Grocery Pioneer Whole Foods to Join Mass-Market Crowd -- 2nd Update

By Annie Gasparro and Heather Haddon Features Dow Jones Newswires

Whole Foods Market Inc. lost its edge, and now it's losing its independence.

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With a sale to Amazon.com Inc. announced Friday, Whole Foods is entering a new frontier, joining the mass retailers from which it has long striven to differentiate itself.

For decades, the natural and organic food retailer grew faster than the rest of the grocery industry by tapping into an emerging population of affluent urbanites interested in a new way of eating and grocery shopping. It had a certain cachet, with a distinct offering of organic foods and specially trained salespeople promoting an experience for which customers were willing to pay more.

But in recent years, as mainstream grocers from Kroger Co. to Wal-Mart Stores Inc. began stocking more natural and organic food at cheaper prices, Whole Foods began to lose its advantage.

"They didn't do enough to continue to command the higher prices," said Gaurav Gupta, a corporate-strategy consultant at Kotter International. "Their competitive advantage has eroded slowly over the last five years."

For nearly two years, Whole Foods, which has about 460 stores, has faced its longest stretch of quarterly same-store sales declines since it began trading on the stock market in 1992. Its share price had been cut in half leading up to Friday's announcement.

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Amazon said it has agreed to acquire Whole Foods for $42 a share in a deal valued at $13.7 billion, including debt.

Pressure on Whole Foods, and its co-founder and Chief Executive John Mackey, mounted this year, when activist investor Jana Partners, with several allies, unveiled a stake in Whole Foods and publicly pushed the company to explore a sale. The new dynamic added to shareholder tension that had been more quietly bubbling, turning attention to the sliding results after years of being a highflying stock.

Since it opened its first store in 1980, Whole Foods has prided itself on its independence. Mr. Mackey, a strict vegan, aimed to bring organic and natural food to the world. During the 1990s and 2000s, Whole Foods expanded rapidly, buying 11 regional health-food chains and opening more stores. As recently as last year, he spoke of expanding the chain to 1,200 stores in the U.S.

Whole Foods' problem with how customers perceived its prices worsened in the summer of 2015, when the New York Department of Consumer Affairs accused it of overcharging customers in nine stores by putting incorrect weights on some items.

"That was when these other competitors were really starting to ramp up, so that was when they needed to reverse that perception, not reinforce the negative perception," said Sonia Lapinsky, managing director in the retail practice at AlixPartners. Whole Foods' sales and stock never came back from that, she said.

Whole Foods put its efforts toward lowering its prices compared with rivals like Kroger. It expanded its private-label brand, called 365, to more foods and opened a new line of smaller stores called 365 by Whole Foods, aimed at offering overall lower prices.

But it was too little too late, Wall Street analysts say.

Despite its efforts, Whole Foods' prices are still 20% to 30% higher than mainstream grocers', according to consulting firm OC&C Strategy Group. Earlier this year, Whole Foods said it was closing several underperforming stores and no longer aiming for 1,200 locations in the U.S.

In November, Whole Foods said its longtime co-chief Walter Robb would step down, leaving Mr. Mackey to make swifter decisions to turn around the lagging business. Last year, Whole Foods' profit declined by more than 5% and its comparable-store sales fell 2.5%.

Mr. Mackey moved more purchasing decisions to its Austin headquarters and made other organizational changes to operate more like a national grocer than a startup.

But Jana Partners said it wasn't enough. The activists pushed for board changes and a slew of operational changes if the company was going to prove it could stand alone. Neuberger Berman, a mutual fund that doesn't typically speak publicly, and other investors were calling for change as well.

In May, Whole Foods moved to shake up its board, naming five new directors and planning to remove two others by the next annual meeting. Jana, though, balked at a settlement offer that would have given the hedge fund only a few seats. That kept the public pressure on the company.

Whole Foods and Jana declined to comment on Friday. Neuberger Berman portfolio manager Charles Kantor applauded the strategic move of uniting with Amazon, but also speculated the bid could be topped.

The unique problems facing Whole Foods came as the grocery sector more broadly continued to grapple with a host of pressures. In recent years, consumers have been buying more of groceries through online merchants, with discounters and meal-kit delivery services all grabbing market share. A glut in commodities from grains to meat has brought down prices for many staple foods over the past 18 months, putting pressure on many retailers to lower their prices.

Amazon brings an innovative, technology-driven perspective to Whole Foods that could help it improve, analysts say. Mr. Mackey will remain chief executive of Whole Foods and the stores will continue to operate under the Whole Foods brand and maintain its suppliers.

Richard Gerber, a former Whole Foods regional president whose Florida-based health-food chain was acquired by the grocer in 1997, welcomed the Amazon bid. He said Mr. Mackey was an innovator in their sector for a period, but that things in the industry have since changed.

"We are granola people but it's about profitability. It's for your shareholders," said Mr. Gerber, who consults in grocery and is a Whole Foods shareholder. "Whole Foods has been unable to find their way. They've been lost in the forest for a long time and they haven't been able to reinvent themselves fast enough."

-- David Benoit contributed to this article.

Write to Annie Gasparro at annie.gasparro@wsj.com and Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

June 16, 2017 15:47 ET (19:47 GMT)