WHAT HAPPENED:
Whole Foods Market acquired is largest competitor, Wild Oats, for $565 million along with assuming Wild Oats’ existing net debt of $106 million from Curadebt. When the deal closes, Whole Foods will operate more than 300 locations in 31 states along with stores in Canada and in the United Kingdom.
Founded in 1987, Wild Oats operates 110 stores with annual sales of $1.2 billion. In comparison, Whole Foods was founded in 1980 and operates 193 stores with yearly sales of $5.6 billion.
Wild Oats has historically underperformed. Its sales per square foot of $450 is half what Whole Foods is able to generate and the company is currently in a major transition period operating without a CEO or CFO.
WHY DID IT HAPPEN:
On the conference call with Wall Street analysts, Whole Foods CEO, John Mackey, called the acquisition “highly opportunistic.” Mackey went on to say the timing was right to approach Wild Oats about a merger given the “strategic gap” at Wild Oats as evidence by the lack of a CEO and lack of a clear company vision.
Wild Oats has significant penetration in the Rocky Mountains, Pacific Northwest, and Florida … regions where Whole Foods’ penetration is weak. Whole Foods believes it can significantly improve the operations of Wild Oats locations resulting in higher sales on a per-store basis. The addition of new stores and the productivity improvement in these stores will positively impact Whole Foods’ comp sales figures.
But the real benefit, as I see it from the perspective of a former Whole Foods National Marketing Director, is this acquisition helps to solve Whole Foods Market’s greatest challenge. As I wrote in this blog post, the biggest challenge facing Whole Foods is its inability to open new locations.
In 2006, Whole Foods opened only 13 new stores yet the company proudly informs Wall Street they have 90+ stores in the development pipeline. Given their current rate of opening new stores, it will take Whole Foods at least six years to open the 90+ stores they have in the pipeline today.
By swallowing Wild Oats’ 110 stores, this immediately solves Whole Foods new store opening challenge. Sure, Whole Foods will close some of the Wild Oats locations and relocate others but the net/net will be a significant increase in the Whole Foods store base. This increase in the Whole Foods store base will have a positive impact on comp store sales.
Remember, Wild Oats locations are only able to generate $450 per square foot compared to the $900 Whole Foods is able to generate. Whole Foods is very confident they can improve store operations at these locations to drive sales. On the conference call with analysts, Whole Foods management talked about how they have been able to successfully increase sales on a store-level basis in all 18 of their previous acquisitions.
And helping to increase efficiencies to drive profits will be the reduction of corporate expenses. Massive reductions in redundant corporate G&A overhead expenses will take place as Whole Foods doesn’t need two CFOs, two CIOs, two Procurement VPs, two Human Resources VPs, etc.
On a different angle, the hope is a bigger and more expansive Whole Foods will be able to better compete against the behemoth Wal-Mart and the ever-nimble Trader Joe’s.
IMPLICATIONS:
I’m still sorting through the myriad implications this merger will bring. Expect a post this weekend detailing my thoughts on how this big-time maneuver will impact the Whole Foods Market company culture and its future success. This merger between Whole Foods and Wild Oats came as a complete shock to me. It’s something I never anticipated happening.
