profiled for this exercise are Whole Foods and Trader Joe’s. Whole Foods is based in Texas and has spread across the country as a retailer of organic, gourmet and natural foods. The company has expanded into Canada and the United Kingdom. Whole Foods also made a major move in the United States when it acquired Wild Oats, which was its major competitor at the time. The deal ran into trouble with the Federal Trade Commission but was ultimately allowed to go through, since there is nothing stopping other grocery stores from selling the same type of foods (Gogoi, 2007).
Trader Joe’s is a competitor to Whole Foods, but one that remains only in the United States and it has typically expanded by building new stores. The company does not just have natural foods but it competes for roughly the same customer base as Whole Foods, and most customers of one will also be customers of the other at times. Trader Joe’s has a different business model to some extent, with a lot of house brands, and smaller stores, but is one of the bigger threats to Whole Foods.
Merger & Acquisition
Whole Foods bought Wild Oats for two reasons. The biggest one is that Whole Foods wanted to expand rapidly. Building its own stores is typically a slow way for a large retailer to grow. Real estate location is important in the grocery industry so growing organically — no pun intended — is a slow process for a company like Whole Foods. The acquisition of Wild Oats was as much about gaining key real estate as it was about shutting down a competitor. Wild Oats was strong in regions where Whole Foods was weak — Florida, the Pacific Northwest and Rocky Mountain (Moore, 2007). Whole Foods therefore was able to enter these regions quickly, and do so with locations already vetted for proximity to key demographic clusters by a competitor in the same industry. This moved saved Whole Foods a lot of time and money with respect to growing its geographic footprint.
Whole Foods also benefitted from access to the Wild Oats customers. Whole Foods saw that the organic food industry was beginning to grow rapidly, and major grocery sellers were starting to increase the amount of organic food on their shelves. As a result, Whole Foods recognized that there was going to be some consolidation among the specialist retailers in this segment in order to gain the scale needed to compete with the larger mainstream grocery retailers. Having already significant experience with the use of acquisitions as an expansion strategy, Whole Foods was able to build the size and scope it needed quickly with this expansion.
In contrast to Whole Foods, Trader Joe’s has preferred to build its own stores in order to expand. Part of this is driven by the desire of Trader Joe’s to build pent-up demand in a given region before entering. The company’s stores have a reputation the precedes them, and it has actively petitioned for its fans to ask for stores in given areas. When it moves in, it tends to do so slowly because of the need to acquire real estate and space its stores. The company’s move into South Florida has taken many years just to get to a couple of stores in Naples and Miami, with expansion in the region remaining gradual (Valverde, 2014).
What the slow pace of growth highlights for Trader Joe’s is that the company needs to start working on a faster pace of expansion. It is recommended that the company undertake an acquisition to fill in its territories. There are a couple of key considerations for Trader Joe’s. The first is that the company is not publicly-traded, so it has a much lower access to capital than most other grocery stores. The company can add debt, but it will be challenged to add equity without tapping the credit markets. This fact has probably played a role in limiting the growth of Trader Joe’s thus far. So any acquisition at this point will probably have to be fairly small. The other factor to take into consideration is that Trader Joe’s has its own brand, store design and inventory — the only thing it really needs to acquire is the real estate. Getting the right location is important in the grocery business, even for a destination store like Trader Joe’s. A map of the company’s stores highlights this — it does not set up shop in poor parts of town, but it prefers to go where it customers live and work.
A good acquisition target for Trader Joe’s therefore is Fresh Market, which is a chain that is about a quarter of the size by the number of stores and even smaller still when evaluated by sales, owing to the fact that Trader Joe’s has much higher sales per square foot. The value of Fresh Market is an bringing about a more national presence to Trader Joe’s, in particular in the eastern markets where Fresh Market is strong. Fresh Market directly competes against Whole Foods but it less successful overall, which makes it a good takeover target.
For an acquisition to have value, it needs to deliver a higher value to the acquiring company than it costs. Two factors are important here. The first is that Trader Joe’s is mostly acquiring the real estate, getting its saturation levels in places on the eastern seaboard more to the level where they are in the West, and doing so in precisely the high-income areas that TJ’s likes to target. The second factor is that the real estate is going to be more valuable for Trader Joe’s. The price is going to be roughly what it is worth for Fresh Market, but Trader Joe’s has the highest sales per square foot in the industry (Loeb, 2012), so that in the hands of a better-run and more successful company like Trader Joe’s that real estate will generate more income. This is where there is advantage for a company to take over the real estate, which is essentially the nature of the transaction for Trader Joe’s.
Whole Foods has a division for its international operations, which are in the UK (9) and Canada (8). The company has expanded slowly in these international operations, in many cases by building the stores greenfield, in both the UK and in Toronto. It entered Vancouver with three stores via acquisition, the one time it has used that as a method of international expansion. It is unusual for a mix of strategies to be used in international expansion, but Whole Foods has used both methods to open stores elsewhere. At present, though, the growth is slow in both foreign countries — after a massive buildout in the 2000s, Whole Foods has curtailed growth ambitions everywhere including internationally.
The sluggish pace of growth internationally should be a concern for Whole Foods management. The company needs to fully commit to these two markets, and right now they retain only a limited presence. The UK operation has only a couple of locations outside of London, which is not good enough given the size of the market. The Canadian operation is only in two markets. These two markets are by far the easiest for an American company to expand into, being large, wealthy and English-speaking. There is potential for Whole Foods to do much better, so it is recommended that expansion proceed more aggressively. The UK has a lot of great potential markets, and Whole Foods should target another six stores there — Bristol, Edinburgh, Southampton, Newcastle, York, Cambridge, Oxford and other cities are all ripe markets. In Canada, the company should avoid Quebec for now because of the language issue, but there are several potential markets for expansion and these should be explored, along with filling in the Toronto market, which is relatively underserved compared with equivalent metros elsewhere.
At the corporate level, the biggest issue is that the foreign operations are still trying to fit into a niche market, as opposed to the Whole Foods strategy in the U.S. They are running a small selection of stores, with hardly any move into the suburbs, and the result is that the company lacks the saturation. It is not a viable grocery option for many people within its target market. There are comparables — looking at the four stores in Vancouver that is the same as the number in Portland, OR, a city of comparable size and market characteristics. Whole Foods still has to consider that it needs a nationwide strategy rather than a focus city strategy for its foreign operations, because it has succeeded in the U.S. By becoming a household name, not a niche player. So there is a corporate-level strategy difference between domestic and international operations and it is recommended that this gap is closed in order to enhance the international operations and get them to the same level as the American operations.
At present, Trader Joe’s does not have any plans to go international. A lawsuit it filed against an imitator in Vancouver essentially reached the same conclusion — Trader Joe’s is not actively pursuing international customers (CBC, 2013). This case is interesting, because it is exactly the same type of guerilla strategy that TJ’s uses when entering new markets. The company allows its reputation and cult following to proceed it — in this case with a store right across the border in Washington State where reportedly 40% of the business comes from Canadians. So as far as a recommendation for operating strategy is concerned, opening a Canadian store makes perfect sense, and Vancouver is the place to start since the advanced hype has been built up already to the point where a business model as absurd as Pirate Joe’s actually works. It is really that simple as far as operating strategy — you have to actually go into another country and operate there. Trader Joe’s does not alter its business model so exporting some of its products is not a direction the company wants to go, and nor should it, but opening a store or two in markets that are already primed for a TJ’s is a great idea.
The decision to move into a foreign market is not one to take lightly, however. There must be a corporate-level strategy where international expansion makes sense. On one level, opening a couple of stores across the border is probably not going to make much of a dent on a company as large as Trader Joe’s. Certainly, moving into two foreign markets has actually done relatively little for Whole Foods. There is no particular advantage to opening a store in Vancouver that opening a store in Random City, USA would not deliver (Memphis, New Orleans, El Paso, Jacksonville and Honolulu are among major cities without one). So it is important for Trader Joe’s to look at international expansion in the bigger picture context.
If Trader Joe’s goes public with an IPO, that will put the company in a better position for international expansion to make sense. An IPO will give the company a major capital injection that will allow it to fill in its domestic markets as well as target international ones. At this point, the company can and should pursue more growth domestically, but having the capital from an IPO will help it to pursue opportunities internationally as well. Canada is obviously the easiest — the brand is becoming known there despite not having stores, the country has money, and most of the largest markets in North America without a Trader Joe’s are now in Canada, not the U.S. Food just gets trucked across the border, so while there are some additional logistics considerations, these are not major and would be overcome is the company had enough money to fill in the Canadian markets in the same way that it has filled in the American ones.
While Whole Foods has engaged in international expansion and Trader Joe’s has not, the way that the they should approach the issue is basically the same in either case. Whole Foods seems to be at least somewhat uncommitted to foreign expansion, having stalled its expansion in the UK for the time being and apparently content to operate only in two Canadian cities. Both companies have opportunity to move overseas, however, and this is something that they should look at. Whole Foods has long recognized that size helps it to compete against the bigger companies, and Trader Joe’s doubtless realizes this, too. In a sense, TJ’s should look at the example of Target, which waited too long to get into foreign markets, only to find that it was unable to do so successfully. Whole Foods might be moving slowly, and needs to move faster, but they are learning with these subsidiaries so that when they do begin to see opportunity, they can move much more quickly. If history has shown anything about international expansion it is that the faster a company goes international, the better they are going to be at it — Starbucks is a classic example of that, having made global growth part of its strategy since day one. Whole Foods is ahead of TJ’s in this regard, but Trader Joe’s can make up this ground if it chooses to go public and get some capital for growth on its balance sheet.
CBC. (2013). Trader Joe’s loses fight with Vancouver’s Pirate Joe’s. Canadian Broadcasting Corporation. Retrieved June 3, 2014 from http://www.cbc.ca/news/canada/british-columbia/trader-joe-s-loses-fight-with-vancouver-s-pirate-joe-s-1.1912400
Gogoi, P. (2007). No Wild Oats for Whole Foods? Business Week. Retrieved June 3, 2014 from http://www.businessweek.com/stories/2007-06-06/no-wild-oats-for-whole-foods-businessweek-business-news-stock-market-and-financial-advice
Loeb, W. (2012). Aldi’s Trader Joe’s is a winner. Forbes. Retrieved June 3, 2014 from http://www.forbes.com/sites/walterloeb/2012/05/17/aldis-trader-joes-is-a-winner/
Moore, A. (2007). Whole Foods to acquire rival Wild Oats. MarketWatch. Retrieved June 3, 2014 from http://www.marketwatch.com/story/correct-whole-foods-to-acquire-rival-wild-oats-for-565-million
Valverde, M. (2013). South Florida’s grocery shopping options increase in 2014. Sun-Sentinel. Retrieved June 3, 2014 from http://articles.sun-sentinel.com/2013-12-26/business/fl-grocers-2014-20131225_1_lorrie-griffith-shelby-report-south-florida
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