Competitive Position Assignment

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Date: 26 January 2011

To: Mr. John Mackey, CEO Whole Foods Market

From: , SVP Corporate Strategy Group

RE: Interim Strategic Analysis

In response to our conversation on January 19, I have prepared a strategic analysis to assess the current

competitive position of Whole Foods Market in the retail grocery and organic food industries. As you

are aware, the US food industry is intensely competitive with firms ranging from corner store shops up

through national retail chains. In recent years, there has been an increased focus on healthy living as

characterized by exercise, mental wellness, and eating healthy and organic food. In addition, concerns

over food safety, particularly the use of pesticides and other chemicals, has gained media attention and

caused some consumers to shift their purchase habits toward organic and natural products. 1 If the

government implements stricter food production policy, Whole Foods should expect an additional

increase in sales. Lastly, a growing awareness of the food supply chain sustainability from the producer

to the retail store has also attracted some customers to our stores.

Whole Foods enjoys as loyal customer base because of our unique position as a national organic food

retailer. We have seen an increase in middle aged and older customers shopping at our stores, in line

with the aging US population. These customers tend to have higher discretionary spending and can

afford to pay the premium price for organic groceries. On the other end of the age spectrum, we are

starting to grow our base of twenty to thirty year old professionals who are conscious about eating

healthy and responsibly produced food. These younger customers and other parts of our customer base

are sensitive to macroeconomic changes; Whole Foods saw relatively flat sales at $8 billion during the

recession in 2008 and 2009 with an increase in sales revenue to $9 billion as the economy recovered in

2010. 2 The effect of the recession was apparent in all regions as the US and Europe account for 96% of

global organic food sales. 3

Please see Exhibit 1 for additional information.

The retail food market as shown in Exhibits 2 and 3 is very competitive. There are low barriers to entry

at the store level, however, high barriers to entry at the national chain level as these operations require

a network of suppliers and a substantial distribution channel. Such rivalry is characteristic of a low

margin, high volume industry like retail food. Whole Food’s main competitors are the Kroger Company, Safeway, and the Ruddick Corporation which operates Harris Teeter. Exhibit 2 shows the relative size of

these companies by the most recent annual revenue numbers.

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Whole Foods has successfully differentiated itself from these and other competitors through its focus on

organic food and the sustainability of each part of the supply chain. Within the organic food industry,

Whole Foods competes with a number of grocers though we remain the only national organic food

retailer. At the local level, Whole Foods competes with local farmers markets and cooperatives which

are often characterized by the supplier interacting directly with the customer. Over recent years, there

has been a trend amongst national food retailers to carve out floor space for organic packaged products

and fresh produce. Some chains have even added private label organic lines to their product offering.

In fact, Safeway announced today that it in addition to its O Organics brand, will introduce a new line of

100% natural food under the Open Nature label. 4 Exhibit 4 shows a strategy map of the organic focus of

our competitors against the number of stores and size with regard to revenue. Whole Foods remains

the only major retailers to commit completely to natural and organic products.

Even with such infringement on Whole Foods’ niche, the company has managed to remain the dominant player in the retail organic market because of its core competency as shown in Exhibit 5. The company’s dedication to selling the highest quality natural and organic products has helped build a base of loyal

customers over the last thirty years. The company’s strict quality standards ensure that only high value packaged products, fresh produce, and prepared food is sold to our customers. As part of its process,

Whole Foods has embarked on numerous campaigns to raise awareness for why its products are of the

best quality as well as priced higher than non-organic food. In particular, the Whole Trade Guarantee

certifies a product’s quality to the consumer and other tools such as the seafood sustainability ratings and the 5-Step Animal Welfare Rating system reinforce Whole Foods’ commitment to selling products that are sustainable throughout the supply chain.

2 The transparency of the company’s commitment to

caring about the community and environment by partnering with local organic farms as well as selling

sustainable meat and seafood is one major point of differentiation between Whole Foods and other

national retailers. Likewise, the knowledge and general happy attitude of our employees reinforce that

shopping at Whole Foods is as much about the food as it is about the experience.

Thus, though the retail food industry is intensely competitive and many large retailers have introduced

organic products or product lines into their stores, Whole Foods continues to enjoy a dominant position

in the retail organic market. Exogenous changes such as shifting consumer preferences toward healthy

and sustainably produced food as well as leveraging internal strengths like our strict quality process and

empowering our employees have built equity the Whole Foods brand. As such, an important part of the

company’s market position is its brand equity and much should be done to protect it. Whole Foods saw sales nearly double from 2005 to 2010 at $5 billion to $9 billion, respectively. We expect this trend to

continue with the improving economy and continued commitment to our core capability.

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EXHIBIT 1. RETAIL AND ORGANIC FOODS INDUSTRY ANALYSIS

EXHIBIT 2. KEY RETAIL COMPETITORS BY REVENUE

Whole Foods 6%

Safeway 32%

Kroger 59%

Ruddick Corp 3%

Source: GlobalData

Source: Whole Foods 10-K, Datamonitor

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EXHIBIT 3. FIVE FORCES ANALYSIS FOR RETAIL AND ORGANIC FOODS

EXHIBIT 4. RETAIL FOODS STRATEGIC MAP

Source: Whole Foods 10-K, Datamonitor

Organic focus based on estimates of organic SKUs to total store SKUs Sources: Company websites, 10-K

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EXHIBIT 5. WHOLE FOODS MARKET CAPABILITIES ANALYSIS

EXHIBIT 6. REFERENCES

1. Datamonitor. “Organic Food in the United States.” December 2009. 2. Whole Foods Market, Inc. “Form 10-K.” US Securities and Exchange Commission. 26 September

2010.

3. Datamonitor. “Global Organic Food.” December 2009. 4. Safeway. “Safeway Announces Open Nature ™ Line of 100% Natural Foods.” Safeway.com. 26

January 2011. Web. 26 January 2011.

http://www.safeway.com/IFL/Grocery/Investors#iframetop

Other

5. Datamonitor. “Food Retail in the United States.” June 2010. 6. GlobalData. “Safeway Inc. (SWY) – Financial and Strategic SWOT Analysis Review.” January 2011.

www.globalcompanyintelligence.com

7. Ruddick Corporation. “Form 10-K.” US Securities and Exchange Commission. 1 December 2010. 8. Safeway Inc. “Form 10-K.” US Securities and Exchange Commission. 2 March 2010. 9. The Kroger Co. “Form 10-K.” US Securities and Exchange Commission. 30 March 2010. 10. www.safeway.com 11. www.wholefoodsmarket.com 12. www.kroger.com 13. www.harristeeter.com

Source: Whole Foods 10-K

Core Capability: Selling the highest quality natural and organic products