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Whole Foods Market: The Deutsche Bank Report
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.
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.