AUSTIN, Texas -- Whole Foods Market here said it plans to use a small natural-foods chain it is acquiring in London as a platform to expand in the United Kingdom and eventually into continental Europe.
"This is the starting point for us," John Mackey, chairman, president and chief executive officer, told analysts during a conference call here.
The vehicle for Whole Foods' first European venture will be Fresh & Wild, a three-year-old chain of seven stores, plus one under construction, that average 5,200 square feet, with combined sales of just under $30 million (U.S.) and identical-store sales of 10% for the year ended Dec. 31. Whole Foods signed a definitive agreement earlier this month to acquire the company for approximately $38 million, and expects the deal to close by the end of February, Mackey said.
Some industry analysts expressed concern that expansion abroad may mean a slowdown of domestic expansion -- a concern Mackey denied was valid.
"We have more stores in development now [in the United States] than ever in our history," he said. "We're accelerating that number every quarter, and we still see many, many, many, many, many years until we saturate the U.S. market. But we want to be an international company."
Carole Buyers, an analyst with RMC Capital Markets, Denver, told SN she has followed Fresh & Wild since it was founded, "and if an American-based natural-food company is going to move into the U.K., this is the company to do it with."
She said Fresh & Wild was founded by Hass Hassan, the founder of Alfalfa's, a Boulder, Colo.-based operation that was subsequently acquired by Wild Oats Markets, also of Boulder.
In contrast to the possible negative impact of the acquisition on domestic expansion, Buyers said Whole Foods has "the biggest expansion pipeline in the company's history, opening six or seven stores a year, and I can't see how this acquisition would slow them down.
Meredith Adler, an analyst with Lehman Brothers, New York, said in a written report the pending acquisition is likely to raise some red flags. "[It] seems oddly timed, and may suggest U.S. growth opportunities are diminishing. It could also prove to be a distraction from successful U.S. growth," she said, adding that "the price paid appears rich, especially given the weak U.S. dollar."
Adler said Whole Foods got "distracted" from its U.S. expansion once before -- in the mid-to-late 1990s, when it invested time and resources in Amrion, a direct-marketing vitamin company, and an Internet retail site, "both of which failed. After those mistakes, management promised it would remain focused on U.S. store growth," she said.
"Altogether, we are concerned about this move and are anxiously hoping for evidence that U.S. growth prospects remain strong and the company will move cautiously with this new venture."
Greg Badishkanian, an analyst with Citigroup Smith Barney, New York, also noted potential investor concerns that international expansion could indicate declining domestic growth opportunities.
However, he said Whole Foods believes its experience, combined with its larger product selection and better store layout -- encompassing fresh perishables displays vs. prepackaged perishables common to U.K. supermarkets -- "will garner a competitive advantage in the U.K."
Speaking with analysts, Mackey said Whole Foods decided to acquire Fresh & Wild not to improve the stores in the United Kingdom, "but to create a platform from which to do further expansion of large-format stores, as we did with Bread & Circus, Mrs. Gooch's, Fresh Fields and Harry's Farmers Markets.
"Over the long term, the small Fresh & Wild stores will be rebuilt and replaced with larger-format Whole Foods stores. Our focus until then will be [to learn from] the intellectual capital in the United Kingdom, the strong team member [employee] base, and the similar culture."
Mackey said Whole Foods looked at several other acquisition options over the last two years, "but we think Fresh & Wild has the best strategic and cultural fit for us."
He also said he would not rule out further U.K. acquisitions.
Asked about expansion into continental Europe, Mackey replied, "We are opportunistic. We plan to concentrate on the U.K., and while we won't be actively looking in continental Europe, we will stay aware in case opportunities come up in other capitals of Europe.
Whole Foods intends to make only minor capital investments in the existing Fresh & Wild stores, which include six stores in London, one in Bristol, and one due to open later this year in London. "We will keep aspects of the operation that make those stores great, and add successful elements from Whole Foods' operations," Mackey said.
He said Whole Foods' goal is to open stores of 40,000 square feet abroad, comparable to its U.S. model, "but we will initially be looking for opportunities [in the London area] in the 20,000-square-foot range," he said.
The company will retain the Fresh & Wild name on the existing stores, including the one under construction.
Mackey said the U.K. stores will be monitored by management from Whole Foods' Northeast region initially.
Fresh & Wild stores feature organic foods, natural remedies, juice bars and delicatessens, the company said. David Lannon, president of the Northeast region, said Whole Foods expects to add meat, seafood, specialty items, prepared foods and better standards to the stores.
According to Mackey, having a foothold in the United Kingdom "will give us everyday access to European products and trends that we can share with our stores across the company."
