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Whole Foods to swallow Wild Oats

The natural-food leader agrees to buy the sector's second-best name for $565 million.

February 22, 2007|Martin Zimmerman and Ronald D. White | Times Staff Writers

It's a natural. Whole Foods is buying Wild Oats, bringing together the nation's best-known names in organic groceries along with their exotic olives, free-range chickens and vegan chocolate cookies.

Known by some wags as "Whole Paycheck" for its pricey offerings, Whole Foods Market Inc. said Wednesday that it would pay $565 million in cash for its biggest competitor.

In the battle for health-conscious consumers, the deal is a victory for the Austin, Texas-based chain over Boulder, Colo.-based Wild Oats Markets Inc., which had cultivated a devoted following.

"This saddens me," said Karen Payne, 50, who was shopping at the Wild Oats on Lake Avenue in Pasadena. "They are both good, but having both gives me options."

But at a nearby Whole Foods store, Sue Jesson didn't seem to mind. "Wild Oats is just like a little Whole Foods," she said, "and it would mean one less stop for me for shopping."

The deal comes as natural-food grocery chains are under increasing pressure from mainstream grocers such as Safeway and Supervalu, which are launching their own natural-food stores. Wal-Mart Stores Inc., the world's biggest retailer, also has gotten into the field in a big way and is now the world's biggest seller of organic milk.

"Natural-food stores have been losing market share to national grocery chains," said Karen Taylor of Nerac Inc., in Tolland, Conn.

Whole Foods, with its emphasis on opening 40,000-square-foot locations, has outgrown its hippie roots to become a one-stop shop for natural and organic foods, complete with an extensive wine section, a sprawling deli and -- in a new Seattle store -- a seafood bar where shoppers can have the catch of the day cooked to order.

At the same time Whole Foods announced the purchase, it reported its first quarterly profit decline in more than a year and said growth in sales at stores open at least a year slowed to 7% in the fiscal first quarter, which ended Jan. 14, down from 13% a year earlier.

"From a competitive standpoint, Whole Foods is more concerned about mainstream supermarkets than they are about anybody in the natural-food space," said Danny Wells, a Vacaville, Calif.-based natural-products consultant.

"Just about every major supermarket chain has a Whole Foods-like concept on the drawing board," he said.

They're attracted to the high profit margins, which run 3% or more in the natural-food segment, compared with barely 1% for mainstream grocers.

Whole Foods defines natural as products without artificial flavors, colors, sweeteners and preservatives. Not everything at Whole Foods costs more than at a traditional grocer. Organic oranges can be had for $1.99 a pound and a head of iceberg lettuce goes for $1.49.

But organically raised filet mignon costs $31.99 a pound and Australian cheddar cheese -- aged 18 months -- is $7.99 a pound.

Much of the higher price comes from the added cost of producing food that can be certified as natural or organic, said food industry expert Dennis Krause of GE Commercial Finance in Norwalk, Conn. For example, he said, the feed used to raise a "certified organic" turkey can be three times that for a traditional bird.

Whole Foods acknowledged that its offerings can be expensive. The chain "works very hard to offer higher-quality products, and the people who want those higher-quality products understand that they cost more to produce," spokeswoman Amy Schaefer said.

Whole Foods founder and Chief Executive John Mackey said it would take about two years to integrate the Wild Oats stores. He said the deal would boost his company's presence in several parts of the country, especially Florida, the Rockies and the Pacific Northwest.

Whole Foods, which had sales of $5.6 billion last year, has 191 stores in the U.S., Canada and Britain, including 20 in Southern California. Wild Oats, with $1.2 billion in sales last year, operates 110 stores in the U.S. and Canada under a variety of names. In Southern California, the company has five Wild Oats locations and 26 Henry's Farmers Markets.

An undetermined number of Wild Oats stores will be closed once the deal is completed, said Mackey, who also indicated there would be layoffs as redundant corporate jobs are eliminated.

The deal, which is contingent on the approval of regulators and Wild Oats shareholders, is expected to close in April.

Wild Oats' board recommended approval of the deal, and its biggest shareholder, L.A. billionaire Ron Burkle's Yucaipa Cos., has agreed to sell its 18% stake, or about 5.1 million shares.

Burkle, who first bought into Wild Oats almost two years ago, said he acquired his portion for about $10 a share -- well below the $18.50 a share that Whole Foods would pay.

Mackey said he made the initial overture to Wild Oats interim CEO Gregory Mays, a longtime colleague of Burkle who serves on the board of supermarket chain Pathmark Stores Inc., in which Burkle retains a sizable investment.

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