Our Competitive Strengths

We believe we are well-positioned to capitalize on favorable natural and organic grocery and dietary supplement industry dynamics as a result of the following competitive strengths:

Strict focus on high-quality natural and organic grocery products and dietary supplements. We offer high-quality products and brands, including an extensive selection of widely-recognized natural and organic food, dietary supplements, body care products, pet care products and books. We offer our customers an average of approximately 21,10022,000 Stock Keeping Units (SKUs) of natural and organic products per comparable store (stores open for 13 months or longer), including an average of approximately 6,5006,700 SKUs of dietary supplements. We believe our broad product offering enables our customers to shop our stores for substantially all of their grocery and dietary supplement purchases. In our grocery departments, we only sell USDA certified organic produce and do not approve for sale grocery products that are known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. In addition, we only sell pasture-raised, non-confinement dairy products, free-range eggs (i.e., from chickens that are not only cage-free but also provided with sufficient space to move) and free-range eggs.naturally raised meats (i.e., from animals that are not known to have been treated with antibiotics, hormones or growth promoters, or fed animal by-products). Consistent with this strategy, our product selection does not include items that do not meet our strict quality guidelines. Our store managers enhance our robust product offering by customizing their stores’ selections to address the preferences of local customers. All products undergo a stringent review process to ensure the products we sell meet our strict quality guidelines, which we believe helps us generate long-term relationships with our customers based on transparency and trust.

Engaging customer service experience based on education and empowerment. We strive to offer consistently exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience, enhances customer loyalty and generates repeat visits from our clientele. A key aspect of our customer service model is to provide free nutrition education to our customers. We believe this focus provides an engaging retail experience while also empowering our customers to make informed decisions about their health. We offer our science-based nutrition education through our trained employees, ourHealth Hotline® newsletter and sales flyer,magazine, community out-reachoutreach programs, one-on-one nutrition health coaching, nutrition classes, cooking demonstrations and our website. Our commitment to nutrition education and customer empowerment is emphasized throughout our entire organization, from executive management to store employees. Every store also maintains a Nutritional Health Coach or NHC,(NHC) position. The NHC is responsible for educating our customers about good nutrition and for training our store employees and educating ouron how to assist customers about nutrition in accordancecompliance with applicable local, state and federal regulations. Each NHC must have earned a degree or certificate in nutrition or a related field from an accredited school, complete continuing education in nutrition, and be thoroughly committed to fulfilling our mission. Substantially all of our NHCs are full-time employees. We believe our NHC position represents a key element of our customer service model.

Scalable operations and replicable, cost-effective store model. We believe our scalable operating structure, attractive new store model, flexible real estate strategy and disciplined approach to new store development allow us to maximize store performance and continue to grow our store base. Our store model has been successful in highly competitive markets and has supported significant growth outside of our original Colorado geography. We believe our supply chain and infrastructure are scalable and will accommodate significant growth based on the ability of our primary distribution relationships to effectively service our planned store locations. Our investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems, support this growth. We also have a comprehensive human resources information and learning management system (HRIS) to further support the scalability of our operations. In addition, we have established effective site selection guidelines, as well as scalable procedures, to enable us to open a new store within approximately nine months from the time of lease execution. The smaller-store footprint made possible by our limited offering of prepared foods reduces real estate costs, labor costs and perishable inventory shrink and allows us to leverage our new store opening costs.

Commitment to sustainable products and practices. We have put in place product standards for dairy, eggs, meat, seafood and produce that support sustainable and ecologically responsible production methods. We believe our standards help to enhance the health of our customers, promote animal welfare, reduce antibiotic resistance and protect the environment. We have also instituted measures to eliminate food waste, divert usable products to food banks, reduce single use plastic bags and reduce the use of toxic pesticides and antimicrobial products. We believe these efforts reflect our commitment to corporate social responsibility and demonstrate our support for sustainable regenerative agricultural practices.

Experienced and committedmanagementteam with proven track record. Our executive management team has an average of 3834 years of experience in the natural grocery industry, while our entire management team has an average of over 3031 years of relevant experience. Since the second generation of the Isely family assumed control of the business in 1998, we have grown our store count from 11 stores to 126153 stores as of September 30, 20162019 by remaining dedicated to our founding principles. Over their tenure, members of our executive management team have been instrumental in establishing a successful, scalable operating model, generating consistently strong financial results and developing an effective site selection and store opening process. The depth of our management experience extends beyond our home office. As of September 30, 2016,2019, approximately 48.0%50% of our store managers at comparable stores had tenures of over four years with us, and our store and department managers at these stores had average tenures of over threefour years with us. In addition, we have a track record of promoting store management personnel from within. We believe our management’s experience at all levels will allow us to continue to grow our store base while maintaining operational excellence by driving efficiencies in store and back room operations, managing inventory levels and focusing on exceptional customer service.

Our Growth Strategies

We are pursuing several strategies to continue our profitable growth, including:

Expand our store base. We intend to continue expanding our store base through new store openings in existing markets, as well as penetrating new markets, by leveraging our core competencies of site selection and efficient store openings. Based upon our operating experience and research conducted for us by The Buxton Company, a customer analytics firm, we believe the entire United States market can support over 1,100 Natural Grocers stores, including approximately 200 additional Natural Grocers stores in the 19 states in which we currently operate or have signed leases. In fiscal years 20162019 and 2015,2018, we opened 23six and 16eight new stores, respectively, and we plan to open 15five to 20six new stores in fiscal year 2017,2020, of which threeone opened during the first quarter of fiscal year 20172020 prior to the filing of this Form 10-K.

Current store locations,signed leasesandnew store locations.

*Includes We have signed leases for an additional five new stores, to be opened subsequent to fiscal year 2016. Between September 30, 2016 and have purchased the date of this Form 10-K,property for an additional two new stores, that we opened three new stores. Additionally, we have 18 signed leases for stores plannedexpect to open in fiscal year 2017years 2020 and 2018.beyond.

Store locations as of September 30, 2019.

Increase sales from existing customers. We have achieved positive comparable store sales growth for over 57 consecutive quarters. In order to increase our average ticket and the number of customer transactions, we plan to continue offering an engaging customer experience by providing science-based nutrition education and a differentiated merchandising strategy that delivers affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to continue to utilize targeted marketing efforts to reach our existing customers, including through the {N}power^® customer loyalty program, which we anticipate will drive customer transactions, increase the average ticket and convert occasional, single-category customers into core, multi-category customers.

Grow our customer base. We plan to continue building our brand awareness, which we anticipate will grow our customer base. During fiscal year 2016,2019, the measures we implemented several measurestook that were aimed at enhancing our brand awareness including:included: (i) increasing the Company’s presencefrequency and range of offerings under the {N}power customer loyalty program; (ii) making our Health Hotline magazine available to customers in both print and electronic format; (iii) entering into a sponsorship arrangement with the Steamboat and Winter Park ski resorts pursuant to which we were designated, on Facebook, Twitter and other social media platforms; (ii)an exclusive basis, the official grocery store of those resorts; (iv) organizing special monthly promotions andto coincide with certain calendar events, such as Resolution Reset Day^® in January, Earth Day in April, on the anniversary of the Company’s founding in August and during the entire month of September to coincide with Nationalfor Organic Harvest Month; (iii)(v) expanding our social media reach through increased investment in paid and organic placements on platforms such as Facebook, Twitter and Instagram; (vi) conducting television, radio, outdoor advertising and targeted direct mail campaigns in select markets; (iv) entering into sponsorship arrangements with a US speed skater and a health and fitness expert; (v) teaming with a Grammy Music Educator Award-nominated musician to produce original Natural Grocers organic-themed songs and music videos; (vi)(vii) extending home delivery services from 118 to select additional markets; and (vii) developing new collateral marketing materials. 151 stores.

We believe offering nutrition education has historically been one of our most effective marketing strategies for reaching new customers and increasing the demand for natural and organic groceries and dietary supplements in our markets. To maximize thetheir impact, ofwe encourage our Nutritional Health Coaches, we have increased theirNHCs to focus on relationship-building opportunities in our communities and with our customers, including promotions, and additional educational cooking events, lectures and classes in our stores. Additionally, we seek to attract new customers by enhancing their nutrition knowledge through the distribution of printed and digital versions of our broad range of educational resources, including the distribution of ourHealth Hotlinenewsletter and sales flyer, and via the internet and social media.magazine. In addition to offering nutrition education, our strategy is to attract new customers with ourEDAP -Every Day Affordable Price and to build community awareness through our support of local vendors and charities.

Improve operating margins. We expect to continue our focus on improving our operating margins as we benefit from investments we have made or are making in fixed overhead and information technology. We anticipate these investments will support our long-term growth strategy with only a modest amount of additional capital. We expect to achieve greater economies of scale through sourcing and distribution asstrategy. To improve operating margins, we add more stores. In addition, to achieve additional operating margin expansion, wealso intend to further optimize performance, maintain appropriate store labor levels, reduce inventory shrink and effectively manage product selection and pricing. In addition, we expect to achieve greater economies of scale through sourcing and distribution as we add more stores.

Our Stores

Our stores offer a comprehensive selection of natural and organic groceries and dietary supplements in a smaller-store format that aims to provide a convenient, easily shopped and relaxed environment for our customers. Our store design emphasizes a clutter-free, organized feel, a quiet ambience accented with warm lighting and the absence of aromas from meat and seafood counters present in many of our competitors’ stores. We believe our core customers consider us a destination stop for their nutritional education and information, natural and organic products and dietary supplements.

Our Store Format. Our stores range from approximately 5,000 to 16,000 selling square feet, and average approximately 11,000 selling square feet. In fiscal year 2016,2019, our 23six new stores averaged approximately 11,00010,000 selling square feet. Approximately one quarter of our stores’ selling square footage is dedicated to dietary supplements. SomeMost of our stores also include a dedicated community room available for public gatherings, a demonstration kitchen for cooking education and/or lecture space. Our comparable stores sell an average of approximately 21,10022,000 SKUs of natural and organic products per store, including an average of approximately 6,5006,700 SKUs of dietary supplements. Set out below is the layout for our new stores:

The following diagram depicts a typical new store layout:

Site Selection. Our real estate strategy is adaptable to a variety of market conditions. When selecting locations for new stores, we use analytical models, based on research provided by The Buxton Company and Forum Analytics, LLC and our extensive experience, to identify promising store locations. We typically locate new stores in prime locations which offer easy customer access and high visibility. Many of our stores are near other supermarkets or gourmet food retailers, and we complement their conventional product offerings with high-quality, affordable natural and organic groceries and dietary supplements in an efficient and convenient retail setting. Our model for selecting viable new store locations incorporates factors such as target demographics, community characteristics, nearby retail activity and other measures and is based on first-hand observation of the community’s characteristics surrounding each site. We have teams of employees dedicated to opening new stores efficiently and quickly, typically within approximately nine months from the time of lease execution.

Store-LevelStore-Level Economics. Since January 1, 2005, openingOur new stores has requiredtypically require an average upfront capital investment of approximately $2.1 million. We anticipate that our fiscal year 2017 new stores will require an average upfront capital investment of approximately $2.2 million, consisting of capital expenditures of approximately $1.6 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately $0.3$0.2 million. We target approximately fourfive years to recoup our initial net cash investments and approximately 30% cash-on-cash returns by the end of the fifthsixth year following the opening. Our actual payback period averages approximately six years.

Individual new store investment levels and the performance of new store locations may differ widely from originally targeted levels and from store-to-store due to competitive considerations and a variety of other factors, and these differences may be material. In particular, investments in individual stores, store-level sales, profit margins, payback periods and cash-on-cash return levels are impacted by a range of risks and uncertainties beyond our control, including those described under the caption “Risk Factors.”

Our Focus on Nutrition Education

Nutrition education is one of our founding principles and is a primary focus for all employees. We believe our emphasis on science-based nutrition education differentiates us from our competitors and creates a unique shopping experience for our customers.

Our Nutritional Health Coaches or NHCs, are a core element of our nutrition education program. Every store has a full-time NHC position to educate customers and train employees on nutrition. NHCs must have earned a degree or certificate in nutrition or a related field from an accredited school, complete continuing education in nutrition, and be thoroughly committed to fulfilling our mission. To educate and empower customers to make informed nutrition choices, our NHCs are available for complimentary one-on-one nutrition health coaching sessions. Each NHC is also responsible for various relationship-building opportunities in our communities and with our customers, including educational activities such as nutrition classes, lectures, seminars, health fairs and store tours. To maximize the impact of our NHCs, we have increasedstress the importance of their focusfocusing on hosting cookingin-store educational events, (atoffering health coaching sessions and holding nutrition classes in the community by partnering with school, municipal and corporate wellness programs. During fiscal year 2019, our stores with demonstration kitchens) and haveNHCs increased the number of their health coaching sessions and community nutrition classes while continuing to offer a variety of in-store educational events they conduct.education events. We believe that our NHCs’ focus on relationship-building opportunities in our communities and with our customers helps to enhance our marketing and branding initiatives. Additionally, our NHCs are an onsite resource for nutrition training and education for our employees. Each NHC trains our employees to use a compliant educational approach to customer service without attempting to diagnose or treat specific conditions or ailments. We believe our NHC position is a competitive differentiator and represents a key element of our customer service model.

Our training and education programs are supplemented by outside experts, online materials and printed handouts. We also use ourHealth Hotline magazine to educate our customers. TheHealth Hotline is a newsletter and sales flyermagazine, which was published ten11 times in fiscal year 2016. Each issue of theHealth Hotline2019, includes in-depth articles on health and nutrition, along with a selection of sale items. The printed version of the Health Hotline magazine is mailed to subscribers and distributed in our stores. In addition, an electronic version of the Health Hotline magazine is also distributed to subscribers via the internet and social media. Consistent withposted on our strategy to shift a greater portion of our marketing efforts from print to digital, the printedHealthHotline newsletter is scheduled to be published seven times in fiscal year 2017. During fiscal year 2015, we redesigned thewww.naturalgrocers.com website to enhance functionality and create a more engaging user experience, including readily accessible additional nutritional education information and resources.website.

Our Products

Product Selection Guidelines. We have a set of strict quality guidelines covering all products we sell. For example:

Our product review team analyzes all new products and approves them for sale based on ingredients, price and uniqueness within the current product set. We actively research new products in the marketplace through our product vendors, private label manufacturers, scientific findings, customer requests and general trends in popular media. Our stores are able to fully merchandise all departments by providing an extensive assortment of natural and organic products. We do not believe we need to sell conventional products to fill our selection, increase our margins or attract more customers.

What We Sell. We operate both a full-service natural and organic grocery store and a dietary supplement store within a single retail location. The following is a breakdown of our sales mix for the fiscal year ended September 30, 2016:2019:

               

The products in our stores include:

Quality Assurance. We endeavor to ensure the quality of the products we sell. We work with reputable suppliers we believe are compliant with established regulatory and industry guidelines. Our purchasing department requires a complete supplier and product profile as part of the approval process. Our dietary supplement suppliers must follow Food and Drug Administration (FDA) current good manufacturing practices supported by quality assurance testing for both the base ingredients and the finished product. We expect our suppliers to comply with industry best practices for food safety.

Many of our suppliers are inspected and certified under the USDA National Organic Program, through voluntary industry associations,standards and by other third party auditing programs with regard to additional ingredients, manufacturing and handling standards. Each Natural Grocers store is certified as an organic handler and processor by an accredited USDA certifier in the calendar year after it opens, and annually thereafter. We operate all our stores in compliance with the National Organic Program standards, which restrictsrestrict the use of certain substances for cleaning and pest control and requiresrequire rigorous recordkeeping and methods to prevent co-mingling and contamination, among other requirements.

Our Pricing Strategy

We have anEDAP -Every Day Affordable Price designation on many products, while also providing special sale pricing on hundreds of additional items. We believe our pricing strategy allows our customers to shop our stores on a regular basis for their groceries and dietary supplements.

The key elements of our pricing strategy include:

As we continue to expand our store base, we believe there are opportunities for increased leverage in fixed costs, such as administrative expenses, as well as increased economies of scale in sourcing products. We strive to keep our product, operating and general and administrative costs low, which allows us to continue to offer attractive pricing for our customers.

Our Store Operations

Store Hours. Our stores typically are open from 8:0030 a.m. to 9:0405 p.m., Monday through Saturday, and from 8:9:00 a.m. to 7:358:05 p.m. on Sunday.

Store Management and Staffing. Our typical store staffing includes a manager and assistant manager, with department managers in each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving departments, as well as several non-management employees. Each store manager is responsible for monthly store profit and loss, including labor, merchandising and inventory costs. We also employ regional managers to oversee all store operations for regions consisting of approximately 13nine to 1514 stores. Each regional manager reports to, and is supported by, a director of store operations.operations and other staff.

To ensure a high level of service, all employees receive training and guidance on customer service skills, product attributes and nutrition education. Employees are carefully trained and evaluated based on a requirement that they present nutrition information in an appropriate and legally compliant educational context while interacting with customers. Additionally, store employees are cross-trained in various functions, including cashier duties, stocking and receiving product.

Every store also maintains a Nutritional Health Coach or NHC,(NHC) position. The NHC is responsible for training our store employees and educating our customers in accordance with applicable local, state and federal regulations. Each NHC must have earned a degree or certificate in nutrition or a related field from an accredited school, complete continuing education in nutrition and be thoroughly committed to fulfilling our mission. Substantially all of our NHCs are full-time employees. The NHCs are overseen by Regional Nutritional Health Coach Managers.

Bulk Food Repackaging Facility and Distribution Center. We lease a 150,000 square foot bulk food repackaging facility and distribution center located in Golden, Colorado. That facility also houses a training center and certain administrative support functions.

Inventory. We use a robust merchandise management and perpetual inventory system that values goods at moving average cost. We manage most shelf stock based on weeks-on-hand relative to sales, resupply time and minimum economic order quantity.

Sourcing and Vendors. We source from approximately 1,2001,100 suppliers, and offer over 3,1003,300 brands. These suppliers range from small independent businesses to multi-national conglomerates. As of September 30, 2016,2019, we purchased approximately 80%77% of the goods we sell from our top 20 suppliers. For the fiscal year ended September 30, 2016,2019, approximately 59%65% of our total purchases were from United Natural Foods Inc. and its subsidiaries (UNFI). In fiscal year 2016, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products through May 31, 2021. In May 2018, we entered into an amendment to our agreement with UNFI pursuant to which we appointed Albert’s Organics, a wholly owned subsidiary of UNFI, as our primary supplier of organic produce products for the majority of our stores. We maintain good relations with UNFI and believe we have adequate alternative supply methods, including self-distribution.

We contracthave contracts with third-party manufacturers to produce groceries and dietary supplements under our private labels, which include the Natural Grocers andVitamin Cottagebrands. brand. We have longstanding relationships with our suppliers, and we require disclosure from them regarding quality, freshness, potency and safety data information. Our bulk food private label products are packaged by us in pre-packed sealed bags to help prevent contamination while in transit and in our stores. Unlike most of our competitors, most of our private label nuts, trail mix and flours are refrigerated in our warehouse and stores to maintain freshness.

Our Employees

OurEmployees

We refer to our employees as our “Good4u Crew.” Commitment to our employees is one of our five founding principles. Employees are eligible for health, long-term disability, vision and dental insurance coverage, as well as Company paid short-term disability and life insurance benefits, after they meet eligibility requirements. Additionally, our employees are offered a 401(k) retirement savings plan with discretionary contribution matching opportunities. We believe we pay above average retail wages, andwages. In addition, all employees receive in store discounts and earn an additional $1.00 per hour, up to $40 per week, in “Vitamin Bucks”Bucks,” which can be used to purchase products in our stores. It is important to us that our employees live a healthy, balanced lifestyle, and we believe that the discounts we offer our employees and the Vitamin Bucks incentive providesbenefit provide an additional resource for our employees to purchase natural and organic products. This further offers our employees the opportunity to become more familiar with the products we sell, which we believe improves the customer service our employees are able to provide. We believe these and other factors result in higherhave a positive impact on employee retention rates and encourage our employees to appreciate our culture, which helps them better promote our brand.

All employees are eligible to participate in our discretionary pay-for-performance incentive compensation plan after meeting certain length of service requirements. The pay-for-performance incentive compensation plan sets certain Company-level financial goals that must be met before it can be funded. If the financial goals are achieved, additional criteria for store-level incentive compensation include meeting sales projections, sales to labor hour goals and cost of goods sold metrics. We believe these criteria help align all store employees with both corporate and store-level financial goals. We have an established set of standard operating procedures, including hiring and human resource policies, training practices and operational instruction manuals. This allows each store to operate with strict accountability and still maintain independence to respond to its unique circumstances.

As of September 30, 2016,2019, we employed 2,6513,029 full-time and 423652 part-time (less than 30 hours per week) employees, including a total of 278345 employees at our home office and our bulk food repackaging facility and distribution center. None of our employees is subject to a collective bargaining agreement. We believe we have good relations with our employees.

Our Customers

The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and nutrition have led to an increase in our core customer base. We believe the demands for affordable, nutritious food and dietary supplements are shared attributes of our core customers, regardless of their socio-economic status. Additionally, we believe our core customers prefer a retail store environment that offers carefully selected natural and organic products and dietary supplements.supplements and supports environmentally sustainable products and practices. Our customers tend to be interested in health and nutrition, and expect our store employees to be highly knowledgeable about these topics and related products.

An analysis of ourHealth Hotline subscriber list indicates that our customers come from broad geographic segments, including urban, suburban and rural areas, which reflects the varied characteristics and portability of our store locations.

Our Communities

One of our founding principles is to be an active member and steward of the communities we serve. As a commitment to this principle, we:

Marketing andAdvertising

A significant portion of our marketing efforts is focused on educating our customers on the benefits of natural and organic grocery products, dietary supplements and dietary supplements.our quality standards. Our customer outreach programs provide practical general nutrition knowledge to a variety of groups and individuals, schools, businesses, families and seniors. These educational efforts fulfill one of our founding principles and also offer us the opportunity to build relationships with customers and community influencers.

{N}powerCustomerLoyalty Program. We introduced the {N}power customer loyalty program in fiscal year 2015. {N}power members receive digital coupons, discounted pricing on certain staple items (such as free-range eggs), personalized offers and other rewards, all by providing their phone number at the time of checkout. We believe the {N}power program has enhanced customer loyalty and increased customer traffic and engagement levels. During fiscal year 2019, we continued to increase the frequency and range of our {N}power offerings. We believe these steps helped to increase membership in the {N}power program during fiscal year 2019. We had over 1.0 million registered {N}power members as of September 30, 2019 compared to approximately 750,000 {N}power members as of September 30, 2018.

Health Hotline. OurThe Health Hotline is a 20-page newsletter and sales flyer whichfour color magazine that contains a mix of in-depth health and nutrition articles, along with a selection of popular sale items. The articles aim to be relevant, science-based and written to reflect the most recent research findings. In fiscal year 2016, the full version of theThe Health Hotline magazine was published ten11 times during fiscal year 2019, and we expect the same publication frequency fiscal year 2020. The printed version of the Health Hotline magazine is mailed to subscribers and distributed in our stores. In fiscal year 2016, a condensed version of theHealth Hotline, which typically emphasizes only one article or topic,was inserted into the newspaper in many of our communities approximately 34 times. In addition, an electronic version of the condensedHealth Hotline wasmagazine and a weekly electronic Health Hotline newsletter are distributed to subscribers in fiscal year 2016. Consistent with our strategy to shift a greater portion of our marketing efforts from print to digital, we expect to publishvia the printedHealthHotline newsletter seven times and the condensedHealth Hotline17 times in fiscal year 2017.internet. Generally, we negotiate with our suppliers for significantly lower costs onHealth Hotline featured sale items, which in turn allows us to offer lowlower sale prices to our customers. Focused staff training at all locations occurs concurrently with the release of eachHealth Hotline to ensure that store staff are familiar with the content in each issue.

Web SitesSponsorships and Special Promotions. In May 2019, we entered into a sponsorship arrangement with Alterra Mountain Company, the owner of the Steamboat and Winter Park ski resorts in Colorado, pursuant to which: (i) the Company has been designated, on an exclusive basis, the official grocery store of those resorts and (ii) the Company is receiving a variety of marketing and brand exposure at those resorts. During fiscal year 2019, we also sponsored a number of nutrition experts. In addition, in September 2019, 2018 and 2017, to coincide with Organic Harvest Month, we collected donations from our customers on behalf of the Organic Farmers Association.

During fiscal year 2019, we organized special promotions to coincide with certain calendar events, such as Resolution Reset Day in January, Earth Day in April, on the anniversary of the Company’s founding in August and during the entire month of September to coincide with Organic Harvest Month. Promotions included product discounts, sweepstakes drawings and nutrition education classes. We expect to continue offering similar special promotions and events in the future.

Website and Social Media. We maintainwww.naturalgrocers.com as our official company website to host store information, sales flyers,sale and discount offers, educational materials, product and standards information, policies and contact forms, advocacy and news items and e-commerce activities. We redesigned ourcapabilities. Our website in fiscal year 2015 to enhance functionality, create a more engaging user experience and increase its reach and effectiveness. The website redesign wasis intended to be part of an overall enhanced branding strategy to more effectively communicate our brand’s unique and compelling attributes, including our founding principles. In September 2018, we launched a new website that was designed to offer a more personalized and convenient online experience for our customers. The website features enhanced product and recipe search interfaces and improved functionality with mobile and tablet devices. We believe the continued growth of site visitors, page views and other metrics of our website activity indicates that our content is timely and informative to the communities we serve. Our website is interlinked with other online and social media outlets, including Facebook, Instagram, Twitter, Pinterest and YouTube. During fiscal year 2016,2019, we created an individualcontinued to increase our investment in paid and organic placements on platforms such as Facebook, page for each of our stores.Twitter and Instagram, resulting in enhanced social media reach. We expect to increase suchcontinue investing in digital engagement activities during fiscal year 2017.2020.

{N}Power^®Customer Appreciation Program.Advertising. DuringOur advertising activities in fiscal year 2015, we completed the introduction2019 included: (i) conducting television advertising campaigns in 12 markets; (ii) conducting radio advertising campaigns in support of the{N}Power customer appreciation program at all our stores. We believe{N}Power has enhanced customer loyalty and increased customer engagement levels. Registered users of{N}Power receive digital coupons, personalized offers and other rewards, all by providing their phone number at the time of checkout.

Special Promotions. During fiscal year 2016, we organized special monthly promotions and events, such as Earth Day in April, on the anniversary of the Company’s founding in August and during the entire month of September to coincide with National Organic Harvest Month. Promotions included contests in connection with “good4u” nutrition challenges and nutrition education classes. We expect to continue offering similar promotions and special events in the future.

Sponsorships. During fiscal year 2016, we entered into sponsorship arrangements with a US speed skater and a health and fitness expert. Under these arrangements, the sponsored individuals attend “meet and greet” events at our stores, contribute articles to the Health Hotlinenewsletter and sales flyer, share recipes and fitness tips on our website and participate in social media and other promotional activities on our behalf.

Original Music.During fiscal year 2016, we entered into an agreement with a Grammy Music Educator Award-nominated musician to produce original organic-themed songs and music videos for us. Under this agreement, the musician also performed at new store openings and participatedstore relocations; (iii) conducting outdoor advertising campaigns in social mediaapproximately 80 markets; (iv) conducting targeted direct mail campaigns in select markets, and other promotional activities during fiscal year 2016.(v) utilizing organic search, search engine marketing, search engine optimization and display advertisements to deliver more customer traffic to our website and stores.

Home Delivery Services. We offer online ordering and home delivery services in select markets in partnership with a third party. We currently provideDuring fiscal year 2019, we expanded our home delivery services in the Portland, Oregon and Denver and Boulder, Colorado markets.offering from 118 to 151 stores.

Other Marketing Activities.During fiscal year 2016, we implemented an outdoor advertising campaign in five markets. In addition, we occasionally use television and radio advertising as part of our marketing activities.

New StoreOpenings. We use various targeted marketing efforts to support the successful introduction of our new stores in their individual markets. In addition to the distribution of ourHealth Hotlinenewslettermagazine and Internet and social media efforts targeted to the region, we utilize direct mail distribution of a series of introductory postcards promoting our brand and providing discounts and other incentives for new customers. We also focus on community relationship-building activities, including a series of lectures and cooking and other demonstrations in each new store’s community room and/or demonstration kitchen. Other new store promotional activities include gift card and prize giveaways, musical performances, appearances by our sponsorship partners and participation by local community leaders and organizations.

Online Pre-Ordering of Holiday Turkeys. We offer an online process to pre-order organic and free-range turkeys for the Thanksgiving and Christmas holidays.

Competition

The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway,Safeway; domestic mass or discount retailers such as Wal-Mart and Target,Target; natural and gourmet markets such as Whole Foods and The Fresh Market,Market; foreign-based discount retailers such as Aldi and Lidl; specialty food retailers such as Sprouts and Trader Joe’s,Joe’s; warehouse clubs such as Sam’s Club and Costco,Costco; dietary supplement retailers such as GNC and The Vitamin Shoppe; online retailers such as Amazon; meal delivery services; independent health food stores, dietary supplement retailers,stores; drug stores,stores; farmers’ markets,markets; food co-ops, online retailersco-ops; and multi-level marketers. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors and the increasing availability of grocery ordering, pick-up and delivery options. These businesses compete with us for customers on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods.Wefoods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage. In addition, we face internally generated competition when we open new stores in markets we already serve.

Seasonality

Our business is active throughout the calendar year and does not experience significant fluctuation caused by seasonal changes in consumer purchasing.

Insurance and Risk Management

We use a combination of insurance and self-insurance to cover workers’ compensation, general liability, product liability, director and officers’ liability, cyber risk, employment practices liability, employee healthcare benefits and other casualty and property risks. Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers and changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements and providers on an ongoing basis.

Trademarks and Other Intellectual Property

We believe that our intellectual property is important to the success of our business. We have received the registration of trademarks not only forVitamin Cottage andHealth Hotline but also for our logo,Natural Grocers by Vitamin Cottage^®®andVitamin Cottage Natural Grocers^®® for appropriate categories of trade. In addition, we have received the registration of service marks forEDAP –Every Day Affordable Price and, {N}power, Organic Headquarters^Power®, Organic Month Headquarters^®, Organic Produce Headquarters^®, Natural Grocers Cottage Wine and Craft Beer^® and Resolution Reset Day and the registration of a trademark forThese Came First®. We do not own or license for use any patents, franchises or concessions that are material to our business. Our trademarks are generally valid and may be renewed indefinitely as long as they are in use and their registrations are properly maintained.

Information Technology Systems

We have made significant investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems. We use an ERP system with an integrated merchandise management, reporting and accounting system at all of our stores, as well as at our bulk food repackaging facility and distribution center and for corporate functions including accounting, reporting and purchasing. Our ERP system application support and hardware functions are outsourced, which allows us to focus on our core business. We also have an enterprise-wide HRIS, which has enabled us to more efficiently and effectively onboardmanage our human resources and train our employeespayroll needs at all locations. During fiscal year 2018, we implemented a company-wide scheduling system for our stores, deployed new handheld technology at all our stores and started to deploy VoiP telephony solutions at our stores. During fiscal year 2019, we began to leverage cloud technology in our information technology systems and continued the deployment of VoiP telephony solutions at our stores. We plan to continue investing in our information technology infrastructure with systems that scale with and add efficiencies to our operations as we continue to grow.

Regulatory Compliance

We are subject to various federal, state and local laws, regulations and administrative practices that affect our business. The safety, formulation, manufacturing, processing, packaging, importation, labeling, promotion, advertising and distribution of products we sell in our stores, including private label products, are subject to regulation by several federal agencies, including the FDA, the Federal Trade Commission (the FTC), the USDA, the Consumer Product Safety Commission (the CPSC) and the Environmental Protection Agency (the EPA), as well as by various state and various agencies of the states and localities. Pursuant to the Food, Drug, and Cosmetic Act (the FDCA), the FDA regulates the safety, formulation, manufacturing, processing, packaging, labeling, importation and distribution of food and dietary supplements (including vitamins, minerals, amino acids and herbs). In addition, the FTC has jurisdiction to regulate the promotion and advertising of these products.

Dietary Supplements. The FDCA has been amended several times with respect to dietary supplements, in particular by the Dietary Supplement Health and Education Act of 1994 (DSHEA). DSHEA established a framework governing the composition, safety, labeling, manufacturing and marketing of dietary supplements, defined “dietary supplement” and “new dietary ingredient” (NDI) and established new statutory criteria for evaluating the safety of substances meeting the respective definitions. In the process, DSHEA removed dietary supplements and NDIs from pre-market approval requirements that apply to food additives and pharmaceuticals and established a combination of “notification” and “post marketing controls” for regulating product safety. Notwithstanding, non-dietary ingredients in a dietary supplement remain subject to the FDA’s food additive authorities. The FDA does not require notification to market a dietary supplement if it contains only dietary ingredients that were present in the United States food supply prior to DSHEA’s enactment on October 15, 1994. However, for a dietary ingredient not present in the food supply prior to this date, or NDIs, the manufacturer must provide the FDA with information supporting the conclusion that the ingredient will reasonably be expected to be safe at least 75 days before introducing a new dietary ingredient into interstate commerce. As required by the Food Safety Modernization Act (FSMA), the FDA issued draft guidance in July 2011 and August 2016, which attempted to clarify when an ingredient would be considered an NDI, the evidence needed to document the safety of an NDI and appropriate methods for establishing the identity of an NDI. The draft guidance has not been finalized. If finalized, the draft guidance may cause dietary supplement products available in the market before DSHEA to be classified to include an NDI if the dietary supplement product was produced using manufacturing processes different from those used in 1994.local agencies.

In certain circumstances, the FDA’s guidance regarding applications for approval of Investigational New Drugs (INDs) applies to the food and dietary supplement industry. The FDA’s guidance states that certain dietary supplements should not be marketed if they contain a substance that is undergoing substantial clinical investigations intended to evaluate the dietary supplement’s ability to diagnose, cure, mitigate, treat, or prevent a disease when such investigations are public knowledge, unless the article was marketed as a dietary supplement before the IND application became effective and before any such investigations began. Although the boundaries of the FDA’s enforcement activities regarding alleged violations of its guidance are not clear at this time, some dietary supplements might have to be immediately withdrawn from the market even if they were marketed as a dietary supplement before initiation of substantial clinical investigations, the existence of which has been made public. The potential need for withdrawal could negatively affect the supply chain for certain products.

DSHEA empowered the FDA to establish good manufacturing practice regulations governing key aspects of the production of dietary supplements, including quality control, packaging and labeling. DSHEA also expressly permits dietary supplements to bear statements describing how a product affects the structure, function and general well-being of the body, if accompanied by a required disclaimer. Currently, although manufacturers must be able to substantiate any such statement, no pre-market approval authorization is required for such statements and manufacturers need only notify FDA that they are employing a given claim within 30 days of first marketing the product. No statement may expressly or implicitly represent that a dietary supplement will diagnose, cure, mitigate, treat or prevent a disease. DSHEA does, however, authorize supplement sellers to provide “third-party literature,” (e.g., a reprint of a peer-reviewed scientific publication linking a particular dietary ingredient with health benefits) in connection with the sale of a dietary supplement to consumers. This provision is an exception to the FDA’s broad powers over the promotion of regulated products. Accordingly, the authorization is limited and applies only if the publication is printed in its entirety, is not false or misleading, presents a balanced view of the available scientific information and does not “promote” a particular manufacturer or brand of dietary supplement and is displayed in an area physically separate from the dietary supplements.

Food.Food Products. The FDA has comprehensive authority to regulate the safety of food and food ingredients other than dietary supplements.(including pet food and pet food ingredients but excluding meat, poultry, catfish and certain egg products, which are regulated by USDA) under the Federal Food, additivesDrug, and food contact substancesCosmetic Act (the FDCA). The USDA’s Food Safety Inspection Service regulates and regularly inspects meat, poultry, catfish and certain egg products to assure that these products are subject to pre-market approvals or notification requirements. safe, wholesome and correctly labeled and packaged under the Federal Meat Inspection Act and the Poultry Products Inspection Act.

The FDA’s overallFood Safety Modernization Act (the FSMA), enacted in 2011, amended the FDCA and significantly expanded food safety requirements and the FDA’s regulatory authority was dramatically enhanced in 2011 with the passage of FSMA.over food safety. The FSMA requiredrequires the FDA to issue regulations mandating that risk-based preventiveimpose comprehensive, prevention-based controls be observed byacross the majority of food producers. Regulations and rules issued under FSMA are in varying degrees of finalization and implementation. Regardless, the FDA’s authority under FSMA applies to all domesticsupply chain, further regulates food facilities and, by way of imported food supplier verification requirements, to all foreign facilities that supply us with food products. In addition, FSMA required the FDA to establish science-based minimum standards for the safe production and harvesting of produce, identify “high risk” foods and “high risk” facilities, set goals for the frequency of FDA inspections of such high risk facilities as well as non-high risk facilities and foreign facilities from which food isproducts imported into the United States. With respectStates and provides the FDA with mandatory recall authority. In addition, the FSMA requires the FDA to both foodsundertake numerous rulemakings and dietary supplements, FSMA meaningfully augmented the FDA’s ability to access both producers’ and suppliers’ records,issue numerous guidance documents, as well as added new records that must be createdreports, plans, standards, notices and maintained. This increased access could cause the FDA to identify areas of concern it had not previously considered to be problematic for our suppliers and contract manufacturers. FSMA also gives the FDA authority to require food producers, distributors and sellers to recall adulterated or misbranded food if the FDA determines that there is a reasonable probability that the food will cause serious adverse health consequences to persons or animals. Additionally, FSMA increases the FDA’s authority for administrative detentions of adulterated and misbranded foods. FSMA also could cause enhanced tracking and tracing of food requirements and, asother tasks. As a result, added recordkeeping burdens upon our suppliersimplementation of the legislation is ongoing and contract manufacturers.likely to take several years.

The FDA also exercises broad jurisdiction over the labeling and promotion of food.food and dietary supplements. Labeling is a broad concept that, under certainmost circumstances, extends even to product-related claims and representations made on a company’s website or similar printed or graphic medium. All foods, including dietary supplements, must bear labeling that provides consumers with essential information with respect to standards of product identification,identity, net quantity/weight, nutritionalnutrition facts ingredients, manufacturerlabeling, ingredient statements, identity and the identitylocation of certain allergens (if present).manufacturer/packer/distributor, and allergen disclosures. The FDA administers a pre-market authorization program applicable to foods and supplements alike regardingalso regulates the use of “nutrient content”structure/function claims (e.g.(e.g., “calcium builds strong bones”), qualified health claims (e.g., "adequate calcium throughout life may reduce the risk of osteoporosis"), nutrient content claims (e.g., “high in antioxidants,” “low in fat,” etc.antioxidants”), “health” claims (claims describing the relationship between a food substance and a health or disease condition) and “natural“natural” and “all natural” claims. “Organic” claims, however, are primarily regulated by the USDA. In addition, the FDA has authority over products falselyCertain new food labeling requirements, including disclosure of calories and other nutrient information, are scheduled to go into effect on January 1, 2020 for manufacturers with $10.0 million or misleadingly labeled “organic.” Products labeled “organic” must be certified by an accredited agent as compliantmore in annual food sales and on January 1, 2021 for manufacturers with USDA-established standards.less than $10.0 million in annual food sales.