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Case Study: Setting the bar

Post-Wild Oats acquisition, Whole Foods expected to innovate in seafood

The Portland, Maine, store was one of 21 that Whole
    Foods opened in fiscal 2007. - Photo by Laura Lee Dobson
By Lisa Duchene
January 01, 2008

Ten years ago, most grocery store seafood departments were lackluster. Though solid movers of product, supermarket seafood counters had grown stale.

Then Whole Foods became a national phenomenon. The natural foods retailer opened stores in major U.S. cities, selling beautifully displayed, high-quality fresh fish and shellfish. Upper-income consumers, who spend the most on seafood, took note, and in turn mass-market supermarket chains followed suit.

"From a merchandising point of view, they've really shown the way for a lot of traditional supermarkets," says Jim Hertel, managing partner of Willard Bishop, a retail food advising firm in Barrington, Ill.

Whole Foods has elevated seafood's presence with interesting merchandising, cooking classes and special events. More retailers pay attention to these things than five or so years ago, says Mike Griswold, research director of the Retail Strategies Group of AMR, an independent Boston research company.

Now, Whole Foods is taking its game to a new level. With annual sales of $5.6 billion, the retailer in late August acquired smaller rival Wild Oats with annual sales of $1.2 billion and 110 stores. The $565 million deal gave Whole Foods 307 stores. It quickly sold 35 stores and announced plans to close nine of the remaining acquired stores.

Analysts say that despite the challenges the deal represents, it will likely end up strengthening Whole Foods and its influence over supermarket seafood and other perishables categories.

"It would not surprise me to continue to see them push the envelope with creativity and innovation with all perishables and certainly within the seafood department," says Griswold.

Two reasons to expect continued innovation, says Griswold, are that Chairman and CEO John Mackey will continue to be at Whole Foods' helm. The company's board of directors re-affirmed its support for the visionary Mackey in early October, following an internal investigation begun July 17 into Mackey's anonymous postings on financial message boards.

The company also will benefit from ideas among the seafood merchandisers at Wild Oats.

"I'm sure the folks at Wild Oats had a few things up their sleeves before the merger," says Griswold.

One of those tricks may be how to improve upon Whole Foods' seafood supply chain. A big part of the company's seafood success has been holding subsidiary processors and distributors that allow it to control some of its supply from boat to store.

But this setup may give Whole Foods too little flexibility, says Joseph Sabbagh, a retail-seafood consultant and president of Sax Maritime Associates in Los Angeles who has worked with both chains.

Wild Oats relies on a single-distribution system to deliver frozen seafood to its stores, then used local distributors to supply fresh product, says Sabbagh.

"[Wild Oats] is getting product to their stores as fresh as, or fresher than [Whole Foods] and at much lower prices because [Wild Oats] has a system that utilizes local vendors and isn't locked into its own bad investments," Sabbagh told SeaFood Business (see interview with Sabbagh in June '07, p. 46).

"If you're a retailer and you start getting into a situation where you're cutting up fish and getting into seafood processing, you're kind of getting away from what you want to do," says Sabbagh.

Whole Foods has shined in staffing counters with experienced seafood people while Wild Oats struggled with labor, says Sabbagh, adding that Whole Foods had changed its seafood-distribution setup within weeks of the merger.

Acquiring and integrating another company is nothing new to Whole Foods. The company has grown by acquisition, swallowing smaller natural foods chains like Bread & Circus and Fresh Fields in the East, Bread of Life and Food for Thought in Northern California and Harry's Farmers Market stores in Atlanta. But Wild Oats represents its largest acquisition and could be a distraction, says Hertel.

"Any time you have a merger and integration to worry about, there are a lot of people who take their eyes off the ball," says Hertel. "It takes a lot of energy and people focused on bringing the two companies together, making financial, operational and political decisions."

Another challenge Whole Foods faces is a downside to its growth strategy. As it acquired companies and stores, it also built stores from the ground up, opening a record 21 new stores in the fiscal year that ended in September. But its 263 stores are spread out, which means it doesn't have much market share in any one area, says Hertel.

When many traditional grocers upgraded their perishables, Whole Foods was careful to still be price-conscious.

One sign that Whole Foods will put its new assets to work and continue to innovate is its plan to convert an 18,500-square-foot store in Boulder, Colo. - a former Wild Oats store on the company's home turf - to a "Whole Foods Market Express," a convenience-focused concept with value-oriented, grab-and-go offerings.

"It's no coincidence that Whole Foods, Giant Eagle and Wal-Mart are all coming up with smaller formats of 12,000 to 15,000 square feet, with Tesco coming [in November]," says Griswold.

Tesco, a British retailer, offers high-quality, fresh prepared foods at competitive prices in a small format and opened six Fresh & Easy Neighborhood Market stores in California on Nov. 8 and five in Las Vegas the following week. A total of 50 stores are scheduled to open by February.

The next key to seafood success, it seems, is which retailer makes the most of seafood in smaller, convenience-focused stores and can do it in a price-conscious way.


Contributing Editor Lisa Duchene lives in Bellefonte, Pa.


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