TOWARDS RESPONSIBLE NATURAL AND ORGANIC FOOD SUPPLY
SYSTEMS:
THE CASE OF WHOLE FOODS MARKET, INC. (WFMI)
ABSTRACT
This study investigated the growing trend in the natural and organic food system and the
challenges and opportunities that exist in this era of increasing global food prices with Whole
Foods Market Inc, as the case of study compared with other competitors in the niche market.
Whole Foods Market, Inc. (WFMI) engages in the ownership and operation of natural and
organic foods (N&O) supermarkets. It offers produce, seafood, grocery, meat and poultry,
bakery, prepared foods and catering, specialty (beer, wine & cheese), whole body (nutritional
supplements, body care, and educational products), floral, pet products, and household products.
The Company operates with more than 270 stores in the U.S. Canada, and the U. K. WFMI was
founded in 1980 and is based in Austin, Texas.
Its sales went up from $92 million in 1991 to $5.6 billion in 2006 with the goal of reaching $12
billion in fiscal 2010 through opening of new stores and acquisitions, with Wild Oats acquired in
August, 2007 to boost sales as the 18th in the company’s history. It is the U.S first national
“Certified Organic” grocer, recognized by Quality Assurance International (QAI) through its
demonstrated voluntary certification that follows the USDA’s organic certification and other
strict set of operating procedures designed to ensure consumer confidence and product
consistency through labeling as truly organic, a challenge to competitors.
As new entrants emerge in the industry as competitors by increasing their organic offerings in
stores, WFMI should implement the strategy of acceleration in store openings and development
of private label products to capture more market segments as a priority to expand its market
share as well as recreating supply chain system; a critical strategy for WFMI to set optimal prices
to attract more demand and improve upon their social responsibility at the same time. Research
shows that it is the intangible assets, such as culture, corporate reputation, and relationships with
customers, which are the most difficult for WFMI competitors to imitate and are the foundation
for long-term success.
Key Words: Whole Food, Whole People, Whole Planet, Conventional Product, Consumer
Confidence.
Introduction and General Background
Whole Foods Market Inc.(WFMI), based in Austin, Texas opened in 1980 to offer wide variety
of produce including seafood, grocery, meat and poultry, bakery, prepared foods in the niche
market of organic foods category. Whole Foods operates with more than 270 stores in North
America and the United Kingdom with 260 in 31 U.S. states. Its sales went up from $92 million
in 1991 to $5.6 billion in 2006 with the goal of reaching $12 billion in fiscal 2010 through
opening of new stores and acquisitions, with Wild Oats acquired in August, 2007 to boost sales
as the 18th in the company’s history. It is the U.S first national “Certified Organic” grocer,
recognized by Quality Assurance International (QAI) through its demonstrated voluntary
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certification that follows the USDA’s organic certification and other strict set of operating
procedures designed to ensure consumer confidence and product consistency through labeling as
truly organic, a challenge to competitors.
Problem Statement
The increase and sustainability of market share by WFMI in the wake of rising global food prices
coupled with fierce competition from conventional food markets leaves much to be desired in the
natural and organic food system in recent times.
As main operator in the natural and organic food market, WFMI seems to be facing a threat of
slow sales growth and a decline in new store openings and acquisitions as its core business
strategy if nothing drastic is done to avert the situation.
This is because whenever the economy gets weak everybody comes out and says Whole
Foods sales are going to fall but major stakeholders in the company disagree with the
assertion.
Whole Foods net profit fell 15 percent to $33.9 million, or 24 cents a share, in the fiscal
fourth quarter ended Sept. 30, 2008 from $39.8 million, or 28 cents a share, a year earlier (
NASDAQ: WFMI, 2007).
As an eco-friendly food shopping store, its contribution to help mitigating climate change can
not be overlooked as the company’s mission is to improve the health, well-being, and healing
of both people and the planet, but how WFMI will remain a dominant player in the niche
market, only time will tell. Hence, the purpose of this study.
Objectives
The main objective of the study is to assess the performance of WFMI in the natural food
industry whether the company will be able to still sustain its local market share and further
expand into new markets overseas over a period of time.
Specifically, the study would:
 Identify major weaknesses and strengths that affect the growth and expansion of sales of
WFMI in recent times
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Find out the opportunities available to WFMI in the niche market of natural foods as well
as the possible threats
Investigate the effect of the merger between WFMI and Wild Oats in 2007
Draw inferences based on the findings obtained and make recommendations to WFMI for
improvement in its sales outlook in the midst of the current global food crisis.
Obtain input on the review of the paper for publication in the special conference edition
of IFAMR- a refereed journal.
Literature Review
Meaning of Organic
Organic agriculture refers to the production method that emphasizes the use of renewable
resources and the conservation of soil and water to enhance environmental quality. Organic food
products are produced using the following:
Agricultural management practices that promote healthy eco-systems and prohibit the use
of genetically engineered seeds or crops, sewage sludge, long-lasting pesticides,
herbicides or fungicides.
Livestock management practices that promote healthy, humanely treated animals by
providing organically-grown feed, fresh air and outdoor access while using no antibiotics
or added growth hormones.
Food processing practices that protect the integrity of the organic product and disallow
irradiation, genetically modified ingredients (GMOs) or synthetic preservatives.
The Evolution of National Organic Standards
The US Congress passed the Organic Foods Production Act in 1990, which directed the USDA
to create a set of national regulations to define "organic" agriculture. The rapid, consistent
growth of the organic movement over the previous decades had created the need for a set of
national organic standards that would serve as clear guidelines for the industry and its customers
as to what can be considered organic. Many individuals and groups involved in the organic
industry (including Whole Foods Market) worked closely with congressional representatives, the
US Department of Agriculture (USDA), and its National Organic Standards Board (NOSB) to
help shape what eventually after 11 years of input and revision became the United States
Department of Agriculture's (USDA) Organic Rule, which became effective on October 21,
2002.
At moment, the Organic Rule applies mainly to organic food products. The USDA and the
organic industry are working to create certification standards for other products such as personal
care, textiles, seafood and pet supplies.
The Reading of Organic Labels on Foods
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All products labeled as "organic" must be certified by a USDA-accredited certifying agency. The
understanding of organic labeling may be a bit confusing at first.
1. 100% Organic means that the product must contain only organically produced material,
excluding water and salt and the name of the certifying agent must appear on packages. The use
of the USDA "organic" seal is often optional.
2. Organic means the product must be at least 95% organically produced ingredients, and the
name of the certifying agent must appear on packages. Use of the USDA "organic" seal is also
optional.
3. A Product must contain at least 70% organic ingredients with the remainder consisting of
conventionally grown agricultural ingredients or approved nonagricultural substances from the
USDA's National List in order to be called Made with Organic Ingredients
The Benefits of Organic Foods
The following are some of the benefits of growing and eating of organic foods:
Organic farming meets the needs of the present without compromising the needs of future
generations.
Growing organically supports a biologically diverse, healthy environment.
Organic farming practices help protect our water resources.
Organic agriculture increases the land's productivity.
Organic production limits toxic and long-lasting chemicals in our environment.
Buying organic supports small, independent family farms.
Organic farmers are less reliant on non-renewable fossil fuels.
Organic products meet stringent USDA standards.
Buying organic is a direct investment in the long-term future of our planet.
Organic farmers preserve diversity of plant species.
Organic food tastes great
Genetically Engineered Foods
The target of Whole Foods Market is to provide informed consumer choice with regard to
genetically engineered ingredients (also called GMOs or Genetically Modified
Organisms).WFMI does this through their support of organic agriculture along with their
commitment to source of 365 Everyday Value and Whole Foods Market brand products to avoid
GMOs.
When developing the store brand products, WFMI works with the manufacturers to source nongenetically engineered ingredients. If those ingredients are not commercially available, WFMI
encourages producers to work to meet that target.
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The Non-GMO Project established in July 2009 is a non-profit organization dedicated to helping
consumers make informed choices by verifying and labeling the store brand food products using
the nation’s first authoritative standard to ensuring sustained availability of non-GMO options.
Whole Foods Market is pleased to be a founding member of the group, which is a collaboration
of manufacturers, retailers, processors, distributors, farmers, seed breeders and consumers.
Together they have established a working standard and have developed North America’s first
independent third-party Product Verification Program, which ensures that food production
follows rigorous best practices for GMO avoidance.
Products Line and Quality Standards
To maintain high quality one needs to have high standards and WFMI’s are the highest in the
industry. Whole Foods evaluates quality in terms of nutrition, freshness, appearance, and taste.
The long search for quality is always a never-ending process involving the careful judgment of
buyers throughout the company. WFMI ensures that:
They carefully evaluate each and every product we sell.
They feature foods that are free of artificial preservatives, colors, flavors, sweeteners, and
hydrogenated fats.
They are passionate about great tasting food and the pleasure of sharing it with others.
They are also committed to foods that are fresh, wholesome and safe to eat.
They seek out and promote organically grown foods.
Below is a chart of the product line of Whole Foods:
Whole Foods
Business
Units
Env’t
Protection
Supplier
Product Lines
Regulation
Sustenance
Luxury
Retail
Culinary
Center
It has been noted that the Chief Medical Officer of Eat Right America, Joel Fuhrman M.D., has
treated over 10,000 patients in more than 15 years, demonstrating clearly that a properly
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nourished body from eating highest quality products which include organic foods can conquer
food cravings, reduce weight, reverse chronic conditions, increase energy and result in brighter
and healthier kids.
In a similar way, a peer review published in Alternative Therapies Magazine in 2008 noted that
the Eat Right America program produced an average weight loss of 53 pounds per participant in
only two years.
Based on the simple premise that "we are what we eat," Eat Right America has developed the
Nutrition Prescription, the nation's only online personal nutrient assessment and eating plan
designed to ensure that one is fully nourished.
Materials and Methods
The methods used for processing the data and paired-samples T tests were Simetar; a risk
analysis tool and the statistical programme SPSS Version 13.0
Study Location
The study was conducted in the United States of America in 2008. The flagship store and global
support offices of WFMI in Austin, Texas was where the interviews and questionnaires were
administered to solicit responses from both customers and management.
Analysis of Demand for Organic food versus other food categories
Corn chips were selected for this trial to investigate the attitudes and acceptance of customers
towards typical organic food because corn chips are a popular snack for young people and also a
processed food almost entirely made of maize. During the academic year 2008, a survey was
conducted among customers at WFMI’s store at Austin to identify the effect of labeling on their
attitudes and acceptance towards organic maize products. Participants attended personal
interviews in which they were asked whether they would agree to sample five specific types of
corn chips. All participants were asked to participate voluntarily in this study. Five non-branded
plastic transparent bags of corn chips containing the same product were presented to the
participants, each one having a different label. Specifically, the bags were labeled as follows and
presented in the same order:
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Organic corn.
Conventional corn.
Genetically modified corn.
Genetically modified corn but specifying that the product is approved by the
EU/USDA since 1997, Directive 90/220/EC.
Non-classified corn.
Participants were asked to eat at least one piece of each product. They also had to fill in a
relevant questionnaire, by ticking a box for each type of corn chip with a “yes”, “no” or “yes
with hesitation” answer according to whether they actually tasted at least one piece of the
specifically labeled corn chip or not or they tasted it but with hesitation. Hesitation was
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confirmed by both the participant and the interviewer who conducted the survey. Participants had
still to sample at least one piece of the product in case they were hesitant. In case that the
participants refused or were hesitant to taste the product they had to fill a multiple choice
question, selecting the main reason(s) for not accepting or hesitating to taste the specific type of
corn chip.
RESULTS
A total of 229 persons of average age 21.1±1.8 years (minimum age 18 years, maximum 31
years) participated in the trial (45.9 per cent men, 54.1 per cent women)
Figure 1 above summarized the results for all five types of corn chips, showing the percentages
of participants that either agreed to sample at least one piece of each product or agreed with
hesitation or totally refused to taste even a single piece of corn chip.
As shown in Figure 1, organic corn had the highest acceptance as 88 per cent of participants
(positive attitude represented by the combination of “agreed to taste” and “agreed with
hesitation”) actually tasted at least one piece of the product. This result is in agreement with
previous studies that have revealed that organically grown food products are favorably perceived
by consumers who believe that they are more “natural” and “healthy” than other food products
produced with different methods.
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However, there is a small percentage (12 per cent) that refused to sample the organic product
(the reasons for that attitude are analyzed in Table 1). The conventional product also has a
relatively high percentage of acceptance (77 per cent), although statistical significantly (p<0.05)
lower than the organic product. After tasting the organic and conventional products, the
participants were asked to taste two genetically modified labeled products. The first GM corn
chip was simply marked as “genetically modified corn”, a term that is imposed by the EU/USDA
and must be included on labels of all food products that contain or consist of genetically
modified organisms. In the second GM product, the certifying agency and date of approval were
added to the label as follows: “genetically modified corn, product approved by EU/USDA since
1997, Directive 90/220/EC”. It is interesting to note that there was a statistically significant
difference observed in the negative attitude towards these two GM labels. The first represented
as “GM corn” in Figure 1 had a high negative attitude (63 per cent). This means that more than
half of the participants refused to taste even a single piece of a snack that is labeled simply as
“genetically modified”. In the second GM label which was more informative (represented as
“GM corn approved by EU/USDA” in Figure 1), the negative attitude (participants that totally
refused to sample) decreased by 35 percentage units (statistical difference p<0.05).
Table 1 above analyzed the main aetiology of the negative attitude of participants towards the
various types of corn chips, represented by the number of respondents that either refused to taste
even one piece of corn chip or they did taste but hesitantly.
The relatively high percentage (12 per cent) that refused to taste the organic corn chip did so
mainly because they were unaware of what exactly is an “organic” product as is shown by the
percentage of respondents that chose “do not know what it is” (44.4 per cent). A limited 7.4 per
cent only declared that they do not trust these products and 3.7 per cent that they “are afraid”, but
it is noteworthy that these feelings were strong enough to make them refuse to eat the specific
corn chip. Conventional corn had a similar answer profile as more than half of the respondents
that refused to try it or tried it with hesitation stated that they had this attitude because they did
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not know what it is. This may be justified by the fact that the term “conventional”, which was
selected because it is the standard term used to discriminate from organic and GM crops, is not
commonly used by consumers. However, none of the participants consider either the organic
product or the conventional product as “dangerous”. This is not the case with GM corn which
had a large negative percentage (63 per cent of refusals) and is regarded by participants that
refused to taste it as “dangerous” (18.6 per cent) or they were “afraid to taste it” (21.4 per cent).
Lack of trust was also stated as a main reason for refusing to taste the GM corn chip but
surprisingly the “do not know what it is” feature had low percentages (15.9 per cent). A similar
trend is evident for answers concerning the corn labeled as “GM approved by EU/USDA” but
the negative percentage is overall significantly lower compared to that of GM corn (28 per cent
vs. 63 per cent). Percentages of participants that consider the product dangerous or that were
afraid are relatively high (14.3 and 22.2 per cent respectively) and also there is a large increase in
the percentage of participants that “have no trust” compared to GM corn (42.9 per cent for GM
approved by EU and 31 per cent for GM). Finally, in the non-classified corn almost all
aetiologies had relatively high percentages (do not know what it is, no trust, dangerous, afraid,
need more explanations).
DISCUSSION
This study has shown that in the U.S., a food label claiming that “this product is organic or
naturally produced” generated a strong positive feeling among customers due to health benefits
and has fewer hazards. This is evident that there is significant difference between organic corn
and conventional corn, which encourage many consumers to purchase safe and healthy food
products.
The study has confirmed this belief, although it did not examine the buying behavior of
consumers. However, within the global political context, with the continuing pressure of NGOs,
the concentration of food processing and retailing firms, mandatory labeling do not act as an
implicit market ban on organic food. Multiple consumer surveys have shown a clear positive
sentiment towards organic foods that seems likely to continue to influence food industry buyers
in favor of importing organic food.
The main reasons (Table 1) stated by the participants for the refusal were that “No Trust” (7.4
per cent) or “Do not know what it is” (44.4 per cent) or even “I am afraid to eat it” (3.7 per cent).
The18.7 per cent of participants who needed more explanations of what exactly organic food is,
indicated that there is the need for more education on consumers the meaning and benefits of
organically grown and labeled foods.
It is interesting to note that participants did not have any negative feeling towards organic and/or
conventional foods as dangerous. This testifies that the two categories are very competitive to
each other and would compete favorable for the customer’s dollar, especially in this era of global
financial and food crises as one navigates the global food supply system.
The results showed that, products that are characterized as “organic” enjoyed a kind of
“immunity” regarding negative comments. A food label including the word “organic” evokes the
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positive feeling of a product that is more natural, healthy and safe. Organic corn chips were
tasted by the majority of participants (>80 per cent) without hesitation and none of the
participants expressed doubts whether the product was really certified as organic. Some of the
participants, however, that did not actually taste these types of chips or tasted with hesitation
stating as their main reason that they were unaware of what is “organic” or “conventional” (19
per cent for organic and 30 per cent for conventional.
Labeling, if not properly and carefully done, can mislead consumers to patronize unhealthy food
products or yet still reject/refuse to accept healthy food products, and in this case, organic maize
which has health benefits and is trustworthy since its introduction into the global food supply
system and marketplaces by scientists through technology advancement still has about 12 per
cent of participants who refused to taste.
SWOT Analysis of WFMI
Internal Environmental Analysis
By the study of the internal environment (strengths and weaknesses) of WFMI, the firm is able to
determine what it can do through its resources, capabilities and core competencies, leading to
competitive advantage and strategic competitiveness.
Strengths
 First mover advantage, Economies of scale and high profit margins for
sustainable development:
As the first business entity to develop sufficient supply and scale to actually get authentic
organic foods into the hands of millions of people, WFMI has achieved first mover advantage in
the market place. With more than $5.6 billion sales in 2006, a 211% increase in sales since 2000,
WFMI currently possesses roughly 10% of the U.S. organic market share1, which gives the
company bargain power and economies of scale to lower Cost of Goods Sold (COGS). In 2006,
by possessing a profit margin of 3.63%, a significant increase from 2.9% in 2005 and 1.5 times
higher than the grocery industry’s average of 1.46%1, WFMI holds a competitive advantage in its
profitability.

Strong Brand Image as a determinant factor to affect the demand:
The mission of WFMI is to promote a sustainable agriculture and environment as well as vitality
and well-being for all individuals by supplying the highest quality, most wholesome foods
available1. As an active participant in the local communities, it gives 5% of net profits every year
to philanthropy organizations 1. It has done more to advance the natural and organic foods
movement in general and local organic growers and artisanal food producers specifically than
any other business in North America3. WFMI defines the priority of their management as to take
care of its employees and for 10 years, has been named one of the best companies to work for by
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Fortune Magazine. With these commitments to its stakeholders, WFMI has built a strong brand
image, which is very appealing to its target market – middle to high income level customers.

Unique and flexible business format:
WFMI has brought a new business concept; grocery shopping is no longer a chore, but an
inviting enlightenment and a positive experience that is also proving educational for adults as
well as for kids. It is switching from merely an organic food retailer to a pioneer in promoting
health and variety in diet, and providing innovative service (for example, food bars, the most
profitable service category with the highest growth rate) to exceed customers’ expectations.
WFMI has successfully increased store traffic by gaining customer loyalty and attracting
customers who are not necessarily organic followers. WFMI also does not adopt a cookie cutter
model for stores. Within a decentralized governance structure, each store is customized to fit the
size and configuration of the particular location and community. An individual store can also
purchase locally and determine the product category and 10% of inventory according to local
demand and the seasonality of supply. This helps WFMI to build supply relationship and
response quickly to market changes, therefore reducing procurement cost and transaction cost.
Weaknesses
 Income elasticity of demand:
Fluctuations in the economy and consumer’s income can decrease WFMI’s ability to make a
profit because of low price non-organic substitutes. Running the following model and checking
the significance of the coefficient associated with income, WFMI could tell if its target market is
income elastic and how income affects the sales of certain WFMI products. Monthly Sales
record is available from WFMI’s company database; other data could be collected from public
sources or bought from private data processing companies.
Qt monthly sales of WFMI’s X produce in $ = f (Household disposable incomet, Pricet of X,
Pricet of Substitute, Monthit, etc. ) where i is a dummy variable ranged from Jan to Nov. to
reflect the seasonality of X.
 Limited International Growth
Poor distribution network coupled with conservative approach to international expansion over
the years has resulted in its low presence in the international market, increasing only its
dependence on the U.S. market and this decreases its economies of scale in other emerging
economies. There are only 3 stores in Canada and 6 in the Unite Kingdom.
 Low Advertisement
The reliance on word-of-mouth advertisement for long time has not augured well for increases in
its revenues. Whole Foods spent only 0.4% of total sales in advertisement and promotional
activities in the last 3 to 4 years and most of the advertisements were in-store marketing related
activities. In comparison, Wal-Mart spent $1.9, $1.6, and $1.4 billion in advertising expenses in
2006, 2005, and 2004, respectively, consisting of print and television advertisements, while
Whole Foods spent $24, $20.1, and $17.4 million, respectively.
 Poor Distribution Network
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Whole Foods, especially when compared to other major food retailers, has a poor distribution
system, which tend to limit growth and expansion opportunities, and keep high transaction costs
in the delivery of products.
 Corporate Governance
The corporate governance of Whole Foods is further a weakness as they are highly decentralized
and based predominantly on a strong culture rather than management and business philosophies.
 Competitors
Wild Oats was not the only competitor of Whole Foods in the organic market since there are
emerging competitors from conventional groceries such as Wal-Mart, Kroger, Safeway, among
others. The acquisition of Wild Oats might not therefore significantly increase Whole Foods size
or growth.
It was expected that only about $700 million in sales from Wild Oats stores would remain. This
represented approximately 11% of Whole Foods' current sales and only about 10% of the
combined company. It also represented only about 9 months of internal growth by Whole Foods
Market at their current rate. The merger would not significantly increase Whole Foods Market's
overall size or their negotiating leverage beyond what it already is.
Therefore, Whole Foods can not eliminate forever the possibility of Kroger, SuperValu, or
Safeway using their brand equity alone to launch a competing national natural/organic food
chain to rival them as small privately held organic concessions may exist and may continue to
emerge in areas beyond the corporate reach of Whole Foods.
External Environmental Analysis
This analysis is challenging and complex. It focused on the opportunities and threats of WFMI
which would help identify what it might choose to do to provide crucial knowledge for the firm’s
strategic decisions.
Opportunities
Demand for natural & organic foods continues to grow at a faster rate than conventional grocery.
 None of WFMI’s markets are saturated. Top markets (big cities) can support a dense
concentration of stores and there is potential opportunity in secondary markets (suburbs) for its
private label products5.
 Competition on the other hand, creates consumer awareness of consuming organic food,
therefore, increasing demand as a whole and bringing potential customers for WFMI.
Threats
 Growing competition:
As long as organic retailers can charge a premium and earn above normal profits, new entrants
will enter the market to take market share way from existing players. Safeway has already
followed WFMI’s lead by providing delightful shopping environment and 150 product lines with
lower price6. Wal-Mart is expanding its organic food offerings with a price 20-30% lower than
WFMI6. As a giant with cost leadership, Wal-Mart can take advantage of global sourcing with its
existing procurement and distribution channel and it owns bargain power that is strong enough to
significantly change the organic industry.
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 Demand exceeds supply:
As of 2005 only about 0.5% of all U.S. cropland and 0.5% of all U.S. pasture was certified
organic7. Some of the obstacles to adoption by farmers include high managerial costs and risks of
shifting to a new way of farming, lack of marketing and infrastructure, and inability to capture
marketing economies. If the demand for organic foods becomes greater than the supply,
suppliers will have stronger bargain power. This would lead to higher wholesale cost for organic
foods and drive down WFMI’s profits. In addition, sourcing products from domestic suppliers
could become a big issue for all organic retailers.
Strategic Issues
 A business philosophy under public spotlight:
No one cared to complain when WFMI was a small Texas company, however, incorporated and
open more locations, and suddenly it received criticism as “Big Organic” and was regarded as
beholden to Wall Street and not to the customers. Despite its impressive performance, WFMI’s
stock price fell 23% on Nov. 3 2006, because the expected same-store sales growth of 6%-8%
was below Wall Street’s expectation of 12% -14%. As a result, half of Wall Street analysts
suggested heavy selling of the stock8. Although John Mackey challenges the traditional “The
Social Responsibility of Business Is to Increase Its Profits (Milton Friedman)” with his business
model of putting common good ahead of investors8, as a leader of a public company, Mackey has
to face the rules of capitalism. The reality casts doubt on whether the customers will follow his
model given a fierce competition from WFMI’s rivals. (WFMI could also test substitute
elasticity of demand using the above regression model.)
 Arguments on sourcing locally:
While WFMI claims that only 22% of its purchases are from large corporate farms, the
opposition doubts how much of the produce sold at WFMI is produced locally. Customers in
northern New Jersey do not consider product from Connecticut or Long Island “local”, even
though the farms might be geographically closer to them than farms in southern New Jersey.
WFMI, however, has to buy from Earthbound and international suppliers to meet demand on a
year-round basis. Big supermarket chains naturally find it easier and more profitable to buy from
big farms selling high volumes of products. WFMI was blamed as just window dressing to help
sell a much more ordinary industrial product9. To its defense, WFMI raised questions of when a
farm is too large to be considered “small”, how far can food be transported before it is no longer
considered “local”, how much machinery a farm is allowed to use before it becomes “industrial”
(and therefore no longer “good”), and also, whether “buy locally” is a kind of community-based
selfishness because “keep your dollars circulating in your own community is not an ethical
principle at all”9. As a leader in organic food industry, WFMI was “entitled” to work out the best
practice consistent with its professed values. Lack of effective communication and education
would easily erode customers’ trust in WFMI.
 The Acquisition of Wild Oats
Whole Foods has already planned the acquisition of its biggest rival in the natural foods market,
Wild Oats. The merger became the 18th in the company’s history, and possibly the most
troublesome/controversial. Because Whole Foods is technically the largest natural and organic
supermarket in the world, the acquisition of its biggest rival raised suspicions concerning
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antitrust issues. Interference by the U.S. government is something to be avoided if Whole Foods
is going to reduce competition to increase same-store sales. There is optimism however, that
Whole Foods can avoid an antitrust investigation. With demand for organics and natural foods
increasing in the new millennium, chains like Wegmans, Kroger, and Wal-Mart have increased
their available organic selections, with Wal-Mart becoming the world leader in organic milk
sales. Such large, established companies can be used as examples of the competition that exists
in the natural foods market to avoid inquisition and possible sanctions regarding any notion of
monopoly and antitrust in the food industry
Effects of the Merger:
From 1996 to 2000 Whole Foods had built a total of 50 new stores and opened another 40
through acquisitions. In August of 2007, Whole Foods acquired its biggest competitor Wild Oats
which had a total of 110 stores and sales of $1.2 billion. Although the expense of $3.8 million
related to transaction would decrease WFMI’s operation margin in a short run, and about 72% of
Wild Oats' sales came from markets in which it overlapped with Whole Foods, in the long run,
WFMI will gain significant synergies through general and administrative (G&A) cost reduction,
greater purchasing power, immediate entry to new markets, increasing utilization of facilities and
new team member talent.
The digestion of the issue is that the acquisition of Wild Oats increases the risk profile for the
stock. While WFMI has had previous success with acquisitions, however, it has never had to
integrate a company as large as Wild Oats. It was unpredictable whether WFMI could
successfully follow through on its plans to make improvement at Wild Oats stores. The company
had paid out approximately $596 million for the deal and the capital expenditure/sales (6.1%) is
higher than its competitors
Alternatives
Acceleration in store opening and development of private label products to capture
more market segments:
WFMI should keep expanding through a combination of new store openings and by acquisitions
of existing stores in order to reach more top markets. Meanwhile, it should develop more private
label product lines and distribute them not only to top markets in its own stores, but also to the
secondary markets by other retailers. In the U.S., private label sales of food and nonalcoholic
beverages rose 4.3% to $44 billion from 2006 to 2007, compared with the sales of branded food
and nonalcoholic beverages that rose only 2.2% during the same period10. Branded goods are
loosing market share to private labels. In 2006 for instance, WFMI had 30,000 natural and organic
stock keeping units (SKUs), with over 1,800 of the SKUs under 3 main private label brands. Its
private label sales in grocery and nutrition accounted for approximately 16% of their total sales
in those product categories in 2006, up from 15% of their total sales in 20051. By developing
and selling its own private label products, WFMI is also able to meet quality standards not found
in some natural food brands.
Recreating Supply Chain System:
With 9 distribution centers in 11 operational regions, WFMI helps suppliers gain access to all
stores within the region. However, the company’s shift from “backdoor sales” to a regional
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distribution model has made it more difficult for small local farmers simply because they do not
grow enough to supply a center, or the centers are too far from their farm. WFMI should build
more distribution centers as well as help more local growers sell directly to stores.
Meanwhile, some developing countries have become leading sources of organic food. China, for
example, has the largest area of certified organic farmland in Asia, at 300,000ha, and is well on
its way to becoming the world's leading organic food exporter11. If the purchasing cost, including
transaction cost, is competitively low, WFMI should do more to promote local agriculture, while
simultaneously supporting global organic food. This is not only consistent to WFMI’s ethical
obligation to help poor around the world, but also gives advantages to Whole Foods to compete
by controlling sources of local supply, with quality and competitive costs, and eventually,
bringing lower priced organic food to more customers.
A More Proactive Branding Strategy:
Without any media advertising expenses, WFMI’s branding relies heavily by word of mouth,
which is not efficient for communication and clarification of misunderstandings. WFMI has
developed a Local Producer Loan Program to promote and encourage farmers to switch to
organic farming practices. For years, it set up mini co-ops to consolidate product from local
vendors. It also developed a complicated system that distributes New Jersey produce to the New
Jersey stores. With all these efforts and more, however, WFMI failed to provide a big picture to
the public to avoid negative judgments. WFMI should invest in a more proactive branding
promotion in order to boost awareness of WFMI.
Conclusion and Recommendation
“Organic” or “Natural” in labels of food products have caused an impression on consumers’
willingness or otherwise to eat such foods but not a phobia nor a deeply rooted negative attitude
(12 per cent) refused to sample a real organic food product presented to them, especially when
the study was done in the U.S. (noted as a strong proponent of organic foods in the world)
backed by the 88% of participants who actually did taste the organic corn chip. If there is
anything to worry about now, it should be the trade descriptions of organic foods by the labeling
third parties.
Diffusion of innovations does take some time; as such more education would have to be carried
out to demonstrate enough that organic foods are not harmful, but healthy and safe.
As more conventional stores are becoming competitors by increasing their organic offerings in
stores, WFMI should take the first alternative as a priority to expand its market share. The
second alternative is also critical for WFMI to set optimal prices to attract more demand and take
the social responsibility at the same time.
Further research is required to be done in this area to bridge the communication gap and the
misunderstandings still lingering in the minds of some consumers in the U.S. about the health
benefits of organic food products.
Furthermore, both the international and local media would need to project higher on the positive
sides of organic food products by giving accurate information on organic foods to reflect
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changing global market trends due to growth in population, changes in income, shifts in
comparative advantages through costs of transportation and technology improvements, down to
government policies.
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