Whole Foods - DOC

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Whole Foods - DOC Powered By Docstoc
					Ryan Ekvall
Strategic Management
07/22/09
Whole Foods Market


                                         Whole Foods Market

Synopsis

         In 1978, John Mackey opened the Safer Way natural grocery store in Austin, Texas. In 1980,

Mackey partnered with Craig Weller and Mark Skiles of Clarksville Natural Grocery to launch Whole

Foods Market. This resulted in a single natural food store with 19 employees, which was a good

number of employees for a natural food store at the time. Enjoying success in Austin, the company

expanded to Houston, Dallas, and then New Orleans. In 1989, the company expanded westward into

Palo Alto, California. Throughout the '90s the company focused on acquiring existing natural food

chains including stores in North Carolina, Massachusetts, Rhode Island, and Michigan. Three years

later, the company completed its IPO to fund management's growth strategy and it hasn't looked back

since.

         The company also purchased and operated subsidiaries including Allegro Coffee Company

which acts as Whole Foods coffee roasting and distribution center. Pigeon Cove serves as Whole

Foods' seafood processing facility on the East Coast and Produce Field Inspection Office and Select

Fish serve as the seafood processing facilities on the West Coast. The company now has nine

distribution centers nationwide although its supply chain remains largely decentralized.

         Today, Whole Foods is the largest natural food supermarket in the United States. They brought

a new kind of supermarket to the mainstream. Not only is the food healthy, but also the displays are

colorful and appetizing. The company has 'food stories' pamphlets telling the story of the chicken or

cow that a customer might buy. Local artisans cook fresh meals inside the store. Whole Foods looked

to make shopping an experience again and not just another chore. The company brought this change of

pace over to their employees too as the company has ranked in Fortune's “100 Best Companies To
Work For” each year for the past 11 years.

       Co-founder and CEO John Mackey has repeatedly said that Whole Foods Market is a uniquely

mission driven company. The company is dedicated to high standards in the products they sell and also

to pushing for change in the food supply industry. As of 2006, the company has surpassed $1 billion in

annual sales of organic food. The emergence of Whole Foods as a natural grocery store chain has

essentially created much of the demand for this organic food over the past 20 years. At the same time,

the company is largely responsible for creating the supply chain for this organic food. What once was a

largely unorganized system is becoming more and more integrated which cuts costs for the company

and for other purchasers of organic, natural, and local foods as well. This is due largely in part to

Whole Foods ability to buy in bulk from suppliers who were previously scrambling to sell small

quantities of food to many purchasers and also because the company created the need for more organic

and natural suppliers.

       An example of how Whole Foods supports local farmers is demonstrated in a few ways. First

of all, over 50 Whole Foods Market stores supports farmer's markets in the store parking lot. This

gives people access to fresh, local food and supports local horticulture. Also, in the past 12 years, there

has been a 140% growth in farmer's markets in the United States. This is largely due to the increase of

consumer awareness of buying locally, but also because of the feasibility of these small farmers due to

purchasers such as Whole Foods Market. When Whole Foods entered the United Kingdom, there was

only 1 farmer's market in the entire U.K. Since Whole Foods entered in 1997, there are now over 500

farmer's markets throughout the U.K. The company also designates $10 million annually for low

interest rate loans for local farmers. Whole Foods estimates that in 2010, they will have $500 million

in local produce sales, which will equate to 25% of their entire produce sales.

       The company also lives its philosophy of creating a world that 'values human creativity,

diversity, and individual choice' by its support of local and international food artisans. Conceivably

seen as part of the slow-food movement to preserve and highlight the value of 'cultural cuisine.'
Recently, Whole Foods has made a $30 million investment as a venture capital fund in unique food

artisans worldwide. The company looks to highlight the artisans craft in their stores through displays

and out of their stores by supporting the development of these artisans' businesses.

       The initiatives at Whole Foods Market do not stop there. The company has developed the

Whole Trade Guarantee that deals with fair trade guarantees with developing countries. First, the

company pays premium prices for produce from places like Guatemala, Costa Rica, Nicaragua, India,

and Africa. 1% of all sales of Whole Trade Products, which include sugar, bananas, coffee, will go

back to fostering partnerships with farmers in developing countries. Also, any products that are Whole

Trade authenticated guarantee that workers or the environment are not being exploited which improves

the standard of living for those in developing countries. The company also executes micro-loans to

women in these same places. These micro-loans enable people from developing nations to start a

business or to fund the continual operation of an existing business.

       The company is also working with the USDA for animal compassion standards. Essentially,

John Mackey would like to create a 5-star rating system that rates the conditions on which the animal

was raised and slaughtered. A one star rating would be the minimal requirements to consider an animal

organic while a five star rating would be reserved for the most humanely treated animals. The

company has also taken products off the shelf of all fish that are categorized as endangered.

       There has been a fair amount of criticism as the company continues to grow from a $45,000

start up to a Fortune 500 company. First, Mackey is vehemently opposed to the unionization of his

workers. In a highly publicized event, when workers from the Madison, Wisconsin Whole Foods

Market tried to unionize in 2002 they were met with their walking papers. Mackey was the recipient of

criticism in Michael Pollen's book, The Omnivore's Dilemma, about how the growth of Whole Foods

Market has incited the rise of the 'industrial organic' or 'corporate organic' industry, which is

supposedly repeating the cycle of big business taking over smaller, independent farms. The company is

famously called “The Whole Paycheck” because of the cost of purchasing food from their store is so
high for many consumers. Whole Foods has strategically placed itself in higher earning, more

educated locations to take advantage of consumer awareness of the foods we eat, which has been linked

to education and affluence. This will prove to be the biggest growth obstacle for Whole Foods Market

in the future, because they have relied and thrived so heavily on strategic real estate acquisitions and

store placements in the past. The other growth obstacle for Whole Foods Market is the tremendous

amount of time that it takes to get a store up and running. The stores are very localized and community

oriented. For this reason, Whole Foods does not try to homogenize every store like a Wal-Mart or

Starbucks. Although the store features the same products in many stores, including the Whole Foods

brand 365 Everyday Value, the actual interior of each Whole Foods is somewhat different as is the

product line in each store. This means longer pipelines for store development and less revenue for

shareholders. Finally, Mackey himself has come under scrutiny by the SEC for 1,400 anonymous posts

over a 3 year span on Yahoo message boards. The subjects of these message boards were for Whole

Foods Market and rival (recent acquisition) Wild Oats Market. Mackey denied any wrongdoing and

was cleared by an investigation into his alleged wrongdoings. Whole Foods was also the subject of an

antitrust suit by the FTC over the purchase of Wild Oats Market. The suit, initially dismissed, was

ruled valid by an appeals court. Before the case went to court again, Whole Foods settled the suit with

the FTC which forced Whole Foods to divest 12 of the Wild Oats stores that it purchased as well as one

of their own stores.

       Overall, the future looks very bright for Whole Foods Market. There is a growing demand for

organic food in our country and across the world. At the same time, the supply for this food will be

outpaced by demand, following the current trend, which will result in higher prices. The trend before

2007 was that organic foods were starting to come more in line with the prices of regularly processed

foods. This will be an interesting development to watch as the company has somewhat saturated the

highest earning, highest educated metropolitan areas that it serves. Expansion into less populated, less

wealthy, and less educated areas may prove unsuccessful if prices are perceived as too high.
Essentially, Whole Foods would have to compete with Wal-Mart or the other grocery store in these

areas where as in larger areas, they could simply co-exist. If prices can remain in tact, the company's

outlook is very positive. More people are becoming aware of their options and responsibilities as

consumers and of their ability to hold corporations responsible and the company has a great head start

on the growing health and wellness trend.

Resources (updated figures from finance.yahoo.com)

    Cash – $31,151,000

    Inventory – $327,452,000

    Property, Plant, and Equipment – $1,900,117,000

    Operates 276 stores

    30 years experience in natural food supermarkets

    CEO and co-founder John Mackey, 2003 Ernst & Young Entrepreneur of the Year

    Wonderful, knowledgeable staff who are referred to as Team Members

    41,400 employees

    Plans for 66 new stores by the end of 2012

    Nine distribution centers

    Fair Trade Partner

    Private Label Brands

        365 Everyday Value, Whole Kids Organic, 365 Everyday Organic Value

    Subsidiaries including Allegro Coffee Company

    Fresh, unique, rich in-store displays

    Specialty food and beverage items including organic wines and cheeses



Capabilities

    Acquisition of smaller natural food stores including main rival Wild Oats Market
    Size allows company to take advantage of economies of scale in purchasing

    Selective to what products will appear on shelf (treatment of animals, no preservatives, etc.)

    Provides fully cooked meal options through private label Whole Kitchen

    Strategically placed supermarkets in highly educated areas

    Almost no advertising, rely heavily on word of mouth

    Does not differentiate by price

    On “100 Best Places to Work” list since 1998 (when list began)

    Stocks new stores with $700,000 worth of inventory

Core Competencies

    Ethically driven company

       sells only natural and organic foods

       pushing for higher standards of the treatment of animals

       stopped selling over fished seafood

    Highest average sales per square foot in supermarket industry

    Highest margins in supermarket industry

    Unique high volume retailer that does not rely on low prices or low margins

    Motivational, respectful, egalitarian work environment

    Recreated the supermarket experience

    Take Action food centers where customers get information on food legislation

    Donate 5% of after tax profits to not-for-profit

    Supports Farmers Markets in 50 store parking lots

SWOT Analysis
                                   Strengths (S)                         Weaknesses (W)
                        Internal   Corporate Responsibility              Perceived as very expensive
                        Factors    Economies of Scale                    Saturated Metropolis Market
                                   Largest Natural Foods Retailer        Not a 'hybrid-store'
      External                     Unique Shopping Experience            Next to no Advertising
      Factors                      Huge Revenues and Profit Margins      Target of Critics
                                   Sell a good, healthy product             “The Whole Paycheck”
                                   Good Market Research before              “Whole-Mart”
                                   entering a new market

    Opportunities (O)              SO Strategies                         WO Strategies
    Expand to Global Markets       Expand into smaller 'feeder' cities   Maybe smaller 'bodega' type stores
Porter Five Forces Model

         1. Entries of Competitors

                Almost impossible for new competition to achieve same economies of scale

                More grocery stores will enter the organic food market

                Small, local owned natural food stores cannot compete (maybe coexist) when Whole

                 Foods Market enters the area

                Almost impossible for competition to offer same amount of variety or volume

         2. Threat of Substitutes

                Europe is already aware and accepting of benefits of organic food, already has an

                 established market. Could any companies move to US market?

                Customers can shop at organic sections in stores like Wal-Mart

                Will trend of increasing demand for organic food continue?

                Most US customers still shop on price and not quality

         3. Bargaining Power of Buyers
         Customers can move to Trader Joe's

         Increasing choices as to where to buy organic foods

         Cannot replace shopping experience at Whole Foods Market

         Customers can shop at local farmers markets for fresh produce

         Not many places with same variety of natural and organic foods

             4. Bargaining Power of Suppliers

         Scattered, unorganized (but improving) supply chain gives little bargaining room for

          suppliers

         Institutionalization of organic farms may give suppliers more bargaining power in

          the future (such as United Natural Foods)

         Increased competition from places like Wal-Mart and other supermarkets may

          give suppliers more leverage in negotiating price

         In current market, hard for suppliers to replace volume purchases by Whole Foods

          Market

         When demand catches up to supply of organic food, suppliers may have more

          leverage to negotiate prices

5. Rivalry Among Existing Players

         In 2007, vowed to match biggest competitor Trader Joe's prices

         Wal-Mart keeps increasing organic food section of their grocery section

         Acquired second biggest competitor Wild Oats Market

         Other grocery stores (Safeway, Stop & Shop, Kroger) are offering more        organic

and       natural options as well

         Big Box Wholesalers such as Costco and BJ's entering organic market

         Currently, 'Whole Foods Market is the market leader with higher comp sales
                   growth, gross margin, operating margin as well as net profit margin as

                   compared to its competitors.'

Findings of Fact and Recommendations

       According to the text, 88% of existing Whole Foods Market stores are located in the top 50

statistical metropolitan area. The company targets areas for expansion that has 40% or higher

population with a college degree. They also choose spots with high population density, high income,

and high home value. These are the real estate requirements they look for according to their website:

      200,000 people or more in a 20-minute drive time
      40,000–75,000 Square Feet
      Large number of college-educated residents
      Abundant parking available for our exclusive use
      Stand alone preferred, would consider complementary
      Easy access from roadways, lighted intersection
      Excellent visibility, directly off of the street
      Must be located in a high traffic area (foot and/or vehicle)


These requirements look a bit strict for expansion in the future considering the company will eclipse

the 300 store level by the end of next year. There simply aren't enough markets that meet these

requirements. And once Whole Foods Markets enters smaller markets (closer to the 200,000 level)

they will be met with heavy competition from established entities in the area. This may lead to price

wars that will eat away at profit margins. Also, these areas will not likely have higher than 40%

college educated adults. For example, Rockford, IL (population 150,000+) has only 20% of the

population as college educated adults. Whole Foods Market might look to change its entry strategy

into these smaller markets. First, they could enter the market into a smaller building. This way, the

company can maintain its prices and its profitability while gaining market share and expanding their

brand. Once the company had an established customer base in the area, they could expand with

another smaller store in the same area in the mold of Starbucks. I think with this strategy, Whole Foods

Market could expand successfully while keeping not only profitability but also their unique image.
       The growth for demand in natural and organic foods is expected to be between 8% and 10%

annually for the foreseeable future. At the same time, only 3% of U.S. Farmland usage yields organic

crops. This leads to a number of obstacles for the company to overcome. First of all, organic food is

already so more expensive than other food. At the same time, Whole Foods Market is already in the

highest income earning areas of the United States, Canada, and the United Kingdom. This means that

while expanding to other markets, Whole Foods Market prices of groceries may become higher than

they already are perceived to be. Whole Foods is already trying to account for this by making micro-

loans to organic farmers in emerging countries abroad. They also give loans to U.S. Farmers for

additions or upkeep of organic farms. In this way, Whole Foods is trying to expand the supply of

organic foods which will benefit the company in the long term. However, there will be a growing trend

for other grocery stores to pick up more high margin organic food items to sell. Wal-Mart has already

started to incorporate organic sections of their grocery store (thus far limited to mostly produce and

packaged meat). Other grocery stores have also begun to do the same. Some stores have two or three

entire rows dedicated to organic and natural foods. This not only means more competition for Whole

Foods Market but, again, higher prices of organic and natural groceries. This may be another reason

for Whole Foods to use less retail space in new markets just so that shelves can remain fully stocked.

The point is that Whole Foods has not had to compete on price (except with Trader Joe's) and it will be

interesting to see if a price war emerges with Wal-Mart (if Wal-Mart makes the logical progression to

include more organic food to entice conscientious shoppers on a budget). Honestly, I think Whole

Foods has positioned themselves so that they can withstand a price war with a giant like Wal-Mart.

Their cash flow and profit margins are really great, it really just depends on how smaller markets will

take to Whole Foods Market and the idea of a rich, rewarding shopping experience.

       Finally, the budget for advertising has been kept around .5% of their total sales annually. This

has worked for the company thus far for a number of reasons. First of all, they are heavily involved in
the local community. The company supports farmer's markets and has initiatives to increase the

amount of local produce offered to 25% of the total produce sold at any given store, where available.

The company also promotes local food artisans and donates money to not-for-profit organizations.

This idea of being part of the community gains the sentiment of the shoppers. The company does local

catering in most areas and also promotes environmental awareness. Also, shopping at a Whole Foods

Market is an experience unto itself. It has been described as 'food porn' because of the decadent set up

with rich colored fruit and vegetable stands, scrumptious pastries, ridiculously good looking meat and

even the unique architecture that holds all of this fresh food. The company has relied on heavy foot

traffic and word of mouth to promote the brand. However, this strategy may not work in smaller

markets. The company rarely offers specials like a typical grocery store does and when they do, it is

usually through signing up at their e-mailing list. I don't think this will work as well in smaller markets

because there simply isn't the same amount of traffic. The company may want to be more proactive in

engaging potential customers. I would suggest heavy advertising coinciding with the opening of any

store. I would also have sign up lists for twitter feeds and email updates. This way, the company can

keep in touch with customers who come into the store. They also will not have to rely on advertising

after the store has been launched. It is getting the initial traffic that will be difficult without advertising

effectively.




                                             Works Referenced

http://www.businessinsider.com/2008/5/whole-foods-ceo-blogger-back-on-the-web-not-terribly-sorry-

       about-that-whole-yahoo-message-board-fiasco

http://www.finance.yahoo.com

http://www.wikinvest.com/stock/Whole_Foods_Market_(WFMI)
http://www.wholefoodsmarket.com

				
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