John Mackey cofounder and Chief Executive Officer (CEO) founded Whole Foods in 1980 with the purpose of providing organic foods to the grocery shopping public. This started a movement over the next 30 years that has brought organic foods to the common shoppers in many markets around the U. S. that had only been previously serviced by smaller health food stores or by their local grocery chain. The success of Whole Foods moving forward will be how they can succeed and maintain their profitability when unemployment remains high and Americans have less disposable income.
This essay will look at several factors of Whole Foods, including latest trends, the competitive environment in the grocery industry, environmental threats, SWOT analysis of the business operations and strengths that must be leveraged to maintain a competitive advantage. Trends in the Organic Foods and the Impact on Whole Foods As the public has become increasingly aware of the potential negative impact of additives, preservatives, and pesticides in their food, organic food grown in a natural way without steroids, pesticides and minimum preservatives offers consumers who are concerned about their food a different choice.
Prior to 1990, there was no government standardization or definition as to what could or could not be classified as natural food. The 1990 passage of the Organic Food Production Act, “started the process of establishing national standards for organically grown products in the United States” (Thompson, Strickland, & Gamble, 2009). This was followed up in 2002 when the U. S. Department of Agriculture provided further standardization by establishing standards for the labeling of products that were categorized as organic.
This standardization worked to alleviate customer concern and skepticism in regards to what was being called organic on the food store shelves. In increasing overall customer confidence, consumers knew that when they purchased a product labeled as organic, they were getting what they paid for. Public health concern over what is done to grow, process, and package the food supply as well as the standardization and classification of organic food has create a niche market for stores that focus on supplying organic foods and earth friendly cleaning supplies to consumers.
Whole Foods has been able to capitalize on this growing niche market by strategically locating their stores through an aggressive expansion into new markets through the last thirty years. Acquisition of competitors has also allowed Whole Foods to absorb the competition and gain access to new markets. As long as consumers are able to afford the premiums cost in purchasing organic foods, the market outlook is positive. Application of Porter’s 5 Forces Model
The grocery industry is a competitive one, with many competitors and very slim profit margins. Box store chains such as Wal-Mart and Target leverage their high volume purchasing power to purchase products from suppliers at the absolute lowest price. These compete with other grocery chains that typically operate on a Regional level, such as Harris Teeter, Food Lion, and Lowes (and many, many more). All of these stores compete aggressively to earn customer loyalty and drive volume of sales.
Whole Foods is able to compete as it markets its goods and services to a very niched market that afford the premium of purchasing organic foods. When applying Porter’s Five-Forces model, one can see how this company has been able to successfully grow and leverage their products and services. Competitive Pressures Created by the Rivalry among Competing Sellers: Whole Foods has differentiated themselves from a very crowded market by offering a unique product to a very select consumer base.
While stores such as Wal-Mart focus on serving the masses with their grocery offerings, Whole Foods targets it products to a customer base that can afford to pay higher premiums for a product that they believe is healthier and safer to consume. The growth of Whole Foods has allowed it to leverage its purchasing power with suppliers that allows for Whole Foods to pass on savings to consumers and offer more competitive prices than competitors.
As in the case with the Wild Oats acquisition, Whole Foods can squeeze the margins of its competition then buy them out as they begin to fail, gaining access to new markets and new customers. Competitive Pressures Associated with the Threat of New Entrants: Whenever a business model has proven to be successful, it is not long before similar entrants to the market appear. One organic food supermarket chain local to North Carolina, Fresh Market, has focused on smaller sized stores located in areas underserved by Whole Foods.
Fresh Market focused its business model on locating its stores near university campuses and other areas where residents had higher levels of disposable income. Now Fresh Market is expanded to more markets easily served by its distribution centers that are centrally located to the entire East Coast of the United States (the I-95 and I-40 corridors). As Whole Foods is both well established and has significant cash reserves, it enjoys a competitive advantage over smaller chains such as Fresh Market when it looks to penetrate new markets with new stores because the necessary capital is on hand to do so.
Competitive Pressures from the Sellers of Substitute Products: It can be expected that Wal-Mart and other competitors seek to steal business from Whole Foods by keeping their prices low, locating stores in proximity to whole foods stores, offer similar organic products for less and potentially conducting studies that show organic foods offer no additional health benefit or decrease risk to consumers than non-organic foods. The question also becomes, how loyal will Whole Foods customers continue to be when food prices begin to soar as oil and gas hit all time highs and the unemployment rate continues to hover close to 10%?
Will customers need to stretch their dollars and go across the street to the competition or will they be loyal to Fresh Market and pay the premium? Competitive Pressures Stemming from Supplier Bargaining Power and Supplier-Seller Collaboration: Whole Foods is able to leverage its pricing structure with suppliers more than competitors because of the volume of products it sells. In fact, it can be said that the growth of Whole Foods has fueled the growth and financial success of its suppliers.
This relationship has allowed Whole Foods to develop relationships with key suppliers and logistics providers that new and smaller organic food chains are unable to compete with. Competitive Pressures Stemming from Buyer Bargaining Power and Seller-Buyer Collaboration: As arguably the largest buyer of organic products, Whole Foods is able to leverage relationships from suppliers. When a new Whole Foods stores opens it “takes [in 2007 dollars] about $850,00, to stock a store with inventory, a portion of which was financed by vendors” (text citation).
By be able to leverage it suppliers in this fashion, Whole Foods can mitigate financial risk and burden. Most Significant Environmental Threat and Whole Foods Combat The largest threat to the profitability to Whole Foods is the state of the current economy and the rise in commodities prices as a result of some of the highest gas prices on record. As consumers have less discretionary income, will they afford to continue shopping at grocery stores that charge a higher premium?
As gas prices rise, so to does the cost of growing, harvesting, and shipping products to the store. Gasoline is used in each of the steps from the farmer growing and harvesting the food, to the large trucks that transport it, to the energy required to supply the packaging and the electricity in all of the stores. The rise in fuel will drastically reduce profit margins and may require price increases. To combat the rise in energy costs, it might be possible for Whole Foods to invest more in green energy.
Already upgrading their vehicles to run on bio-diesel, it might be possible for Whole Foods to place solar farms on the roofs of their buildings much like Kohl’s Department Stores have. This would be in line with their corporate governance and mission statement and would allow them to harness the power of the sun to sell energy back to energy producers thereby reducing overall costs while taking advantage of the government green energy tax credits currently in place. SWOT Analysis Strengths (Internal): Cash Rich – Debt to Capital Ratio of 13.
97% (industry Average 37. 88%), Positive Earnings of $. 51 per Share, Strong Distribution Network, Supplier Relationships, Loyal Customer base, Motivated Work Force, High Rate of Revenue per Employee of $206,849. 70 (TD Ameritrade, 2011). Weaknesses (Internal): Unionization, Cowboy Leadership-John Mackey, Average Store Size 37,600 square feet (down from 51,500 in 2008), Average Store Age is Nine Years (TD Ameritrade, 2011). Opportunities (External): Increased Growth in Overseas Markets, Store Expansions in the U. S.
, Perceived Shareholder Value, Ability to Borrow Money at Favorable Rates due to Credit Rating. Threats (External): Cap and Trade, Rise in Oil Prices, Drastic Reductions in Real Estate Values, Consumer Income and Unemployment, Government Regulation and Taxation, Government Mandated Health Care, Drought and Weather Related Issues that Affect Supply. Sustaining Competitive Advantage Whole Foods can use it strengths and opportunities to achieve a sustained competitive advantage in the marketplace by increasing their presence in markets in both the U. S. and abroad.
The company is moving forward slowly with expansion plans with only one store currently under development as of 9/26/10 (TD Ameritrade, 2011). With real estate at all time lows in most markets, the company could leverage some of the equity and cash it currently has on hand to purchase real estate where future stores could be opened. With the instability and uncertainty in the economy investing in real estate would allow for future growth or future profits. Whole Foods should also continue to find new opportunities to grow their business to non-believers in the organic way.
By sanctioning health outcome studies that look at the long term health implications of eating foods high in preservatives, steroids, pesticide content, etc. , it is possible Whole Foods might prove overall better health outcomes when people go organic. There is also risk associated with sanctioning that sort of study as it might prove to be that organic foods offer no better health outcomes than traditional foods. The risk reward would be fantastic should organics be found to provide better health outcomes. Store sales would skyrocket and the
general population would be more willing to purchase organic foods at a higher premium should it prove to be safer than traditional food. Summary When one researches the financials and fundamentals of Whole Foods, little negatives are observed or found. When comparing these financials and fundamentals to other Grocery Store Chains, Whole Foods out performs the competition in nearly every single category. At the close of the markets on 4/21/2011, Whole Foods stock closed at $66. 30 per share, close to its 52 week high and dividends are being paid to investors at an incredible $. 40 per share (TD Ameritrade, 2011).
John Mackey, though often criticized for his flamboyant style and leadership, has found a successful way to reach customers with a unique product. Whole Foods is a leader and a revenue generator far above others in its class. References TD Ameritrade. (2011, April 16). Research and Ideas. [Chart]. WFMI Overview and Valuation. Retrieved April 23, 2011 from https://wwws. ameritrade. com/cgi-bin/apps/Main Thompson, A. A. , Strickland, A. J. , & Gamble, J. E. (2010). Crafting and executing strategy: The quest for competitive advantage: Concepts and cases: 2009 custom edition (17th ed. ). p. 8,New York, NY: McGraw-Hill-Irwin
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