Industry Analysis
Rivalry amongst existing competitors
Just in a matter of six years, Whole Foods became the nation’s largest natural foods
retailer and fastest growing company; evolving and establishing dominance. 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. 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) The surge in demand for
natural and organic products is growing worldwide further expanding the industry. Whole
Foods’ central focus is profitability.
Rivalry within the industry is getting stronger for Whole Foods as grocers want to attain
more of the organic market. Kroger, Safeway, and Supervalu are amongst Whole Foods’
competitors who are general grocers and have high market shares. Their main organic grocer
competitor is Trader Joe’s. Trader Joe’s mission is to focus on providing great value to
customers by having competitive prices on all their products. They attempt to create an exotic
shopping experience for the customer. The selection of privately labeled products is large and
they have a fast inventory turnover rate. Trader Joe’s weaknesses are that it is limited in store
size and location, and there isn’t a clear distinguishing factor between their conventional
products and organic foods. Whole Foods uses a differentiation strategy and makes it one of
their missions to have organic differentiation. They have a strong brand which displays effective
communication with the market. Whole Foods stores are located in target market areas and have
more square footage in comparison to Trader Joe’s.
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 for Whole
Foods are high, with their ability to produce large volumes with low costs. Wal-Mart, who is a
competitor in the sense of organic products; drives down prices which causes fluctuations in the
economies of scale.
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. Whole Foods decreased their expected
retaliation by gaining volume through taking from incumbents through mergers and acquisitions.
Since capital requirements are high, exit barriers are strong. High investment in inventories,
distribution, and property are at stake. It is unlikely for local growers to become a dominate
force and enter the market independently since most are not willing to invest in getting
certification with the government. It is easier for major corporations to enter the market since
they can finance the type of goods the customers are looking for. Network externalities are
strong whereas there is no impact yet of government protection of incumbents on profitability.
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. In this case
the switching costs to substitutes are low within the store front as compared to other grocers.
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. Wal-Mart’s
emphasis on “Everyday Low Prices” leaves room for the customer to shop around for the
cheapest price. They’ll go store to store to get specials.
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. The demand for food
won’t decrease and consumers will have a demand for value pricing. Buyers of Whole Foods’
products are living a lifestyle that promotes health living and ethics that are consciousness of the
environment. Organics and products have been socially accepted. Willingness to buy is
relatively moderate to high in the natural foods and organic industry making customers less price
sensitive. As substitutes and alternatives are introduced by competitors, there is a demand for
value pricing and differentiation.
Buyers in large volumes have more power. 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 employees believed Whole Foods was becoming too big and the
all-natural mission was part of a social and political agenda. This further implements Whole
Foods’ central issue of maintaining dominance through growth while trying to uphold the social
mission.
The price elasticity of demand of buyer’s product is low. In terms of Whole Foods,
backward integration is low. Buyers have many alternative products that they can purchase at
other grocery stores, local markets, and produce stands.
Bargaining Power of Suppliers
The supplier industry is more concentrated and is a dominate power in this industry.
Whole Foods has a strong network of suppliers. 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. Shifting suppliers would be difficult for Whole Foods since
they are heavily invested within a network of suppliers. The products Whole Foods receives are
differentiated. It is not likely for suppliers to integrate forward into the industry due to
certification and the money it would cost.
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 moderate to high.