Whole Foods Market will be reporting earnings for both its fourth fiscal quarter and its full year on Wednesday, November 5, 2008. The market is not expecting good news.
Whole Foods has seen its stock price decline 78% over the past year. The company had already eliminated its dividend and scaled back capital expenditures; now the word on the Street is that sales trends have gotten worse and that the company is expected to reduce its guidance.
David Kesmodel of The Wall Street Journal wrote a searing piece pointing out that the chain just has the wrong concept for the moment:
“They’re going to have to take their punches,” said Bob Summers, an analyst with Pali Research. “It’s kind of the wrong time, wrong concept.”
Kesmodel goes on to say:
Economic conditions since have worsened, making it even harder for the company, based in Austin, Texas, to attract customers to the gourmet foods that account for much of its profit, such as $15-a-pound sesame-crusted salmon and $9-a-pound mushroom-leek strudel.
Normally, an upscale concept in downscale times just has to batten the hatches and live to fight another day when the economy turns. But the article points to limits in the financial flexibility at Whole Foods:
The timing is particularly poor because Whole Foods aggressively expanded in recent years, often building stores that were bigger and more expensive than its earlier outlets.
One reason analysts expect Whole Foods to make further changes to its plans for new stores or capital expenditures is that it doesn’t have much wiggle room on its balance sheet. As of July 6, the company had about $25 million in cash and about $135 million available on credit lines.
The article implies Whole Foods is playing hardball to adjust lease terms:
Edward Aaron, an analyst with RBC Capital Markets, said he estimates the company has signed leases for about 70 new stores in the coming years. “The $64,000 question,” he says, is how much flexibility it has to back out of leases or revise terms.
One case in Seattle signals the grocer is willing to go to extreme lengths to rein in its growth. Seattle developer Interbay Urban Investors LLC in September sued the retailer, alleging that it reneged on a lease signed in 2005 to occupy a 60,000-square-foot store in a shopping center to be built in the city. Last July, with the center under construction, Whole Foods notified the developer that it preferred a 40,000-square-foot store because its sales projections no longer supported the larger format, according to the lawsuit filed in King County Superior Court. Whole Foods also wanted to delay the store’s opening by a year to late 2009.
In September, just a week before the developer was to turn over the store to the retailer to outfit, Whole Foods terminated the lease, according to the lawsuit. Many retailers are seeking to delay store openings or cancel them before leases are signed in the poor economy. But an anchor tenant walking away from a signed lease is a rare and troubling sign for retail landlords. The Seattle developer claims damages of nearly $68 million. The developer and his attorney didn’t return phone messages seeking comment Friday. Whole Foods declined to comment.
Last quarter Whole Foods announced it had lost $18.4 million in one year in its British operations. With other upscale retailers in the UK such as Waitrose and Marks & Spencer scrambling, it is hard to see the situation getting much better fast. Although Whole Foods CEO John Mackey had explained that the company had lost a lot of money in Canada when it launched there and that this was ultimately a profitable investment, with credit markets as they are and its share price as it is, the company may simply not have the financial flexibility to look to its long term plan.
Which raises five possibilities.
Muddle through. By paring back capital expenditure and utilizing its credit lines, Whole Foods may make it through but if we are in for a long recession, there is a real risk that the company could eventually run out of money.
Whole Foods may have to sell stock even at this stock price to raise capital and sustain its operational plans.
Whole Foods may find a partner for its British operation that is willing to put in capital to sustain the operating loss and capital expenditures needed to grow the division.
Whole Foods could shutter its UK division and staunch the bleeding
Perhaps Whole Foods could sell itself to another retailer better able to carry it through the recession.
Which retailer would this be? Well it would be a logical play for any of the big three:
Tesco has had interest before but found it pricey. The new lower share price would give it an instant footprint across North America and allow it to roll its money-losing Fresh & Easy division into a new consolidated North American Tesco division. This would confuse the numbers and save Tesco from ever really accounting for the losses Fresh & Easy will accumulate.
Carrefour would value a North American division to diversify its revenue and profit sources. With the Whole Foods footprint and infrastructure, Carrefour could try to open many different formats.
Crazy as it sounds, it would also be a perfect fit for Wal-Mart. Very little customer overlap, different positioning in the mind of the consumer. There is a real risk of culture clash, but if Wal-Mart could convince Mackey to stay and run it as a separate division it would be a winner. Wal-Mart’s enemies would be thrown into fits of cognitive dissonance.
Whatever Whole Foods does, as we mentioned here, there is a real danger to its attempting to shake its image as high-priced. The core of the clientele at Whole Foods values shopping there because of a conviction that high prices enable Whole Foods to offer better quality, better food safety and to buy and operate more justly and more sustainably. If tomorrow Whole Foods lowered its prices to match Wal-Mart, it would alienate its core customers as they would assume that paying Wal-Mart prices means that Whole Foods bargained its suppliers down to what they presume to be Wal-Mart standards.
So the only choice is to stay in business long enough for the market to move its way. The question is how to do that.
In our extensive coverage of Tesco’s adventures in America through its Fresh & Easy format, we have often pointed out the untenable nature of its produce operation.
By electing to go 100% private label, it denied consumers the brands they were familiar with, and by repacking everything and demanding unusual specifications, it was both undermining its sustainability credentials and significantly driving up costs for no purpose.
For several months now, we’ve seen occasional appearances of items in shipper brands, particularly in the section reserved for good deals.
Then all the sudden we got word that Doug Dobbs, formerly Director of Customer Service and Logistics at Dole and now a Managing Board Director and VP of Supply Chain Management at Wild Rocket, Fresh & Easy’s British transplanted produce supplier, was shaking up the place and actively soliciting quotes in normal shipper cartons and labels.
Now his efforts are really starting to show up in the stores. One local produce guy sent this quick note:
Just a heads up: I have been seeing more branded items at Fresh & Easy. This AM: Bolthouse 1# carrots, Earthbound 1# organic baby carrots, Earthbound 1# organic carrots, Earthbound 3 pack organic snack baby carrots, Andrew & Williamson Baja Classic 6 pack of Roma tomatoes, Ocean Mist 5.5 oz green onions, 5# bag Non Pareil Idaho russet potatoes, 3 pack CMI gala apples, and 1# black seedless grapes.
Still a lot of out-of-stocks and many inventory control issues.
Having recently returned from the UK where the efforts of Tesco to position itself as the value leader were extensive, we have to believe that this business of buying product from the best producers in the world and then rewrapping it has attracted attention from those looking to focus on value.
We continue, however, to hear of vendors who have walked away from “category captain” status with Fresh & Easy. The low volume is part of the problem but many report unhappiness not with Tesco but with Wild Rocket.
These complaints range from allegations of slow pay to clipping of bills and a failure to protect category exclusivity.
Most of the top vendors are used to working directly with retailers and find an intermediary at best an annoyance.
Of course, if Fresh & Easy is moving to accept shipper packaging and brands, one wonders if Ready Pac, virtually down the block from Fresh & Easy headquarters, couldn’t do the fresh-cuts. Of course, wouldn’t a switch to shipper brands and outside processing turn Wild Rocket into just a procurement and drayage company? How long before Tesco decides it should just have its own buyers?
If private label produce was a mistake, was there really a need to import Wild Rocket at all?
As we prepared to head off to PMA, we published a piece entitled a Tribute to Tip Murphy, which mentioned that the PMA Foundation for Industry Talent was to be the home of a new Tip Murphy Legacy Fund, initially funded with grants from Castellini, Chiquita, Naturipe Farms, Paramount Citrus and Ready Pac. The purpose of the fund is to furnish scholarships to various PMA and PMA Foundation for Industry Talent events.
Although the Fund is now undertaking fund-raising to build a permanent endowment, it is still going to give out one scholarship this year. Here are the details:
Recognizing that strong leaders drive the future of the produce industry, the Tip Murphy Scholarship for Leadership Excellence (TMSLE) supports emerging leaders by advancing their careers through development of leadership skills and is funded by the generous donations of supporters of the Tip Murphy Legacy Fund. The fund was created in 2008 to honor the life and career of Tip Murphy, a beloved 15 year veteran of the produce industry.
This new program covers the cost of registration and associated hotel expenses to ONE of a growing number of PMA and Foundation leadership events including:
Fresh Summit International Convention & Expo
Produce Solutions Conference
For the 2009 year, one scholarship will be awarded. The application deadline is November 14, 2008.
Applications will be reviewed anonymously by a Scholarship Advisory Council and all applicants will be notified by the PMA FIT Executive Director of the selection decision by November 28, 2008.
To be eligible, candidates must:
Be employed in any segment of the produce supply chain both at the time of application and at the time of the chosen event
Have been employed in the produce industry for a minimum of 3 years
Demonstrate character, leadership and a desire to make a meaningful contribution to the industry
To be considered in the application process, all three requirements must be submitted at the same time:
Completed application form
Personal statement describing yourself, career aspirations, leadership philosophy and why a Tip Murphy Scholarship is sought
Letter of support from employer (CEO, direct supervisor or VP of Human Resources)
Note: By accepting this scholarship, you allow the PMA Foundation for Industry Talent to include your name and company name in materials promoting the Tip Murphy scholarship program.
So this scholarship provides free registration and hotel to the winner’s choice of premier PMA and PMAFIT events. Depending on membership status, which event the winner chooses and the number of days in the hotel, this scholarship can be worth in excess of $5,000!
Note, however, this year the deadline is coming fast. You need to get the application and supporting paperwork in by November 14, 2008 — that is just ten days from now.
So download the application here, get a letter of support from your employer in the works and make sure everything is filled out and returned by November 14, 2008.
The scholarship is new so the odds are better if you apply this year. Next year, you can expect many more applicants and thus a stiffer competitive pool. So enter now, once again, you can download the application here.
Back in March we ran a piece, Friday The 13th, March 1989…Important Date In Produce History, which dealt with the cyanide scare on Chilean grapes. The piece brought a quick response advising us of another important date in produce history. With the election upon us and Thanksgiving soon to be here, we thought now is an appropriate time to run this letter:
Another important date in produce history is November 9, 1959. The issue of food safety and protecting the public health may have actually had its genesis 49 years ago on that date with the “Cranberry Scare.”
The USDA had certified the herbicide aminotriazole for post-harvest weed control on cranberry bogs but some growers used the herbicide pre-harvest because it produced better yields. Aminotriazole residue showed up in FDA tests, so in 1957 the FDA confiscated 3 million pounds of cranberries. In 1958, incidents of contamination dropped, but the story didn’t end there.
In 1958, Rep. James Delaney, a Democrat from New York, inserted an amendment into a bill that became known as the Delaney Clause: “No additive shall be deemed safe if it is found to induce cancer when ingested by man or animal.” This gave the FDA authority to ban any food containing a suspected carcinogen.
On November 9, 1959, just two weeks prior to Thanksgiving when the majority of cranberries for the entire year were about to be sold, the Secretary of Health, Education and Welfare, Arthur S. Fleming, announced that some cranberry products were contaminated by a weed killer called aminotriazole, and that the FDA had evidence that the herbicide caused cancer in rats. Consumers were told to not buy cranberries unless they were certain about the product’s safety.
This set off a nationwide panic; growers protested and went to Washington, DC. Vice President Richard Nixon and Senator John Kennedy ate platefuls of cranberry sauce for the press, but the Cranberry Scare could not be reversed. This was the Thanksgiving without cranberry sauce. Cranberries were harvested, drenched with kerosene so that they would not be eaten (or delivered for a second time to an unsuspecting handler), and then buried in landfills. Sales of cranberry products fell by more than 60%; growers lost about $20,000,000 at that time.
Eventually it was learned that the cranberries with aminotriazole residue were limited to a few producers in one state, and the USDA reimbursed growers $10-12 million for their losses. It was also reported that based on the concentration of aminotriazole detected in the residue, a person would have had to eat 15,000 pounds of cranberries every day for several years to ingest the equivalent dose consumed by the rats.
As they say, every cloud has a silver lining. The Cranberry Scare actually was a turning point for the Ocean Spray Cooperative. The cooperative felt that it needed to reduce its dependency on holiday sales, so Ocean Spray invested in new products like cranberry apple juice, and the rest is history.
— Jack Crooks American Mushroom Cooperative Wayne, Pennsylvania
Indeed the “Cranberry Crisis” was the first modern food safety issue involving a chemical additive. It also showcased an early use of a de facto government ban:
Secretary Flemming at a press conference specially called just 17 days before Thanksgiving: two batches of the cranberry crop from Washington and Oregon had been found contaminated from improper use of a toxic weed killer called aminotriazole. The chemical, he said, had been tested on rats and had caused thyroid cancer. And so consumers should avoid buying Washington and Oregon cranberries until a way is found to separate the good berries from the bad. In fact, said Flemming, housewives should be “on the safe side” and not buy any, unless they could be sure that the berries were not tainted. As his advice hit the headlines, housewives, supermarkets and restaurants swept cranberries off their shelves, shopping lists and menus.
No Tolerance. “This is a disaster,” cried George Olsson, president of Ocean Spray Cranberries, Inc., a cooperative for 1,079 growers who produce 75% of the nation’s 62,000-ton cranberry production. Cranberrymen, he said, have used aminotriazole with care — even before the Agriculture Department set a rule requiring that bogs could be sprayed only after harvest, to prevent contamination of berries. (In 1957 Ocean Spray took more than 3,000,000 lbs. of a suspect crop off the market.)
Secretary Flemming (Arthur S. — for Sherwood — Flemming, U.S. Secretary of Health, Education and Welfare) had acted on the strength of a Food and Drug Administration (part of his HEW department) ruling that allows no tolerance of aminotriazole. Yet even the experts proved to be divided on whether the feeding of aminotriazole caused cancer in rats, and there was no evidence that it would produce cancer in humans. And anyway, by the standards used on the rats, a human would have to stuff down about 15,000 lbs. of cranberries a day over the years to get the same symptoms. Said Dr. Chester E. Cross, director of the University of Massachusetts Cranberry Station: he would as soon eat a helping of tainted cranberries as smoke a cigarette.
No Hope. The cranberry farmers dismally predicted that Flemming’s feverish warning had crippled the industry for years to come. They were convinced that no matter how many lots of berries might be cleared for the coming holidays, edgy housewives would still refuse to buy them.
Neither were they cheered by the fact that Agriculture Secretary Ezra Benson, who has enough trouble with the farmers, performed a kind of ritual sacrifice by gulping down a bowl of cranberries in public to show that he was behind the industry. In Wisconsin, Presidential Hopeful Jack Kennedy loyally tossed off a couple of glasses of cranberry juice, and Vice President Nixon cheerfully ate four helpings of sauce. (Afterward, agents seized a tainted Wisconsin batch.)
The Delaney Clause actually had a significance beyond what Jack implies. The Delaney Clause did not merely “give FDA authority to ban any food containing a specific carcinogen;” it prohibited the FDA from approving any additive that was found to cause cancer in man or experimental animals.
Since it is often pointed out that “the dose makes the poison,” the Delaney Amendment was opposed by the FDA because there was no science connecting rat cancer from the consumption of massive quantities of an item with human cancer caused by normal quantities consumed by humans.
The clause never applied to fresh produce but to processed items. Pesticides were finally removed from the Delaney Clause by a 1996 amendment to the Food Quality Protection Act.
The schizophrenic attitude of the government toward food safety was evident even then. After the Secretary of Health and Human Services issued his advisory, the Secretary of Agriculture and the two Presidential candidates, Vice President Nixon and Senator Kennedy, rushed to proclaim that they would ignore the warning.
That attitude has changed. Can you imagine if the Secretary of Agriculture, John McCain, Barack Obama and Hillary Clinton had all pledged to eat tomatoes after the FDA de facto ban? This might have made a difference. Maybe we have to remember to bring such a history lesson to the politicians next time FDA gets hysterical.
In any case, as we vote, we can remember that there was a moment when the Presidential election focused on produce.
Many thanks to Jack Crooks and the American Mushroom Cooperative for prompting us to remember a time when food safety and Presidential politics intersected.
“Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.”
As Americans head to the polls, it is worth paying mind to Churchill’s words as they embed within them a deeply conservative warning of the dangers posed to society by utopian schemes.
It is easy to find fault with our electoral system. The recent campaign was not particularly enlightening but campaigns rarely are. Franklin Roosevelt ran pledging to reduce budget deficits and accused Hoover of “reckless and extravagant spending”… In 1960 the Presidential debate focused on a few tiny islands called Quemoy and Matsu and the issue of whether the US would defend Taiwan against invasion or also defend these small outlying islands. William Henry Harrison was elected President in 1840 after a campaign that established little except that he drank not wine but, rather, “hard cider.”
One would think it enough to ruin us but it turns out that Adam Smith was on to something when in response to a young man who believed that the loss of its American colonies would “ruin” Britain, Smith explained that “there is a lot of ruin in a nation.”
In America, these deeply unsatisfactory campaigns are, in fact, our quadrennial miracle.
Despite wars, depressions, natural disasters and any number of panics, on Tuesday November 4, 2008, a miracle unprecedented in human history will occur. For the fifty-sixth consecutive four-year term, a President will be chosen.
Should Barack Obama win the election, as the polls indicate, then as American Enterprise Institute put it, “this will be the twenty-third time power has shifted from one party or political philosophy to another.”
The vast expanse of human history offers no more inspiring example of peaceful transition.
Whether you are or are not a fan of President George W. Bush, know that he has quietly established a precedent that can only do America good. He has established a “Presidential Transition Coordinating Council,” which is an original and official effort to make the transition between the outgoing President and the incoming President quick and effective. The world moves too fast now to first start getting up to speed after an inauguration. We need key nominees, especially in national security areas, nominated, vetted and confirmed quickly.
This may wind up being a crucial part of the Bush legacy. The world works in strange ways and two hundred years hence when the Iraq war may be just a history lesson, Presidents may still be appointing their Transition Coordination Councils.
In America our Presidents have a dual role. They are our chief administrators but also the symbol of our polity. We have no King or Queen to serve this function and so, just as the young Elizabeth about to be anointed Queen in being crowned was transformed into the vessel of British nationhood, so our Presidents, in taking the oath of office, pick up the great American narrative.
This has, from the beginning, been Barack Obama’s great strength. Think what one will of Democrats and Republicans, liberals and conservatives, the possibility that a black man would rise to be President of our country is the completion of a long journey of expanding opportunity in America. Although there are those who will vote against Obama because of his skin color, it speaks volumes about our country that, for many, we would say for most, his skin color is a reason to vote for Obama, not against him.
Of course the election is not yet over, and one would be foolish to assume too much. There has been much talk of the supposed “Bradley Effect,” in which voters are hesitant to tell pollsters that they don’t support a black candidate lest they be perceived as racist, this may cause the polls to overstate Obama’s strength among the voters.
Late-breaking issues such as the publication of comments Obama made about the coal industry earlier this year may swing a key state such as Pennsylvania and change the dynamics of the race.
The accuracy of polls depends crucially on the accuracy of their estimation of who will show up at the polls and actually vote. When all the numbers are in, don’t be surprised if the composition of the voting population changes less than many expect.
Finally, in the quiet of the voting booth, voters may focus on different criteria and opt for the war hero whose character was tested in ways unimaginable to most of us as a prisoner of war in Vietnam.
We hope that all those who have taken the time to educate themselves on the candidates and the issues will go and vote. It is always the case that the candidates’ claim that the election at hand is the one that will decide our course unto eternity. On one side paradise and the other doom and despair. Yet we are more optimistic. We believe the Republic shall endure even if our candidate doesn’t win.
Educated participation in the process is vital though. Not only on Election Day, but every other day. For Presidents and members of congress once elected are powerfully swayed by the sentiments of the people. We try, with our little Pundit here, to provide useful gist for the intellectual mill so that this community can make a meaningful and valuable contribution on Election Day and throughout the year.
Much of what is written about politics is wrong. You will often hear people speak of how horrible it is that everyone doesn’t get out and vote. Yet it is actually a great sign of civic strength. Societies where everyone feels the need to vote are often those in which a change of parties can be a matter of life and death. In politics it is better to follow Talleyrand’s admonition: “Surtout, pas trop de zele,” — typically translated this means, “Above all, not too much zeal.” In the George W. Bush/John Kerry election, turnout hit 60.7% of the eligible electorate. In the Adolph Hitler/Paul von Hindenberg election of 1932 in Germany, turnout was 86.2%, and that was not a sign of civic health.
The Churchill quote we focus on today reminds us of this always-useful question: “What alternative, precisely, would you propose?” Democracy is messy and the winner is not always the better candidate, but it is the best way we have for all to get along together — and that, in essence, is what politics is all about.
As one watches the election results, it is worth remembering that democracy is not just an election. There are multiple ways both directly and through associations to both promote “change” and to hold back undesirable “change,” and if one is still unhappy, well the founders gave us a chance to throw out every member of the House and a third of the Senate in just two-years’ time.
May the best candidate win and may God protect the United States of America.