Ever since Whole Foods’ hot streak cooled and competitors began chipping away at its natural and organic industry dominance, rumors of a sale have swirled around the Austin, TX-based chain.
Three years ago, Publix surfaced as a potential buyer. Then came news that Kroger was interested in an acquisition. Private equity and international buyers were touted as possibilities next, followed by e-commerce giant Amazon. Speculation grew so rampant that last summer, Whole Foods stated during an earnings call that it was not for sale.
But results haven’t improved, and pressure on the company has continued to build. Now, Whole Foods faces calls from two major shareholders — activist investor Jana Partners and mutual-fund manager Neuberg Berman, which collectively own a more than 10% stake in the company — to explore a possible sale. The firms, which did not work together, have also called on Whole Foods to install new personnel and deploy many conventional retail strategies it has resisted over the years.
“I’ll be shocked if John Mackey wants to sell. I think he’ll fight. I don’t think he’s going to want to sell because it’s his baby and he still thinks there’s a lot of growth.”
Brian Yarbrough
Senior research analyst with Edward Jones
Shortly after Jana bought its stake in early April, talk of acquisition ramped up again as the Financial Times reported that Albertsons and owner Cerberus Capital were exploring acquisition, and that Whole Foods had enlisted the investment bank Evercore to advise it on a possible sale.
But will the company that by all accounts launched the mainstream natural and organic retail movement bow to the pressure? Brian Yarbrough, senior research analyst with Edward Jones, doesn’t think so. He believes that CEO John Mackey, who founded the company more than thirty years ago, will resist putting the company up for sale as long as he can.
“I’ll be shocked if John Mackey wants to sell,” Yarbrough told Food Dive. “I think he’ll fight. I don’t think he’s going to want to sell because it’s his baby and he still thinks there’s a lot of growth.”
Mackey, according to Yarbrough, does not own enough shares to block a sale should shareholders vote in favor of one. Still, the 63-year-old executive, who took sole ownership of the CEO role late last year after sharing it with Walter Robb for six years, believes he can steer the company back on track. In 2015, as same-store sales began to slide, Whole Foods established a nine-point plan to rein in costs and drive sales. It included cutting $300 million out of the supply chain, building its 365 banner stores, offering more targeted promotions and enhancing its digital capabilities.
The strategy was a major departure from the high-price, high-investment model Whole Foods was used to operating, but has so far failed to improve the company’s performance — making many investors impatient. In January, after Whole Foods posted its sixth straight quarter of same-store sales declines, the company announced it would cut store growth and speed up implementation of its efficiency and category management measures.
Who can afford Whole Foods' premium price tag?
Observers agree that Whole Foods’ updated strategy, while late to the game, is mostly on target. However, they question whether the company can execute the plan, and do so before the pressure from shareholders becomes too great.
“Whole Foods is taking the right steps to turn things around,” Diana Sheehan, Director of Retail Insights with Kantar Retail, told Food Dive. “It just becomes a question of, will they be able to do it fast enough on their own, or will they be forced to change?”
Certainly, the company holds high value for potential buyers, despite its recent struggles. It has a strong brand, top-notch prepared foods departments, and still has high sales per square foot. It also enjoys tremendous loyalty amongst “Whole Foodies,” the values-focused shoppers with plenty of disposable income that contribute significantly to the company’s bottom line.
“Whatever tarnish the brand has, it’s still the premier player in its space,” Neil Stern, senior partner with retail consulting firm McMillanDoolittle, told Food Dive.
But given its size and the premium price tag it would no doubt carry, Whole Foods is a retail prize only a few players in the industry can afford. This includes Kroger, the country’s largest conventional grocer, whose natural and organic expansion has been a major drag on Whole Foods’ sales in recent years. Credit Suisse analyst Edward Kelly recently touted the retailer as a good fit to acquire Whole Foods. The play would increase its footprint at a time when new locations are hard to come by, he noted, and would expose the company to new, high-value customers.
Others aren’t so sure the Cincinnati-based grocer and Whole Foods would go well together. Stern noted that Kroger has focused mainly on what he calls “tactical acquisitions” lately, including regional players like Harris Teeter in the Atlantic region and Roundy’s in the Midwest. Kroger also has an investment in Lucky’s Markets, a low-price specialty chain that competes with Whole Foods in the natural and organic space.
Sheehan, meanwhile, pointed to Kroger’s deepening investments in store technology and e-commerce as the more likely focus for the company moving forward. Kroger’s strong lineup of private label brands, including natural and organic line Simple Truth, which takes in $1.7 billion annually, suggests to Sheehan that it wouldn’t need what many see as one of Whole Foods’ biggest assets: its 365 store brand line.
“[Kroger] has done such a good job building its own organic line, it would almost become competitive with 365,” Sheehan said.
What other buyers might be out there?
Albertsons, which appears to be the front-runner right now to close a deal, also raises concerns. The supermarket chain, which has rapidly acquired competitors under the ownership of Cerberus Capital — including Safeway two years ago — seems keen on expanding into the natural and organic industry. Before its link to Whole Foods, the retailer was reported in March to be exploring an acquisition of Sprouts Farmers Market. A Whole Foods acquisition might help the company obtain a public offering, which it sought unsuccessfully the past few years. However, the deal would put the company, which already carries significant debt, further into the red. Yarbrough estimated the debt load at more than $20 billion.
“We’re seeing many of the more affluent buyers like those that shop at Whole Foods shifting to Amazon for their dry goods and various items. So Whole Foods is really getting squeezed."
Matt Sargent
Senior vice president of retail at Frank N. Magid Associates
A Whole Foods-Albertsons partnership might also face significant competitive pressures from Amazon. Matt Sargent, senior vice president of retail at consulting firm Frank N. Magid Associates, noted that customers with both companies are heavy Amazon Prime and Prime Now users. Although Amazon’s grocery sales are modest right now — just 10% of users buy groceries and household items through the site, according to numbers compiled by Magid — the e-commerce giant could become a major threat in the near future.
“We’re seeing many of the more affluent buyers like those that shop at Whole Foods shifting to Amazon for their dry goods and various items,” Sargent told Food Dive. “So Whole Foods is really getting squeezed. On the high end, customers are migrating online, while on the low end, which is a growing segment, shoppers aren’t going into Whole Foods stores.”
The bigger issue, sources said, is that while a conventional grocer might help Whole Foods control its costs and operate more efficiently, it may not have the expertise to maintain Whole Foods’ values and quality standards amidst all the streamlining and cost cutting.
“If a conventional grocer like Albertsons or Kroger comes in, do they start stripping this thing down and cutting costs to the point where you’re hurting the whole brand that’s been built over many years?” said Yarbrough.
The best sale option for Whole Foods, some analysts noted, might be a private equity firm. That kind of owner could take the company off the stock market, make significant investments, and reduce prices. Within a few years, the right firm could have Whole Foods ready to go public again.
“Private equity, at the end of the day, is so focused on return on investment, they would walk in and not be afraid to make tough decisions to change the organization,” said Sheehan.
There's work ahead, regardless of ownership changes
Whether they eventually sell or manage to maintain control, Whole Foods’ management team faces significant challenges in the months to come. In addition to instituting more of the blocking and tackling measures favored by conventional retailers, analysts said the company needs to continue implementing cutting-edge data and efficiency programs like direct-to-shelf replenishment, loyalty programs and consumer analytics. And it needs to do so without radically altering the brand to which so many shoppers remain loyal.
Yarbrough, noting that Whole Foods’ prices are often 20% to 30% higher than mainstream competitors like Kroger, said it’s certainly possible for the chain to address its “Whole Paycheck” image with consumers while still maintaining its identity.
“They don’t need to be the same price as Kroger, they just need to be in an 8% to 10% range where people are willing to pay more, but they’re getting that experience,” he said.
