WHOLE FOODS MARKET CASE ANALYSIS
A Project Presented to the Faculty of California State University, Stanislaus
In Partial Fulfillment of the Requirements for the Degree of Master of Business Administration
By Bernadet Martrous May 2016
CERTIFICATION OF APPROVAL
WHOLE FOODS MARKET CASE ANALYSIS
by Bernadet Martrous
Signed Certification of Approval Page is on file with the University Library
Dr. Sally Hamilton Professor of Finance
Date
Dr. Tzu-Man Huang Professor of Finance
Date
Dr. Sijing Zong Professor of Finance
Date
© 2016 Bernadet Martrous ALL RIGHTS RESERVED
ACKNOWLEDGEMENTS Special thanks to everyone who contributed to this project: Dr. Sally Hamilton, Dr. Tzu-Man Huang, and Dr. Sijing Zong.
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TABLE OF CONTENTS PAGE
Acknowledgements .................................................................................................
iv
List of Tables .......................................................................................................... viii List of Figures .........................................................................................................
ix
Abstract ...................................................................................................................
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CHAPTER I. Introduction ...........................................................................................
1
Industry Overview ....................................................................
2
Whole Foods Market.............................................................................
5
Purpose and Core Values .......................................................... Quality Standards and Differentiated Product Offering ........... Certified Organic Retailer ......................................................... Exclusive Brands ...................................................................... Commitment to Local ............................................................... Properties .................................................................................. Performance .............................................................................. Economic and Industry Factors ................................................ Overview of Fiscal Year 2015 .................................................. Purchasing and Distribution...................................................... Marketing .................................................................................. Value Programs ......................................................................... Global Responsibility................................................................ Growth Strategy ........................................................................ Competition............................................................................... Kroger .................................................................................. Trader Joe’s.......................................................................... Wegman’s ............................................................................
5 6 7 9 9 11 13 14 15 16 17 18 19 19 20 20 21 21
Case Analysis ........................................................................................
22
Strategic Issues and Key Problem.............................................
22
External and Internal Analysis ..............................................................
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II.
III.
IV.
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External Analysis ...................................................................... PEST Analysis ..................................................................... Political and Legal Issues................................................ Economic Issues.............................................................. Sociocultural and Demographic Information.................. Technology .....................................................................
23 23 23 23 23 24
Porters Five Forces of Competition ..................................... Bargaining Power of Buyers ........................................... Bargaining Power of Suppliers ....................................... Threat of New Entrants ................................................... Threat of Substitute Products .......................................... Intensity of Rivalry .........................................................
24 24 25 25 25 26
Internal Analysis .......................................................................
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SWOT .................................................................................. Opportunities................................................................... Threats............................................................................. Strengths ......................................................................... Weaknesses ..................................................................... Value Chain ......................................................................... Grand Strategy ..................................................................... Market Analysis ................................................................... Target Consumer ............................................................. Channels.......................................................................... Marketing Strategy.......................................................... Core and Distinctive Competencies ................................ Financial Analysis..................................................................... Liquidity Ratios ................................................................... Current Ratio.................................................................... Quick Ratio ...................................................................... Times Interest Rate .......................................................... Leverage Ratios ................................................................... Debt to Equity Ratio ........................................................ Debt to Assets Ratio......................................................... Activity Ratios ..................................................................... Asset Turnover ................................................................. Fixed Asset Turnover....................................................... Total Asset Turnover ....................................................... Inventory Turnover .......................................................... Accounts Receivable Turnover ........................................
26 26 28 29 29 30 32 32 32 33 33 34 34 34 34 35 35 37 37 37 38 39 39 39 39 40
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Profitability Ratios ............................................................... Profit Margin on Sales ..................................................... Operating Margin ............................................................. Return on Sales ................................................................ Return on Assets (ROA) .................................................. Return on Equity (ROE) .................................................. Market Valuation Ratios ...................................................... Price to Earnings (P/E) Ratio ...........................................
41 41 42 42 42 42 44 44
V.
Alternatives ...........................................................................................
46
VI.
Recommendations .................................................................................
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Strategic Recommendations...................................................... Tactical Recommendations .......................................................
48 49
Implementation Plan .............................................................................
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Steps ..........................................................................................
51
Conclusion ............................................................................................
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References ...............................................................................................................
55
VII.
VIII.
Appendices A. B. C. D. E. F. G. H. I.
Number of Stores Operated by Whole Foods Market ............................... Sales Growth in Fiscal Years 1991 and 2015 ............................................. WFM’s Investments as of Sept. 27, 2015 ................................................... Performance Graph ..................................................................................... Stores at Beginning of Fiscal Year ............................................................. Stores at End of Fiscal Year........................................................................ Whole Foods Market Financial Ratios ....................................................... Whole Foods Market Income Statement ($ millions) ................................. Whole Foods Market Balance Sheet ($ millions) .......................................
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59 62 63 64 65 66 67 69 71
LIST OF TABLES TABLE
PAGE
1. Annual Percentage Sales ...................................................................................
7
2. Cumulative 3-year Total Return to Shareholders .............................................
13
3. Share Repurchase Activity ................................................................................
14
4. Whole Foods Market’s Investment ...................................................................
16
5. Whole Foods Market’s Marketing ....................................................................
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6. Store Growth for Whole Foods Market ............................................................
20
7. Liquidity Ratios ................................................................................................
36
8. Leverage Ratios ................................................................................................
38
9. Activity Ratios ..................................................................................................
40
10. Profitability Ratios ............................................................................................
43
11. Market Valuation Ratios ...................................................................................
44
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LIST OF FIGURES FIGURE
PAGE
1. Industry and Natural Product Sales in 2014 .....................................................
3
2. Produce Sold in Whole Foods Market Stores ...................................................
10
3. Number of Stores Operated by Whole Foods Market (1) .................................
12
4. Number of Stores Operated by Whole Foods Market (2) .................................
12
5. Number of Stores Operated by Whole Foods Market (3) .................................
13
6. Liquidity Ratios (Fiscal Year 2014) .................................................................
36
7. Leverage Ratios (Fiscal Year 2014) .................................................................
38
8. Activity Ratios (Fiscal Year 2014) ...................................................................
41
9. Profitability Ratios (Fiscal Year 2014) .............................................................
43
10. Market Valuation Ratio (Fiscal Year 2014)......................................................
45
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ABSTRACT This case study focused key problems Whole Foods Markets may be encountering now, and recommends some solutions to solve its problems and improve the company’s performance. Analyzing the company required an examination of the company’s external and internal performance. For external analysis, the researcher used PEST analysis, looking for political, legal, and economics-related issues the company may encounter. An analysis was also performed using Porters Five Forces of Competition. For internal analysis, the researcher utilized SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis as well as value chain, grand strategy, market analysis, and financial analyses. Finally, the researcher offers alternatives and recommendations, based on information gathered from external and internal analysis, to enhance the company’s performance in future.
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CHAPTER I INTRODUCTION Whole Foods Market (WFM) is one of the leading grocery stores in the natural and organic food industry. It is the first national “Certified Organic” grocer and has specifically positioned itself in the natural and organic foods supermarkets segment. John Mackey, founder of the company, started Safer Way Natural Foods in Austin, Texas. The company operated in 1978 and opened the first Whole Foods Market after merging Safer Way with Clarksville Natural Grocery in 1980. The company’s mission is to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available (Whole Foods Market, 2015a). The company’s product selection includes grocery, meat, seafood, prepared foods and catering, bakery, coffee, tea, wine, beer, cheese, vitamins, nutritional supplements, body care, and lifestyle products including pet products, books, and household products (Whole Foods Market, 2014). As of September 27, 2015, the company operated 431 stores in the United States, Canada, and the United Kingdom. The average customer visits per week is over 8 million (Whole Foods Market, 2015b). The company’s growth strategy is to expand mainly through new store openings; meanwhile, the company may use acquisitions of smaller chains that
1
2
provide access to targeted geographic areas. In 1996, its biggest acquisition was Fresh Fields, the second-largest U.S. natural foods chain, with 22 stores on the East Coast and in Chicago (Elstrott, 2015). As of September 28, 2014, Whole Foods Market employed 58,100 workers, with $20.3 billion USD in market capitalization, $14.6 billion in revenue, and $588 million in net income (Whole Foods Market, 2014a). Industry Overview The U.S. supermarket industry includes warehouse grocery stores, supercenters, conventional supermarkets, military commissaries, and limitedassortment and natural/gourmet-positioned supermarkets. The U.S. supermarket industry, had approximately $638.3 billion in sales in 2014, a 3% increase compared to the prior year, and a leading trade publication for the natural foods industry, natural product sales were approximately $98.6 billion, a 9% increase compared to the prior year.
3
Figure 1. Industry and Natural Product Sales in 2014. $700,000,000,000
$638,300,000,000
$600,000,000,000 $500,000,000,000 $400,000,000,000 $300,000,000,000 $200,000,000,000 $98,600,000,000 $100,000,000,000 $0 The U.S. supermarket industry
Natural product sales
Source: Author
The growth in sales of natural and organic foods is due to the following factors: •
Customers are aware of healthy products, and the important role that this factor can play in long-term consumption;
•
The population of well-educated and wealthier customers who are mostly in their middle age is increasing each year;
•
A younger generation of customers with a substantial influence on the food industry is increasing in size each year. These customers value health, sustainability, and organic products;
4
•
Customers prefer to have enough information about where and how food is produced; and
•
Customers have various environmental concerns.
CHAPTER II WHOLE FOODS MARKET Purpose and Core Values Whole Foods Market has a unique mission statement which has helped the company to be successful in the food industry and survive over the years. The purpose of the company, besides generating profits, is creating value for all of its major stakeholders, each of which is linked interdependently. The following core values express how the company achieves its purpose. •
Whole Foods Market (WFM) sells the highest quality natural and organic products
•
The company satisfies, gratifies and nourishes its customers
•
The company supports its team members, and pays substantial attention to their happiness and excellence
•
The company creates wealth through profits and growth
•
The company supports and serves its local and global communities
•
The company has great influence on environmental stewardship
•
The company creates ongoing partnerships with its suppliers
5
6
•
The company promotes the health of its stakeholders by providing healthy eating education (Whole Foods Market, 2015) Quality Standards and Differentiated Product Offering Whole Foods Market differentiates its stores from other supermarkets by
having high quality standards. For this reason, the company is able to attract and maintain a broad base of loyal customers. The company’s high quality standards prohibit hundreds of ingredients which can be found in other companies’ products, as well as farming, ranching methods, and numerous manufacturing practices that are not in standard form. The standards that the company follows include: •
No artificial flavors, colors, sweeteners, or preservatives.
•
No hydrogenated fats
•
No meat from animals raised with antibiotics
•
No synthetic nitrates added to cured meat,
•
Eggs from cage-free hens
•
Fifty banned body care ingredients
•
Wild-caught seafood rated for sustainability
•
Responsibly farmed seafood
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•
Cleaning products with full disclosure of ingredients, rated for safety and environmental impact (Whole Foods Market, 2015a). Whole Foods Market strongly emphasizes perishable foods, and has numerous
stores offering the widest selection of high-quality products produced with natural and organic ingredients. On average, a store can keep approximately 34,000 units, and stores with larger capacity can carry up to 52,000 units. Table 1 depicts a summary of annual percentage sales by product category for 3 consecutive years. Table 1 Annual Percentage Sales Perishables
2015
2014
2013
Prepared foods and bakery
19.0%
19.2%
19.0%
Other perishables
47.5
47.6
47.2
Total perishables
66.5
66.8
66.2
Non-perishables
33.5
33.2
33.8
100.0%
100.0%
100.0%
Total sales
Certified Organic Retailer In 2003, Whole Foods Market certified all of its stores, and became the first national “Certified Organic” grocer. Whole Foods Market is certified by California Certified Organic Farmers (CCOF). Based on CCOF’s Organic Certification Program for retailers Whole Foods Market follows all required regulations in producing organic goods according to stringent USDA guidelines including,
8
•
The company examines its current organic certification status for producing organic products
•
The company demonstrates a fully traceable audit trail for organic products by maintaining an extensive record-keeping process;
•
The company is able to protect its organic products from comingling with conventional products and contamination with prohibited materials;
•
The company is successful in the handling practices of organic product because of having training team members; and
•
The company opens its stores to on-site inspections by CCOF Additionally, certain facilities and product lines have been certified organic
through their own organic handling plans, including all regional distribution centers and several of its bake houses; the 365 Organic Everyday Value private label product line; and the Allegro Coffee™ line (Whole Foods Market, 2015a). Whole Foods Market offers more than 25,000 unique organic SKUs companywide. The company covers all areas of its stores including produce, packaged goods, bulk, dairy, frozen, meat, bakery, beer, coffee, tea, prepared foods, wine, cheese, nutritional supplements, body care, and vitamins. Approximately 30% of Whole Foods Market’s sales were organic in fiscal year 2015.
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Exclusive Brands Whole Foods Market recorded revenue of approximately $2.1 billion in sales in fiscal year 2015 and currently features approximately 5,300 SKUs in its exclusive brands program. Whole Foods Market’s exclusive brands accounted for approximately 14% of total retail sales in fiscal year 2015, up from 13% of total retail sales in fiscal year 2014. Approximately 45% of the company’s exclusive brand offerings are either Non-GMO Project Verified or certified organic. Other exclusive brands include, but are not limited to, Allegro Coffee, Whole Foods Market, Whole Paws, and Engine 2 Plant-Strong. Notable product launches in fiscal year 2015 included over 100 new and rebranded dietary supplements; pollinator-friendly almonds and almond butters; a collection of organic barbecue sauces, each with a unique regional flavor; a collection of body care products for babies; and an expanded item assortment for the holiday season. In addition to exclusive brands offered by the company, Whole Foods Market offers more than 550 exclusively branded products that are unique to Whole Foods Market in terms of size, flavor, or other attributes (Whole Foods Market, 2015a). Commitment to Local Whole Foods Market buys its products from local producers whose products meet its high quality standards, particularly those who are dedicated to environmentally friendly, sustainable agriculture. For some stores, “local” is defined as within a certain mile radius; for others, it means within the metro, state, or tristate area. As stated on the company’s website, Whole Foods Market has the opportunity
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to buy locally which allows WFM to offer its customers the freshest, most flavorful pick of seasonal products; it bolsters local economies by keeping money in the pockets of community growers; and it contributes to responsible land development and the preservation of viable green spaces. Whole Foods Market currently purchases produce grown locally on over 1,200 U.S. farms, and in fiscal year 2015, approximately 24% of the produce sold in its stores came from local farms (Whole Foods Market, 2015).
Figure 2. Produce Sold in WFM Stores.
24%
76%
Local Farms
Other
Whole Foods Market sponsors the Local Producer Loan Program, and budgets up to $25 million to support and promote local production. As of September 27, 2015,
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the company had disbursed approximately $18 million in loans to nearly 235 local producers under this program. Properties As of September 27, 2015, Whole Foods Market operated 431 stores: 412 stores in 42 U.S. states and the District of Columbia, 10 stores in Canada, and nine stores in the U.K. Whole Foods Market also own a building and a parking facility, which are leased to third parties. All other stores, bake houses, distribution centers, and administrative facilities are leased, and Whole Foods Market has options to renew most of its leases in 5-year increments. In addition, as of September 27, 2015, Whole Foods Market had 27 leased properties and adjacent spaces related to its acquisition of Wild Oats Markets in August 2007. Whole Foods Market is currently negotiating to terminate leases related to these locations (Whole Foods Market, 2015b). The number of stores operated by Whole Foods Market in U.S. states, the District of Columbia, Canada and the U.K. as of September 27, 2015, are depicted in the following figures.
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Number of Stores
Figure 3. Number of Stores Operated by Whole Foods Market. 100
80
80 60 40 20
2
10
1
9
0
25
24
20
11
10
4
3
4
1
1
Location
Alabama
Arizona
Arkansas
California
Canada
Colorado
Connecticut
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Source: Author
Number of Stores
Figure 4. Number of Stores Operated by Whole Foods Market. 40 30 30 20 10
14 4
2
5
9 1
0
6
6 1
2
2
5
1
Location Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Hampshire New Jersey
Source: Author
New Mexico
4
13
Number of Stores
Figure 5. Number of Stores Operated by Whole Foods Market. 30 25 20 15 10 5 0
Location New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
United Kingdom Utah
Virginia
Washington
Wisconsin
Source: Author Performance The following table shows the cumulative 3-year total return to shareholders of Whole Foods Market, Inc. common stock relative to the cumulative total returns of the S&P 500 Index, the S&P Food Retail Index, and the S&P Consumer Staples Index. The graph shows the performance of a $100 investment in Whole Foods Market’s common stock from the fiscal year 2013 to the fiscal year 2015 (see Appendix B). Table 2 Cumulative 3-year Total Return to Shareholders 2015
2014
2013
Whole Foods Market, Inc.
182.29
216.78
329.19
S&P 500
187.02
188.18
157.17
S&P Food Retail
237.10
204.81
201.94
S&P Consumer Staples
194.08
181.21
155.51
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Table 3 depicts Whole Foods Market’s share repurchase activity during the 12 weeks ended September 27, 2015. Table 3 Share Repurchase Activity Period July 6, 2015 - August 2, 2015 August 3, 2015 - August 30, 2015 August 31, 2015 - September 27, 2015 Total
Total number of shares purchased 917,329 7,456,576 1,567,884 9,941,789
Average price paid per shares $36.38 $32.36 $31.89 $32.66
Economic and Industry Factors Food retailing is a large, intensely competitive industry. The U.S. supermarket industry, which includes conventional supermarkets, supercenters, warehouse grocery stores, military commissaries, and limited-assortment and natural/gourmet-positioned supermarkets, had approximately $638.3 billion in sales in 2014, a 3% increase over the prior year. Within this broader category, natural product sales through retail channels totaled approximately $98.6 billion, increasing 9% over the prior year. Whole Foods Market has substantial competitors which are not limited to local, regional, national, and international conventional and specialty supermarkets, restaurants, warehouse membership clubs, online retailers, natural foods stores, smaller specialty stores, farmers’ markets, and home delivery. The company competes with each of its competitors on the basis of product selection and quality, customer service, convenience, price, store ambiance, and experience.
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Whole Foods Market offers the widest selection of high-quality organic products. The company also considers perishable foods in its production process. Whole Foods Market has been successful in attracting and maintaining a broad base of loyal customers by offering high quality products and standards. For this reason, the company has been able to differentiate its stores from other competitors. The company’s high quality standards “ban hundreds of ingredients commonly found in other stores as well as numerous manufacturing, farming, fishing, and ranching practices that don’t measure up” (Whole Foods Market, 2015a). Overview of Fiscal Year 2015 During fiscal year 2015, Whole Foods Market recorded total sales of $15.4 billion, an 8.4% increase over the prior year; an increase of 2.5% for each store; and average weekly sales per store of $715,000. The company’s sales per gross square foot was approximately $970. Earnings Before Interest, Taxes, Depreciation (EBITDA) was $1.3 billion, or 8.4% of sales, and diluted earnings per share were $1.48 (Whole Foods Market, 2015b). As of September 27, 2015, Whole Foods Market had approximately $218 million in available-for-sale marketable securities, and approximately $32 million in short-term investments classified as cash and cash equivalents (see Appendix C).
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Table 4 Whole Foods Market’s Investments
WFM's investments as of Sept. 27, 2015
Available-for-sale marketable securities
$218 million
Short-term investments (cash and cash equivalents)
$32 million
Purchasing and Distribution Whole Foods Market needs to meet its high quality standards, and for this reason the company is buying from selected local, regional, and national producers. Whole Foods Market purchases a majority of its products from regional and national sources, which enables the company to innovate categories, negotiate better discounts, and improve the supply chain. Whole Foods Market operates three seafood processing and distribution facilities, a specialty coffee and tea procurement and roasting operation, and 11 regional distribution centers that focus primarily on perishables distribution to its stores across the U.S., Canada and the U.K. The company also has three regional commissary kitchens and four bake house facilities, all of which distribute products to its stores. Whole Foods Market obtains other products through a combination of specialty direct distributors and wholesalers.
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United Natural Foods, Inc. (UNFI) is WFM’s largest third-party supplier, accounting for approximately 32.0% of its total purchases in fiscal year 2015. Whole Foods Market had a distribution agreement with United Natural Foods, Inc. in fiscal year 2015 to extend a long-term relationship between two companies. As a result, UNFI is WFM’s primary supplier of dry grocery and frozen food products through 2025 (Whole Foods Market, 2015a). Marketing Whole Foods Market’s strategy is to “allocate our paid media and marketing investments among strategic national and regional programs and our individual stores; and we benefit from valuable earned media, social media and word-of-mouth advocacy” (Whole Foods Market, 2015). The company has approximately 900 social media channels, and publishes more than 1,200 messages per day. The company’s overall social media footprint on Twitter, Facebook, Instagram and Pinterest is over 11 million. The company is capable of building deep community ties, which enables the company to connect more directly to the tastes and needs of local customers. This was achieved by having both global brand accounts and individual store accounts. In summary, the company has approximately 5 million Facebook followers and 5 million Twitter fans.
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Table 5 Whole Foods Market’s Marketing
Whole Foods Market’s Marketing
Social media channels
900
Facebook followers
5 million
Twitter fans
5 million
Overall social media footprint
11 million
Value Programs Whole Foods Market has identified important factors of the company’s sales growth, and is committed to delivering the highest standards of quality of all categories in each department. The company offers thousands of products to its customers, and strives to promote its products each month. Company products include non-GMO sale items and the widest array of organics. Whole Foods Market offers The Whole Deal coupon booklet and in-store value tours. Whole Foods Market also offers particular brand coupons for its customers online and in all stores in the U.S. and Canada. In addition, the company offers online services using its website featuring budget-friendly recipes, current store sales, and money-saving tips (Whole Foods Market, 2015)
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Global Responsibility Whole Foods Market provides ethically sourced, high-quality products and transparent information to its customers. Whole Foods Market tries to reduce its impact on the environment, and also actively participates in its local communities. Whole Foods Market’s stores have a separate budget for making contributions to community activities, and developing a high profile within the community. The company’s goal is to contribute at least 5% of its after-tax profits to nonprofit organizations annually (Whole Foods Market, 2015). Growth Strategy Whole Foods Market’s sales have grown rapidly through strong store sales growth, acquisitions, and new store openings, from approximately $93 million in fiscal year 1991, to approximately $15.4 billion in fiscal year 2015, or a 24-year compounded annual growth rate of approximately 24% (see Appendix B). Whole Foods Market’s growth strategy is to open new stores in existing trade areas as well as new areas, including international locations. New stores may be as small as 20,000 square feet or as large as 75,000 square feet, the majority fall in the range of 35,000 to 45,000 square feet. In FY 2015, Whole Foods Market planned to launch a second store format, 365 by Whole Foods Market, which expanded its growth opportunity to beyond 1,200 stores. The mission of 365 by Whole Foods Market is to bring healthy and affordable food to more customers in more places (Whole Foods Market, 2015) (see Appendices E, F). Store growth for Whole Foods Market is summarized in the Table 6.
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Table 6 Store Growth for Whole Foods Market 2015
2014
2013
399
362
335
38
34
26
Acquired stores
-
4
6
Relocated stores
-6
-1
-5
431
399
362
Stores at beginning of fiscal year Stores opened
Stores at end of fiscal year
Competition Food retailing is a fiercely competitive industry. Whole Foods Market’s competition is in local, regional, national, and international conventional and specialty supermarkets, warehouse membership clubs, natural foods stores, online retailers, restaurants, and home delivery companies. The company competes based on product selection and quality, customer service, price, or a combination of all of these. Some of Whole Foods Market’s competitors are profiled below. Kroger Kroger has a diversified portfolio of successful formats, including food/drug combo stores, food discounters, neighborhood perishable-oriented upscale format, and super centers. Kroger launched its own brand of premium-quality natural and organic products to compete in natural foods. The company’s Naturally Preferred line features include baby food, pastas, cereal, milk, and snacks.
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Trader Joe’s Trader Joe’s has grown its expansion to 344 stores in 25 states and Washington, D.C. The annual sales of Trader Joes are roughly $8 billion. Trader Joe’s growth strategy is to be careful about unplanned expansion of its stores that could be risky for its culture, brand affiliation, and value proposition. For this reason, Trader Joe’s only opened five new stores in 2010. Wegman’s Wegman’s is one of the leading regional gourmet store chains in the United States. The company offers a broad range of products with 60,000 SKUs, including 400 specialty cheeses. It has developed a European-style open-air market atmosphere, with such offerings as artisan breads baked in the stores’ Spanish-style brick ovens and inviting displays of meats, fresh seafood, and international foods. Wegman’s stores are large with wide aisles, exposed ceilings, granite countertops, and terrazzo floors. Wegman’s offers a full range of healthy food choices, such as hormone-free meats and products that are free of partially hydrogenated oils.
CHAPTER III CASE ANALYSIS Strategic Issues and Key Problem The grocery industry is a competitive one, with many competitors; for this reason, the key issue is how Whole Foods Market can keep its leadership position in the market and be the first mover in the industry to use healthier, organic ingredients; and how Whole Foods Market can continue its success by attracting nonusers (consumers who don’t normally purchase natural and organic products), convince current customers to buy extra and more often, and gain customers from WFM’s competitors. Key Problem: The products in this industry have low product innovation and fewer differences; thus it is easy for customers to switch stores.
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CHAPTER IV EXTERNAL AND INTERNAL ANALYSIS External Analysis External analysis consists of PEST Analysis and Porters Five Forces of Competition. PEST Analysis PEST analysis consists of Political and Legal Issues, Economic issues, and Socio-cultural and Demographic Information. Political and legal issues. There were no government issues prior to 1990. The 1990 passage of the Organic Food Production Act, “started the process of establishing national standards for organically grown products in the United States” (Thompson, Strickland, & Gamble, 2009). This standardization was based on customer concern as to what was being called organic. Economic issues. As long as consumers are able to afford the premium cost of purchasing organic foods, the market economic outlook is positive. Sociocultural and demographic information. In the United States, there will be an increase in consumption spending due to an increase in the senior population. In Europe, the population is increasing and there are significant suppliers of organic foods with built-in acceptance among the people there. As more people become health conscious, demand for organic food increases as well. The major markets for Whole Foods Market are the United States, the United Kingdom, and Canada.
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Technology. Whole Foods Market has replaced its core legacy systems with scalable solutions, and leveraged technology advances to deliver an improved end-toend shopping experience. The company had substantial achievements over the last year including the implementation of Workday, an online human resources management system; the launch of a new and robust Whole Foods Market mobile app focusing on shopping utility, recipes and store information and events; a partnership with Apple Pay; and the initial rollout of a new customer platform centered around a unified point-of-sale system. Whole Foods Market also implemented online delivery in more than 60 stores in 16 cities (Whole Foods Market, 2015). Porters Five Forces of Competition Porters Five Forces of Competition consists of bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threat of substitute products, and intensity of rivalry. Bargaining power of buyers. The bargaining power of the customer is considered low. Even though organic consumption trend is increasing, most consumers buy products individually from the local store. Customers also react according to product prices when economy is slow. However, the new regulations for controlling organic products give more advantages to the big chain companies. Combining the complexity of labeling products as organic food and customer preferences for convenience brings customers down to more narrow choices such as Whole Food Market, which expands its store according to customer geography and
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provides better accessibility and assortment with acceptable prices (U.S. Grocery Shopper Trends, 2012). Bargaining power of suppliers. Suppliers include dairy, beef and pork, confectionery, and fruit and vegetable wholesaling. With the demand for organic products growing, power will typically increase. These products are very important for Whole Foods and other grocers that sell natural and fresh products. At this time Whole foods is still able to control its suppliers because the company buys product in bulk and distributes to its subsidiaries. However, the number of suppliers is still low compared to the growth in customer demand; this bargaining power could change any time by the emergence of competitors who have larger customer bases and stronger purchasing power. Threat of new entrants. Potential entrants into the grocery market is limited, with small and medium size stores representing more than 70% of the industry. With restrictions from local suppliers and providers, it is difficult for small and medium size business to convert themselves to compete with large chain stores. The freshness of the products creates higher costs when small and medium businesses deal with supply chain management. Moreover, big companies like Whole Foods will acquire their potential competitors if they see an advantage on the store location. Threat of substitute products. Threat of substitute product is considered high because the price of organic foods is generally higher than regular grocery items. Also, customers might consider other healthy options such as natural or non-GMO groceries which customer also view as the healthy options with cheaper prices.
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Intensity of rivalry. The supermarket and grocery industry is a fiercely competitive environment. As mentioned in the industry analysis section of this study, small and medium size operations represent almost 70% of the industry’s revenue while the largest four companies account for the rest. Therefore, the market concentration is still low. Moreover, other wholesale superstores such as Walmart, which also provide groceries (with 25% lower prices than organic products) are considered to be new major players in the industry (Shelly, 2014). Internal Analysis SWOT Opportunities. Increasing demand for organic products. The demand for organic and natural foods has risen over the years due to increased awareness of the importance of such foods in diets. According to industry reports, the U.S. organic industry registered a 12% increase in 2013, fetching sales of nearly $35 billion, of which organic food sales alone crossed the $30 billion mark and accounted for about 90% of organic sales in the U.S. This trend is expected to grow even further. In 2018, the market is forecast to reach nearly $45,901.4 million, an increase of 34.1% since 2013. A recent study by industry sources shows that nearly 80% U.S. families reported the purchase of organic products “every once in a while,” especially with parents opting to provide healthier foods to their children. This has led to an increase in the frequency of organic foods purchases in the country. Moreover, the rise in organic sales and trust in organic products can also be credited to awareness of the USDA Organic seal. This
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seal convinces consumers to trust and buy products when shopping for organics (Nutraceuticals World, 2013). Increasing popularity of private labels. The recent increase in popularity of generic and private label products in the U.S. has led to the growth in their demand since they provide an attractive alternative to expensive national brands. This appeals not only to people with limited income but also to upper-income people with high disposable budgets. According to industry sources, private label sales increased by approximately 3% to $109 billion in 2012, including all major U.S. retailers. Since 2009, the average annual growth of store brands sales reached approximately 5%, compared to that of national brands sales at approximately 2%. For instance, Whole Foods alone offers more than 2,600 products under its store brands which include specialty and organic coffee, tea and chocolate drinks via its subsidiary Allegro Coffee Company. During 2013, approximately 16% of Whole Food’s nonperishable sales and approximately 12% of its retail sales came from exclusive brands. Thus, the increasing popularity of private label products is expected to favor the company's sales and profit margins (Whole Foods Market, 2013). Health conscious consumers. Over the past couple decades consumers have been becoming more health conscious and eating right. WFM can take advantage of this new outlook on the health foods industry by acquiring new customers. Also, Whole Foods Market should spend more money on advertising to attract these healthconscious customers.
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Threats. Intense competition. The food retailing industry is fiercely competitive. Local, regional, national, and international conventional and specialty supermarkets, organic foods stores, warehouse membership clubs, farmers' markets, small specialty stores, and restaurants compete based on product selection, quality, customer service, price, or a combination of all of these. Most supermarkets offer limited choices while some have expanded their selections to aggressively pursue the market. Major competitors include Safeway Inc., The Kroger Co., Publix Super Markets, Inc., Trader Joe's, and retail giant Walmart. These are larger and have more resources than rest in the industry. For instance, Safeway’s revenues were $36,139.1 million in December FY2013, and those of The Kroger Co. were $98,375 million in January FY2014. In comparison, revenues for relatively smaller retailers like Whole Foods Market were $12,917 million in FY2013. Thus, intense competition could negatively drive sales, market share, and margins for relatively smaller names against the giants in the industry (Market Line, 2014). Stringent regulations and laws. The natural and organic foods industry is subject to many health, food labeling, and sanitation-related regulations and laws. As Whole Foods operates in this industry, it must abide by these regulations as well. Moreover, the company must comply with provisions regulating licensing for beer, wine, and other alcoholic beverages as well as other provisions and standards for formulation, manufacturing, packaging, labeling, processing, etc. set forth by federal agencies like the Food and Drug Administration (FDA), the Federal Trade
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Commission (FTC), the Consumer Product Safety Commission (CPSC), USDA, and Environmental Protection Agency (EPA). Failure to follow these could lead to penalties resulting in extra compliance costs and reduced margins as well as seizure of licenses to sell (Whole Foods Market, 2015). Strengths. Whole Foods Market has two narrow markets that it serves. Organic differentiation is the keystone of Whole Foods’s mission. This means Whole Foods Market uses a focus differentiation strategy, highest quality brand reputation, dedication to the social ethics of organics, industry-best customer service, strong supply chain, and developing a private label of organics. Whole Foods Market has had experience in the natural/organic retailing industry since 1980. For the past 30plus years it has built over 300 large customized stores in North America and also in the United Kingdom. Whole Foods Market is known to provide the highest quality of products (Whole Foods Market, 2015a). Weaknesses. Weak international operation. The company has a weak international operation with just three stores in Canada and six in the UK. The company’s operations in the UK and Canada are not yet large enough in purchasing and distribution, resulting in relatively high product prices. Small amounts on advertising and marketing. Whole Foods relies heavily on word-of-mouth publicity, which is a disadvantage in comparison to its competitors who use print, television, and online media. The company spends small amounts on
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advertising and marketing compared to its competitors. In 2007, the company spent 0.5% of its total revenues on advertising (Whole Foods Market, 2007) Value Chain Whole Foods’s three primary activities are inbound logistics, operations, and services. With “Whole Foods, Whole People, Whole Planet” as its mission statement, inbound logistics, which is the receiving, storing, and distributing inputs of a product is a primary activity of Whole Foods Market (Dess, Lumpkin, Eisner, McNamara and Kim, 2012). The company sells only pure and unaltered products; it achieves this by promoting its own house brands such as Whole Catch, Whole Creamery and 365 Everyday Value label as substitutes for processed foods (Conway, 2007). For example, Oreos Cookies are replaced by 365 Everyday Value organic cookies and cream sandwiches. In addition, Whole Foods purchases its salmon from an on-site salmon buyer in Alaska who has long-standing relationships with noncommercial fishermen. This supply line ensures that wild-caught salmon is available for sale within 48 hours, guaranteeing its freshness and quality (MIT Sloan Management, 2010). Whole Foods’s second primary activity is its operations which include facility operations associated with transforming inputs into final outputs. (Dress et al, 2012). This can be seen from the empowerment of store managers who are allowed to stock up to 10% of the store with products they feel are suitable for the local community. Through this, Whole Foods is able to cater to the unique tastes of the community they
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are based in as well as decentralizing the company as a whole. The passionate and knowledgeable employees of Whole Foods contribute by affecting the customers with enthusiasm, making their shopping experience fun and exciting, increasing the chance of repeat customers, and generating more revenue (MIT Sloan Management, 2010). In addition, Whole Foods has gained competitive advantage by being the first national-certified organic grocer under the USDA’s organic standard. Whole Food’s third primary activity is its service which includes actions related to providing service to enhance the value of the product it sells (Dress et al, 2012). Whole Foods goes the extra mile by checking for defects in fragile products and taping containers of items, securing them for the journey back (MIT Sloan Management, 2010). Personalized service is provided through in-store specialists to assist customers in making decisions suited to their needs. Besides the above primary activities, Whole Foods also has several support activities which play a back-of-the-house role in contributing to the company. First, the HR management of Whole Foods plays a part by mandating a “living-wage” minimum of $13.50 per hour to its employees; however, an executive’s maximum pay can be only 19 times the hourly wage, resulting in a flat hierarchy (MIT Sloan Management, 2010). Whole Foods encourages transparency by implementing a no secret policy whereby all company information is available to all employees. Whole Foods’s firm infrastructure is a significant supporting activity. The company culture supports giving back to society and WFM donates 5% of its profits to the communities in they are based in (Conway, 2007). Whole Foods also instills
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decentralization by being transparent in their management, gaining the trust of their employees. Grand Strategy The company’s strategy is to produce the healthiest products in the market. The strategy is well matched to recent development and conditions in the natural and organic foods segment of the food retailing industry; it focuses on supplying the healthiest products to consumers and is meeting its goal by never compromising on quality. The strategy of expansion and opening of new stores is matched with the rising demands of the customers as they are becoming more aware of healthy lifestyles by meeting the labeling standards of USDA which makes customers more educated about the merits of various organic products. Moreover, by looking at the certified organic farms in 2005 and in 2006, farmers are becoming more interested and attracted to organic farming. In order to be differentiated Whole Foods has a skilled and efficient workforce, attractive colorful designs of stores, environmentally friendly operations and facilities, and social well-being that are required to meet the standards set by USDA (United States Department of Agriculture, 2015). Market Analysis Target consumer. WFM’s primary target consumers are middle to high income customers because of having high prices. WFM targets both genders, mainly educated females who like to prepare their own food with organic and healthy products especially for their children; therefore, demand for organic food increases.
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Channels. The company owns two produce procurement centers which facilitate the procurement and distribution of the majority of the produce it sells. It also operates a national meat purchasing office, a confectionary, four seafood processing and distribution facilities, a specialty coffee and tea procurement and brewing operation, and nine regional distribution centers, which distribute a full range of products to its stores across the U.S., Canada, and the United Kingdom. In addition, it has five regional commissary kitchens and 11 bake house facilities, all of which distribute products to its stores. Other products are typically procured through a combination of specialty wholesalers and direct distributors” (Whole Foods Market, 2015b). Marketing strategy. WFM’s differentiated-focused strategy and store expansion throughout the world allow the company to capitalize with a growing number of buyers and suppliers of organic products. Whole Foods Market has two narrow markets that it serves. Organic differentiation is the keystone of Whole Foods’s Mission. This means Whole Foods Market uses a focus differentiation strategy, highest quality brand reputation, dedication to the social ethics of 16 organics, industry-best customer service strong supply chain, and developing a private label of organics. WFM’s marketing level is market penetration. In the past 30-plus years, it has built over 300 large customized stores in North America and the United Kingdom. Whole Foods Market is known to provide the highest quality of products in its stores. Whole Foods Market includes the high prices for its products
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which is a direct result of the company’s focus on producing the finest products (Wholefoodsmarket.com). Core and distinctive competencies. Whole Foods Market has three core competencies: the ability to go out of its way to appeal to its customers by taking every advantage of the customer expectation exceeding their reputations; the mutual but beneficial relationship between Whole Foods and its suppliers that allows for deep discounts and favorable terms; and a strong and committed mission and vision that allows Whole Foods to be perceived by the public as a trustworthy firm that values relationships over materials. This in turn has led to an increase in investors and being voted as one of the best companies to work for. Financial Analysis Liquidity Ratios Liquidity ratios are extremely important tools that measure a company’s ability to meet short term debt and also shed light on how a company is positioned to invest in potential projects. (See Table 7 and Figure 6.) Current ratio. The current ratio is the most simplistic way to measure the company’s liquidity. The formula is the company’s current assets divided by its current liabilities. If the ratio is higher than 1, it means that the company will more than likely be able to meet any payments or obligations in the near future. Unfortunately for WFM this ratio has declined over the previous 3 years to fall to 1.23, compared with Walmart Corporation (WMT) with a ratio of .88. WFM is not
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performing badly; however, since this ratio should be greater than 1; it may be concluded that both WFM and WMT are experiencing some liquidity issues. Quick ratio. This ratio is a more in-depth approach to judging the firm’s liquidity because it does not include items such as inventory that take longer to convert to cash, as well as items such as accounts receivable and short-term marketable securities. This ratio also should be greater than 1. WFM’s ratio has fallen from 1.44 to 0.83 over the last 3 years. Comparing this to WMT’s ratio of 0.24, there seems to be a problem with cash on hand for both companies because of having ratio less than 1. Times interest rate. This ratio is another way to determine a company’s liquidity and judge whether a company will be able to pay its debts or not. The formula is the company’s gross profit divided by interest expense, a more in-depth approach to judging the firm’s liquidity because it does not include items such as inventory that take longer to convert to cash, as well as items such as accounts receivable and short-term marketable securities. This ratio also should be greater than 1. WFM’s ratio has fallen from 1.01 to 0.78 over the last three years. Comparing that number to WMT (10.55), it seems that WFM has a problem with cash on hand and paying its debts.
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Table 7 Liquidity Ratios Liquidity Ratios
2015
2014
2013
WMT-2014
Current Ratio
1.23
1.40
1.82
0.88
Quick Ratio
0.83
1.05
1.44
0.24
Times Interest Rate
0.78
1.24
1.01
10.55
Figure 6. Liquidity Ratios FY2014. 12
10.55
10
Ratios
8 6 4
1.4 1.05 1.24
2 0
WFM-2014 1.4 1.05 1.24
Current Ratio Quick Ratio Times Interest Rate Current Ratio
Source: Author
0.88
Quick Ratio
Times Interest Rate
0.24
WMT-2014 0.88 0.24 10.55
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Leverage Ratios Leverage ratios are an important tool to shareholders to measure how the company is positively using and managing its debt in order to be financially healthy. Investors need to be cognizant of how much debt the firm takes on because there is more risk involved. If the company does not manage its debt properly, in the worst case, shareholders can lose what they have invested in the company. The formula is the company’s total debt divided by stock plus paid in capital. A low debt to equity ratio conveys that the company doesn’t owe a lot of money and is, in turn, a less risky company to invest in. (See Table 8 and Figure 7.) Debt to equity ratio. Looking at the debt to equity ratio of Whole Foods Market in 2015 (1.64) it appears that this number has increased from 0.67 in 2013 to 1.64 in 2015. Comparing WFM with Walmart, WMT has a ratio of 0.57 which is much lower and WFM is not doing well compared to WMT. So, WFM should take responsibility and manage its borrowing or sales of shares. Debt to assets ratio. Another way to assess whether leverage is acceptable is counting debt to assets. WFM has a high rate of asset debt, and this is not good for the company. Leverage can be affected by borrowing or sales of shares. The formula is the company’s total debts divided by total assets. Looking at the debt to assets ratio of Whole Foods Market in 2015 (1.08) it appears that this number has increased from 0.47 in 2013 to 1.08 in 2015. Comparing WFM with Walmart, WMT has ratio of 0.22 which is much lower than WFM and WFM is not doing well compared to WMT. So,
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WFM should take responsibility and manage its borrowing or sales of shares. WFM is looking positive and will be able to easily pay its interest expense. Table 8 Leverage Ratios Leverage Ratios
2015
2014
2013
WMT-2014
Debt-Equity Ratio
1.64
1.57
0.67
0.57
Debt-Assets Ratio
1.08
1.04
0.47
0.22
Figure 7. Leverage Ratios FY2014. 1.8
1.57
1.6 1.4
Ratios
1.2
1.04
1 0.8
0.57
0.6 0.4
0.22
0.2 0
WFM-2014 1.57 1.04
Debt-Equity Ratio Debt-Assets Ratio Debt-Equity Ratio
WMT-2014 0.57 0.22
Debt-Assets Ratio
Source: Author Activity Ratios Efficiency or activity ratios are good tools to use to assess how the firm is managing its assets and liabilities. How quickly a firm can turn over its assets and
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inventory while managing receivables can help investors judge the performance of the company. WFM’s ratios are illustrated in Table 9 and Figure 8. Asset turnover. Asset turnover measures how well the firm is managing short and long term assets. The formula is the company’s net sales divided by its incomeproducing assets. The higher the turnover the better the company is at doing this. WFM had a ratio of 2.68 in 2015. Comparing this ratio to WMT’s ratio (2.34), it can be concluded that WFM is doing well and its performance in managing its incomeproducing assets is better than WMT’s. Fixed asset turnover. Asset turnover measures how well the firm is at managing its short and fixed assets. The formula is the company’s net sales divided by its fixed assets. The higher the turnover the better the company is at doing this. WFM had a ratio of 9.97 in 2015. Comparing this ratio to WMT’s ratio of 7.78, it can be concluded that WFM is doing well and its performance in managing its fixed assets is better than WMT’s. Total asset turnover. Asset turnover measures how well the firm is at managing income-producing assets. The formula is the company’s net sales divided by total assets. The higher the turnover the better the company is at doing this. WFM has a ratio of 2.68 in 2015. Comparing this ratio to WMT’s ratio of 2.33, it can be concluded that WFM is doing well and its performance in managing its assets is better than WMT’s. Inventory turnover. The formula is the company’s cost of goods sold (COGS) divided by average inventory. When measuring the company’s inventory
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turnover WFM is performing better than WMT. WFM had a ratio of 21.20 in 2015 while WMT had a ratio of 8.08. Therefore, we can conclude that WFM is doing well and its performance in managing its inventory is better than WMT’s. Accounts receivable turnover. The formula is the company’s net credit sales divided by half of beginning accounts receivable and ending accounts receivable. Over the last 3 years WFM’s receivables turnover ratios, which measure how quickly the company receives payment from its customers, are generally stable. Receivables data was not available for 2013; for 2014 and 2015 the average is approximately 40 (40.27 in 2014 and 39.31 in 2015). On the other hand, the number for Walmart is 70.85. Although, the result for WFM is lower than WMT, the company (WFM) is doing a good job collecting payment from customers and is also doing a good job with how it goes about granting credit to its customer base. Table 9 Activity Ratios Activity Ratios
2015
2014
2013
WMT-2014
Asset Turnover
2.68
2.52
2.29
2.34
Fixed Asset Turnover
9.97
8.08
6.52
7.78
Total Asset Turnover
2.68
2.47
2.33
2.33
Inventory Turnover
21.20
21.40
19.39
8.08
Receivable Turnover
39.31
40.27
36.64
70.85
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Figure 8. Activity Ratios FY 2014. 80 70.85 70 60
Ratios
50 40.27 40 30
21.4
20 10 0 WFM-2014 WMT-2014
8.08
8.08 7.78 2.52 2.34 Asset Turnover 2.52 2.34
2.47 2.33 Fixed Asset Turnover 8.08 7.78 WFM-2014
Total Asset Turnover 2.47 2.33
Inventory Turnover 21.4 8.08
Receivable Turnover 40.27 70.85
WMT-2014
Source: Author Profitability Ratios Profitability ratios are a good tool to use to assess out how well the firm can achieve profits from its operations. Ratios results are listed in Table 10 and Figure 9. Profit margin on sales. The formula is the company’s gross income divided by sales. The profit margin on sales of WFM has been reduced by roughly 1 percentage point a year over the last 3 years (0.04 in 2013, 0.04 in 2014, and 0.03 in 2015) but is nearly identical with WMT’s ratio of 0.04 in 2014. A possible reason for this is that the firm needs to offer better value to customers by reducing prices while the economy has become more particular about how they view their buying habits.
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Operating margin. The formula is the company’s operating earnings divided by total revenue. In this case, as depicted in the table below, the operating margin of WFM has been reduced by about 1 percent (from 0.07 to 0.06). Compared to WMT with a ratio of 0.06 in 2014, WFM is doing well. Return on sales. The formula is the company’s gross income divided by total sales. In this case, the return on sales of WFM has been reduced from 0.36 in 2013 to 0.35 in 2015. Compared to WMT with a ratio of 0.25, WFM is doing better than WMT in managing its expenses. Return on assets (ROA). The formula is the company’s net income divided by average total assets. The company has seen a very good return on assets of 0.10 in 2013 and 0.09 in 2015. Compared to WMT’s ratio of 0.09, it can be concluded that both WFM and WMT are performing well in turning their assets into profit. The ROA ratio takes into account the after-tax interest expense because some of the assets may be financed by both debt holders and equity holders. Return on equity (ROE). The formula is the company’s net income divided by average owner’s equity. WFM’s return on equity, which takes the company’s net income divided by the average shareholder’s equity, is lower than WMT’s rate which is 0.21. In 2014, the number was higher at 0.15, but 0.14 in 2015. This can be explained by less shareholder equity with the same amount of net income.
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Table 10 Profitability Ratios Profitability Ratios
2015
2014
2013
WMT-2014
Profit Margin on Sales
0.03
0.04
0.04
0.04
Operating Margin
0.06
0.07
0.07
0.06
Return on Sales
0.35
0.36
0.36
0.25
Return on Assets
0.09
0.10
0.10
0.09
Return on Equity
0.14
0.15
0.14
0.21
Figure 9. Profitability Ratios FY2014. 0.4
0.36
0.35 0.3
Ratios
0.25 0.25
0.21
0.2
0.15 0.15 0.1 0.05 0
WFM-2014 WMT-2014
0.04 0.04 Profit Margin on Sales 0.04 0.04
Operating Margin
Return on Sales
Return on Assets
Return on Equity
0.07 0.06
0.36 0.25
0.1 0.09
0.15 0.21
WFM-2014
Source: Author
0.1 0.09
0.07 0.06
WMT-2014
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Market Valuation Ratios Market Value ratios are important tools to assess how highly a publicly traded firm is valued by current and prospective investors. The formula is the company’s price divided by dividend. If all of the company’s other financial ratios are in good standing, the market value ratios should support the stock’s price. The ratios results are listed in Table 11 and Figure 10. Price to earnings (P/E) ratio. Price to earnings ratio tells an investor how much the market is willing to spend for a company’s earnings. The higher the P/E ratio the more confidence the marketplace has that the firm’s stock price will rise. WMT’s P/E ratio is higher but very consistent with the industry average. In this case, WFM had a ratio of 16.65 in 2014 and a ratio of 18.59 in 2015 which is higher than WMT’s ratio of 15.39 in 2014. Therefore, it can be concluded that WFM is performing better than WMT. Table 11 Market Valuation Ratios Valuation Ratios
2015
2014
2013
WMT-2014
PE Ratio
18.59
16.65
13.78
15.39
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Figure 10. Market Valuation Ratio FY2014.
WMT-2014, 15.39, 48%
WFM-2014, 16.65, 52%
WFM-2014
WMT-2014
Source: Author
Overall, the company’s performance in meeting its financial requirements and generating profit compares favorably to Walmart. Whole Foods’s differentiatedfocused strategy and its superior product presentation skills have led to a much larger profit margin compared to its strongest competitors.
CHAPTER V ALTERNATIVES 1.
Faced with unprecedented economic challenges and numerous
competitors, Whole Foods needs to take an aggressive approach to offset any challenges. By anticipating continued interest in healthy eating, Whole Foods should target children as their new customer base with the development of an organic line of products designed for children. 2.
With increased competition and economic conditions in the states
where they are located, Whole Foods needs to expand its marketing strategy toward a broader, interactive one. The use of Facebook and Twitter could be useful tools on the local and global level to communicate with current and future customers. 3.
Whole Foods also needs to continue its commitment to the
environment. Expanding on programs already in place, such as eliminating disposable plastic bags, charitable donations, and green power use, Whole Foods should take part in programs that promote animal welfare on farms and ranches. 4.
Value perception is one of the most important strategies that needs to
be focused on if Whole Foods is to continue competing with low cost competition. Providing coupons, budget conscious recipes, and money saving tips are services that customers value. An in-store value guide can help customers
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locate the best deals in the store. Along with a friendly and educated staff, these strategic alternatives can provide Whole Foods with the tools necessary to overcome the challenges it currently faces.
CHAPTER VI RECOMMENDATIONS Strategic Recommendations 1.
Increase brand awareness, image, and loyalty through various
forms of advertising and public relations. •
Advantages: Promoting not only the Whole Foods brand but
organic foods in general should increase sales of current customers and continue bringing in new customers. Whole Foods already holds a strong position in the market, and by increasing the awareness of and demand for organic foods it will inevitably increase its market share and profits. Whole Foods can continue to increase its brand image through community service in the local operation areas to enhance brand loyalty. •
Disadvantages: Whole Foods traditionally relies on word of
mouth advertising and also its continuing customers, an increase in advertising costs would initially affect the bottom line. If a large scale advertising plan does not generate the projected sales, it could have a very detrimental effect on the company’s long term performance. This approach is very attractive and Whole Foods has a great ability to pursue this alternative. Whole Foods would be penetrating the market through advertising and promotions, and would be increasing its brand image and brand loyalty
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through community service. Strategy Formulation: Given its position on the Generic Strategy Matrix (exploit competitive position), Whole Foods needs to focus its strategy on market penetration. 2.
Determine the most effective and efficient store size for each
market location. •
Advantages: Determining the best store size to serve the area it
is operating in could help Whole Foods attract and keep the “in and out” shopper that they could miss out on with the larger facilities. Another advantage would be reducing overhead costs by reducing store sizes where necessary. Whole Foods could become more efficient in customer service by improving its employee to shopper ratio. •
Disadvantages: Conducting an analysis of appropriate store
sizes would be very costly. Surveying the market area and determining a precise answer would be extremely difficult. Reducing future store sizes would limit the volume at which they operate and could limit the assortment of products offered. This approach has a medium attractiveness, and a medium ability to achieve. It would be difficult for Whole Foods to overcome the obstacles in place to succeed in this venture. Tactical Recommendations •
Sustaining Competitive Advantage: Whole Foods can use its
strengths and opportunities to achieve a sustained competitive advantage in
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the marketplace by increasing its presence in markets in both the U.S. and abroad. The company is moving forward slowly with expansion plans with only one store currently under development as of September 2010 (TD Ameritrade, 2011). With real estate at all-time lows in most markets, the company could leverage some of the equity and cash it currently has on hand to purchase real estate where future stores could be opened. With the instability and uncertainty in the economy investing in real estate would allow for future growth or future profits. •
Whole Foods should also continue to find new opportunities to
grow its business with nonbelievers in the organic way. By sanctioning health outcome studies that look at the long term health implications of eating foods high in preservatives, steroids, pesticide content, etc., it is possible Whole Foods might prove overall better health outcomes when people go organic. There is also risk associated with sanctioning this sort of study as it might prove that organic foods offer no better health outcomes than traditional foods. The risk reward would be significant should organics be found to provide better health outcomes. Store sales would skyrocket and the general population would be more willing to purchase organic foods at a higher premium should organics prove to be safer than traditional foods.
CHAPTER VII IMPLEMENTATION PLAN Factors to be considered while implementing these recommendations: •
Assumptions: The demand for organic and health foods will continue to increase; therefore, market share and profits will also continue to increase with the rising demand in this market.
•
Identify critical success factors: The consumer continues to view Whole Foods as the best and primary provider of organic and health food.
•
Identify key risks: Devoting too much of its resources to advertising and losing focus on company operations. Steps
1. Increase brand awareness, image, and loyalty through various forms of advertising and public relations. This will help Whole Foods further penetrate the market and continue to increase market share and profits. 2. Whole Foods should allocate 95% of available resources to the first recommendation and the remaining 5% should be concentrated on determining store sizes and locations for the highest customer acquisition.
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3.
As the number one retailer in the natural and organic food industry, Whole Foods Market should expand its business to Europe where potential economic growth awaits. Building a positive relationship with suppliers in Europe can help to meet the organic demands in United States, Canada and the United Kingdom. However, Whole Foods should never neglect its European consumers because of its large population and acceptance of organic produce. •
Short term implementation: Whole Foods could hold radio station promotions for the local community to gain new customers and use billboard ads to grow the Whole Foods name to grab customers who might not have awareness of the local areas.
•
Long term implementation: Launch national advertising promotions by sponsoring a large health-related event and gain statistics on the target market TV shows and advertise on these channels at the given time of the target markets’ attentiveness.
CHAPTER V CONCLUSION In conclusion, Whole Foods Market is in good standing with the competition. Whole Foods seems to have a strategy that is working for them; however, it may need to emphasize a bit more on advertising and attracting more health conscious people with pamphlets at gyms. The company is in a position to change people’s lives forever and future generations as well, as many companies are doing now, finding their consumers and keeping those customers for life. Whole Foods Market is the leader in the niche market of natural and organic foods and is facing strong competition from the superstores such as Walmart, Costco and many other grocery retail chains. Internally, the company looks great with not too much to worry about but externally it must act now before Walmart and other grocery retailers begin taking its profits.
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REFERENCES
55
REFERENCES U.S. Grocery Shopper Trends. (2012). 2012 executive summary. Retrieved from http://www.icn-net.com/docs/12086_FMIN_Trends2012_v5.pdf Banjo, S. (April 10, 2014). Expensive organic food beware: Wal-Mart declares a price war. Wall Street Journal, Retrieved from http://blogs.wsj.com/corporateintelligence/2014/04/10/expensive-organic food-beware-Wal-Mart-declares-a-pricewar/ Conway, S. (2007). Whole Food Market: An industry leader? Graduate School of International Relations and Pacific Studies, 1-19. Dress, G. Lumpkin, G. Eisner, A. McNamara, G. & Kim, B. (2012). Strategic management: Creating competitive advantages. New York, America: McGraw-Hill Irwin. Elstrott, J. (February 3, 2015). Hoover’s Company Records. Whole Foods Market, Inc. MIT Sloan Management. (2010). Trader Joe’s vs. Whole Foods Market: A Comparison of Operational Management. MarketLine, (2014). Whole Foods Market, Inc. Swot analysis, 4-8, Retrieved from http://web.b.ebscohost.com.mcc1.library.csulb.edu/ehost/pdfviewer/pdfviewer?sid=1 11b0671-0fe3-4db78433-d9e3b15aba07%40sessionmgr111&vid= 4&hid=105 McKitterick, W. (2015). IBIS World Industry Report 44511. Supermarkets & Grocery Stores in the US.
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Nutraceuticals World. (2013). 80% of U.S. Parents Report Buying Organic. Retrieved from http://www.nutraceuticalsworld.com/contents/view_breaking-news/2013-04-10/80of-us-parents-report-buying-organic TD Ameritrade. (2011). Why TD Ameritrade? Retrieved from https://www.tdameritrade.com/service/why-td-ameritrade.page?a=bri&cid=PSBRA &ef_id=V6anDQAAAf7QK1A2:20160807034054:s&s_kwcid=AL!2521!10!108084 97298!25005612684&referrer=https%3A%2F%2Fwww.bing.com%2FOrganic Foods Production Act of 1990. (November 10, 2005) Retrieved from https://www.ams.usda.gov/sites/default/files/media/Organic%20Foods%20Production %20Act%20of%201990%20%28OFPA%29.pdf United States Department of Agriculture. (2015). National Organic Program. Retrieved from http://www.ams.usda.gov/AMSv1.0/NOPOrganicStandards Whole Foods Market. (2007). 2007 Annual report of Whole Foods Market, Inc. Retrieved from https://www.wholefoodsmarket.com/sites/default/files/media/Global/Company %20Info/PDFs/ar07.pdf Whole Foods Market. (2013). 2013 Annual report of Whole Foods Market, Inc. Retrieved from https://www.wholefoodsmarket.com/sites/default/files/media/Global/ Company%20Info/PDFs/WFM-2013-Annual-Stakeholders-Report.pdf Whole Foods Market, Inc. (2014a). 2014 Annual report of Whole Foods Market, Inc. Retrieved from http://www.mergentonline.com.mcc1.library.csulb.edu/company detail.php?comp number=71872&pagetype=synopsis
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Whole Foods Market, Inc. (2014b). 2014 Annual report of Whole Foods Market, Inc. Retrieved from http://assets.wholefoodsmarket.com/www/company-info/investorrelations/annual-reports/2014 WFM-10K.pdf Whole Foods Market (2015a). History. Retrieved from http://www.wholefoodsmarket.com/company-info/whole-foods-market-history Whole Foods Market, Inc. (2015b). 2015 annual report of Whole Foods Market, Inc. Retrieved from http://assets.wholefoodsmarket.com/www/company-info/ investorrelations/annual-reports/2015-WFM-10K.
APPENDICES
59
APPENDIX A NUMBER OF STORES OPERATED BY WHOLE FOODS MARKET Location
Number of stores
Alabama
2
Arizona
11
Arkansas
1
California
80
Canada
10
Colorado
20
Connecticut
9
District of Columbia
4
Florida
24
Georgia
10
Hawaii
3
Idaho
1
Illinois
25
Indiana
4
Iowa
1
Kansas
4
Kentucky
2
60
NUMBER OF STORES OPERATED BY WHOLE FOODS MARKET – CONT. Louisiana
5
Maine
1
Maryland
9
Massachusetts
30
Michigan
6
Minnesota
6
Mississippi
1
Missouri
2
Nebraska
2
Nevada
5
New Hampshire
1
New Jersey
14
New Mexico
4
New York
16
North Carolina
12
Ohio
9
Oklahoma
3
Oregon
8
61
NUMBER OF STORES OPERATED BY WHOLE FOODS MARKET – CONT. Pennsylvania
10
Rhode Island
3
South Carolina
4
Tennessee
6
Texas
28
United Kingdom
9
Utah
5
Virginia
11
Washington
8
Wisconsin
2
62
APPENDIX B SALES GROWTH IN FISCAL YEARS 1991 AND 2015 SALES GROWTH IN FISCAL YEARS 1991 AND 2015 $93,000,000.00
$15,400,000,000.00
1991
Source: Author
2015
63
APPENDIX C WFM'S INVESTMENTS AS OF SEPT. 27, 2015 WFM'S INVESTMENTS AS OF SEPT 27, 2015
$32,000,000.00, 13%
$218,000,000.00 , 87%
Cash and Cash Equivalents
Source: Author
Marketable Securities
64
APPENDIX D PERFORMANCE GRAPH PERFORMANCE GRAPH S&P Consumer Staples S&P Food Retail S&P 500 Whole Foods Market, Inc. 0.00
2013 2014 2015
Whole Foods Market, Inc. 329.19 216.78 182.29
50.00 100.00 150.00 200.00 250.00 300.00 350.00 S&P 500
S&P Food Retail
157.17 188.18 187.02
201.94 204.81 237.10
2013
Source: Author
2014
2015
S&P Consumer Staples 155.51 181.21 194.08
65
APPENDIX E STORES AT BEGINNING OF FISCAL YEAR STORES AT BEGINNING OF FISCAL YEAR
335, 31% 399, 36%
362, 33% 2015
Source: Author
2014
2013
66
APPENDIX F STORES AT END OF FISCAL YEAR STORES AT END OF FISCAL YEAR
362, 30% 431, 36%
399, 34% 2015
Source: Author
2014
2013
67
APPENDIX G WHOLE FOODS MARKET FINANCIAL RATIOS Leverage Ratio
2015
2014
2013
Debt-Equity Ratio
1.64
1.57
0.67
Debt-Assets Ratio
1.08
1.04
0.47
Liquidity Ratio
2015
2014
2013
Current Ratio
1.23
1.4
1.82
Quick Ratio
0.83
1.05
1.44
Cash Ratio
0.29
0.24
0.37
Times Interest Rate
0.78
1.24
1.01
Activity Ratio
2015
2014
2013
Asset Turnover
2.68
2.52
2.29
Fixed Asset Turnover
9.97
8.08
6.52
Total Asset Turnover
2.68
2.47
2.33
Inventory Turnover
21.2
21.4
19.39
Days in Inventory
17.22
17.05
18.83
Receivable Turnover
39.31
40.27
36.64
9.29
9.06
9.96
Average Collection
68
WHOLE FOODS MARKET FINANCIAL RATIOS – CONT. Profitability Ratio
2015
2014
2013
Net Profit Margin
0.03
0.04
0.04
Return on Assets
0.09
0.1
0.1
Return on Equity
0.14
0.15
0.14
Operating Margin
0.06
0.07
0.07
Return on Sales
0.35
0.36
0.36
Valuation Ratio
2015
2014
2013
PE Ratio
18.59
16.65
15.46
69
APPENDIX H WHOLE FOODS MARKET INCOME STATEMENT ($ MILLIONS) 2015
2014
2013
Sales
15,389
14,194
12,917
COGS
9,973
9,150
8,288
Gross Profit
5,416
5,044
4,629
SG&A
4,472
4,032
3,682
83
78
64
861
934
883
1,126
762
886
Income/Expense
-
-
-
Special Items
-
-
-
Pretax Income
878
946
894
Tax expense
342
367
343
-
-
-
536
579
551
Non Recurring Operating Income Net interest expense Non-Operating
Unusual items (after tax) Net Income
70
WHOLE FOODS MARKET INCOME STATEMENT ($MILLIONS) – CONT. Dividends
-184
-170
-508
Retained Earnings
720
749
1,059
Number of shares
281
265
261
EPS
1.91
2.18
2.11
-0.65
-0.64
-1.95
Net Income to
Dividend per share Current Share Price
30.97
71
APPENDIX I WHOLE FOODS MARKET BALANCE SHEET ($ MILLIONS) 2015
2014
2013
ASSETS Cash and marketable securities
364
299
401
Short Term Investment
155
553
733
Accounts receivable
417
366
339
Inventory
500
441
414
Other current assets
108
97
93
Total current assets
1,544
1,756
1,980
63
120
302
3,163
2,923
2,428
710
708
679
Intangible Assets
79
81
65
Other long-term assets
38
24
12
144
132
72
Total long-term assets
4,197
3,988
3,558
Total Assets
5,741
5,744
5,538
Long-term tangible assets Other Investments Goodwill
Deferred Long Term Asset Charges
72
WHOLE FOODS MARKET BALANCE SHEET ($ MILLIONS) – CONT. LIABILITIES Account payable
776
698
651
Notes Payable
0
0
0
Short-term debt
3
2
1
Taxes Payable
0
0
0
Accrued Expenses
0
0
0
473
557
436
1,252
1,257
1,088
62
60
26
587
548
500
0
0
0
Other long-term liabilities
71
66
46
Total long-term liabilities
720
674
572
1,972
1,931
1,660
Other current liabilities Total current liabilities
Long-term debt Deferred liabilities Minority Interest
Total Liabilities (L)
73
WHOLE FOODS MARKET BALANCE SHEET ($MILLIONS) – CONT. Shareholder's Equity Stock Warrants Common shareholders' equity Treasury Stock Retained Earnings Other Stockholder Equity Total shareholders' equity (SE)
0
0
0
2904
2863
2,765
-1,124
-711
-153
2,017
1,668
1,265
-28
-7
1
3,769
3,813
3,878
5,741
5,744
5,538
Total Liabilities + Shareholder Equity Internal Growth Rate
12.54%
