“The growth opportunity in this category has led to increased competition from many players, most of whom are not dedicated natural and organic foods supermarkets, but are considerably larger than we are,” said Mr. Mackey. “We have made 18 retail acquisitions in our history, many of which were platform acquisitions from which we have been able to accelerate our growth geographically. Wild Oats Markets will be our largest acquisition and is a great geographical fit as all of our 11 operating regions will gain stores and three of our smallest regions — our Pacific Northwest, Rocky Mountain and Florida regions — will gain critical mass. We will also gain immediate access into a significant number of new markets.”
The link-up clearly is motivated by the perceived need to obtain critical mass to procure and market effectively against much larger organizations as they move into organic product. Wal-Mart, Costco and virtually every supermarket are moving in this direction.
Trader Joe’s, the new Tesco format and specialty markets such as the new Publix GreenWise concept will challenge Whole Foods as well.
Probably the most common question the Pundit has been asked is whether anti-trust authorities will allow the acquisition.
They should, but much depends on how you define “the competition.” If you believe there is a separate category of, say, “health food supermarkets,” then the FTC would be hesitant to approve. Wild Oats is the best shot at being a true competitor to Whole Foods, and allowing them to merge would be seen as anti-competitive.
A more reasonable view of the market, though, is that Whole Foods is part of a larger food retailing industry and in that industry it has an insignificant market share.
One question is what will happen with the Wild Oats initiative to sell branded product in supermarkets? One possibility would be to continue it under the Wild Oats name, while that name gets phased out of the retail store business.
Whole Foods has been under pressure for some time. We had a little fun with them in the very first Pundit as they struggled to explain their position on live lobsters. More recently the company had to lift its ratio on how much executives can earn compared to the average employee as its executives were being poached by retailers looking to emulate the success of Whole Foods.
Of course if you have to lift the ratio to keep people, it indicates that these executives don’t really buy into the Whole Foods mission anyway.
Which is really the big question facing the company. Do consumers who shop at Whole Foods buy into an ideology? Or do they want something in the food choice or atmosphere presented that can be easily offered elsewhere?
It will be difficult for chains such as Publix, much less Wal-Mart, to duplicate the culture of Whole Foods. So if that is key, then Whole Foods is secure. But if consumers simply want organic foods, want specialty cheeses, lots of prepared foods, or want an upscale concept — then Tesco, Costco, Wal-Mart, Safeway’s Lifestyle stores and many other concepts are going to be very tough competition.