Whole Foods Market - Case Study Example

Unit 5 Whole Foods Market 2007 Case Study Analysis Introduction In many cases expansion can be thwarted by supply and demand. Traditionally in business the limiting factor is demand for a product or service, but in the case of Whole Foods Market (WFM) it seems as though available supplies may slow their progress at a more rapid rate. Regardless of the industry, no business is totally self-sufficient. In some way they depend on external sources to supply them with the materials or goods that they will then resell or manufacture into the final product/service. Many companies are able to establish redundant contingencies for when supply lines fail, which is the reason that supplies are so rarely the cause of stifled growth. This case study provides a different look at the situation, wherein the specificity of the supplies is what gives the product and services of WFM its value. Synopsis of the Situation Following the turn of the millennium the market for natural and organic food sales shifted from niche to mainstream. Once considered excessive in terms of cost and unimportant in terms of health, WFM pioneered and developed an industry that now accounts for more than 2.5%, or $13.8 billion in US food sales annually. This product line has shown greater growth in sales than traditional grocery offerings for the last several years. Further, studies indicate that this trend will continue into the future as the Baby Boomers reach senior status, their children enter middle age and their grandchildren reach adulthood. Each of these generations has enjoyed a greater degree of disposable income and exposure to higher education; factors which both play a major role in WFM’s market demographic. With that said, at the time this study was written, their organizational objective was to reach $12 billion in revenue and have more than 300 stores in operation (Harasta & Hoffman, n.d.). They were able to achieve only half of this objective by reaching 304 store locations domestically and another 12 internationally for a total of 316 current locations (“Our Stores,” n.d.). Unfortunately, while up 12% from 2009, they fell short of their fiscal goals reaching $9 billion in sales in 2010 (McCann, 2010); however with only half of the 2011 fiscal year gone they have significantly overtaken the half-way mark of 2010 by already producing $5.4 billion in sales (McCann, 2011). Key Issues WFM face three pivotal issues that are hindering their ability to expand at a faster pace: Increased competition, rigid target market requirements and a limited supply of natural and organic goods. Currently, they control 47% of organic food sales in the US; however similar vendors and national supermarket chains have taken notice of the profitability of natural products and entered the market with varying degrees of success. As a whole they account for another 46% of sales, leaving the remaining 7% to small-scale farmer’s markets. The supermarket chains pose the greatest threat, as they are able to offer reduced prices on organic and natural products due to the substantial revenue they earn from other products. In terms of establishing new locations, while they have been successful in identifying and engaging their market, the segment they target is so specific that it limits their ability to find adequate areas to open new stores. Their formula calls for near-metropolitan areas where at least 40% of the population has a college degree and average income levels exceed their predetermined metric. With 88% of their stores already located in the top 50 metropolitan areas they are running out of viable options. Finally, the increased competition, federal agricultural regulations and shrinking land resources have aggravated scarcity of resources. In order to legally label an item as natural or organic it must meet a number of criteria. With less than 3% of usable farmland dedicated to products of this sort it is clear that WFM faces competition not only from other companies, but from every new location they open as well (Harasta & Hoffman, n.d.). Define the Problem Given the three issues addressed above, the method of selecting new locations can be most easily influenced by WFM. They have no influence over external competition and the scarcity of domestic supplies can only force them to seek international suppliers, which poses two problems: WFM relies on local growers to ensure products are fresh, and passing federal regulations could prove difficult if products were imported. Both of these options could result in diminished customer satisfaction, thus profit loss and reduction in market share. Ultimately, WFM must reevaluate their business model in terms of altering their target market or expanding their geographical area of influence. Alternative Solutions WFM must determine the profitability of redefining their demographic model to fit a wider target market. By doing so they would extent their scope of customers. This could be done by creating smaller, farmers market style locations, or scaling back some of the features found in higher-end stores; e.g. cooking lessons, massages, home delivery or valet parking. The primary concern with this solution is that by compromising the shopping experience that is the hallmark of their business they would degrade the organizational product. A second possible solution is to cease all domestic expansion efforts and shift all focus toward developing their international footprint. By doing this they would be able to avoid the competition they currently face, slow the scarcity rate of supplies and continue to utilize the model without compromising the needs of their target market. Selected Solution to the Problem As mentioned above, WFM recently became an international business with 12 new locations; however at this time the scope of their expansion is limited to the UK and Canada. While each of these markets provides new metropolitan areas that fit the demographical profile that has been proven effective throughout the US, WFM must begin to consider other countries where their business could flourish. Despite the growth economies of Brazil, Russia, China and India it is unlikely that WFM would thrive in these countries due to political and cultural reasons. It would be more effective to focus their expansion efforts throughout Europe and Australia, using their UK locations as a springboard into other nations. Additionally, these two continents have exponentially more organic farmland available than the US; globally 62% compared to the US’s 7% (Kilcher & Willer, 2009). With these resources the issue of supply in these regions becomes moot. Finally, these cultures follow similar trends to those found in the US and would be highly receptive to the services provided by WFM, and offer a number of locations that meet the demographic target market they cater to. Implementation Strategic global partnerships could aid in international expansion. Currently Holland & Barrett, a vitamin, supplements and health food provider, operates nearly 550 locations throughout Europe, Africa and Asia. In 2010 a US-based private equity group, The Carlyle Group (TCG), purchased it. Along with their other European holdings (Solgar, Nature’s Bounty, Nature’s Way, Ester-C, GNC, Julian Graves Health Food, Boots The Chemist and Alliance Pharmacies) TCG is positioned to provide the greatest blockade to entry (“Carlyle News,” 2010). While the businesses they own in the region do not replicate the services provided by WFM, they fall into the same industry. Ideally a partnership between WFM and TCG could prove highly profitable for both companies and provide WFM access to a standing customer base. Once solidly established in the UK, expansion into other European countries would follow. Spain, Germany and the Netherlands all have thriving agricultural industries that could locally support new WFM locations. Unlike the UK and Europe, Australia seems to be devoid of a dominant natural and organic retailer. OrganicFoodDirectory.com.au offers an exhaustive list of 377 various providers, but overall it seems as though no one chain, barring GNC, owns more than ten separate locations (“Organic Food Search,” n.d.). Based on this, Australia provides a market with easy entry and five cities with a population of more than 1 million. Most notable are their two major metropolitan areas, Sydney with a population of 4.5 million and Melbourne with a population 4 million (“Population and Settlement,” 2010). Beginning in either or both of these cities would ensure initial success and provide a foundation for expansion throughout those areas that fit their model. Recommendations WFM should enter into talks with TCG to accelerate expansion throughout the UK and Europe. Additionally they should establish an office in the UK to assist in the management, training and quality control of the new locations in Europe and Australia. Key personnel that have proven their commitment to the corporate vision and mission statement should be selected to function as international trainers. These individuals would be tasked with ensuring that the level of service WFM provides to its customers domestically is duplicated globally. Another pivotal step is to develop strong relationships within the international agricultural community, which can be partially facilitated by those suppliers they currently do business with. Finally, WFM must allocate a greater amount of funds to marketing in these new areas than they traditionally do in the US. It is vital that brand awareness and education take place prior to large­scale entry. This will be simpler in the UK where stores already exist, but outside of the country it must be a priority. Conclusion WFM has spent the last three decades building the nation’s premier natural and organic food grocery store. They successfully took a niche market and created in an industry that forced the national supermarket chains to take notice. At this point in their development they must move beyond domestic sales to continue to expand at the rate their potential allows. Continuing to try and create significant domestic growth will only exacerbate the issues that are currently hindering them; primarily increased competition (both external and internal), limited areas that fit their demographic model for success and the increasing sparse access to supplies. Their recent adventures in international expansion are sure to usher in new and exciting opportunities that will provide WFM endless growth potential. References Carlyle news. (2010, October 1). The Carlyle Group completes acquisition of NBTY, Inc. for $4 billion. Retrieved from http://www.carlyle.com/media%20room/news%20archive/2010/item11693.html Harrasta, P. & Hoffman, A.N. (n.d.). Whole Foods Market 2007: Will there be enough organic food to satisfy growing demand? Retrieved from http://content­bus.kaplan.edu/MT460_1102B/images/product/Case28_WholeFoods.pdf Kilcher, L. & Willer, H. (2009). The world of organic agriculture: Statistics and emerging trends 2009. Bonn: IFOAM. McCann, C. (2010, November 3). Whole Foods Market reports fourth quarter results. Retrieved from http://www.wholefoodsmarket.com/company/pdfs/Q410financial.pdf McCann, C. (2011, May 4). Whole Foods Market reports second quarter results. Retrieved from http://www.wholefoodsmarket.com/company/pdfs/Q211financial.pdf Organic food search results. (n.d.). Retrieved from http://www.organicfooddirectory.com.au/search-results.html Our stores. (n.d.). Retrieved from http://wholefoodsmarket.com/stores/all/ Pearce II, J.A., & Robinson Jr., R.B. (2010). Strategic management. (11th ed.). Dubuque, IA: McGraw-Hill Higher Education. Population and settlement. (2010). Retrieved from http://www.infrastructure.gov.au/infrastructure/mcu/soac_files/SOAC_Chapter_3.pdf Running head: WHOLE FOODS MARKET 2007 Unit Five 8 Appendix Figure 1. SWOT Analysis Situation being analyzed: Whole Food’s external and global environment Read More