TO:
Whole Foods Co-Founder and CEO John Mackey
FROM:
DATE: 3/2/2016
RE: Whole Foods Macro Environment Recommendations
Recommendations
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The economy is stagnant and the growth rate of the market could drop off at any time. Whole
Foods should develop a low cost house brand product line.
New competitors are looking to capitalize on the opportunity of the growing market. This
includes start-up companies but more importantly, well established grocery stores. Organics
could be a fad as the American Dietetic Association says that organics are no more nutritious than
other foods. Whole Foods should consider adding non organic products to their product line.
The added cost of the USDA organic certification could drive some suppliers out of business
giving leverage to others to charge more. The development of a backwards vertical integration,
like the fish supply, to stabilize the supply line and reduce costs, should be considered.
With its affluent customer base, Whole Foods should develop a program to compete with
Stop&Shop’s Peapod service.
Current Situation
The growth rate of natural foods has dropped from double digits in the mid 1990s to
8.3% in 2001 and is running in the single digits for 2002. However, the Organic Trade
Association predicted the sales of organics would rise from the 2001 figure of about $10 billion
to reach near $20 billion by 2005. Regardless, the growth rate of natural food sales remains
considerably larger than the conventional grocery store growth rate of 1-2%. The 2002 stagnant
economy is one reason for the dip in the organic segment growth rate. However, the
government’s economic stimulation efforts should increase the monetary supply and therefore
spending.
2000 was the first year 70% of conventional grocery stores selling organics outsold all
20,000 natural food stores. Conventional grocery stores’ organic sales will continue to increase
in total sales. The number of conventional grocery stores selling organics will also increase.
Wal-Mart and Kroger, the two largest conventional grocery chains, made large investments in
selling organics.
The 1990 Organic Food Production Act established national standards for organically
grown food products. In 2002, the USDA established labeling standards for organic products,
ridding the market of inconsistencies. Obtaining USDA organic seal approval is costly. The
additional costs prohibited some small producers from continuing to sell and increased the cost
for all organically produced and labeled products. In 2002, the number of acres of land dedicated
to the production of organic products grew at a rate of approximately 12% a year, but comprised
only 1% of US farmland.
People are living longer and the population’s average is increasing. Young and old people
are looking to eat healthier due to an overall wellness trend. People have become better educated
on healthier foods and aging, affluent people are the market segment most likely to be interested
in organics. People are increasingly concerned about the use of pesticides, growth hormones and
other chemicals in traditional grocery items. People are more concerned about environmental
factors that organic products avoid and eliminate. The Nutrition Business Journal estimated
0.3% of U.S. adults were heavy users of organics; spending $200 or more a month. 90% of
American adults never buy organics.
Analysis and Conclusion
The growing market and complementary societal values provide an opportunity for
expansion and a threat of new entrants to the market. The threat of new entrants to the market
comes from new companies or existing conventional grocery stores like supermarkets. The
supermarkets are the greatest threat with their already large customer base and great capital.
Whole Foods should continue to expand in urban and suburban areas and needs to be very aware
of the risk the grocery stores pose with their ability to offer low cost one-stop shopping.
Despite confident predictions to the contrary, there is a question of whether or not
organic food is just a trend. The American Dietetic Association says that organics are no more
nutritious than non-organics and they have not been proven to be any healthier than other foods. It is
risky to base the company entirely on a fad. With conventional grocery stores offering both
regular and organic goods, it is easy for the customer to do all their shopping there; leaving
Whole Foods out of the picture. Since there are so few people that buy all organics, and so many
that buy a mix of goods, there is a definite opportunity for Whole Foods to offer regular goods in
their stores. Whole Foods should consider positioning itself as an upscale, healthy, one-stop
grocery store.
The company should also consider the fact that sales may be rising now but the trend is
showing the growth rate is falling and will undeniably flatten out at some point. The current state
of the economy is not good; it is stagnant and people may look to substitute higher priced
organic foods with cheaper conventional grocery store foods. Whole Foods should establish a
cheaper priced brand under their own name to meet this demand and keep people coming to their
stores in tough times.
The USDA Organic certification is expensive but it increases buyer confidence and
quality assurance which will increase the customer base and therefore total sales. However, the
additional cost of meeting the standard is a clear threat. Whole Foods needs to be aware that the
standard will force some of its smaller suppliers to go out of business or not comply and will
increase costs for the suppliers that do comply. With the smaller companies going out of
business, the ones who do survive will have leverage to charge more as well. Whether or not
Whole Foods passes the increased cost on to its consumers is only a question of whether the
gross profit % or total sales will be hurt. Whole Foods should look into stabilizing its supply line
by investing in a backwards vertical integration platform, similar to what the company did with
its fish supply, for a broad range of their goods.
On the technology side, Whole Foods has done little to take advantage of an older
affluent customer base. Competitors like Stop&Shop have developed online delivery programs
mainly targeted at older people who don’t want to leave the house and younger people who are
just too busy. Whole Foods should take advantage of their great service and knowledgeable staff
to develop an upscale online delivery program for their older and busy affluent customers.
Possible distinguishing Whole Foods services to be included with the program include the Whole
foods associate unloads the groceries upon delivery and explains the benefits of certain foods
while offering recipes. For non computer literate customers the Whole Foods Associate could set
the order up and make adjustments on visits. Other advance in technology like self checkout
lines seem to contradict the Whole Foods approach and are therefore not recommended.