Competitive strategy at Whole Foods Market
By Amanda Roberson, Amy Zelezen, Ankush Brahmavar, Boris Pilipenko, Kinjal Gandhi and Matt Werner
Cincinnati resident Roberta Mand is spoiled for choice every time she steps out to buy groceries. Depending on whether she want to buy steaks, sushi, staples or macadamia-encrusted tuna, she heads to Costco, Wal-Mart, Kroger, Whole Foods or the local farmer’s market, all of which are nearby. Roberta’s array of choices illustrates the ever-evolving dynamics of the grocery industry. In this extremely competitive environment, all major players must continuously strategize to maintain a strong presence. A look at Whole Foods Market reveals how this increased competition can leave a company at a strategic crossroads. Since its beginnings in 1980, Whole Foods has been a leader in supplying organic and natural foods, and for years enjoyed its role as the only store catering to this niche market. However, since then other major players have identified this growing segment and now also carry lines of organic and natural foods.
Shoppers like Mand can now buy most specialty items almost anywhere. Competitors, such as Safeway and Kroger, bring with them vast experience in supply chain and vendor development, which allows them to optimize more effectively, use economies of scale, and reduce costs. Despite a public perception that Whole Foods competes against the Sunflower Markets and Trader Joe’s of the world, neither the company itself nor analysts consider this to be Whole Foods’ true competitive arena. As a Fortune 500 company, it plays with the big boys. According to Nick Ford, a Thunderbird MBA student and former employee of Whole Foods, the company positions itself as a large retailer and grocer and does not consider other natural food stores to be threats. An informal survey confirmed this - Paradise Valley, AZ Whole Foods shoppers said that as alternatives they most often shopped at Safeway or Fry’s, not Trader Joe’s or Sprouts. In addition, the growing popularity of farmers’ markets at the other end of the spectrum places Whole Foods in an in-between position where its sales, brand and popularity could be affected from both ends.
The growing concern that organic foods are more expensive than conventional foods may lead Mand and other shoppers to believe shopping at Whole Foods will cost them their “Whole Paycheck.” Also, critics say the company not marketing and advertising as extensively as its competitors has caused many regular customers to stop visiting Whole Foods, pointing to single-digit growth in stores sales when compared to previous years. For Mand and her fellow shoppers, variety, low prices, convenience, and low switching costs mean they can easily walk into any store they choose to do their grocery shopping. Based on these odds stacked against Whole Foods, it is clear that the company faces challenges in maintaining its customer base and financial growth as well as its brand positioning.
A closer look at the company, however, gives us evidence quite to the contrary. Whole Foods continuously outperforms its major competitors in the grocery industry by a wide margin. The company currently earns a profit margin of 34.29%, compared to an industry-wide profit margin of 19.25%. Even Safeway, its nearest competitor, only earns 28.62%, while Kroger is suffering at 1.63%. Whole Foods inventory turns are also tops at 16.5 versus Safeway’s 11.4 and Kroger’s 13.3. The company is extremely healthy financially and seems to have recovered from the effects of the recession: From quarter three to quarter four 2010, Whole Foods experienced a 15% increase in sales. For the whole of 2010, the company has $67.3 million in free cash flow on operating income of $438 million. During the worst of the recession, the company learned a lot about running a leaner operation and managed to keep its profit margins high even as the number of transactions decreased. Another valuable lesson learned was the need to appeal to a broader customer base in terms of purchasing power.
Whole Foods is taking many measures to shed its “Whole Paycheck” reputation. “We used to have a lot of foodie focus before the recession. We used to have the Whole Kitchen, Whole Pantry line of mid-priced products, but we phased those out after the recession and expanded to the 365 Everyday Value and 365 Organic brands, which are very attractive to customers,” explained Theresa Sarna, Whole Foods marketing manager at the Tempe, Arizona location. She also commented that a lot of company's outreach now is focused on value, explaining that “ever since the recession, we are really focused on the value image,” Whole Foods introduced the “Value Guru” to help customers navigate stores to find best deals and prominent signs pointing out lower-priced products and sale items. The shift from the “Whole Paycheck” image to affordable products is the direction that the company plans to follow in the future. This should help it during future economic downturns, as 45% of Americans purchased more store brands during the “great recession,” according to market research done by Harris Interactive.
Backward integration of stores to carry their private label products represents an important development in the industry that changes how profits are divided, and Whole Foods is well-positioned to ride that wave with its strong brand name. Products with the Whole Foods store-brand label offer low-cost but high-quality alternatives to premium brand-name items beside them on store shelves. In 2009, total sales of private-label products accounted for about 11% of the company's retail sales, compared to 10% for the previous year including Whole Body products. As CEO John Mackey says, “If you visit a Trader Joe’s and buy only products from their house brand, it will cost you the same as going into a Whole Foods and buying only from their house brand.” Likewise, Mand and other shoppers can buy a “basket” of commonly purchased grocery items (a common benchmark in the industry) for $150.00 at Whole Foods, compared to $165.00 at Safeway. The difference is that many people who go into Whole Foods also buy luxury or impulse items which the stores stocks in abundance, giving Whole Foods its reputation for being expensive. If Mand sticks to her list, however, it really is not. By shopping smartly, she can do well at Whole Foods.
Whole Foods’ vision is to continue growing. With only 300 locations in three countries, their market is far from saturated. As Ford said, the company is very strategic about where it opens stores. Whole Foods is trying to locate itself where demand already exists among an educated and interested populace. The more than 50 stores in development listed on company website indicate that there are many markets yet untapped.
Whole Foods’ main customer base is growing as more and more people care about the environment and their health, and become interested in purchasing organic and natural products. In fact, the study conducted by Harris Interactive also found that 51% of Americans were interested in cooking at home more often and that 73% of Americans will continue to purchase natural or organic foods in the same quantities regardless of economic conditions. With an increasing clientele who have become knowledgeable about healthy eating, the company has been able to lower its price offerings in certain areas and focus on the 365 Everyday brand while still increasing sales.
While some see the growing popularity of farmers markets as a threat to Whole Foods, this trend is actually a boon. Long before supporting local producers was considered trendy, Whole Foods held and continues to hold farmers markets in its own parking lots. The benefit is two-fold: First, the buying team at each store develops stronger relationships with local suppliers and supports producers who are too small to sell in bulk, creating goodwill. Second, the suppliers gain direct access to a broader customer base, which creates supplier loyalty. A well-developed loan program for local vendors reinforces this loyalty and creates an unquantifiable feel-good factor among buyer and customers. Often, these farmers sell their products through Whole Foods stores for the rest of the week. Another benefit of holding markets in Whole Foods parking lots is the increased traffic and greater footfall into stores on market days. The Whole Foods buying team has a strong farm-to-market supply chain already in place and is well-positioned to take advantage of rising interest in local products by having staples such as toilet paper, rice, and sugar conveniently available alongside local produce, whether in-store or directly from a farm vendor. This decentralized buying also ensures that there are purchasing experts available in each region to monitor the quality of products and provide feedback for continuous development. Whole Foods’ reliance on local sourcing also helps it to reduce transportation costs, helping revenue growth. Currently, there are 6,132 farmers markets in operation in the United States (more than a three-fold growth since 1994), but their irregular operating hours and limited and seasonal selection make it impractical for most Americans to shop there exclusively.
The experience Whole Foods creates for its customers allows the company to maintain its corner in the market. Since its inception, Whole Foods has continued to transform grocery shopping into an enjoyable experience filled with learning. Its founder, John Mackey (who since 2007 has drawn a $1 annual salary, engendering much goodwill amongst employees), envisioned Whole Foods stores as community centers that celebrate natural and delicious foods and a healthy lifestyle. When entering a store, shoppers feel as if they are at a fair. A seafood counter is filled with sustainably-harvested fish; a butcher and educational signs reveal the history and benefits of each product. Friendly, happy employees with passions for food and drink help shoppers navigate the extensive selection of natural and organic produce. The extensive knowledge that employees gain through ongoing training in areas that interest them adds another pleasing dimension to the whole shopping experience.
While it has positioned itself as a large grocer similar to Wal-Mart or Safeway, Whole Foods has ensured that customers enjoy themselves while visiting the store, coaxing them to visit the store again by making each trip a memorable experience. Mand may choose Whole Foods over its competitors for reasons besides buying the basics, such as happy hours, delicious, café-style prepared food counters and cooking classes where she can relax and socialize. Workshops held at Whole Foods create a collaborative experience with customers. According to our informal market research study, the organic selection, natural selection, Whole Foods “experience,” and prepared foods section are the top draws for Whole Foods patrons.
As customers shop at Whole Foods more often, they learn more about the benefits of healthy eating and organic food, leading them to visit more frequently in the future. Whole Foods barely has to advertise for customers because its loyal customers advertise for them. In addition to its growing fan base, customers including chefs, naturopaths, and doctors become such fans of the store that they act as Whole Foods ambassadors. Also, many new customers start shopping at Whole Foods when they are pregnant, want to feed healthy food to their children, or are trying to control a medical condition.
According to Sarna in Tempe, Whole Foods rarely has to spend on traditional advertising. There are no weeklies in the papers. The spread of the “green movement” toward eating natural and organic foods has helped bring more people into the store. Frequent media coverage of food, including movies like Food Inc. and the Dr. Oz TV show, evangelize the benefits of healthy eating. The company also receives an unbelievable amount of free press due to their “Best Place to Work” status, including landing on the cover of Fortune magazine. Another advertisement for Whole Foods is its work with the community. It just finished a back-to-school lunch program and is currently running a salad bar project through which public schools can apply for grant money to start an organic salad bar. Whole Foods chooses to invest time and money in promoting healthy lifestyle and natural foods in effort to grow its customer base. Finally, the majority of Whole Foods’ marketing revolves around the artistic and often-imitated in-store signage and sampling. Through its excellent merchandising, it has created an experience analogous to visiting a Nordstrom store versus a JC Penney.
Essentially, Whole Foods has covered its strategic bases by staying true to its roots. This well-oiled green machine has remained profitable in tough economic times by creating an irreplaceable experience. While a fast growth strategy and drastic price competition may tempt Whole Foods, this would weaken its competitive advantage. The company’s focus on fresh food and local suppliers, combined with smartly run operations, set it apart from its competitors. Although Mand may be able to buy her organic and natural products at others stores, the Whole Foods experience and the peace of mind that she is shopping conscientiously will keep her coming back for years to come.
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This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.