Yesterday, it was disclosed that activist hedge fund Jana Partners and several allies have taken a 9% stake in Whole Foods Market. The stock increased approximately 10%, closing at $34.17, up $3.10. As of 11:30am EST today, the stock was trading at $33.20.
The Wall Street Journal (paywall) reported that Jana “wants the chain to improve its technology and operations to better compete with larger rivals, shake up its board and find out how much a potential bidder might be willing to pay, according to a Monday regulatory filing.”
Yesterday, I spoke to one of the sharpest industry executives that I know, who is also very familiar with this situation, and there are two key issues to look at.
1) Can Jana Partners Improve Current Operations?
While I have no doubt that technology improvements can be made, operational efficiencies can be achieved and the board can be shaken up, these moves are just not going to be enough.
According to the executive, “Whole Foods needs to be what it was. Period. It needs to provide the best experience you can have when shopping at a grocery store. Customers shopped at Whole Foods for the people, the experience and the selection. With the full-time/part-time ratio of employees once at 90%/10%, it is now at roughly 50%/50%. The culture has been damaged, and employees do not have the same sense of ownership. Furthermore, by trying to centralize a decentralized company, product selection has suffered and will continue to do so. People will pay more for unique, hard-to-find items that they can’t get at other markets. This is how Whole Foods became what it is, and it needs to return to this.”
Last night, Reuters reported that former Gap CEO Glenn Murphy, former Harris Teeter Supermarkets CEO Thomas “Tad” Dickson and former Barclays stock analyst Meredith Adler have agreed to be on Jana’s slate of nominees for the board. Additionally, former Safeway chief marketing officer Diane Dietz and food writer Mark Bittman are acting as consultants.
All have purchased stock in the company, with Murphy investing the most at $44 million.
While these are all extremely accomplished people, none has first-hand experience of the Whole Foods culture. None was inside of Whole Foods when it was dominating the industry.
If it were me, I would be bringing back former executives from Whole Foods who intimately understand the culture, appreciate the nuances of the organic industry, and are acutely aware of what needs fixing.
Erewhon in Los Angeles, arguably the best market in the country, is proving that an organic supermarket can thrive in today’s hyper-competitive environment. As such, Whole Foods’ struggles cannot be blamed on today’s price wars.
Erewhon’s selection, customer service, shopping experience and prepared foods section are unparalleled. Because of this, people are willing to pay up and the store has a legion of die-hard fans that most retailers can only dream about. For those of us who are obsessed with organic food, Erewhon is the absolute first stop when visiting Los Angeles.
I don’t believe for one second that Wall Street understands what will bring shoppers back to Whole Foods.
Jana’s potential nominees for the board and its hand-selected consultants only reaffirm this belief.
2) Is There a Buyer?
While Jana is certainly hoping to improve current operations, it is ultimately looking for a buyer.
But is there one?
If one of the publicly traded supermarkets wanted to buy Whole Foods, it would have done so already. But it hasn’t.
Even though Amazon is starting to get into the retail grocery business, I don’t foresee them buying Whole Foods either.
That leaves private equity.
But with Jana already pushing the stock into the mid-30s, that means private equity would have to pay in the 40s, at a minimum.
And if private equity didn’t make a bid in the mid or high 30s when the stock was 28, are they going to want to pay an even higher price for it now?
Whole Foods is not your classic private equity deal of cutting costs, investing in technology, becoming more efficient and selling off unprofitable or non-core assets.
This is something entirely different.
Maybe that is the reason that private equity funds have stayed away so far. However, it doesn’t mean that one couldn’t come along.
Jana Partners is now getting ready to battle for control of one of America’s most iconic brands.
It is an asset that those of us in the organic industry care deeply about, and we all want it to succeed.
Based on Jana’s initial moves, I am not encouraged that this will have a happy ending. I hope I am proven wrong.
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Have a great day! 
Max Goldberg, Founder |
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