresh Market’s model of prepared foods and local products, they still tend to be price-driven. “I think that it’s going to be hard for the large, traditional competitors, even if they change the offerings, to provide the same experience you get at a smaller store with more service,” Carlock says. The company thinks its ceiling is about 500 stores in the U.S. “In a place like Augusta, Ga., or Aiken, S.C., we can get a larger piece of the specialty pie, or we can go into an Atlanta or Chicago and get a smaller piece of a larger specialty pie. We feel like we can go to just about any trade area and have a real good chance of being successful.”

Not short of optimism, Carlock believes the company’s culture, cultivated over more than 30 years, and customer service will help it outlast the recent same-store sales blip. “See, where I would think we’d perhaps made some mistakes is if the traffic stayed the same but people didn’t buy things. Then I would worry about our prices, or then I would worry about our execution or our displays or our signs,” he told analysts during the conference call. “But if there’s a sudden drop in traffic, it’s very hard to effect that here with a mistake.” In other words, though its stock may have faltered, the bottom has not fallen out of Fresh Market.