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 Date

Professor of Finance

Dr. Tzu-Man Huang Date

Professor of Finance

Dr. Sijing Zong Date

Professor of Finance
 © 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.

iv
 TABLE OF CONTENTS
PAGE

Acknowledgements ................................................................................................. iv

List of Tables .......................................................................................................... viii

List of Figures ......................................................................................................... ix

Abstract ................................................................................................................... x

CHAPTER
I. Introduction ........................................................................................... 1

Industry Overview .................................................................... 2

II. Whole Foods Market............................................................................. 5

Purpose and Core Values .......................................................... 5

Quality Standards and Differentiated Product Offering ........... 6
Certified Organic Retailer ......................................................... 7
Exclusive Brands ...................................................................... 9
Commitment to Local ............................................................... 9
Properties .................................................................................. 11
Performance .............................................................................. 13
Economic and Industry Factors ................................................ 14
Overview of Fiscal Year 2015 .................................................. 15
Purchasing and Distribution...................................................... 16
Marketing .................................................................................. 17
Value Programs ......................................................................... 18
Global Responsibility................................................................ 19
Growth Strategy ........................................................................ 19
Competition............................................................................... 20
Kroger .................................................................................. 20
Trader Joe’s.......................................................................... 21
Wegman’s ............................................................................ 21

III. Case Analysis ........................................................................................ 22

Strategic Issues and Key Problem............................................. 22

IV. External and Internal Analysis .............................................................. 23

v
External Analysis ...................................................................... 23
PEST Analysis ..................................................................... 23
Political and Legal Issues................................................ 23
Economic Issues.............................................................. 23
Sociocultural and Demographic Information.................. 23
Technology ..................................................................... 24

Porters Five Forces of Competition ..................................... 24

Bargaining Power of Buyers ........................................... 24
Bargaining Power of Suppliers ....................................... 25
Threat of New Entrants ................................................... 25
Threat of Substitute Products .......................................... 25
Intensity of Rivalry ......................................................... 26

Internal Analysis ....................................................................... 26

SWOT .................................................................................. 26
Opportunities................................................................... 26
Threats............................................................................. 28
Strengths ......................................................................... 29
Weaknesses ..................................................................... 29
Value Chain ......................................................................... 30
Grand Strategy ..................................................................... 32
Market Analysis ................................................................... 32
Target Consumer ............................................................. 32
Channels.......................................................................... 33
Marketing Strategy.......................................................... 33
Core and Distinctive Competencies ................................ 34
Financial Analysis..................................................................... 34
Liquidity Ratios ................................................................... 34
Current Ratio.................................................................... 34
Quick Ratio ...................................................................... 35
Times Interest Rate .......................................................... 35
Leverage Ratios ................................................................... 37
Debt to Equity Ratio ........................................................ 37
Debt to Assets Ratio......................................................... 37
Activity Ratios ..................................................................... 38
Asset Turnover ................................................................. 39
Fixed Asset Turnover....................................................... 39
Total Asset Turnover ....................................................... 39
Inventory Turnover .......................................................... 39
Accounts Receivable Turnover ........................................ 40

vi
 Profitability Ratios ............................................................... 41
Profit Margin on Sales ..................................................... 41
Operating Margin ............................................................. 42
Return on Sales ................................................................ 42
Return on Assets (ROA) .................................................. 42
Return on Equity (ROE) .................................................. 42
Market Valuation Ratios ...................................................... 44
Price to Earnings (P/E) Ratio ........................................... 44

V. Alternatives ........................................................................................... 46

VI. Recommendations ................................................................................. 48

Strategic Recommendations...................................................... 48
Tactical Recommendations ....................................................... 49

VII. Implementation Plan ............................................................................. 51

Steps .......................................................................................... 51

VIII. Conclusion ............................................................................................ 53

References ............................................................................................................... 55

Appendices

A. Number of Stores Operated by Whole Foods Market ............................... 59

B. Sales Growth in Fiscal Years 1991 and 2015 ............................................. 62
C. WFM’s Investments as of Sept. 27, 2015 ................................................... 63
D. Performance Graph ..................................................................................... 64
E. Stores at Beginning of Fiscal Year ............................................................. 65
F. Stores at End of Fiscal Year........................................................................ 66
G. Whole Foods Market Financial Ratios ....................................................... 67
H. Whole Foods Market Income Statement ($ millions) ................................. 69
I. Whole Foods Market Balance Sheet ($ millions) ....................................... 71

vii
 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 .................................................................... 18

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

viii
 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

ix
 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.

x
 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
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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 limited-

assortment 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

 7

• 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
Total sales 100.0% 100.0% 100.0%

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.

 9

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
 10

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,
 11

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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Figure 3. Number of Stores Operated by Whole Foods Market.

100

Number of Stores
80
80
60
40 25
20 24
20 11 10 9 10
2 1 4 3 1 4 1
0
Location

Alabama Arizona Arkansas California

Canada Colorado Connecticut District of Columbia
Florida Georgia Hawaii Idaho
Illinois Indiana Iowa

Source: Author

Figure 4. Number of Stores Operated by Whole Foods Market.

40
Number of Stores

30
30
20 14
9
10 4 5 6 6 5 4
2 1 1 2 2 1
0
Location

Kansas Kentucky Louisiana Maine

Maryland Massachusetts Michigan Minnesota
Mississippi Missouri Nebraska Nevada
New Hampshire New Jersey New Mexico

Source: Author
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Figure 5. Number of Stores Operated by Whole Foods Market.

30

Number of Stores
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
 14

Table 3 depicts Whole Foods Market’s share repurchase activity during the 12

weeks ended September 27, 2015.

Table 3

Share Repurchase Activity

Period Total number of Average price

shares purchased paid per shares
July 6, 2015 - August 2, 2015 917,329 $36.38
August 3, 2015 - August 30, 2015 7,456,576 $32.36
August 31, 2015 - September 27, 2015 1,567,884 $31.89
Total 9,941,789 $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.

 15

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).
 16

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.
 17

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

Stores at beginning of fiscal year 399 362 335

Stores opened 38 34 26

Acquired stores - 4 6

Relocated stores -6 -1 -5

Stores at end of fiscal year 431 399 362

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.

 21

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.

22
 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.

23
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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-to-

end 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
 25

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.
 26

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
 27

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 health-

conscious customers.
 28

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
 29

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 30-

plus 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
 30

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
 31

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
 32

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.
 33

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
 34

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
 35

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.

 36

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

8
Ratios

2 1.4 1.05 1.24

0.88
0.24
0
WFM-2014 WMT-2014
Current Ratio 1.4 0.88
Quick Ratio 1.05 0.24
Times Interest Rate 1.24 10.55

Current Ratio Quick Ratio Times Interest Rate

Source: Author
 37

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,
 38

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
1.2 1.04
Ratios

1
0.8
0.57
0.6
0.4
0.22
0.2
0
WFM-2014 WMT-2014
Debt-Equity Ratio 1.57 0.57
Debt-Assets Ratio 1.04 0.22

Debt-Equity Ratio 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
 39

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 income-

producing 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 income-

producing 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

 40

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

 41

Figure 8. Activity Ratios FY 2014.

80
70.85
70

60

50
Ratios

40.27
40

30
21.4
20
8.08 7.78 8.08
10
2.52 2.34 2.47 2.33
0
Asset Fixed Asset Total Asset Inventory Receivable
Turnover Turnover Turnover Turnover Turnover
WFM-2014 2.52 8.08 2.47 21.4 40.27
WMT-2014 2.34 7.78 2.33 8.08 70.85

WFM-2014 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.
 42

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.
 43

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
0.25
0.25
0.21
Ratios

0.2
0.15
0.15
0.1 0.09
0.1 0.07 0.06
0.04 0.04
0.05

0
Profit
Operating Return on Return on Return on
Margin on
Margin Sales Assets Equity
Sales
WFM-2014 0.04 0.07 0.36 0.1 0.15
WMT-2014 0.04 0.06 0.25 0.09 0.21

WFM-2014 WMT-2014

Source: Author
 44

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

 45

Figure 10. Market Valuation Ratio FY2014.

WMT-2014, WFM-2014,
15.39, 48% 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 differentiated-

focused 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

46
 47

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

48
 49

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

 50

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.

51
 52

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.

53
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/corporate-

intelligence/2014/04/10/expensive-organic food-beware-Wal-Mart-declares-a-price-

war/

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.
 56

Nutraceuticals World. (2013). 80% of U.S. Parents Report Buying Organic. Retrieved from

http://www.nutraceuticalsworld.com/contents/view_breaking-news/2013-04-10/80-

of-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
 57

Whole Foods Market, Inc. (2014b). 2014 Annual report of Whole Foods Market, Inc.

Retrieved from http://assets.wholefoodsmarket.com/www/company-info/investor-

relations/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/ investor-

relations/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 2015

Source: Author
 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 Marketable Securities

Source: Author
 64

APPENDIX D

PERFORMANCE GRAPH

PERFORMANCE GRAPH

S&P Consumer Staples

S&P Food Retail

S&P 500

Whole Foods Market, Inc.

0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00

Whole Foods S&P Consumer
S&P 500 S&P Food Retail
Market, Inc. Staples
2013 329.19 157.17 201.94 155.51
2014 216.78 188.18 204.81 181.21
2015 182.29 187.02 237.10 194.08

2013 2014 2015

Source: Author
 65

APPENDIX E

STORES AT BEGINNING OF FISCAL YEAR

STORES AT BEGINNING OF FISCAL YEAR

335, 31%
399, 36%

362, 33%

2015 2014 2013

Source: Author
 66

APPENDIX F

STORES AT END OF FISCAL YEAR

STORES AT END OF FISCAL YEAR

362, 30%
431, 36%

399, 34%

2015 2014 2013

Source: Author
 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

Average Collection 9.29 9.06 9.96

 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

Non Recurring 83 78 64

Operating Income 861 934 883

Net interest expense 1,126 762 886

Non-Operating

Income/Expense - - -

Special Items - - -

Pretax Income 878 946 894

Tax expense 342 367 343

Unusual items (after

tax) - - -

Net Income 536 579 551

 70

WHOLE FOODS MARKET INCOME STATEMENT ($MILLIONS) – CONT.

Dividends -184 -170 -508

Net Income to

Retained Earnings 720 749 1,059

Number of shares 281 265 261

EPS 1.91 2.18 2.11

Dividend per share -0.65 -0.64 -1.95

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

Long-term tangible assets 63 120 302

Other Investments 3,163 2,923 2,428

Goodwill 710 708 679

Intangible Assets 79 81 65

Other long-term assets 38 24 12

Deferred Long Term Asset

Charges 144 132 72

Total long-term assets 4,197 3,988 3,558

Total Assets 5,741 5,744 5,538

 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

Other current liabilities 473 557 436

Total current liabilities 1,252 1,257 1,088

Long-term debt 62 60 26

Deferred liabilities 587 548 500

Minority Interest 0 0 0

Other long-term liabilities 71 66 46

Total long-term liabilities 720 674 572

Total Liabilities (L) 1,972 1,931 1,660

 73

WHOLE FOODS MARKET BALANCE SHEET ($MILLIONS) – CONT.

Shareholder's Equity

Stock Warrants 0 0 0

Common shareholders' equity 2904 2863 2,765

Treasury Stock -1,124 -711 -153

Retained Earnings 2,017 1,668 1,265

Other Stockholder Equity -28 -7 1

Total shareholders' equity (SE) 3,769 3,813 3,878

Total Liabilities + Shareholder

Equity 5,741 5,744 5,538

Internal Growth Rate 12.54%