WHOLE FOODS SPELLS OUT RECIPE FOR GROWTH

R. MICHELLE BREYER

SAN FRANCISCO -- Whole Foods Market, Austin, Texas, will continue to flex its muscles, with ambitious plans to grow to 140 stores by the year 2003 and an aggressive strategy to fend off its biggest competitor.

Whole Foods executives told their plans to more than 200 employees and shareholders at the company's annual meeting here last week.

The company said it would rely more on new stores than acquisitions and underlined a commitment to accelerating growth in major metropolitan markets.

The meeting was a chance to reflect on the past year, which Chairman John Mackey characterized as the most significant in terms of growth in the company's 16-year history.

Whole Foods began the year with 41 stores in six regions and finished with 68 stores in seven regions. That growth came through the opening of new stores and the acquisition of Fresh Fields, which had 22 stores at the time of the merger.

Sales grew to $892.1 million in 1996, up 26% from 1995, when sales were $709.9 million. Sales for fiscal 1997 are on track to top $1 billion, Mackey said.

Earlier this month, the company acquired Bread of Life, a two-store chain of natural-food supermarkets that brings the company's total number of stores to 72 in 17 states and Washington. While relatively small in size, that acquisition signals the company's intentions to expand in the Southeast.

These recent acquisitions cement Whole Foods' position as the nation's largest natural-food grocery chain, with 12% of the market and growing, Mackey said.

"We will not be able to keep this rate of growth up or we'll end up being bigger than Wal-Mart," Mackey said. "But we're filling in the map."

Less than a mile from the hotel where the annual meeting was held is one of Whole Foods' newest and most successful stores. In only seven months, the unit here has become one of the company's top three performers. That store features such innovations as an Odwalla Juice Bar, the company's first such joint venture with the California-based juice manufacturer.

With fewer attractive acquisition targets, Mackey said, much of the company's future growth will come through new stores. The company plans to open six new stores in 1997 and eight to 10 stores in 1998, including its long-awaited Manhattan store.

These new stores will be the company's successful, larger stores in major metropolitan markets. Stores opened over the past year-and-a-half, which range from 30,000 square feet to 40,000 square feet, have averaged sales of $290,00 a week -- significantly higher than sales at its older stores.

Whole Foods plans to saturate each of these markets to establish its brand position and make it harder for competitors to take business away, Mackey said.

Despite its size, Whole Foods continues to look over its shoulder. At the hour-long meeting, executives outlined the company' strategy to compete with several of its biggest rivals: Wild Oats, Boulder, Colo., and Trader Joe's, South Pasadena, Calif.

Wild Oats, the second-largest natural-food supermarket chain, has begun encroaching on Whole Foods' territory in such markets as Los Angeles and San Francisco. It has 44 stores, concentrated mainly in the mountain states.

Whole Foods is fighting back by opening a 39,000-square-foot superstore -- one of its largest stores to date -- with a Barnes & Noble bookstore later this year in Wild Oats' hometown, Boulder, Colo. Wild Oats stores average 14,000 square feet.

Mackey said Wild Oats has used profits made at its stores in Colorado to fuel its expansion into Whole Foods' markets.

"We're going to blow up the factories that make the bombs," Mackey said, referring to Whole Foods entry into Boulder.

In addition to Boulder, Whole Foods plans to enter several other markets dominated by Wild Oats, including Denver; San Jose, N.M.; St. Louis; and Salt Lake City.

Faced by competition from Trader Joe's in many of its markets, Whole Foods this year is launching a line of private-label products called "365" -- for low prices every day of the year.

The line's products will not be organic and will cost about 20% less than the Whole Foods Market-branded items. The product line will feature 100 items by the end of the year and several hundred within five years, including sauces, salad dressings, vitamins, spices and jams, Mackey said.

Despite competition, Whole Foods is gaining market share in every area except Los Angeles. Mackey called the problems in southern California the "low point" of an otherwise exciting year.

After Whole Foods acquired Mrs. Gooch's, Los Angeles, in 1993, sales growth was sluggish, profit growth was flat, overhead costs remained high and employee moral was sinking.

In January 1996, the company decided to restructure the region, putting Whole Foods operations, human resources, marketing and accounting systems in place. These measures reduced overhead by more than $2 million.

The company also decided to change the name of the Mrs. Gooch's stores to the Whole Foods banner -- a move that has had a negative effect. Sales have dropped 5% since the name change. Mackey stressed that although southern California lags behind its other regions, the stores are posting a profit and sales should increase as the company remodels stores, upgrades operations and concentrates on marketing.