Merger Acquisition and International Strategies

International Strategies

Whole Foods Market (WFM) is a grocery store chain that has operations in the U.S., Canada and the UK. Competitor The Fresh Market (TFM) is based only in the United States at this point. While Whole Foods is substantially bigger, these two companies are close competitors of one another based on the similarity of their product lines and their target markets. This paper will analyze the strategic tactics of each of these companies, based on their respective growth strategies.

The Merger & Evaluation

By 2007, Whole Foods was becoming the dominant player in the natural foods grocery business. It sought to grow further, and decided to purchase struggling competitor Wild Oats (Fineman, 2007). At the time, Whole Foods paid $18.50 in cash for each share of Wild Oats. There was concern from the Federal Trade Commission about the deal, because it put Whole Foods in a dominant position within the natural foods business (Bartz, 2009). The company actually had to sell the Wild Oats brand, 13 of the stores, and the leases and assets for a further 19 stores that had already closed (Ibid). There was a loss of competition in 29 markets, the FTC had deemed. The stores that were sold were generally underperforming and/or redundant.

The deal was made to give Whole Foods a rapid way about expanding its business. The company had been facing increasing competition from companies like Trader Joe's, Safeway as well as regional chains like Publix and Wegmans, all of which were beginning to add natural and organic foods to their shelves. It was this factor that helped Whole Foods to realize that it needed to strengthen its presence in order to become the true nationwide player in its niche. Since that point, other companies like Target have begun to target the organic grocery segment. That makes the logic of Whole Foods' move quite evident -- the company needed to build up its size in order to remain competitive with the larger grocery retailers that were likely going to enter its market.

On balance, the acquisition of Wild Oats was the right deal at the right time for Whole Foods. The company had a dominant position in its niche and a great brand. It needed to do two things, one of which was to take the brand to other markets, and the other of which was to defend against the threat of new entrants, especially as many of new entrants have higher density of stores and better bargaining power with suppliers. The move essentially solidified Whole Foods as the dominant player in its industry. Other companies can attack the industry but they are overall less effective because they are not as closely associated with the niche as Whole Foods is.

The Non-Merger

In contrast to the approach taken by Whole Foods, the Fresh Market has taken a more cautious approach to expansion. Founded in 1982, Fresh Market has grown organically, and until 2010 was privately-held. At this point, the company has gone public. It may change its strategy if it decided to utilize some of the capital that it raised. With a total of 131 stores, it is much smaller than Whole Foods, which operates 365 stores, one for every day of the year.

The non-merger strategy is somewhat questionable for Fresh Market. There are many other firms in the grocery business that have succeeded as privately-held companies -- the aforementioned Publix, Wegmans and Trader Joe's among them -- but for Fresh Market capital constraints appear to have hindered growth. They were founded only two years after Whole Foods, but went public 18 years later. As such, they have not been particularly aggressive with their growth. Both companies have seen around a 50% increase in revenues in recent years, so both are succeeding but Whole Foods is ten times larger than Fresh Market and no less profitable. What this highlights is that Fresh Market could have added much more value if it had chosen to expand, especially if it took a rapid course of action with an expansion that would have made it a much larger player much earlier. At this point, Fresh Market is playing catch-up with Whole Foods. Whole Foods added 110 stores with Wild Oats, and this is a major reason why the company has become so much bigger despite having roughly the same time frame with which to work. It should be noted that Whole Foods was already in Canada and the UK before acquiring Wild Oats, so on the international strategy it was always thinking bigger than Fresh Market.

Possible Merger

The Fresh Market is itself a good merger target. A good takeover target should be a company where there are some synergies. This is because the price paid will be above market value to convince the shareholders to accept the deal. If you are going to overpay for an asset you have to be sure that you can add value to that asset. This points Fresh Market towards other grocery companies, especially those that target a similar high end clientele. One option is Vitamin Cottage, which also does business as Natural Grocers. This chain is a publicly traded company -- NGVC on the New York Stock Exchange -- and it is about half the size of Fresh Market, operating 65 stores, mostly in the West.

There are several reasons why this is a great purchase. First, the company is in the same business. This means that its real estate is a good fit for Fresh Market, with large bright stores with ample parking. This is the same model that Fresh Market utilizes. The move is also smart because it would take Fresh Market nationwide. Right now, Fresh Market operates in the eastern states mostly. Its leading states are Florida (31), Georgia (12) and North Carolina (15). Natural Grocers is primarily a western chain, with almost all of its stores West of the Mississippi, from Oregon to Texas. With this acquisition, Fresh Market will be in a position to operate in nearly every state in the continental U.S.. Strategically, this move is roughly the equivalent of what Whole Foods did when it acquired Wild Oats.

Natural Grocers went public in 2010, just like Fresh Market did. Its revenues are growing relatively slowly and it has a much lower profit margin than does Fresh Market. What this means is that if Fresh Market's branding, merchandising and managerial expertise are applied to Natural Grocers, the company is likely to perform better and earn more profit. So this, in addition to the nationwide presence, are the two synergies that Fresh Market should be looking for in order to make sure that this is a good purchase that adds value to the organization.

International Business

Whole Foods has made baby steps into international business, and only to markets where the grocery store model familiar in the U.S. is known to work. The first international expansion was to Toronto, and this was followed by moves into London and suburban Toronto. The company acquired a Wild Oats in Vancouver and has since expanded in that market. In the UK, Whole Foods only has three stores in London. Thus, the company has taken a more conservative approach to the international markets than it has with the domestic market. There are many other good markets in those countries but Whole Foods appears content to slowly build up the presence in those three core cities. Yet, it should be counted as something of a disappointment that ten years after first moving international, Whole Foods is still only in three cities abroad. It is recommended that Whole Foods start moving beyond these areas and challenge those markets a little bit more. If it does not feel comfortable going into French-speaking Quebec it should at least get into Calgary and Ottawa. In the UK, especially in the south there are many towns where a high end grocery store would succeed -- the likes of Cambridge and Bath come to mind. Whole Foods is recommend to get more aggressive with its international expansion plans.

The Fresh Market should still focus on the domestic market. It is likely that Whole Foods wants to shore up the domestic market before getting too aggressive with the international ones, and Fresh Market probably has no interest in international expansion. It should look at expanding domestically and building up a national presence. Natural Grocer is the perfect target at this point in time, in that it is half the size and is barely profitable. It is important to bear in mind that Fresh Market will also benefit if it expands to improve its bargaining power with suppliers. Right now it is having a tough time being competitive on price with Whole Foods, and that is saying something.