WHOLE FOODS EYES DISTRIBUTION OPTIONS 2004-09-20 (1)

CHRISTINA VEIDERS

NEW YORK -- Whole Foods Market is in an aggressive expansion phase, building larger stores that often can be clustered closer together.

As the Austin, Texas-based natural and organic food retailer reaches greater market saturation in its operational areas, self-distribution on the East and West Coasts could become more economically feasible, John Mackey, chairman, president and chief executive officer, told investors during the Goldman Sachs Annual Global Retailing Conference here this month.

"We've looked at self-distribution on the East and West Coasts before, but so far it hasn't passed our EVA hurtle. But as we keep getting more stores clustered together, that may not be the case over time," he said in response to a question about contract negotiations with supplier United Natural Foods, Dayville, Conn.

Whole Foods is in the process of renegotiating a long-term distribution contract with the natural/organic food distributor. It extended its present contract until the end of the year. According to Mackey, 25% of the distributor's sales come from Whole Foods, and 18% of Whole Foods' products are distributed by United.

Whole Foods currently self-distributes much of its fresh produce from nine regional distribution centers. Produce represents 66% of Whole Foods' sales. Mackey said the percentage of fresh produce sales is expected to climb to 77% by the end of the decade.

In his presentation, Mackey displayed a map of West Los Angeles pointing to eight stores located less than five miles from each other. "All are doing extremely well," Mackey pointed out. The situation is the same in Boston, Washington and the New York area, where Mackey said Whole Foods has just started to scratch the surface.

He described the company's 59,000-square-foot Columbus Circle store in the Time Warner Center in Manhattan as the highest-volume restaurant in the United States. "People go to feed, not dine," he said, noting all the various ethnic foods available in the store.

Ten years ago, building Whole Foods stores in close proximity to each other would not have been possible because of limited appeal, he stated.

Whole Foods has yet to saturate any of its markets, Mackey said. The company operates in eight geographic regions, including Canada and the United Kingdom. Earlier this year, Whole Foods purchased Fresh & Wild, a seven-unit natural and organic food retailer in England.

Mackey said each region can support about one new store per quarter, for a total of 32 stores per year. The rate of store growth is expected to accelerate as the company adds more regions. In a research note, John Heinbockel, vice president, Goldman Sachs, also based in New York, said Whole Foods has the possibility of doubling its store base within the next six to seven years. Over the last 12 months, Whole Foods' 161 stores produced $3.7 billion in sales.

Along with adding more stores, Whole Foods is building larger stores. Over the last five years, it increased store size by 25% to 31,300 square feet. Forty-nine stores currently under development average 47,800 square feet.

According to Mackey, larger stores appeal to a broader customer base. "It's no longer the healthy-food, crunchy-granola types. We are reaching into mainstream America. The soccer moms shop our stores."

The company said that 32% of its customer base is comprised of what it calls "foodies" -- those customers who shop Whole Foods for high quality, selection and service. The rest fall into the "healthy lifestyle" segment, which includes vegetarians.