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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM Monday, August 1, 2005: It's been amazing run. For now I'm staying in. Though its P/E is high, so is its growth..

Last week Whole Foods (WFMI) reported sales and earnings for the 12-week quarter ended July 3, 2005. For the third quarter, sales rose 23% to $1.1 billion. This increase was driven by 13% weighted average year-over-year square footage growth and comparable store sales growth of 15.2%. Neat growth! Wall Street hankers for growth. How much more growth? I believe plenty. Here's this weekend's piece from the Economist, titled "A Wal-Mart for the granola crowd."

NO ONE admits to being more surprised by the runaway success of Whole Foods Market than its boss. “In all my profound wisdom I decreed a maximum of 100 stores, and thought that would saturate the United States,” recalls John Mackey of the time when his company went public in 1992. That in itself was quite a milestone for a grocery retailer that he began in 1978 in a garage in Austin, Texas, when he was living in a vegetarian co-op. At first, hippies and college students were his main customers. But now, with over 170 stores feeding America's organic-food-addicted middle class, Whole Foods Market has become firmly established as the world's largest natural-foods chain.

John Mackey,. Whole Foods founder and present CEO.

Nor is there any sign of the firm's rapid growth coming to an end. Its sales rose by 23% to $3.9 billion in the latest financial year. Mr. Mackey is now expanding the firm abroad, initially with a move to London. As for the success of this, a chastened Mr. Mackey says, “we actually don't have the least bit of doubt”.

To understand the allure of Whole Foods Market, look no further than the new landmark store that it opened in Austin, Texas earlier this year. Occupying almost 80,000 square feet (7,300 square meters), it is one of the firm's largest, and features a vast array of treats, from organic enchiladas to an in-house meat smoker. There are sampling stations, cooking demonstrations and café tables galore. Employees, called “team members”, are as enthusiastic as the shoppers, and gladly explain company policy on, say, sustainable fishing (no Chilean sea bass, for instance, as it is seriously overfished). The firm is starting to label its own-brand foods to indicate any genetically modified ingredients.

Yet fancy food is just one part of the recipe. Whole Foods Market is also deeply committed to its “green mission”. “We see the environment as a stakeholder in the business,” says Mr. Mackey who, no surprise, lives his brand. Trim and fit, he prowls the office in shorts and a handyman-style canvas shirt, and is very much the outdoors type. This summer he is hiking along part of the Pacific Crest Trail, which runs from Mexico to Canada.

The firm's environmentalism is decentralized: each store is encouraged to experiment, and implement what best suits its own circumstances. So, for example, the California stores use solar power, taking advantage of subsidies provided by the state government. In other locations, some use wind energy. Newer stores, such as one in Sarasota, Florida, are pioneering new types of “green building”, for instance, using recycled materials. Successes and failures are shared via the Internet.

Yet Mr. Lackey's organic idealism and greenery should not be confused with a lack of hard-nosed business acumen. He can quote Adam Smith with the best of them. He is often criticized for wiping out the small, local natural-food businesses that, not so long ago, were what the industry was all about. He is also opposed to trade unions. Whole Foods Market workers in Madison, Wisconsin, caused a stir three years ago when they voted to join a union, but the company persuaded them to back down. Currently his stores remain non-union. Mr. Mackey says he dislikes the “adversarial nature” of tabor unions—the “zero-sum mentality” whereby “if shareholders are winning, tabor is losing”. The market, he says, is the “best check against exploitation, because people can vote with their feet.” Indeed, says Roy Bingham of Health Business Partners, an investment bank, Whole Foods Market benefits from the undying keenness to work for it of the “sandals brigade” of young idealists. The firm is regularly cited by Fortune as one of the top 100 places to work in America.

If there is something familiar about a giant, anti-union retailer crowding out small local businesses, Mr. Mackey rejects any comparison with Wal-Mart—well aware of the battering that the world's biggest retailer has taken because of its relentless growth. “It's like comparing a Hyundai car to a Lexus,” he says. “Wal-Mart's focus is on getting the cheapest stuff in; we're focused on getting the best stuff.” That said, Wal-Mart is starting to offer organic and natural foods as it pursues wealthier customers. This may spell trouble some day for Whole Foods Market. For all its growth, the company is still dwarfed by Wal-Mart, which had revenues last year of $285 billion.

Also unusually for the organic-food industry, but in common with Wal-Mart, Whole Foods Market has grown partly by acquisition, buying chains such as Fresh Fields, Bread & Circus and, in London, Fresh & Wild. More acquisitions may follow abroad. Although there is now little left to buy in America, Mr. Mackey still sees opportunity to grow there. Whole Foods Market currently has a presence in only 39 of the country's top 50 metropolitan markets. “None of those markets has reached saturation, plus the whole market is continuing to rapidly expand,” he says. As for Europe, Mr. Mackey wants to open a big Whole Foods Market store in London, but has yet to find the right site. If London does well, then he would move aggressively into continental Europe.

Now in your basement.

Always looking for new opportunities, Mr. Mackey is now trying to combine organic food with the other craze gripping America's middle class: real estate. The idea is to build Whole Food Market stores into apartment-building basements. “In urban areas like New York or London, land is so expensive that it really helps to make our stores more affordable if we can get multi-use developments on top of us,” says Mr. Mackey. “And housing is perfect because it doesn't compete with us and in fact gives us customers” who enjoy direct access by elevator to the store.

So, is there anything that could cause Whole Foods Market to choke? “You know, I'm not a worrier,” says Mr. Mackey. Barring some freak event such as food terrorism, Whole Foods Market seems set for more success. Mr. Mackey certainly seems relaxed about the future. When trekking through the wilderness, he does not even bother to carry a mobile phone.

Facts about the pharmaceutical business: From a recent Economist. "Big Pharma" consists of a dozen or so multinational firms with headquarters in Europe or America. Their sales account for roughly half the world's $550 billion retail drug market. The pharmaceutical industry is relatively fragmented, with the biggest company, Pfizer, holding less than 10% of the global market.

These are the top-selling drugs. Amazing numbers:

Now you know why you see so many ads on TV: Drug companies have trebled their spending on direct-to-consumer advertising since it was legalized in America in 1997 and the investment seems to have paid off. A study by IMS Health, looking at 49 brands advertised between 1998 and 2003, shows that the average return on $1 spent on advertising a blockbuster drug was more than $3.50.

Now you know why doctors get pitched so intensely: Doctors known to be heavy prescribers are bombarded by up to half a dozen salesmen from the same company selling the same product because the drug companies know that more reps mean more sales. The average rep detailing to primary-care doctors generates $1.9 million in sales each year, according to an analysis by Lehman Brothers. An additional 1,000 reps — at a cost of $150,000 a head (a year) — can bring in an extra $1.9 billion.

The sad part is that big pharma drugs are coming off patent. The next five years will see $70 billion go off patent. Big pharma has difficulties filling its pipeline with new drugs. Hence, my interest in small biotechs -- which can (I believe) provide big pharma with the drugs it needs to grow.

Happy Birthday, SkypeOut!
SkypeOut service for calling landlines and mobile phones (i.e. ones not on Skype) all over the world is 1 year old. To celebrate the company lowered our SkypeOut rates in over 20 countries and added six new countries -- China, Greece, Taiwan, Hong Kong, Poland and Switzerland. Most SkypeOut rates are 2.3 cents a minute. You won't get that from your local phone company. Skype to Skype calls are free. For more, click here.

The world's basket case: Zimbabwe is governed by a nutcase dictator called Robert Mugabe. Think of a program to destroy the country and he has done it. Unemployment is is now over 70 percent. Inflation is 164 percent a year. And exports fell again -- this by 20% year over year. It's sad. I went there once as a tourist. It was a nice place. I wouldn't go back for all the money in China.

The logic makes sense
Moishe is driving in Jerusalem. He's late for a meeting, he's looking for a parking place, and can't find one.

In desperation, he turns towards heaven and says, "God, if you find me a parking place, I promise that I'll eat only kosher, respect Shabbas and all the holidays, and never blaspheme you."

Miraculously, a place opens up just in front of him. He turns his face up to heaven and says, "Never mind, I just found one."

Sometimes men should just shut up
On their wedding night, the young bride approached her new husband and asked for $20.00 for their first lovemaking encounter. In his highly aroused state her husband readily agreed. This scenario was repeated each time they made love, for the next 30 years, with him thinking that it was a cute way for her to afford new clothes and other incidentals that she needed.

Arriving home around noon one day, she was surprised to find her husband in a very drunken state. During the next few minutes, he explained that his employer was going through a process of corporate downsizing, and he had been let go. It was unlikely that at the age of 55, he'd be able to find another position that paid anywhere near what he'd been earning, and therefore, they were financially ruined.

Calmly, his wife handed him a bank book which showed thirty years of deposits and interest totaling nearly $1 million. Then, she showed him certificates of deposits issued by the bank which were worth over $2 million, and informed him that they were one of the largest depositors in the bank. She explained that for the 30 years she had charged him for sex, these holdings had multiplied and these were the results of her savings and investments.

Faced with evidence of cash and investments worth over $ 3 million, her husband was so astounded he could barely speak, but finally he found his voice and blurted out "If I'd had any idea what you were doing, I would have given you all my business !"

Sometimes, men just don't know when to keep their mouths shut.....

Recent column highlights:
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell your stocks. Click here.

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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