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In the United States (US), the organic food industry crossed a threshold in 2000: growth in retail sales has reached 20% or even more annually since 1990, organic products are now available in approximatively 20,000 natural stores and are sold in about 73% of traditional stores (Greene and Dimitri, 2002). In 1980, Whole Food Markets (WFM) has been established and became one of the leading grocery stores in the natural and organic food industry (Martrous, 2016:1). In this first part of the study, I will discuss on the microeconomic factors that impacted WFM and examine the challenges that the organic retailers in the US face.
The focus on the study will be on the American market of WFM for organic foods and beverages.
WFM is a Texas-based food grocery store, selling the highest quality organic and natural food, including seafood, meat and poultry, prepared food and catering, body, floral, pet and households’ products (Lee and Linowes, 2009:2). The company core values had since then not changed.
It seeks to sell the highest and finest quality of organic foods, satisfy customers, promote team members growth and happiness, practice win-win partnerships with the suppliers, create profits and prosperity and respect the environment and community (Whole Foods, 2019). Since 1984, WFM had a rapid growth and has today over 400 stores in the US, Canada and United Kingdom, with over 91000 employees; this makes WFM the largest retailer of organic food in America and the 5th largest public food retailer (Vennamaneni, 2017).
Whole Foods Market’s “no secrets” management philosophy allows people to have access to all the financial data and salary information of its employees (Lee and Linowes, 2009:3-4).
According to the graph below (Statista.com, 2019), it can be observed that the global net sales of WFM has considerably increased, from $9,006 in 2010 to $16,030 in 2017; this is almost a 78% growth rate.
In the US, the sales growth is fluctuating during those past three years from 12% in 2011, 15.7% in 2012 and 10.4% in 2010; however retail industry revenue has decreased by 0.4%, which means that WFM has surpassed industry expectations: sales per square foot has increased from 854$ in 2011 to 937$ in 2013 (aashree.files.wordpress.com, 2019).
Concerning the financial statements of WFM, it has been observed that ” return on asset, gross profit margin and net profit margins have consistently increased during the past 3 years, quality of income is satisfactory as cash flow from operating activity by net income is greater than 1 all 3 years as net income is growing in line with cash flow ” (aashree.files.wordpress.com, 2019). Also, net income as percentage of cash flow is growing, meaning that the working capital management is efficient; fixed asset turnover ratio is increasing consistently in past 3 years and for each dollar spent on PPE, WFM earns about 5.6$ in sales revenue in 2013 (aashree.files.wordpress.com, 2019).
Organic consumers are increasingly mainstream: WFM mainly target individuals and families whose income is well above the average national income, concerned by their health and the environment, have college degrees and live in up-scale suburban areas (Vennamaneni, 2017). Indeed, several studies have been conducted on the buying habits and demographics of consumers of organic foods: consumers prefer organically produced food because of their concerns regarding health, environment and animal welfare; thus, they are willing to pay the highest prices established by the market (USDA, 2019). WFM essentially targets consumers who earn a middle to high income because of having high prices (Martrous, 2016:32); the majority of their customers have an average income of $125,000 (Snapshot, 2019). WFM also targets both men and women. But put a particular emphasis on educated women who enjoy cooking their own food with organic products (Martrous, 2016:32). The average value of a basket at WF is $42,85 (Snapshot, 2019). Also, according to the chart below (Statista, 2019), almost 20% of the customers of WFM are between 30 and 49 years old.
Organic products have shifted from being a life-style choice for a small share of the American population to being consumed by the majority of Americans (USDA,2019).
WFM average market hourly pay ranges from $11,89 per hour to $21,41; and the average WFM salary ranges from approximatively $20,000 per year for handler to $80,000 per year for associate manager (indeed.com, 2019)
Concerning the expenditures on R&D, ” WFM has replaced its core legacy system to scalable solutions and leveraged technology advances ” (Martrous, 2014:24). Indeed, they implemented ” Workday “, an online human resource management system, launched a new WFM mobile app and signed a partnership with ApplePay. Also, ” innovation and experimentation occur at the store level, as managers are permitted to choose up to 10% of store items, allowing stores to cater to local tastes and availability ” (Lee and Linowes, 2009:3).
WFM offer an important variety of high quality organic and natural products that are not available in other markets: they meet health and quality standards, own label, do not carry products with hydrogenated fats, do not sell meat from animals raised on antibiotics, do not sell caged eggs and products containing artificial flavors and sweeteners (Lee and Linowe, 2009:4). The suppliers of WFM include local organic farmers producing dairy, beef and pork, confectionery, and fruits and vegetables .” (Martrous, 2016:23). WFM controls its suppliers because the company buys product in bulk and distributes to its subsidiaries.” (Martrous, 2016:23).
Concerning the substitutes, the threat level is high: it is easy for existing mainstream grocers to sell natural and organic foods; buyers may also choose to do so for some of their shopping at local farmers market (aashree.files.wordpress.com, 2019).
The organic consumers accept price premiums 10 to 20 %, or a maximum of 25%; if higher than that, they are usually more reluctant to buy organic foods (Kortbech-Olesen, 2002:19). Developing countries exporters may also typically expect a premium of 10-25%, though in some cases the premium may be much higher, up to 100% or more, if the product concerned is in short supply; however, the unusual demand and supply mechanism will tend to force the prices to go down over time (Kortbech-Olesen, 2002:19). For WFM, the prices are premiums; although their customers are not really price sensitive (meaning that an increase in the price of the products would not have a big impact on their demand curve), the company would offer more sales on its products in order to attract customers from other organic retailers (Vennamaneni, 2017).
It is important that producers and exporters in developing countries do not overestimate the price premiums that may be obtained and that they base their export prices on realistic production costs and price expectations; existing as well as new suppliers to the US market, they will have to price their products at competitive levels with those issued of the domestic market (Kortbech-Olesen, 2002:19).” As prices for most organic products tend to fluctuate over time and market requirements change frequently, suppliers need to monitor the market and price movements closely to arrive at realistic pricing policy “(Kortbech-Olesen, 2002:19).
The American market has over 20,000 stores, supplying organic foods and beverages. In the US, the organic segment is one of the 3 major retail markets categories in the speciality food industry: ” the sales of organic food increased by 62 billion in 2007, which represents a 10% increase in comparison to the previous year ” (Lee and Linowe, 2009:4). Also, the retail market for organic food and beverages has been estimated at about 8 billions in 2000 (Greene and Dimitri, 2002:8).
When it comes to the access to information, advertising and promotion play an important role in the organic food trade and private labels and manufacturers’ brands are being promoted by the food industry and the retail sector: for instance, in September 2007, the 10th annual Organic Harvest Month celebration took place focusing on the benefits and practices of organic agriculture; special activities were carried out by producers and retailers in order to share information with consumers on what organic stands for and what organic products are available on the market (Lee and Linowe, 2009:4).
Although the US is a very important producer of organic foods and also produces quite a broad range of organic foods and beverages, the country is still very reliant and needs support: important quantities are imported from foreign countries, in order to meet the requirements of the rapidly growing market (Lee and Linowes, 2009:4). Potential entrants into the American grocery market is limited, with small and medium size stores representing more than 70% of the industry; moreover, with restrictions from local suppliers and providers, it is a big challenge for small and medium size business to compete with large chain stores. (Martrous, 2016:25). Also, ” US import duty rates vary by product as well as by country of origin: the same rates apply whether a product is organic or conventional “(Lee and Linowes, 2009:26).It should be emphasised that any importers and exporters have to choose a certification body that would provide access to the US market (Lee and Linowes, 2009:27).
” Food retailing is a fiercely competitive industry: WFM competition is in local, regional, national, and international conventional and specialty supermarkets, warehouse membership clubs, natural foods stores, online retailers, restaurants, and home delivery companies. The company competes based on product selection and quality, customer service, price, or a combination of all of these ” (Martrous, 2016:20). Whole Foods competes with many markets, with privately held specialty grocery store chain headquartered in Monrovia, California, such as Trader Joe’s, which offers similar organic goods and has also seen rapid growth in recent years.
In addition to Trader Joe’s and local organic food stores, the company is facing increasing competition from mainstream U.S. supermarket chains hoping to capitalize on popular consumer trends.” (Lee and Linowes, 2009:8-9). For instance, there is Sprouts Farmers Markets, that is an American supermarket chain that was founded during the year 2002, providing various products like groceries, food, organic food, dietary supplements, and vitamins. (Bhasin, 2019). Then, there is the popular supermarket chain industry, Kroger, established during the year 1883, the second largest retailer in the world, and that has its business operations directly or through its subsidiaries in about 2,800 stores across 35 states by having annual sales of about $115.3 billion. (Bhasin, 2019).
Finally, I can cite Raley’s Supermarkets, a popular retail and grocery industry that was established during the year 1935 and is headquartered in California, United States: it is a privately held, family-owned supermarket chain that provides fair prices and also a good customer service, according to the reviews (Bhasin, 2019). ” The supermarket and grocery industry is a fiercely competitive environment: small and medium size operations represent almost 70% of the industry’s revenue while the largest four companies account for the rest. Therefore, the market concentration is still low. Moreover, other wholesale superstores such as Walmart, which also provide groceries (with 25% lower prices than organic products) are considered to be new major players in the industry ” (Shelly, 2014).
Despite the fierce competition, WFM enjoys competitive position due to its early start, scale and expansion, as it has closed partnership with over 2000 organic suppliers worldwide, mission-driven brand superiority, and premium shopping experience.
WFM’s strategy is to allocate paid media and marketing investment among strategic national and regional programs and individual stores; and benefit from valuable earned media, social media and word-of-mouth advocacy (Martrous, 2016:17). The company has a strong presence on social media (Facebook, Twitter and Instagram) with over 11millions of followers; this was achieved by having global brand accounts and individual store accounts decreased. (Martrous, 2014:19). WFM rely heavily on word-of-mouth publicity, which is a disadvantage in comparison to its competitors who use prints, television and social media: in 2007, the company spent 0,5% of its total revenue on advertising (Martrous, 2014:29).
WFM differentiated focus strategy and store expansion throughout the world allow the company to capitalize with a growing number of buyers and suppliers of organic foods: first, organic difference is the key stone of WFM’s mission with highest quality brand reputation, dedication to the social ethics and a market penetration with 300 large customised stores in North America in the past 30 years (Martrous, 2014:33).
It should be emphasised that the focus on high prices for its products which is a direct result of the company’s focus on producing the finest products (Martrous, 2014:19).
WFM has only one operating segment that is natural and organic foods supermarket; this segment is $100 billions; the company also positions itself as the best source for healthiest, natural and organic foods among its competitors and is the first grocery store to be certified organic in America; the high quality standards and the important supply chain procures its products from local and global producers and ensures that its products are manufactured without violating any labour laws, human or animal rights (Vennamaneni, 2017).
” The company’s strategy is to produce the healthiest products in the market; the strategy is well matched to recent development and conditions in the natural and organic foods segment of the food retailing industry” (Martrous, 2016:32). Indeed, WFM’s sales have grown significantly ” through important store sales growth, acquisitions and new stores openings, from approximatively $93 millions in fiscal year in 1991 to $1.5 billions in 2015, or a 24 year compounded annual growth rate of almost 24% ” (Martrous, 2014:19). Also, WFM planned to launch a second store format, that will allow the company to expand its growth opportunity to beyond 1200 stores (Martrous, 2014:19). WFM planned new store openings for fiscal year 2009 were at a range of 25 to 30, however, given the challenges in the economic environement, the number has been lowered to 15 ” (Lee and Linowes, 2009:6).
” WFM climate change strategy is focused almost entirely on renewable energy purchases: the company has purchased 1.2 million MWh hours of wind-based renewable energy credits (serving as carbon off sets for 100 percent of the electricity used in all of its stores), installed solar panels on nine stores, and converted its truck fleet to bio-diesel fuel ” (Sheppard, 2010). However, WFM has not publicly disclosed a greenhouse gas (GHG) emissions inventory or emissions reduction targets” (Sheppard, 2010). Also, WFM ” was given a zero on board oversight, and only an 11 on management’s execution of a sustainability strategy. Whole Foods neither accounts for nor publicly discloses its emissions ” (Sheppard, 2010). Green brands such as WFM have not managed to commit to environmentally responsible farming practices that protect drinking water, prevent agricultural runoff, and curb climate emissions.
Moreover, as the new report shows, WFM source meat supplied from some of the most polluting agribusinesses in the country (Zabcik, 2018).
In order to provide a solution to the climate change issue, WFM said it was prohibiting some insecticides that can impair neurological development in children: “After three years of research and planning, Responsibly Grown is the result of our collaboration with suppliers, scientists and issue experts to continue our strong commitment to organic, while embracing additional important topics and growing practices in agriculture today” , said Matt Rogers, global produce coordinator at Whole Foods Market. (Frizzel, 2014). Also, WFM argues that the program will encourage farmers to recycle plastics, install solar panels, plant wildflowers to restore natural bee habitats, and more efficiently irrigate their fields, for example. (Frizzel, 2014).
To conclude, I would say that WFM is one of the most important and largest organic retailer in the world. The different demand factors such as the average income of the customers, age, ethnicity, level of education and tastes have a considerable play in the demand and supply curve of the company, as well as in the price fixing of the products, that are quite high in comparison to the prices of products from conventional stores. The market for organic products in the American market contains almost 20,000 stores, selling for some of them products cheaper than those supplied by WFM, and represent a high threat in terms of substitutes.
Although the American market produces its own organic products, it is far from being self-reliant. But yet, the American State has imposed different barriers entry that makes it hard for foreign and small or medium companies to enter the market and being competitive.
WFM strategy is based on a strong expansion strategy and essentially a word-of-mouth marketing strategy. This might constitute a disadvantage, when its main competitors have a more “intense” marketing strategy.
Finally, it should be emphasised that although the WFM is an organic retailer, the production of the company allows negative externalities: the company has not been open regarding its gas emissions and has not been able commit to environmentally responsible farming practices. In order to deal with those issues, Certain policies and means have been developed in order to limit those externalities.
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