For Whole Foods, Dismal Detroit Is a Dream Location

Walter Robb, co-chief executive officer of Whole Foods Market Inc., speaks during an interview at the company's new store in Detroit, Michigan Photograph by Bryan Mitchell/Bloomberg

Detroit may be on the verge of bankruptcy, yet as of this morning its solvent citizens can purchase gourmet cheeses and craft beers at the first Whole Foods store to open inside the city. It might seem like a risky bet on a troubled market for the high-end grocer, but this is a savvy play that combines discounted real estate, generous subsidies, and little local competition.

In investing terms, Whole Foods is buying low—so low, in fact, that the company won’t have to do much to bring its Detroit outpost into the black. To start with, Whole Foods got a sweet deal on the Mack Avenue space. The project cost $12.9 million, according to the Wall Street Journal, but the company probably paid less than half the total cost, thanks to about $5.8 million in state and local grants and tax credits. Ram Realty, a development partner building apartments nearby, donated land worth about $1 million and put up part of the $6.1 million equity package with Whole Foods to cover the rest.

Last year, the average Whole Foods store measured 37,000 square feet and posted $682,000 in weekly revenue, according to the company’s SEC filings. If the 21,500-square-foot store in Detroit is as busy as an average store, Whole Foods can expect around $20.6 million in yearly sales. At the company’s 2012 operating margin of 6.4 percent, that’s about $1.3 million in annual profit coming out of Detroit.

Whole Foods, in its SEC filings, has set a goal for new locations to contribute “Economic Value Added” to the company within five years. The Detroit store, again assuming average performance, should net about $6 million in that time, even after accounting for the expected 8 percent capital costs. That’s more than enough to cover the company’s equity outlay, with the remaining profit helping to bolster grocer’s bottom line.

But there’s a good chance the Detroit Whole Foods could perform even better than many of its other 335 locations. Sure, the Motor City has rival health-food stores, but none of the incumbents has the brand power of Whole Foods or the publicity momentum the Texas-based company is riding on this morning. And the new Whole Foods shop isn’t in Detroit’s affluent suburbs, such as Royal Oak, which has a Trader Joe’s, or Grosse Pointe, which has a grocer called Fresh Farms Market. The new store is downtown in the truest sense—just a few blocks from the Wayne County Jail and the crowds at General Motors headquarters. In fact, this Detroit location seems poised to help Whole Foods’s bid to win less-affluent shoppers and shed its “whole paycheck” reputation.

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