Natural~Specialty Foods Memo Analysis and Opinion
Whole Foods Market, Inc. and Tesco's Fresh & Easy Neighborhood Market are two very different food retailers, but they do have at least one similarity.
That similarity is the fact for the last couple years both retail chains have been locking up new store site leases throughout Northern California at a breakneck pace.
Whole Foods, which these days tends to build primarily mega-natural foods supermarkets in the 45,000 -to- 75,000 square foot range, with some exceptions of course, currently has 13 new store locations in various degrees of development in Northern California. Eleven of the 13 locations have signed leases.
Fresh & Easy Neighborhood Market, which is the U.S. division of United Kingdom (UK)-based international retailer Tesco, the third largest retailer in the world, is engaged in its own leasing frenzy in Northern California. Thus far, Tesco has locked up leases on 43 sites for its small-format combination fresh foods and basic grocery stores in Northern California--21 locations in the San Francisco Bay Area, 20 in the Sacramento/Vacaville/Farfield region and one in Modesto, in the Northern San Joaquin Valley, and one in the south coastal city of Seaside near Monterey.
The 43 store locations are just those Tesco has either confirmed or we have identified independently. The retailer is in the process of securing many more new store site leases at present. The first of the 10,000 -to- 13,000 square foot Northern California Tesco Fresh & Easy Neighborhood Market grocery stores are scheduled to begin opening in early 2009. Just as its been the case since November, 2007 in its current Southern California, Nevada and Arizona markets, expect to see Tesco open a new Fresh & Easy store in Northern California about every 3 -to- 4 days beginning early next year.
Whole Foods Market, Inc. though, unlike Tesco's Fresh & Easy, is putting the brakes on its new store opening plans for at least the next year, including in Northern California, which strategically is one of the natural grocer's top new store development markets for the next few years.
Last week after reporting poor sales and profit numbers, Whole Foods announced it planned to scale back the number of new stores it plans to open in the U.S. next year from the 25 -to- 30 it had planned to open in 2009, to just 15. As mentioned above, 13 of those new store locations are in Northern California.
On Friday, David Lannon, president of Whole Foods' Northern California division said that as part of the grocer's 2009 new store opening reduction plan, all but two of the 13 planned new stores in Northern California are subject to not being opened next year as originally planned. He said the retailer is committed to eventually opening all 13 stores in Northern California, but that it's obvious in light of the fact Whole Foods will only open 15 new stores nationally in the U.S. next year, that most of those 13 stores won't open in 2009 as planned.
According to Lannon, the two Whole Foods stores that will open for sure in Northern California is a store in the south coastal city of Santa Cruz (set to open in the first quarter of 2009) and one in Roseville, which is a suburb of Sacramento. That store is scheduled to open in November, 2009. It will only be Whole Foods Markets' second store in the fast growing Sacramento Metropolitan region. The existing store is in Sacramento.
Lannon and a team from the Northern California division office plan to meet with landlords and developers of the 11 leased sites to determine the status of each project and discuss the future in light of Whole Foods corporate plans to reduce the number of new stores it will open next year by nearly half. Final decisions on moving forward and scaling back will be made at Whole Foods' corporate headquarters in Austin, Texas, Lannon says.
Meanwhile, Tesco's Fresh & Easy Neighborhood Market is moving full bore ahead, not only with its plans to open the 42 Northern California combination fresh foods and basic grocery markets next year, but also scouting out additional sites and signing additional leases for them throughout the region.
In addition to the Bay Area and Sacramento region, Tesco is looking for additional store sites (it already has the one in Modesto) in the Northern San Joaquin Valley cities of Stockton, Manteca and Tracy, additional locations in Modesto, and in other communities in the region.
Tesco also is looking for Fresh & Easy store sites in the Monterey/Salinas/Santa Cruz area where it recently inked a deal for a store site in Seaside, next door to Monterey.
Further, it's looking to lock up leases for additional Bay Area stores in all nine counties, along with more stores in the Sacramento/Vacaville/Farfield area.
The retailer's strategy is to have stores throughout the Bay Area, to Sacramento on the I-80 corridor, from Sacramento throughout the Central Valley, and out to the south coast. Five stores are set to open in the Bakersfield Metropolitan region next year, along with six in Metro Fresno. The retailer also is looking for a couple store sites in the Merced County region.
The net result will be to have Fresh & Easy Neighorhood Market grocery stores from Southern California, where there currently are about 37 of the markets (there are 71 stores total thus far in Southern California Metro Las Vegas, Nevada and in the Phoenix, Arizona Metropolitan area), through Bakersfield and Fresno, into the Northern San Joaquin Valley, out to Sacramento, into the San Francisco Bay Area, and over to the south coast, by the end of 2009.
This strategy will give Tesco the beginnings of a critical mass of food stores in California, which it plans to then add additional units to throughout 2009 and 2010, likely ending up with around 200 stores in California by the end of 2010.
One shouldn't attribute the fact Tesco is going forward so aggressively with its new store development program in Northern California, while Whole Foods Market, Inc. is putting the brakes on its, to Whole Foods' being the only one of the two food retailers having sales and profits problems.
Although it hasn't released any sales numbers yet, we know Tesco is losing millions with its start up Fresh & Easy. A big part of this loss is just that start ups lose money, especially very aggressive retail start ups like Fresh & Easy is.
But the start up explanation is only half of the equation. Thus far Tesco's Fresh & Easy stores have been underperforming to Tesco's internal target, which was weekly sales in the average 10,000 -to- 13,000 square foot stores of about $200,000 per-week. Our sources and research says on average the stores have been doing about half that sales number, although they've been picking up in the last couple months because Tesco has been launching some aggressive promotions, including distributing lots of coupons good for a whopping $5 off total grocery purchases of $20 or more in all its Fresh & Easy stores.
The fact is though, Fresh & Easy USA is a major initiative for Tesco, which is the world's third-largest retailer with annual sales of over $83 billion last year. The United Kingdom-based retailer plans to loose money on its Fresh & Easy U.S. venture for sometime--although it didn't initially count on losing as much as it has so far.
Compared to Tesco, Whole Foods Market is a tiny food retailing fish, with sales in the $6 -to- $7 billion dollar a year range. However, Whole Foods isn't much of an international retailer, with just a few stores in Canada and a handful of stores in the United Kingdom, the rest being in the United States. Therefore, that fact, combined with its focus on the natural and organic foods categories (it doesn't have the sales luxury of selling basic groceries in other words) makes Whole Foods a very impressive food retailer in scale and sales domestically. It's just not anywhere near the scale of a Tesco--or a Walmart, Inc., Kroger, Safeway, SuperValu and numerous others.
And in the case of going forward with new store opening plans rather than putting the brakes on such plans, being an $80-plus billion a year international retailer that has lots of cash on hand helps, compared to being a $7 billion a year retailer who's fate--unlike Tesco's which has operations all over the globe---lies 100% on its U.S. stores' performance, which thanks to the poor U.S. economy is taking a serious battering right now.
Nonetheless, Tesco would covet having a $6-plus billion a year U.S. division like Whole Foods Market, Inc., although it would likely prefer it to be under a more traditional food and grocery retailing format, rather than one focused on natural, organic, fresh and specialty foods categories. Or perhaps it wouldn't? The U.S. economy will boom once again, and upscale will be back in for many.
But, we also know that Tesco senior management has looked on Whole Foods in the U.S. in many ways with a keen eye, particularly admiring what its done in the organic fresh foods and grocery categories. And when Whole Foods opened its first store in London in the UK last year, Tesco watched closely. Unfortunately for Whole Foods Market, Inc., the retailer has lost $18 million to date on that London store, but business has picked up at the 70,000 square foot London food emporium, and it's drawing many more shoppers than it was just a year ago.
In the UK, Tesco is very deep in the natural and organic foods categories across all store categories, including dry grocery, fresh foods and even non-foods, particularly with its own store brands, which are the leading selling items in many categories throughout Britain.
Tesco is the UK's leading food and grocery retailer, controlling an impressive 31% share of the country's food and grocery sales market. Number two Wal-Mart-owned Asda has about a 17% share. Number three Sainsbury's about 15.5%. The remaining percentage is split among numerous food and grocery chains, including Morrisons (4th ranked) the Co-operative Group (now number 5 after just having acquired the Somerfield supermarket chain), Waitrose, Marks & Spencer, small-format German discount grocers Aldi and Lidl, and and a few others.
Last year when the U.S. Federal Trade Commission (FTC) made the first of its many legal challenges (which are still going on) against Whole Foods Market, Inc.'s acquisition-merger of Wild Oats Market, Inc., saying the deal would give Whole Foods' monopoly power in the supernatural food retailing category--an argument we've argued is wrong--we wrote that the FTC and others are forgetting Whole Foods Market, Inc. is a rather small fish in terms of overall food and grocery retailing in the U.S. (There are 21 retailers ranked above Whole Foods in terms of annual sales in the U.S. Further, the majority of these retailers are regional rather than national food retailers like Whole Foods is.)
As a result we wrote that Whole Foods Market, Inc. itself could become an acquisition target in the near-to-medium term, especially since major U.S. retailers like Safeway Stores, Inc., Kroger Co., SuperValu, Inc. and many others have moved into the natural and organic foods retailing space in a big way.
Thinking about how Whole Foods is having to scale back its plans to open about 30 stores in the U.S. next year to 15, while Tesco will likely open well over 100 new Fresh & Easy stores next year in California alone (granted the Fresh & Easy markets are much smaller than the average new Whole Foods store is), as well as is now moving into India and further growing its already impressive international business, our thoughts turn back to that Whole Foods as a potential acquisition target, as this month marks about a year since the Wild Oats acquisition.
While we believe based on source information Tesco eventually has bigger strategic plans in the U.S. than acquiring say a Whole Foods Market, Inc.--such as possibly acquiring something on the order of a Safeway or SuperValu, Inc. for example, along with growing Fresh & Easy into the Chicago Metro, Florida and New York markets--acquisitions are as much situational as they are long-term strategic opportunities.
A year ago, with its stock at an all time high, not even a Tesco or Wal-Mart, Inc. would likely consider acquiring the natural foods chain, even if they coveted doing so. But today, Whole Foods' stock is 70% below that all time high of just a year ago, and its being forced to cut back on its rapid new store growth program dramatically for the first time in two decades.
Additionally, Wall Street, which as recent as 6-7 months ago was super-bullish on Whole Foods Market, Inc.'s stock, is now bearish on the natural foods retailer. Whole Foods after all is a public company with numerous major institutional stockholders who must be satisfied. This is particularly the case since these investors are used to Whole Foods' stock going north rather than south in terms of value--at least until now.
This brings us to Tesco. If it wants to be a major player in food and grocery retailing in the U.S., it's going to have to eventually acquire a good-sized retailer or two at least. Although it's launched what is perhaps the most aggressive food retailing start up in modern history in the U.S. with Fresh & Easy, even if it opens 150 stores a year for the next five years (doable but tough to sustain and do well), it will still be a minor overall player with about 800 small-format stores. Nothing to sneeze at, but not in the big leagues either.
With Whole Foods' stock 70% below last year's high, along with the retailer having to scale back its new store opening plans for next year by nearly 50%--which means it doesn't have enough cash to go forward even while turning in poor sales and profit numbers in the short term--Whole Foods' is ripe to be acquired. The natural grocery chain also announced yesterday it will lay off about 43 employees at its Austin, Texas corporate headquarters.
If Tesco were to acquire Whole Foods, it could do many things for the international retailer. First, it would give it an immediate annual sales base of nearly $7 billion in the U.S., which is nothing to sneeze at, even for an $83-plus billion a year international retailer.
Second, it gives Tesco what arguably is the best upscale natural, organic and fresh foods format in the world. Imagine what a retailer the scale of Tesco could do with Whole Foods if it could do it right?
Third, it gives Tesco, which has the cash to expand Whole Foods internationally, an upscale natural, organic and green retailing format that it could expand throughout Europe, Australia, parts of Asia and even to the oil rich Arab countries where the UK's upscale Waitrose and the U.S. gourmet grocer Dean & Delucca are opening stores.
Lastly, at home in the UK, which on a per-capita basis has become the world's leading organic foods retail market, Whole Foods would give Tesco a banner which it could use to eventually dominate the natural foods' retailing space like its done in the grocery and general merchandise spaces with its various Tesco banner stores, ranging from hypermarkets to its small-format Tesco Express convenience-style grocery stores.
We believe Whole Foods CEO John Mackey and the company's board of directors would fight any acquisition, and likely would fight a deal offer from a British-based chain like Tesco even more so. However, if Whole Foods' performance doesn't improve dramatically in the next two quarters say, such a fight could be very difficult if such an acquisition were to come from Tesco or any other major retail chain. Nobody knows this better than John Mackey and the Whole Foods' board, since it was a fledgling, poor performing Wild Oats Market, Inc. it acquired about a year ago.
Is Tesco interested in acquiring Whole Foods Market, Inc.? We don't know. However, like we mentioned earlier in this piece, acquisitions are as much situational as they are long-term strategic. What we do know is that a couple U.S. supermarket chains are watching Whole Foods' performance closely, and that the A (acquisition) word has been tossed around by these chains, at least hypothetically.
What we do know is that Tesco has the cash to acquire Whole Foods without any trouble if it wants to. The possible political battle if it were to be a hostile acquisition, which would likely be the case at least right now, is another matter altogether. We doubt if Tesco is up for that just now.
However, when it comes to publicly-owned food retailing chains, circumstances change rapidly. Performance rules the day. For example, before investor Ron Burkle bought a major chunk of Wild Oats Market, Inc., became chairman of the board, and engineered the replacement of the company's CEO, both Wild Oats' board and key executives were adamant they would never sell to Whole Foods. That changed rather fast once Burkle got involved.
One could see a similar situation happening with Whole Foods. In fact, Burkle was a major player in brokering the Whole Foods-Wild Oats acquisition-merger. He's been rather low-key of late in the supermarket sector, but Whole Foods' current situation is one that brings out Ron Burkle and other investors like him who are adept at engineering just such acquisitions once they make a substantial investment in a company. Burkle still has stock in Whole Foods Market, Inc. from the Wild Oats acquisition, by the way.
Don't be shocked if in the not too distant future you see Whole Foods going from being charged by the FTC and others as a monopolist acquirer to being acquired itself.
Will it happen this year; next year? We have no idea. What we do know is that the chances of Whole Foods being acquired now are about 100% higher than they were just a year ago. That alone is worth paying attention to.
Editor's note: Watch for an upcoming story and analysis of retailer's we think would benefit overall by acquiring Whole Foods Market, Inc. An 'America's top Whole Foods Market, Inc. acquisition parade' if you will.
That similarity is the fact for the last couple years both retail chains have been locking up new store site leases throughout Northern California at a breakneck pace.
Whole Foods, which these days tends to build primarily mega-natural foods supermarkets in the 45,000 -to- 75,000 square foot range, with some exceptions of course, currently has 13 new store locations in various degrees of development in Northern California. Eleven of the 13 locations have signed leases.
Fresh & Easy Neighborhood Market, which is the U.S. division of United Kingdom (UK)-based international retailer Tesco, the third largest retailer in the world, is engaged in its own leasing frenzy in Northern California. Thus far, Tesco has locked up leases on 43 sites for its small-format combination fresh foods and basic grocery stores in Northern California--21 locations in the San Francisco Bay Area, 20 in the Sacramento/Vacaville/Farfield region and one in Modesto, in the Northern San Joaquin Valley, and one in the south coastal city of Seaside near Monterey.
The 43 store locations are just those Tesco has either confirmed or we have identified independently. The retailer is in the process of securing many more new store site leases at present. The first of the 10,000 -to- 13,000 square foot Northern California Tesco Fresh & Easy Neighborhood Market grocery stores are scheduled to begin opening in early 2009. Just as its been the case since November, 2007 in its current Southern California, Nevada and Arizona markets, expect to see Tesco open a new Fresh & Easy store in Northern California about every 3 -to- 4 days beginning early next year.
Whole Foods Market, Inc. though, unlike Tesco's Fresh & Easy, is putting the brakes on its new store opening plans for at least the next year, including in Northern California, which strategically is one of the natural grocer's top new store development markets for the next few years.
Last week after reporting poor sales and profit numbers, Whole Foods announced it planned to scale back the number of new stores it plans to open in the U.S. next year from the 25 -to- 30 it had planned to open in 2009, to just 15. As mentioned above, 13 of those new store locations are in Northern California.
On Friday, David Lannon, president of Whole Foods' Northern California division said that as part of the grocer's 2009 new store opening reduction plan, all but two of the 13 planned new stores in Northern California are subject to not being opened next year as originally planned. He said the retailer is committed to eventually opening all 13 stores in Northern California, but that it's obvious in light of the fact Whole Foods will only open 15 new stores nationally in the U.S. next year, that most of those 13 stores won't open in 2009 as planned.
According to Lannon, the two Whole Foods stores that will open for sure in Northern California is a store in the south coastal city of Santa Cruz (set to open in the first quarter of 2009) and one in Roseville, which is a suburb of Sacramento. That store is scheduled to open in November, 2009. It will only be Whole Foods Markets' second store in the fast growing Sacramento Metropolitan region. The existing store is in Sacramento.
Lannon and a team from the Northern California division office plan to meet with landlords and developers of the 11 leased sites to determine the status of each project and discuss the future in light of Whole Foods corporate plans to reduce the number of new stores it will open next year by nearly half. Final decisions on moving forward and scaling back will be made at Whole Foods' corporate headquarters in Austin, Texas, Lannon says.
Meanwhile, Tesco's Fresh & Easy Neighborhood Market is moving full bore ahead, not only with its plans to open the 42 Northern California combination fresh foods and basic grocery markets next year, but also scouting out additional sites and signing additional leases for them throughout the region.
In addition to the Bay Area and Sacramento region, Tesco is looking for additional store sites (it already has the one in Modesto) in the Northern San Joaquin Valley cities of Stockton, Manteca and Tracy, additional locations in Modesto, and in other communities in the region.
Tesco also is looking for Fresh & Easy store sites in the Monterey/Salinas/Santa Cruz area where it recently inked a deal for a store site in Seaside, next door to Monterey.
Further, it's looking to lock up leases for additional Bay Area stores in all nine counties, along with more stores in the Sacramento/Vacaville/Farfield area.
The retailer's strategy is to have stores throughout the Bay Area, to Sacramento on the I-80 corridor, from Sacramento throughout the Central Valley, and out to the south coast. Five stores are set to open in the Bakersfield Metropolitan region next year, along with six in Metro Fresno. The retailer also is looking for a couple store sites in the Merced County region.
The net result will be to have Fresh & Easy Neighorhood Market grocery stores from Southern California, where there currently are about 37 of the markets (there are 71 stores total thus far in Southern California Metro Las Vegas, Nevada and in the Phoenix, Arizona Metropolitan area), through Bakersfield and Fresno, into the Northern San Joaquin Valley, out to Sacramento, into the San Francisco Bay Area, and over to the south coast, by the end of 2009.
This strategy will give Tesco the beginnings of a critical mass of food stores in California, which it plans to then add additional units to throughout 2009 and 2010, likely ending up with around 200 stores in California by the end of 2010.
One shouldn't attribute the fact Tesco is going forward so aggressively with its new store development program in Northern California, while Whole Foods Market, Inc. is putting the brakes on its, to Whole Foods' being the only one of the two food retailers having sales and profits problems.
Although it hasn't released any sales numbers yet, we know Tesco is losing millions with its start up Fresh & Easy. A big part of this loss is just that start ups lose money, especially very aggressive retail start ups like Fresh & Easy is.
But the start up explanation is only half of the equation. Thus far Tesco's Fresh & Easy stores have been underperforming to Tesco's internal target, which was weekly sales in the average 10,000 -to- 13,000 square foot stores of about $200,000 per-week. Our sources and research says on average the stores have been doing about half that sales number, although they've been picking up in the last couple months because Tesco has been launching some aggressive promotions, including distributing lots of coupons good for a whopping $5 off total grocery purchases of $20 or more in all its Fresh & Easy stores.
The fact is though, Fresh & Easy USA is a major initiative for Tesco, which is the world's third-largest retailer with annual sales of over $83 billion last year. The United Kingdom-based retailer plans to loose money on its Fresh & Easy U.S. venture for sometime--although it didn't initially count on losing as much as it has so far.
Compared to Tesco, Whole Foods Market is a tiny food retailing fish, with sales in the $6 -to- $7 billion dollar a year range. However, Whole Foods isn't much of an international retailer, with just a few stores in Canada and a handful of stores in the United Kingdom, the rest being in the United States. Therefore, that fact, combined with its focus on the natural and organic foods categories (it doesn't have the sales luxury of selling basic groceries in other words) makes Whole Foods a very impressive food retailer in scale and sales domestically. It's just not anywhere near the scale of a Tesco--or a Walmart, Inc., Kroger, Safeway, SuperValu and numerous others.
And in the case of going forward with new store opening plans rather than putting the brakes on such plans, being an $80-plus billion a year international retailer that has lots of cash on hand helps, compared to being a $7 billion a year retailer who's fate--unlike Tesco's which has operations all over the globe---lies 100% on its U.S. stores' performance, which thanks to the poor U.S. economy is taking a serious battering right now.
Nonetheless, Tesco would covet having a $6-plus billion a year U.S. division like Whole Foods Market, Inc., although it would likely prefer it to be under a more traditional food and grocery retailing format, rather than one focused on natural, organic, fresh and specialty foods categories. Or perhaps it wouldn't? The U.S. economy will boom once again, and upscale will be back in for many.
But, we also know that Tesco senior management has looked on Whole Foods in the U.S. in many ways with a keen eye, particularly admiring what its done in the organic fresh foods and grocery categories. And when Whole Foods opened its first store in London in the UK last year, Tesco watched closely. Unfortunately for Whole Foods Market, Inc., the retailer has lost $18 million to date on that London store, but business has picked up at the 70,000 square foot London food emporium, and it's drawing many more shoppers than it was just a year ago.
In the UK, Tesco is very deep in the natural and organic foods categories across all store categories, including dry grocery, fresh foods and even non-foods, particularly with its own store brands, which are the leading selling items in many categories throughout Britain.
Tesco is the UK's leading food and grocery retailer, controlling an impressive 31% share of the country's food and grocery sales market. Number two Wal-Mart-owned Asda has about a 17% share. Number three Sainsbury's about 15.5%. The remaining percentage is split among numerous food and grocery chains, including Morrisons (4th ranked) the Co-operative Group (now number 5 after just having acquired the Somerfield supermarket chain), Waitrose, Marks & Spencer, small-format German discount grocers Aldi and Lidl, and and a few others.
Last year when the U.S. Federal Trade Commission (FTC) made the first of its many legal challenges (which are still going on) against Whole Foods Market, Inc.'s acquisition-merger of Wild Oats Market, Inc., saying the deal would give Whole Foods' monopoly power in the supernatural food retailing category--an argument we've argued is wrong--we wrote that the FTC and others are forgetting Whole Foods Market, Inc. is a rather small fish in terms of overall food and grocery retailing in the U.S. (There are 21 retailers ranked above Whole Foods in terms of annual sales in the U.S. Further, the majority of these retailers are regional rather than national food retailers like Whole Foods is.)
As a result we wrote that Whole Foods Market, Inc. itself could become an acquisition target in the near-to-medium term, especially since major U.S. retailers like Safeway Stores, Inc., Kroger Co., SuperValu, Inc. and many others have moved into the natural and organic foods retailing space in a big way.
Thinking about how Whole Foods is having to scale back its plans to open about 30 stores in the U.S. next year to 15, while Tesco will likely open well over 100 new Fresh & Easy stores next year in California alone (granted the Fresh & Easy markets are much smaller than the average new Whole Foods store is), as well as is now moving into India and further growing its already impressive international business, our thoughts turn back to that Whole Foods as a potential acquisition target, as this month marks about a year since the Wild Oats acquisition.
While we believe based on source information Tesco eventually has bigger strategic plans in the U.S. than acquiring say a Whole Foods Market, Inc.--such as possibly acquiring something on the order of a Safeway or SuperValu, Inc. for example, along with growing Fresh & Easy into the Chicago Metro, Florida and New York markets--acquisitions are as much situational as they are long-term strategic opportunities.
A year ago, with its stock at an all time high, not even a Tesco or Wal-Mart, Inc. would likely consider acquiring the natural foods chain, even if they coveted doing so. But today, Whole Foods' stock is 70% below that all time high of just a year ago, and its being forced to cut back on its rapid new store growth program dramatically for the first time in two decades.
Additionally, Wall Street, which as recent as 6-7 months ago was super-bullish on Whole Foods Market, Inc.'s stock, is now bearish on the natural foods retailer. Whole Foods after all is a public company with numerous major institutional stockholders who must be satisfied. This is particularly the case since these investors are used to Whole Foods' stock going north rather than south in terms of value--at least until now.
This brings us to Tesco. If it wants to be a major player in food and grocery retailing in the U.S., it's going to have to eventually acquire a good-sized retailer or two at least. Although it's launched what is perhaps the most aggressive food retailing start up in modern history in the U.S. with Fresh & Easy, even if it opens 150 stores a year for the next five years (doable but tough to sustain and do well), it will still be a minor overall player with about 800 small-format stores. Nothing to sneeze at, but not in the big leagues either.
With Whole Foods' stock 70% below last year's high, along with the retailer having to scale back its new store opening plans for next year by nearly 50%--which means it doesn't have enough cash to go forward even while turning in poor sales and profit numbers in the short term--Whole Foods' is ripe to be acquired. The natural grocery chain also announced yesterday it will lay off about 43 employees at its Austin, Texas corporate headquarters.
If Tesco were to acquire Whole Foods, it could do many things for the international retailer. First, it would give it an immediate annual sales base of nearly $7 billion in the U.S., which is nothing to sneeze at, even for an $83-plus billion a year international retailer.
Second, it gives Tesco what arguably is the best upscale natural, organic and fresh foods format in the world. Imagine what a retailer the scale of Tesco could do with Whole Foods if it could do it right?
Third, it gives Tesco, which has the cash to expand Whole Foods internationally, an upscale natural, organic and green retailing format that it could expand throughout Europe, Australia, parts of Asia and even to the oil rich Arab countries where the UK's upscale Waitrose and the U.S. gourmet grocer Dean & Delucca are opening stores.
Lastly, at home in the UK, which on a per-capita basis has become the world's leading organic foods retail market, Whole Foods would give Tesco a banner which it could use to eventually dominate the natural foods' retailing space like its done in the grocery and general merchandise spaces with its various Tesco banner stores, ranging from hypermarkets to its small-format Tesco Express convenience-style grocery stores.
We believe Whole Foods CEO John Mackey and the company's board of directors would fight any acquisition, and likely would fight a deal offer from a British-based chain like Tesco even more so. However, if Whole Foods' performance doesn't improve dramatically in the next two quarters say, such a fight could be very difficult if such an acquisition were to come from Tesco or any other major retail chain. Nobody knows this better than John Mackey and the Whole Foods' board, since it was a fledgling, poor performing Wild Oats Market, Inc. it acquired about a year ago.
Is Tesco interested in acquiring Whole Foods Market, Inc.? We don't know. However, like we mentioned earlier in this piece, acquisitions are as much situational as they are long-term strategic. What we do know is that a couple U.S. supermarket chains are watching Whole Foods' performance closely, and that the A (acquisition) word has been tossed around by these chains, at least hypothetically.
What we do know is that Tesco has the cash to acquire Whole Foods without any trouble if it wants to. The possible political battle if it were to be a hostile acquisition, which would likely be the case at least right now, is another matter altogether. We doubt if Tesco is up for that just now.
However, when it comes to publicly-owned food retailing chains, circumstances change rapidly. Performance rules the day. For example, before investor Ron Burkle bought a major chunk of Wild Oats Market, Inc., became chairman of the board, and engineered the replacement of the company's CEO, both Wild Oats' board and key executives were adamant they would never sell to Whole Foods. That changed rather fast once Burkle got involved.
One could see a similar situation happening with Whole Foods. In fact, Burkle was a major player in brokering the Whole Foods-Wild Oats acquisition-merger. He's been rather low-key of late in the supermarket sector, but Whole Foods' current situation is one that brings out Ron Burkle and other investors like him who are adept at engineering just such acquisitions once they make a substantial investment in a company. Burkle still has stock in Whole Foods Market, Inc. from the Wild Oats acquisition, by the way.
Don't be shocked if in the not too distant future you see Whole Foods going from being charged by the FTC and others as a monopolist acquirer to being acquired itself.
Will it happen this year; next year? We have no idea. What we do know is that the chances of Whole Foods being acquired now are about 100% higher than they were just a year ago. That alone is worth paying attention to.
Editor's note: Watch for an upcoming story and analysis of retailer's we think would benefit overall by acquiring Whole Foods Market, Inc. An 'America's top Whole Foods Market, Inc. acquisition parade' if you will.
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