AUSTIN, Texas -- Whole Foods Market here said it will use the store base and other infrastructure from its pending acquisition of Harry's Farmers Market to expand across the South, with the potential of up to 50 stores in the next few years.
The company also said it plans to use the intellectual capital from the Harry's purchase to develop a new hybrid it can expand nationwide.
Whole Foods disclosed earlier this month it has signed a definitive agreement to acquire substantially all of the Harry's assets for approximately $35 million in cash, including three superstores with annual volume of $100 million; the Harry's Farmers Market name; the company's real estate, valued at $25 million; and inventory worth $7 to $8 million, plus a distribution center, commissary kitchen, bakehouse and office facilities. The deal excludes six smaller Harry's in a Hurry convenience stores.
According to John Mackey, Whole Foods chairman and chief executive officer, Whole Foods had created a new region in the South -- consisting of two stores in Atlanta and five in North Carolina -- prior to beginning negotiations with Harry's.
"The Harry's infrastructure makes this an opportune time for us to step up our real estate efforts in the South, a process that we have already begun," he said.
Asked in a conference call with securities analysts about expansion plans in Atlanta, Mackey replied, "Instead of Atlanta, think about how many stores we can open in the South. We can probably do 50, and we plan to expand rapidly across the South over the next few years.
"Harry's gives us a platform for that growth as [previous acquisitions] Bread & Circus did on the East Coast, Mrs. Gooch's did in southern California and Fresh Fields did in the Mid-Atlantic region."
The three Harry's stores -- in Gwinnett, Alpharetta and Cobb, Ga. -- range from 54,000 to 70,000 square feet, compared with Whole Foods' average of 27,000 square feet -- although Whole Foods does have some stores ranging up to 50,000 square feet, Mackey pointed out.
Harry's specializes in perishables, including produce, meat, poultry, seafood, baked goods, prepared foods, deli, cheese and dairy products, which collectively account for 75% of its sales. The stores also carry extensive lines of specialty and gourmet nonperishable food products, plus kitchen-oriented housewares, floral items, natural health and beauty care items, and a full line of wines and imported and domestic beers.
Asked if Whole Foods will use the Harry's model to develop a hybrid store that appeals to a broader demographic base, Mackey replied, "That's definitely a possibility. We want to evolve our format into larger stores -- perhaps not as large as Harry's but certainly larger than anything we've done at Whole Foods -- that have the potential to expand throughout the U.S."
Mackey said Whole Foods expects to gain expertise from Harry's in such areas as produce, seafood, ethnic foods, cheeses and wine. "And the intellectual capital will include how to operate stores of this size with such large perishables departments," Lee Valkenaar, president of Whole Foods' Mid-Atlantic region, said. "Harry's is a different kind of operation that we're looking forward to getting our hands on."
Harry Blazer, chairman and CEO of Harry's Farmers Market, said he has agreed to vote his shares of the company, which represent over 80% of the total outstanding, in favor of the transaction.
He said Harry's will retain use of the name "Harry's in a Hurry" through a license from Whole Foods, along with the right to operate and grow those stores. Blazer also said he will stay on in a consulting capacity to help with the transition toward Whole Foods' ownership.
Of the $35 million cash price, Harry's said approximately $23 million will be used to pay off and retire the company's credit facility with Back Bay Capital and to pay transaction fees.
Meredith Adler, an analyst with Lehman Brothers, New York, said the acquisition looks like a great deal for Whole Foods. "Despite all of Harry's past struggles, it still has a surprisingly good reputation," she noted, "and with the locations and the commissary and the distribution center included in the deal, Whole Foods can't lose.
"On top of all that, there's the upside potential Harry's provides to Whole Foods, giving it the ability to take the perishables-oriented superstore and test it and do other things with it and possibly grow its upscale image a bit. And if Whole Foods executes well, it can certainly take the concept and the expertise Harry's will provide and leverage that knowledge across the rest of its business."
Debra Levin, an analyst with Morgan Stanley Dean Witter, New York, said it will be a challenge for Whole Foods to turn Harry's sales around, "but Whole Foods will be able to reverse the sales trends over time, given its strong training and employee empowerment programs, its plan to introduce better financial reporting at department levels (which should facilitate better operations), and its plan to invest $10 million in the stores over the first 12 to 18 months after the acquisition."
Levin also said the acquisition will enable Whole Foods to accelerate its expansion in the Southeast and improve its merchandising throughout the company over the longer term.