The Whole Foods Market - Case Study Example

? Whole Foods Case Study Analysis BY YOU YOUR SCHOOL INFO HERE HERE Whole Foods Case Study Analysis Analysis of Whole Foods’ external environment Whole Foods Market, a leader in providing organic and health-conscious products, operates in a highly competitive market with considerable competitive growth. This growth has taken a previously niche market into a broader market of different consumers based on changing procurement models with supermarkets, club stores, and local grocery retailers adopting organic and health food supply chain elements to satisfy consumers. In the last 30 years, sales of organic products have increased by 30 percent, driven by changing consumer habits in healthier eating and lifestyle (Gemma, 2009; Thompson, 2008). More consumption of organic products and healthier lifestyle products have made this an attractive procurement model for many different grocers and specialty stores to keep up with this increase in consumer demand. Thus, Whole Foods no longer corners the market and runs the risk of losing market share to new competition in key target markets. Using Porter’s Five Forces as the relevant example, Whole Foods operates in a market environment where there is relative ease of entry by competition, a market where competitive rivalry does not require complex technologies or capital investment to differentiate, where there is relative ease of product substitution for consumers, and where there is relatively low bargaining power for Whole Foods within the supply chain. In fact, Whole Foods acknowledges in its 2010 annual report that the business maintains many different risks associated with current and future unpredictable supply fluctuations that makes forecasting and procurement difficult to manage (Whole Foods, 2010). The supply chain is significantly impacted by changing laws on organic and health-related products (Whole Foods, 2010) that can create harsher product formulation changes. At the same time, increase in competitive procurement of organic products has the ability to limit supply, thus raising prices within the supply chain against the laws of supply and demand (Boyes & Melvin, 2005). High availability of substitutes and increasing competitive rivalry in marketing, supply and differentiation give consumers considerable buying power in this market which forces Whole Foods to continuously monitor the marketing environment to counter competitive marketing to sustain its current and projected market share expectations with key target markets. Currently, the life cycle of organic products in this market environment is unpredictable, as most of the demand for similar health-conscious and organic products is trends-based driven by lifestyle and consumer attitude. Therefore, the sustainability of certain organic products represents a risk to the business and therefore impacts supply chain, promotions, and even pricing establishment. In many ways, the competitive advantages currently experienced by Whole Foods is strongly influenced by consumer behaviour and lifestyle demands that might not always be sustainable. However, Whole Foods currently maintains high revenues that continue to show growth in organic and health-conscious products (Whole Foods, 2012; MMR, 2012, MMR, 2011). Growth estimates recently provided by Whole Foods illustrate an estimate of 15.6 percent, up from the 2011 projection of 13.5 percent (MMR, 2012). The sales growth improves market availability domestically and internationally, however it is a market where competitive differentiation and marketing-based positioning drive competitive rivalry. 2. Resource and competitive position of Whole Foods Whole Foods Market maintains a significant cost advantage in advertising over competition. In 2007, the business only devoted 0.5 percent of its total budget to this function, relying instead on word-of-mouth for sustaining market share and satisfying customers (Whole Foods, 2010; Thompson, 2008). Other competitors in this environment spend considerably more on advertising and promotion in order to gain market attention. Whole Foods is able to reduce costs in advertising which can be applied to other capital investment, procurement strategies, or sustaining future acquisitions. The ability to use the company’s core values in service delivery and differentiation of in-house products and service delivery serve as the majority of its word-of-mouth advertising cost savings. Additionally, Whole Foods has selected an acquisitions-based strategy for strategic operations (Thompson, 2008) which gives the company many advantages. In 2010, the business maintained a USD 342.9 million credit line with banking institutions (Whole Foods, 2010), which is moderately lower than other businesses of its size, thus large-scale development in new constructions would not necessarily be able to be sustained by its current moderate credit line or available cash. Acquisition strategies give the business much more market presence internationally and domestically whilst still satisfying its budget and credit capacity. By procuring organisations with pre-established customer loyalty and brand, Whole Foods is able to enter markets successfully with a dedicated organic and health-conscious product consumer following. This is another dimension of the business’ sustainable competitive advantages. The business also gains market attention from consumers for its dedicated commitment to environmental sustainability and corporate social responsibility, much more than other competition such as supermarkets and local organic grocers. In the USA, Whole Foods devoted five percent of its total sales from Indiana stores to a community activity referred to as Freewheelin’ Community Bikes (Indianapolis Business Journal, 2011). In 2010, Whole Foods allied with The Non-GMO project to raise consumer awareness about the risks of genetically-modified foods as part of an informational CSR campaign (Grocer, 2010). In Virginia, USA, Whole Foods devoted acreage to develop a community-style garden that would serve to supply local Whole Foods stores to reflect its commitment to environment and organic quality (Grocer, 2010). All of the business’ strong commitments to corporate social responsibility and environmental sustainability are well-publicized (Lomax, 2007; California Green Solutions, 2007), which meets positively with the market characteristics and personalities generally associated with organic and health-conscious food consumption. Environment and CSR gives the business considerable competitive advantage with key target markets. This is evident with the high volume of fans Whole Foods currently maintains on Facebook and Twitter, with over 2.1 million dedicated fans and followers in social media as of 2010 (Whole Foods, 2010). This is another low cost method of promoting the business and offering various incentive coupons to entice fans and followers, and new market opportunities, to select Whole Foods over competition. 3. Whole Foods’ current generic strategy for competitive advantage Whole Foods currently utilises a broad differentiation strategy, one where “buyer-desired attitudes and characteristics” are incorporated into the business model to position the business differently than competition (Thompson, et al., 2008, p. 146). This model is the most beneficial to Whole Foods as it allows for premium pricing through differentiation strategies, has the ability to build more consumer loyalty as it is consumer-centric, and increases profitability through premium price positioning in its markets. The success of broad differentiation strategy is witnessed in the company’s annual report income statements related to increases in sales revenues (Whole Foods, 2011; Whole Foods, 2010; Thompson, 2008). Further, the company’s merchandising strategy which includes in-store restaurants in certain markets, full-service sushi bars (Thompson, 2008), in-store wine and chefs, and instructional classes in-store are only a few examples of its differentiation strategies through tangible service delivery and through customer-centred unique service concepts different from competitive organic markets. Instead of focusing on the product itself, which is largely standardized with competing markets throughout the supply chain, Whole Foods establishes a uniquely positioned brand that is focused on its core values and unique service structure to gain consumer satisfaction and loyalty. More evidence of the broad differentiation strategy at Whole Foods Market are the unique colour combinations used in-store (Thompson, 2008) and the Take Action centres in many stores that provide a more interactive customer experience with the Whole Foods Brand. These and the other aforementioned activities justify its premium pricing on its products related to service and service excellence. 4. A new strategy for sustainable competitive advantage Before identifying a new strategy to gain competitive advantage, it is important to understand the complexities faced by Whole Foods. First, the acquisition strategy imposes cost issues associated with long-term lease obligations that impact its operational finance capacity. The business enters into leasing agreements post-acquisition that cannot be legally terminated, therefore when the business divests some of its holdings, the company is forced to continue to pay on these leases where there is no longer operational support (Whole Foods, 2011). These are also subject to changing real estate values and terms of contract to complete through duration. Additionally, Whole Foods’ premium pricing structure must not only be in-line with competition, but also must take into consideration the risks of inflation within the supply chain domestically and internationally (CEO Wire, 2011). Organic producers domestic and internationally are charging higher prices due to demand and the rising costs of growing organic produce which is then put into the supply model that impacts Whole Foods cost of goods sold. At the same time, international currency fluctuations create problems with ensuring profitability from its import partners across the world (CEO Wire, 2011). The instability of the global recession and regional economic difficulties make it difficult to create hedging strategies or predict currency exchange rates that impact not only procurement, but also pricing considerations related to cost of goods sold. The CEO John Mackey has also put forward a very intensive store expansion strategy, which requires more credit availability and capital growth. The CEO identifies that 24-27 stores in 2012 and 28 to 32 stores in 2013 are expected to be opened with a goal of 1,000 total Whole Foods stores opened by the end of the decade (Zwiebach, 2012). These are intended to be capital investment projects for ground-up construction. This will increase not only the debt load of the business, but also represent divestiture risks if these businesses fail to meet sales expectations post-launch. The business is also sustaining sales growth year-on-year, through its differentiation strategies and premium market positioning. However, there are indications in the market that rising prices in the supply chain for organic and health-conscious products might be pushing the limit on premium prices currently set (Hamstra, 2009; Thompson, 2008). Changing incomes associated with target markets and growth in competitive pricing in many different varieties of competition make pricing a long-term consideration for profit growth and profit sustainability. With all of these factors in mind, the business should continue along with broad differentiation strategy, with more focus on value propositions for the business. Despite sales growth increases, this is a trends-based market that is dependent on lifestyles and current attitudes of consumers regarding organic and health product purchasing. It was identified previously that supermarkets, local grocers, and club stores are beginning to adopt organic purchasing models, many of these have well-established brands in their markets and considerable loyalty (i.e. Wal-Mart, Costco, Publix, etc.). If these businesses are able to develop more effective promotions or use their buying power in the supply market to offer organics at a much lower profit margin to penetrate markets with dynamic pricing, this could impact the profit potential for Whole Foods. Even though Whole Foods Market has a strong niche following (whilst also broadening its target market portfolio), pricing is influenced by regional economic conditions and also the price-sensitivity of certain organic product consumers. Value, however, does not always have to be driven by pricing considerations. It is recommended that Whole Foods continues with its current strategies for premium pricing, but also introduce more incentives and direct marketing communications with customers related to value. Value is indicated by advertising its in-house teaching sessions, restaurants, and other service-related concepts. The company has, traditionally, been able to rely on word-of-mouth advertising, however the ease of market entry into this market and also growth in brand-established supermarkets adopting organic purchasing models run too many risks for Whole Foods. It is recommended that Whole Foods devote another one percent of its budget to advertising, thus totalling 1.5 percent, to be more proactive in creating coupon incentives or special sales philosophies to illustrate the flexibility and value of Whole Foods to gain new market and keep existing customers. Supermarkets adding to competitive risks run these promotions regularly to outperform other supermarket competition and this will likely spill over into organic products especially if demand continues to increase. The additional one percent can also be devoted to enhancing service delivery in areas of instruction classes and food quality in restaurants to ensure the business is in-line with its devotion to satisfying customers with its excellent service model. Currently, the business devotes five percent of sales to charitable organisations. If there were a moderate one percent reduction, this would offset the added costs of advertising and promotion needed to promote value and also gain market share with price-sensitive customers. It is also recommended that Whole Foods Market reduce its store expansion strategies temporarily to build more capital and also expand its value and service provision concepts. Though the trends indicate growth in these markets, there are considerable externally-driven risks and concerns about the sustainability of international economies in key markets. In Europe, the recessionary environment and fluctuating currency levels have not found resolution in the last four years, which impacts product import profitability and also market disposable incomes. The business should retain these earnings, which would also avoid the high obligations for completing leases on acquired properties, until the economic environment domestically and internationally has stabilized. Procurement costs continue to rise and the business will either, in the short- or long-term, have to increase their already premium prices to sustain its profit expectations or allow profit losses under its existing procurement. It simply does not make sense, based on ease of market entry, considerable growth in competition with well-established brand names, and procurement costs rising to continue with expansion at this time. The same store sales promoted by Thompson (2008) and Whole Foods annual reports sustain the business currently and it has a considerably strong brand with niche and other markets for profit growth. By waiting two to three years for expansion, the company can establish more credit worthiness and also have the capital collateral needed, either through revenue growth or cash availability, to make higher loans attractive to lenders. Whole Foods needs to wait on high capital investment in new operations until the risks to its profit have been better analysed and long-term competitive strategies against giant brands have been assessed. Finally, it is recommended that Whole Foods Market begin creating barriers for competition as it relates to market entry by being more proactive in setting trademarks, copyrights, and other intellectual property protections on its service models, self-branded products, and promotional materials. The ease of entry cannot be controlled by Whole Foods, however the extent to which other companies can develop intellectual property similar to Whole Foods can be affected. Working with product developers, by developing strategic alliances in formulation and product development, can build more long-term assets through intellectual property growth that would make the market unattractive to new entrants based on competitive power of Whole Foods. The company is in a market position to begin creating barriers, using co-branding strategies with multiple actors in the market, that would reduce competition growth and allow the company to focus more effectively on finding competitive marketing strategies to outperform major supermarkets and brands internationally and domestically. References Boyes, W., & Melvin, M. (2005). Economics (6th ed.). Cengage Learning. California Green Solutions. (2007, March 30). Whole Foods to certify sustainable products. Retrieved from http://www.californiagreensolutions.com/cgi-bin/gt/tpl.h,content=262 CEO Wire. (2011, June 17). John Mackey, CEO Whole Foods. Bloomberg LP. Gemma, C. (2009, June 17). Whole Foods Market. Marketing, p. 17. Grocer. (2010, October 9). Whole Foods Market, 233(7976), p. 5. Grocer. (2010, June 26). Whole Foods Market, 233(7961), p. 6. Hamstra, M. (2009). Whole Foods improves image, Supermarket News, 57(20). Indianapolis Business Journal. (2011). Whole Foods Market, p. 28A. Retrieved from www.galegroup.com. Lomax, A. (2007, April 2). Fair’s Fair at Whole Foods. The Motley Fool. Retrieved from http://www.fool.com/investing/general/2007/04/02/fairs-fair-at-whole-foods.aspx MMR. (2010). Whole Foods maintains momentum, 28(14), 7. Retrieved from www.galegroup.com MMR. (2012, June 18). Outlook raised by Whole Foods, 29(2), 15. Retrieved from www.galegroup.com Thompson, A. (2008). Case 1: Whole Foods Market in 2008: Vision, Core Values and Strategy. University of Alabama. Whole Foods. (2009). Whole Foods Annual Report. Retrieved from http://www.wholefoodsmarket.com/sites/default/files/media/Global/Company%20Info/PDFs/ar09.pdf Whole Foods. (2011). Whole Foods Annual Report. Retrieved from http://www.wholefoodsmarket.com/sites/default/files/media/Global/Company%20Info/PDFs/ar11.pdf Whole Foods. (2010). Whole Foods Annual Report. Retrieved from http://www.wholefoodsmarket.com/company/pdfs/ar10.pdf Zwiebach, E. (2012). Whole Foods expansion on track. 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