strategy diamond - wfm analysis

7/21/2019 Strategy Diamond - WFM analysis

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According to the definition of strategy: it is consists of pattern of actions that management takes to:

Pursue its organizations mission

Achieve its objectives

The mission of Whole Foods Market (for the sake of everyones time, I will call it WFM here onwards) is

short, clear and makes very good business sense. The seven core values of WFM are clearly chalked outand directly link to companys mission. These guide the pursuit of its mission and are not cosmetic.

They derive their strategy or pattern of actions from the values.

Whole People

Organic & Natural

Foods

Highest Quality

Standards

Team Member

Happiness &

Excellence

CustomerDelight

Caringabout

communities &

environment

Healthy Eating

Education

Whole Foods

Whole Planet

Win-win

partnerships with

Suppliers

Profits & Growth

Arenas

Market Segment:

OrganicFoods Retailing Segment

Product Categories

Fresh produce Fruits, vegetables, meat and poultry and seafood

Baked andother prepared foods

Finequalitycheeses andwines

Household products, Body-care andnutritional

Organicpet food

Floraldepartment

Education material onhealth

Geographic Area:

Upscale urbanmetropolitanareas

US, UK and Canada

High trafficshopping locations and other premier real estatesites

Average storesize: 45,000to 60,000

Target Audience:

Nicheclientele willing to paypremium prices for healthyfoods and a organic lifestyle

Differentiators

Quality/Reliability Strict Quality Standards Extensive list of unacceptable ingredients (2008 the list had 81

chemicals)

Customization Each store layoutcustomizedto fit the particular site

Best show offthe particular product mixchosen for that storestarget clientele

Image Projectas authentic retailer of healthy organic products

Styling Colorfuldcor & attractive product displays

Cleanliness

Product design Wide varietyof veganand vegetarianproducts

Services Valet parking,massages,personalshopping andhome delivery

Education abouthealthy foods

Locally made offerings andextensive internationals ections; grilledto order dishes

Friendly and knowledgeable store personnel

Pricing

Competitive Prices

In-valuestoreguide WholeDeal created thatcontainedcents-off coupons, etc.

Private label offeringsthat were lessexpensive

Distribution

Purchased fromlocal, regional andnationalwholesalesuppliers to gaineconomiesof scale

Twoprocurement centers, ten regionaldistribution, eight regional bakehouses, five regional

kitchens, four seafood processing centers and Allegro exclusive coffee distribution

operation.

Vehicles

1992 2002ProactiveStrategy: Opennew stores + Acquiresmall owner managedchains with capable

personnel

Unanticipatedchange: Attractive acquisition candidates werehard to find:

2002 2007

Reactive Strategy: Decided to open 10-15 intended bigger stores in metropolitan areas

eachyear

Unanticipatedchange: Wild Oats acquisition completed but was divested

after FTC filed a suit against WFM

Reactive Strategy: Going forward growth strategy wouldbe basedon opening new stores

Staging

Speedof Expansion

Sequence of Initiatives

2003 WFM designated as first national Certified Organic grocer by Quality

AssuranceInternational.

1991 2008 emphasison expanding geographically

2008 2009 recession scaledback expansion

Swift cost containmentmeasures, sales improved again by first quarter of fiscal 2010.

Economic Logic

Uniqueproduct offering: selectiveproduct range, strong mission and core valuesthat were applied aggressively, stringent qualitystandardsandcommitment to sustainableagriculture.

PremiumPricing: Customers enchanted withproduct offerings & shopping experience overlooked thehigh prices.

Spent less on national marketing & advertising: relied mainlyon word-of-mouth recommendations from customers.

Team member compensation was tied to store profitability motivating the employees andincreasing store contributions.

Beforeentering into new leases, projections had topass specified profitability hurdlesabove the capital that would beinvested in thenew

store.

Purchases were made regionally or nationally leading toeconomies of scale.

Privatelabel offerings werecheaper and widely availablewithin store.

Please zoom in the image.


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Five elements that make up strategy diamond:

Arenas

Vehicles

Differentiators

Staging

Economic Logic

But strategy is more than choices on these five fronts. It is an integrated, mutually reinforcing set of

choiceschoices that form a coherent goal.

== Basically, WFM we need to explain not only the strategy diamond, but:

1. How it is derived from its mission to its core values and from there the strategy. And how the choices

they make on each of the five fronts are mutually reinforcing. The link among them is very important.


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Mission:

Whole Foods, Whole People, Whole Planet.

7 core values were actually converted into strategic and financial objectives and the co. strategy was

truly derived from it. From selling highest quality organic and natural food to delighting customers, retail

innovation and educating customers and team members about healthy living, team member happinessby providing great growth opportunities and excellent work environment, maximizing profits for

shareholders and caring about communities and environment.

Arenas:

Market Segment: Organic Foods Retailing Segment

Target Audience:

o WFM served a niche clientele, but also managed to attract a new kind of customer - one who

was willing to pay a premium to dabble in health food without being totally committed in

vegetarianism or organic lifestyle.o Food lovers who were willing to pay a premium to get pleasurable taste and indulgence for what

they saw as a high quality gourmet experience.

Geographic Area:

Upscale Urban Metropolitan Area

US, UK and Canada

High traffic shopping location

Premier real estate sites: freestanding, strip centers, high density mixed-use projects

2001-2009: store footprint45000-60000 square feet.

Internally developed model to analyze potential markets according to education levels, population

density, and income within certain drive times.Economic Logic

Cash investment: Calculate the total.


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Vehicles:

How to get to the arenas?

WFMGrowth Strategy:

1. Combination of opening new stores and acquiring small, owner managed chains that had capable

personnel and were located in desirable markets.

19912002Open new stores + Acquire small ones.Proactive Strategy

Unanticipated Change: Attractive acquisition candidates were hard to find. Therefore, WFM reacted to

this change and evolved its strategy:

20022007Management decided to drive growth by opening 10 15 intended bigger stores (40,000

-80,000 square feet) in arenas: metropolitan areas staging: each year. Arenas:These stores were on the

same scale or larger than the conventional super markets operated by Kroger, Safeway, Publix and other

chains.

Change: Unanticipated/Anticipated?

Purchased Wild Oats Market for $565 million.

Unanticipated Change: WFM completed the acquisition in Aug 2007 after FTC opposed the acquisition

but a US district court gave a go ahead. But in 2008, the US Court of Appeals reversed the lower courts

order and reopened the proceedings.

Reactive Strategy: Post the problematic settlement was made, management decided that going forward

WFM growth strategy would be primarily based on opening new stores rather than on making

acquisitions.


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Differentiators

Image | Customization | Price | Styling | Quality/Reliability

WFM was the worlds biggest seller of organic produce - from 20000 items in small stores to 50000

items in largest stores - including natural, organic, gourmet food items, household products, body

care and nutrition, education materials related to healthy eating, organic pet food, floraldepartment and other beverages.

Sell foods that met strict standards and that were of high quality in terms of nutrition freshness,

appearance and taste. WFM quality standards team maintains an extensive list of unacceptable

ingredientsin 2008, there were 81 chemicals on this list.

WFM clientele were enchanted by their product offerings and shopping experience that they

overlooked the high pricesand patronized the store in increasing numbers.

Image & Customization:Each store layout was customized to fit the particular site and building to

show off the particular product mix chosen for that stores target audience.

o Colorful dcor, products displayed in attractive manner to welcomed inspection and

stimulated buying.

o Project as authentic retailer of healthy organic products, lifestyle brand and a supermarket

playground with unusually appealing food selections. Great customer service, wide aisles

and cleanliness.

o

Product design:

o All non-food items entailed the use of non-animal testing methods and contained no

artificial ingredients.

o Private-label offerings led by its 365 Everyday Value and 365 Organic brands which

were less expensive and were available in many product categories.

Pricing:

o

Sell at most competitive price as possible.o Higher prices as compared to conventional supermarkets were due to the higher cost of

growing, distributing and marketing organic products.

o Unanticipated Change: 2008-09 recession

WFM executives had to act swiftly and decisively to change the co. strategy to

better match the economic climate: aggressive campaign to emphasize the

number of value-priced items and communicate with the customers about how

prices stacked up at WFM as compared to their rivals.

Services:

o Education about healthy foods and living and cooking classes.

o

Some of the stores had valet parking, massages, personal shopping and home delivery.o Locally made offerings and international sections from around the world Lebanon,

Morocco, India, Thai, Greece & Hungary.

o Fresh Grilledtoorder dishes.

o Personal attention by store personnel.


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Distribution:

o Purchased from local, regional and national whole suppliers.

o At Regional and national levels to gain economies of scale.

o In 2007, emphasis on buying directly from manufacturers and producers.

o Two produce procurement centers

o

Ten regional distribution, eight regional bake houses, five regional commissary kitchensand four seafood processing centers to supply its stores.

o

Allegrocentral coffee roasting operation


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Staging

Growth Strategy: Acquisitions + Open new stores. After the problematic Wild Oats acquisition events,

management decided to rely only on opening new stores rather than acquiring other organizations.

This graphs shows that WFM was aggressively expanding by opening and acquiring new stores until

2007 (The spike at 90 in 2007 was because of the Wild Oats acquisition) but then in 2008-09 recession

hit US, and the company had to scale back its store expansion program.

New stores opened after 12-24 months of signing the lease.

1015 17

712

7 712 13

179 9 10

1812 11

90

-1

95

-20

0

20

40

60

80

100

1

995

Increase in stores


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Economic Logic

After acquiring Wild Oats in 2007, WFM quickly sold 35 Henrys and Sun Harvest stores

previously acquired by Wild Oats for approx. $165 million, reducing its net purchase price for

Wild Oats to $535 million. Scaled back expansion program after recession in 2008-09.

Swiftly and aggressively changed the co. strategy to better match the economic climate:

emphasize the number of value-priced items and communicate how prices stacked up against

rivals.

Spent less on marketing and advertising. Relied mainly on word-of-mouth recommendations

from customers. Marketing budget was used in the in-store value guide, e-newsletter and other

promotional activities at individual stores. Knowledgeable and friendly store personnel

proactively helped customers so that the customer had pleasurable experience shopping at

WFM and advocated their positive experiences to their friends and family.

Team member compensation was tied to store profitability and stock option rewards weregiven. This promoted strong corporate culture and kept the employees motivated enough.

Local Producer Loan Program provided $10 million in low interest loans to promote organic

farming to small farmers. Their fresh produce was sold at the market.

Before entering into a new lease for new stores, the projections had to pass specified

profitability hurdles over and above a return on the capital invested in the store.

EVA based bonus system that linked profits after taxes and cost of capital to executives

compensation. At store level, it meant linking store performance to the team members working

in it.


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Fit Test:

How well does the strategy fit the companys situation?

External

A strategy has to bewell matched to industry and competitive conditions.Compare what the

others are doing in the industry.

Companys best market opportunities

o In 1980, when WFM opened with a staff of 19, there were less than half a dozen natural

foods supermarkets in US. By 1991, co. had 10 stores with revenues of $92.5 million and

a net income of $1.6 million, over the next 18 years, sales grew at a compound annual

rate of approx. 28% to over $8 billion.

Business environment: Organic Foods Retail Segment (Detail required)

Internal

Strategy must be tailored to the companys resources and competitive capabilities:

o Acquisition of Harrys Market superstore in 2002 where 75% of sales were perishables,

had provided WFM with personnel having valuable intellectual capital in creatively

merchandising all major perishable categories.

Strategy must be supported by a complementary set of functional activitiesSCM, operations,

sales and marketing, so on.

o

Employees in each store were divided into teams, headed by team leader. They were

empowered to make many decisions to support customer satisfaction. This was to keep

team members motivated enough to go to great lengths to satisfy and delight

customers and operate store as efficiently and profitably as possible.

Strategy must be compatible with a co. ability to execute the strategy in competent manner.

Dynamic

Strategy must evolve over time in alignment with the co. situation as external and internal

conditions change.

o Unanticipated Change: 2008-09 recession: Reactive Strategy:

WFM executives had to act swiftly and decisively to change the co. strategy to

better match the economic climate: aggressive campaign to emphasize the

number of value-priced items and communicate with the customers about how

prices stacked up at WFM as compared to their rivals.

In Nov 2007, the company announced it was scaling back its store expansion

program.

In Nov 2007, the company announced it was scaling back its store expansion

program. Reduction in a gross square footage of stores in development from 4.5

million in Nov 2007 to 3.3 million in Nov 2008 and 2.9 million in 2009.


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Average store size was lowered to 44000 in Feb 2010 as compared to

56000 in Nov 2006.

Leaner and more disciplined approach to design and build, smaller

stores with simpler dcor and less labor intensive departments to lower

costs.

Management instituted series of cost containment measures cost ofgoods sold, direct store expenses, general and admin expenses, hiring

and salary freeze. Steps to monitor and adjust work hours according to

store traffic and workforce reduction through normal attrition without

involuntary layoffs.

Competitive Advantage Test

Can the strategy help the company achieve a sustainable competitive advantage?

Long term sustainability. The bigger and more durable the competitive advantage, the more powerful itis.

WFM merchandising skills were one of the prime factors in its success to gain market share and

lure shoppers. Sales per square foot were double as compared to that of Kroger and Safeway.

The Performance Test

Is the strategy producing good co. performance?

Two kinds of performance indicators:

1. Competitive strength and market standing.

o WFM clientele were enchanted by their product offerings and shopping experience that they

overlooked the high prices and patronized the store in increasing numbers.

2. Profitability and financial strength.

Financial performance

o Sales revenues grew 20% annually during 2000-2007.

o Profitable every year except 2000.

o Very strong cash flows from operations prior to Wild Oats acquisition.

o Dividend from 2004

o Unanticipated change: 2008-2009 recession:

Result: In Feb 2010, management was pleased with the results of its new pricing

strategy and emphasis on value. Sales growth per store for the first quarter of

fiscal 2010 was 3.5% and total revenues were up 7% over the first quarter of

fiscal 2009.

Cost containment measures result: gross profit improved from 34.03% in fiscal

2008 to 34.29% in fiscal 2009 and 34.34% in first quarter of fiscal 2010. These

measures also produced very strong cash flows from operations. This money


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was then used in repaying long-term debt that was taken while the acquisition

of Wild Oats was going on.

Gain in market share

o WFM clientele were enchanted by their product offerings and shopping experience that

they overlooked the high prices and patronized the store in increasing numbers.

o

Competitive position

Profitability

strategy diamond - wfm analysis

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