Discussion 1

Whole Foods Market 2010:

How to Grow in an Increasingly Competitive Market?

Patricia Harasta

Alan N. Hoffman

Bentley University and Rotterdam School of Management, Erasmus University

Reflecting back over his three decades of experience in the grocery business, John Mackey

smiled to himself over his previous successes. His entrepreneurial history began with a

single store which he has now grown to the nation’s leading natural food chain. Whole

Foods is not just a food retailer but instead represents a healthy, socially responsible lifestyle

that customers can identify with. The company has differentiated itself from competitors by

focusing on quality as excellence and innovation that allows them to charge a premium price

for premium products. This strategy has formed their success over the last 30 years but like

any success story there are limits to how far it can go before a new direction is needed so

that it remains successful for the next 30 years. While proud of the past, John had concerns

about the future direction Whole Foods should head.

COMPANY BACKGROUND

Whole Foods carries both natural and organic food offering customers a wide variety of

products. “Natural” refers to food that is free of growth hormones or antibiotics, where

“certificated organic” food conforms to the standards, as defined by the U.S. Department of

Agriculture (USDA) in October 2002. Whole Foods Market® is the world’s leading retailer of

natural and organic foods, with 193 stores in 31 states and Canada and the United Kingdom.

John Mackey, current president and cofounder of Whole Foods, opened “Safer Way” natural

grocery store in 1978. The store had limited success as it was a small location allowing only

for a limited selection, focusing entirely on vegetarian foods. John joined forces with Craig

Weller and Mark Skiles, founders of “Clarksville Natural Grocery” (founded in 1979), to

create Whole Foods Market. This joint venture took place in Austin, Texas in 1980 resulting

in a new company, a single natural food market with a staff of nineteen.

In addition to the supermarkets, Whole Foods owns and operates several subsidiaries.

Allegro Coffee Company was formed in 1977 and purchased by Whole Foods Market in

1997 now acting as their coffee roasting and distribution center. Pigeon Cove is Whole

Foods’ seafood processing facility, which was founded in 1985 and known as M & S Sea-

food until 1990. Whole Foods purchased Pigeon Cove in 1996, located in Gloucester, MA.

The company is now the only supermarket to own and operate a waterfront seafood facil-

ity. The last two subsidiaries are Produce Field Inspection Office and Select Fish, which

is Whole Foods’ West Coast seafood processing facility acquired in 2003. In addition to

the above, the company has eight distribution centers, seven regional bake houses and four

commissaries.

“Whole Foods Market remains uniquely mission driven: The Company is highly selec-

tive about what they sell, dedicated to stringent quality standards, and committed to sus-

tainable agriculture. They believe in a virtuous circle entwining the food chain, human

beings and Mother Earth: each is reliant upon the others through a beautiful and delicate

symbiosis.” The message of preservation and sustainability are followed while providing

high-quality good to customers and high profits to investors.

Whole Foods has grown over the years through mergers, acquisitions and new store

openings. The $565 million acquisition of its lead competitor, Wild Oats, in 2007 firmly

set Whole Foods as the leader in natural and organic food market and added 70 new stores.

The Federal Trade Commission (FTC) focused their attention on the merger on antitrust

grounds. The dispute was settled in 2009, with Whole Foods closing 32 Wild Oats stores

and agreed to selling the Wild Oats Markets brand.

The organic grocer’s stock plunged in 2008 as its sales staggered. Later that year the

private equity firm Green Equity Investors invested $425 million in Whole Foods, thereby

acquiring about a 17% stake in the chain. For the first time in its 29-year history, Whole

Foods reported negative same-store sales in the quarter ended December 2008 as traffic in

its stores fell.

Today Whole Foods is listed in the S&P 500 and ranked 284th in the Fortune 500. It is the

world’s leading natural and organic foods supermarket and is America’s first national certified

organic grocer. In 2009, it had sales of $8 billion and 289 stores; 273 stores in 38 states of the

U.S. and the District of Columbia, 6 stores in Canada, and 5 stores in the UK. The company

has grown from 19 original employees to more than 53,500 team members. 1

While the majority of Whole Foods locations are in the U.S., European expansion pro-

vides enormous potential growth due to the large population and it holds “a more sophis-

ticated organic-foods market than the U.S. in terms of suppliers and acceptance by the

public.” Whole Foods targets their locations specifically by an area’s demographics. The

company targets locations where 40% or more of the residents have a college degree as they

are more likely to be aware of nutritional issues.

WHOLE FOODS MARKET’S PHILOSOPHY

While Whole Foods recognizes it is only a supermarket, they are working toward ful-

filling their vision within the context of their industry. In addition to leading by example,

they strive to conduct business in a manner consistent with their mission and vision. By

offering minimally processed, high quality food, engaging in ethical business practices and

providing a motivational, respectful work environment, the company believes they are on

the path to a sustainable future.

Whole Foods incorporate the best practices of each location back into the chain. This can

be seen in the company’s store product expansion from dry goods to perishable produce,

including meats, fish and prepared foods. The lessons learned at one location are absorbed

by all, enabling the chain to maximize effectiveness and efficiency while offering a product

line customers love. Whole Foods carries only natural and organic products. The best tasting

and most nutritious food available is found in its purest state—unadulterated by artificial

additives, sweeteners, colorings, and preservatives.

EMPLOYEE AND CUSTOMER RELATIONS

Whole Foods encourages a team based environment allowing each store to make indepen-

dent decisions regarding its operations. Teams consist of up to eleven employees and a team

leader. The team leaders typically head up one department or another. Each store employs

anywhere from 72 to 391 team members. The manager is referred to as the ‘store team

leader.’ The ‘store team leader’ is compensated by an Economic Value Added (EVA) bonus

and is also eligible to receive stock options.

Whole Foods tries to instill a sense of purpose among its employees and has been named

for 13 consecutive years as one of the “100 Best Companies to Work For” in America by

Fortune magazine. In employee surveys, 90% of its team members stated that they always

or frequently enjoy their job.

The company strives to take care of their customers, realizing they are the “lifeblood

of our business,” and the two are “interdependent on each other.” Whole Foods’ primary

objective goes beyond 100% customer satisfaction with the goal to “delight” customers in

every interaction.

COMPETITIVE ENVIRONMENT

At the time of Whole Foods’ inception, there was almost no competition with less than six

other natural food stores in the U.S. Today, the organic foods industry is growing and Whole

Foods finds itself competing hard to maintain its elite presence.

In the early to mid 2000s, its biggest competitor was Wild Oats. In 2007, Whole Foods

put a bid on Wild Oats for $670 million 2 , and drew an antitrust investigation from the FTC.

The FTC felt that a merger of the two premium natural and organic supermarkets would

create a monopoly situation, ultimately harming consumers. It was found that although

Whole Foods and Wild Oats were the two key players in the premium natural and organic

food market, they are not insulated from competition from conventional grocery store

chains. With the decision coming down in favor of Whole Foods and Wild Oats, the trans-

action was completed. Although this eliminated Whole Foods most direct competitor, they

still faces stiff competition in the general grocery market.

Whole Foods competes with all supermarkets. With more U.S. consumers focused on

eating healthfully, environmental sustainability, and the green movement, the demand for

organic and natural foods has increased. More traditional supermarkets are now introducing

“lifestyle” stores and departments to compete directly with Whole Foods. This can be seen

in the Wild Harvest section of Shaw’s, or the “Lifestyle” stores opened by conventional

grocery chain Safeway.

Whole Foods competitors now include big box and discount retailers who have made

a foray into the grocery business. Currently, the U.S. largest grocer is Wal-Mart. Not only

do they compete in the standard supermarket industry, but they have even begun offering

natural and organic products in Supercenter stores. Other discount retailers now competing

in the supermarket industry include Target, Sam’s Club and Costco. All of these retailers

offer grocery products, generally at a lower price than what one would find at Whole Foods.

Another of Whole Foods’ key competitors is Los Angeles based Trader Joe’s, a premium

natural and organic food market. By expanding its presence and product offerings while

maintaining high quality at low prices, Trade Joe’s has found its competitive niche. It has 215

stores, primarily on the west and east coasts of the U.S., offering upscale grocery fare such as

health foods, prepared meals, organic produce and nutritional supplements. A low cost struc-

ture allows Trader Joe’s to offer competitive prices while still maintaining its margins. Trader

Joe’s stores have no service department and average just 10,000 square feet in store size.

A DIFFERENT SHOPPING EXPERIENCE

The setup of the organic grocery store is a key component to Whole Foods’ success. The

store’s setup and its products are carefully researched to ensure that they are meeting the

demands of the local community. Locations are primarily in cities and are chosen for their

large space and heavy foot traffic. According to Whole Foods’ 10K, “approximately 88%

of our existing stores are located in the top 50 statistical metropolitan areas.” The company

uses a specific formula to choose their store sites that is based upon several metrics, which

include but are not limited to income levels, education, and population density.

Upon entering a Whole Foods supermarket, it becomes clear that the company attempts

to sell the consumer on the entire experience. Team members (employees) are well trained

and the stores themselves are immaculate. There are in-store chefs to help with recipes,

wine tasting and food sampling. There are “Take Action food centers” where customers

can access information on the issues that affect their food such as legislation and environ-

mental factors. Some stores offer extra services such as home delivery, cooking classes,

massages and valet parking. Whole Foods goes out of their way to appeal to the above-

average income earner.

Whole Foods uses price as a marketing tool in a few select areas, as demonstrated by the

365 Whole Foods brand name products, priced less than similar organic products that are

carried within the store. However, the company does not use price to differentiate itself from

competitors. Rather, Whole Foods focuses on quality and service as a means of standing out

from the competition.

Whole Foods spends much less than other supermarkets on advertising, approximately

0.4% of total sales in the fiscal year 2009. They rely heavily on word-of-mouth advertising

from their customers to help market themselves in the local community. They are also pro-

moted in several health conscious magazines, and each store budgets for in-store advertis-

ing each fiscal year.

Whole Foods also gains recognition via their charitable contributions and the awareness

that they bring to the treatment of animals. The company donates 5% of their after tax prof-

its to not-for-profit charities. It is also very active in establishing systems to make sure that

the animals used in their products are treated humanly.

THE GREEN MOVEMENT

Whole Foods exists in a time where customers equate going green and being environmen-

tally friendly with enthusiasm and respect. In recent years, people began to learn about food

and the processes completed by many to produce it. Most of what they have discovered is

disturbing. Whole Foods launched a nationwide effort to trigger awareness and action to

remedy the problems facing the U.S. food system. It has decided to host 150 screenings of

a 12 film series called “Let’s Retake Our Plates,” hoping to inspire change by encouraging

and educating consumers to take charge of their food choices. Jumping on the bandwagon

of the “go green” movement, Whole Foods is trying to show its customers that it is dedicated

to not only all natural foods, but to a green world and healthy people. As more and more

people become educated, the company hopes to capitalize on them as new customers. 3

Beyond the green movement, Whole Foods has been able to tap into a demographic that

appreciates the “trendy” theme of organic foods and all natural products. Since the store is

associated with a type of affluence, many customers shop there to show they fit into this

category of upscale, educated, new age people.

THE ECONOMIC RECESSION of 2008

The uncertainty of today’s market is a threat to Whole Foods. The expenditure income is low

and “all natural foods” are automatically deemed as expensive. Because of people being laid

off, having their salaries cut, or simply not being able to find a job, they now have to be more

selective when purchasing things. While Whole Foods has been able to maintain profitability,

it’s questionable how long they will last if the recession continues or worsens. The reputation

of organic products being costly may be enough to motivate people to not ever enter through

the doors of Whole Foods. In California, the chain is frequently dubbed “Whole Paycheck.” 4

However, the company understood that it must change a few things if it were to survive

the decrease in sales felt because customers were not willing to spend their money so easily.

They have been working to correct this “pricey” image by expanding offerings of private

label products through their “365 Everyday Value” and “365 Organic” product lines. Private

label sales accounted for 11% of Whole Foods total sales in 2009, up from 10% in 2008.

They have also instituted a policy that their 365 product lines must match prices of similar

products at Trader Joe’s.

ORGANIC FOODS A COMMODITY

When Whole Foods first started in the natural foods industry in 1980 it was a relatively new

concept and over the first decade Whole Foods enjoyed the benefits of offering a unique

value proposition to consumers wanting to purchase high-quality natural foods from a

trusted retailer. Over the last few years, however, the natural and organic foods industry has

attracted the attention of general food retailers that have started to offer foods labeled as

natural or organic at reasonable prices.

As of 2007, the global demand for organic and natural foods far exceeded the supply. This

is becoming a huge issue for Whole Foods, as more traditional supermarkets with higher

purchasing power enter the premium natural and organic foods market. The supply of organic

food has been significantly impacted by the entrance of Wal-Mart into the competitive arena.

Due to the limited resources within the U.S., Wal-Mart begun importing natural and organic

foods from China and Brazil, which led to it coming under scrutiny for passing off non-natural

or organic products as the “real thing.” Additionally, the quality of natural and organic foods

throughout the entire market has been decreased due to constant pressure from Wal-Mart.

The distinction between what is truly organic and natural is difficult for the consumer

to decipher as general supermarkets have taken to using terms such as “all natural,” “free-

range,” “hormone free,” confusing customers. Truly organic food sold in the U.S. bears the

“USDA Organic” label and needs to have at least 95% of the ingredients organic before it

can get this distinction.

In May 2003 Whole Foods became America’s first Certified Organic grocer by a feder-

ally recognized independent third-party certification organization. In July 2009, California

Certified Organic Growers (CCOF), one of the oldest and largest USDA-accredited third-

party organic certifiers, individually certified each store in the U.S., complying with

stricter guidance on federal regulations. This voluntary certification tells customers that

Whole Foods have gone the extra mile by not only following the USDA’s Organic Rule,

but opening their stores up to third-party inspectors and following a strict set of operating

procedures designed to ensure that the products sold and labeled as organic are indeed

organic– procedures that are not specifically required by the Organic Rule. This certifica-

tion verifies the handling of organic goods according to stringent national guidelines, from

receipt through repacking to final sale to customers. To receive certification, retailers must

agree to adhere to a strict set of standards set forth by the USDA, submit documentation,

and open their facilities to on-site inspections – all designed to assure customers that the

chain of organic integrity is preserved.

STRUGGLING TO GROW IN AN INCREASINGLY COMPETITIVE MARKET

Whole Foods has historically grown by opening new stores or acquiring stores in affluent

neighborhoods targeting the wealthier and more educated consumers. This strategy has

worked in the past however the continued focus on growth has been impacting existing store

sales. Average weekly sales per store have decreased over the last number of years despite

the fact that overall sales have been increasing. It is likely that this trend will continue

unless Whole Foods starts to focus on growing sales within the stores they have and not just

looking to increase overall sales by opening new stores. It is also increasingly difficult to

find appropriate locations for new stores that are first and foremost in an area where there

is limited competition and also to have the store in a location that is easily accessible by

both consumers and the distribution network. Originally Whole Foods had forecast to open

29 new stores in 2010 but this has since been revised downward to 17.

Opening up new stores or the acquisition of existing stores is also costly. The average

cost to open a new store ranges from $2–$3 million and it takes on average 8-12 months.

A lot of this can be explained by the fact that Whole Foods custom builds the stores which

reduces the efficiencies that can be gained from the experience of having opened up many

new stores previously. Opening new stores requires the company to adapt their distribution

network, information management, supply and inventory management and adequately sup-

ply the new stores in a timely manner without impacting the supply to the existing stores.

As the company expands this task increases in complexity and magnitude.

The organic and natural foods industry overall has become a more concentrated market

with few larger competitors having emerged from a more fragmented market composed of

a large number of smaller companies. Future acquisitions will be more difficult for Whole

Foods as the FTC will be monitoring the company closely to ensure that they do not violate

any federal antitrust laws through the elimination of any substantial competition within

this market.

Over the last number of years there has been an increasing demand by consumers for

natural and organic foods. Sales of organic foods increased by 5.1% in 2009 despite the fact

that U.S. food sales overall only grew by 1.6%. 13 This increase in demand and high margin

availability on premium organic products had led to an increasing number of competitors

moving into the organic foods industry. Conventional grocery chains such as Safeway have

remodeled stores at a rapid pace and have attempted to narrow the gap with premium gro-

cers like Whole Foods in terms of shopping experience, product quality, and selection of

takeout foods. This increase in competition can lead to the introduction of price wars where

profits are eroded for both existing competitors and new entrants alike.

58 Unlike low-price leaders such as Wal-Mart, Whole Foods dominates because of its

brand image, which is trickier to manage and less impervious to competitive threats. As

competitors start to focus on emphasizing organic and natural foods within their own stores,

the power of the Whole Foods brand will gradually decline over time as it becomes more

difficult for consumers to differentiate Whole Foods’ value proposition from that of their

competitors.