Fresh Market store in Greensboro, NC.

Photographer: Jim R. Bounds/Bloomberg via Getty Images

Fresh Market Buyout Isn't All That Appetizing

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
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The case for a Fresh Market buyout has got some mold on it.

Ray Berry, founder of Fresh Market, is considering a takeover of the $1.3 billion grocer and has turned to Apollo Global Management for help, a person familiar with the matter told Bloomberg News last week. Fresh Market announced on Tuesday that it is conducting a strategic review that could result in a sale.

Apollo is an obvious partner for a buyout after its success with Sprouts Farmers Market. The private-equity firm took the natural and organic foods chain public in 2013, just two years after acquiring it. The result was one the best debuts for a U.S. company in years: Sprouts rode the health food craze toward a share price that more than quintupled the value of Apollo’s reported $214 million investment, Bloomberg News calculated at the time. Sprouts is up 25 percent since going public. Apollo's fully realized return is 10.3 times invested capital, according to an earnings presentation.

Fresh Market has the low debt and stable cash flow that private-equity firms like. It’s no Sprouts, though, and the market for natural and organic food is getting tougher.

Healthy fare is still selling better than traditional packaged goods, but the exponential revenue bursts that companies enjoyed in the past are tapering off. For one, U.S. spending on food for home consumption (i.e. grocery shopping) is slowing as more Americans dine out. And shoppers that are buying organic today aren't necessarily buying more.

Sales of natural and organic products increased 9.6 percent for the 52 weeks ended March 22, 2015, according to data from research firm SPINS provided for an April presentation with Bloomberg Intelligence’s Jennifer Bartashus. That’s down from 13.2 percent growth for the year ended March 24, 2013. 

There’s also way more competition these days. Just look at Whole Foods Market. The king of natural and organic groceries is on track for its weakest annual same-store sales performance since the financial crisis as it faces off with traditional supermarkets offering healthier fare at a lower cost.

At Fresh Market, annual revenue growth peaked in fiscal 2012 with a 20 percent surge. This year, the company is looking at about 7 percent expansion. Same-store sales will drop 1.5 percent, the first decline since 2009, according to analysts' projections.

Deutsche Bank’s Karen Short can get to a buyout price of $32 a share for Fresh Market -- a 35 percent premium to the unaffected 20-day average -- with "very aggressive" assumptions on same store sales growth and margin improvement. Very aggressive may be too aggressive in this case.

Things are only going to get more challenging for Fresh Market. At the beginning of 2015, Trader Joe’s, Whole Foods and Sprouts had a combined 32 stores in Florida (Fresh Market's biggest state), according to data compiled by Piper Jaffray. That works out to one store for every 625,000 people. In California, by comparison, there’s a Trader Joe’s, Whole Foods or Sprouts store for every 118,000 people.

Fresh Market’s Southeastern stronghold will come under pressure as rival grocers seek to fill their geographic holes. It’s hard to see how being private could make the competition go away.

One tactic could be to cut prices as Sprouts has done. A May 2014 Bloomberg Intelligence study found that goods at the chain cost about 13 percent less than at Whole Foods, after accounting for discounts. The result? Sprouts is increasing same store sales faster than all of its main public competitors.

But turning Fresh Market into Sprouts puts Apollo at risk of cannibalizing Sprouts' success. If it ain’t broke, why mess with it?

Fresh Market is also less focused than Sprouts. In addition to natural and organic food, it sells premium foodie items like Urbani White Truffle and Porcini Thrills sauce and specialty capers. That's not stuff the average shopper buys regularly. It's also not stuff that can be easily discounted.

There may be better uses for Apollo’s buyout dollars. The private-equity firm is in the running for Petco Animal Supplies after losing out to BC Partners in the bidding for PetSmart last year, people familiar with the matter told Bloomberg News. Offers for Petco are due next month.

Everyone knows puppies are way more fun than vegetables anyway.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net