The fundamental purpose of this assignment is to provide an opportunity to apply the theoretical concepts and frameworks dis

2

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.

3

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.

4

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

5

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

6

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

Page 1 of 10

To: John Mackey, CEO – Whole Foods Market, Inc. From: Re: Whole Foods Competitive Position and Analysis Date: January 26, 2011

Introduction

Whole Foods Market is a multi-national retailer of organic and natural foods. According to the Organic Trade Association (OTA) and Nutrition Business Journal, the organic and natural foods industry’s revenue is currently approximately $26 billion in the U.S.1 and $71 billion worldwide2. The OTA says that the organic and natural food category grew between 15% and 20% each year through 2008 before being stifled by the economic downturn in 2009 with only 5.1% growth3. Similar growth trends are expected for the next few years. With increased competition from more traditional grocers like Kroger and Safeway, as well as supercenters like Wal-Mart and Super Target, is Whole Foods’s fate in jeopardy?

Competitive Position

Whole Foods’s position in the organic and natural foods sector is dominant. With approximately 33.6% market share in the U.S. in 2010, no other single competitor comes close to the organic food volume of Whole Foods4. Exhibit 1 shows Whole Foods’s revenue and market share from 2003 to 2009. Since 1980, Whole Foods has concentrated on offering the highest variety of organic and natural food products5. With exception of Whole Foods, the organic and natural food market is fragmented with many customer buying channels. Competition exists from direct competitors like The Fresh Market, extended product offerings from traditional grocers and supercenters like Kroger and Wal-Mart, and local farmers’ markets and coops such as those found around Charlottesville, VA. The threat of new entrants is high as more existing food retailers chase the product differentiation and variety of organic foods. Exhibits 2 and 3 show a list of competitors, key figures, and strategies of those competitors.

Whole Foods has the advantage of being the first large mover in the organic retail industry. Substitutes in the organic and natural food segment are limited although more food retailers are now offering organic food selections. Whole Foods takes advantage of its above industry average selection with higher prices than most competitors on the hard to find organic products. With few complete channels to buy organics, buyer power is low for those products with limited selection, and high for those organic products being offered in many channels. According to a United States Department of Agriculture (USDA) study, suppliers are limited but are growing to larger regional and national positions6. Unlike the traditional grocers and supercenters, Whole Foods has the advantage of close partnerships with over 2,000 organic suppliers world-wide7. This enables Whole Foods to retain control, get more products year round, and keep prices as low as possible for customers. A complete five forces analysis is found in Exhibit 4.

Currently, Whole Foods’s capabilities are well-positioned for market growth. Exhibit 5 shows an analysis of Whole Foods’s current capabilities. Whole Foods’s team of highly skilled procurement specialists assists stores in buying what customers want and provides assistance to suppliers through growth loans and cost reduction consulting. These relationships ensure high quality standards and timely delivery to 299 stores. The Whole Foods’s store model is focused on local customers’ organic needs as well as an aesthetically pleasing atmosphere for organic food exploration and education. Whole Foods also concentrates on educating pregnant mothers and

Page 2 of 10

parents on the benefits of organic foods. The company’s website has a blog dedicated to organic food cooking and healthy lifestyle tips8. Overall, these capabilities are what the traditional grocers and supercenters are currently lacking.

However, competitors are copying Whole Foods’s success. Just this week, Wal-Mart announced plans to increase the number of healthy food items available at its stores. With support from First Lady Michelle Obama, Wal-Mart will drop prices on fruits and vegetables. This plan also compliments their 2006 plan to increase organic food products available at its stores9. Publix has launched a chain of stores to compete directly with Whole Foods called Publix GreenWise Markets10. According to Willard Bishop, a food research firm, consumer demand for supercenter groceries will grow by 7.3% per year compared to only 1.7% per year for the fresh format (organic and natural food) grocers11. If the supercenter can offer more organic product offerings, Whole Foods will suffer.

Changing Industry

According to Willard Bishop, the entire retail food industry generates approximately $1 trillion of revenue in the U.S12. The industry is segmented into three main areas: 1) Traditional Grocery (~47.5% of the total market) 2) Convenience Stores (~15.4% of the total market) and 3) Non-traditional Grocery (~37% of the total market)13. Whole Foods plays in the traditional grocery segment under a subset called fresh format. The fresh format concentrates on a particular food segment—organic and natural foods for Whole Foods. Exhibit 6 shows the breakdown of organic food sales by channel in 2009. According to the OTA, the sale of organic and natural foods through organic and natural food retailers was 47% in 2005—9% higher than in 200914. The OTA says that shifts in organic buying trends to traditional grocers, club stores, and supercenters are attributed to more product availability in those channels, lower prices, and the growth of private-labeled organic products. For availability, the Food Marketing Institute says that 76% of traditional grocery stores now offer some natural and organic food selection15. These shifts in consumer purchasing trends and channels could be trouble for Whole Foods’s future competitive position.

Additionally, there are other environmental factors affecting the industry. The USDA says consumer awareness of organic food benefits is high and will continue to grow. It is estimated that 69% of consumers purchased organic products in 200816. Whole Foods, through its organic and natural foods message, has driven much of the trend towards this food group. Supply for organic and natural foods does not always meet demand, particularly in areas of the country with low organic farms density17. Exhibit 7 shows organic farms by location and size. Most are located in the western U.S. As a result, according to a 2004 USDA study, approximately 38% of organic handlers had to import organic products to meet consumer demand. This effort is compounded by strict USDA procedures and a three year waiting period before a farm can sell certified organic foods18. One of Whole Foods’s largest risks is the ability to get organic products as demand continues and more retailers fight for organic products.

Conclusion

As a first mover, Whole Foods has gained a competitive advantage in the organic foods retail market. However, stiff competition and consumer demand for lower prices will pose a problem for Whole Foods going forward. More competitors will try and imitate Whole Foods’s success model in the organic foods segment. Thus, Whole Foods’s competitive position may be at risk.

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