Whole Foods Market has seen better days. Last week, the organic food chain announced its seventh straight quarter of same-store declines, and hedge fund Jana Partners, one of its top investors, has demanded huge overhauls to keep the company afloat.
But while Whole Foods announced a managerial shakeup last week, there is one big change suggested by Jana that it has yet to address: the possibility of selling the chain.
Whole Foods Market is keeping predictably mum about the idea, but that hasn't kept analysts from considering it.
“[CEO John Mackey] has been fantastic at building the brand, but you wonder if he has the bandwidth to be the operations guy, too,” said Bloomberg Analyst Jennifer Bartashus – and she and other industry professionals have wasted no time in offering up their thoughts on how such a sale could go and what it would mean for the future of the brand.
1. Whole Foods Market Goes Traditional
One of the major reasons why Whole Foods has been in such dire straits of late is because competition from mainstream grocery stores is so fierce. Chains from Costco to Kroger are offering organic food for less money than the store notoriously known as “Whole Paycheck,” so it's perhaps no surprise analysts believe that one of these conventional supermarket chains could be the ideal buyer.
Kroger has surfaced as a major frontrunner in these analyses. The Ohio-based chain currently controls 11 percent of the market, second only to Wal-Mart, and Crédit Suisse Analyst Edward Kelly argues that an acquisition of Whole Foods would allow the company to cut costs and gain new shoppers as it faces rising competition in the market.
Wells Fargo Analyst Zachary Fadem agrees, noting in an April report that the firm has run several merger and acquisition scenarios, with Kroger coming back as a “highly viable strategic option.”
Elley Symmes, analyst for Kantar Retail, also suggested Kroger as a good option.
“They’re a world-class operator,” Symmes said. “They’ve been acquiring different businesses over the past 10 years. They know how to come in, look at the issues, maximize the synergies and really create a more efficient business model without having that banner lose their authenticity.”
Seeking Alpha, however, has highlighted Albertsons as an alternative top choice – and it may also be the most likely. Cerberus Capital Management, which controls the Idaho-based chain, has already held preliminary talks with bankers about a potential Whole Foods buyout, and given that Albertsons already attempted to buy Sprouts Farmers Markets last year, the chain's interest in acquiring a natural food company is no secret.
No matter which of these conventional stores acquire Whole Foods, however, one thing is clear: if the chain goes this route, prices would end up being slashed quite a bit. Currently, Whole Foods Market prices hover somewhere between 20 and 30 percent higher than conventional, according to Brian Yarbrough, analyst for Edward Jones, who notes that they would have to drop to somewhere between 8 and 12 percent higher than conventional to be viable in this scenario.
2. Whole Foods Market Goes Digital
Soon after Jana announced its demands for Whole Foods, Bloomberg revealed that the idea of a sale hadn't come out of left field: Amazon already considered buying Whole Foods last year, the news agency reported, though the company never officially made a bid.
From the Organic Authority Files
The times might be changing, however: the acquisition of Whole Foods would add to the list of Amazon's recent grocery successes, likethe expansion of its AmazonFresh grocery delivery service to serve more and more major American and international cities, the announcement of cashier-less Amazon Go stores last December, and the development of grocery pickup facilities in Seattle.
Analysis from The Motley Fool notes that seeing as pricey Whole Foods and Amazon, with its $99 annual Prime fee, already target similar customer segments, this could be the perfect match. This is especially true given that most Whole Foods stores are located near Amazon customers, enhancing Amazon's grocery delivery model substantially.
A Whole Foods Market acquisition could allow Amazon to make its delivery options more widespread much more quickly, and Amazon's ability to leverage its distribution network and buying power would most certainly also lower prices at Whole Foods, according to analysts.
3. Whole Foods Market Transitions to 365
It is evident from Whole Foods' efforts to fulfill every demand from Jana except for the possibility of a sale that the chain is doing whatever it can to avoid this eventuality.
“Whole Foods has this air to them — ‘We are Whole Foods, we are the superior food operator, we only have organic and natural products,’” Symmes told the Packer. “So to sell out to this kind of conventional grocery business, I think they feel, ‘No, we’ve always been better than this and we want to keep being better than this.’"
But while some analysts think that a sale is the only way to keep Whole Foods afloat, analysis from Seeking Alpha notes that the chain might be able to have its cake and eat it, too, if it drastically changes its business model. In fact, Seeking Alpha contends, this might be the best option for all involved.
“Having another supermarket chain to acquire Whole Foods doesn't add much value that WFM can't achieve itself, including switching to cheaper centralized buying systems used by traditional grocers,” explains the analysis.
Vertical integration with organic food growers is just one suggested modification that could allow the chain to source organic food more cheaply and, therefore, pass these savings on to customers.
It seems that Whole Foods Market has already taken this analysis into account, as one part of its new strategy is to roll out additional smaller, less expensive 365 by Whole Foods Market stores. With four 365 stores currently in operation and 22 in the pipeline, these less expensive stores might be the key to reversing Whole Foods' rapid descent.
"We continue to test and refine our 365 model," CEO John Mackey told CNBC. "We like the profit model that 365 delivers. It doesn't have all the bells and whistles that Whole Foods has but also has significantly lower capital costs."
In this scenario, Whole Foods might lose out on those "bells and whistles" that drew people to it when the chain first opened in the '80s, but it may also draw customers back.
One thing is certain: wherever Whole Foods Market goes from here, prices are going to drop.