Kantar Retail analyst Elley Symmes was speaking to FoodNavigator-USA after the Financial Times reported that Cerberus Capital Management - which controls Albertsons – “is exploring a takeover” of Whole Foods, citing “two people briefed about the matter.”
It also reported that Whole Foods has hired investment bank Evercore to advise it on a possible sale.
Neither party has commented on the FT report, which comes two weeks after activist investors led by Jana Partners acquired 8.3% of Whole Foods’ stock and called on the chain to re-engineer its "sub-optimal and cost disadvantaged grocery procurement and distribution strategy."
For Albertsons – which has reportedly held preliminary talks to acquire Sprouts Farmers Market in recent weeks – “there is a lot of upside for acquiring Whole Foods,” said Symmes.
“Compared to its top competitors - Kroger, H-E-B, Publix, Ahold Delhaize - Albertsons has less of a presence in the natural/organic space. Acquiring Whole Foods would make it a dominant player in one of the fastest growing food retail segments," she explained
"The organic food industry will grow to ~$50 billion this year and Whole Foods equals around 20% of those sales.”
‘From a Whole Foods perspective, I am less excited about this …’
For Whole Foods, however, the marriage may not be made in heaven, said Symmes: “From a Whole Foods perspective, I am less excited about this… Albertsons is not a world class operator like a Kroger or Publix. Neither is Whole Foods, and bringing too average operational structures together does not equal one good one.”
She added: “Albertsons [which merged with Safeway in 2015] and Whole Foods are two of the most decentralized grocery retailers in the industry… There can be benefits to this but right now neither of them are maximizing those. If Albertsons acquires Whole Foods they would have 25+ divisions to manage…
“Bottom line, based on the decentralized nature of both Albertsons and Whole Foods I am pessimistic about the possible supply chain synergies. It seems more like it would add cost into their operations. Moreover, the assortments at both retailers are very different. Whole Foods does not allow products with GMOs to be sold in their stores. This limits synergies from a buying perspective.”
Could this start a bidding war?
Asked whether Jana Partners’ intervention made a sale inevitable, she said it had “created a real sense of urgency,” but added: “I don’t think Whole Foods needs to be impulsive about selling. Selling to Albertsons seems a bit impulsive. But it could also start a bidding war and then maybe Kroger would make a bid, which would be much better.”
Asked why Whole Foods – which has been pretty frank about the challenges it faces during recent earnings calls – wasn’t capable of fixing itself without teaming up with a larger chain, she said: “I think Whole Foods needs an outside company to help them turn things around.
"Whole Foods found a niche 37 years ago and has built an incredibly strong culture and differentiated business around that niche. Now they have lost the niche and need to shift that culture so they can operate more like a conventional supermarket. Culture takes a long time to change and without an outside group I don’t think they can get there."
TABS Analytics: A lack of obvious and really high potential synergies
Dr Kurt Jetta, CEO at TABS Analytics, told FoodNavigator-USA that there were pros and cons to a tie up with Albertsons.
On the plus side, it created "ready-made locations for site conversions," he said. "They could easily swap the Whole Foods brand in for weak stores in their chain and likely upgrade the productivity of their space." There would also be potential private label opportunities for Whole Foods' 365 private label brand in Safeway/Albertsons stores, coupled with potential procurement efficiencies.
On the downside, a merger would "unwind all the progress Whole Foods has just made in centralized buying and the efficiencies that came with that," he observed, while it wasn't clear that Cerberus had the capital needed to invest in a broader store network or that Albertsons had much to teach Whole Foods when it came to merchandising or supply chain efficiency.
Overall, he concluded: "The lack of obvious and really high potential synergies suggests that the overall transaction will be negative."
Jana Partners: ‘Whole Foods must re-engineer its suboptimal and cost disadvantaged grocery procurement and distribution strategy’
In an April 10 SEC filing, Jana Partners noted that Whole Foods’ same store sales had been in negative territory for more than a year and argued that it must re-engineer its “suboptimal and cost disadvantaged grocery procurement and distribution strategy.”
While Whole Foods responded by saying it “welcomes investment in the company and is open to the views and opinions of all of our shareholders,” CEO John Mackey told analysts in February that the company was well aware of the challenges it faced as rivals muscled in on its territory, and said its new focus was on "disciplined growth.”
Whole Foods: ‘What are we doing here that's not creating value?’
Going forward, the focus would be on getting core customers, which account for the majority of sales, to spend more, said Mackey, who recently struck a deal with dunnhumby to boost the chain’s data-driven, category management capabilities.
“If these customers add just one more item per trip, the sales potential is significantly greater than with any other segment. Going forward, Whole Foods Market will focus on serving this growing niche of customers better than ever before.”
A lot of focus had also been placed on driving efficiencies in store, said Mackey, who has been driving significant operational changes over the past year covering procurement, category management, customized promotions, digital coupons and new point of sale (PO) systems: “We're basically examining every aspect of our retail operations and asking what are we doing here that's not creating value?”
Whole Foods operates 465 stores, the vast majority of which are in the US, although it also operates stores in Canada and the UK.