Fairway's Warning to Retailers
Fairway couldn't take the heat.
The specialty grocer officially filed for bankruptcy protection Monday. It marks the end of an era for niche grocers that thrived as Americans shifted to healthier fare, becoming self-proclaimed foodies in search of the next kale, acai or quinoa to liven up their kitchens.
Fairway's recent downfall is a far cry from the fanfare of 2013, when the Manhattan fruit-and-vegetable stand turned gourmet grocer went public. On its first day of trading, shares of Fairway rose by more than 33 percent on investor excitement about plans to build more than 300 stores around the U.S. By the time Fairway declared bankruptcy, it had only gotten up to 15 locations.
Fairway's slogan, "Like No Other Market" -- meaning it claimed to offer hard-to-find specialty gourmet offerings traditional supermarkets don't carry, but at lower prices than other natural-food stores -- may have rung true then. But the irony is that Fairway's undoing was caused by the fact that it did become just like every other market.
After Fairway went public, it was weighed down by what turned out to be an unmanageable amount of debt taken on by its private-equity investors. It began focusing more on trying to churn out profits (to no avail) and opening new stores, rather than on investing in the high-quality food and low prices that once underpinned its slogan.
Meanwhile, natural grocers such as Sprouts and Trader Joe's began cutting prices to stay competitive. Conventional supermarkets such as Kroger and Walmart began ramping up their specialty and organic offerings. Soon you could find organic snacks everywhere, from your local gas station to Overstock.com. It started to make less sense for specialty grocers such as Whole Foods and Fairway -- which relied on new store openings to juice sales -- to build as many locations as they had planned.
And the competition is only going to heat up more. Competitive forces have already pushed The Fresh Market into the hands of private equity shop Apollo Global Management, which acquired the grocer in March after it struggled to keep up sales growth. Whole Foods is having a hard time convincing customers to pay higher prices for beefsteak tomatoes and artisanal cheese they can find elsewhere.
Natural product sales are growing -- they rose by 13 percent for the 52 weeks ended in March from a year earlier, compared to a 0.2 percent increase in conventional food and beverages during the same period. But they're rising faster at traditional supermarkets and convenience stores than at specialty grocers, according to data from research firm SPINS. And Bloomberg Intelligence analyst Jennifer Bartashus notes that consumer expectations about prices are forcing the price gap between organic and non-organic food to shrink.
The thing is, a big part of retail is about copying what's working at your competitors and trying to do it better. Walmart founder Sam Walton famously mimicked strategies from Kmart and Sears and wrote in his autobiography that "most everything I've done I've copied from someone else." Walton would test competitors' ideas and, if they worked, roll them out across the chain. (Walmart continues to do this with many categories, but especially with organic food.) And Amazon has a record of seeing what's working for merchants that sell goods through its marketplace and then swooping in to offer the same products.
This same phenomenon is unfolding in the growing market for activewear, which was once available only at specialty sports retailers but can now be found everywhere, from the Gap to Forever 21 -- contributing to the downfall of retailers such as Sports Authority and Eastern Mountain Sports.
The lesson of Fairway is that being "like no other" doesn't tend to last very long.
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Shelly Banjo in New York at firstname.lastname@example.org
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