Whole Foods Market
Case Analysis
Submitted to:
Dr. Roger Hinson
Submitted by:
Group 10
Savana Abbott
Spencer Hebert
Bilal Javed
Evan Lane
Ryan McCann
Brandon Nichols
Matthew Pierce
ACEG 4433
Agricultural Business Planning,
Management, and Policy
Philip Taylor
Louisiana State University
February 15, 2012
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Table of Contents
Case Analysis .............................................................................................................................1
Whole Foods Market ...............................................................................................................1
Central Problem.......................................................................................................................3
Goals ........................................................................................................................................4
Maintain dominance .............................................................................................................4
Upholding social mission .....................................................................................................4
Raise customer satisfaction ..................................................................................................4
Continuing growth................................................................................................................5
Constraints Facing Whole Foods ............................................................................................6
Alternatives .............................................................................................................................9
Industry Analysis ...................................................................................................................12
Rivalry amongst existing competitors ................................................................................12
Threat of Entry ...................................................................................................................14
Threat of substitute products or service .............................................................................14
Bargaining power of buyers ...............................................................................................15
Bargaining Power of Suppliers ..........................................................................................16
Overall Analysis .................................................................................................................17
Works Cited ...........................................................................................................................17
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Central Problem
The majority of companies that experience rapid growth often find it difficult to stay true to the
principles, values, and business intentions originally outlined in their mission statement. Whole Foods is no
different; “Since going public in 1992, Whole Foods’ stock [has] returned more that 2,700%” to investors.
As a result, investors influence in decision making has caused management to put more emphasis on
growing profits and market share and less emphasis on their original mission as stated in the “Declaration of
Interdependence.” Whole Foods reputation as an eco-friendly, high quality natural foods retailer is slowly
diminishing as they continue to expand their business operations. Whole Foods must determine how to
maintain dominance in the marketplace through sustained growth and increased profits while striving to
fulfill its social mission if they hope to remain successful in the future.
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Goals
Maintain dominance
John Mackey founded Whole Foods in 1980 with a $25,000 investment from his father. The store
was 10,500 square feet, just a fraction of the 55,000 square feet that the stores take up today. Throughout the
1980’s, Mackey expanded Whole Foods to 10 stores. During the 1990’s and early 2000’s, Whole Foods
acquired already existing natural food chains such as Wellsprings Grocery, Bread & Circus, Mrs. Gooch’s
Natural Foods Markets, Bread of Life, and Amrion, among others. These acquisitions allowed Whole Foods
to become the largest natural foods retail chain in the country by 2006. However, the acquisition that gave
Whole Foods its dominant position in the organic market was the gaining of Wild Oats in 2007. One of the
main goals of Whole Foods is to maintain the dominance that John Mackey brought to the company over the
last 30 years.
Upholding social mission
Whole Foods’ first value in their social mission is to “sell the highest quality natural and organic
products available”. The second core value is to “satisfy and delight the customers”. These values are the
fundamental mission of Whole Foods. The company must continue to put emphasis on these values, even
while trying to grow and increase profits. Without selling a quality product, the company would lose the
principals on which it was founded. Even more important than losing their founding principles is customer
dissatisfaction. Without loyal, satisfied customers Whole Foods would not be the business it is today. The
company must continue to uphold its social mission in order to maintain its dominance.
Raise customer satisfaction
Customer satisfaction is the key to any business surviving and growing. There must be some way in
which the company is satisfying the customer’s needs or the business will fail. Whole Foods has satisfied
customers by offering them a quality product and by giving back to the community they belong to. Whole
Foods offered to pay employees for up to 20 hours each year for community service and even gave
assistance to local farmers by having food farmer’s markets in parking lots of Whole Food stores and
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provided loans to local farmers. These actions gained favor of the local community and increased
satisfaction among their customers in local areas.
Continuing growth
Another goal of Whole Foods is to sustain growth. Founder John Mackey constructed a solid
foundation for future growth. The company has grown substantially over the last 20 years as organic foods
have increased in popularity. The nation as a whole is becoming more health conscious, which provides
Whole Foods with the demand the company needs to thrive. Whole Foods should continue expansion up to
the point at which the company is constrained by the ability to provide high quality, fresh produce to each
store.
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Constraints Facing Whole Foods
The organic, socially conscious innovator faces numerous constraints both in the market as well as
internally. These include outside competition, higher prices, maintaining a positive social perception while
dealing with distribution issues, and maintaining the quality consumers and employees alike expect while
still continuing to grow.
Outside competition and other firms entering the market have proved to be a difficult task for Whole
Foods to deal with. The primary areas where they face stiff competition are: lower cost alternative markets,
conventional supermarkets, and small sellers like farmers markets. The main competitor that it faced was
Trader Joe’s, an alternative market that offered more specialized and exotic products. In order to be highly
competitive, Joe’s took on a smaller and more specific product line as opposed to an expansive store like
Whole Foods. Joe’s only dealt with low price suppliers and eventually carried almost exclusively private
label products. Joe’s was able to detract from Whole Foods because of the low prices that it offered that
Whole Foods simply could not match. As if Joe’s competing away the market was not bad enough, other
supermarkets also began offering organic options as well as other popular buzzwords such as “locally
grown.” Additionally, a farmer’s market craze kicked in despite Whole Foods growth. Consumers viewed
farmers markets as an even fresher alternative to Whole Foods because they were buying directly from the
source rather than a distribution center.
The next constraint that Whole Foods faced was the higher prices due to the higher quality. It
effectively earned its nickname as “Whole Paycheck” due to the higher quality and more expensive
distributors they had to go through to satisfy their mission. In order to try and deter this image they were
being given, Whole Foods started a campaigning strategy in the New York Times for 12 weeks claiming
“More of the good stuff. For less than you think.” Another strategy they adopted was introducing some of
their own private label brands. Yet, even with these measures in place they still showed diminishing growth
as the market was being competed away by lower-priced competitors.
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A third constraint for Whole Foods is maintaining a positive social image while dealing with
distribution issues. As profit sharing, decision making, and managing became more decentralized, logistics
and distribution were becoming more centralized. Whole Foods started moving away from the local
distribution systems and facilities and instead started consolidating them into regional and national centers.
One of the bigger problems it needed to overcome was keeping the food “whole” while still avoiding the
costly issue of spoilage. To overcome this they temporarily used regional distribution centers while making
their own specialized and innovative facilities in order to continue with their Quality Standards while
becoming more centralized. To further this operation Whole Foods chose to sign with United National Foods
which in turn caused an internal rift. To keep employees from losing their faith in the company or stakeholders to see them as a harsh corporate entity, Whole Foods would permit individual chains to choose up
10% of their products without having to get national approval. It seemed that almost every positive step
Whole Foods would take would be countered in some way. While its social mission was one of its greater
assets, it also was becoming increasingly difficult to stay within the bounds.
Probably one of the most difficult problems Whole Foods faces is maintaining the Quality Standards
that customers expect and buy into while still continuing to grow and bring in more customers. One instance
of this, is the distribution of commodities to consumers that may not be in season. In order to overcome this
problem and not lose potential customers, Whole Foods opted to fly in items from growers year round who
abide by their Quality Standards. The most controversy that they face is in expanding their product line. As
customer demands for different products that were unconventional in the Whole Foods line such as beer,
wine, specialty cheeses, or sugary snacks began to grow, Whole Foods had to answer. When bringing these
in the “high mission valence” got upset and protested that Whole Foods was decreasing its Quality
Standards. While these products technically never violated the standards, they claimed the products violated
the original spirit of the company. As Whole Foods may have cut its losses with this smaller group, it kicked
the door open for a much larger group of consumers to buy into their products.
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Whole Foods social mission is what differentiated them from all of the others, yet it also seems to be
the one thing that is inhibiting its potentially endless expansion. In a sense its greatest strength has become
its greatest weakness. That being considered, Whole Foods still expertly walks the tight-rope of upholding
its Social Mission while continuing to be a major player in the grocery market.
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Alternatives
Alternatives
Whole Foods has several alternatives to the central issue. One of which would be to return to its
original statement of being a simple natural food store. By committing to this plan, Whole Foods would in
time regain the support of its organic followers and earn their reputation once again as an honest company.
Many individuals believe that since Whole Foods has “sold out,” it no longer has a claim as a genuine and
sincere, thus driving some sales from its total income. If Whole Foods makes this change, however, and
purges its stores of processed materials, it is likely to lose sales and market share. What is more important to
Whole Foods, reputation or sales, depends on top management.
In order to sustain growth in both the number of stores as well as profits, Whole Foods could implement an
expansion strategy focused on opening new stores in new locations as opposed to their existing strategy of
growth through mergers and acquisitions. Wal-Mart growth strategy of opening new stores exemplifies the
efficiency and effectiveness of this type of strategy. Whole Foods could learn from the successes of WalMart by pursuing a similar growth strategy that is tailored to their specific competitive environment. There
are numerous advantages associated with this alternative growth strategy that can potentially cut costs, help
to promote an eco-friendly image, and increase profits. By choosing to open completely new stores, Whole
Foods avoids the costs of acquiring an existing retailer. Building new stores will allow Whole Foods to take
advantage of technology that can reduce energy costs. They can also choose locations that can easily be
serviced by existing distribution centers. Furthermore, Whole Foods can increase the benefits gained through
the centralization of distribution and logistics decisions through implementing a distribution network
(tailored to their needs) that parallels that of Wal-Mart.
Finally the last alternative to Whole Foods central issue could be to take a page from Trader Joe’s strategies,
and offer customers different products weekly. Trader Joes inventory is driven by the cost it takes to acquire
the inventory, which is why many people choose their establishment over Whole Foods. This low-cost
strategy is something that could crush Trader Joes niche, and bring dominance back to Whole Foods by
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eventually putting Trader Joes out of business. Whole Foods customers will see that they are adapting to
accommodate its customers, which in turn will help turn Trader Joe customers into Whole Foods patrons.
With changing its strategies Whole Foods will get back to its roots of giving its customers the best deals
available without compromising quality. Along with adopting this strategy Whole Foods can also expand
the customer base it serves because many people see Whole Foods as being expensive, but this strategy will
bring the low-cost customers in, which in the end will increase sales.
Advantages/Disadvantages
Each alternative that Whole Foods faces comes with its own advantages and disadvantages with
respect to the goals and constraints listed previously. In the following section the alternatives will be
compared and contrasted against the goals and constraints.
The first alternative holds advantages of customer support and increasing a specialized market.
Whole Foods Market originally made its name by selling only organics and natural food items, so returning
to a more focused inventory of these items would keep whole foods true to its name and image. With this
change, some customers’ loyalty will return and strengthen in the company and others will forgive Whole
Foods for “selling out”. This alternative would satisfy each of the goals pointed out in the previous section
especially maintaining dominance. Whole Foods already is in a niche market, so with this alternative it will
adapt further so customers don’t change their opinions on the store. The disadvantages of this strategy may
very much outweigh the advantages. If Whole Foods returned to its stricter market than it may perhaps lose
more potential customers than gain some back. This will hurt the company in the long run. Whole foods has
seen some success as they have expanded and returning to a more concentrated whole foods store may cause
them lose ground and also their new markets and customers they have acquired through such expansion.
Whole Foods also mentioned that it now competes with superstores such as Wal-Mart, returning to its
original strategy can create a large disadvantage in its competition with these larger stores.
If Whole Foods Market decides to pursue the second alternative of following Wal-Mart’s expansion
strategy, it could see some good improvement and advantages. Expanding and creating more stores can
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ultimately be more profitable for the company, which is a large advantage. Also the firm can learn valuable
information on how to maintain its expansion and where to locate new stores. Knowing where to locate new
stores is advantageous, especially in Whole Foods’ specialized target market. The potential disadvantage
that this poses is Whole Foods become too much like Wal-Mart and cannot differentiate itself in the market.
This may cause loss of customers and sells. They also run the risk of losing more of its initial reputation by
growing too large. If Whole Foods Market can maintain its differentiation in the market while expanding
then this alternative could suit them.
The last alternative the company faces can give it an advantage in the organic and natural foods
market. By lowering the prices of its items many customers that view Whole Foods as expensive may decide
to shop there. Also by doing this and offering new products weekly like Trader Joe’s, it can give Whole
Foods the advantage over its’ competitors. Controlling more of the market and beating out its competitors
are all advantages for the firm. The downside in this is Whole Foods trying to pursue a market that it does
not have experience in. A large disadvantage shared with this alternative is again non-differentiated itself
from other competitors. Consumers may view this strategy as copying another firm. Also Whole Foods loyal
customers may see them still not performing in guidance with its initial market, hurting it’s reputation.
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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
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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
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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
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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.
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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.
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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
One reference is not sufficient. The way the OTA is treated as if it was a person’s name is incorrect. Go to a style
manual to correct this.
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