Whole Foods Market:

The Deutsche Bank Report

Travis Simpkins
Mitchell Cameron
Madelynn Meisel
Gianpaolo Barelli
Michael Reilly
Tyler Novak
Alec Fong
Whole Foods Strategy & Competitors
Due to its intense competition, the grocery industry has historically been a low-
growth industry, yielding low long-term growth rates of 2% to 3%. These low margins tend
to favor large competitors, and as a result small competitors are typically forced to close or
be acquired. The grocery industry can be divided into four key segments: Conventional
grocers such as Kroger, Publix, Safeway; Supercenter such as Wal-Mart, Target; Natural
grocers such as Whole Foods, Sprouts, and The Fresh Market, and wholesalers such as
Costco and Sam’s Club.
Whole Foods strategy is to market their company as the leading natural and organic
food supply store. The company was able to maintain a high growth rate from their initial
IPO drop date in 1992 until the American recession of 2008 by expanding their stores
through acquisitions and increasing same-store sales.
Stores such as Wal-Mart and Target cannot be considered as true competitors of
Whole Foods because they target different demographics and sell slightly different
products. Although Wal-Mart was the largest food retailer in the United States in 2014,
with 25% market share, their business model varies greatly from that of Whole Foods. Wal-
Mart stores are typically found in lower income neighborhoods, and offer quantity rather
than quality goods.
Despite the stiff competition in a low-growth environment, natural grocers have
grown rapidly over the past twenty years. Increasing trends of health-conscious consumers
fueled natural grocers growth by over 20% per year since 1990. Although the natural and
organic segment’s success ignited competition from both old and new players, Whole
Foods maintained its position as the market leader for the natural and organic industry.

The Moat
  Whole Foods’ moat is the ability to sell to their customers high quality products at
premium prices; they are able to achieve this by targeting high-income demographics.
Differently, from their competitors, since its date of its foundation in 1978, Whole Foods
has been able to create a bond with their customers. Whole Foods competitive advantage is
not only to sell to their customer’s healthy food but also to “teach” their customers how to
practice a healthy lifestyle. In this way, they were able to create a brand identity while
developing customer loyalty.
In addition, they are able to differentiate their products by remaining transparent
with their customers. In fact, the company’s website lists over 75 substances that were
prohibited in all of its products. Whole Foods’ CEO John Mackey alluded to the lack of clear
legal definition for natural foods; he implied his competitors mark standard foods using
misleading labels.
Whole Foods is able to sustain its ranking as the leading natural grocer because of
its ability to adapt to the current market and economy. After the economic recession of
2008 the company’s growth strategy had moved away from acquisitions, and management
saw improving same-store sales and continued new openings as its primary growth
opportunity. They were able to achieve all of this with no debt financing.

Margins and Ratios

By evaluating the EBITDA margins, we notice that Whole Foods consistently carries
a greater margin over its competitors throughout the entire decade from 2003-2013,
except for 2008-2010 during the economic recession. Whole Foods is able to maintain a
higher EBITDA margin because their sales are greater than competitors due to their
premium prices. They most likely fell below their competitors during the recession because
of their consumers decrease in disposable income, thereby forcing customers to shift
towards cheaper foods.
Their average sales growth stays at a steady 20% from 2003 until the recession hits
in 2008. It really is not until 2013 when Whole Foods is able to regain its footing from the
recession and climb to a sales growth rate of 10%. The sales growth ratio tells us a lot of
about the profitability and efficiency of a company. The sharp decline in growth in 2008 is
logical for whole foods because less people were able and willing to pay the company’s
premium prices.
Relative to its industry competitors, such as Trader Joe’s and Sprouts, Whole Foods
has more stores open with equal or slightly greater same-store sales growth. In fact, on
average Sprouts outperformed Whole Foods in same-store sales growth between the years
of 2008- 2013. This may be due to the recession, or whole foods lack of loyalty program
rewards, and large sales like its similar competitors.

Exhibit 7
Exhibit 7 is very interesting because it gives a clean break down of the Whole Foods
Income Statement from 2011-2013. Return on invested capital is driven by the firm’s
NOPAT, NWC, and PPE. Focusing on 2012 and 2013, we notice that the number of stores
will increase by 27, Net PPE will increase by 235, and Net working capital will decrease by
(234). NOPAT will be higher in 2013 than 2012 because of higher EBIT. Because Whole
Foods business plan puts a heavy emphasis on store growth, with their CEO hoping to open
a total of 1,000 stores nationwide by 2023, the projected store growth forecast for 2014
and 2015 indicated a positive growth trend for the company. This is important to note
because ROIC and growth are the two drivers of value. Exhibit 7 forecasts a continual
increase in both such areas, thus serving as a reasoning behind DB’s high value projection
for Whole Foods.

DCF for 2014-2024

Financial Assumptions
The Deutsche Bank forecast does not account for management and the goals of
management. In Timothy Green’s article written titled “Whole Foods Market, Inc. Has a
Very Big Problem,” he writes that while Whole Foods is optimistic about increasing
margins in future years, the analysis does not account for the effect that competition will
have on the market. In the years leading up to 2014, competition from companies such as
Sprouts as well as other smaller grocery stores forced Whole Foods to reduce their prices,
but the model accounts for further growth of operating margins. Because of this, Whole
Foods’ stock price dropped 20% a day after they released earnings, showing that
management was overconfident in their expected growth. Whole Foods, because of their
increase in store growth from 4% to 7.7% in 2011 to 2012, was optimistic about that trend
continuing into 2014 and 2015, which did not actually happen. Whole Foods is being
affected by the competition in having very fresh and organic produce by companies such as
Sprouts and Trader Joe’s, who continue to grow in that market. Because of this competition,
Whole Foods decided to reduce prices, which is never the right call to differentiate within a
market, because someone will always be able to go lower.
This change will impact the valuation because with less expectation for sales, Whole
Foods would be able to see their stock price as overvalued, and would be able to make
adjustments to right the ship. There would be less projected FCF on a yearly basis, which
would help expose the true value of the company.

Amazon acquisition of Whole Foods: a 13.5B acquisition.

Acquisition date: June 16, 2017
Acquirer Financial Statistics:
·      EV: $464.8 billion
·      LTM EBITDA: $12.2 billion 
Target Financial Statistics:
·      EV: $14.0 billion
·      LTM EBITDA: $1.3 billion