Could an activist investor save Whole Foods?

Jana Partners seeks to give the organic grocery chain's operations and management a much-needed shakeup.

Walk into any Whole Foods and you will see its signature green-and-white logo, earthy decor, and aisles and aisles of organic foods and other specialty products. On the surface all looks well as a steady stream of shoppers select from carefully curated shelves and baskets of fresh produce labeled with their geographical source, the more local the better.

But an activist investor who has mounted a challenge to the health-food chain’s leadership sees something else: a missed opportunity.

Jana Partners, founded by Barry Rosenstein, said in a regulatory filing made public on Monday that Whole Foods’s shares are undervalued because of “chronic underperformance.” This speaks to the setbacks found in daily operations not always obvious to loyal customers that include such core activities as procurement and buying practices, pricing strategies, and online offerings, to name a few. The investor and its team of retail and food luminaries, which include a former chief executive of Gap and food journalist and cookbook author Mark Bittman, want the chain to improve its operations and technology, shake up its board and senior management, and push for a sale. 

Could the move be the answer that Whole Foods needs in order to stay relevant in the organic food movement it helped create? In recent years the retailer appears to have lost its way as Kroger, Costco, Wal-Mart, and meal kit providers such as Blue Apron now offer many of the same products, oftentimes at lower prices. 

Jana, which, along with its affiliates, now owns 8.8 percent of Whole Foods’s shares, is trying to convince the board, and, importantly,  other long-term shareholders, including The Vanguard Group and Goldman Sachs, that its plan is the best course of action to revive the chain, explains Alon Brav, a finance professor at Duke University’s Fuqua School of Business who has researched activist investors.

“This is, in many ways, democracy in play,” Dr. Brav tells The Christian Science Monitor in a phone interview. “The beauty of it is that we are not having someone acquire 40 or 50 percent decide what to do. [Jana] bought 9 [percent].... All of these other longterm shareholders will now have to take a stand, and will have to digest what’s going on, whether they think these operational improvements are viable or whether the company has it right.”

Jana hasn’t yet met with Whole Foods’s current board or executives including its outspoken libertarian co-founder John Mackey, according to media reports, citing people familiar with the matter. It is also unclear whether the chain will pay heed to Jana’s sharp-worded filing it submitted to the Securities and Exchange Commission four months before its deadline to launch a board fight. 

In addition to reporting that it and its affiliates are the second-largest shareholders of Whole Foods, Jana proposed four new board nominees, including Mr. Bittman, a former New York Times food columnist, and Glenn Murphy, the former chief executive officer of Gap. Jana was also critical of Whole Foods's real estate and capital allocation strategies, operations and brand development, and grocery and distribution strategies, and encouraged Whole Foods to explore how much it could sell for.

Jana’s list of potential bidders includes Amazon, as well as traditional grocery chains such as Kroger Co. and Albertsons Cos., according to Bloomberg. A private equity firm could also step in, helping take Whole Foods private to fix its problems out of the public eye.

Whole Foods responded on Tuesday by saying it is open to the views and opinions of all shareholders.

“We are committed to driving value for all Whole Foods Market shareholders and will continue to act to achieve this important objective,” Whole Foods spokeswoman Brooke Buchanan said in a statement shared with the Monitor.

News of the filing bumped Whole Foods’s shares up almost 10 percent on Nasdaq on Monday to close at $34.18, its biggest rally in more than two years. Its stock had previously climbed just 1 percent in 2017, lagging behind the 5.2 percent advance of Standard & Poor’s 500 Index, according to Bloomberg. Shares of Whole Foods then jumped an additional 4.3 percent to $35 in early trading after Bloomberg reported Amazon mulled a takeover last fall, but didn’t pursue the deal.

But analysts were unsure how long Whole Foods’s stock would trend upward, even as healthy and fresh food sales increase across the industry. Sales of organic products, for instance, increased 209 percent in the United States between 2005 and 2015, reaching $43.3 billion by 2016, according to the Organic Trade Association in North America.

Whole Foods’s stalled growth is evident in its slowed market penetration. According to data from Kantar Retail’s ShopperSCape survey, Whole Foods had a 7 percent penetration rate in 2009 when it had about 273 stores, reported The Washington Post. Since then, the chain has expanded to more than 420 locations, but its market penetration only increased to 8 percent.

“That means its major capital investments in building those stores – and the ongoing expense of staffing and maintaining them – have not done much to grow its share of devoted shoppers,” writes Sarah Halzack, the Post’s national retail reporter.

“The industry has really upped its game,” consultant Roger Davidson told Bloomberg. “[Whole Foods has] to open that gap again,” he said, urging the company to reconnect with the food trends that fueled its growth in earlier days.

Customers exiting a Whole Foods in the heart of Boston on Tuesday were seen carrying little more than a single grocery bag, a hot or cold lunch, or a coffee. It was lunchtime on a workday, but customers who spoke to the Monitor said they only shop at the store for certain products, not all of their grocery needs.

Joy Erb, of Melrose, Mass., visits a Whole Foods every couple of weeks, this time to buy peppermint oil and flaxseed. But she is interested in Whole Foods’s chain of stores under the name 365, a smaller-store format promising good-value, private-label products.

Northeastern University students Kanisth Raghani and Saumya Chopra acknowledge they don’t cook often, but prefer Whole Foods to other grocery stores. They especially like the market’s fresh fruits and cakes, which they fear might diminish in quality if the chain expands.  

This report contains material from Reuters.