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- 1. Whole Foods Market (WFM) was founded in 1980 as a single local grocery store by John Mackey for natural and health foods. By 1991, WFM had 10 up-and-running stores with revenues of about $92.5 million in United States Dollars (USD), and a net income of about $1.6 million in USD. In 1992 WFM became a publicly traded company with its stock trading on the NASDAQ. By 2006 Whole Foods Market had progressed into the world’s largest retail chain of natural and organic foods supermarket. As of September 2007 WFM has 276 stores up-and-running.... [tags: Business Case Study]
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1. (b) The attractiveness of this industry and its potential for profit are functions of Michael Porter's five competitive forces model: barriers to entry, bargaining power of both suppliers and buyers, the threat of substitute products, and the depth of competition among rival companies.
Barriers to Entry
Currently, Whole Foods has no significant barriers to entry. Americans are becoming more food and health conscious and Whole Foods is catering to this demand by becoming the premier outlet for all-natural, organic food products, while creating a unique, cohesive brand. The company is growing a loyal customer base, and is offering the majority of its products at competitive prices. With more than 300 stores located in the US, the UK and Canada generating twice the revenue per square foot as almost all its competitors, the capital requirements for success are solid, and the switching costs for customers are low. Perhaps the only real barrier to entry is the minimal 3% requirement by the government for organic farming. With farmers only producing such a small supply of organic product, the lack of supply and increased demand could lead to price wars. Even with its prime locations in highly educated, prosperous cities, current economic conditions could also lead to reduction in demand for the premium type products that Whole Foods carries, though there is no evidence of this yet.
Bargaining Power of Suppliers
With the demand for organic products growing, the power will typically increase with suppliers. These types of agricultural goods are very critical to the success of the Whole Foods and the natural food market. Having acquired many of its smaller competitors and base suppliers, Whole Foods owns and operates a significant number of subsidiaries, currently keeping the bargaining power of its suppliers in control. However, with increased demand and limits on the amount of organic products produced, that power could shift and suppliers could take more control.
Bargaining Power of Buyers
Whole Foods has shifted from its typical 31,000 square-foot stores to larger than 50,000, and even 80,000 square-foot versions. According to the Food Marketing Institute, the rest of the industry is taking the opposite approach and downsizing its stores to an average 34,000 square feet. And with more than 300 Whole Foods locations, being this large a part of the industry, while still growing, and being able to purchase a large portion of the total output makes the buying power of Whole Foods very attractive. And this time, with the future possibility of increased demand, and possible price wars, the high amount of capital Whole Foods secures in the marketplace will help to maintain that bargaining power.
Threat of Substitute Products
The threat of substitute products that may exist in this industry lies with the choice of the consumer, at least when there is no significant price difference. With more than 70% of the items Whole Foods sells being common grocery items, the choice is whether to buy organic or non-organic. The organic product Whole Foods offers is a differentiated industry product where no significant price difference exists, and when the price differential does exist, it is currently treated as having more quality, thus more value than the non-organic traditional one. With shoppers being more food and health conscious, as well as morally conscious as to how the food is grown, obtained, packaged, presented, and how the business behind it supports the industry and the community, they are turning away from the traditional supermarket that has very little, if any, of the positive health or social attributes as the products at Whole Foods.
Intensity of Rivalry Among Competitors
Within the foods retail industry Whole Foods largest competitors are Wal-Mart, and Kroger. Within the organic foods retail industry, the competition is Trader Joe's and smaller localized organic grocery stores. Whole Foods also competes with GNC's dietary products and nutritional supplements. Most of the relationships are not equally balanced but industry growth in the organic market is increasing and this will raise the strategic stakes. There are no significant exit barriers so a moderately intense rivalry among the larger competitors will exist.
While the foods retail industry is highly competitive, Whole Foods has established a reputation and maintains a brand loyalty with its customers. Increased rivalry will occur in the larger grocery chains like Wal-Mart and Kroger, because of their flexibility in the products they can offer, and the pressures they can put on the sales growth and overall profits of Whole Foods. They have a larger cash and customer base, and the ability to better advertise their products, while Whole Foods still generates most of their customer base through word-of-mouth and limited advertising.
2. (a) The strengths and weaknesses of Whole Foods are the functions of its internal environment and the decisions management makes concerning the company's resources, capabilities, and core competencies.
Whole Foods currently has more than 300 stores in the US, Canada and the UK offering more than 1,500 privately labeled products. The company also owns and operates several subsidiaries including Allegro Coffee Co., Pigeon Cove Seafood Co., its east coast fresh seafood supplier, Select Fish Seafood Co., its west coast supplier, and Produce Field Inspection Office. Whole Foods also has multiple distribution centers, bake houses, and commissaries to help it maintain the standard of quality and brand name that its customers value. The stores employ skilled professionals, such as in-house chefs, massage therapists, and management with expertise in organic foods and the benefits of buying organic.
The resources of Whole Foods allow the company to better build and maintain its brand name and enhance the company's capabilities. The store layouts are designed to encourage the shoppers to linger and better enjoy the shopping experience. Instead of just running out to pick up meal essentials, the customers can enjoy prepared meals, from fresh salads and cooked fish to gourmet coffee and fresh pastries, all made for them at the store for immediate eating. The lighting used in sections of the store is typical to the type used in art galleries and the music is normally classical, evoking a tempting atmosphere. With sit-down areas to eat, wireless internet, and even an outdoor playground for kids, Whole Foods offers customers more than the usual grocery store experience.
The specific knowledge and skills of the company's employees, and the ability to envision the future of organic products, offer customers a better understanding of the products they are buying. This helps to develop and maintain the value of its brand name.
Of the resources and capabilities of Whole Foods, its core competency lies in its dominance of the organic market, with more than 300 stores, and the ability to target its locations towards smarter, more health conscious consumers. The company is better managed and employed to provide the information an organically inclined customer would need as compared to traditional stores carrying only some organic products. The work force in this regard will tend to be more attracted to a Whole Foods Market than a traditional grocery store.
2. (b) Critical factors for Whole Foods' success include its reputation, trust, and friendship among its customers and suppliers, its ability to stay on top of the organic food industry, and its commitment to developing healthier, more responsible products, even beyond natural foods. The store has developed its first all-organic clothing department within some of its stores. This type of forward thinking needs to continue to maintain the consumer trend of all natural products.
3. (a) Whole Foods holds a dominant presence in the organic foods industry and a strong position in the retail grocery industry overall. To continue at a desirable level of expansion and growth, the company should take advantage of two different types of opportunities increased advertising and development of its clothing line.
Advertising for Whole Foods should be a common practice, which currently doesn't exist. Statistically, media and print advertising only benefit an organization and generate additional revenue. The company's current philosophy supports growth and exchange of ideas, which advertising will help them do. A major portion of this advertising should be web-based, with an online database of the nutritional information Whole Foods' customers would be attracted to.
The second opportunity for Whole Foods is its ability to diversify by developing its all-natural clothing line. Conventional cotton is grown with fungicides and insecticides and Whole Foods has shown positive returns on its current department of all-natural clothing products in some of its stores. The market for cruelty-free, all natural clothing has already been established with companies like American Apparel, with little competition. In the environmentally conscious, educated market in which the stores operate, this type of venture could be profitable.
3. (b) Whole Foods will face certain challenges in the upcoming future. Most importantly, the company faces higher demand for organic products, with limited supply, and the challenge of continuing its expansion while still using its current strategy of correlating education and income with interest in organic products.
3. (c) In order to tackle these challenges, Whole Foods needs to develop a corporate strategy for responding to the supply and demand challenges of the organic food industry, and develop an investment strategy to continue successful placement of its stores in the marketplace.
Strategy 1: Supply and Demand
In order to meet the growing demand for organic foods by consumers, and the supply demand of buyers entering into the organic marketplace, Whole Foods needs to invest a substantial amount of energy into political reform of the current government regulations in place regarding the amount of organic farming, or start research and development on producing the majority of its staple organic products itself. Possible outsourcing of producing these products is a possible rationale as well.
Strategy 2: Placement
Whole Foods targets the above-average income earner by placing its stores in areas where at least 40% of its residents have college degrees. The assumption is that they are more likely to be aware and supportive of nutritional, environmental and health issues. With its current number of stores and subsidiaries, the company is close to reaching its limits of this current strategy. In order to continue its growth while still targeting the company's ideal all-natural consumer, the company needs to invest some financial and sales research into additional possibilities for these types of consumers that are correlated with other factors, not necessarily just income or education level.