Memo

To: John Mackey & Walter Robb

From:
Subject: Executive Summary: Whole Foods Competitive Position Analysis

Industry Analysis
As the largest grocery chain of natural and organic foods in the United States, Whole Foods Markets
competes within a specialized segment of the $557 billion (FMI, 2009) overall grocery retail industry. Its
main competitors sit within various strategic groups encompassing specialized organic/natural food
retailers, traditional grocers (especially those with dedicated organic food offerings), mass merchandisers
such as Wal‐Mart who have launched organic food lines, and even local co‐op markets or farmer markets.
However, Whole Foods enjoys an enviable competitive position in this industry due to its scale and
expansion, mission‐driven brand superiority, and premium shopping experience.

In evaluating the industry, the environmental factors that are most important are market size,
demographic trends, regulatory factors, technology developments, supplier channels, as well as consumer
habits and social considerations (Exhibit 1). The effects of these factors are dramatically much more
favorable for the natural/organic food retail industry than the overall grocery industry, due to greater
market growth and increased consumer adoption due to perceived health and wellness benefits coupled
with an affluent customer base willing to pay a price premium. The only adverse factor, the higher levels
of regulation impacting the organic food segment, is counterbalanced by the ability of the segment to
withstand more stringent food quality and safety regulations in the future. As Whole Foods is just 1.3%
(Riddick, 2011) of the overall food retail market, it is well‐positioned to capitalize on these attractive
industry fundamentals for natural and organic foods.

A Porter’s Five Forces analysis (Exhibit 2) further solidified this reasoning. Whole Foods has already
established a strong industry presence in the natural/organic food retail segment with over 300 stores
nationwide, as well as six in Canada and five in the UK (Whole Foods Annual Report, 2010). With 30,000
SKUs, it has a broad product line that provides a comprehensive shopping experience for consumers.
Furthermore, consumers are choosing higher margin products and spending more: in a recent survey of
Whole Foods store managers, 64% said consumers were willing to trade up and 82% said that consumer
spending had much improved over last year (Mushkin, 2011). Whole Foods is also able to capitalize on
having a local community presence by working with local suppliers, farmers and growers while having the
power of a national brand. Due to its strong industry positioning, Whole Foods is poised to capture
additional share as it expands its retail presence both domestically and internationally and grows both
within the natural/organic food retail segment and wins “converters” from the overall food segment who
switch to natural/organic offerings.

Strategic Groups & Positioning

Whole Foods’ market positioning is challenges by a number of competitors who represent different retail
formats. While it competes directly with natural/organic grocers such as Trader Joe’s and Fresh Market,
it also faces competition from traditional supermarkets, and more recently, from mass merchandisers
such as Wal‐Mart and club stores such as BJ’s. Exhibit 3 shows a breakdown of the main competitors
within each strategic group. As consumers continue to push for healthier food choices in seeking out
natural / organic foods, traditional grocery outlets have drastically ramped up their organic offerings. In
2009, mass market retailers representing mainstream supermarkets, club/warehouse stores, and mass
merchandisers sold more than 54 percent of organic food (Organic Trade Association, 2010). Whole Foods
Market needs to fight against these more traditional outlets to achieve share.
Competitor Analysis
Further analysis of competitive forces reveals that Whole Foods is in good position to push back against
the encroaching invasion of market share. Three retailers, Trader Joes, Kroger, and Wal‐Mart, were
chosen to represent the typical competition that is faced by Whole Foods (Exhibit 4). While their main
consumer appeal in competitive pricing and selection does challenge Whole Foods market share, Whole
Foods has significant competitive advantages by offering an unparalleled value proposition in the food
quality and selection as well as providing a premium shopping experience by delighting its customers.
While price points are higher in Whole Foods Markets, it has ramped up its competitive offerings in value
products by offering 2,200 SKUs in its private label line, 365 Everyday Value (Whole Foods 10‐K) and
pushed products discounts. Its mission‐drive culture permeates the store to every consumer basket – it
takes leadership in consumer education of environmental and sustainability issues, thus building more
loyalty for its products that support these causes. However, Whole Foods does face formidable
competition from all sides of retail, from traditional supermarkets to mass merchandisers to local famer’s
markets, and it will need to act defensively within the markets it currently operates in and aggressively
move into new ones in order to achieve continued growth.

Whole Foods certainly has the capabilities for this – it has pursued an expansion policy since its founding
and at the same time, has cut development costs by 35% (Riddick, 2011), so will be able to become even
more expedient in its expansion efforts. This commitment to frugality is evinced also by the compensation
structure ‐ executive compensation is capped at 19x average employer salary, yet Whole Foods has
remained in Fortune’s “100 Best Companies to Work For” for 13 years, indicating that its strong
commitment to employees and culture has resulted in high employee satisfaction and dedication to
driving the firm’s success. Lastly, Whole Foods has strong supplier relationships, emphasizing the local
communities around each store. In sum, its people, process, and systems are poised to help Whole Foods
continue to achieve market share gains and represent a significant competitive advantage.

Competitive Positioning
Whole Food’s 2007 acquisition of Wild Oats, formerly its largest competitor, has allowed it to continue to
expand its retail presence both domestically and internationally. While the overall grocery market is
saturated, there is room to grow within the natural/organic segment. The strong company culture and
dedication to the consumer has resulted in identical store sales growth at 6.0% (Whole Foods 10K), driven
partly by its recognition that consumers need value‐based products in natural/organic foods as well. Its
“The Whole Deal” weekly promotion and 365 Everyday Value private label directly staves off competition
from traditional and discount retailers trying to steal share. As average transaction count and basket size
continue to increase at 7% and 2% respectively (Riddick 2011), Whole Foods will undoubtedly be well‐
positioned to gain more share and sustain its position as the market leader in this grocery segment as the
health and quality benefits of natural/organic foods moves further into consumers’ minds and captures
their wallet share. As long as Whole Foods remains on the offensive in expanding its stores and also its
offerings to a broader range of customers, the firm should continue to enjoy a dominant competitive
position in the natural/organic food industry.
 Addendum
Exhibit 1:
Environmental Analysis:

Retail Grocery Industry (1) Whole Foods

Market Size $907 billion $76 billion
Annual Growth -0.9% 5%
Demographic Trends • Health and wellness an • Segment caters to affluent
increasing priority for Shoppers
consumers, reflected in • Improvements in the
food choices economy have led shoppers
• Consumers have become to move towards organic
more eco‐conscious baskets
Regulatory Factors • Regulation exists: FDA • Much heavier regulation in
approval required for most organic food markets from
foods the FDA, FTC, CPSC, USDA,
and EPA
Technology Developments • Online food shopping is • Foods feature new
carving out a niche (Amazon innovations such as
Fresh, Fresh Direct, Relay hydroponic vegetables,
Foods, etc.) almond milk, etc.
Suppliers • Wide range of food • Fair‐trade, fair‐shade,
suppliers organic, and local sourcing a
priority
Consumer Preferences/ • Social culture moving • Price sensitivity in food
Social Factors towards environmental retail does not always
awareness and support for extend to premium
sustainability products valued for quality,
• Consumers still fairly price health, or other factors
sensitive on food items • High brand loyalty
• Society migrating towards
an “experience economy”

(1) Includes grocery stores, supermarkets, convenience stores, independent stores, and chain stores.
Sources: Wikinvest, Damodaran, Aswath (Professor of Finance, NYU Stern).
Exhibit 2:
Porter’s Five Forces Analysis

Retail Grocery Industry Natural/Organic Retail

Segment
Intensity of Competition • Extremely competitive • Competitive against other
• Oversaturated market food retail offerings
• Multiple players consisting • Unsaturated market
of supermarkets, • Many regionally based
warehouse stores, players, few larger chains
natural/organic specialty exist except Whole Foods
stores, warehouse clubs, (& Wild Oats, acquired by
supercenters, mass Whole Foods), Trader Joe’s,
merchandisers, and & Fresh Market
convenience stores
Power of Suppliers • Depending on the product, • Many foods are sourced
suppliers can have strong from local suppliers and
leverage (Nestlé) or little growers
leverage (regional wineries) • Suppliers have far less
• Many products are carried power in the organic/
by a retailer as loss leaders natural food retail segment
Power of Buyers • Consumers have full power • Consumers still have high
in choosing among various purchasing power, but they
brands, products, as well as are willing to pay a price
retail channels in a premium for higher
commodity food market quality/health benefits
• Price sensitivity is high • Economic recovery leading
to more consumers
choosing to “trade‐up” for
their food choices
Substitute Products • Consumers can make • Threat of substitutes mainly
substitutes within food exists from non‐
categories, but most organic/nonnatural foods
products are not
substitutable
Barriers to Entry • Barriers to entry involve • Same barriers to entry as
establishing relationships general food retail
with suppliers and • Establishing supplier
cultivating customer loyalty relationships can be more
• Switching costs fairly high as difficult
most consumers tend to • Convincing customers who
stick with one supermarket don’t typically shop at
• Assets costs and exit natural/organic markets to
barriers are moderate switch is very difficult
Exhibit 3:
Strategic Groups Within Organic/Natural Food Retail Industry:

Natural/Organic Traditional Club Warehouses Independent Mass-

Grocer Supermarket Merchandisers
Trader Joe’s Kroger BJ’s Wholesale Harvest Co-op Wal-Mart
Club (Cambridge, MA)

Fresh Market Supervalu Sam’s Club Rebecca’s Natural Target

Foods
(Charlottesville, VA)
Food Emporium Safeway West End Market
(New York, NY)

Sources: Whole Foods 10‐K, Riddick.

Exhibit 4:
Competitor Analysis:

Whole Foods Trader Joe’s Kroger Wal-Mart

Value • High quality • Low price • One‐stop shop • Low prices
Proposition • Locally sourced points • Wide selection • Availability of
• Broad selection of • Unique of foods other products
products selection • Familiar (e.g. apparel,
• Premium • Fun, but format toys) in store
shopping crowded • Discount club despite low
experience shopping cards for food selection
experience frequent • Add‐on services
shoppers like pharmacy,
• Add‐on credit
services like
pharmacy,
Starbucks,
bank branches
Geographic 300 domestic, 353 domestic 3,619 stores 8,500 stores in
Presence 11 international 15 countries
Price • High • Low‐Average • Average • Low
Points • Increased • Some sales on • Frequent sales • Frequent sales
discounts & products & customer on discounted
private label loyalty cards items
products
Target • Affluent, health • Younger • Mainstream • Value shoppers
Market conscious generations shoppers • Moms
“yuppies”
 Capabilities • Significant brand • Buys directly • Largest • Multi‐national
leverage over from suppliers, national mass
suppliers & doesn’t charge grocery chain; merchandiser
customers slotting fees has significant with very
• Provides an • Private label leverage powerful
exploratory “Trader Joe’s” against leverage against
shopping has high suppliers suppliers
experience consumer • Offers broad • Excellent supply
• Delivers value‐ loyalty array of chain
based products • Employees products to management
through “365 asked to focus consumers, • Sophisticated
Everyday Value” on customer including huge inventory
brand satisfaction private label management
• Employees and delivering selection systems
trained to on it • Uniform • Four retail
“delight” experience concepts with
customers across stores different aims
• Strong supplier • Excellent (Wal‐Mart
relationship with supply chain neighborhood
United Natural management market
Foods, which process supports
accounts for 27% • Sophisticated grocery efforts)
of purchases inventory • Grassroots
• Average management process aims to
development systems captures
costs of new employee
stores 35% feedback
cheaper YOY
• Mission‐driven • Fun, unique • Core values • Relentless profit
(supports market culture include safety, driven culture
for sustainable reflected by diversity, • 3 basic beliefs
products, gives a store integrity, & of respect for
minimum of 5% employees and respect the individual,
of profits each pervades the • Seeks diversity service to
year) shopping in suppliers customers,
• Supportive of experience with focus on striving for
wellbeing of team • Commitment increasing excellence
members to low prices women‐and • Employees
(employees) and for consumers minority‐ encouraged to
customers) owned shout the Wal‐
• Upholds integrity companies Mart Cheer in
in dealings with • Culture of stores to show
partners and inclusion pride in
suppliers company

Source: Wikipedia, TraderJoes.com, Whole Foods 10K, Kroger.com, Walmartstores.com, BusinessWeek,

Refrigerated Transporter, Riddick.
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