Whole Food’s Strategic Analysis Case Study September 11, 2011 Table of Contents Whole Food’s Strategic Analysis Case Study3 Whole Foods Winning Strategy4 Whole Foods Vision and Core Values6 Whole Foods Competitive Advantage7 Whole Foods Market Financially Sound10 Whole Foods Strategic Recommendations13 Reference15 Table of Figures Figure 1: Whole Foods Market – SWOT analysis 3 Figure 2: Porter’s Five Forces Summary8 Figure 3: Whole Foods Market – Trend Analysis………………………………………….. 0 Figure 4: Whole Foods Market – Profitability ratios11 Figure 5: Whole Foods Market – Liquidity, Debt and Activity ratios12 Whole Food’s Strategic Analysis Case Study Whole Foods Market the world’s largest supermarket chain of natural and organic foods has commissioned our firm to provide actionable recommendations that will add value to Whole Foods product base as it pertains to their marketplace growth, operations and strategic direction.
The following SWOT analysis highlights the current situation of Whole Foods Market (WFM).
Internal EnvironmentSTRENGTHSWEAKNESS 1) Industry leader in the organic and natural foods markets with over $8 billion in sales and an approximate 1% share of the total grocery sales in 2009 (Thompson, Peteraf, Gamble, & Strickland, 2012).
1) Consumers continue to associate Whole Food’s with their Whole Paycheck. 2) A highly skilled work force grown organically and through strategic acquisitions that is incented to operate profitable stores that achieve organizational objectives. ) Higher overall labor costs compared to chain competitor’s 3) Superior reputation based on the variety and quality of organic products available3) Limited international expansion, especially the “hot” German market. External EnvironmentOPPORTUNITIESTHREATS 1) Growth in the existing market as consumers demand for organic products continues to increase at greater than 10% vs.
traditional grocery product (Thompson et al. , 2012). ) Continued economic recession causing targeted consumers to reduce grocery spending at premier chains like WFM and/or substitute similar products from lower cost providers. 2) Expansion o f value based products through increased demand for WFM’s 365-Everyday Value and 365 Organic private label products2) Increased regulations due to number of product recalls, inaccurate labeling, etc. 3) Expansion to sell WFM value based products in traditional markets and food deserts. ) Increased competition thru supermarket rebranding and big box giants 4) Targeted marketing to the aging population ($2 billion health and wellness market) Figure 1. Whole Foods Market – SWOT Analysis Whole Foods Markets’ strengths of industry leader, exceptional employee knowledge base and superior reputation positioned them as exceptionally strong in the organic retailing industry. Although organic retailing has become more competitive, customers are continuing to spend their money on healthy organic foods.
Whole and natural foods are known to be beneficial and it readily accepted as the mainstream diet of choice for the informed and health-conscious shopper. Although the volatile economical conditions do encourage consumers to cook at home, and save on outside dining, they still expect good value for their money. WFM should continue to spotlight their narrowly focus strategy of differentiation and introduction of value based products. The aging population, urban singles, and consumers with higher levels of disposable income will be the main drivers for the ontinued demand of organic foods. WFM should exploit these markets with targeted advertisement and education to counteract the external threats of increased competition. Additional recommendations are outlined in the recommendations section. Whole Foods Winning Strategy Whole Foods Market’s strategic vision is anchored on being selective about the products they sell, ensuring their quality standards are met, commitment to sustainable agriculture, and remaining dedicated to their core values.
This vision has been implemented through component strategies such as store growth, product line and merchandising, pricing, store operations, cost containment, social responsibility, supplier integration and sustained financial. To be considered a winning strategy it must “fit” the organization. This means meeting performance targets both financially and from a market position while enabling a sustainable competitive advantage (Thompson et al. , 2012).
One way WFM meets this winning strategy combination is by adapting its strategic approaches as industry conditions change. The global recession that began in 2007 has impacted many aspects of WFM’s key strategies. WFM’s initial growth strategy changed from opening new stores and aquiring small organic chains less than 20,000 square feet that were located in targeted sites to driving growth through launching massive stores and acquiring major competitors as the organic food market exploded in the mid 2000’s.
Due to continuing economic uncertainty and regulatory intervention in the Wild Oats acquistion WFM has revised their growth strategy again to focus primarily on introducing new right sized stores (Thompson, et al. , 2012). These actions increased their market standing, allowed them to enter strategic markets they weren’t previously located in, and provided them intellectual capital in areas where they lacked skills, for example perishable food merchandising, that they might not have been able to cost effectively procure otherwise.
Likewise, they revamped their pricing strategy to alleviate customers’s concern that a typical basket of goods was significantly higher priced at WFM. They cut back prices on many staple items to show added value to consumers, used signs to more strategically emphasize the many value priced items carried, collaborated with suppliers to take advantage of bulk purchases and passed those savings onto customers. WFM’s product line strategy focused on providing the highest quality and largest variety of fresh foods.
They achieved this through careful selection of suppliers who are in keeping with the highest standards of food production while maintaining a certain degree of environmental and social responsibility in the process (Whole Foods Market, n. d. ). They also introduced a suite of private-label products and categories that were less expensive than comparable name brands. These actions were intended to “strike the right balance between driving sales over the long term by improving our value offerings while maintaining margin” (Thompson et al. , 2012, pg. C-20).
While WFM has had difficulties throughout 2008-2009 they have made strategy corrections that have shown a return to financial stability in 2010 and through the first three-quarters of 2011 while positioning themselves for the exciting future. Whole Foods Vision and Core Values John Mackey’s graphic strategic vision of achieving $12 billion in sales and launching 400 stores by 2010 was certainly achievable based on historical performance; unfortunately no one had predicted the recession that has crippled their growth and hindered performance since 2007.
WFM’s vision speaks to specifics such as carrying the highest quality natural and organic foods available (focused on food not every organic product), being the best food retailer in each community they serve (limited to areas they serve), and setting the standard of excellence in food retailing through growth, a wider product selection, competive pricing, and sustained financial performance. The vision is specific enough that each team member can find something to relate to and link departmental objectives and financial targets to it.
The strategic vision set by John Mackey lays the foundation for which Whole Food’s mission is built upon: “Whole Foods, Whole People, Whole Planet”. What I consider excellent about the mission statement is it speaks to the core values of the company, it’s a concise memorable slogan that is easy to communicate to employees and it doesn’t need to be updated regularly. Regrettably, it doesn’t indicate the direction the company is heading and I don’t believe it’s feasible because it intends to be everything to everyone “Whole…. ”.
Although the core values are written in the sort of prose that feels like cosmetic window dressing there are significant facts to back up all seven core values (CV). For example: CV#3 team member happiness and excellence can be supported by the fact that WFM has been included in Forbes “100 Best Companies to Work For list” since the initial report in 1998 (Thompson et al. , 2012). In fact, in 2010 they were rated #18 overall. A strong corporate culture exists due to the self-directed team approach, various stock options and incentive plans, and the ability to determine the appropriate health care and benefits options.
CV#5 – caring about our communities and our environment is supported by the fact WFM directs at least five percent of Whole Foods’ annual profits to nonprofit groups and pays its employees wages when they do community service (Whole Foods Market, n. d. ). Additionally, the Whole Planet Foundation has empowered 60,000 individuals to help fight poverty through educational training and over $11 million in microloans (Thompson et al. , 2012). Finally, core values one, two, and four are directly related to the success of the company.
Sell the highest quality organic products; provide excellent customer service, and creating wealth through profitability and growth. If Whole Food’s doesn’t achieve these core values there won’t be a Whole Food’s company. Whole Foods Competitive Advantage Whole Foods has many capabilities which provide strategic and competitive advantages for the company. First is the company’s reputation for quality products and social responsibility which establishes Whole Foods public image and customer’s value this reputation.
Second, they have built a strong brand name which is identifiable to consumers and differentiates themselves from competitors while promoting customer loyalty. Third, organizational morale is important to WFM as the company focuses on motivating and empowering employees. Finally, WFM’s unique distribution channels which have been developed as a result of multiple acquisitions (including Wild Oats) and integrating with key suppliers. These key capabilities of brand loyalty, reputation, and organizational culture are very difficult to imitate, sustainable and provide WFM competitive advantage over its three identified rivals.
Porter’s Five ForcesThreat to WFM Profitability Internal Rivalry – competitivenessStrong New entrants Moderate Substitute products Moderate Supplier bargaining power Strong Buyer bargaining power Weak to Moderate Figure 2. Porter’s Five Forces Summary Rivalry in the food retail industry is intensively competitive with local and national chains, Fresh Market, and Trader Joe’s considered rivals each competing with WFM on the basis of store ambiance and experience, product selection, quality, customer service, price or more likely a combination of these factors, with price most often the deciding aspect (Whole Foods annual report 2010, 2011).
As WFM supports local markets and farmers these entities are not considered rivals in this analysis. The food retail business generates billions of dollars in annual sales of which the organic market is gaining market share. Even though buyer demand is rising, the increasing availability of organic products with minimal differentiation, low or no buyer switching costs and high dependence on perishable goods (produce, meats, fish) leads to the strong rating. A threat of entrants into the organic retail business is rated at moderate based on new entrants into the market (low) versus established companies introducing organic products (high).
For new entrants significant barriers exist in achieving economies of scale, establishing effective supplier distribution channels, the high capital requirements and acquiring knowledgeable resources are rated weak. Established companies like Wal-Mart, Kroger’s, and Safeway that are expanding into the organic market have existing stores (no need to invest significant capital), may need only minor supplier network additions so therefore competition is rated high.
Substitution is a moderate force and threat to organic grocers mostly as it relates to higher prices. Although consumable options are readily available the targeted market of health conscious consumer’s looking to procure organic products does not freely substitute non-organic products. However, many traditional grocers now carry organic products at lower retail prices. Supplier power is rated as strong because the supply of products especially organically grown produce has not kept pace with the growing organic demands.
WFM has tried to alleviate this shortage in capacity by sponsoring local co-ops and independent farmers, but with 27% of their total purchases coming from a single supplier there is significant risk of future shortages (Whole Foods Market annual report 2010, 2011). Buyer power on the other hand is rated weak to moderate; weak in respect that individual consumers shopping at WFM do not carry enough bargaining power to negotiate prices with WFM (Thompson et al. , 2012). High in that switching costs are low to none for a customer to shop elsewhere to purchase organic products.
Overall, Porter’s Five Forces Model suggests that Whole Foods Market should be concerned about its ability to sustain long term profitability. Using 1991-2010 numbers, excluding pooling transactions, the CAGR for WFM as reported in the 2010 annual report is 27% significantly above the food retail industry (Whole Foods Market annual report 2010, 2011, pg. 5). Given that WFM’s compounded annual growth rate (CAGR) for 2005-2010 is 13,88% compared to the North American CAGR of 11. 9% and the projected global CAGR of 12. % from 2010-2015 my analysis indicates that WFM has continued profitability potential (Organic food, beverage market to reach $104. 5 billion by 2015, 2011). Whole Foods Market Financially Sound All industries including the organic food retailing industry experienced significant financial difficulties during 2008-2009 and Whole Foods Market was no exception as indicated by the chart below which uses 2007 as the base year for trend analysis comparisons. Figure 3. Whole Foods Market trend analysis.
By reviewing the trend chart it shows that 2008-2010 has been fairly stable across all areas with the biggest discrepancy being operating and net income which can be directly attributed to consumer’s unease with the economic environment, producing stagnant sales. Even so, gross profit, operating income, and net income have all increased during the past 3 years due to increased overall sales, demonstrating a steady investment for shareholders. During 2010 the board of director’s reinstated the quarterly cash dividend (Whole Foods Market annual report 2010, 2011).
On the flip side liabilities decreased indicating a strong commitment to cost containment practices implemented in 2008. WFM’s is highly seasonal with their largest per store sales naturally coming in the spring and summer months and operating cash flow may fluctuate significantly due to this seasonality. WFM’s strategy changes in 2009 helped produce strong cash flows including allowing them to pay down the debt incurred in 2008 which shored up cash flow constrains and exchanging the outstanding 425,000 shares of preferred stock for common stock without paying out in cash (Thompson et al. 2012). Profitability measures are critical to analysts because they are the “primary measure of the overall success of the company” (Libby, Libby & Short, 2009, pg. 718). Profitability can demonstrate to external decision makers the company’s ability to generate income (profit margins) and pay dividends (EPS/ROE). Profitability RatiosWF 2010WF 2009WF 2008 Gross Profit Margin (GPM)34. 8%34. 3%34. 0% Operating Profit Margin (OPM)4. 9%3. 5%3. 0% Net Profit Margin (NPM)2. 7%1. 5%1. 4% Return on Assets (ROA)5. 2%2. 2%2. 3% Return on Equity (ROE)10. 1%7. 3%7. 6% Earnings Per Share (EPS)$1. 5$0. 85$0. 82 Figure 4. Whole Foods Market Profitability ratios. The ongoing economic recession impacted WFM’s profitability down from its peak of 35. 1% GPM in 2005, even though revenues reached $9 billion in 2010. Even with the recession WFM saw a slight increase in gross profit, operating profit, and net profit margins year over year since 2007. These margin increases are primarily attributed to increased sales, taking advantage of supplier purchasing opportunities which reduced cost of goods sold and continuation of cost containment efforts started in 2008.
Return on assets (ROA) has trended up actually doubling between 2009 and 2010 based on reducing the number of stores they planned to open in 2009-2010 and right sizing the stores they did open to effectively managing their capital investments and earning a $5 return on every dollar invested. Return on equity (ROE) at 10. 1% for 2010 is below the “average” range of 12% to 15%, but continued to trend up from the base year 2007 increasing 28% from 2009. This aligns with the price to earnings (P/E) ratio of 33. 3 that WFM achieved in 2010 which indicates strong investor confidence in a company’s outlook and earnings growth potential (Whole Foods Market, EPS, 2011). Liquidity ratios demonstrate to external decision makers the company’s ability to pay current liabilities while leverage ratios focus on meeting long-term obligations and activity ratios focus on inventory management and recievables due or the number of day’s cash is outstanding. Liquidity / Debt RatiosWF 2010WF 2009WF 2008 Current Ratio1. 551. 540. 69 Quick Ratio0. 800. 780. 22 Working Capital$413,647$371,356-$43,571 Debt to Assets Ratio0. 30. 200. 27 LT Debt to Capital Ratio0. 180. 310. 38 Debt to Equity Ratio0. 71. 11. 2 LT Debt to Equity Ratio0. 71. 11. 4 Days of inventory20. 121. 522. 8 Inventory Turnover Ratio18. 117. 016. 0 Receivable Turnover Ratio5. 44. 85. 3 Figure 5. Liquidity, Debt, and Activity Ratios (2008 – 2010). WFM’s strategy changes in 2009, hiring/pay freezes, discontinued dividend payouts except for perferred stock, and supplier cost reductions helped produce strong cash flows including allowing them to pay down the debt and loans incurred to acquire Wild Oats and bridge the 2008 cash shortage.
This strategy reduced their debt to equity ratios, long term debt ratio and debt to asset ratios to acceptable industry levels, while increasing working capital 110%. If cash flows are predictable and stable the current ratio can be low, even less than one and be acceptable (Libby, Libby & Short, 2009). Unfortunately during 2008 WFM needed to borrow funds to ensure continuation of day to day operations that is reflected in the subpar current ratio during 2008 of . 69.
Through increasing short term liquid assests and reducing their liabilities (long term debt and capital leases of stores) they have doubled the current ratio to 1. 55 for 2010 which is within acceptable industry ranges. Whole Foods Market has continued to increase their inventory turnover rate and lower their ratio which is partly due to the nature of the organic market and Whole Foods’ focus on fresh items (quality strategy) and partly due to the self-directed teams collective knowledge of inventory management (efficient store operations).
This number might be slightly slanted since WFM sells only organic foods which have a shorter shelf life. Finally, the receiveable turnover rate has fluctuated during the past couple of years which can be attributed to suppliers in the value chain also struggling with the economic conditions. While currently trending up it directly relates to sales and WFM saw an increase of 10. 8% in sales from 2009 to 2010. WFM does appear to pay their suppliers faster than any of the competitors examined.
This could be considered a negative but Whole Foods must have strong relationships with their suppliers since organic foods have to meet certain regulatory requirements. Whole Foods needs to maintain robust supplier relationships and timely payments are one way to strengthen and ensure longevity in the value chain. Whole Foods Strategic Recommendations Strategic recommendations are included that rely on Whole Foods Markets strengths and internal capabilites in order to be successful while mitigating their internal weakness.
I recommend that Whole Foods Market continue their expansion of value based products, focus on customer differentiation by targeting different groups (baby boomers, young families) to garner a subset of the health and wellness industry, and improve international and food desert community penetration. The health and wellness industry is a billion dollar industry. Expand value based products by partnering with a nationally known healthy weight organization like Weight Watchers. Launching “Whole Weight” branded products.
Engage a celebrity spokesperson to promote and educate non-traditional organic shoppers on the benefits of converting and the availability of over 2000 Everyday Value and 365 organic private labels products for price-sensitive consumers. WFM will need to increase their advertisement budget to achieve this objective. Additionally, WFM needs to develop innovative taglines that associate the health benefits of organic with specific targeted groups expanding on their “Whole People” mission.
Develop an organic line of packaged “Whole Kids”/”Whole Baby” dinners, baby food, and easy finger food snacks (similar to Organic Farms prepackaged carrots/dip). WFM should broaden its growth strategy to more aggressively expand internationally, starting with Germany which is one of the leaders in organic consumption. During 2010 “Europe had the largest share in the global organic food and beverages market with revenues of $27. 8 billion” (Organic food and beverage.. , 2011, para. 5). They should leverage their stores in the
United Kingdom to showcase their superior products and provide supplier connections. A final recommendation is to identify and support 10-15 food desert communities within the United States through establishment of small Whole Foods Market stores. These stores would be 10,000-15,000 square feet in size selling only fruits, vegetables and a small selection of fresh meat. Reference Libby, R. , Libby, P. , & Short, D. (2009). Financial Accounting (6th ed. ). New York: The McGraw-Hill Companies, Inc. Organic food, beverage market to reach $104. 50 billion by 2015. March 2, 2011). Retrieved from http://westernfarmpress. com/management/organic-food-beverage-market-reach-10450-billion-2015 SWOT Analysis: http://www. companiesandmarkets. com/table-of-contents-for-whole-foods-market,-inc. -(wfmi)-financial-and-strategic-swot-analysis-review-680291. aspx Thilmany, D. (April 2006). The US organic industry. Important trends and emerging industries. Retrieved from http://organic. colostate. edu/documents/Thilmany_paper. pdf Thompson, A. , Peteraf, M. , Gamble, J. , Strickland, A. (2012). Crafting & Executing Strategy.
The Quest for Competitive Advantage (18th ed. ). New York, NY. Whole Foods Market (n. d. ). Retrieved on September 3, 2011 from Whole Foods Market Website http://www. wholefoodsmarket. com/ Whole Foods Market EPS (n. d. ). Retrieved on September 5, 2011 from http://ycharts. com/companies/WFM/pe_ratio Whole Foods Market 2007 Annual Report. (2008). Retrieved on September 3, 2011 http://www. wholefoodsmarket. com/company/pdfs/ar07. pdf Whole Foods Market 2010 Annual Report. (2011). Retrieved on September 2, 2011 from http://www. wholefoodsmarket. com/company/pdfs/ar10. pdf
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