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Whole Foods must re-engineer its 'suboptimal and cost disadvantaged procurement and distribution strategy,' say activist investors

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By Elaine Watson+

Last updated on 11-Apr-2017 at 17:00 GMT2017-04-11T17:00:32Z

Activists buy Whole Foods' stock to address chronic underperformance

Activist investors led by Jana Partners have acquired 8.3% of Whole Foods’ stock according to an SEC filing, which says Whole Foods must take radical action to address its recent “chronic underperformance."

In the April 10 filing,  the investors note that Whole Foods’ same store sales have been in negative territory for more than a year and argue that it must re-engineer its “suboptimal and cost disadvantaged grocery procurement and distribution strategy.”

Whole Foods has not commented publicly on the filing, but CEO John Mackey told analysts in February that the company was well aware of the challenges it faced as rivals muscled in on its territory, and said it had now abandoned its 1,200+ store goal and that its new focus was on "disciplined growth" and encouraging core customers to spend more.

Speaking on the Q1 earnings call, John Mackey said he was not, however, going to “compete in a race to the bottom.”

We're basically examining every aspect of our retail operations

Going forward, the focus would be on getting core customers, which account for the majority of sales, to spend more, said Mackey, who recently struck a deal with dunnhumby to boost the chain’s data-driven, category management capabilities.

“If these customers add just one more item per trip, the sales potential is significantly greater than with any other segment. Going forward, Whole Foods Market will focus on serving this growing niche of customers better than ever before.”

A lot of focus had also been placed on driving efficiencies in store, said Mackey, who has been driving significant operational changes over the past year covering procurement, category management, customized promotions, digital coupons and new point of sale (PO) systems: “We're basically examining every aspect of our retail operations and asking what are we doing here that's not creating value?” 

Click HERE  to read more about Jana Partners, which says its is looking to shake up the company's board and push it to explore strategic options, including a potential sale - something that Edward Jones analyst Brian Yarbrough told Bloomberg might offer greater "upside" for investors than a lengthy turnaround.

Jana Partners has a history of activist investing in food and food retail, taking a 7.2% stake in ConAgra Foods in 2015 and urging management to sell Ralcorp, the private label business it had only recently acquired. 

Whole Foods operates 441 stores in the US, 12 stores in Canada and 9 stores in the UK.

"To put it simply, Whole Foods has lost its mojo... Natural/organic has gone mainstream. You can buy the same quality product almost everywhere, from Kroger to Aldi to Walmart... Whole Foods essentially lost many core loyal consumers [Gen Xers, Boomers] over the last few years without gaining significant growth among Millennials."

Diana Sheehan, Kantar Retail

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