Retail Memo: The 'Whole Analysis' - Whole Foods Market Inc's First Quarter Financials, FTC v. Whole Foods...The Natural Grocer At Home and Abroad

Whole Foods Market's flagship store and corporate headquarters in Austin, Texas. [Photo Credit: Whole Foods Market, Inc.]

Whole Foods Market, Inc. reported its first quarter fiscal year sales and profits on Wednesday afternoon (February 18), after the financial markets closed. [You can view Whole Foods' detailed financial release at the link here: Whole Foods Market Reports First Quarter Results.]

The good news

Whole Foods' beat stock analysts estimates in terms of its Q1 profits, despite the fact the natural foods grocery chain's profit dropped by 17% during its first quarter, to $32.3 million, compared to $39.1 million for the same quarter last year. Overall Q1 revenue increased by $2.5 billion over last year's first quarter revenue.

As a result of beating analysts estimates, Whole Foods Market, Inc's stock soared by a whopping 34% in trading on Thursday and Friday, following Wednesday's report. That's a much needed boost for Whole Foods' stock since its per-share value had dropped by about 75% (from its 52-week high) prior to Wednesday.

The bad news

In addition to the 17% Q1 net income loss, Whole Foods Market, Inc. experienced for the first time in the company's history a quarterly drop in same-store sales. Sales at stores open for at least one year decreased by 4% in the first quarter. Same-store sales are an important industry indicator of a retailer's performance.

Whole Foods' senior management has found great pride, as it should, in the fact that same-store sales has increased every quarter, until now, for the natural foods grocery chain.

But in the current severe economic recession, it isn't a surprise to Natural~Specialty Foods Memo (NSFM), nor should it be to investors and industry observers, that Whole Foods Market, Inc. experienced the decrease in same-store sales in its first quarter. Having said that, this is something the natural grocer must reverse in the second quarter.

As we've previously reported, Whole Foods Market made a number of cost-cutting moves last summer, including laying off about 100 employees at its corporate headquarters in Austin, Texas, in hope that in the face of reduced sales it could stem its loses. It's likely that without those cost-reductions the natural and organic foods grocer would have shown poorer Q1 results.

During a conference call with analysts on Wednesday, Whole Foods said it has enacted a salary and hiring freeze going forward as a way to further cut costs.

In the conference call, Whole Foods' CEO John Mackey said the company is seeing early signs that increased sales, do largely to more aggressive pricing and promotions by the retailer, may be stemming the same-store sales decrease experienced in the first quarter. Of course, with the recession continuing to get deeper and worse, it's near-impossible what the next couple of months will bring for more upscale, specialty-oriented grocers like Whole Foods Market.

It's our analysis that Whole Foods still likely has some cutting to do because we believe, as do most experts and analysts, that the recession is going to get worse before it gets better, even with the $787 billion economic stimulus package signed by President Obama, and that the remainder of 2009 will see cash-strapped consumers continuing to trade-down in terms of shopping more at discount food retailers, along with spending less money overall on food and groceries because the plain just have less to spend.

We do see some positive signs, based on store visits and interviews and discussions with shoppers, that Whole Foods' new value emphasis, in which it has lowered some prices, is offering better promotions, including coupons, focusing more on basic items, along with featuring less expensive store brands more often, is beginning to bare some sales fruit at store-level.

FTC v. Whole Foods: The FTC-induced bad news

As Natural~Specialty Foods Memo (NSFM) has been reporting on writing about regularly, Whole Foods Market, Inc. continues to battle the U.S. Federal Trade Commission (FTC) over the natural grocery chain's friendly 2007 acquisition of Wild Oats Market, Inc. At present, Whole Foods and the FTC are in negotiations over a possible settlement to the long and protracted FTC legal case against the deal.

The FTC has a halt of further legal proceedings in place until March 6, while the two parties are negotiating a possible settlement.

Should a settlement not be reached by then, the FTC will go forward with its legal challenge to the merger. The regulatory body has an April 6, 2009 date set to begin an Administrative trial in which an FTC Administrative Law Judge will hear arguments from Whole Foods and the FTC on the deal and rule on its outcome, which could include an order to break-up the now nearly-100% merged grocery chains.

Whole Foods Market, Inc. reported Wednesday that it spent a whopping $11 million in the first quarter alone on legal costs related to fighting the FTC challenge to the merger. This $11 million is a significant contributor to the natural and organic grocer's 17% income loss in Q1.

Since it's our argument that the FTC is wrong in its argument and legal case that a combined Whole Foods-Wild Oats represents a monopoly in 29 U.S. markets, in what the regulator calls the "premium natural and organic retailing segment (PNOS),"we strongly suggest this $11 million expense was an unnecessary one for Whole Foods. In fact, were we an investor in Whole Foods Market, Inc., we would protest the FTC's continued legal challenge to the merger to the President and Congress, arguing that doing so by the FTC is a misuse of taxpayer funds.

Because of the serious challenges Whole Foods is facing due in large part to the the bad economy, along with increased competition from other natural foods class of trade retailers, supermarket chains moving increasingly into the natural and organic products space, and discounters like Wal-Mart, Costco, Target, Trader Joe's and others, it could have used that $11 million for promotional and other merchandising purposes rather than having to spend it on legal counsel.

After all, do Whole Foods' first quarter financials look to any reasonable person reading them like the sales and income numbers of a retailer that holds a monopoly in any so called segment of the U.S. food and grocery retailing industry?

We think not. And just because the company's stock soared by 34% on Thursday and Friday, that means very little in the medium-to-long run. Wall Street plays the expectations game. Whole Foods Market's Q1 numbers were much better than many analysts thought they would be. Therefore, the natural and organic grocer's having beat these estimates, the stock soared. Remember, what goes up, particularly in the stock market, also comes down -- and often times nearly as rapidly as it went up. Investors also were looking hard for companies to invest in last week, which helped fuel a flight of cash into Whole Foods' stock.

It's our analysis and opinion that the FTC case against Whole Foods Market, Inc. has actually become an economically punishing one for the company and its shareholders. This at a time when the federal government is spending hundreds of billions of dollars of taxpayer money to keep companies in other industries -- financial services, automobile manufacturing -- alive.

General Motors is now asking Congress and President Obama for another $21 million and Chrysler, which is majority-owned by the Cerebus private equity firm (about 80% ownership) is asking for an additional $5 billion.

Meanwhile, an agency of this very same government, the FTC, is prosecuting a legal battle against Whole Foods Market, Inc. that cost the retailer and its investors $11 million in the first quarter, millions more before that, and possibly million more in the next couple months unless a settlement is reached with the FTC.

This is just wrong. The FTC argument is folly, in our analysis. And at a time when the federal government is bailing out a host of companies, it is doubly-wrong that the FTC is pursuing a course of action that is significantly contributing to severe struggles by Whole Foods Market, Inc., as well as costing its investors money.

There is some indication our argument, and those of others, has sunk into the heads of some of the FTC Commissioners -- and we hope it has -- which could be one of the reasons they've decided to work towards a settlement agreement with Whole Foods.

The 'whole' conference call

There were a number of other announcements and points of information of interest during the analysts' conference call with Whole Foods on Wednesday. Below is a summary of those key points of interest as stated in the conference call by the company's senior executives:

~"Although transaction count and basket count are still down, the decline in transaction count has improved slightly. While it is obviously still too early to say our sales are stabilizing, we (Whole Foods) are encouraged by these trends."

~"Competition continues to be a factor as retailers fight over fewer food dollars being spent. Cannibalization also remains a factor, but to a lesser degree."

~"Whole Foods Market private label SKU count increased 11% year-over-year, accounting for 22% of our total grocery and Whole Body sales."

~"We (Whole Foods) plan to roll out a 5-Step Animal Welfare Rating system beginning in our United States stores later this year."

~"We (Whole Foods) reduced our planned new store openings by 50% for fiscal year 2009 to 15 from a prior range of 25 to 30. We terminated 11 leases in development, totaling approximately 570,000 sq ft, and down-sized nine leases by an average of 10,000 sq ft each."

~"We (Whole Foods) spent a lot of time in Q1 really focusing on values especially in produce, meat and seafood. And we've seen a lot of very good reaction to our promotions that we've done in those areas."

~"We (Whole Foods) believe the long-term growth and return potential in the United Kingdom is much greater than Canada, and we're taking some proactive steps to improve our operations there."

Whole Foods United Kingdom

This last point about Whole Foods Market's favoring the long-term growth and return potential in the United Kingdom over that in Canada (those are the only two international markets the company operates in outside the U.S.) is extremely interesting.

During the conference call Whole Foods' said it is breaking up its UK stores into separate geographical regions, similar to what it does in the U.S. That shouldn't be too hard a task at present since all of its UK stores are located in London, England.

Whole Foods Market, Inc. currently operates five stores in the UK, all in London, England, as mentioned above. Only one of the five stores, its nearly 80,000 square foot natural-organic and premium food emporium in the huge The Barkers Building on 63-97 Kensington High Street in London, has operated under the Whole Foods banner since it was opened, which was in 2007. The other four London stores have operated under the Fresh & Wild banner. Fresh & Wild was a small, UK-based natural products chain Whole Foods Market, Inc. acquired a few years ago.

Whole Foods is in the process of changing the name of the remaining Fresh & Wild banner stores to its Whole Foods banner, so that all of its UK (read just London for now) stores operate under the same banner -- Whole Foods. The rebranding is set to be completed by the end of this month. [You can view a list of Whole Foods' UK-London stores here.]

The nearly 80,000 square foot Kensington High Street Whole Foods banner store the retailer opened about two years ago has been a struggle for the natural grocery chain. During its first year of operation, 2007, the aisles of the huge market were almost always empty. However, beginning towards about the end of the first quarter in 2008, business started to pick up considerably at the market, after Whole Foods made a number of changes to the store, along with initiating more aggressive promotions and other merchandising and marketing initiatives.

But beginning in about October of last year, business dropped at the upscale store, as it began doing at most all of Britain's premium and natural foods-focused food stores because of the financial-credit crisis and deepening of the global economic recession. The struggle in the down UK economy continues for the Kensington High Street Whole Foods, as it does for other natural grocers and upscale UK supermarket chains like Waitrose and Marks & Spencer.

Like in the U.S. at present, British consumers are flocking to discount stores where they can save money on their food and grocery purchases. The fastest-growing food retailer in the UK in terms of sales and market share growth over the last year has been Aldi-UK, the British division of the global small-format, hard-discount Aldi International chain, which is based in Germany.

Aldi's U.S. division, Aldi USA, which operates almost 1,000 small-format, hard-discount stores in the U.S., also has seen a dramatic increase in business during the recession. It's growing fast and plans to open 100 new stores in the U.S. this year, including moving into the new markets of New York and Texas, where Whole Foods market is based. Aldi USA also moved into Florida for the first time in late 2008.

Aldi-UK is increasingly (more so than Aldi USA) offering natural, organic, specialty and premium food and grocery products in its UK stores, in most cases under one or more of its various store brands. These items sell for 15% -to- 30% less everyday than comparable items at UK natural foods stores and upscale supermarkets like Waitrose. As a result, Aldi-UK is taking some share away from these format stores in the natural and specialty categories just like it's taking share away from leading UK supermarket chain Tesco in the basic food and grocery segment.

During the Wednesday conference call, Whole Foods Market, Inc. CEO John Mackey said the natural foods chain has determined that the nearly 80,000 square-foot Kensington High Street Whole Foods store is just plain too big, which he said is the primary reason for its struggles in the UK. Mr. Mackey announced that going forward, any new Whole Foods stores opened in the UK would be in the 20,000 square foot range, which by UK standards is still a good-sized food store.

Natural~Specialty Foods Memo (NSFM) reported and detailed last year in this March 4, 2008 piece [Retail Memo: Whole Foods Market to Dramatically Expand in the United Kingdom; Will Open Up To 30 New Stores in the U.S. in Fiscal 2009] how at the time Whole Foods Market was aggressively looking for new store sites in the UK, particularly in and around London. Those store locations-sites were closer to the nearly-80,000 square-foot size rather than the 20,000 square foot model the natural grocer now says it will follow in the UK. (Note to the March, 2008 linked piece. As we've reported since, Whole Foods Market reduced the number of planned new stores to about 15 for this year. Another cost-cutting move.)

But Whole Foods' aggressive search for new store locations in the UK has cooled dramatically in the current recessionary climate. As far as we are aware, the natural-organic grocer has no new UK store openings planned for 2009.

Further, we aren't sure a UK growth strategy, even long-term, is a good one for Whole Foods. The UK, particularly Britain, and especially England, is a very retailer brand loyal market. For example, just four grocery chains -- Tesco, Wal-Mart-owned Asda, Sainsbury's and Morrisons -- control a whopping 73%-75% of the total food and grocery sales market share.

If you add in the Cooperative Group chain, which last year acquired the Somerfield supermarket chain, making the Co-op the UK's fifth-largest grocer after number four Morrisons (Tesco is number one, Asda number two, Sainsbury's number three), the five chains control about 82% of all grocery sales in the country. All also sell plenty of natural, organic and specialty-premium food products.

There is room for niche players, such as upscale Waitrose and Marks & Spencer, which combined control about 9% of the remaining 18% of share in the nation -- that leaves about 9% for everybody else, and about half of that 18% is controlled by the UK hard-discount grocers Aldi, Lidl, Iceland and Netto -- but it's a tiny niche. And, there are numerous UK-based natural products retailers, such as Boots and others, filling a big part of that tiny niche.

Whole Foods could make it in the UK -- but not without spending a considerable amount of money on marketing and advertising, in our analysis. And the retailer needs to do a much better job of adapting to the British style of food retailing to do so. However, in its quarterly financial report, Whole Foods said its UK operations were a major contributor to the company's overall income loss, which isn't a good sign going forward right now.

And even if Whole Foods can do well in the UK down the road, one has to ask at what level? In other words, can the UK really contribute a significant amount of sales and profits to Whole Foods Market, Inc. over the next five, or even ten years, to make it worth the effort? The jury of course is out on that -- but we think it is something worth looking at closely by Whole Foods in its strategic planning process.

Whole Foods Canada

Last month we heard a rumor that Whole Foods Market, Inc. could be considering selling its stores in Canada, assuming of course it could find a buyer in the current frozen credit market. We have been unable to substantiate such rumors to date.

The conference call comments by CEO John Mackey -- that the UK holds far more long term promise for the natural foods grocery chain than Canada does -- are interesting ones though in light of those rumors.

The reason this is interesting -- and it is based on deductive reasoning and not source information -- is because Whole Foods has historically been a growth-based retailer in all of its markets. Therefore if it believes Canada holds minimal long-term growth potential then selling the stores there might make good sense. The natural-organic grocer could then use the cash from such a sale to grow the business in the UK and for other purposes.

Whole Foods Market, Inc. currently operates six stores in Canada. Four of the stores are located in Vancouver, British Columbia. The other two stores are in Ontario; one in Toronto and the other in Oakville. [Click here for a list of the Canada stores.]

With only six stores in the entire country of Canada, and in only two market regions (Vancouver and Ontario) to boot, Whole Foods' really can't make much of an impact in the country at present. And, based on the conference call comments, it doesn't sound like any additional stores are planned in Canada in the near or even medium-to-long term. Therefore, selling the stores starts to make even better sense.

One likely candidate, should Whole Foods decide to sell its stores in Canada, would be Canadian natural products retailer Planet Organic, Inc. Planet Organic has been growing fiarly rapidly in Canada and even entered U.S. natural foods retailing in 2008 when it acquired the Mrs. Green's chain of 11 natural foods stores based in upstate New York.

However, Planet Organic had to back out of a deal to acquire Santa Cruz, California-based New Leaf Natural Markets last year because it couldn't raise the about $15 million needed to do the deal. Planet Organic had floated a new stock offering on the Vancouver stock exchange for about that amount, which it was planning to use to make the acquisition, but decided to pull the offer because of the financial-credit crisis and the related drying up of investment capital, after it determined there wasn't an investor appetite for the new offering by the company.

But, since the Whole Foods stores are right in Planet Organic's backyard -- it just might be better able to find the money should the Austin, Texas-based natural foods grocery chain decide to unload its stores in British Columbia and Ontario, Canada.

FTC v. Whole Foods settlement deal

Meanwhile, Whole Foods Market, Inc. needs to come to a settlement agreement with the FTC so that it can get back to focusing on what it does best, merchandising and selling natural, organic and premium food and grocery products, rather than fighting legal battles. It also needs to reach a settlement, assuming one that's not to devistating to its acquisition of Wild oats, so that it can stop burning cash paying for legal fees related to the legal case.

We say this, that a settlement deal needs to be reached between Whole Foods and the FTC, despite the fact we believe the FTC's case is pure folly.

At this point though, reaching a decent settlement deal is far better for Whole Foods Market, Inc. than continuing to have to fight the FTC in court, the end result of which could be a break-up of the now combined Whole Foods-Wild Oats, which at this point in Whole Foods Market, Inc.'s nearly 100% integration of Wild Oats could be a very costly process and end result.

Retail Memo: Whole Foods Market to Dramatically Expand in the United Kingdom; Will Open Up To 30 New Stores in the U.S. in Fiscal 2009

Austin, Texas-based supernatural and lifestyle grocer Whole Foods Market, Inc. plans to expand from its current one store in London, England under the Whole Foods' banner, to additional stores in the London Metropolitan region and elsewhere in the United Kingdom.

In addition to its current 75,000 square foot Whole Foods Kensington High Street flagship store in London, Whole Foods Market, Inc. owns the small natural and organic foods' chain Fresh & Wild, which it acquired from its British owners about four years ago. The Fresh & Wild natural and organic foods' markets are located in and around London.

At the time of the Fresh & Wild acquisition, Whole Foods' CEO John Mackey said the grocer was buying the British-born natural foods chain in part as a stalking horse, in that it would provide a base of business in the UK so that Whole Foods could eventually start opening larger stores under its Whole Foods banner. Mackey also said then, and repeated recently, that most if not all of the grocer's new stores in the UK would be under the Whole Foods banner rather than Fresh & Wild.

The grocer started doing just that almost a year ago when it opened its first Texas-sized (75-k square foot) Whole Foods Market in London. The London flagship store got off to a bit of a slow start. However, business has picked up dramatically over the last couple months.

We've now learned Whole Foods has hired a two commercial retail agencies in London to search for new store sites in the London Metropolitan area and beyond in other parts of the UK.

Those two agencies, Green & Partners and Gilbert, have been given marching orders from the grocer's Austin, Texas corporate headquarters to look for potential store sites of between 20,000 square feet -to 75,000 square feet within an hour or so drive from central London as the top priority, and elsewhere in the UK as the secondary priority. Twenty thousand square feet is considered a very decent-sized supermarket in London. Seventy five thousand square feet--the size of the grocer's flagship store in London--is considered a massive supermarket in the region.

Whole Foods has taken a further step, which demonstrates the grocer is serious about its UK expansion. That step is the hiring of Nina Shores, who is the former retail property director for British retailer Bank Fashion, to head up the supernatural grocer's UK expansion program.

Additionally, during a recent trip to the store in London, numerous store-level employees mentioned to us they were aware that Whole Foods' is looking for sites throughout the UK. One store team member said he was thinking about quiting because of a lack of advancement opportunities at the single store. However, he said he was told by a higher up not to worry because the grocer was going to be opening many stores in the next few years, and that there would be multiple opportunities soon.

Whole Foods' target customer in the UK is similar to its target shopper at home in the U.S. College educated, and post undergraduate degree-holders, are key. Upper income is a key demographic as well. Additionally, ethical consumers, "greens" and health conscious shoppers round out Whole Foods' key variables when looking for neighborhoods to locate it new United Kingdom stores in.

There are plenty such neighborhoods within a one hour's drive of central London. And many more throughout the United Kingdom. Further, London is arguably the current global capital of ethical and green or sustainable consumerism, which fits Whole Foods' retailing and merchandising philosophy extremely well.

UK upscale supermarket chains Waitrose and the Co-op (and Sainsbury's in part) are currently the primary grocers of choice for London Metro region consumers who fit the Whole Foods' demographic profile.

And, of course, there are the Whole Foods'-owned Fresh & Wild stores already in the area. Those stores are much smaller than a typical Whole Foods' banner store, and as a result carry a much smaller selection of natural and organic products. They also don't have the extensive in-store prepared foods venues and other special lifestyle features that a 45,000 -to- 80,000 square foot Whole Foods' banner store does. They do have a nickname similar to Whole Foods' "Whole Paycheck" in the U.S. though. The British wags call the stores "Fresh & Wildly Expensive."

Our UK industry sources have told us a number of sites in Metro London and elsewhere in the UK have been rumoured to be high on the short list of possible locations for new Whole Foods' banner stores. These potential sites include: numerous locations in the city of London, the dockland banking district's Canary Wharf, Manchester, Bristol and Edinburgh.

We, nor do our UK sources, know the number of Whole Foods' banner stores the grocer wants to open in the United Kingdom. What we do know though is Whole Foods Market, Inc. knows it needs a critical mass of stores in the region in order to do its brand of merchandising and promotion. As such, we believe the supernatural retailer will embark on a multi-year new store development program in the UK--beginning first with opening new stores and filling out in the London Metropolitan region.

Along with that strategy, we see the grocer opening stores at the same time--but at just a slightly slower pace--in key parts of the UK that fit its education, income, environmental and ethical consumer demographic variables best. In other words, the UK is no longer a mere retail test for Whole Foods Market, Inc.. Rather, it is along with Canada becoming nearly as important corporately as the grocer's U.S. expansion plans are.

Whole Foods' to open up to 30 new stores in U.S. in 2009

Speaking of those U.S. expansion plans. Whole Foods' announced today in a filing with the U.S. Securities and Exchange Commission that it plans to build and open between 25 -to- 30 new stores in the U.S. next year. That's a new store opening somewhere in the U.S. at a rate higher than one every other week.

The 29-30 new stores will all likely be no smaller than 45,000 square feet (except in special cases like urban neighborhoods where there are geographical limitations of course) and as big as 80,000 square feet. The new stores also will be located both in regions like Texas and the west and east coasts, where Whole Foods' already has a substantial number of stores, and in new areas of the U.S. where the grocer has little or no current retail presence.

Whole Foods also is set to open its Whole Foods Express small-format, convenience-oriented prototype store in a renovated former Wild Oats market building in Boulder, Colorado later this year. If that test--and format--proves successful, we could see the supernatural grocer join the growing small-format grocery store revolution in the U.S. with additional Express stores in other parts of the country perhaps even beginning next year.

From what we've been able to learn thus far, the Whole Foods Express format will be about 15,000 square feet -to- 20,000 square feet in size. It will feature a limited selection of natural and organic grocery products, fresh produce and meats and other perishables.

A key feature of the Express store will be an extensive selection of natural, organic, healthy and tasty ready-to-eat and ready-to heat prepared foods. We also expect to see some sort of an in store cafe in the Express store, as well as a small version of a Whole Foods-style in-store Bistro food service venue.

Retail Memo: Whole Foods Wants A Court-Mandated Financial Records Dump from Portland-based New Seasons Market; it Says For its Battle Against the FTC

The ongoing FTC-Whole Foods Market, Inc. legal case and saga

"When the going gets weird, the weird turn pro." -- the late Gonzo Journalist Hunter S. Thompson.

For the second time in as many years (two) Whole Foods Market, Inc. is attempting to obtain the confidential financial and other records, including new store plans and strategies, of nine-store, Portland, Oregon based natural foods retailer New Seasons Market, as part of the supernatural foods retailer's ongoing legal battle and saga with the U.S. Federal Trade Commission (FTC) over its merger with Wild Oats Market, Inc. last year.

Whole Foods has filed a subpoena for these financial and related records from the privately-held, Portland, Oregon-based natural foods retailer, according to Brian Rohter, the CEO of New Seasons Market. Privately-owned companies like New Seasons aren't normally required to make financial information public like publicly-held companies such as Whole Foods Market, Inc. are.

Rohter wrote about Whole Foods' legal attempt to obtain the company's financial records and more, which New Seasons is fighting at a significant financial cost to the small retail chain, in the company Blog on November 24. Below is Brian Rohter's post from the New Seasons Market Blog:

Monday, November 24, 2008
We're Just Trying To Mind Our Own (Local) Business
By Brian Rohter - New Seasons Market Blog

You may have heard that New Seasons Market has found ourselves caught in the crossfire of an ongoing legal dispute between the Federal Trade Commission (FTC) and Whole Foods Market. The disagreement has to do with whether or not the Whole Foods merger with Wild Oats should be “allowed to proceed”. Yes, we know that seems like a crazy thing to be fighting about since all the Wild Oats stores that were around here have already been closed or turned into Whole Foods stores, but neither the federal government or Whole Foods asked us for our opinion about that.

You also are probably trying to figure out what this could possibly have to do with us. That’s a great question. Since we’ve been minding our own (local) business and have never expressed an opinion one way or the other about this merger, we were wondering the same thing.

As it turns out, because of their legal dispute with the FTC, Whole Foods has an opportunity to try and force us to give them copies of some of our most confidential financial records – for instance what our sales are, week by week, at each of our stores. They’ve also demanded all of our files that detail our strategic plans, all of our marketing plans and all of our studies about where we are considering opening new stores.

You can see the entire subpoena here, and below is a partial list of what they’re trying to get (quoted directly from the subpoena):

3. All documents relating to Whole Food’s acquisition of Wild Oats, including documents discussing the effect of the merger on you.

4. All documents discussing competition with Whole Foods or Wild Oats, including responses by you to a new Whole Foods or Wild Oats store and responses by you to prices, product selection, quality, or services at Whole Foods or Wild Oats stores.

5. All market studies, strategic plans or competition analyses relating to competition in each Geographic Area, including documents discussing market shares.

6. All market studies, strategic plans or competition analyses relating to the sale of natural and organic products, including the sale of natural and organic products in your stores.

7. All documents relating to your plans to increase the shelf space at your stores allocated to natural and organic products, the number of natural and organic products sold in your stores, or the sales of natural or organic products in your stores.

8. All documents discussing your plans to renovate or improve your stores to sell additional natural and organic products or to open stores emphasizing natural and organic products.

9. Provide documents sufficient to show, or in the alternative submit a spread sheet showing: (a) the store name and address of each of your stores separately in each Geographic Area; and (b) for each store provide the total weekly sales for each week since January 1, 2006 to the current date.

I have to believe that any reasonable person would agree that it’s really over the top for Whole Foods to be asking for this information, especially since we have nothing to do with their lawsuit. It takes away the level playing field, creates an unnecessary risk for our business and has the potential to have a negative impact on our network of local growers, ranchers and suppliers. It also could permanently damage the fragile regional food system that we’ve been working to create and, in the end, could reduce options for Portlanders who choose to shop at locally owned stores.

New Seasons Market is a small, locally owned company that competes against large, multi-national chains including Whole Foods. Whole Foods has about 270 stores in cities all over North America and in England. We have 9 stores in the Portland area. Allowing Whole Foods to look through all of our private information about how we operate and what our plans are for the future unfairly adds to their already large size and financial advantage. We’ve been able to build a successful local business being David against their Goliath, and we’re happy to keep doing that, but we do object to having one hand tied behind our back.

Whole Foods says that we should give our information to their lawyers and they claim the lawyers won’t let anyone else in the organization see them. That’s like trusting the fox to guard the hen house – and we don’t have any faith it’s going to work like that.

I’m sorry to say this, but some of the people at Whole Foods have a history of less than stellar behavior when it comes to competing fairly. There are two obvious examples of this. First, last year, their CEO John Mackey was caught posting derogatory information online about Wild Oats, using a made up screen name. Here’s a New York Times story about that.

Second, during the first round of this law suit last year, the FTC released a bunch of e-mails that some Whole Foods executives had sent over the previous few years. You can find the entire (really lengthy) FTC report here, but just to give you a flavor of it, below are a few excerpts of Whole Foods’ comments in regards to Wild Oats:

“Wild Oats needs to be removed from the playing field...”“…[m]y goal is simple – I want to crush them and am willing to spend a lot of money in the process.”“...elimination of a competitor in the marketplace, competition for sites, competition for acquisitions, and operational economies of scale. We become the Microsoft of the natural foods industry.”

Yikes!

This case has been going on for about 18 months. This is the second time Whole Foods has tried to get access to our records. Last year they also filed a motion to try and get our financial records turned over to them; not just to their “outside” lawyers, but to executives who are on the Whole Foods payroll and work in the Whole Foods corporate offices in Austin, Texas. What possible reason do we have to believe they won’t just try and do that again?

When I received this subpoena my immediate reaction was disbelief. I was confident there was no way our legal system would force us to give our private business records to one of our competitors. It looks like I may have been wrong about that. We’re fighting this (and running up whopping legal bills in the process) and here's a copy of the motion we filed with the Federal Trade Commission. Amazingly, our lawyers tell us that there’s a chance we’ll lose the case and will be required to turn over the information.

Of course I asked what would happen if we refused. The answer was that we could be held in contempt of court and subject to large fines or even jail time. In case anyone is planning on visiting me there, I really love doing the daily Oregonian crossword and also M&M Peanuts. (My wife Eileen doesn’t think this is very funny.)We’ll keep you posted on this as the situation evolves.

[End of brain Rohter's November 24 post.]

As regular readers of Natural~Specialty Foods Memo know, we've been writing since last year, when the FTC first raised its objections to the Whole Foods-Wild Oats merger, about how wrong, foolish and a waste of U.S. taxpayers' money we believe the FTC's ongoing legal case and argument that the acquisition/merger (which is about as merged by now as mergers can be) should not go through was and is. The basic FTC argument is a merged Whole Foods-Wild Oats provides Whole Foods Market, Inc. with an anti-competitive position in the natural foods retailing segment, which will allow it to raise retail prices and behave in other "anti-competitive" and "monopolistic" ways.

The FTC's argument, and thus lawsuits,was wrong over a year ago and it's even more wrong today. All the FTC need do to see how foolish its legal saga and argument is in the face of it is to look at the demonstrable, empirical evidence of a combined Whole Foods Market-Wild Oats Market in the real world as of today, December 1, 2008.

The anti-FTC legal case and argument evidence:

1. Whole Foods Market's post Wild Oats'-acquisition stock share value today is about 70% less than it was at the very best time following the merger.

2. Whole Foods had a 40% drop in income in its last quarter.

3. Whole Foods is so in need of cash for regular operations that it recently sold 17% of the company to an investment firm from Southern California.

4. Whole Foods laid off about 100 corporate headquarters employees in Austin, Texas in the last two months. More layoffs are in the works. Store managers are being told to cut costs across the board dramatically.

5. Whole Foods has cut in half, from about 30 to 15, the number of new stores it had planned on opening next year. We hear the retailer will most likely not even open 15 stores in 2009.

6. Whole Foods has put its expansion plans in the United Kingdom on hold. It's also sold a couple of its Wild & Natural banner stores in the nation. It also might sell its one and only Whole Foods Market in the UK, it's huge, nearly 80,000 square foot market in London, England, if it could get a buyer, which it likely can't.

7. Whole Foods Market, Inc. senior executives and upper management are essentially going without bonuses and their famous stock options, which few really want right now anyway.

8. Whole Foods would like to sell more of the Wild Oats stores, beyond those it has already sold, but can't find any buyers willing to pay a price close to what the retailer needs to sell them for.

We ask you, does a retailer experiencing the above eight (and we could have listed a few more but were starting to get depressed) negative factors look like a natural foods retailing monopolist company to you? To us, and many others, it looks more like a fledgling company struggling to survive -- and a potential takeover candidate, based on its stock share value.

Meanwhile, there are competitor natural foods chains beating Whole Foods on price, and thus taking business and market share away from its stores. These include fast-growing Sprouts Farmers Market, just as fast-growing Sunflower Farmers Market, Trader Joe's, and even Henry's in Southern California, which Whole Foods sold to Smart & Final, Inc. after acquiring the 36 Henry's and Sun Harvest banner natural foods stores in the Wild Oats markets' merger.

There are other regional multi and single-store natural foods retailers -- PCC in Washington state, Mrs. Green's in New York, New Seasons in Portland itself in fact, along with others -- that are competing head-to-head with Whole Foods Market, Inc. stores and doing well, even in the current recessionary economy.

Then there are the supermarket chains, as we've detailed previously in Natural~Specialty Foods Memo. Safeway with its Lifestyle stores nationally, Publix in Florida, H-E-B and United Supermarkets' Market Street in Texas, Wegmans in New York, Raley's in Northern California, Fresh Market in the South (even Wal-Mart, Costco and Target) and dozens more, all are challenging Whole Foods with upscale supermarkets that feature lots of natural, organic, specialty and premium, prepared foods items and other in-store features similar to those offered by Whole Foods. Plus these chains sell conventional groceries as well, giving them a big benefit especially in the current down economy.

If anything, we see Whole Foods Market, Inc. being squeezed from both ends -- by aggressive regional natural foods retailers on one end and upscale supermarket chains and discounters heavily into the natural and organic categories at the other end.

And of course, surrounding both ends is the recession and financial crisis, which is forcing all food and grocery retailers to lower prices, promote more and put a much more significant emphasis on value.

Whole Foods is focusing on value as well -- but its "Whole Paycheck" reputation, right or wrong, is making doing so difficult, thereby opening up greater opportunity for Sprouts, Sunflower and the others which operate on a much lower cost model than Whole Foods does, resulting in lower everyday prices across all natural and organic product categories in their stores.

Having said this -- that we believe the FTC is out to lunch with its ongoing legal fight to stop the Whole Foods-Wild Oats merger -- we do not approve in any way, shape or form of Whole Foods Market, Inc. trying to obtain the private information from New Seasons Market, or from any other small, privately-owned similar natural products retailer, which should likely be the case since it would seem the supernatural retailer would want similar data from more than just New Seasons, wouldn't it? [The Whole Foods Market subpoena to New Seasons looks somewhat boilerplate in its nature. Therefore we are searching for other natural products retailers who may have received such a subpeona as well.]

It's like Whole Foods has adopted the FTC's wrong-headed and heavy-handed methods as a way to defend itself against the FTC's wrong-headed and heavy-handed methods. 'I have seen the monster (FTC) and have now become the monster (Whole Foods) in order to fight the monster on equal footing.'

We understand what the Whole Foods legal team is trying to do, which is to build a data base of financial and related data from competitors in the markets, like Portland, Oregon, where the FTC is claiming Whole Foods has too high of a concentration of stores post the Wild Oats merger.

But Whole Foods is going about it the wrong way. Why not ask various retail competitors to testify to the FTC as to if they see Whole Foods Market, Inc. today in a monopolist position? For example, we would find it hard for Sunflower Farmers Markets and Sprouts to answer yes to this question with any credibility since it would be rather hard to explain why the natural foods retailers are building so many stores and going right at the heart of Whole Foods throughout the Western U.S. As a self-proclaimed ethical retailer, Whole Foods Market needs to ask itself if the means justify the ends in this case.

We defended CEO John Mackey after the U.S. federal government cleared him of any wrong doing over his postings under an assumed screen name on the Yahoo Finance Internet financial boards during the run up to the Wild Oats acquisition, saying we thought it was unethical and just plain dumb, but that he should be allowed to move on after learning his lesson.

However, we aren't so sure now.

The attempt by Whole Foods Market, Inc. to obtain so much proprietary data from New Seasons via the courts smacks of "Wacky Mackey," the form of behavior John Mackey exhibits on occasion that has earned him that particular nickname -- "Wacky Mackey." We are rather sure John Mackey's and Whole Foods' corporate statement as to why they want this data from New Seasons would go something like this: It's the lawyers, not us.

But CEO's can tell lawyers no. And they should when legal requests cross the line, which we believe is the case in Whole Foods Markets' formal, legal request for New Seasons' proprietary financial and other information. We know John Mackey hasn't been afraid to tell lawyers no before, such as when they made certain suggestions to him during the time the federal government was deciding if he broke any laws with his Yahoo Finance posts under the assumed screen name. Mackey was cleared of any legal wrong doing in the matter.

The subpoena of New Seasons Market's financial and related records is just another sad commentary on what has been a foolish saga, the FTC's continued legal quest, based on non-market realities, to invalidate the Whole Foods Market-Wild Oats merger. which earlier this year John Mackey said if he had to do all over again he would not do.

But the subpoena demanding New Seasons' financial and related records, which any business would fight just like the nine-store natural products retailer is doing at an expense it doesn't need in this recession, makes Whole Foods Market, Inc. look as stupid as the FTC in this matter. It's wrong in our analysis and opinion -- and we bet it is going to backfire in terms of hurting Whole Foods reputation as an ethical retailer.

In fact, if things keep going the way they are for Whole Foods Market, Inc., it just might be forced to ask one federal government agency, the Treasury Department headed by "Bailout King" Hank Paulson, for some of Treasury's rapidly diminishing $700 billion in bailout funds, while at about the same time attend a hearing forced by (the FTC has a hearing on the Whole Foods-Wild Oats merger set for February, 2009) another federal agency, the FTC, in which that agency claims Whole Foods Market, Inc. is a monopolist, and that its acquisition of Wild Oats should be reversed.

We could imagine this scene happening in February, 2009:

Whole Foods' lawyer at the February, 2009 FTC hearing on the Whole Foods-Wild Oats merger hearing: I call former U.S. Treasury Secretary Hank Paulson to the stand please.

'Former Secretary Paulson, isn't it true that in early January, 2009, before President Barack Obama was sworn in and you were replaced by the new Treasury Secretary, that my client, Whole Foods Market, Inc., requested $500 million in federal bailout money in order to survive as a corporationthrough 2009?'

Former U.S Treasury Secretary Hank Paulsen (the former CEO of Goldman Sachs prior to being named Treasury Secretary by then President George W. Bush), who in February, at the time of the hearing, is back on Wall Street: 'Yes Sir, Whole Foods Market, Inc. did request $500 billion in bailout money via a letter signed by the company's CEO John Mackey. But we obviously didn't give the company the money for two reasons: First, that $700 billion is for Wall-Street, which is what I said all along as Treasury Secretary, right up until the day I left Washington and returned to Wall Street. That's why I named the bailout TARP (Troubled Assets Repair Program). There's nothing about grocery markets in Tarp Sir.'

'Also, the head of the FTC told us at Treasury that Whole Foods Market, Inc. was a monopolist that controlled the natural foods retailing segment in the U.S., whatever that means.' 'So, yes Sir, Whole Foods asked -- but we didn't give.'

Whole Foods' lawyer: 'Thanks former Secretary Paulson. For your answer that is...but not for turning down Whole Foods' request for a tiny share of that bailout money, which could have meant the company's not having to soon be acquired, assuming there's an entity somewhere out there willing to acquire the retailer.' And, by the way: ' Congratulations on being appointed the new Chairman and CEO of Citicorp, Mr. Paulsen.'

Hank Paulsen: 'Thank you Sir...it's great to be back home on Wall Street. And, regarding the bailout request...Well, I'm sorry. But Lehman Bros. went down -- and its a whole lot older than Whole Foods Market is. Plus, I was on a first name basis with all the players over at Lehman. I mean, does America really need a national organic grocer, which I am told is what Whole Foods Market is? We love the store in the Time Warner building in Manhattan though, even with its recent downscaling.'

We offer this little narative to point out the absurdity of the entire FTC's ongoing legal case and its argument. For example, what can be done now regarding the merger anyway, even if let us say one assumed Whole Foods was in a monopolist position like the FTC argues. Most legal experts say the FTC will end up demanding Whole Foods sell a bunch of the former Wild Oats stores in selected regions in the U.S., so as to shrink the chain's store count, should it win its case.

If it has a buyer Whole Foods would likely beat the FTC to the punch in many regions, since at least about half of the current remaining former Wild Oats stores that have been and are being turned into Whole Foods banner stores are either very loudly barking retail dogs or had a bark when they were acquired last year that was far bigger than their current sales bite is.

Therefore, ironically, Whole Foods Market, Inc. just might have to sell many of these stores anyway, assuming it can find find a buyer or multiple buyers for the stores -- a situation we doubt will happen anytime soon in the current recession -- in order to generate operational cash to make it through next next year.

Whole Foods has no reason to legally or ethically ask for a legally-binding, court-mandated financial data and related records dump from privately-owned New Seasons Market though, just like the court said it didn't in 2007. Ethically, doing so seems the opposite of organic and sustainable. It's really down right toxic, come to think about it.

Resources:

Click here, here and here for a selection of past posts on the FTC-Whole Foods-Wild Oats merger issue in Natural~Specialty Foods Memo.

Retail Analysis Memo: Growth and A Tale of Two Retailers-Tesco and Whole Foods Market: Is One Ripe For Acquisition and the Other Ripe For Acquiring?

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.

Retail Format Innovation Memo: The United Kingdom's 'Best' Cybercafe Just Might Be Inside Whole Foods Market, Inc.'s Huge London Flagship Store

Austin, Texas-based supernatural grocery chain Whole Foods Market, Inc. decided to go where few American grocery chains go--overseas, and specifically to the United Kingdom--about a year ago.

Why do we say, "where few U.S. grocery chains go?"

Because it's true. American-based supermarket chains tend to be domestic rather than global enterprises, which is generally the opposite of most other large U.S. corporations, in business sectors ranging from oil and high tech, to automobiles, pharmaceuticals and agribusiness.

For example, the three-largest supermarket chains in the U.S.: Kroger Co. (about $69 billion in annual sales), SuperValu, Inc. (about 44 billion in gross sales per year) and Safeway Stores, Inc. (annual sales of about $42 billion) have no stores outside North America. In fact, Safeway is the only one of the three chains with stores in Canada. Kroger and SuperValu do all there business in the Continental U.S.

The same is the case with nearly every other American supermarket chain. Crossing the Atlantic or Pacific oceans to open stores or acquire foreign-based food retailing companies isn't the industries cup of tea.

Of course, Wal-Mart is a different animal. The world's largest retailer is just that: a global retailer. It owns the Asda chain in the UK, which is that nation's second-largest retailer after Tesco, and has operations in Asia, including Japan, India and China, and in Mexico, as well as Canada. Wal-Mart also is preparing to enter the retailing market in Russia and elsewhere globally.

Wal-Mart however isn't a supermarket retail company. Rather, it's a broadline retailer which sells everything from food and groceries, to books, electronics, garden supplies, clothes, furniture and more.

Austin, Texas-based Whole Foods Market, which also has stores in Canada, decided to break that general U.S. food and grocery retailing parochialism last year however when it opened it's huge, three-story flagship food emporium on Kensington High Street in London, England in the UK.

The store is nearly 75,000 square feet, huge by UK standards, and features an extensive selection of natural, organic and specialty fresh foods and groceries, along with natural and organic health and wellness products, a mega-natural body care department, a fresh produce department itself as big as many London supermarkets, numerous in-store restaurants, and more.

Part of that "more" is an in-store feature that's been getting raves among London's high-tech community as well as just plain folks in the cosmopolitan city which is rivaling New York City as the world's financial capital these days.

On the third-floor of the Kensington High Street Whole Foods mega-market sits a fully-equipped cyber or internet cafe. Cyber cafe's aren't a new development in London--they're located over the city. However, the Whole Foods-London flagship natural foods market's cybercafe is attractive, spacious and rapidly becoming the most popular of the many located in the urbane city.

The open-style, third-floor Whole Foods Market cyber cafe has seating for about 25 people. There are comfortable tables in the open-style cafe as well. Electrical power outlets are in abundance--and the use of the high-speed Wi-Fi internet network is completely free of charge, which isn't the case in many of London's cyber cafes.

The other thing Londoners' are loving about the cyber cafe is that unlike many located in the city, Whole Foods' third floor, in-store operation doesn't put any restriction on how much time a person spends in it using the free Wi-Fi connection. No hassles, not even dirty looks if you spend a full eight hour work day using the internet cafe's free connections and workspaces.

There's not even a restriction that cybercafe users have to purchase anything to eat or drink in order to use the facilities. However, the Whole Foods store offers such a variety of prepared foods and beverages, that one seldom sees a third-floor cyber cafe patron without food or drink of some kind while surfing the net on their laptop computers.

The store has a gourmet pizza station, sushi restaurant, a wine and cheese bar, meat and veggie grilling station, a gourmet sandwich shop, offers fresh coffees and baked goods in the cafe/pastry shop, prepares fresh-squeezed fruit juices and makes smoothies at a separate bar, and has in-store prepared foods ranging from American classics, to British foods, Indian, Thai, Japanese, Chinese and other ethnic cuisines And, this list is just for starters.

Cyber cafe patrons can purchase whatever foods they desire and take them up to the third-floor cafe. All that's missing is being able to wear ones pajamas when using the internet cafe's free high-speed Wi-Fi connections and attractive space.

The Kensington High Street flagship Whole Foods had a bit of a rocky start in the months following its opening about a year ago. However, it's gradually been winning over the stomachs and pocketbooks of Londoners, who marvel at the massive selection of food, grocery and related products the store offers. Both customer count and store sales have been climbing dramatically over the last six months, according to nearly all of the UK analysts we've talked with or who's reports of the store we've read.

In fact, business has improved so much in the last six or so months Whole Foods Market, Inc. recently hired two commercial retail real estate firms in the UK to search for additional sights in London and throughout the UK for the retailer to open more Whole Foods Market supernatural grocery stores. [Read our piece on that search here.]

the inclusion of the spacious third-floor cybercafe in the store is turning out to be a very smart and savvy move by Whole Foods. Even though it isn't a money maker, after all the Wi-Fi connection is free and cafe users aren't even required to purchase anything to use the connection and the space, it's becoming a gathering place, used regularly by everyone from local entrepreneurs and business people to students, as well as people visiting London from elsewhere on business.

We think the popular, and rapidly becoming famous, Whole Foods cyber cafe in its London flagship store is a perfect example of what grocery retailers need to do in order to create brand in a new market--and even in existing ones.

In-store features like the internet cafe also create a "sense of place" in a supermarket, which results in encouraging shoppers to linger and buy more when in the store and to return more often and become primary shoppers of that store.

Not every feature a grocer puts in its stores will be a money maker. However, features such as the Whole Foods-London third-story cyber cafe will make a grocer more money throughout the store. Not a bad trade off.

The Friday Fishwrap: End-Of-The-Week News, Analysis, Insight and Musings

Retail Whispers: Heard on the Street and Read on the Net

Profit and Loss: Canada's Planet Organic Health Corp., which recently acquired two U.S. natural foods' retailers--Mrs. Green's Natural Foods in New York and New Leaf Community Markets in Santa Cruz, California, had a whopping 99% increase in sales over the same period last year in its just-reported second quarter of this year. Sales were C$27.5 million (Canadian dollars), compared to C$13.8 million for the same period last year. However, sometimes such soaring sales growth results in a loss. Planet Organic reported a net loss for the quarter of C$45,000, compared to a net income of C$537,000 in the same quarter last year. Oouch, growing pains. (more here.)

Britain's Green PM: British Prime Minister Gordon Brown warned his nation's supermarket chain and corner retail shop proprietors that unless they get with it and start charging consumers for plastic grocery bags if they choose them, like Marks & Spencer announced earlier this week it would begin doing, then he just must impose the fees on the grocers and other retailers in the form of a law. Read what the UK's Daily Scotsman has to say about the issue in tomorrow morning's edition. Marks & Spencer (M&S) is charging shoppers the equivalent of about 10 cents U.S. per plastic bag. No charge for paper. Reusable shopping totes are sold at the stores and encouraged.

U.S.-based Whole Foods Market, Inc., which has a large natural foods superstore in London, will go M&S one better next month. The supernatural grocer will stop using plastic grocery bags at all of its stores in the U.S., Canada and in the London store beginning on April 22, which is Earth Day 2008.

We predict the United Kingdom's other major chains will follow Marks & Spencer's lead on charging shoppers for plastic tote bags. Our prediction: Waitrose will be next to announce, followed by Sainsbury's, then Asda and Morrisons, with Tesco last. Why Tesco last? Take a look here.

London's Daily Mail newspaper has started what it calls its "Banish the (plastic) Bag Campaign." Here is what the paper's latest poll of British consumers found: A solid 83% of consumers said they are 'Concerned' about the impact on the environment of plastic bags. Only 16% said they are unconcerned. A full 76% of those consumers said supermarkets should stop giving out plastic bags all together. And, a whopping 86% of the consumers said a per-plastic bag charge by retailers would encourage them to bring their own reusable shopping bags to the store. You can read more on the survey here.

Food & Street Theatre Memo: Peta's 'Unhappy Mother's Day For Pigs'

The pro-vegetarian animal rights group People for the Ethical Treatment of Animals (Peta) kicked its public performance art-oriented displays designed to get people to renounce their meat-eating ways up a notch today in London, England's Covent Garden.

As pictured at left, they had a visibly pregnant woman crawl into a replica of a farrowing crate, similar to the ones used to house sows when they are pregnant and nursing their young.

While the "human sow," played by a pregnant human woman crawled into the farrowing crate to depict the actual sow, fellow protesters held up a banner which read: 'Unhappy Mother's Day for Pigs, Go Vegetarian.'

Our London correspondent, who was having lunch at Covent Garden when the street theatre-style protest was presented, reports the Peta protesters definitely got lots of attention. However, he also said a number of other folks, who were eating lunch just like him, not only lost their appetites, but had some digestion problems as well, after viewing the protest, which went on for some time. And yes, we asked; and the answer is no, he wasn't having a pork sandwich for lunch.

Retail Whispers: Heard on The Street and Read on the Net--Part Deux

The Greening of Emeril @ Whole Foods Market: The Discovery Channel, Whole Foods Market, Inc. and that hyper-celeb chef Emeril Lagasse are partnering up. Emeril (no last name needed) will star in a new show, Emeril Green, on the Discovery Channel four nights a week at 8pm. The show will take place inside a Whole Foods Market store. All of the ingredients the rapid-fire chef uses to cook with in the show will come from Whole Foods, of course. The ingredients--and resulting dishes--will be organic, fresh, upscale, sustainable---and all "green." Read all about the show and partnership here.

Whole Foods Market Haight (Ashbury): If healthy and crunchy loving Whole Foods Market can't get a store built in San Francisco's Haight-Ashbury neighborhood (which was known as Hashbury in the 1960's) then what grocer in the world can? "The Haight," as the locals call it, was the home to the 'Summer of Love', student protests, frequent acid (and not car battery) tests, and numerous other hedonistic pursuits in the 1960's and 1970's.

Throughout the 1980's, the neighborhood was considered undesirable by many. However, beginning in the late 1980's--and into the 1990's to today--"The Haight" has undergone a resurgence. The neighborhood, which is near the famed Golden Gate Park, is packed with unique ethnic and upscale restaurants, brew pubs, cafe's and bookstores. There's still lots of young folks hanging out in the neighborhood--perhaps looking to find what maybe their parents (or grandparents) might have found (if they could remember it) in the 1960's--but gentrification is the rule of today in the neighborhood.

Enter Whole Foods Market. The supernatural grocer wants to locate it's fourth lifestyle supermarket in San Francisco in an empty building that formerly was a Cala Foods supermarket for decades.

Cala Foods was most recently owned by Kroger Co. as part of its Ralph's Supermarkets division. It sold most of the other Cala Foods' stores in San Francisco to independents and closed the remaining handful of stores, including the Haight-Ashbury market. Even though the store is much smaller than Whole Foods' desires, they plan to remodel the building and open a store there. Retail space is a premium in the neighborhood. So the Cala Foods' site is a major get for Whole Foods.

Haight-Ashbury, however, has a couple of dueling neighborhood groups. Those two groups, the Haight-Ashbury Neighborhood Council and the Haight-Ashbury Improvement Association, are butting heads over a laundry list of issues regarding the Whole Foods store's going into the neighborhood. Read what's going on here. For those of you in the heartland, this happens in San Francisco all the time. And, Whole Foods is familiar with it. Just ask Walter Robb.

Food Safety in America Memo: And Now it's the Alfalfa Sprouts.

Attention, Re-calling All Sprouts: The latest food item (among the numerous) in the U.S. to be recalled is that famous sandwich and salad add-on loved by nearly all natural foods'-oriented folks: alfalfa sprouts. Dixon, California-based Salad Cosmo USA Corporation and J.H Caldwell and Sons of Maywood, in Southern California, are recalling the crunchy sprouts throughout the western USA. Among the stores involoved in the recall are Trader Joe's, Save Mart Supermarkets and others. Read more here. Tests to the sprouts detected salmonella, which can be fatal. That's why the alfalfa sprouts are being recalled.

What Gives? First it was bagged spinach, then bagged salads, and now sprouts. Although the U.S. has a good, overall food safety record, its been declining for the last 10 years or so. Are you listening President Obama, McCain, Huckabee Clinton or Nader?

Election Year Memo: Presidential Candidates As Grocery Stores

Speaking of U.S. candidates for President (we like segways. Not the scooters, the word transitions.) Our evenings of late have been consumed primarily by two activities: writing this blog and watching the Presidential debates and related coverage. So, naturally, we got to thinking about what the Democratic and Republican candidates for President have in common with grocery stores or supermarkets.

As a result, we bring you our very own version of, "Presidential Candidates as Grocery Stores:"

Barack Obama: Obama is the Whole Foods Market, Inc. candidate. Like a Whole Foods' store Barack is eclectic, smooth, thoughtful and urbane. But, like Whole Foods, Obama also comes from humble origins. Whole Foods targets its stores primarily to the well-educated; college grads and post-grads. College educated Democrats are choosing Obama over Clinton big time.

But, also like Whole Foods Market, Obama does not want to be viewed as elitist, which he isn't. He wants organic foods for everyone, just like Whole Foods' does. And, he is appealing more and more these days to lower and middle income Democrats. Just like at Whole Foods,' the message is important.

Like Whole Foods Market, Obama has crossover appeal. He attracts indpendents and even some Republicans, along with Democrats. there's even a group of Independent and Republican voters termed "Crunchy Cons," who are supporting Barack for President. These folks are conservative, but don't embrace the traditional GOP line. They shop at places like Whole Foods Market, are generally young and well-educated, are environmentalists and health-oriented consumers, and are looking for political and social change. They aren't liberals though...we like to call them "Whole Foods Market Conservatives."

Hillary Clinton: Hillary Clinton on the other hand is trying to appeal to everyone, especially lower and middle income Democrats, who are proving to be her base of support. That's why Hillary is the Wal-Mart candidate. Her motto, "I'm ready to assume the duties of President on Day One," reminds us of Wal-Mart's can-do attitude. Her pep-rallies also remind us of how Wal-Mart store managers rally the troops every morning before the store opens by leading them in the "Wal-Mart Cheer."

Just like a Wal-Mart store, Hillary can be all things to everybody. She can out-Liberal the Liberals and out-Conservative the center-right. Similar to Wal-Mart, Ms. Clinton has had to be the "Low-Price Leader" in her race against Obama, as he has beat her in fundraising hands-down. Her cheerful optimism even reminds us of the Wal-Mart smiley face.

And, of course, Hillary is no stranger to Wal-Mart, Inc. She spent a number of years on the mega-retailers board of directors when she was First Lady of Arkansas during her husband's two-terms as the state's Governor.

John McCain: Johnny Mac, as his friends call him, is without a doubt the Trader Joe's candidate. Like Trader Joe's, McCain is small, but stout. He packs a huge punch into a little frame, just like the small-format specialty grocer packs tons of goods into its 10,000 square foot stores.

McCain also is quirky, just like TJ's operations and product mix. Johnny Mac might one day present himself as a "Conservative's Conservative," then do something "liberal" like being the only Republican to vote against George W. Bush's famous tax cuts, saying, "They benefit only the rich."

Lastly, with tongue planted firmly in cheek of course, rumor has it that some of McCain's U.S. Senate colleagues used to call him "Two-Buck Mac" for the amount of money he likes to spend when he bought them lunch. As we all know, Trader Joe's is famous for its $1.99 bottle of wine nicknamed "Two-Buck Chuck."

Mike Huckabee: Huckabee is the Kroger Co. candidate. He's a little bit upscale--well educated, dresses well, loves good food, is articulate--but is mostly still just folks. Like a typical Kroger store, Huckabee isn't going to knock your socks off. He's likes to say, "What you see is what you get." That's sort of Kroger's motto in many of its store banners.

Huckabee, like Kroger, also is essentially middle-America. Although Kroger operates supermarket chains on the left and right coasts in the U.S., they are known as the grocer for middle-America primarily. Huckabee also has left and right coast tastes--he plays the base guitar with a rock band, loves appearing on talk shows in Hollywood and New York City, as well as loves hosting Saturday Night Live--but has firmly positioned himself as the favorite of middle America and Christian Evangelicals. Huck is just a small town preacher from Hope, Arkansas.

Kroger, though, has been moving into the natural, organic and healthy foods' categories in a big way the last couple years. So has Huckabee. He lost a couple hundred pounds over the last few years by giving up a high-salt, high-fat and high-carb diet for a healthy one. He also says he eats natural and organic foods as much as possible. Weight loss and diet is a major plank in his platform in fact.

So, there you go. As a voter you now have an additional variable--grocery stores--whichyou can use in choosing which Presidential candidate you will support and vote for in the 2008 election. Consider it a public service offering form us to you.

[To our readers: We would love to read which grocery stores you match-up with which Presidential candidates. Use our comment box to express your opinion, and to VOTE on your favorite from our four "candidates as grocery stores" above.]

The Friday Fishwrap Week-Ender

The Topic: Honest Food Labeling

Enjoy your weekend!