Photo: RetailWire
Would Whole Foods do better under new ownership?
A hedge fund that is the second largest shareholder of Whole Foods Market stock took a swipe at the slow pace of the company’s turnaround efforts and called for management to explore options including a possible sale of the company.
In filing with the Securities and Exchange Commission, Jana Partners, which owns 8.8 percent of the chain’s stock, said it has teamed up with a group of other shareholders to seek four spots on Whole Foods’ board of directors. The group is looking for the grocer to make improvements in analytics, branding, customer service and supply chain.
In recent years, Whole Foods has gone from being a darling of Wall Street to a company that is being pressured competitively on all sides. Its stock price has fallen substantially from the peak reached in 2013.
The chain has taken numerous steps to turn its business around including working with Dunnhumby, the analytics firm, to better understand and meet the needs of its shoppers. Whole Foods has also launched a loyalty program, shifted purchasing from local buyers to category managers at headquarters, and debuted a new concept 365 by Whole Foods Market. The company has created a national branding campaign including television commercials while focusing on being more price competitive.
Despite its various initiatives, Whole Foods has failed to gain traction.
Analysts at UBS, as reported by The Wall Street Journal, wrote, “The entrepreneurial culture that served [Whole Foods] well in its growth mode now needs to be more process-oriented. That can be a rough transition.”
The call by Jana Partners for the chain to explore its sale value is not the first of its kind. Last year, rumors circulated that Kroger might have an interest in acquiring Whole Foods. The speculation didn’t prove true. Many critics of the hypothetical deal pointed out that Kroger’s push into organics was largely responsible for Whole Foods’ problems in recent years. Buying the chain might make sense for Whole Foods, but didn’t offer much upside for Kroger.
- Activist Investor Jana Partners Takes Nearly 9% Stake in Whole Foods – The Wall Street Journal
- Whole Foods Pressured by Activist Investor Jana Partners – The New York Times
- Will Dunnhumby’s analytics do for Whole Foods what it did for Kroger? – RetailWire
- How price competitive does Whole Foods need to be? – RetailWire
- Should Kroger go after Whole Foods? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Do you agree that the “entrepreneurial culture” at Whole Foods has become more of a liability that an asset in recent years? Would Whole Foods be more likely to perform better if it were acquired?
Poll
BrainTrust
Mohamed Amer, PhD
Independent Board Member, Investor and Startup Advisor
Scott Magids
CEO, Motista
Entrepreneurial culture does not become a liability at a company unless it has become disconnected from delivering exceptional value to paying customers. What Whole Foods is experiencing is the relentless shift from being THE defining player in the organic foods market to being one of many. Over the decades, Whole Foods’ defensive moat has shrunk as the company relied on its reputation and loyal customer base and ceased to push the differentiation envelope. Competitors have continued to chip away at Whole Foods’ advantages to the point that their high prices became a hurdle against growth and attracting new customers. At the same time, rollout of their 365 stores has been limited to three locations.
Now Jana Partners views the business as more commodity than food fashion, and therefore finds opportunities in operations and back-office synergies across the chain. The challenge Whole Foods and Jana Partners face is how to re-establish a growth trajectory and less on efficiencies and cost reductions. The former is long-term thriving, while the latter is about surviving the short-term.
You really nail the essence of Whole Foods’ current challenge in your second sentence, Mohamed. The company is now confronting change in its market relevance that has been wrought in large measure by its own success and the responses of competitors.
One of my favorite axioms is, “Under different circumstances, circumstances will be different.” Whole Foods must continue to adapt or risk being overtaken by more moderately priced “better-for-you” chains, like Sprouts, and the merchandising adjustments of powerful mainstream operators like Kroger. Sure, an entrepreneurial spirit is a necessary ingredient, but redefining its value proposition requires both inspiration and discipline.
Thanks Jamie. Nothing remains the same; how well we anticipate, adapt and execute determine our future success.
In the last few weeks it feels as though we have gone from discussing the innovation potential Whole Foods may gain from working with Dunnhumby to better understand their customers, to debating how they need to better compete with increasing pressure from all sides including brands that previously had no entry into this market, to now discussing their imminent downfall. How the mighty have fallen! It seems Whole Foods is under attack not just from traditional grocery competitors but from online competitors, organics competitors and now financial backers. Clearly a change is needed, however it does seem that no one is willing to give Whole Foods the time it needs to try and innovate. Retail innovation doesn’t happen in a day, it takes time. Just ask Amazon how it’s going figuring out their bugs with Amazon Go. Whole Foods once had a great formula for success but they just haven’t kept up with the times as far as delivering what their customers want — if they’ve woken up to that fact, there is still hope.
In my opinion, Whole Foods could be 1,000 stores tomorrow, easy. They are clearly the best mass “better-for-you” grocery store in the U.S. It’s not even close. And better-for-you is more than just a trend at this point, it’s a chosen lifestyle for millions of Americans, especially young people. And I’m not talking about organics — it’s everything, all products = better-for-you. Walmart or Kroger can do organics. It’s much more than that. It’s a lifestyle. And Whole Foods is a league above any other chain in that regard.
So why aren’t they growing by leaps and bounds? You have to ask that question, whether you’re an investor or just someone who’d like a Whole Foods in their area. I’m not a fan of hostile investors as they usually muck up the works, but you do have to wonder if a good shot in the pants isn’t what’s needed. Guess we’re about to find out.
Entrepreneurial culture is the octane in retail gas. It is the invitation to new ideas and to improvements. As consumers advance in their expectations, which are fueled by brand and retail behavior, an attitude of experimentation, trail, analysis and innovation will keep the brand fresh. Boards are expected to look for the numbers and the smart ones also look for new concepts and ideas that seed future success. Entrepreneurs (and boards) have a bias to operating lean, so the shared culture of continuous improvement, even with some failures, but with breakthrough approaches too, makes for a healthy and growing brand. Bureaucratic mentalities can exist in a strong concept, but it settles in all too easily. Entrepreneurs thrive on uncertainty so the occasional shot over the bow is a useful enterprise management tool for inspiring an improvement culture.
For a troubled company like Whole Foods, a transition to private ownership may help it to conceive and execute a new strategy. Without the pressure of Wall Street’s growth expectations, Whole Foods may be able to refine its value proposition and define a new model for its success.
The process and back-end changes that an investment management firm might bring would certainly help out the bottom line, but such changes won’t turn the tide for Whole Foods. Whole Foods’ position in the marketplace is defined by the unique connection it has with its customers — a connection that is deeper and more emotional than with any traditional grocery store. That’s not to say that an institutional investor or PE firm can’t create an entrepreneurial culture — but if an acquisition does take place, the investor would need to take positive steps to do so rather than simply focusing on operational improvements and cost-cutting. Investors or not, the most important thing Whole Foods needs to focus on now is re-establishing that customer connection and building on the emotional motivators that built their success in the first place.
Whole Foods and today’s shoppers just do not mix well. The Dunn can tell them that, but so can the reality that healthy foods that used to be their differentiator are now available at Kroger — thanks to The Dunn Factor. The entrepreneur element has gone on too long and if Whole Foods really wanted to own market share again, they should ask Kroger to buy them out and then take some vacation. Last, shop Whole Foods and shop a Kroger chain like Fry’s. The cost difference is amazing, but the store environment is similar and so is the freshness element and natural element. Let Kroger run the operations and Whole Foods creatives run the creative skin that the shoppers see. End up with better buying, distribution, pricing, and ROI along with turn rates and replenishment.
Again? Certainly, like any company, one can play a “what if?” game with Whole Foods and imagine something better; and Mr. Mackey is always a lightning rod for controversy. But haven’t we all tired of “activist investors” making things worse? Really what the he## does a hedge fund know about running a grocery? Butt out, Jena!
Whole Foods’s strength is brand loyalty and lifestyle, not just being an organic food purveyor. The key for Whole Foods success in the future is innovation and transformation as organic products become more mainstream and drive to a “whole lifestyle” relationship with their customers. Trying to be the “Walmart of Organics” I don’t think will work in the long run….
The market’s response to Whole Foods was better ingredients and/or better prices for the larger portion of consumers. Let us not forget the never ending greater depression and the collapse of the middle class and discretionary spending. Retail has little to do with executive opinion and staying the course of plans for an age gone for the foreseeable future. The decade old retreat from 1990s buying habits is most telling about the abilities to respond, adapt and regain momentum about the leadership or lack of.
With Amazon and Walmart firmly in the contest for large portions of the grocery business, it will only be much more difficult to survive let alone compete. Instead of looking for and wondering how to get back their customers, it might be better to visit the market and see what needs there are. After all, Twinkies did it.