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To:JohnMackey&WalterRobb From: Subject:ExecutiveSummary:WholeFoodsCompetitivePositionAnalysis IndustryAnalysis As the largest grocery chain of natural and organic foods in the United States, Whole Foods Markets competeswithinaspecializedsegmentofthe$557billion(FMI,2009) overallgroceryretailindustry.Its main competitors sit within various strategic groups encompassing specialized organic/natural food retailers, traditional grocers (especially those with dedicated organic food offerings), mass merchandiserssuchasWalMartwhohavelaunchedorganicfoodlines,andevenlocalcoopmarketsor farmer markets. However, Whole Foods enjoys an enviable competitive position in this industry due to itsscaleandexpansion,missiondrivenbrandsuperiority,andpremiumshoppingexperience. In evaluating the industry, the environmental factors that are most important are market size, demographic trends, regulatory factors, technology developments, supplier channels, as well as consumerhabitsandsocialconsiderations(Exhibit 1).Theeffectofthesefactorsaredramaticallymuch more favorable for the natural/organic food retail industry than the overall grocery industry, due to greatermarketgrowthandincreased consumeradoptiondueto perceivedhealthandwellnessbenefits coupled with an affluent customer base willing to pay a price premium. The only adverse factor, the higher levels of regulation impacting the organic food segment, is counterbalanced by the ability of the segment to withstand morestringent foodquality andsafetyregulationsinthefuture.AsWholeFoods is just 1.3% (Riddick, 2011) of the overall food retail market, it is wellpositioned to capitalize on these attractiveindustryfundamentalsfornaturalandorganicfoods. A Porters Five Forces analysis (Exhibit 2) further solidified this reasoning. Whole Foods has already established a strong industry presence in the natural/organic food retail segment with over 300 stores nationwide,aswellassixinCanadaandfiveintheUK(WholeFoodsAnnualReport,2010).With30,000 SKUs, it has a broad product line that provides a comprehensive shopping experience for consumers. Furthermore, consumers are choosing higher margin products and spending more: in a recent survey of WholeFoodsstoremanagers,64%saidconsumerswerewillingtotradeupand82%saidthatconsumer spending had much improved over last year (Mushkin, 2011). Whole Foods is also able to capitalize on having a local community presence by working with local suppliers, farmers and growers while having the power of a national brand. Due to its strong industry positioning, Whole Foods is poised to capture additional share as it expands its retail presence both domestically and internationally and grows both within the natural/organic food retail segment and wins converters from the overall food segment whoswitchtonatural/organicofferings. StrategicGroups&Positioning Whole Foods market positioning is challenges by a number of competitors who represent different retail formats. While it competes directly with natural/organic grocers such as Trader Joes and Fresh Market, it also faces competition from traditional supermarkets, and more recently, from mass merchandiserssuchasWalMartandclubstoressuchasBJs.Exhibit 3showsabreakdownofthemain competitors within each strategic group. As consumers continue to push for healthier food choices in


seeking out natural / organic foods, traditional grocery outlets have drastically ramped up their organic offerings. In 2009, mass market retailers representing mainstream supermarkets, club/warehouse stores, and mass merchandisers sold more than 54 percent of organic food (Organic Trade Association, 2010).WholeFoodsMarketneedstofightagainstthesemoretraditionaloutletstoachieveshare. CompetitorAnalysis Further analysis of competitive forces reveals that Whole Foods is in good position to push back against the encroaching invasion of market share. Three retailers, Trader Joes, Kroger, and WalMart, were chosen to represent the typical competition that is faced by Whole Foods (Exhibit 4). While their main consumerappealincompetitivepricingandselectiondoeschallengeWholeFoodsmarketshare,Whole Foods has significant competitive advantages by offering an unparalleled value proposition in the food quality and selection as well as providing a premium shopping experience by delighting its customers. While price points are higher in Whole Foods Markets, it has ramped up its competitive offerings in value products by offering 2,200 SKUs in its private label line, 365 Everyday Value (Whole Foods 10K) andpushedproductsdiscounts.Itsmissiondriveculturepermeatesthestoretoeveryconsumerbasket it takes leadership in consumer education of environmental and sustainability issues, thus building more loyalty for its products that support these causes. However, Whole Foods does face formidable competition from all sides of retail, from traditional supermarkets to mass merchandisers to local famers markets, and it will need to act defensively within the markets it currently operates in and aggressivelymoveintonewonesinordertoachievecontinuedgrowth. WholeFoodscertainlyhasthecapabilitiesforthisithaspursuedanexpansionpolicysinceitsfounding andatthesametime,hascutdevelopmentcostsby35%(Riddick,2011),sowillbeabletobecomeeven more expedient in its expansion efforts. This commitment to frugality is evinced also by the compensation structure executive compensation is capped at 19x average employer salary, yet Whole Foods has remained in Fortunes 100 Best Companies to Work For for 13 years, indicating that its strongcommitmenttoemployeesandculturehasresultedinhighemployeesatisfactionanddedication to driving the firms success. Lastly, Whole Foods has strong supplier relationships, emphasizing the localcommunitiesaroundeachstore.Insum,itspeople,process,andsystemsarepoisedtohelpWhole Foodscontinuetoachievemarketsharegainsandrepresentasignificantcompetitiveadvantage. CompetitivePositioning Whole Foods 2007 acquisition of Wild Oats, formerly its largest competitor, has allowed it to continue to expand its retail presence both domestically and internationally. While the overall grocery market is saturated, there is room to grow within the natural/organic segment. The strong company culture and dedication to the consumer has resulted in identical store sales growth at 6.0% (Whole Foods 10K), driven partly by its recognition that consumers need valuebased products in natural/organic foods as well. Its The Whole Deal weekly promotion and 365 Everyday Value private label directly staves off competition from traditional and discount retailers trying to steal share. As average transaction count and basket size continue to increase at 7% and 2% respectively (Riddick 2011), Whole Foods will undoubtedly be wellpositioned to gain more share and sustain its position as the market leader in this grocery segment as the health and quality benefits of natural/organic foods moves further into consumers mindsand captures their walletshare.Aslongas WholeFoodsremainsontheoffensive in expanding its stores and also its offerings to a broader range of customers, the firm should continue to enjoyadominantcompetitivepositioninthenatural/organicfoodindustry.


Addendum Exhibit1: EnvironmentalAnalysis: Marketsize Annualgrowth DemographicTrends OverallFoodRetail(1) $907billion 0.9% Healthandwellnessanincreasing priorityforconsumers,reflectedin foodchoices Consumershavebecomemore ecoconscious Regulationexists:FDAapproval requiredformostfoods Onlinefoodshoppingiscarving outaniche(AmazonFresh,Fresh Direct,RelayFoods,etc.) Widerangeoffoodsuppliers Socialculturemovingtowards environmentalawarenessand supportforsustainability Consumersstillfairlyprice sensitiveonfooditems Societymigratingtowardsan experienceeconomy Organic/NaturalFoodRetail $76billion 5% Segmentcaterstoaffluent shoppers Improvementsintheeconomy haveledshopperstomove towardsorganicbaskets Muchheavierregulationin organicfoodmarketsfromthe FDA,FTC,CPSC,USDA,andEPA Foodsfeaturenewinnovations suchashydroponicvegetables, almondmilk,etc. Fairtrade,fairshade,organic, andlocalsourcingapriority Consumerpropensitytotrade upandpayapremiumon certainfooditems Pricesensitivityinfoodretail doesnotalwaysextendto premiumproductsvaluedfor quality,health,orotherfactors Highbrandloyalty

Regulatoryfactors

Technologydevelopments

Suppliers ConsumerPreferences/ SocialFactors

(1) Includesgrocerystores,supermarkets,conveniencestores,independentstores,andchainstores. Sources:Wikinvest,Damodaran,Aswath(ProfessorofFinance,NYUStern).


Exhibit2: Porter'sFiveForcesAnalysis: IntensityofCompetition OverallFoodRetail Extremelycompetitive Oversaturatedmarket Multipleplayersconsistingof supermarkets,warehousestores, natural/organicspecialtystores, warehouseclubs,supercenters, massmerchandisers,and conveniencestores Dependingontheproduct, supplierscanhavestrongleverage (Nestl)orlittleleverage(regional wineries) Manyproductsarecarriedbya retaileraslossleaders Consumershavefullpowerin choosingamongvariousbrands, products,aswellasretailchannels inacommodityfoodmarket Pricesensitivityishigh Organic/NaturalFoodRetail Competitiveagainstotherfood retailofferings Unsaturatedmarket Manyregionallybasedplayers, fewlargerchainsexistexcept WholeFoods(&WildOats, acquiredbyWholeFoods), TraderJoes,&FreshMarket Manyfoodsaresourcedfrom localsuppliersandgrowers Suppliershavefarlesspowerin theorganic/naturalfoodretail segment Consumersstillhavehigh purchasingpowerbuttheyare willingtopayapricepremium forhigherquality/healthbenefits Economicrecoveryleadingto moreconsumerschoosingto tradeupfortheirfoodchoices Threatofsubstitutesmainly existsfromnonorganic/non naturalfoods Samebarrierstoentryas generalfoodretail Establishingsupplier relationshipscanbemore difficult Convincingcustomerswho donttypicallyshopat natural/organicmarketsto switchisverydifficult

PowerofSuppliers

PowerofBuyers

SubstituteProducts

Consumerscanmakesubstitutes withinfoodcategoriesbutmost productsarenotsubstitutable Barrierstoentryinvolve establishingrelationshipswith suppliersandcultivatingcustomer loyalty Switchingcostsfairlyhighasmost consumerstendtostickwithone supermarket Assetscostsandexitbarriersare moderate

BarrierstoEntry


Exhibit3: StrategicGroupsWithinOrganic/NaturalFoodRetailIndustry: Natural/Organic Traditional FoodMarkets Supermarkets TraderJoes FreshMarket Kroger Supervalu Club Warehouses Specialty Mass Markets/Coops Merchandisers WalMart Target Farmers Markets Inmostcities

BJsWholesale HarvestCoop Club (Cambridge,MA) SamsClub Rebeccas NaturalFoods (Charlottesville, VA) WestEndMarket (NewYork,NY)

FoodEmporium

Safeway

Sources:WholeFoods10K,Riddick.

Exhibit4: CompetitorAnalysis ValueProposition WholeFoods Highquality Locallysourced Broadselection ofproducts Premium shopping experience TraderJoes Kroger WalMart

Lowpricepoints Onestopshop Lowprices Uniqueselection Wideselectionof Availabilityof Fun,butcrowded foods otherproducts shopping Familiarformat (eg.apparel,toys) experience Discountclubcards instoredespite forfrequentshoppers lowfoodselection Addonserviceslike Addonservices pharmacy,Starbucks, likepharmacy, creditcardlines, bankbranches etc. 3,619stores 8,500storesin 15countries

Geographic Presence PricePoints

300domestic 353domestic 11international High Increased discounts& privatelabel products LowAverage Somesaleson products

Average Low Frequentsales& Frequentsales customerloyaltycardsondiscounted items Mainstream shoppers Valueshoppers Moms

TargetMarket

Affluent,health Younger conscious generations yuppies

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CompetitorAnalysis(contd) (contd) Capabilities WholeFoods Significantbrand leverageover suppliers&customers Providesan exploratoryshopping experience Deliversvaluebased productsthrough365 EverydayValuebrand Employeestrained todelight customers Strongsupplier relationshipwith UnitedNaturalFoods, whichaccountsfor 27%ofpurchases Average developmentcostsof newstores35% cheaperYOY Missiondriven (supportsmarketfor sustainableproducts, giveaminimumof5% ofprofitseachyear) Supportiveofwell beingofteam members(employees) andcustomers Upholdsintegrityin dealingswithpartners andsuppliers TraderJoes Buysdirectly fromsuppliers, doesntcharge slottingfees Privatelabel TraderJoes hashigh consumer loyalty Employees askedtofocus oncustomer satisfactionand deliveringonit Kroger WalMart

Largestnational Multinationalmass grocerychain:has merchandiserwith significant verypowerful leverageagainst leverageagainst suppliers suppliers Offersbroad Excellentsupply arrayofproducts chainmanagement toconsumers, Sophisticated includinghuge inventory privatelabel managementsystems selection Fourretailconcepts withdifferentaims Uniform experienceacross (WalMart stores neighborhoodmarket Excellentsupply supportsgrocery chain efforts) management Grassrootsprocess process aimstocaptures Sophisticated employeefeedback inventory management systems

Culture/Values

Fun,unique Corevalues Relentlessprofit includesafety, culture drivenculture diversity,integrity,3basicbeliefsof reflectedby &respect store respectforthe employeesand Seeksdiversityin individual,serviceto pervadesthe supplierswith customers,striving focuson shopping forexcellence Employees increasing experience encouragedtoshout Commitment womenand tolowpricesfor minorityowned theWalMartCheer consumers instorestoshow companies prideincompany Cultureof inclusion

Source:Wikipedia,TraderJoes.com,WholeFoods10K,Kroger.com,Walmartstores.com,BusinessWeek,Refrigerated Transporter,Riddick.


References CorporatecultureprovidesWalMartcompetitiveadvantage(2002,July1).Referigerated Transporter.RetrievedJanuary26,2011fromhttp://refrigeratedtrans.com/mag/ transportation_corporate_culture_provides/index.html Damodaran,Aswath.ValueLineDatabase:HistoricalGrowthRatebySector.RetrievedJanuary26, 2011fromhttp://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histgr.html Gu, Lawrence, Popovici, Andrei, & Alcalay, Morgan. Whole Foods Market (WFMI). Retrieved from http://www.wikinvest.com/stock/Whole_Foods_Market_(WFMI) IndustryStatisticsandProjectedGrowth(2010).OrganicTradeAssociation.RetrievedJanuary26,2011 fromhttp://www.ota.com/organic/mt/business.html Kroger:Diversity(2011).Kroger.com.RetrievedJanuary26,2011fromhttp://www.kroger.com /company_information/careers/Pages/diversity.aspx Mushkin, Scott A. & Otway, Mike. (2011, January 13). Whole Foods Market: Wow! New York, NY: Jefferies&Company RiddickMarc.(2011,January5).WholeFoodsMarket.NewYork,NY:WilliamsCapitalResearch Supermarket Facts: Industry Overview 2009 (2011). Food Marketing Institute. Retrieved January 26, 2011fromhttp://www.fmi.org/facts_figs/?fuseaction=superfact TraderJoes(2011).Wikipedia.RetrievedJanuary26,2011fromhttp://en.wikipedia.org/wiki/ Trader_Joe's TraderJoes:OurStory(2011).TraderJoes.com.RetrievedJanuary26,2011from http://www.traderjoes.com/about/ourstory.asp. WalMart(2011).Wikipedia.RetrievedJanuary26,2010fromhttp://en.wikipedia.org/wiki/Walmart WalMartCorporate:Culture(2011).Walmartstores.com.RetrievedJanuary26,2011from http://walmartstores.com/AboutUs/295.aspx Whole Foods Market Inc. (2010). Form 10K for the fiscal year ended September 26, 2010. Retrieved January26,2011fromhttp://www.wholefoodsmarket.com/company/annualreports.php Zellner,Wendy.WalMart:YourNewBanker?(2005,February7).Businessweek.com.Retrieved January26,2011fromhttp://www.businessweek.com/magazine/content/05_06/ b3919046_mz011.htm

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