Grocery Pioneer Whole Foods to Join Mass-Market Crowd

By Annie Gasparro 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 offering 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.

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.

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.

More to come

Write to Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

June 16, 2017 14:16 ET (18:16 GMT)