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Coverage Initiation: The Fresh Market
The Fresh Market (TFM) bills itself as a “specialty retailer focused on creating an extraordinary food shopping experience…” The stores are centered around fresh and perishable products, such as “hand-trimmed steaks that are aged for tenderness, fresh seafood delivered up to six times per week, hand-stacked produce that is colorfully displayed and French-style baguettes baked in-store each morning.” In 2010, approximately two-thirds of the company’s sales were of perishable items. The presentation of these products, which tend to be high margined, is also a key factor in the “extraordinary” experience the company attempts to create, and includes such things as “colorful product presentations, ceramic tiled floors, darkened ceilings, incandescent lighting, classical music and various aromas including flowers, coffee and freshly baked goods.”
Ray and Beverly Berry opened the first Fresh Market in Greensboro, North Carolina in 1982. In the late 1980s and 1990s, the company opened stores in Tennessee, Georgia, and South Carolina, and entered the Florida market in 1996. In 2005, the specialty grocer expanded into the Midwest, with stores in Ohio, Indiana, and Illinois. Stores in Connecticut and New York were opened in 2009 and 2010, respectively. As of January 2011, the company operated 100 stores across 20 states. Florida, with 24 stores, is The Fresh Market’s largest market.
One of the major differences between The Fresh Market and a “typical” grocery store is the average size of its stores, which, at 21,000 square feet, are materially smaller than most modern built grocery stores, which can be as large as 60,000 square feet. The smaller size means they do not try to provide everything for everyone. Thus the focus on higher margined goods, such as those mentioned above. The company also tries to differentiate itself by providing a higher level of service to its customers than the “typical” grocery store. This includes the store presentation, which is geared to engender the feel of a neighborhood grocer.
A smaller store footprint also allows the company to more easily find locations that would be too small for larger grocery stores. The reduced property costs associated with a smaller store are also a benefit, as it allows the company to maintain margins that are above the industry’s norms. The company’s net profit margin in 2010 was 2.4%, a full percentage point higher than that of The Kroger Company (KR), the largest U.S. grocery chain. A compact store format should also assist the company’s expansion plans, particularly in the space constrained northeastern United States.
Management believes that it can open up to 500 Fresh Market stores, which would provide the grocer with many years of growth, based on recent store opening trends. Indeed, there were less than 10 net store openings a year from 2008 to 2010 (a more aggressive 14 stores were added in 2007, however). The company targets a four-year payback period on all new openings, from build to suit sites to those the company builds itself.
The ability to grow via expansion, however, can be a double edge sword, as sales growth attributable to expansion can hide sluggish performance at existing stores, which makes same store sales (sales at stores open for more than a year) a key metric to assist in gauging this company’s underlying health while it is expanding. This is particularly true for a company that is geared toward higher-margined, and higher-priced goods, as the excitement surrounding new stores can fade quickly, leaving cost a more important factor. Difficult economic times can also cause consumers to switch to less costly venues, which could hurt The Fresh Market.
An increasing store count can help build economies of scale, however, which would allow The Fresh Market to reduce its operating expenses. This would be achieved via such things as larger orders with certain suppliers and distribution across numerous stores in one region. For example, the Northeast, which has many relatively wealthy local markets, could likely support Fresh Markets in close proximity to each other, allowing for shared shipping between stores. Of note, Fresh Market outsources all of its logistics to third parties, thus avoiding the need for warehouses and trucks; management believes this allows the company to focus on its core competency in running its stores.
A focus on customer service and the introduction of new products also have good and bad sides. While word of mouth about positive experiences can be beneficial, unpleasant interactions with customers, which are inevitable in any retail situation, can hurt. So, too, can bad merchandising choices in a store that is focused around new product introductions. Interestingly, this factor is more akin to a clothing store that focuses on high inventory turns, a model that The Fresh Market appears to attempt to mix with grocery retailing. That said, a frequently refreshed product mix can bring customers back to the store in search of something new and “different”.
The Fresh Market attempts to tread a line between grocery store and specialty retailer that has, so far, worked to its advantage. Execution, however, is key for this company, as it must maintain high standards of excellence. It has managed this feat to date, but it is still relatively small. An expanding store count could provide for plenty of top-line growth over the coming years, but equally important will be the performance of its existing stores.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.