Date: To:

26 January 2011 Mr. John Mackey, CEO Whole Foods Market , SVP Corporate Strategy Group Interim Strategic Analysis

From:

RE:

In response to our conversation on January 19, I have prepared a strategic analysis to assess the current competitive position of Whole Foods Market in the retail grocery and organic food industries. As you are aware, the US food industry is intensely competitive with firms ranging from corner store shops up through national retail chains. In recent years, there has been an increased focus on healthy living as characterized by exercise, mental wellness, and eating healthy and organic food. In addition, concerns over food safety, particularly the use of pesticides and other chemicals, has gained media attention and caused some consumers to shift their purchase habits toward organic and natural products.1 If the government implements stricter food production policy, Whole Foods should expect an additional increase in sales. Lastly, a growing awareness of the food supply chain sustainability from the producer to the retail store has also attracted some customers to our stores. Whole Foods enjoys as loyal customer base because of our unique position as a national organic food retailer. We have seen an increase in middle aged and older customers shopping at our stores, in line with the aging US population. These customers tend to have higher discretionary spending and can afford to pay the premium price for organic groceries. On the other end of the age spectrum, we are starting to grow our base of twenty to thirty year old professionals who are conscious about eating healthy and responsibly produced food. These younger customers and other parts of our customer base are sensitive to macroeconomic changes; Whole Foods saw relatively flat sales at $8 billion during the recession in 2008 and 2009 with an increase in sales revenue to $9 billion as the economy recovered in 2010.2 The effect of the recession was apparent in all regions as the US and Europe account for 96% of global organic food sales.3 Please see Exhibit 1 for additional information. The retail food market as shown in Exhibits 2 and 3 is very competitive. There are low barriers to entry at the store level, however, high barriers to entry at the national chain level as these operations require a network of suppliers and a substantial distribution channel. Such rivalry is characteristic of a low margin, high volume industry like retail food. Whole Foods main competitors are the Kroger Company, Safeway, and the Ruddick Corporation which operates Harris Teeter. Exhibit 2 shows the relative size of these companies by the most recent annual revenue numbers.

Whole Foods has successfully differentiated itself from these and other competitors through its focus on organic food and the sustainability of each part of the supply chain. Within the organic food industry, Whole Foods competes with a number of grocers though we remain the only national organic food retailer. At the local level, Whole Foods competes with local farmers markets and cooperatives which are often characterized by the supplier interacting directly with the customer. Over recent years, there has been a trend amongst national food retailers to carve out floor space for organic packaged products and fresh produce. Some chains have even added private label organic lines to their product offering. In fact, Safeway announced today that it in addition to its O Organics brand, will introduce a new line of 100% natural food under the Open Nature label.4 Exhibit 4 shows a strategy map of the organic focus of our competitors against the number of stores and size with regard to revenue. Whole Foods remains the only major retailers to commit completely to natural and organic products. Even with such infringement on Whole Foods niche, the company has managed to remain the dominant player in the retail organic market because of its core competency as shown in Exhibit 5. The companys dedication to selling the highest quality natural and organic products has helped build a base of loyal customers over the last thirty years. The companys strict quality standards ensure that only high value packaged products, fresh produce, and prepared food is sold to our customers. As part of its process, Whole Foods has embarked on numerous campaigns to raise awareness for why its products are of the best quality as well as priced higher than non-organic food. In particular, the Whole Trade Guarantee certifies a products quality to the consumer and other tools such as the seafood sustainability ratings and the 5-Step Animal Welfare Rating system reinforce Whole Foods commitment to selling products that are sustainable throughout the supply chain.2 The transparency of the companys commitment to caring about the community and environment by partnering with local organic farms as well as selling sustainable meat and seafood is one major point of differentiation between Whole Foods and other national retailers. Likewise, the knowledge and general happy attitude of our employees reinforce that shopping at Whole Foods is as much about the food as it is about the experience. Thus, though the retail food industry is intensely competitive and many large retailers have introduced organic products or product lines into their stores, Whole Foods continues to enjoy a dominant position in the retail organic market. Exogenous changes such as shifting consumer preferences toward healthy and sustainably produced food as well as leveraging internal strengths like our strict quality process and empowering our employees have built equity the Whole Foods brand. As such, an important part of the companys market position is its brand equity and much should be done to protect it. Whole Foods saw sales nearly double from 2005 to 2010 at $5 billion to $9 billion, respectively. We expect this trend to continue with the improving economy and continued commitment to our core capability.

EXHIBIT 1. RETAIL AND ORGANIC FOODS INDUSTRY ANALYSIS

Source: Whole Foods 10-K, Datamonitor

EXHIBIT 2. KEY RETAIL COMPETITORS BY REVENUE

Ruddick Corp 3%

Whole Foods 6%

Safeway 32% Kroger 59%

Source: GlobalData

EXHIBIT 3. FIVE FORCES ANALYSIS FOR RETAIL AND ORGANIC FOODS

Source: Whole Foods 10-K, Datamonitor

EXHIBIT 4. RETAIL FOODS STRATEGIC MAP

Organic focus based on estimates of organic SKUs to total store SKUs Sources: Company websites, 10-K

EXHIBIT 5. WHOLE FOODS MARKET CAPABILITIES ANALYSIS

Core Capability: Selling the highest quality natural and organic products

Source: Whole Foods 10-K

EXHIBIT 6. REFERENCES 1. Datamonitor. Organic Food in the United States. December 2009. 2. Whole Foods Market, Inc. Form 10-K. US Securities and Exchange Commission. 26 September 2010. 3. Datamonitor. Global Organic Food. December 2009. 4. Safeway. Safeway Announces Open Nature Line of 100% Natural Foods. Safeway.com. 26 January 2011. Web. 26 January 2011. http://www.safeway.com/IFL/Grocery/Investors#iframetop Other 5. Datamonitor. Food Retail in the United States. June 2010. 6. GlobalData. Safeway Inc. (SWY) Financial and Strategic SWOT Analysis Review. January 2011. www.globalcompanyintelligence.com 7. Ruddick Corporation. Form 10-K. US Securities and Exchange Commission. 1 December 2010. 8. Safeway Inc. Form 10-K. US Securities and Exchange Commission. 2 March 2010. 9. The Kroger Co. Form 10-K. US Securities and Exchange Commission. 30 March 2010. 10. www.safeway.com 11. www.wholefoodsmarket.com 12. www.kroger.com 13. www.harristeeter.com 6