Taking Stock

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Investor Jana Partners Attempting To Force Change At Struggling Whole Foods Market

We’ve seen this play before: Wall Street investment firm acquires substantial stake in undervalued publicly-traded supermarket chain. In this case, that company is Jana Partners LLC, which three years ago (almost to the day), announced it had acquired 6 percent of Safeway’s common stock.

Fast forward to April 10 when that same company, led by activist hedge fund executive Barry Rosenstein, proclaimed that it has taken a nearly 9 percent equity stake in Whole Foods Market. While Safeway was long seen by Wall Street as a steady, if not somewhat plodding grocery chain, Whole Foods until recently was viewed as a creative and proactive merchant that maintained wide appeal with America’s most desirable shoppers – millennials and Gen-Yers. But in the challenging and fickle world of retail food there certainly was a commonality between both chains, at least from Wall Street’s perspective. Both companies were deemed as undervalued and arguably in need of a management overhaul and perhaps a cultural change. At Safeway, stalwart CEO Steve Burd was about to retire after 20 years at the helm (his successor former CFO Robert Edwards ultimately sold the company to Albertsons); at Whole Foods, co-founder and current CEO John Mackey has been manning the ship since its creation in 1980 and in the past two years the legacy organics merchant has lost considerable mojo.

Enter Jana. This isn’t about a takeover plan by another PE company, nor is it an attempt to entirely revamp the way Whole Foods goes to market. Much like Safeway, this is an investment opportunity – one designed to create pressure on WFM to drive the company’s flagging stock price up. The Jana investment certainly produced a short term surge with Whole Foods’ shares moving to a new 52-week high of slightly more than $35 per share. A year earlier, WFM was trading at approximately $50 per share.

With a 9 percent stake, Jana could possibly squeeze out two board members who could act as potential change agents. Jana has even listed former Harris Teeter chairman and CEO Tad Dickson, former Safeway chief merchant Diane Dietz and former New York Times food critic Mark Bittman as co-investors, all of whom theoretically add credibility to Jana’s effort.

Whole Foods needs a shakeup. Its relevance is not in question. It is still the best in class, but not nearly as good as it was five years ago. The problem isn’t with its merchandising or its strong community connection; Whole Foods’ biggest flaw is the quality of its store operations. Labor training has suffered as the company has grown very rapidly, and the fresh, local appeal of shopping a Whole Foods store has waned. And competition is stiffer, not only from other organics operators like Sprout’s, New Seasons and Vitamin Cottage Natural Grocers, but also from progressive conventional supermarket retailers like Kroger, H-E-B and Wegmans.

Certainly there are other issues that come onto question – Jana mentioned those in its SEC filing – including senior management, optimizing real estate, customer loyalty/analytics and its new “365” store model.

Most of those issues are legitimate including “365” which I believe is a long-term non starter. Perhaps the role of John Mackey also needs to be examined. He’s been a dynamic leader with great passion and vision, but after nearly 40 years atop the horse, maybe it’s time to bring in an outsider with different ideas.

These are very difficult challenges, but Whole Food is definitely fixable. I don’t think Jana’s play is anything more than an effort to gain more profit. However, in taking on the role as a now important investor, the PE firm is asking the right questions and is certainly putting its money behind its attempted change effort. And if that alone forces Whole Foods to make the improvements it’s been unwilling or unable to make, Jana’s investment will be beneficial in the long term for all parties.