Industry Analysis
Rivalry amongst existing competitors
Whole Foods is one of the largest natural and organic food retailers in the United States.
They gained dominance in the natural food industry through distinguishing themselves amongst
competitors. Whole Foods reinvented the image of health food stores. John Mackey opened the
first Whole Foods Market in 1980 and by 2000 he expanded his company with the acquisition of
40 stores and the construction of 50 new locations. Mackey’s focus was store development. The
square footage of stores were larger than competitors; thus, being a factor in sales per foot
increasing. Whole Foods held the highest sales per foot for the natural foods industry. They
began to outperform competitors in volume of net income, return on common equity and
inventory turnover. Their entrance into the market sharply increased the demand for organic
products. It was necessary for clear standards to be set for organic foods. In 1990, the United
States Department of Agriculture (USDA) created a National Organics Standards Board.
Growers, handlers, or processors of organic were required to have USDA certification. Farmers
and organic growers had to change their work practices to meet standards. Such standards posed
challenges on the organic market. Producers and retailers felt the burden of new requirements
and distributors as well. Produce that was organic had come from regional distributors rather
than national ones. Organic foods could not have any use of pesticides, sewage sludge, and
synthetic fertilizers. Without the use of pesticides, organic foods have a shorter shelf-life.
Farmers achieve better tasting produce by harvesting a riper product.
Just in a matter of six years, Whole Foods was the nation’s largest natural foods retailer
and fastest growing company; evolving and establishing dominance. The degree of their supplier
concentration became more centralized. Whole Foods built regional distribution centers to aid
suppliers in accessing stores within their region. Through a company building distribution
centers, it increases the ability for a supplier to support regional/ local production. With a surge
in demand for natural and organic products the industry is growing worldwide. The Organic
Trade Association detailed a statistic regarding the United States’ sales of organic food and
beverage. Just in 1990 sales amounted to $1 billion and by 2010; the sales equaled $26.7 billion.
A year’s growth from 2009 to 2012 was 7.7%. (Association, 2011) The trend of growth for the
natural and organic food industry is upward trending. Upon the acquisition of Wild Oats, Whole
Foods furthered their competitive edge in the grocery market. (Companies in the grocery market
included: Kroger, Safeway, Winn-Dixie, Wal-Mart, Great Atlantic & Pac Tea, and Ingles.
Whole Foods was now competing with mainstream groceries.) Wal-Mart and groceries began
stocking natural and organic foods that once could only be found in health stores. In 2012, mass
market retailers (mainstream supermarkets, club/warehouse stores, and mass merchandisers)
made up 54% of organic food sales with 39% of sales going to natural retailers. (Association,
2011) Products are differentiated amongst stores but it is the competitors who differentiated
themselves in terms of store size and appealing to health conscious customers with different cost
structures. There are many sellers in the market, which make rivalry a high threat to Whole
Food’s profits.
Threat of Entry
Economies of scale reduce long run average costs which create lower prices for
consumers and give a company the ability to grow. Significant economies of scale include the
ownership of distribution centers. The Local Producer Loan Program to help get small local
producers’ products on Whole food shelves, corporate social responsibility, Quality Standards,
and Open Book policy/management. The importance of reputation and establishing brand
loyalty is important. Whole Foods stands by a Declaration of Independence that has five core
values to which the company stands for. Customers of Whole Foods are health conscious and
those with high brand loyalty are considered “high valence” employees and customers.
The threat of entry by new entrants is low and the exit barriers are strong. Entry to the
market is either supermarkets being rebranded or health stores transitioning into supermarkets.
Whole Foods strategy to dominating this industry was expanding through new store openings
with an aggressive approach in its founding years. Network externalities are strong whereas
there is no impact yet of government protection of incumbents on profitability. Perceived
competition expectations of retaliation and reputation for toughness are strong.
Threat of substitute products or service
Whole Foods social mission is to “promote the vitality and well-being of all individuals
by supplying the highest quality, most wholesome foods available.” The customer is to utilize
Whole Foods as a one stop store. Whole Foods faced three types of competitors-conventional
supermarkets, small sellers like farmers’ markets, and low cost alternative markets. Trader Joe’s
was a primary competitor in the low cost alternative market. Both Whole Foods and Trader
Joe’s attracted health nuts, intellectuals, and foodies. Trader Joe’s did not limit their products to
only being organic foods. They carried less products and the selection changed from week to
week. Product variability was a result of the company’s goal to stock products that could be
bought and sold at competitive prices. Low prices were Trader Joe’s primary focus.
Conventional stores like Wal-Mart, who already advertised low prices, began offering natural
foods. SuperTarget and Kroger Inc. received organic certification from the USDA and now
began labeling products “organic” to better appeal to customers. This posed a threat to Whole
Foods which was viewed as pricey or an expensive place to shop. Whole Foods created its own
private label brand, “365 Organic Everyday Value” to compete with new products. Mackey
discerned Whole Foods from other stores by stating, “[Customers] don’t really want to buy
[health foods] at Safeway…They want to make a statement about who they are by where they
shop.” Although this ties into brand and customer loyalty, Whole Foods still faced smaller
competitors. A customer could stop at a produce stand or farmers market to get the true essence
of buying local and organic while knowing directly where the product came from.
Bargaining power of buyers
Power relationships with a company’s buyers are negotiated through the individual buyer
who can affect probability with low purchase prices. The buyer can directly influence what a
company supplies. Factors that influence a buyer are not limited to but include costs, customer
service, and the store environment. Whole Foods wants the customer to be able to stop and buy
everything they need. They want their customers delighted and satisfied.
Buyers in large volume have more power. Employees and customers who strongly
resonate with the Whole Foods mission are known as “high mission valence” employees and
customers. When Whole Foods attempted to expand its product selection to reach a larger group
of customers, buyers felt the spirit of the store was violated. Whole Foods had begun stocking
specialty cheeses, sugary snacks, beer, wine, chocolate, and other products. The products met
the Quality Standards and enticed the buyer but further antagonized critics. The Quality
Standards regulated ingredients that could be used in products sold and the term “natural” for the
company. Any product that had hydrogenated oils, sweeteners, trans fats, preservatives,
flavorings, or artificial colorings were prohibited. The employees believed Whole Foods was
becoming too big and the all-natural mission was part of a social and political agenda.
Whole Foods takes great care to implement a store atmosphere that educates and engages
the customer. Ways that Whole Foods ensures the customer is comfortable with purchases is
through storyboards hanging above produce bins, to display the cycle of the good, and pamphlets
and signs. The pamphlets and signs explain various concepts like sustainable, free range, and
certified organic. Through displaying information like this for the buyer to see, they are making
a relationship-specific investment to support transactions with the specific buyer. The price
elasticity of demand of buyer’s product is low. In terms of Whole Foods, backward integration
is high due to them purchasing and building their own distribution centers to consolidate costs.
In terms of customers of Whole Foods, back integration is an ample threat since gardens can be
grown and harvested for local produce stands or markets.
Bargaining Power of Suppliers
The supplier industry is more concentrated and is a dominate power in this industry. As
stated in the rivalry amongst competitors section of the paper, Whole Foods has built its own
distribution centers for suppliers. A result of Whole Foods taking action like this is the
heightened competition by other mass market food retailers selling natural and organic food.
Stores are expanding the quantity and type of products they carry like organic product lines and
private label store brands. The supply chain is more integrated than the past. Whole Foods does
not limit themselves to just regional suppliers but also local ones. More suppliers/ farmers are
signing contracts with corporations. Since companies own their own distribution centers, they
can buy directly from manufactures and purchase higher volumes of goods leaving room for few
substitutes for suppliers’ input. To maintain positive relationships and support transactions with
specific suppliers, there are relationship-specific investments. Local markets and produce stands
are some of Whole Foods competitors. Yet the organic supply chain is underdeveloped, forward
integration is a credible threat in this industry. The number of operating farmers’ markets has
been steadily increasing since 1994. Whole Foods has tried to erase the scary corporation image
that farmers’ fear.
Overall Analysis
Based on Porter’s Five Forces, the following threats on future profits for Whole Foods
can be made: rivalry amongst competitors is high, threat to entry is medium/low, pressure from
products and support from complements is medium, power of input suppliers is high, and power
of buyers is high.
Works Cited
Association, O. T. (2011, June). Industry Statistics and Projected Growth. Retrieved Marh 6, 2012, from
Organic Trade Association: http://www.ota.com/organic/mt/business.html