Retail Memo: Trouble in Paradise: Canada's Planet Organic Health Corp. Backs Out of Deal to Acquire Santa Cruz, CA New Leaf Community Markets

Located on the North-Central cost of California, Santa Cruz, is a post card-picture paradise of sorts.

With its numerous sandy beaches, sunshine throughout the summer, its classic beach and boardwalk with amusement rides, and a quaint downtown lined with cafes, bookstores and restaurants, Santa Cruz is just the place one would think the principles of a natural foods retail company from chilly Canada would want to visit frequently in order to "do store checks" in their coastal California region natural foods stores.

The coastal city also is home to a campus of the University of California with an ocean view, as well as being a short drive from famous Monterey, Pebble Beach and Carmel.

But for the executive team of Canada's Planet Organic Health Corp. and Planet Organic Markets, that's not going to be the case.

As Natural~Specialty Foods Memo was one of the first publications to report earlier this year on February 17, Canada-based Planet Organic Health Corp., which operates Planet Organic Markets banner natural foods stores, other natural products retail stores and a vitamin and supplements company in its home country, had agreed in principle earlier this year to acquire Santa Cruz, California multi-store independent natural foods retailer New Leaf Community Markets for $9.8 million.

However, we've learned the acquisition will not be going through. The reason: Planet Organic Health Corp. has decided to withdraw a planned $15 million new common stock offering due to what it says are week market conditions at present.

Apparently, the natural products company needed a portion of that $15 million (the $9.8 purchasing price of New Leaf Community Markets) to pay for the acquisition.

Darren Krissie, Planet Organic Health Corp.'s chief financial officer, says the company is "doing well and will continue to grow," but that it can't acquire New Leaf Community markets without the new $15 million stock offering, so therefore can't do the deal.

We had talked to both companies earlier this year when we reported the acquisition. All the principles seemed certain it would happen. The deal was supposed to be finalized on April 31.

New Leaf Community Markets has five natural foods stores under the New Leaf banner in the Santa Cruz area. Under the deal with Planet Organic, the Canadian company was to acquire three of the existing five stores, plus the new Half Moon Bay store and another new store set to be built on the westside of the city of Santa Cruz. Planet Organic would also acquire the company.

The reason it wouldn't acquire the other two stores--one in nearby Felton and the other in nearby Boulder Creek--is because they're owned by a independent operator who licenses the New Leaf name from the company. That owner, Bob Locatelli, plans to continue operating those two stores under the New Leaf banner, he says.

You can read a fact sheet New Leaf Community Markets put together earlier this year for its customers about the Planet Organic Health Corp. acquisition here. It further explains the relationship with Locatelli as well.

To announce the deal earlier this year, Planet Organic's CEO and CFO Krissie spent a couple days in Santa Cruz with New Leaf Community Markets co-owner and president Scott Roseman. They even all held a press conference and photo-op session together where all spoke with certainty about the acquisition, even detailing how Roseman would remain in charge and how Planet Organic would infuse new money into the operation, including for the new New Leaf store currently being built in the nearby coastal city of Half Moon Bay.

New Leaf's Roseman says he is "disappointed about a lost opportunity with a retailing organization (Planet Organic) with similar values," but that New Leaf Community Markets is in healthy financial condition and will move forward with its new projects, including completing and opening the new Half Moon Bay store.

Other plans Planet Organic and Roseman discussed in the press conference earlier this year included building a new, large New Leaf natural foods store on the westside in Santa Cruz where there currently is an existing New Leaf store, as we mentioned above.

Roseman says both the completion of the Half Moon Bay store, which the company is currently hiring staff for, and the future plans to build the new Santa Cruz-Westside store, are still a go.

We aren't so sure however. When New Leaf Community Markets and Planet Organic Health Corp. jointly announced the acquisition/merger together, Roseman said one of the main reasons for doing so is because New Leaf needed the new infusion of capital to open its Half Moon Bay store, build the new Santa Cruz-Westside natural foods market, and to remodel at least one of its current, existing stores, which likely is its downtown Santa Cruz market.

The $9.8 million from the acquisition by Planet Organic would have gone a long way towards meeting these three goals.

Without that cash infusion, we can't help but believe New Leaf is going to have a tough time not only getting the new Half Moon Bay store up and running properly, but it's likely in our analysis the natural foods retailer will either have to find some cash or put off building the new Santa Cruz-Westside store and remodeling the existing store, as it had planned.

The economy in Northern California could be better, and Whole Foods Market is making a push into New Leaf's market area with its huge supernatural foods stores as well. It's a tough time for any retailer in the region.

The Planet Organic acquisition was going to infuse New Leaf not only with the initial $9.8 million in cash, but the Canadian natural products' company also had said it planned to provide additional capital to grow the natural foods retailer.

Last year, as part of its strategy to enter the U.S. natural foods retailing market from its base in Canada, Planet Organic acquired the 11-store Mrs. Green's Natural Foods chain in upstate New York. As we reported here on April 16, Planet Organic recently said it plans to spend $1 million to build a new fresh, prepared foods facility to serve the 11 Mrs. Green's natural foods stores.

The Mrs. Green's stores have a popular fresh, prepared foods offering. However, all of the prepared foods for the deli and bakeries are currently being produced in a crapped basement kitchen below on of the stores. The new facility is designed to replace that basement kitchen, as well as to allow the natural foods retailer to expand the quantity and variety of prepared foods' items it produces for sale in the 11 stores.

We don't know if the prepared foods facility expansion will be delayed or postponed because of Planet Organic Health Corp.'s decision to remove its $15 million new stock offering from the market.

The New Leaf Community Markets' acquisition was to be the second leg of Planet Organic's entry into the U.S. natural foods retailing market. The idea being to acquire an existing multi-store retailer in the eastern region of the U.S. (Mrs. Green's) and on the west coast (New Leaf Community Markets). These two regions are the strongest per-capita natural foods retailing markets in the USA.

From there, Planet organic planned to open additional Mrs. Green's and New Leaf stores, as well as scout for other similar sized multi-store operators for possible acquisition.

This USA strategy is obviously on hold now, since the $15 million dollar new stock offering was key to it. However, we expect Planet Organic Health Corp. to float the offering, or one of a similar amount, when the stock market conditions in Canada and the U.S. improve. From everything we have observed, the company wants to continue its rapid growth.

However, whenever that time comes will be too late for Santa Cruz-based New Leaf Community Markets.

If the retailer is well financed as it says, there should be no problems. However, if that's not the case, there are other potential suitors out there in terms of acquisitions and mergers. We see Sunflower Farmers Markets and Sprouts Farmers Markets as two potential, fast-growing natural foods chains which might be interested in New Leaf.

Both retailers have recent infusions of cash and are building numerous new stores in the Western U.S. Sprouts currently has a couple of stores in Southern California but none in Northern California. It also has stores in Arizona and elsewhere in the Western U.S.

Sunflower Farmers Markets has stores in Colorado, Arizona and New Mexico, but none in California. Both Sunflower and Sprouts are planning to open stores in Texas as well, either later this year or early next year.

New Leaf, with its long history in Santa Cruz and strong local community support, could be a could move for either of these natural foods retailers.

Then, of course, there's Whole Foods Market. Even though the existing New Leaf stores are smaller than Whole Foods' new stores, it has in the past acquired similar natural products retailers in California, both as an entry into a particular region, as well as to merely eliminate them as competition.

Regardless if New Leaf remains independent or looks for a suitor, we see numerous opportunities out there for the natural foods' retailer, even in these less than strong economic times.

Meanwhile, pulling out of the deal will be a setback for Planet Organic in terms of its U.S. natural foods' retailing strategy. New Leaf Community Markets offered itself as a nice bookend to the Mrs. Green's acquisition in New York.

Since such bookends in the form of small-chain, multi-store natural foods retailers which have strong local community support like New Leaf Community Markets has, aren't easy to find, it could be some time before Planet Organic finds such a good west coast retail yang (New Leaf) to its east coast retail yin (Mrs. Green's), even if it has the cash in hand.

Ethical Retailing Memo: David vs. Goliath: Planet Organic Markets Beats Out Whole Foods Market, Others as the 'Top Organic' Grocer in Canada

Canada's Planet Organic Markets, a national natural and organic foods retailer, edged out U.S.-based Whole Foods Market, Inc's Canadian division for the honor of top organic food retailer in Canada, in a survey and analysis by Corporate Knights magazine, a national publication which covers ethical and responsible corporate and business behavior and practices.

Planet Organic Markets received an A grade, and Whole Foods Market-Canada a B+ in the publications first "Green Grocer" survey, which is modeled after the United Kingdom's National Consumer Council's ethical grocers' survey.

Corporate Knights magazine rated Canada's top grocers--Planet Organic Markets, Whole Foods Market-Canada, Loblaws, Safeway, Metro, Provigo, Sobeys and a few others--in five areas: climate change, which looked at the availability of locally-produced food, the sale and promotion of CFL light bulbs, and in-store conservation efforts; consumer education, which looked at how organic and local food, Fair Trade products, and a reduced-meat diet are promoted; food sustainability, which surveyed the availability of organic products as well as responsibly-farmed fish and meats; household sustainability, which examined the stores' availability of "green" household products; and waste recycling, which looked at the recycled and Forest Stewardship Council content in product packaging , along with the stores' efforts to reduce the use of plastic grocery bags.

You can read more details about the survey and analysis here. There's also two links here, one for the actual survey methodology, and the other to view the survey questionnaire filled out by the Canadian grocers participating. The links are located in the yellow "resources" box on the right hand of the linked page.

While Planet Organic Markets and Whole Foods-Canada scored and A and a B+ respectively, the mainstream grocers mentioned above who were surveyed scored between a C and C+ overall, with their individual stores scoring a bit higher in the C to B range. This is because some stores take it on themselves to do more in the environmental and ethical categories surveyed compared to the chains as a whole.

Regarding Whole Foods Market-Canada, the Corporate Knights magazine survey was conducted before the supernatural grocer eliminated the use of all single-use plastic carrier bags from its U.S., Canadian and UK stores on April 22, Earth Day 2008.

Therefore, since plastic grocery bag reduction efforts are one of the criteria in the survey, Whole Foods' elimination of the bags completely in all its Canadian stores might have pushed it up a notch, from a B+ to an A, therefore perhaps coming in a dead heat with Planet Organic for first place. We don't know that for sure however.

Planet Organic Markets uses biodegradable plastic carrier bags in all its Canadian stores.

For a more detailed overview of how each of the grocery chains scored in the survey, as well as the differences between Planet Organic Markets and Whole Foods vis-a-vis the mainstream grocery chains, you can read this piece from Corporate Knights magazine about the survey.

Among some of the highlights of Planet Organic Markets' "green" and sustainability efforts, is the fact that its store employees were uniforms made out of bamboo, the grocer buys wind energy to power much of its operations, the store janitorial crews use sustainable cleaning products and all of the plastic grocery bags used in the stores are biodegradable.

Ironically though, one the question of local foods sourcing, Whole Foods Market-Canada did much better than Planet Organic Markets. Whole Foods also buys wind energy to power 100% of its Canadian stores.

The survey-takers said all of the Canadian grocers--with Whole Foods and Planet Organic at the top--are making good progress on reducing the use of single-use plastic carrier bags in their stores but there's much more progress to be made.

Canada is debating passing a law that would either put a per-bag fee on the plastic grocery bags or perhaps even ban their use completely in supermarkets. As we mentioned above, Whole Foods voluntary has stopped using single-use plastic carrier bags in all its stores in Canada.

As we've written about in Natural~Specialty Foods Memo recently, Canada's Planet Organic Markets' parent company, Planet Organic Health Corp. is expanding rapidly, including making two recent acquisitions of regional natural foods retail chains in the U.S.

Those two acquisitions, of 11-store Mrs. Green's Natural Foods Markets in New York and New Leaf Community Markets in Northern California, are the natural products' retailers first entry into the U.S. Market.

As we've also reported, Planet Organic is spending over $1 million to build a new, state of the art prepared foods facility in upstate New York for its Mrs. Green's retail operation. The grocer also plans to add additional Mrs. Green's stores in the upstate New York region and most likely elsewhere nearby.

Planet Organic also is building a brand new New Leaf Community Market natural foods store in the seaside town of Half Moon in the San Francisco Bay Area's coastal region. That will give the natural grocer four New Leaf banner stores when the new store is completed later this year.

Both Planet Organic and Whole Foods Market, Inc. are expanding the number of stores they have in Canada.

Although Whole Foods Market, Inc. with sales over $6 billion annually, is a natural foods' retailing Goliath compared to Planet Organic Markets, with sales of about $120 million a year, Planet Organic is in a hyper-growth and expansion mode. Just seven years ago when the current Planet Organic Health Corp. parent company was formed as an umbrella for the stores and the company's other operations, retail sales were only $1.6 million annually.

Planet Organic Health Corp.'s move into the U.S. market with the Mrs. Green's and New Leaf acquisitions also demonstrates this natural foods' retailing David isn't afraid of Whole Foods post its acquisition of Wild Oats Markets, Inc., despite the fact U.S. Federal Trade Commission (FTC) persists in wasting taxpayer money to go back again and again to the federal appeals court, trying to get the Whole Foods/Wild Oats acquisition-merger broken up.

While we certainly believe there are instances when the FTC is warranted in stepping in to stop acquisitions and mergers which would restrain competition and pricing, the Whole Foods/Wild Oats merger isn't one of the instances in our analysis.

Just ask the marketplace, and natural foods' retailers like Planet Organic, Sprouts Farmers Markets, Sunflower Farmers Markets, Tesco's Fresh & Easy Neighborhood Markets and others who are expanding rapidly, and in the case of Sunflower and Sprouts, getting ready to open stores right in the heart of Whole Foods Market Country, in Texas.

Also ask mainstream supermarket retailers like Safeway, SuperValu, and Kroger, and mega-mass merchandisers Wal-Mart and Target, as well as scores of regional chains and thousands of independent grocers in the U.S., which are all getting deeper and deeper into the natural and organics categories. There's plenty of competition--and more coming--for Whole Foods Market, Inc. in the United States.

Planet Organic Markets is bringing its Canadian brand of "green" and ethical food retailing to the two natural foods chains its acquired in the U.S. As such, there are going to be some interesting changes at the Mrs. Greens and New Leaf stores in the coming months.

We also know Planet Organic is looking for other multi-store natural foods retailers in the U.S. similar to the two it acquired last year (Mrs. Green's) and this year (New Leaf).

Doesn't Planet Organic remind you of another fast-growing natural foods' retailer, say in about the late 1980's and early 1990's? That one from Austin, Texas. The one that was just starting to boom about that time and didn't even carry the title "supernatural" grocer yet?

You know, that Texas natural foods grocer who today, about 15 years later, is not only a national chain but an international natural products retailer as well? and continues to grow rapidly--and in new ways?

It does us. In many ways, today's Planet Organic, with its rapid-growth and innovation, looks much like Whole Foods Market, Inc. did 15 or 20 years ago. It will be interesting to chart the Canadian-based natural foods' chain's growth, both at home and now in the United States.

In conjunction with its responsible grocers' survey and rating project, Corporate Knights magazine published a special feature in its April, 2008 edition on responsible and "green" retailing in Canada. You can read the various articles on the topic in the magazine's April issue here.

Prepared Foods Memo: Planet Organic's Mrs. Green's Natural Market Planning Big Push in Fresh, Prepared Foods' Category

As we reported here, Canada's Planet Organic Health Corp. recently acquired two U.S. Natural foods' retail chains, 11 store Mrs. Green's Natural Market (acquired last year) based in Scarsdale, New York and 3-store (with a new store being built) New Leaf Community Markets (acquired this year), based in Santa Cruz in Northern California.

These two acquisitions marked Planet Organic's first move into the U.S.

We've said before the Canadian natural products' retailers move into the U.S. with these two acquisitions is further evidence of the argument we've been making since last year that contrary to the position of the U.S. Federal Trade Commission (FTC) and many U.S. natural foods' retailers, suppliers and observers that Whole Foods Market, Inc.'s acquisition of Wild Oats Markets, Inc. would stifle competition, we believe the opposite is true: that it's actually increasing competition and innovation by both natural foods' retailers and supermarket chains and independents in the USA.

As we reported in a previous piece, Planet Organic plans to add numerous new stores to its recently acquired Mrs. Green's (in the east) and New Leaf (in California) chains in the next couple years. Further, Canada's Planet Organic is on the lookout to acquire other small-to-medium-sized regional natural foods' retail chains in the U.S.

We've now learned Planet Organic is making a major investment at its Mrs. Greens operation in New York in the prepared foods' category.

Historically, when it was an independent operation, Mrs. Green's Natural Market supplied its 11 units with fresh, prepared foods out of a 3,000 square foot kitchen in the basement of one of its stores. This cramped commissary put a crimp on the volume of deli and other prepared foods' items the retailer could supply to it busy stores. It also meant the 40 chefs and others working in the 3,000 square foot basement kitchen were elbow-to-elbow for eight hours a day.

This situation no longer will be the case though. Planet Organic plans to build a new, state-of-the-art 30,000 square foot, above ground kitchen/commissary where not only will the retailer's chefs and others have plenty of space to create the fresh, prepared foods, but also will allow the natural foods' grocer to supply its stores better and with a larger variety of prepared foods items.

According to Harold Hochberger, Mrs. Green's founder and current Co-President under Planet Organic's ownership, the 3,000 square foot basement kitchen currently produces everything from fresh, organic pies and fruit smoothies, to complete vegetarian meals for distribution to and for sale in the stores.

The fresh, prepared foods produced in the basement kitchen account for about $3.5 million a year in sales for the 11-store natural foods chain, or about about 8% of total store sales, Hochberger says.

With the addition of the new, above-ground commissary which will be ten-times the size of the current basement kitchen, Mrs. Green's is looking forward to not only increasing the quantity and variety of prepared foods for its stores, but increasing that $3.5 million in annual prepared foods' category sales considerably.

Hochberger says prepared foods sales in the Mrs. Green's stores have been increasing by about 15% annually for the last few years. He and Planet Organic believe with the new commissary, which will cost at least $1 million to build and equip, sales growth will be even higher once the facility is operating. He says he expects the facility to open in about six months.

Planet Organic Health Corp. is currently launching an aggressive growth plan, on top of seven year's of already rapid growth, focusing on its home market of Canada and in the U.S.

Seven years ago, annual gross sales for the company were only $1.6 million. At present, the Canada-based natural products company has sales of about $100 million. That's a gain of $7 million a year in each of those seven years.

Planet Organic is a diversified, publicly-held natural products company. In addition to operating nine natural foods supermarkets in Canada under the Planet Organic Market banner (with more on the way) and the Mrs. Green's and New Leaf stores in the U.S., the company also operates 48 natural health stores in Canada under the Sanger's Health Centre banner and eight similar stores under the Healthy's and Planet Organic Living banners.

Planet Organic Health Corp. also owns Trophic Canada, which is that country's leading manufacturer and marketer of natural supplements.

Planet Organic's two acquisitions in the U.S.--one on the east coast and the other on the west coast, which are two of Whole Foods Market, Inc.'s strongest market regions--proves despite the arguments of the FTC and some suppliers, natural foods' retailers and industry observers, that retailers including Planet Organic and others like Sprouts Farmers Market and Sunflower Farmers Market, don't believe the combined Whole Foods/Wild Oats chain poses neither a barrier to entry in the natural foods' retailing category in the U.S. or offers too stiff of competition for them to grow and thrive.

After all, if they did believe such was the case, would all three of the natural foods' chains mentioned above be in such rapid expansion modes like they are?