Whole Foods Acquires Wild Oats

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WHAT HAPPENED:

Whole Foods Market acquired is largest competitor, Wild Oats, for $565 million along with assuming Wild Oats' existing net debt of $106 million. When the deal closes, Whole Foods will operate more than 300 locations in 31 states along with stores in Canada and in the United Kingdom.

Founded in 1987, Wild Oats operates 110 stores with annual sales of $1.2 billion. In comparison, Whole Foods was founded in 1980 and operates 193 stores with yearly sales of $5.6 billion.

Wild Oats has historically underperformed. Its sales per square foot of $450 is half what Whole Foods is able to generate and the company is currently in a major transition period operating without a CEO or CFO.

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WHY DID IT HAPPEN:
On the conference call with Wall Street analysts, Whole Foods CEO, John Mackey, called the acquisition “highly opportunistic.” Mackey went on to say the timing was right to approach Wild Oats about a merger given the “strategic gap” at Wild Oats as evidence by the lack of a CEO and lack of a clear company vision.

Wild Oats has significant penetration in the Rocky Mountains, Pacific Northwest, and Florida ... regions where Whole Foods’ penetration is weak. Whole Foods believes it can significantly improve the operations of Wild Oats locations resulting in higher sales on a per-store basis. The addition of new stores and the productivity improvement in these stores will positively impact Whole Foods’ comp sales figures.

But the real benefit, as I see it from the perspective of a former Whole Foods National Marketing Director, is this acquisition helps to solve Whole Foods Market’s greatest challenge. As I wrote in this blog post, the biggest challenge facing Whole Foods is its inability to open new locations.

In 2006, Whole Foods opened only 13 new stores yet the company proudly informs Wall Street they have 90+ stores in the development pipeline. Given their current rate of opening new stores, it will take Whole Foods at least six years to open the 90+ stores they have in the pipeline today.

By swallowing Wild Oats’ 110 stores, this immediately solves Whole Foods new store opening challenge. Sure, Whole Foods will close some of the Wild Oats locations and relocate others but the net/net will be a significant increase in the Whole Foods store base. This increase in the Whole Foods store base will have a positive impact on comp store sales.

Remember, Wild Oats locations are only able to generate $450 per square foot compared to the $900 Whole Foods is able to generate. Whole Foods is very confident they can improve store operations at these locations to drive sales. On the conference call with analysts, Whole Foods management talked about how they have been able to successfully increase sales on a store-level basis in all 18 of their previous acquisitions.

And helping to increase efficiencies to drive profits will be the reduction of corporate expenses. Massive reductions in redundant corporate G&A overhead expenses will take place as Whole Foods doesn’t need two CFOs, two CIOs, two Procurement VPs, two Human Resources VPs, etc.

On a different angle, the hope is a bigger and more expansive Whole Foods will be able to better compete against the behemoth Wal-Mart and the ever-nimble Trader Joe’s.

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IMPLICATIONS:
I’m still sorting through the myriad implications this merger will bring. Expect a post this weekend detailing my thoughts on how this big-time maneuver will impact the Whole Foods Market company culture and its future success. This merger between Whole Foods and Wild Oats came as a complete shock to me. It's something I never anticipated happening.

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Comments

[Chris]

So... Whole Foods generates $900 per square foot to Wild Oats' $450. Does this mean that Whole Foods' prices are twice what Wild Oats' are? One must wonder. Bigger isn't always better.

[johnmoore (from Brand Autopsy)]

Chris ... to quickly answer your question, NO. WFM prices are not twice that of Oats.

Both grocers sell roughly the same products with the major differences found in the perishable departments. WFM sells more upscale products than does Oats and the in-store merchandising at WFM is consistently stronger than Oats. More upscale merch and better in-store sets will usually result in being able to command higher prices, just not double. Dig?

Wild Oats has struggled to drive sales and profits similar to Whole Foods. People in the know say Wild Oats has been weak at running their stores from an operations end. Meaning, they have a hard time controlling expenses and managing margins from procurement to payroll to other areas.

The company culture at WFM is different than Oats and that difference might help explain why WFM is able to generate 100% higher sales per square ft. WFM has a bottom-up organizational culture where decision-making responsibility is pushed down to regions/stores. To my knowledge, Oats has a much more traditional top-down, command and control org structure. So, more ownership and accountability is at the store level with WFM than Oats. That might be the biggest reason WFM is able to generate more sales per sq foot on a store-by-store basis.

I'm still trying to sort out this 300+ unit WFM. To your point, bigger isn't always better. Being better can make a business bigger. But being bigger doesn't always result in being better. True dat!

[Lewis Green]

John,

After seeing Mackey interviewed this week, here is my inexpert analysis: Whole foods has hit a wall growing its own stores, and to continue growth and per store comps, it had (has) to get into the merger and aquisition phase. A dangerous strategy, for sure, which, according to case studies and market research, seldom reaps favorable ROI.

We shop at Wild Oats, and I am betting on higher prices.

[johnmoore (from Brand Autopsy)]

Lewis ... I have a much different take. Throughout WFM's history, they have grown by acquiring regional competitors. Since 1980, they have acquired 18 regional competitors. Of WFM's current 191 locations in its store base, probably 25% of them are from acquisitions.

Like you, I value organic growth more than “artificial” growth by acquisition. However, I see this merger as a defensively offensive play. Defensively in that a bigger WFM helps it compete better against Wal-Mart and Trader Joe's. Offensively in that they now have access to more real estate locations in regions where they were under-represented.

Think of this merger like SBUX acquiring the UK-based Seattle Coffee Company. In one swoop, SBUX was able to have access to about 60 real estate locations in the UK. It would have been very spendy and time-consuming for SBUX to acquire the same 60 real estate locations on a one-by-one basis.

I’m no financial guy but $565M (+ $106M of Oat’s debt) seems a fair price to pay for immediate access to 110 real estate locations that can be easily converted to WFM locations.

There’s an old story of how many years John Mackey sent the original founder of Wild Oats the board game RISK. Included with the board game was note from Mackey that essentially said “game-on.” Sure, this move is risky move but Mackey saw a competitor in disarray with no leader in place and its troops spread way too thin to not pounce on. Mackey is a fierce competitor who couldn’t pass up this opportunity to eliminate Wild Oats from the risky game of business.

[Chris Baskind]

That's an interesting footnote to your column.

I published an article about the merger on my site, which deals with sustainability issues. Seemed germane.

Within hours, I was receiving rather angry emails for posting the story. People were upset. They saw Whole Food's purchase of Wild Oats as hostile and bullying -- another victory for "corporate Amerika," as one commenter put it.

Of course, Wild Oats was fully part of the corporate world in the first place. I rather doubt the people who complained represent the majority opinion of Whole Foods' brand, but it might reflect brewing problems WF should address.

[Camelia Mazard]

Does anyone know whether the Wild Oats/Whole Foods deal was issued a second request or did the waiting period expire?

[Dan]

It's funny, I work for Henry's Pacific Beach store. OATS treats us as it's Red Headed Stepchild because they don't understand the simple concept of good inexpensive locally grown produce, clean grocery products & a complete nutrition section.

The concept was started way before Wild Oats or Whole Foods. The Boney family decided to protect their San Diego & Southern California foothold by opening as many stores as possible. Once the Boney family sold to OATS they moved to Arizona and started Sprouts. They are moving into San Diego. Will Whole Foods sell Henry's back to the Boney family and loose their foothold in San Diego & Southern California?

You can look at how many Whole Foods are in San Diego county. You will only find 2 stores for over 2 million people. Why? Because Henry's is everywhere! Will Whole Foods close 21 stores that make money just because they don't like how Henry's makes it?

I hear a lot of rumors from a lot of people who think they are more important than they really are. No one knows what will happen until it happens. Many people looking at the picture are bean counters and know nothing about what's happening on the floor. All I know is Henry's will stay around and dominate San Diego like it has for over 20 years. People in San Diego are too busy paying more than $ 3.50 for a gallon of gas to pay $ 3.50 for an organic orange. If the demand for more Whole Foods stores was there , there would be more Whole Foods already in Southern California.

P.S. Funny thing about Trader Joe's. Our store is located right across the street from TJ's. Customers of ours shop at both stores back to back on the same day. A good suggestion would be to take the best of TJ's and model it into existing Henry's to keep TJ's in check.

[Mary Paskens]

I think the merger will be a good one. I do see some problems coming as I have now been informed by receiving information that the Chicago courts have a case where the domain for "Henrys Farmers Market.com which covers 33 stores of Wild Oats has a pending lawsuit by a large firm stating they have complete rights to the domain and will prove it in a Chicago court room shortly. If this case is lost it will cost this merger huge costs and loss of revenues. Key Question...What will Wild Oats and Whole Foods do to eliminate this mess before their merger is completed?

[Jeff Merriweather]

Big Problems already. Beware. I do see some problems coming as I have now been informed by receiving information that the Chicago courts have a case where the domain for "Henrys Farmers Market.com which covers 33 stores of Wild Oats has a pending lawsuit by a large firm stating they have complete rights to the domain and will prove it in a Chicago court room shortly. If this case is lost it will cost this merger huge costs and loss of revenues. Key Question...What will Wild Oats and Whole Foods do to eliminate this mess before their merger is completed?

[Peter Oslo]

I work with a vendor in the natural product industry. So we supply to Whole Foods and Wild O.. And i can tell you the industry is shifting so much we just cant believe it. Whole and Wild O. were the big shots for us for quite some time but at this time all the conventional retailer like Save Way and etc. are jumping on organic and all of a sudden Wild O. and Whole F. are just little players in the game and it is over with the big discounts they were used to get. They have to stand in line now and wait. And with all the problems and money that is needed to get this merger in place Whole Foods will walk into a hard Future. I will sell Short on my Whole Foods stocks that's my recommendation.

Thanks
peter

[RemyC]

Everybody forgets to mention Gaiam in this equation... Gaiam is the umbrella financial groups which owns Whole Foods... and a myriad of other large "green" companies... The question has always been, will Gaiam remain independent, as a bastion of green business pioneering... or will it too, ultimately sell out to a large food conglomerate like a Kraft or a Pepsico, which would in essence destroy the entire meaning of the green philosophy that has made whole foods and wild oats successful. (as with the nuclear power industry buying into wind companies.) I think that's a fair question to ask... since this country is also highly threatened by international laws trying to ban the majority of supplements from store shelves... relabeling them from foods to drugs... making them only available by prescription, some european countries now lamenting vitamin C for example is priced out of reach for most people. americans have some hard thinking to do about what it means to remain free... I don't know that I see this merger as a good thing... in fact I see it as impetus for the rebirth of smaller, more personal health food stores... already in my community, the oldest health food store, which everyone thought would never stand the onslaught... has suddenly increased in popularity... people always return to where they feel most at home... a place where employee are allowed minds of their own... it's worth a few dollars more when you know food tastes as good as the love that goes into it.

[johnmoore (from Brand Autopsy)]

RemyC ... Gaiam doesn't own Whole Foods Market. At sometime during the dot-com heyday, Gaiam and Whole Foods were linked financially and strategically. Today, their financial and strategic relationship is thin. I'm not sure of all the details but I can say with confidence that Gaiam doesn't own Whole Foods and Whole Foods doesn't own Gaiam.

[knappster]

And so the absurdity of capitalism marches on.  A company calling itself "Whole" Foods markets the myth that sustainability can be compatible with endless growth on a finite planet.  As millions of fools join the dance of death, the main question is how much carrying capacity will be destroyed before capitalism collapses or we kill it.

Large scale destroys ecology, democracy and community.  Whole Foods has become another sickening face of the destruction — a cancer on the land and humanity.