Whole Foods path to international success stems from CEO and founder, John Mackeys initial vision for the company, To promote vitality and well-being for all individuals by offering the highest quality, least processed, most flavorful natural and naturally preserved foods available. (John Mackey) Rather than becoming one of the dime-a-dozen smaller retail chains throughout America, Whole Foods set out to open its own massive stores of around 50,000 square feet (Meador & Britton). After Austin Texas, they expanded out to Houston, Dallas, Palo Alto, and even Eastward to New Orleans during the 1980s. As Whole Foods continued to expand, through both opening new stores and merging with other companies, it began acquiring existing natural food stores, so that some twenty years later in 2006, it was the nations largest natural/organic retailer. From day one, their concept has been to create an inviting and interactive store atmosphere where shopping for food was a fun and pleasurable experience. Analysis of the Industry
The Grocery industry, which includes conventional supermarkets, supercenter, limited-assortment and natural gourmet supermarkets, netted approximately $563 billion in sales in 2010, a 1% increase from 2009. Since the organic and natural foods departments account for approximately $65 billion dollars annually of the $563 billion dollar pie, up 7% from 2009, this was a very important factor for Whole Foods (Meador & Britton). According to the statistics, the natural and organic foods industry is represented by a wide range of consumer goods and continues to grow with popularity each year. Natural and organic foods are those consumer goods prepared without any artificial ingredients, making them whole and natural. The USDA sets the standards for the term natural to strictly mean meat and poultry along with the regulation of the term organic under the Organic Foods Production Act (The Natural Industry, 2012).
In the early 1990s, Natural and Organic food stores were normally thought as small, not well lit, not well organized and unpopular. Organic foods were considered inferior, unreliable, and much more expensive; an unrealistic option for the everyday consumer (Marquis, Besharov, & Thompson). This was a big factor for Whole Foods and played a big role in their store layout and design in the years to follow. Even today, Whole Foods carefully maps out store location while designing each individual store to fit the particular location and reflect the surrounding community. Mackey sought to take the banal perception of grocery shopping and transform it into a good experience, Shopping for groceries is like a chore, its like doing the laundry or taking out the garbage. Whole Foods strives to make shopping engaging, fun and attractive (Marquis, Besharov, & Thompson).
This metamorphosis of food shopping from a chore to an energetic experience has become one the most important aspects of Whole Foods everyday strategy. Upon entering a Whole Foods Market store, one immediately feels the atmosphere, with well-trained team members, and an inspirational product mix which focuses on healthy eating and quality over quantity. With its unique store design, Whole Foods strives to create an environment for people to gather, interact and learn about different food.
During its 90s, because organic products saw a sharp increase in demand, the organic market faced challenges involving tough regulations. The first was the environmental factors in which the products were categorized. Before the 1990s, there were no official requirements for organic foods, and thus no assurance that organic meant the same thing from state to state or store to store. The word organic could be printed onto the product without it meaning anything. Thus, The Organic Foods Production Act of 1990 changed the way in which we would see the same unified organic and natural products from place to place. This Act regulated the agricultural product, botanical pesticides and many other factors, including the way the products were handled and distributed (Organic Foods Production Act of 1990, 2005). These standards changed the ways and practices for many farmers who grew organic foods. All persons involved in the process were required to be certified by the U.S. Department of Agriculture (USDA). These governmental standards overhauled the entire organic market by placing heavy burdens on producers and sellers in the growing and selling of organic and natural foods (Marquis, Besharov, & Thompson).
Purchasing and Distribution
As the market steadily increased, distribution then became a challenging factor. Organic and natural foods, which were grown without chemicals and pesticides, generally had a shorter shelf-life and were known to spoil or rot if they did not get from the producer to the consumer in a relatively short period of time. It was hard for farmers and producers to deal with large retail chains like Whole Foods; so instead, the farmers sold to large distributors. Whole Foods, in turn, needed to deal with these large regional distributors, who pretended to not deal with the small farm entities practicing natural and organic farming. Even so, by doing the majority of their purchasing at the regional and national level, Whole Foods was able to negotiate large volume discounts and save money. As of 2011, Whole Foods single largest third party supplier is United Natural Foods (UNF), which accounts for a staggering approximate 31% of their total purchases (Whole Foods Market, 2011). Meanwhile, at micro level, Whole Foods still continues to purchase locally from the small organic growers. This is an essential component to Whole Foods essence, which creates the inspirational product mix, making the stores unique to their specific location.
Expansion and Acquisitions
Whole Foods began expanding right from the beginning. From its humble genesis in its first store in Austin, TX. It would eventually spread throughout Texas and the South and, ultimately, to the west coast in California. While expanding in house, throughout the 1990s, Whole Foods started acquiring other natural food chains. Other entities acquired were Wellspring Grocery, Break & Circus, and Mrs. Goochs Natural Foods. In order to improve its distribution position, in 2008, Whole Foods opened its first own distribution center in Braselton, Georgia thereby allowing Whole Foods to further minimize costs and maximize profit. In the late 2000s, the organic foods giant, Whole Foods, began deteriorating, and its stock prices began plummeting. Even after the company lowered its prices while still maintaining its trademarked high quality standards, many thought Whole Foods was on its way out.
In light of its looming decline, Whole Foods initiated its largest acquisition in 2007. At the time, Whole Foods biggest rival, Wild Oats, had held a strong presence in the market where Whole Foods was less established, so Whole Foods made a step to acquire it. However, this acquisition would not come without many challenges. The first barrier came in the form of The Federal Trade Commission (FTC), which stepped in and opposed the acquisition attempting to stop an organic supermarket monopoly. Initially, the FTC was unsuccessful and the merger occurred, but later the FTC again intervened and Whole Foods was required to make certain concessions, which included divesting of certain trade names and stores.
In order to understand the scope of the situation, it is very important to consider the competitive environment surrounding Whole Foods, or as our book clarifies, the industry environment (Dess, Lumpkin, Eisner, & McNamara, 2012). The competitive environment consists of many different factors that are particularly relevant to the firms strategy. These can include existing competitors, potential competitors, customers and suppliers. The industry of food retailing is immensely competitive and complex. During the years of its development, Whole Foods competition has been increasingly growing across the country in the forms of either local, regional, national and international conventional, or specialty stores. Local farmers markets, smaller specialty stores, and membership clubs had been continuing to try to compete with Whole Foods dominance. According to the case study, throughout much of its growth period, Whole Foods main competitor has been Trader Joes, which had the philosophy less is more. Trader Joes took a radically different approach to Whole Foods.
With stores averaging less than 10,000 square feet and only carrying around 2,500 different products, they sought to keep their prices competitive, always ready to buy or sell. Whole Foods, in turn, responded with a product differentiation, which allowed them to create strong brand and customer loyalty and a barrier to enter the market (Dess, Lumpkin, Eisner, & McNamara, 2012). In the years following the case study, the nations largest grocery retailer, Wal-Mart, announced it would be doubling its organic product offerings, placing it a direct competitor of Whole Foods. Critics and food advocates applauded the development of Wal-Marts efforts of this expansion, thereby increasing the amount of organically farmed land and the quantity of organic food available to the public. However, others were not so optimistic.
Some viewed the retail giants entrance into the organic grocer sector as bad, because it would be another competitor for Whole Foods to jostle elbows with (Warner, 2006). Since Wal-Marts increase of organic products, Whole Foods has continued to emphasize the quality of its products and its prices. With such a new and powerful competitor, Whole Foods may need to reposition its stores to sustain a competitive market. Other competitors such as Safeway, Kroger, Hannaford and Super Target have also secured organic certification from the USDA (Marquis, Besharov, & Thompson).
Although an analysis of Whole Foods Strengths, Weaknesses, Opportunities and Threats (SWOT) is not the best way to analyze its business strategy and make future recommendations, it can be a useful starting point.
Perhaps Whole Foods most apparent strength is there experience, knowledge and expertise in the market of organic and natural foods. As mentioned earlier, Whole Foods tailors and customizes each store to its individual geographical location. It strives to have the best and largest selection and variety of products with over 30,000 different items to choose from. It is unusual to see natural and organic food stores larger than 20,000 square feet; however, by operating in such large facilities of 50,000 square feet, Whole Foods has a sharp competitive edge to smaller stores. Another major strength that Whole Foods possesses is there sense of team and how they incorporate and foster team building.
Whole Foods encourages friendly competition within their stores while striving to attain success in each of its different departments. Compensation is no secret within Whole Foods as employees are compensated for their hard work and effort. Another strength that Whole Foods possesses is their constant growth into new and different channels. Whole Foods owns and operates several distribution centers in which it has complete control. Such control helps eliminate price wars while aiding in negotiation with its major third party distributors, such as UNF.
One of the biggest weaknesses Whole Foods succumbs to is their pricing strategy. Whole Foods emphasizes quality; however, their prices are sometimes 75% higher than the competitors. Another weakness is their store locations. Whole Foods only operates in large metropolitan areas, where other large competitors (e.g. Wal-Mart) are usually found, thus potential profit is divided amongst the many competing organic stores.
One of the most important opportunities is increasing the attractiveness of natural and organic foods. Though organic and natural foods are not new to the market, over the past decade or so, the demand for these products has skyrocketed. Thus, to the uninformed person, Whole Foods has the rich opportunity to reach out in this unexplored market and capture the consumer. Another opportunity for Whole Foods is expanding into new geographic locations. Whole Foods already operates in large metro areas but could expand into markets it has yet to enter.
One of the biggest threats a company like Whole Foods must be aware of is the big box stores. These stores are usually national chain stores such as Wal-Mart and Super Target, which usually have much better purchasing and bargaining power, thus placing specialty stores like Whole Foods at risk. Therefore, it is absolutely imperative that Whole Foods create an experience for those customers, which sets them apart from their competition. Another threat at the local level is conventional supermarkets. Whether they are locally owned or chain store supermarkets, these will always present some sort of threat. Although they may not carry the same selection and variety as Whole Foods, small supermarkets will have some imitation product with which they will attempt to compete.
Because of the demand over the past five years, conventional supermarkets have transitioned from their mainstream products and now carry many more organic and natural foods. The rational behind this shift is a nationwide increase in nutritional education, the awareness of obesity and the aging population (Thrill, 2013). A third and very important threat to consider is the large increase in the number of local farmers who offer their natural and organic products in even smaller markets at a much lower cost. These farmers offer their products for sale at local farmers markets at local areas or in parking lots in front of big retail chain stores.
By looking at Exhibit 1 we are able to compare some key financial metrics of the grocery industry, specifically Kroger (KR), Safeway (SWY) and Whole Foods (WFM). Looking at revenue it is no secret that Kroger ($94 billion) and Safeway ($44 billion) far surpass Whole Foods ($12 billion). Although this is an indication that Kroger and Safeway represent larger pieces of the overall grocery market, it may be misleading if we do not continue to the bottom line. Whole Foods is a natural and organic foods supermarket, which typically carries higher margins than normal grocery chains. Whole Foods currently holds a 36% margin compared to Kroger at 21% and Safeway at 28%. While better margins are certainly the goal of any company; so is keeping operating costs low as this is what ultimately leads to profitability.
By looking at the operating profit we note Whole Foods does a great job in comparison to the market as they are able to maintain > 6% operating profit which totals $465 million during the past year. From the dollar perspective both Kroger and Safeway have larger bottom line dollars but the Operating Income rate as a percentage of revenue is less than half the rate of Whole Foods. Considering Whole Foods recent success in gaining valuable market share, if they can hold their Operating Income (OI) rate constant and continue to grow, it may not be long before they surpass the competition. From the investor perspective WFM also boasts a larger earnings per share (EPS) at $2.52 and market capitalization $17 billion which indicate that it is currently more profitable and of a larger value in the market.
Whole Foods must change with the times. They need to continue to offer high quality natural and organic foods at a competitive price. They need to expand to smaller markets in addition to large markets that they currently serve. In doing so, they need to be conscious of the great cost in operating large scale retail establishments and should consider smaller brick and mortar establishments which could be operated more efficiently with less manpower. The larger markets seem to be more saturated with establishments which sell natural and organic products; therefore, the mid-sized and smaller markets are the areas, which Whole Foods must infiltrated in order to sustain future growth.
Whole Foods should also continue to partner with the growers of natural and organic foods and permit farmers to set up small retail stands in their parking lots. This may appear to take some business away from them, however, a modest fee could be charged. By doing so, allowing this local commerce would simultaneously give the public the perception that Whole Foods is marketing the home grown type products. Whole Foods may also consider offering natural and organic food catering services in the areas that they serve. This would give them another avenue to market their products and could be accomplished without a large additional expenditure of capital or manpower.
Whole Foods has parlayed itself into the largest single retailer of natural and organic products in the country; however, as other large-scale retailers are also entering the competitive arena, it needs to change its strategy and focus in order to continue to be profitable. Only by reinforcing the buy-low, sell-high model of business while offering other services than those traditionally offered by grocery stores, and by further adverting this yet unexplored sector of food only then can Whole Foods continue its longstanding growth and satisfy its shareholders. Through the decades, Whole Foods has been able to adapt to the changing market environment as a corporate giant. With these changes and its community enriching love of organic products, Whole Foods can ensure its future.
Dess, G., Lumpkin, T., Eisner, A., & McNamara, G. (2012). Strategic Management: Creating Competitive Advantages (6th Edition ed.). McGraw-Hill
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Organic Foods Production Act of 1990 (November 10, 2005).
The Natural Industry. (2012). Natural and Organic Food Industry. Retrieved from Natural Industry Jobs: naturalindustryjobs.com/natural-organic-foods.asp Thrill, C. (2013, January 17). National Grocers: Vast Runway for Growth In A Surging Industry. Seeking Alpha . Warner, M. (2006, May 12). Wal-Mart Eyes Organic Foods.
Whole Foods Market. (2011). FORM 10-K. Washington D.C.: United States Securities and Exchange Commission.