Whole Foods still struggling to feel its oats

Competition, food costs add to tough year since buyout

By Alicia Wallace, Daily Camera

Published September 1, 2008 at 9:05 p.m.

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Photo by Mark Leffingwell / Daily Camera

Erik Ellis holds his daughter, Mehana Ellis, 3, last month while they pick out an afternoon snack from the fruit and salad bar at Whole Foods in Boulder.

Photo by Mark Leffingwell / Daily Camera

Pamela Lippe fills a sack with honey-roasted peanuts in the bulk foods section.

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Whole Foods Market closed on the $565 million acquisition of its smaller rival, Boulder-based Wild Oats Markets, on Aug. 28, 2007.

The news came after a months- long legal battle with the Federal Trade Commission, which said the deal was anti-competitive and something that consumers "should not be required to swallow."

Just over a year has passed since the buyout was completed, and, much like the events that preceded them, the past 12 months have been far from quiet.

Whole Foods' acquisition resulted in the natural grocery stalwart quintupling its Boulder County store base, laying off some of Wild Oats' former work force and gaining a new competitor from an old foe - Sunflower Farmers Markets, a discount natural foods chain started by a Wild Oats founder. The Boulder-based Sunflower opened its first hometown store in early 2008.

Within the past 12 months, Whole Foods also has faced the pinch from outside forces, namely consumers tightening their financial belts, higher food costs and unwelcome early anniversary presents from the FTC and the U.S. Court of Appeals, whose actions show that the legal scuffle is far from over.

"It's hard to believe it was only a year ago," said Will Paradise, who heads up Whole Foods' Rocky Mountain region. "It feels like 10."

Local effects

In the year since the acquisition, Whole Foods sold 35 of Wild Oats' Sun Harvest and Henry's Farmers Market stores and closed a dozen others. It now operates more than half of Wild Oats' former base and has 271 stores, up from 189 when the deal was announced.

The four-state region of Colorado, Kansas, New Mexico and Utah was impacted heavily as a result of the acquisition. Whole Foods' Rocky Mountain region tripled in size overnight, bolstering its 10 stores by another 23.

One year later, 20 of those Wild Oats stores are operating, while 15 have been remodeled into Whole Foods markets. After cutting about 100 jobs at Wild Oats' former headquarters at 1821 30th St. in Boulder, Whole Foods relocated its regional operations to the site and bulked up its office.

During the six-month limbo between the acquisition's announcement and the determination by a federal judge that the merger should be allowed, the grocers said it was "business as usual." However, Wild Oats did not open its 40,000-square-foot flagship store at Boulder's Twenty Ninth Street retail center, a property into which it funneled millions.

The space remains empty.

Whole Foods also added staffing at its regional stores and lowered "thousands" of Wild Oats prices, Paradise said.

"Overall, we've always looked at this as a two-year deal," he said. "It's like turning an oil tanker; you don't just do it on a dime."

New look from an ex-foe

Competition was the hot-button topic of the acquisition, and in Boulder - a city where the four- store Whole Foods operates more groceries than any other retailer - another player entered the field.

Sunflower Farmers Markets, a natural and organic chain focused on low prices, opened its first Boulder store in April. During Sunflower's initial weeks of operation, and especially during its opening weekend, the store was packed. Walking room in aisles was a precious commodity and register lines were 10- to 15- carts- long at times.

"I think that the acquisition of Wild Oats helped in terms of eliminating one other competitor," said Sunflower founder Mike Gilliland, who helped start Wild Oats.

Gilliland said his company reaped the benefits from not only shoppers, but also former Wild Oats employees who either were laid off or decided not to stay with Whole Foods.

"Not everybody meshes with the new culture," he said.

Four months later, business at Sunflower remains strong, Gilliland added, noting that the Boulder location is one of the top three stores among his 16-market chain. The company has its sights set on opening a Longmont location in the near future.

Whole Foods' Boulder locations, including its soon-to-be expanded Pearl Street store, felt the impact of lost customers during Sunflower's early days, Paradise said. However, he said Whole Foods has "gained a lot of those customers back."

"I think for a lot of people, they go and check things out. . . . It's human nature," he said. "Our core customers are still shopping in our stores."

But Sunflower is not the only competitor, Paradise said, rattling off nearby retailers such as Safeway, Natural Grocers by Vitamin Cottage and King Soopers.

Gilliland said that grocery stores such as King Soopers and Safeway - both of which are renovating some of their stores to emphasize natural and organic products, local goods, quality and freshness - are more of Sunflower's direct competition than is Whole Foods.

"I think when these guys do these remodels, to me, they look more and more like Whole Foods," he said. "The more they look like Whole Foods, the better for us."

The goal, he said, is to beat others on price. And in an economy that has been tough on people's pocketbooks, Gilliland said, Sunflower has a leg up.

"In this day and age, you've got to address it," he said.

And recently, Whole Foods has been doing just that.

In July, Whole Foods launched a program featuring discounted products in its stores. Last month, for instance, the company sent out kits to area media that included price comparisons of 15 products purchased at three Boulder stores: its own, Sunflower and Safeway.

The comparative pricing push was to challenge people's perceptions of affordability at Whole Foods.

"There's an image of Whole Foods and the image is, you can't go in there and find value," he said.

In terms of staple items, Paradise said, Whole Foods' prices are "as good as anyone in town."

Expensive reputation

Combining the 15 items Whole Foods priced - including Kashi Go Lean Crunch, an organic banana and Horizon 1 percent milk - and showing receipts at the three stores, Whole Foods said it was $2.38 cheaper than Sunflower and $10.02 cheaper than Safeway.

The timing for the campaign appears to be critical for Whole Foods, which three weeks ago reported that its net income plummeted 30 percent. Officials said the "challenging economic environment" and costs associated with the Wild Oats acquisition were the main causes for the drop.

The state of the economy has shifted consumer behavior when it comes to purchasing organic products, experts say. Shoppers have been making trade-offs, buying organic in what they perceive to be higher-value categories such as meat, produce and dairy, and purchasing nonorganic items in areas such as dry goods.

The result has been a leveling- off of overall purchases in an organic industry that recently has experienced double-digit annual sales growth.

It's expected that consumers will continue to be cautious with their spending, said Mark Hamstra, retail and financial editor at Supermarket News, a New York-based trade publication.

If that's the case, it could be difficult for Whole Foods, he said.

Noting the value campaign, Hamstra said it could be a good way to capture further dollars from existing customers. However, he added, it might not be enough to lure new customers to Whole Foods.

"I think it's going to be hard to get that message across because the people really have this deep- seated sense that Whole Foods is more expensive than typical supermarkets," he said. "They still have this reputation as being the 'Whole Paycheck.' "

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