Whole Foods Strategic Audit

Whole Foods Market competes successfully within the organic/natural foods industry, having enjoyed close to 19% growth over the past five years. As a point of comparison, Kroger – a traditional supermarket operator – only grew 4%. On a larger scale, the organic food retail industry in the U. S.

Has fared well in the last decade. Reported sales grew 23. 4%, which is much more than the 3. % growth of the overall food industry during the same time period. However, a recent announcement from a Whole Foods competitor recently sparked considerable buzz In the Industry and put a mild dent In Whole Foods Market stock price. The announcement came from the Industry giant Wall-Mart who unveiled Its plan to more than double Its organic offerings and begin marketing to more upscale clientele, many of who currently shop at Whole Foods.

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Wall-Mart is well known for squeezing supplier margins to bring “everyday low prices” to consumers.

As the industry leader in several retail categories, including traditional grocery sales, Wall-Mart has the size and influence to significantly impact the organic DOD landscape if it dedicates itself to the market. Although Wall-Mart’s impact on the natural niche remains to be seen, it’s critical that Whole Foods review its strategy in light of Wall-Mart’s entry. Whole Foods’ advantage comes from offering both high quality and a wide variety of organic products. It also excels at delivering an Inviting shopping experience for Its customers.

Because of these high-value offerings, Whole Foods sets Its prices In the premium range.

Our concern with Wall-Mart entering the market Is that the overall price range of organic foods may decrease, resulting In customers expecting those products to be less expensive at other retail outlets, including Whole Foods. In addition, if Wall-Mart continues to pursue the organic food niche, it may give existing organic food competitors the ability to offer more products at a lower cost. Although this competitive threat may tempt Whole Foods into entering a price war with Wall-Mart, our recommendation is that they continue to pursue their current strategic course of premium differentiation.

This course will include continuing to offer a high-end shopping experience, including knowledgeable employees such as dieticians and chefs. Long-term, Whole Foods may consider backward Integrating to control its own food supply.

Even though Wall-Mart Is Indeed a formidable competitor, we believe that their customer base Is ultimately looking for a different product (only low prices) than then Whole Foods customer (high quality and the overall shopping experience), and we would do well not to waiver from our current direction. PEST Analysis B.

Porter’s Five Forces Ill. Competitor Analysis A. Trader Joey’s B. Wild Oats C.

Wall-Mart IV. Whole Foods Firm Analysis A. Current Competitive Position B. Resources and Capabilities C. Profit-Earning Potential V. Problems/Opportunities VI.

Recommendations A. Short-Term B. Long-Term VI’. Endnotes VIII. Appendices and Exhibits page Number 44569 10 11 12 14 14 14 17 19202021 2224 Introduction Whole Foods Market, a retailer of organic/natural foods, is the largest player in a hot market, experiencing nearly 19% growth over the past five years. When you compare that to 4% growth over the same period for Kroger, a traditional supermarket operator, one can begin to grasp how special Whole Foods’ rise has been.

2 With projected sales for 2010 continuing to rise (Whole Foods recently raised its target from $10 billion to $12 billion) and consumer demand growing, Whole Foods appears o have limitless potential. 3 But a recent announcement from a Whole Foods competitor recently sparked considerable buzz in the industry and put a mild dent in Whole Foods Market stock price.

The announcement came from the industry giant Wall-Mart who unveiled its plan to more than double its organic offerings and begin marketing to more upscale clientele, many of who currently shop at Whole Foods. Wall-Mart is well known for squeezing supplier margins to bring “everyday low prices” to consumers. As the industry leader in several retail categories, including traditional tartar niche remains to be seen, it behooves Whole Foods to review its strategy in light of Wall-Mart’s entry.


Organic/Natural Foods Industry Overview Whole Foods Market competes in the specialty and organic food retail industry as one of the few firms that offers this type of food in a supermarket setting. The rising popularity of Whole Foods has played an integral part in the industry growth and consumer recognition over the past two decades. The high growth and popularity of the organic and specialty food industry has lifted Whole Foods, along with other firms, into the consumer mainstream of food retail.

Organic food can now be found in many different retail establishments, including supermarkets, specialty and organic food sellers, mass food retailers, and other specialty food outlets. Natural food stores such as Whole Foods now make up 10% of the grocery business, even though they are relatively new players.

4 Demand for organic products by a growing number of consumers has fueled most of the development. A Whole Foods study conducted last year found that nearly two-thirds of Americans had tried organic foods and beverages, up 54% from 2003 and 2004. The organic food retail industry in the U. S. As fared well in the last decade.

Reported sales grew from $4. 2 billion in 1997 to $7. 9 billion in 2000, which represents an annual growth rate of 23. 4%. Comparing these figures to total food sales in the U.

S. Within the same period, with sales of $444 billion in 1997 to $489 billion in 2000, representing an annual growth rate of 3. 3%, the organic food industry is growing much faster than the overall food industry. 6 Traditional groceries have been haunted by extremely thin margins, sparked largely by fierce price competition.

But the outlook for the organic foods market has looked much brighter.

Profit margins are generally much higher for organic foods. Last year, organic retail sales topped $15 billion, up from $1 billion in 1990, according to the Organic Trade Association in Greenfield, Mass. 7 And still, organic foods account for only a small portion of the $550 billion in U. S. Food sales. Thus, there is plenty of room to grow.

The Organic Trade Association estimates that the average U. S. Household will spend 14% of its budget on organic products in 2025. 8 A.

PEST Analysis There are several external influences affecting the macro level business environment for organic groceries.

Using the PEST analysis, which tigresses influences as political, economic, socio-cultural, or technological, as a framework, it becomes clear that political, economic, and socio-cultural factors are currently making the most impact. 1 . Socio-cultural Undoubtedly, the organic food market has benefited from an increasingly hallucinations consumer. The market for healthier foods has grown more than 10% per year. 9 Research has continued to shine a light on the dangers of pesticide resins and preservatives in foods.

Over the last several years, the federal government has banned or restricted the use of over a dozen pesticides due to health risks. And at least one organization has gone as far as to produce a shopping guide for pesticides in produce to allow consumers to make informed decisions. 10 Even though studies are hardly conclusive, many consumers view healthy eating as a lifestyle choice and are willing to pay extra for it. As one mother put it, “l have four young children, and I’m concerned how chemicals and other foreign ingredients might affect their health.

If I can control some of the toxins in their bodies, and it helps them, it’s worth its weight in gold. “11 2.

Economic Generally speaking, consumers do not curb their food purchases based on respective income. However, this does not mean that grocery consumers are not price sensitive. Household income plays an important role in which products consumers choose to purchase. As organic products are priced higher than their non-organic counterparts, consumers must balance disposable income with desired health benefits. 5 3.

Political The political landscape for health issues is constantly evolving.

New pesticides are being banned regularly, leading us closer to a more organic culture. Moreover, diseases such as Mad Cow and Avian Flu spawn intensive governmental regulation to protect the welfare of the general public. Recently, there has been great debate on the standards that define organic foods. Large companies have tried to use their influence in Washington to weaken the national standards to allow certain synthetic substances in the preparation, processing, and packaging of organic foods.

Despite resistance from organic activists, the new standards were passed into law as corporation environmental practices, which largely swings along political party lines, also plays a role in the behavior of market participants.

B. Porter’s Five Forces Driving the annual double digit compound growth rate in this industry is consumer demand ND attitudes toward healthier living and corresponding lifestyle choices, which includes adding more organic foods into daily consumption.

However, aside from consumer drive, other factors play into the relative success of this industry, including relatively high barriers to entry, an abundance of substitute goods found in general grocery stores, and supplier issues such as union issues with industry labor, and pricing from food distributors and makers/growers. 1 . Customers A critical factor in the rapid growth seen in this industry over the last decade, and projected continued growth at similar rates, is customer demand.

Driving such high consumer demand is the overall notion that organic food represents a much safer and healthier choice in available food products.

This perception alone is expected to drive continued growth in the organic food industry for the near future. Firms in this industry attribute future growth to other facets of consumer purchasing, including a broadening of the of the natural products consumer base, which in itself is being driven by healthier eating patterns, increasing concern over food purity and safety, an increased appreciation for the livelihood of organic food producers, and awareness to buy reduces that support local farmers and producers.

Although natural food products typically are priced at a premium to other food items, consumers are willing to pay these prices, which mean these consumers see an added value in high quality naturally grown food and are willing to pay for it. For example, in 1999, general supermarket sales of natural and organic foods increased by 19%, which indicates a broader acceptance of organic foods and wider availability of product. 3 6 Other factors driving increased consumer demand in this industry include a butterfingered and wealthier consumer base, a greater concern for the environmental effects of poor farming processes which result in soil erosion and water contamination and in overall increase in consumer awareness regarding the purity and safety of food.

To this point, customers in recent years have been exposed to increasing issues regarding food safety, such as genetically engineered food, presence of pesticide residues, growth hormone effects on human health and development, artificial ingredients and other chemicals found in food, and diseases that affect the food supply, such as mad cow disease.

In general, food buyers are demanding more information regarding the factors of production for the food arched, including where the food originates, how and where it is grown, chemicals or growth enhancement used, harvesting and preparedness techniques, and distribution safety. These consumer preferences are the driving growth in the organic food industry. 2. Suppliers In response to consumer demands for information and safe food, the organic food industry has established guidelines for food safety, purity, and quality, and definitions for their product.

To differentiate organic food from other food stuff, the industry has defined “organic” food as: Mostly or Heimlich Minimally processed and as near to their whole, natural state as possible 14 These organic food definitions provide the retailer with a product differentiation means, and as consumers live longer and demand healthier lifestyle choices, to an end result of increasing power over customers to maximize profitability and growth.

The power struggles between retailers in the organic food industry and their suppliers continue in an ever changing and expanding market. Two suppliers that play critical roles in the success for any firm in the industry are organic food producers and the labor workforce. Organic food producers supply this industry with the goods that provide profitability for the retailers who sell them. Any disruption of the supply of organically grown food, from local to international suppliers, would profoundly impact this industry.

Whereas traditional grocery stores purchase their products through brokers who mark up prices to cover their costs, organic food retailers can purchase through this distribution, or bypass brokers and go straight to wholesalers or manufacture their own products, which maintain organic product quality and control. Organic food producers range in size from small, local, family- wend farms that produce low quantity, high quality products, to international organic farming firms.

Both types of suppliers have the 7 power to charge premium prices to retailers, as farmers must maintain certain growing standards to label their products as organic. Also, these farmers are currently the only firms producing their products, and because of the limited number of suppliers, they again have power over the retailers. However, economics of the agriculture industry is purely market-driven, meaning prices for their products are often very elastic, based on consumer demand.

Because of the increasing demand or organically grown foods by consumers, farmers are more willing to produce such goods, and are less willing to exert their power over retailers in the industry. As a result, organic farmers often charge prices that retailers and consumers are willing to pay, which leaves the consumer with the overall power. Another supplier concern for this industry is the state of labor relations for the retailers.

Many firms in this industry rely on their workforce as a differentiation strategy for competition.

Firms hire a range of employees, from highly educated food experts, chefs, and nutritionists to low wage staff to work in stores. As firms differentiate their products via store experience and knowledgeable and friendly staff, if the supply of labor decreases or unionizes, power from the labor group increases even more. Firms currently relinquish some power to the professional staff, and if the low wage staff forms a union, their power would increase over the retailers, which might affect who competes in the industry and overall industry profitability. 3.

Barriers to Entry Employing a specialized professional workforce is one barrier to entry into the organic food industry.

While obtaining this resource might cause cash issues, larger barriers to entry loom. One barrier is the high cost of obtaining organic food require specific growing conditions and extremely specialized care, dictate that farmers will charge higher prices for their goods. Another barrier to entry is the logistics of establishing a business in this industry. Store locations must be placed in strategic locations easily accessible by the target market.

Also, because organic food carries specific rules and regulations to be certified and labeled as such, every operating part of the business must adhere to these rules to maintain product integrity. Operating units that manage products in the organic food industry include rowers, shippers, processors, certifiers, brokers, distributors, and retailers, all of which must operate to specified standards, which raises entry costs.

Another barrier that adds to entry costs is The Organic Rule, adopted by the Unites States Department of Agriculture (USDA) in 2002 which set standards for organic food production, storage, and retailing.

Any firm competing in this industry must comply with these standards, which include the prevention of commingling organic and conventional products, protecting products from contamination, proper labeling, handling, shipping, and records kept with vendors. A USDA-accredited certifying agency must certify any products that are sold under the “organic” label. Firms that compete in this industry must obtain governmental certification to sell products. 15 These barriers have inhibited the number of firms competing in this rapidly growing industry to one major firm, and a few smaller firms. .

Substitutes As a major substitute to organic food products, conventional food sold through supermarkets has not impacted the growth of the organic industry. In fact, growth in the supermarket industry has flattened to 3%-5% annually over the last few years. The two industries can coexist, each filling specific consumer needs. Consumer demand drives the organic food industry, which will continue to grow as the consumer base increases. Some firms in the industry consider supermarkets as gateway channels into organic foods, rather than substitutes (see Exhibit 1. 16 Overall, substitute goods have not decreased consumer demands for healthier lifestyle choices and living, which includes the organic food industry.

5. Competitive Environment Within the industry, the number of firms competing for consumer demand has remained low due to the barriers to entry described above, with one argue player competing against a few smaller firms that sell only organic foods, larger supermarkets testing entry, and farmer’s markets that cannot compete on a large scale.

Firms that can manage the high capital costs of entry, government certification requirements, acquisition of talented professionals and low cost manual labor, and the intricate details of supplier management to ensure product quality can survive in this growing industry. However, to attain profitability and growth, firms in this industry must produce what consumers demand, and demand for organics is rowing: according to the data in Exhibit 2, projected organic food retail sales for 2006 is $20 billion, up from $1. Billion in 1990. 17 The industry indeed is driven by the consumer.

Ill. Competitor Analysis Despite the fact that there is a relatively low number of competitors in the natural/organic foods industry, there are a few discusses two traditional competitors – Trader Joey’s and Wild Oats, and one “non- traditional” competitor – Wall-Mart. We think it is very valuable to consider the two organic firms because they directly compete within the natural foods industry. Wall-

Mart also occupies a prominent place in our analysis because they’ve recently announced an expansion in their offering of organic foods, and their low prices and ability to squeeze suppliers pose concerning issues to the future direction of Whole Foods’ strategy. 9 A.

Trader Joey’s Trader Joey’s (known as It’s to its fans) is an important competitor of Whole Foods because both stores cater to “bodies” – those who delight in gourmet food. Also, both companies emphasize the importance of delivering an enjoyable shopping experience; buying food is transformed from a chore into a fun part of the ay.

It’s has cultivated a base of fanatical devotees who drive for hours to visit stores, write fan websites and blobs about the store’s products, and wax poetic about the culinary delights found there. How has the company managed to develop such a cult- like following? They’ve done this by offering a winning combination of unique products, low prices, and a fun atmosphere. What do lime-and-chili peanuts, peanut butter-stuffed pretzels, and chocolate-covered espresso beans have in common? These items, among many others, are sold at Trader Joey’s stores under the store’s own private label.

It’s store shelves are occupied 80% by its private label products, with the remaining 20% taken up with other brand names.

18 It’s offers many unique foods that can only be found at their stores, and nowhere else. Customers are lured by the unusual selection, and often get hooked on the interesting delicacies offered at It’s. The company has a tasting panel that has to approve a food item before it’s added to the private label product line-up. Also, all food products sold under the Trader Joey’s name must be free of artificial colors, preservatives, flavors, and MS. 19

The company has done a great Job of associating its brand with high quality, resulting in customers viewing Trader Joey’s private label foods as truly excellent – not sub-par, as may be the case with other store brands.

One thing to note, though, is that the average Trader Joey’s store only carries up to 3,000 different product types, as compared to the 55,000 offered at a regular supermarket. 20 Also, product selections change frequently; the bell pepper salsa you are craving might disappear from the shelves between visits… Sometimes the company discontinues a product that wasn’t as big of a hit, so it can deliver new products to customers.

Also, they may not have been able to get a big shipment of your favorite salsa at the economical price they needed. With such high-quality products, you might think that high prices are a given. After all, other gourmet food grocers charge premium prices. However, offering economical prices is a key part of Trader Joey’s strategy. It’s founder, Joe Coulombs, stated that his goal was to appeal to “people who are well-educated, well-traveled, and underpaid.

“21 These people enjoy nutritious, tasty, unique food, but don’t want to go broke filling their shopping baskets.

Trader Joey’s is able to keep prices low by armorial stocking its own private label, offering only a limited selection of products, 10 Along with offering high-quality products at a low price, It’s also delivers a fun, enjoyable shopping experience. All It’s people from the CEO down to the part-time store employees wear bright Hawaiian shirts to work. Store d©cord makes you feel like you’ve Just wandered into the neighborhood co-cop, and employees are helpful and friendly. Store employees are reportedly paid better than the industry average, and the company’s website describes how all people are promoted from within.

2 What can we expect from It’s in the future? Currently, there are Trader Joey’s stores in 21 states, for a total of approximately 260 locations. 23 They are a privately held company, so their financial performance is unknown – Yahoo! Finance did offer one piece of information: 2004 revenue was estimated at 4 billion. As a point of comparison, Whole Foods had sales of 5 billion, and the industry average is 3. 03 billion. 24 The company’s website boats that they are a growing company, with expansion into several new states slated to occur in the near future. 5 If they build locations next to more Whole Foods stores, their comparatively lower prices may pose competitive challenge, but they may need to consider a wider product variety to become a true challenger.

B. Wild Oats Wild Oats is another important competitor to Whole Foods. Along with Trader Joey’s and Whole Foods, Wild Oats also concentrates on selling foods that are natural or organic – free from artificial colors, flavors, and preservatives. They are also closer to Whole Foods in their average store size and variety of products offered – unlike Trader Joey’s, they offer a wide variety of products in a roomy store environment.

Their pricing strategy is also similar to Whole Foods – they sell gourmet foods at premium prices.

Wild Oats currently has 112 stores in 24 states – they also have locations in Canada. 26 The company’s financial do appear to be a little lacking, as their operating margins are only 1. 36% vs.. The industry average of 3.

6%. Also, their revenue growth is . 3% as compared to the industry average of 5. 7%. Their gross margin does outpace the industry average slightly – 29. 19% vs.

. 28%. 7 Company management blamed some of these lackluster numbers on acquired stores that were in less-than-ideal locations, and they expect performance to improve as these are moved to new locations. 28 Similar to Trader Joey’s, we expect Wild Oats to continue its growth trend in the future. A Forbes.

Com article mentioned that the company leaders were expecting to open as many as 450 new stores in the United States, although the expected timeline for those openings wasn’t stated. 29 11 C. Wall-Mart Wall-Mart needs little introduction. The retail giant has continued to conquer new product offerings while redefining how retailers do business.

As some have put it, “Wall-Mart is an irresistible (or at least unavoidable) retail force that has yet to meet any immovable objects.

“30 Wall-Mart is particularly famous for its low prices, inventory management, and sheer market influence. . History Sam Walton, the founder of Wall-Mart, had the idea to open discount stores in small towns and Wall-Mart Stores went public with 18 stores and sales of $44 million. Avoiding regional retailers by continuing to focus on small towns, Wall-Mart continued to grow and by 1980 had 276 stores and sales of $1. 2 billion.

In 2002, Wall-Mart was recognized as America’s largest corporation by Fortune magazine. Today, Wall-Mart is the world’s largest retailer with $285 billion in global revenue, $10. 3 billion of which represents net income, in the year 2005. 31 Although Wall-Mart began with a humble, mall-town flavor, focusing on discount staples such as food and clothing, the behemoth has tackled every retail niche it deems profitable. Wall-Mart’s offerings now include electronics, health and beauty products, sporting goods, entertainment, toys, pharmaceuticals, and home furnishings.

The company has even tackled online music, banking, and liquor sales.

Suffice it to say, Wall-Mart typically succeeds when it targets a market. Much of Wall-Mart’s success can be attributed to its “everyday low prices. ” Despite recent criticism for underpaying its employees, Wall-Mart is the new of the industry for its ability to squeeze margins. In particular, because of its massive size and market power, suppliers often have little discretion when it comes to accepting Wall-Mart’s individualized demands. For instance, Wall-Mart has almost single-handedly ushered in the widespread use of many inventory management tools by requiring many of its suppliers to incorporate such technology.

Wall-Mart did not fully confront the grocery industry until 1988 when it opened its first Supercomputer, a complete grocery store along with a 36-department merchandise store. As a testament to its ability to dominate a market, Wall-Mart has quickly become the action’s largest seller of groceries with over 2,000 Superstores in 45 states. And it does not plan to stop there. Wall-Mart already has plans to open up to 280 Superstores in the United States in 2006. 32 In a noticeable shift from its low price mantra, Wall-Mart has begun to take note of the recent success of retailers such as Target and started to offer more upscale offerings.

In 2005, Wall-Mart launched its Metro 7 women’s apparel line, which has proven extremely successful, 12 and it plans to introduce an urban-inspired label for men in July of this year. Furthermore, Walter plans to remodel 1 ,800 of its stores by mid-2007 to further appeal to more upscale shoppers. Lavish changes will include mock-hardwood floors, wider aisles, and nicer bathrooms. 33 2. Wall-Mart’s Entry into Organic Foods Anytime the world’s largest retailer decides to enter a market, other retailers are wise to pay attention.

But when Wall-Mart attacks a company’s core product offering, the company must do more than take note?it must react.

Wall-Mart recently announced that it would further its commitment to the organic market. Items will include organic cotton baby clothes to ocean fish caught in environmentally friendly ways. The industry ant has begun experimenting with the sale of more than 400 organic foods, more than double its current offerings, to plan for a nationwide launch “at the Wall-Mart price. “34 This recent endeavor has everyone speculating on the impact on the organic foods market.

Simply stated, how will Wall-Mart’s supplier power affect how organic groceries do business? As Jeff Erikson, U. S. Erector of London-based potential because it’s not Just Wall-Mart we’re talking about, it’s their entire supply chain. “35 Certainly, extending its organic offerings and in turn, improving its environmental practices has brought Wall-Mart some goodwill. For the last several years, the company has continually fought bad press for its practices. Even Carl Pope, executive director of the Sierra Club and board member of Wall-Mart Watch, a union- backed group that criticizes the retailer, praised the move.

36 But not everyone is excited. Organic farmers have generally benefited from strong demand and healthy margins.

Many farmers fear that the company will use its market strength to drive down prices, as it has done with everything else it sells. As Richard Dilled, who co- owns a large organic farm in Wisconsin, put it, “Wall-Mart has the reputation of eating up on its suppliers. I certainly don’t see ‘selling at a lower price’ as an opportunity. “37 And Tilde’s fears are not unfounded.

Wall-Mart’s CEO has made the company’s goal very evident. During the company’s annual meeting, he said the following: ‘We know that customers at all ends of the income spectrum want organic and natural foods.

But, frankly, most of them Just can’t afford the high prices the specialty stores charge. Well, we don’t think you should have to have a lot of money to feed your family organic foods. “38 Three out of four respondents in a November study agreed.

9 In order to achieve lower prices, the organic landscape may change in several significant ways. First, it is highly likely that retailers will import more supplies from overseas markets 13 where costs are less. In addition, more U. S. Farmers may make the switch to organic farming, thus increasing the local competition.

For example, in California alone, the state has shown a 27% increase in organic livestock production over the past year.

Organic vegetable production has also experienced a substantial increase, with 12% more acreage devoted to the cause. 40 All this begs the question of whether Whole Foods, the current organic retail leader, can sustain its competitive advantage in light of Wall-Mart’s entry into the market. IV. Firm Analysis A. Current Competitive Position Whole Foods has 181 store locations in 32 states, Canada and the United Kingdom.

1 They lead the gourmet grocery industry with revenues of 5 billion. Their gross margin of 35% and operating margins of 4. 87% both beat the industry averages of 28% and 3. 6%, and their quarterly revenue growth YOU is a whopping 21. 8% compared to the industry average of 5.

7%. 42 Whole Foods has very strict standards for the types of products offered at their stores, and they offer n amazing variety of items fitting within these parameters – along with traditional grocery products, Whole Foods also offers product categories as diverse as natural cosmetics and baby clothes.

All told, they offer approximately 20,000 different food and non-food product types at each store location. 43 In addition to an impressive collection of healthy products,