Whole Foods Market 1

Running Head: Whole Foods Market

Whole Foods Market

Rhett Williams

Columbia College

Dr. Kurt L. Miller

MGMT 479
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Whole Foods Market

Introduction

Whole Foods Market is the largest natural food supermarket in the United States. The

company has a strong workforce of 32000 employees and runs 172 stores in the United States,

Canada, and the United Kingdom. John Mackey first started the company as a natural grocery

store in 1978. The store failed to meet most wanted results due to its small location, which

facilitated only limited selection. Moreover, the store zeroed in on only vegetarian foods. Later,

he decided to associate with Craig Weller and Mark Skiles to start Whole Foods Market in

Austin, Texas, in 1980. The company purchased Allegro Coffee Company in 1997 and it became

its coffee roasting and distribution centre later on. In 1996, the company purchased Pigeon Cove,

which is the only supermarket in the country own and operate a waterfront seafood facility.

Basically, Whole Foods is specialized in selling of natural food, which is free from growth

hormones and antibiotics and organic food, which confirms to US standards set by the United

States Department of Agriculture. The company was recognized by fortune as one of the 100

best companies to work for.

Vision and strategies

Vision of the company is to offer high-quality food and engage in ethical business

practices. Whole Foods firmly believes that the best tasting and nutritious would be preserved if

the food is not added with sweeteners, colorings and preservatives. The company aims to attain

motivational and respectful work environment. To achieve this, the company encourages each

store to make independent decisions with respect to its operations. In addition to this, it aims to

attain more than 100% customer satisfaction. In order to obtain this, Whole Foods intend to

delight the customers in every interaction.

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To meet it’s vision of more than 100 percent customer satisfaction, the company

attempted in various ways. It endeavored to influence the customer through various practices,

such as home delivery and cooking classes. In an attempt to get recognition, the company

involved in various charity activities and active to ensure that animals used in their products are

treated humanely.

Trends in grocery industry

Low prices and convenience are major factors to lure consumers towards supermarkets.

In order to retain customers, companies need to offer various rewards, which would put more

pressure on margins. In an attempt to provide convenient shopping to customers, supermarkets

now days have the practice of accommodating banks, pharmacies and coffee shops inside their

premises. Any effective business model followed by the players in the industry is replicated by

other players without any time delay, leading to severe competition. Moreover, players sometime

face stern competition from the wholesale players as well.

SWOT Analysis

Strength:

The company has two procurement centers and several bake houses to distribute the

products to their stores. Whole Foods sources its required products from local suppliers. The

company could bargain for discounts from its suppliers, given the large-scale purchases. By

sourcing products from local suppliers, the company is benefited in the following ways, it is seen

as supporting the community and it is in a better position to handle perishable goods. The

distribution system adopted by the company instigated it to focus more on perishable goods,

where it achieved peak. The company followed the practice of percolating the learning from one
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store to entire chain. As a result of this practice, the company was able to maximize its

effectiveness and efficiency throughout the chain.

Opportunity:

In contrast to traditional grocery stores, Whole Foods offers various products that suit the

need of people in different geographic regions. With the help of this model, the company

reached various consumers across the country. Basically, Baby Boomers are health conscious

and could afford to pay premium prices for healthy foods. Demand for organic foods, which is

generally perceived to be healthy, from this category of population is expected to be robust in

days ahead. Furthermore, demand for natural foods is expected to grow by 8-9% and the

company is likely to tap this successfully. Potential demand for prepared meals from working

families is another area of opportunity for the company. Whole Foods is well equipped to tap

this demand with its products, such as Whole Kitchen. Lack of availability of reputed nutritional

brand in the country provides an opportunity for the company. The company already has three

private-labels in this segment.

Weakness:
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Generally, the larger grocery chains in the country are more flexible in terms of product

offerings and mostly; they intend to promote their products from their sales. Whole Foods never

adopted this strategy and consequently, it would likely to face severe competition from larger

grocery chains. The company spent only 0.5% of their sales on advertisement and largely

depends on word of mouth advertising from their customers.

Threat:

Availability of prime store locations and supply of organic foods seem to be a major

threat for the company. Mostly, the company aimed to open stores, where customers are well

educated. Because, Whole Foods believes that they may be getting higher salaries and willing to

pay higher prices. Generally, farmers do not farm organic corps, primarily due to strict

government regulations and more effort intensive. Given the increased offerings of organic foods

by conventional super markets, the demand is likely to outstrip the supply in future. As organic

food is one of the major offerings of the company, any contraction in its supply, in the wake of

healthy demand, would affect the top-line of the company.

Competitor analysis

The objective of this analysis is to identify competitor’s strategies, how the competitor

may reach to Whole Foods actions and how the competitor’s behavior would influence Whole

Foods own advantage.

Major strategy adopted by Trader Joe’s is to expand its presence and product offerings

with an intention to maintain high quality with low prices. This low cost strategy of the company

resulted in low cost structure, which enabled the company maintain high margins. Average size

of Trader Joe’s stores was around 10000 square feet. Wild oats is relatively smaller player

compared to Whole Foods and Trader Joe’s. Unlike founders of Whole Foods, Wild Oats’s
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founders did not have good understanding of the grocery business. They firmly believe in their

employees to understand the business. With the lack of business knowledge of the founders, it

would be difficult for the company to withstand in the long-term as employees would not make

them understand the nitty-gritty of the business. Hence, likelihood of getting effective guidance

from the founders is minimal.

When compare the sales of natural and organic foods of the three companies, growth of

Whole Foods and Trader Joes’ witnessed a drop, however, Wild Oats saw a moderate growth.

Trader Joe’s reported good sales, however, it was lower than sales growth of Whole Foods.

Being a biggest competitor to Whole Foods, Trader Joe’s sales were close to Whole Foods.

However, over a period of time sales of Whole Foods grew much faster than that of Trader Joe’s.

Chart 1: Comparison of natural and organic foods sales

3500 $mn

3000

2500

2000

1500

1000

500

0
2000 2001 2002 2003
Whole Foods Trader Joe's Wild Oats

Source of data comes from page 31-4 Exhibit 2

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Given the relatively small scale of operations, it is unlikely that Whole Foods would face

stiff competition from Wild Oats. Despite there is a close competition between Whole Foods and

Trader Joe’s, Whole Foods is having an edge over Trader Joe’s, given the large size of its stores.

Financials

From 2000 to 2004, sales of the Whole Foods grew by whopping 87%. The company

was able to achieve this tremendous growth despite unfavorable economic conditions. Further,

company’s net income also witnessed significant rise during the same period. This enormous

growth in net income was primarily supported by the company’s expansion and acquisition

strategy. In view of consistent growth in the net income, the company’s retained earnings have

increased considerably to $4.3 billion.

Company’s various strategies to achieve efficiency, such as absorbing the learning from

one store to entire chain and thereby increasing efficiency, started showing good results. It is

evident from its unchanged proportion of operating expenses and cost of revenue to total

revenues.

From 2002 to 2004, the company exhibited strong liquidity position by having around 5

current assets for each current liability. Interest expenses of the company have been declining,

which was mainly due to company’s ability to ask for low interest from the lenders.

Due to lower interest expenses and significant increase in operating income, interest

coverage ratio achieved its peak value in 2004. The company was desirous to tap the capital

market on the back of steep appreciation of its stock prices, which increased by 1000% in 10

year period of time. This intention of the company was clearly evident from the declining debt-

equity ratio.
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Resources and Capabilities

Major resources of Whole Foods are,

1. procurement policy and distribution system

2. Sound financials

3. Prepared meals

4. Private labels

5. Quality and service

The company follows the policy of procuring foods from local suppliers and this policy

would help the company understand the local trends. Moreover, suppliers are benefited in terms

of large scale business from the company and would be committed to supply the products on

time. Under this practice, Whole Foods is also benefited in terms of more discounts on the

backdrop of large transactions with the suppliers.

The company reported significant rise in its revenues and is likely to increase further on

the back of upward sales projection for natural products. Expansion and acquisition plans of the

company resulted in strong growth in net income, which led to huge retained earnings. In future,

the company could use these retained earnings to partly finance their expansion plans. Further,

relatively lower debt position of the company would place it in a better position to raise funds to

meet its future fund requirements.

In view of surge in working women population, the demand for prepared foods has been

increasing. The company could serve this category of customers in the wake of its adaptability in

accordance with changing consumer preferences. Apart from prepared meals, company’s private

labels also would help the company report better sales.

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Generally, the company highly emphasizes on its quality and services and uses these two

factors as a mean to stand out from its competitors. In recent times, demand for nutritional

products heavily increased due to emergence of more diet plans by the people in the country.

This rise in demand for nutritional products gave great opportunity for the company.

Issues

Major issues the company would face are given below,

1. Store locations

2. Scarcity in organic foods

Generally, Whole Foods prefer to open its store in prime locations. Because, the company

perceived that major cities may house large number educated people, who would be equipped to

afford higher prices due to their high remuneration. Given the limited number of communities,

where more that 40% of the people had college degrees, it is difficult for the company to adopt

this strategy effectively.

In recent time, mainstream supermarkets also started carrying organic foods in their

premises, which ensued of increased demand for organic foods. People in the country mostly do

not prefer to farm organic foods due to stringent regulations, which have to be adhered to.

Moreover, farming organic crops required more efforts and time consuming. This constrained

supply of the organic products likely to create mismatch between supply and demand. Due to

unavailability of required quantity and strong growth in demand for organic foods, the cost to

acquire these products would go up and this rise in cost would adversely affect the bottom-line of

the company.
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Conclusion

Due to increased diet plans by people and expected surge in Baby Boom population,

demand for nutritional products is expected to increase considerably. As there is a lack of

availability of brands for nutritional products, Whole Foods should leverage its recognition in the

country to market its private labels, such as 365 Everyday Value, Whole Kids Organic and 365

Organic Everyday Value. Since these products are certified organic, the company should use

these three products to tap the demand for organic foods from health conscious consumers. Due

to its relatively low cost nature, the company could attract consumers who are ready to pay

relatively low cost for organic products and thereby increasing its customer base.

To avoid direct competition from Stop ‘N Shop and Shaw’s, the company should try to

acquire one of them. This acquisition strategy would help the company in long-term as these

large grocery stores market their products from their sales, which Whole Foods never tried.

Whole Foods would not face any difficulties to raise funds to facilitate this acquisition on the

back drop of sound financials. As the larger grocery stores started carrying natural products, this

acquisition strategy would enable the company cater to increasing demand for natural products.

Company’s strong distribution network and expertise to handle perishable goods could be

deployed to the development of the target company as well.

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References:

Wheelen, Thomas and Hunger, David. Strategic Management and Business Policy. Upper Saddle

River: Pearson/Prentice Hall, 2008.