Buad 497 Whole Goods

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BUAD 497

Final Project

Huiyi Deng, Sophie (Yajie) Zhu, Houquan Chen, Songbai Zhang,

Michelle Wirawan, Hein Htet Zaw, Josephyn Kosanawsaty, Siyuan Cang

1. Introduction

As America’s first “Certified Organic” grocery store, Whole Foods Market has made a name for itself in the industry as the “go to” place for good quality organic food. While Whole Foods has been around for nearly four decades, it still prides itself as the number one natural gourmet food retailer in the United States. Whole Foods Market has always been pinpointing its capabilities and resources to provide a zero-distanced access for customers to purchase naturally grown food. Since 97% of Whole Foods revenue comes from domestic market, we will initially discuss Whole Foods’ performance in the U.S. According to its 2016 Annual Report, the supermarket industry has experienced a 2% growth from last year. Moreover, the “organic food” segment inside this industry has experienced a 9% increase. As a growing population is becoming aware of the importance of food quality, they will tend to be more selective in terms of choice of food. Nevertheless, even though Whole Foods exploited first mover advantage in the industry, it still experiences strong industry rivalry and potentially an even more fierce price war from traditional consumer goods retailers. In summary, low switching cost, quick access to products, high consumer bargaining power and limited reliable suppliers of organic food drive down Whole Foods’ profitability throughout the years while the diversification of products has decreased the power of suppliers. The strength of Whole Foods is the high quality of products. However, as more and more retail giants entering organic food segment, consumers can easily substitute them with cheaper choices.

1. External Analysis

The supermarket and other grocery stores industry (NAICS code: 445110) is primarily engaged in retailing a general line of food such as canned and frozen foods, fresh fruits and vegetables, and fresh and prepared meats, fish, and poultry. The key players of the industry are as follows: Whole Foods Market, Wal-Mart, Trader Joe’s, Kroger, Superior Grocers, and Safeway. There are currently 41,076 stores that are classified under this industry. The industry is currently in the mature stage.

Whole Foods lies in a relatively stable but large market in the supermarket industry. While natural gourmet sector continues to attract a growing population in the U.S., the fierce competition and industry rivalry drives down the revenue. According to the newly disclosed financial reports regarding 2016, the industry revenue increased about 1.0% on a CAGR base from 2012 to 2016 while Whole Foods remains pessimistic toward 2017, gauging a 0.2% growth, which is shrinking accounting the nominal GDP growth. The contradicting expansion in customer base and contraction in market size might result a diminishing profitability. With a current revenue reported as around $US 15 billion, Whole Foods will continue to struggle to sustain its leading position in the US.

1. Macro Analysis (PEST framework)

As the leading American grocery stores offer organic and health food, Whole Foods Market should address its impact from the following external forces on its remote environment.

Political Analysis

The United States Department of Agriculture (USDA) establishes a strict policy against genetically modified organism (GMO) in order to approve organic food products. With this in mind, Whole Foods should increase efforts to expand the product line of National Certified Organic products and further improve management to ensure the quality control of products. Additionally, the free trade agreements also give Whole Foods the opportunity to expand the business overseas with favorable tax benefits.

Economic Environment Analysis

The most important economic factor is the stability of economy which directly affects the level of household income. The level of household income is positively correlated with the level of spending on organic and natural gourmet food. A higher income usually impacts people’s shopping habits and  instigates a demand for food with premium prices.  

Moreover, Whole Food’s strong dependence on logistics indicates that transportation costs will be a fundamental pricing factor for Whole Food’s gross margins and profitability. This suggests that Whole Foods should develop strategies to optimize its on-ground logistics to fully utilize economies of scale in the future.

Social Analysis

Two of the major trends in nowadays society is a shift in food choice and a change in residence selection. A growing population is preferring natural organic food and living in rural areas. As the trend of a “healthy lifestyle” surges, there is a growing demand for the organic and natural food.

Additionally, as a result of population relocation from rural to urban areas, there is an increase in difficulty to plant and harvest natural foods in the urban cities. This then translates to an increase in the consumer demand for organic foods given the difficulty in harvesting these foods themselves.

Lastly, since the idea of health lifestyle is becoming popular in developing countries, Whole Foods can seize the opportunity to capture this prospering market and attract foreign customers by allocating capital into their international expansion efforts.

Technology Analysis

Whole Foods has the opportunity to boost their overall supply efficiency by implementing inventory and logistic information update system. A typical example is the Wal-Mart global satellite system. The information sharing process provided Wal-Mart with speedy updates and immediate notifications on store sales and inventory management. Whole Foods Market as a retailer focusing on perishable goods, will fully utilize products on shelf period if information discrepancy could be eradicated through a cross-store information sharing system.  

1. Whole Foods Market Porter’s Five (See Appendix A)

Bargaining Power of supplier (High)

Whole Foods Market has a large number of national and international suppliers. However, this impact is offset by the size of its suppliers since they are mostly large wholesalers, especially its major supplier United Natural Foods Inc. (UNFI), who has much leverage over Whole Foods Market by imposing price changes on many products. The power of supplier is also increased due to the limited supply of truly organic and non-GMO good in the market.

Bargaining power of buyer (Medium)