WHOLE FOODS MARKET TO ACQUIRE FRESH FIELDS

DAVID ORGEL

AUSTIN, Texas -- Whole Foods Market here underscored its dominance in the natural foods industry last week by arranging to acquire Fresh Fields, Rockville, Md., its biggest competitor.

The move signaled continued consolidation of the natural foods sector and would probably mean a redirection of Fresh Fields' merchandising along the Whole Foods model, analysts said. The latter model emphasizes a purer natural foods product mix that avoids overlap with supermarkets.

The deal, a stock merger valued at approximately $134.5 million, is expected to close in September. Whole Foods would discontinue the Fresh Fields banner in favor of Whole Foods Market. The transaction would put Whole Foods, which posted sales of $496.4 million last year, into the $1 billion sales club in 1997, Peter Roy, Whole Foods president, said in a conference call with analysts. Fresh Fields' volume was $213.5 million in its most recent fiscal year. Fresh Fields runs 22 units in the Washington, Philadelphia, Chicago and greater New York metropolitan areas. Whole Foods operates 47 natural foods supermarkets in 12 states with banners including Mrs. Gooch's and Bread & Circus.

"We've been saying we should have 100 stores and $1.5 billion in sales by the year 2000," Roy said. "We should hit $1 billion in sales in fiscal 1997, so it looks like we'll make the projections fairly easily."

The merger would boost Whole Foods' long-term growth prospects in several regions. "We will achieve critical mass in the Washington and Chicago markets, and in New York and Philadelphia we now have a solid base from which we can continue to expand," Roy said. Whole Foods would close the Fresh Fields corporate office in Rockville and study the Fresh Fields operation over the next two months in areas ranging from purchasing to human resources to systems. Fresh Fields' executive leadership would leave the company upon the deal's completion, according to statements during the conference call. Chris Hitt, president of Bread & Circus' Northeast region, would become president of Whole Foods' new MidAtlantic region, which would include the District of Columbia and Philadelphia areas. The total natural foods market is estimated at about $8 billion to $9 billion, most of which is represented by small operators. That compares with nearly $400 billion for the supermarket industry. The other big merger taking place in the natural foods sector is the combination of Alfalfas and Wild Oats Community Markets, both based in Boulder, Colo. That soon-to-be-completed deal would result in a $250 million company with 49 units in the West and Southwest, which would represent Whole Foods' biggest competitor.

The Whole Foods/Fresh Fields deal is the latest in a string of acquisitions by Whole Foods. This is the ninth for the company and the sixth since it went public in 1992. Whole Foods executives stressed the company is well positioned against supermarket and other competition.

"There's a tremendous positive momentum at Whole Foods," Roy said. "The industry growth rate last year was once again more than 22% as more consumers recognize the value of natural organic foods. Despite the fact that more supermarkets than ever are expanding their selections of natural products, our stores are continuing to comp in the high single-digit range as they have throughout our history. We feel the new combined company is well positioned to be the leader in this vibrant industry."

A major issue would be the future of units in the two chains' overlap areas. The company is now evaluating how many stores would need to be closed. Whole Foods also plans to make significant cuts in Fresh Fields' general and administrative expenses. "We want to cut it to less than 2% from about 6%," Roy said.

Fresh Fields has posted significant operating losses recently -- $6.4 million in 1995. However, in 1996 the company is posting a profit so far, according to Glenda Flanagan, Whole Foods' chief financial officer, who spoke in the conference call. "These Fresh Fields stores are profitable now," John Mackey, chairman and chief executive officer of Whole Foods, said during the conference call. "They've been burdened with high preopening expenses and high G&A expenses. Our strategy will be to rationalize in terms of competing stores and make major G&A cuts. Then the profits will flow to the bottom line."

The two natural food operations have attained prosperity with different geographic strategies, executives explained. "Fresh Fields has had more success than Whole Foods in suburban middle- class markets," noted Roy. "Whole Foods has had more success in urban markets. But we'll be studying this."

Whole Foods would layer its private-label program into the Fresh Fields operation and fine-tune the fresh foods direction of the Maryland chain. There would also be store layout changes, executives explained. Whole Foods executives said they didn't expect approval problems from the Federal Trade Commission because the combined entity would have a small share of the entire natural foods industry and a tiny fraction of the entire grocery business.

Charles Cerankosky, a financial analyst with Hancock Institutional Equity Services, Cleveland, said Whole Foods' task will be to build more uniqueness into the Fresh Fields operation.

"They'll redirect Fresh Fields' marketing toward the traditional Whole Foods approach of no crossover product," he said. "They don't want nationally branded foods that violate the natural foods creed. That will differentiate Fresh Fields from the conventional operators. Fresh Fields had strayed from the natural foods marketing strategies."

Cerankosky said Whole Foods will continue to gain from the benefits of size. "Whole Foods wants to be out front in store expansions, and they are not shy about opening new stores," he said.

Barbara Miller, an equity analyst with Alex. Brown & Sons, Baltimore, said Whole Foods would gain a lot of synergies from the merger in "buying, merchandising and expense reduction that will enable the company to realize very strong profitability from the Fresh Fields stores."