WHOLE FOODS ON THE ROAD TO DETROIT VIA ACQUISITION

GREG GATTUSO

AUSTIN, Texas -- Whole Foods Market here said last week it will enter the suburban Detroit market next month by acquiring Merchant of Vino, Farmington Hills, Mich., in a $41.2 million stock transaction.

Financial analysts told SN the acquisition would continue a trend to target affluent, educated shoppers with natural food and gourmet food under one roof, and would give Whole Foods instant expertise in wine merchandising.

Merchant of Vino owns and operates two small specialty wine and gourmet-food shops and four natural-food supermarkets in the Detroit suburbs, and has a fifth supermarket in development. Whole Foods, with 76 natural foods supermarkets in 17 states and the District of Columbia, had sales of $1.0 billion in fiscal 1997. Its closest store to Detroit is in Ann Arbor, Mich.

"This is really an opportunity for Whole Foods," said Gary Giblen, managing director at Smith Barney, New York. "The acquisition gives them immediate market penetration. Detroit is an untapped market for natural food.

"The thrust of this acquisition is to access the non-hardcore customer," Giblen said. "Sure, you want the customers who wear Birkenstocks. But you also want regular Yuppies. Wine fits into that. Wine attracts the high-income customers."

Kim Galle, securities analyst with Adams, Harkness & Hill, Boston, said he has seen a convergence of gourmet specialty items and natural food.

"Merchant of Vino has a strong reputation as a gourmet-food retailer and as a wine retailer. And Whole Foods stacks up as one of the best providers of perishables," Galle said.

While Whole Foods currently sells wines as well as craft beers where legal, the merger would give the company more merchandising expertise and bolster the high-margin category, the analysts said. Galle said Marc Jonna, president of Merchant of Vino, would become national wine buyer for Whole Foods. Jonna was not available for comment last week.

"As a wine specialist, Merchant of Vino could give Whole Foods better purchasing power, and bring a lot of interesting, lesser-known labels into the store," Galle said.

According to Galle, the stores would be called Merchant of Vino Whole Foods Market in an attempt to maintain the name recognition Merchant of Vino has built since its first store opened in Troy, Mich., 22 years ago.

By keeping Merchant of Vino on the banner, Whole Foods hopes to avoid the error it made last year, when it changed the name of Mrs. Gooch's -- a southern California natural-food company it had acquired three years earlier -- to Whole Foods Market. According to the company, customers were unhappy with the change and sales dropped about 5%.

All the stores to be acquired are under Whole Foods' average store size of 33,000 square feet. A unit in Ann Arbor measures 18,500 square feet, while stores in Rochester, Somerset and Farmington, Mich., range from 22,000 to 23,000 square feet. The specialty stores, in Troy and Birmingham, measure 4,000 and 8,000 square feet, respectively.

The Merchant of Vino store in development, which is in Ann Arbor, will be 33,000 square feet.

Lana Lazarus, research analyst with Piper Jaffray, Minneapolis, said Ann Arbor's sizable student population could support another Whole Foods store or two.

"These types of university communities tend to be good markets for natural-food supermarkets," she said. "And there are no other players in Michigan.

"Out in the suburbs of Detroit, it's an affluent area and a great market that is ripe for a natural-food retailer."