Whole Foods Market

A Case Analysis
5/30/2012

Kathleen Schuelke William Walker Amy Deater Thomas Black

Contents
I. Strategic Profile and Purpose..................................................................................................................... 2 II. Situation Analysis .................................................................................................................................... 2 Environment Analysis ............................................................................................................................... 2 Industry Analysis ...................................................................................................................................... 3 Competitor Analysis ................................................................................................................................. 4 Internal Analysis ....................................................................................................................................... 5 Financial Analysis..................................................................................................................................... 6 III. SWOT Analysis ...................................................................................................................................... 6 Strengths ....................................................................................................................................................... 6 Weaknesses ............................................................................................................................................... 6 Opportunities............................................................................................................................................. 7 Threats ...................................................................................................................................................... 7 IV. Strategy Formulation .............................................................................................................................. 7 Alternative #1: Aggressive International Expansion ................................................................................ 7 Alternative #2: Similar Store Decisions.................................................................................................... 8 Alternative #3: Increase Private Label Products ....................................................................................... 8 Alternative #4: No Change ....................................................................................................................... 8 V. Recommendation and Plan of Action ...................................................................................................... 9 Plan of Action ......................................................................................................................................... 10 Works Cited ................................................................................................................................................ 11

I. Strategic Profile and Purpose This case contemplates Whole Foods Market and the projected supply of organic foods to satisfy the growing demand. Whole Foods Market carries both natural and organic food; whereas natural means free of growth hormones and antibiotics, and organic refers to the standards defined by the U.S. Department of Agriculture (U.S.D.A.) as of October 2002. In 1978, John Mackey, cofounder and president of Whole Foods Market, owned Safe Way natural grocery store and later joined forces with Craig Weller and Mark Skiles, who also owned a natural grocery store. The three of them merged and opened Whole Foods Market in 1980, which took place in Austin, Texas. Whole Foods Market is the leading retailer of natural and organic foods, with 172 stores throughout North America, Canada, and the United Kingdom; moreover, there is discussion of expanding into the European area, as well. The company targets locations where 40 percent or more of the residents have a college degree, as statistics predict the college-educated market as being more likely to be aware of and supportive of nutritional issues (Haraston, 2005).

II. Situation Analysis Environment Analysis Examination of environmental factors is central to situational analysis development; as such, key factors influencing the environment, including technology, demographics, economics, sociocultural norms and global implications, are examined. Beginning first with the technological approach, advancements in this area have shaped the retail food industry into its current form. Prior to the advent of the supermarket, consumers relied on specialized retail stores and street vendors to supply their nutritional needs; however, the transition to chain stores, beginning in the 1920s, is largely attributed to major societal changes, including population shifts from rural to urban areas and increased disposable income(Haraston, 2005).

With the shift in population, demographics of urban areas are studied to ensure market potential and profitability of proposed Whole Foods Market sites; as such, the company varies their products according to geographic regions and local farm specialties. From an economic standpoint, the company integrates money-saving coupons, printable from The Whole Deal section of their website and offer tips to help consumers stay within their budget while enjoying organic and natural food to benefit overall health. While health and wellness are a current trend, low prices and convenience are dominant factors leading consumers to shop supermarkets; however, the rise in aging baby boomers and urban singles, both groups having high percentages of disposable income, have caused a demographic shift expanding the market for gourmet and specialty stores like Whole Foods Market (Haraston, 2005). Sociocultural norms have shifted along with demographics as an increasing number of women work outside the home. The demand for the convenience of prepared food has increased, paving the way for Whole Kitchen, Whole Foods Markets line of ready-to-eat meals. Catering to the changing demographic and sociocultural norms cultivates a level of flexibility which allows the company to cater to changing tastes and preferences of the consumer market. A final piece of environmental analysis probes into the global context. Driven by their Whole Planet focus, the company is selective in product offerings through global application of high quality standards. Additionally, the company actively supports organic farming and sustainable agriculture. For example, in 2011 the company stopped selling all red-rated swordfish and tuna as part of a larger initiative toward a fully-sustainable seafood department in cooperation with the Marine Stewardship Council (Whole Foods Market, 2011). Industry Analysis A U.S.D.A. food inflation forecast predicts costs to rise between 2.5 and 3.5 percent for 2012, pressuring margins in the organic food industry as consumers struggle to conform to budgetary restrictions during this low economic period (Agnese, 2012). Retailers in the food industry fear price increases as demand rises for organic and natural food products resulting from a shortage of product

availability, which has the potential to interfere with overall profitability. Traditional retailers offering organic products may delay passing along price increases, using profits from other products to bridge the gap, in an effort to gain market share, leading to high risk of food cost inflation for retailers specializing in natural foods. While the reduction is low, this causes great concern for the organic retail industry when examined through Porters Five Forces Analysis, especially in regard to threat of substitute products. The rivalry is growing stronger resulting from off-brand introduction of substitutes into the market at much lower costs to the consumer discount and drug stores offering organic and natural selections at a reduced price; likewise, 54 percent of organic purchases are made outside of specialty organic food stores (Organic Trade Association, 2011).Furthermore, according to a Nielsen report that surveyed 27,000 consumers from around the globe, 76 percent of respondents cited their perception that [organic foods] are healthier as the main justification for their purchase (The Nielsen Company, 2010). Healthier perception, rather than factual data, leads consumers away from brand-name purchases and toward economically priced substitutes, which could hurt the companys bottom line. Competitor Analysis In 1980, when the company was founded, there was little competition less than six other stores specialized in natural food in the United States (Haraston, 2005). Since then, organic and natural foods have gained significant popularity and the market for related products has thrived, giving rise to increased competitors including Trader Joes Company and Wild Oats Markets. The company responded positively and experienced much growth, largely attributable to mergers and acquisitions. In 2007, the company
Other: Internet, farmers' markets, specialty stores, 7%

Consumer Purchase Activity

Natural Retailers, 39%

Mass Market Retailers, 54%

purchased Wild Oats Markets, a major competitor, despite the governments efforts to block the transaction on concerns the acquisition would reduce competition (Fineman, 2007). Currently, there are three companies in competition with Whole Foods Market: The Kroger Company, Safeway Incorporated, both which are publicly held, and Trader Joes Company, a privately held company(Yahoo! Finance, 2012). While Whole Foods Market focuses primarily on the natural and organic products, the Kroger Company and Safeway Incorporated diversify their competitive strategy to include multi-department stores offering organic alternatives alongside their general grocery and merchandise selections. Trader Joes Company, however, is more of a direct competitor of Whole Foods Market in that it incorporates health foods, organic produce, and nutritional supplements rather than traditional grocery offerings. To stay competitive, Trader Joes Company focuses on upscale grocery items, does not include service departments, and has its own line of more than 2,000 private-label products comprising 70 percent of overall sales volume (Trader Joe's Company, 2012). Internal Analysis Whole Foods Market divides the United States into 11 regions to ensure freshness and quality in local food sources (Whole Foods Market, 2011). Focusing on locally grown products, combined with buyers personally visiting and inspecting sources, provides value to customers in ensuring adherence to the highest quality standards. Whole Foods Market focus on selecting suppliers with high standards regarding sustainable agriculture allows the company to afford a level of empowerment to individual stores; thus, allowing regional buyers to seek out locally grown produce according to regional, seasonal supplies. In defining the term local, corporate standards require a maximum travelling distance of seven hours, whereas a majority of the stores have shorter maximum distance standards (Whole Foods Market, 2011).

Financial Analysis The company increased sales growth by 87 percent, to $3.86 billion, during the five year period from 2000 through 2004 (Haraston, 2005). In 2012, eight years later, sales are expected to increase 15.2 percent, from $10.1 billion to $11.6 billion, growth largely attributable to the projected opening of 27 new stores combined with an increased selection of value-priced products (Agnese, 2012). Compared to previous fiscal year profit analysis, this is aligned with 2011 trending gains, which are up 12.2 percent from 2010 and 25.5 percent from 2009(Yahoo! Finance, 2012). Additionally, due to trending growth in organic and natural food products and the competitive nature of the retail grocery market, the risk assessment of Whole Foods Market is low(Agnese, 2012)

III. SWOT Analysis Strengths Originally, health food stores were small, expensive, and didn't carry a large variety of products; Whole Foods changed this and became the founding firm of the organic industry. They offer catering, seasonal products and recipes, in-store events such as cooking classes, and free tours around the store for customers with food allergies. The employ a little over 52,900 people throughout the world. Supported by complementary industries such as: Health Industry, Health Insurance Companies, Health Care Specialists, Fitness Centers and Wellness Programs. They are the undisputed Organic Supermarket Industry Leader.

Weaknesses Not supported by U.S. government subsidies; therefore, companies utilizing non-organic ingredients can grow more food cheaper and faster. The number of organic food farmers is growing slowly and the supply chain is underdeveloped, causing shortages within the industry.

Reputation as "Whole Paycheck, a play on Whole Foods, because of the high price of organics over other grocery store selections.

Opportunities Promote and build brand identity with organic foods, eventually leading to the idea that when people think "organic" they will think "Whole Foods." Sponsor town events to increase recognition of the brand name, increasing consumer awareness. Find cost effective wayscreate value for consumers, such as rewarding repeat customers and targeting new customers with a customer loyalty rewards program. Increase benefits of healthier eating through high quality natural and organic foods. Challenge misconception of healthy foods being too expensive in the eyes of shoppers through creating awareness of Whole Foods store brand that is comparable in price to other grocery chains. Threats Changes in government regulations on organic food could increase costs and threaten profitability Low U.S.economic activity instilling desire to save money and not spend on quality organic groceries. Increased competition from existing supermarkets that re-branding, copying atmosphere, and offering lower-priced organic and natural food selections to compete with Whole Foods Markets.

IV. Strategy Formulation Whole Foods Markets objective is to increase profitability in revenue, sales, and profit margins without sacrificing quality and its current standing as the market leader. As such, the following strategies focus on differing applications to ensure the overall success of the company in light of the factors discussed previously in this report. Alternative #1: Aggressive International Expansion Whole Foods Market stores will experience many advantages through aggressive global expansion. A key market is the United Kingdom; likewise, expansion in this area provides enormous

growthpotentialbecause of the large population and their more sophisticated organic market. Additionally, benefits of expansion would be great in the following ten countries, as they are the top healthiest-eating countries in the world: Japan, Singapore, China, Sweden, France, Italy, Spain, South Korea, Israel, and Greece. Additionally, global expansion in the Asian market will require Whole Foods Markets to specialize in natural seafood. If done correctly, the company will generate increased profit and become the most well-known organic grocery company on a global level. Possible disadvantages with this strategy begin with expansion costs being high and profits not immediately being realized. Negative publicity will follow upon initial entering of a foreign companyinto a new market, resulting from consumers initially resisting change. The company must also navigate unfamiliar government regulations and agencies in the foreign countries. Alternative #2: Similar Store Decisions The company currently allows each store to make independent operating decisions regarding suppliers and store layout. If the corporate officedictates guidelines on store layout, taking the best tactics from each store and incorporating them across the chain, costs should decrease and operations will run more efficiently. Corporate will also better understand potential problems within each location and can more easily take corrective action. Major disadvantages include taking away individual empowerment and purpose from the stores Team Leaders, increased difficulty in catering to the demands of local communities, and may result in loss of the classification as one of the top companies to work for. Alternative #3: Increase Private Label Products Having only three private label products, including 365 Everyday Value, Whole Kids Organic, and Whole Kitchen, limits profit potential and brand recognition. Increasing the selection ofproducts that are less expensive would attract a different target market of consumers, thus increasing overall customer base. However, this strategy possibly will create disadvantages. Consumers, basing their shopping off high quality food,may turn away from Whole Foods Market due to lower prices often being equated with poor quality. Additionally, Whole Foods Market may create a negative reputation of turning away from all natural and organic items if too many less expensive private label products are incorporated. Alternative #4: No Change

Whole Foods Market is doing well and is profitable in their industry; as such, no change is a considered option. Having been the industry leader for a considerable amount of time, trends, if accurate, indicate they will continue as the leader in the future. Their reputation of providing high quality natural and organic food while focusing on locally grown selections and sustainable agriculturehas proven successful. Targeting areas where at least 40 percentof consumers have college degrees is also a successful strategy due to market research showing that group having increased interest in nutritional value. Empowering each store to make decisions creates independence and customization of each store to better reach the local consumers. The strategy of no change, however, could have negative implications, such as losing market share by not adapting to changing consumer tastes and preferences. Whole Foods Market must strive towards a competitive advantage to stay ahead of competitors.

V. Recommendation and Plan of Action The recommendation is to use Alternative #3: Increasing Private Label Products, with specific focus being on their line of 365 Everyday Value to generate a lower cost image. A Food Marketing Institute study in the U.S. found that retailers earn a 35 percent gross margin on store-branded products compared to 25.9 percent on comparable nationally advertised brands; therefore, expanding the 365 Everyday Value label should yield an additional 8 percent in operating revenue. Additionally, three main advantages for the expansion of private label brands include: (1) control over pricing, marketing, and distribution of the product; (2) personalized image leading to increased customer loyalty; and (3) capturing the market as shopping preferences change with consumers moving towards economically price private label products. These points provide an edge over the other brands and allow Whole Foods Market to showcase the 365 Everyday Value label in a broad range of varieties from food to cosmetics. This form of branding will help create personalized and unique brand recognition for company, building value and recognition through providing consumers with an alternative to national brands. Furthermore, a report in the Wall Street Journal showed that consumers are developing loyalty to store brands for reasons besides price [often paying] more for store brands, many of which have been positioned as gourmet or specialty items

(Karp, 2012). The competition has seized this opportunity to grow private labels to differentiate themselves, incorporating flagship promotions that offer premium and organic brands such as Safeways SELECT and O Organics, Krogers Private Selections and Naturally Preferred. These premium private labels serve not only to distinguish supermarket chains but product lines from one another (Volpe, 2011). This analysis shows that Whole Foods Market has been extremely successful in developing the natural and organic food shopping experience in the ever changing competitive landscape; therefore, the expansion the 365 Everyday Value label is projected to reach across all product lines, reassuring patrons that Whole Foods Market is not only concerned with wholesome products that are healthier, sustainable and kinder to the environment, is concerned with their financial well-being, as well. This will abate the growing concern that organic foods are more expensive than conventional foods, and leadconsumersaway from the belief that shopping at Whole Foods will cost them their Whole Paycheck.

Plan of Action Revision of the current line of products is of utmost importanceto determine what areas of expansion are needed to meet customers needs. As to implementing this increase in private label variety, established safeguards are currently in place with suppliers to ensure quality, price, and sustainable practices; thus, little added expense is required outside of selecting specific product lines and developing promotional campaigns to create customer interest. Whole Foods Market will not stop at expanding the 365 Everyday Value product line; the products must reach the hands of patrons. Utilizing cross-merchandising and promotional displays of compare and save signage, point of sale, internet and register generated coupons, along with product profiles on our website will increase awareness and generate interest in the consumer. Company standards of quality and sustainabilityare unmatched in the retail food industry; thus, once the new product line gains exposure, word of mouth recommendations by customers will further drive these new categories forward in sales.

Works Cited Agnese, J. (2012, May 11). Whole Foods Market Stock Report. Retrieved from Standard & Poor's: http://0www.netadvantage.standardpoor.com.libcat.ferris.edu/NASApp/NetAdvantage/simpleSearchRun .do?ControlName=CompaniesSimpleSearch Fineman, J. (2007, August 28). The Washington Post. Retrieved from The Washington Post: Harris Teeter Supermarkets Haraston, P. a. (2005). Whole Market Foods: Will There Be Enough Organic Food To Satisfy The Growing Demand. Karp, H. (2012, January 31). the Wall Street Journal. Retrieved from Store Brands Step Up Their Game, and Prices: http://online.wsj.com/article/SB10001424052970204624204577179193540556620.html MSN Money. (2012, May 18). Whole Foods Market. Retrieved from MSN Money: http://investing.money.msn.com/investments/company-report?symbol=wfm Organic Trade Association. (2010, June). Consumer Profile Facts. Retrieved from Organic Trade Association: http://www.ota.com/organic/mt/consumer.html Organic Trade Association. (2011). Industry Statistics. Retrieved from Organic Trade Association: http://www.ota.com/organic/mt/business.html The Nielsen Company. (2010). Reasons for Organic Food Purchase. The Nielsen Company. Thunderbird School of Global Management. (2010, December 13). Thunderbird School of Global Management. Retrieved from Competitive strategy at Whole Foods Market: http://knowledgenetwork.thunderbird.edu/student-projects/2010/12/13/whole-foods-market%E2%80%93-competitive-strategy/ Trader Joe's Company. (2012, May 17). Trader Joe's Company Profile. Retrieved from Yahoo! Finance: http://biz.yahoo.com/ic/47/47619.html Volpe, R. (2011). The Relationship Between National Brand and Private Label Food Products. Washington, DC: United States Department of Agriculture. Whole Foods Market. (2011, April 12). Newsroom. Retrieved from Whole Foods Market Newsroom: http://media.wholefoodsmarket.com/news/whole-foods-market-replaces-red-rated-swordfish-andtuna-with-sustainable-s Yahoo! Finance. (2012, May 17). Whole Foods Market Competitors. Retrieved from Yahoo! Finance: http://finance.yahoo.com/q/co?s=WFM+Competitors Yahoo! Finance. (2012, May 18). Whole Foods Market Financials. Retrieved from Yahoo! Finance: http://finance.yahoo.com/q/cf?s=WFM+Cash+Flow&annual