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profiled for this exercise are Whole Foods and Trader Joe's. Whole Foods is based in Texas and has spread across the country as a retailer of organic, gourmet and natural foods. The company has expanded into Canada and the United Kingdom. Whole Foods also made a major move in the United States when it acquired Wild Oats, which was its major competitor at the time. The deal ran into trouble with the Federal Trade Commission but was ultimately allowed to go through, since there is nothing stopping other grocery stores from selling the same type of foods (Gogoi, 2007).
Trader Joe's is a competitor to Whole Foods, but one that remains only in the United States and it has typically expanded by building new stores. The company does not just have natural foods but it competes for roughly the same customer base as Whole Foods, and most customers of one will also be customers of the other at times. Trader Joe's has a different business model to some extent, with a lot of house brands, and smaller stores, but is one of the bigger threats to Whole Foods.
Merger & Acquisition
Whole Foods bought Wild Oats for two reasons. The biggest one is that Whole Foods wanted to expand rapidly. Building its own stores is typically a slow way for a large retailer to grow. Real estate location is important in the grocery industry so growing organically -- no pun intended -- is a slow process for a company like Whole Foods. The acquisition of Wild Oats was as much about gaining key real estate as it was about shutting down a competitor. Wild Oats was strong in regions where Whole Foods was weak -- Florida, the Pacific Northwest and Rocky Mountain (Moore, 2007). Whole Foods therefore was able to enter these regions quickly, and do so with locations already vetted for proximity to key demographic clusters by a competitor in the same industry. This moved saved Whole Foods a lot of time and money with respect to growing its geographic footprint.
Whole Foods also benefitted from access to the Wild Oats customers. Whole Foods saw that the organic food industry was beginning to grow rapidly, and major grocery sellers were starting to increase the amount of organic food on their shelves. As a result, Whole Foods recognized that there was going to be some consolidation among the specialist retailers in this segment in order to gain the scale needed to compete with the larger mainstream grocery retailers. Having already significant experience with the use of acquisitions as an expansion strategy, Whole Foods was able to build the size and scope it needed quickly with this expansion.
In contrast to Whole Foods, Trader Joe's has preferred to build its own stores in order to expand. Part of this is driven by the desire of Trader Joe's to build pent-up demand in a given region before entering. The company's stores have a reputation the precedes them, and it has actively petitioned for its fans to ask for stores in given areas. When it moves in, it tends to do so slowly because of the need to acquire real estate and space its stores. The company's move into South Florida has taken many years just to get to a couple of stores in Naples and Miami, with expansion in the region remaining gradual (Valverde, 2014).
What the slow pace of growth highlights for Trader Joe's is that the company needs to start working on a faster pace of expansion. It is recommended that the company undertake an acquisition to fill in its territories. There are a couple of key considerations for Trader Joe's. The first is that the company is not publicly-traded, so it has a much lower access to capital than most other grocery stores. The company can add debt, but it will be challenged to add equity without tapping the credit markets. This fact has probably played a role in limiting the growth of Trader Joe's thus far. So any acquisition at this point will probably have to be fairly small. The other factor to take into consideration is that Trader Joe's has its own brand, store design and inventory -- the only thing it really needs to acquire is the real estate. Getting the right location is important in the grocery business, even for a destination store like Trader Joe's. A map of the company's stores highlights this -- it does not set up shop in poor parts of town, but it prefers to go where it customers live and work.
A good acquisition target for Trader Joe's therefore is Fresh Market, which is a chain that is about a quarter of the size by the number of stores and even smaller still when evaluated by sales, owing to the fact that Trader Joe's has much higher sales per square foot. The value of Fresh Market is an bringing about a more national presence to Trader Joe's, in particular in the eastern markets where Fresh Market is strong. Fresh Market directly competes against Whole Foods but it less successful overall, which makes it a good takeover target.
For an acquisition to have value, it needs to deliver a higher value to the acquiring company than it costs. Two factors are important here. The first is that Trader Joe's is mostly acquiring the real estate, getting its saturation levels in places on the eastern seaboard more to the level where they are in the West, and doing so in precisely the high-income areas that TJ's likes to target. The second factor is that the real estate is going to be more valuable for Trader Joe's. The price is going to be roughly what it is worth for Fresh Market, but Trader Joe's has the highest sales per square foot in the industry (Loeb, 2012), so that in the hands of a better-run and more successful company like Trader Joe's that real estate will generate more income. This is where there is advantage for a company to take over the real estate, which is essentially the nature of the transaction for Trader Joe's.
Whole Foods has a division for its international operations, which are in the UK (9) and Canada (8). The company has expanded slowly in these international operations, in many cases by building the stores greenfield, in both the UK and in Toronto. It entered Vancouver with three stores via acquisition, the one time it has used that as a method of international expansion. It is unusual for a mix of strategies to be used in international expansion, but Whole Foods has used both methods to open stores elsewhere. At present, though, the growth is slow in both foreign countries -- after a massive buildout in the 2000s, Whole Foods has curtailed growth ambitions everywhere including internationally.
The sluggish pace of growth internationally should be a concern for Whole Foods management. The company needs to fully commit to these two markets, and right now they retain only a limited presence. The UK operation has only a couple of locations outside of London, which is not good enough given the size of the market. The Canadian operation is only in two markets. These two markets are by far the easiest for an American company to expand into, being large, wealthy and English-speaking. There is potential for Whole Foods to do much better, so it is recommended that expansion proceed more aggressively. The UK has a lot of great potential markets, and Whole Foods should target another six stores there -- Bristol, Edinburgh, Southampton, Newcastle, York, Cambridge, Oxford and other cities are all ripe markets. In Canada, the company should avoid Quebec for now because of the language issue, but there are several potential markets for expansion and these should be explored, along with filling in the Toronto market, which is relatively underserved compared with equivalent metros elsewhere.
At the corporate level, the biggest issue is that the foreign operations are still trying to fit into a niche market, as opposed to the Whole Foods strategy in the U.S. They are running a small selection of stores, with hardly any move into the suburbs, and the result is that the company lacks the saturation. It is not a viable grocery option for many people within its target market. There are comparables -- looking at the four stores in Vancouver that is the same as the number in Portland, OR, a city of comparable size and market characteristics. Whole Foods still has to consider that it needs a nationwide strategy rather than a focus city strategy for its foreign operations, because it has succeeded in the U.S. By becoming a household name, not a niche player. So there is a corporate-level strategy difference between domestic and international operations and it is recommended that this gap is closed in order to enhance the international operations and get them to the same level as the American operations.
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