whole foods market inc. entry strategy into...

International Business Environment

BSc in International Business

Copenhagen Business School

1

WHOLE FOODS MARKET INC.

ENTRY STRATEGY INTO CHINA


International Business Environment Exam: 48 hour’s individual home assignment

14.10 – 16.10.2015 Number of pages: 10

Number of characters (including spaces): 23, 406




2

1.1 Introduction

As of recent decades, companies are becoming more interconnected on many levels due to the

lowering of trade and investment barriers and advances in telecommunications and transportation

technologies. Whole Foods Market Inc. (WFM) is one of many MNEs that has expanded

internationally, benefitting from globalisation. But with the opportunities that globalisation presents

to firms come also many threats. As competition increases on the domestic food retail market, I

believe that the future growth of WFM is in China. The nation possesses certain location-specific

advantages that can match the firm’s core competencies. In this paper, I will begin by briefly

introducing WFM and the importance of its internationalisation decision into China, before

exploring this into depth through the OLI framework. Finally, I will propose an entry mode for

WFM into China, if I deem this to be a profitable market, and discuss how this can affect the firm’s

current strategy and organisation.

1.2 Company overview and internationalisation decision

Following a merger between two local natural food stores, WFM opened its very first store in Texas

in 1980. By 2006, the chain had exploited its first-mover advantage in a niche segment to become

“the world’s largest retail chain of natural organic foods supermarkets” (Meador, Britton, Phillips &

Howery, n.d.). Since 2001, WFM has operated abroad, with 10 of its 431 stores in Canada and 9 in

the UK (Fast Facts, WFM website). In FY2014, WFM’s revenues amounted to $14,194, an increase

of 9.9% over FY2013, but the US accounted for 96,7% this figure (Company profile, 21 Aug 2015).

This is worrisome considering the growing competition from large retailers in the US, such as

Costco and Walmart, selling organic foods and products for cheaper prices. In order to remain price

competitive, therefore, WFM should concentrate on its global expansion strategy, as revenues made

abroad can subsidise lower prices in the home market. Further reasons for WFM to internationalise

include risk diversification in the case of external shocks on the US market, reduced dependence on

domestic market sales thanks to an expansion of its consumer base, and the development of best

practices. As WFM sells perishable food, exporting is not an option for WFM. Thus, I believe that

WFM should engage in FDI in China, a decision that I will go on to explore using the OLI

framework according to Dunning’s Eclectic Paradigm theory.




3

2.0 The OLI framework of the Eclectic Paradigm Theory

According to Dunning, a firm should engage in FDI in a country that has location-specific

advantages that allow the firm to exploit its competitive, or owner-specific, advantages in that

country’s market (Hill, 2014).

2.1 Ownership-specific advantages

WFM has certain core competencies that it can exploit abroad to increase both profitability and

profit growth. It can do this by reducing the costs of value creation and/or by creating perceived

value (Porter in Hill, 2014). I will outline these using the VRIO framework, suggesting that only

resources that are valuable, rare, hard to imitate, and organisationally embedded will generate

sustainable competitive advantage (Barney, 1991). WFM has competitive advantages in both

primary and supporting activities.

Primary activities

With its broad and differentiated product offering, the firm can address numerous market segments.

This also protects it in case of major drops in a product’s demand, and WFM can test a new product

on the market without it affecting sales. Furthermore, WFM creates value by assuring excellent

quality, ethical, and sustainability standards for all of its items, e.g. by promising full GMO-

transparency by 2018 (“Our commitment”, WFM website). These core competencies are valuable

and rare, as no other food retailer in the US offers such a broad variety of products with excellent

standards. They are also hard to imitate, as certain of WFM’s quality controls are costly to

implement, such as the full GMO-transparency policy.

WFM’s reputable customer service is valuable, as it enables WFM to set prices near consumer’s

reservation price. The company increases perceived value of its products through home delivery

from its online store, exceptional in-store service, including personal shopping, and by engaging

customers in health initiatives e.g. in-store education (MarketLine Case Study, Nov 2012).

These core competencies are organisationally embedded. WFM’s mission is to create value to its

customers, team members, local and global communities in all of its value-adding activities. For

example, its open-door policy motivates employees on all levels to engage in the firm’s

development process (“Our Core Values”, WFM website).




4

Supporting activities

With its reputation relying on high quality standards, I assume WFM has a competitive advantage

in high quality control, possibly adopting a Six Sigma program to ensure minimal mistakes and

defects in its products. This allows WFM to reduce costs e.g. by increasing productivity and

reducing waste and rework of defected goods.

I will go on to analyse China’s location-specific advantages, continuously studying how these relate

with the specified ownership-specific advantages and deciding whether they are all equally relevant

in the case of WFM. Existing bi- and multi-later trade agreements between China and the US also

affect WFM’s internationalisation decision, as will be explored.

2.2 China’s location-specific advantages and potential threats

Social-cultural factors

Growing disposable incomes and shifting consumer tastes are interrelated social-cultural factors that

can benefit WFM. Chinese consumer’s purchasing power is increasing as disposable incomes are

growing and inequality gaps are closing (China, July 2015). Also, due to growing health concerns

and fears over infamous food scandals, the demand for organic foods and foreign health food

imports is sharply rising, despite their premium prices. Competitors struggle to set prices low

enough to attract customers, but high enough to ensure brand quality (Wright, 30 June 2015). Thus,

WFM can use its excellent quality standards to create perceived value to customers and differentiate

itself, filling a gap in the Chinese market.

Regarding culture on the consumer end, WFM can use its broad product range to target the younger

Chinese generation, more open to Western ideals. WFM’s customer service can also be transferred

to China, where personal shopping experiences are preferred (Hudson & Moore-Mangin, n.d).

However, Chinese business culture is unlike what WFM has experienced in the Anglo-Saxon

countries where it currently operates. Chinese culture emphasises collectivism, making employees

dedicated and loyal. This is different to US individualistic but can can cut costs of doing business

there with mutual respect of each other’s cultures. To succeed in China, WFM must cultivate

guanxiwang, a network of social relationships involving reciprocal obligations (Hill, 2014). This

could be difficult as a foreigner without local help.

5




Finally, WFM must acknowledge that China’s social-cultural factors are dynamic due to constantly

changing demographics.

Economic factors

Chinese monetary and fiscal policy has traditionally concentrated on short-term growth, forgetting

the importance of public goods spending for long-term development (Porter, 25 Aug 2015).

Consequently, GDP per capita is low in China, a threat to WFM if it wants a broad consumer base.

Also, due to a lack of financial market transparency, bounded rationality can increase transaction

costs for WFM. Nonetheless, having a Chinese partner can avoid this. Also, since late 1970s, China

has moved from a closed and centrally planned system to a market-oriented one. Reforms, such as

decentralisation and openness to FDI and trade, have made China a superpower with an average

GDP growth of 9.96% in 2004-14 (China, July 2015) and a PPP that may exceed the US in 2016

(Picardo, 14 March 2014). This reflects in the organic food retail industry as China was overall the

fourth, and the first emerging, country in retail sales of organic food worldwide in 2013 (FiBL;

IFOAM; AMI, Statista 2015). Although this means greater competition for WFM, its core

competencies, e.g. its high quality standards, differentiate it from other retailers in China. In

essence, there is great potential for WFM to take part in China’s continued growth.

Exchange rate

By setting the value of its currency, the renminbi, referencing a basket of currencies including the

dollar, China operates a managed float exchange regime. Recent signs of China’s “mercantilist

policy” of devaluation have made exports to US cheaper and imports costlier (Bajpaj, 11 June

2015). This can profit WFM, as they can offer their high-quality products cheaper than other

imported foreign products. Yet, this assumes that WFM succeeds in relying on Chinese

procurement, rather than American imports to stock its stores, as the latter would raise costs and

prices.

A managed float system can be manipulated when it goes outside a certain bandwidth to ensure a

stable inflation rate and investment environment. But, this controlling feature of a fixed exchange

regime can cause fluctuations in price levels, as happened in the gold standard era. Also, China’s

dirty float policy has led to conflicts with the US. With a floating exchange regime, US enjoys

allocation of resources according to market forces and autonomy in its monetary policy, which can

6




be targeted to price stability and growth. However, its floating exchange rate relative to China’s

manipulated one puts US importers at a disadvantage, shown by the country’s hefty trade deficit

with China. Considering these differences in Chinese and US exchange rate regime, WFM must

consider hedging tactics to reduce its economic exposure if it enters into China. I would recommend

WFM to use currency swaps, e.g. a spot against a forward swap, to ensure that their deals are as

profitable in the future (Hill, 2014).

Political-legal factors

Because of the minor public opposition to the Chinese Communist Party (CCP), analysts forecast

political stability in China. Nevertheless, with recent growth stagnation, others claim

democratisation to be a key factor in ensuring further economic development (Porter, 25 August

2015). Lack of data transparency makes a thorough analysis of the situation difficult. This also

increases corruption activities in China, a threat to WFM as working around it could increase

transaction costs.

Hoping to raise demand for domestic food products by ensuring food safety, the CCP implemented

a harsh food law on October 1st, 2015. Overall, “the new law grants regulatory bodies more

authority, sets harsher penalties for violations, and introduces more guidelines for consumer product

manufacturing and production” (Shira & Al., 13 May, 2015). This can benefit WFM, who’s strict

quality standards, such as the GMO-transparency policy, may comply with the new law, giving

them a head start as competitors struggle to update their value chain. It can also be costly for WFM

if they have to change any deep-rooted practices, and especially if they fail to comply with any

guidelines as this could damage their reputable brand equity.

Technological factors

In its 12th Five-year plan, the Chinese government has decided to switch strategy from a policy of

joint ventures and imported technology transfers to one of independent innovation (China, July

2015). It has R&D interests in agriculture and food and bio-products, which can aid WFM in

supplying its stores with high quality Chinese goods. Further, the percentage of Internet users is

expected to rise from its 2013 rate of 45.1% (China, July 2015). This is an incentive for WFM to set

up an online shopping/delivery system in China to reach a larger consumer base, transferring their

competence of unique customer service.

7




Geographical factors

Despite having only 8% of the world’s farmland, China moved between 2000-06 from 45th to

second place in number of hectares of organic produce (Paul, 2007). The region of Inner Mongolia

is relatively near Beijing and had the greatest number of acreage of organically farmed land in

China in 2014 (CGFDC, Statista 2015), making it a potential source of procurement for WFM.

Internationalisation to China could also open doors to other Asian markets with whom China has

trade agreements.

Relevance

China’s social-cultural, political-legal and economic factors are the most relevant for WFM, as they

present both opportunities and threats that the internalisation decision must account for. Another

point to consider is the effects of bi- or multi-lateral trade agreements between the US and China.

This will now be explored.

China – US Trade Agreements

Acknowledging its simplifications, Ricardo’s “theory of comparative advantage suggests that trade

is a positive-sum game in which all countries that participate realise economic gains” (p.168, Hill,

2014). China and the US have recognised their mutual benefit collaboration, hence their many bi-

lateral trade agreements. They also adhere to common multi-lateral trade agreements such as APEC,

WTO and the latest Trans-Pacific Partnership (TPP). In theory, these reduce trade barriers, putting

downward pressures on costs and prices (benefitting consumers), fortify a multi-lateral transfer of

technological, managerial and marketing know-how and stimulate member’s economic growth rates

(Hill, 2014).

The real effects of the TPP are unwritten, but it will reduce agricultural barriers (World Grain, 10

May 2015). This means that WFM can produce certain goods in its American factories and export

them to its Chinese subsidiary at a low cost. The TTP can likewise translate into lower risks for

WFM of doing business in China. Indeed, the agreement’s common framework for intellectual

property rights, labour- and environmental law and an investor-state dispute settlement mechanism

can facilitate activities. Also, the TTP opens a door for WFM to access other Asian markets for the

procurement of its goods and possibly for future expansion.

8




Having followed the OLI framework to explore China’s many location-specific advantages, I can

argue that there are many opportunities for WFM to succeed in the area. Nonetheless, the MNE

must acknowledge multiple threats when deciding on its entry strategy. I will go on to analyse a

proposed entry mode for WFM in China by comparing the benefits, costs and risks of two different

strategies before choosing one that I deem superior.

2.3 Internalisation advantage - WFM entry mode

Despite the many threats to WFM of internationalising to China, the country possesses apparent

location-specific advantages that would allow the firm to match its competitive advantages there.

Referring to Dunning’s theory (Hill, 2014), WFM should engage in FDI to maintain control of the

firm’s value adding activities, thus internalising its transaction costs. The Chinese market has high

pressures for cost reductions, due to price competitiveness and consumers’ low switching costs, but

also for local responsiveness, to account for differences in culture and harsh food guidelines. Thus,

WFM should follow a transnational strategy, which I believe WFM can do either through an

acquisition or a joint venture.

Acquisition

By acquiring a Chinese company, WFM can set up one or more wholly owned subsidiaries over

which WFM has full control. Consequently, WFM would not risk losing control over its high

quality standards, its key core competence. But acquiring a firm and setting up operations would

require immense capital investment, and WFM would bear the full risks associated with doing

business in an environment very different to the US.

Joint venture

Through a joint venture (JV), WFM could acquire local know-how and guanxiwang from its

partner. Additionally, the partner could protect it from corruption and legal conflicts, particularly

critical considering the new food regulations. The JV can take the form of a strategic alliance with a

partner that has good knowledge of the market but that needs WFM’s financial strength and

retailing abilities to expand. By cooperating, the risks of failure are lower, and so are the costs in

case of failure. The drawback of this entry mode is that WFM would not have full control of its

operations, but WFM can work around this by finding a partner that would accept a minority share

in the venture, although this can be hard. Also, ensuring a successful strategic alliance is vital.

9




WFM can do this by investing in a thorough partner selection procedure, an alliance structure

guarding WFM from opportunism by the partner and by encouraging interpersonal relationship

building (Hill, 2014).

Overall, I believe that the lower costs and risk factors of doing a JV outweigh the benefit of having

full control of operations in China, as would be the case if WFM entered through an acquisition.

Therefore, I think that a JV entry mode proves superior to an acquisition. I will go on to specify

how WFM should enter China through a joint venture.

Store formats

With reference to the Uppsala Model, WFM should start its venture in China on a small-scale, i.e.

partnering up with a firm that has max ten stores, only in urban areas. A store in Beijing would

locate WFM near the organic fields of Inner Mongolia and open it up to a large, profitable

consumer base. As WFM has previously only expanded to Canada and the UK, which have similar

location-specific advantages as its home market, the MNE should test the Chinese market before

investing too much in it. The store sizes should be smaller than in the US to attract more “in and

out” Chinese consumers, who generally prefer to shop less and more often. This also reduces

overhead costs and supports good customer service as employee to shopper ratio is improved. With

deli bars and full-service bakeries, consumers can experience the same personal interactions as they

do at the popular “wet” markets. All of these features create greater perceived value of WFM’s

goods, allowing the firm to set high prices.

The entry mode should include a WFM online shopping portal similar to its American one, as

Chinese consumers are increasingly turning to online retail and online to offline (O2O) platforms

(Wright, 30 June 2015). Through a delivery system they can also reach a larger consumer base at

minimal costs.

Procurement

All products must meet WFM’s high quality standards, whatever their procurement source. Before

entry, WFM should invest in analyses to find suppliers that can meet its quality requirements. In

this way it can transfer its core competence of high quality control, reducing costs. WFM’s product

range should include Western-inspired products, highly demanded by Chinese consumers, but also

products adapted to local tastes that are locally procured. If the exchange rate allows for it, and with

10




the TPP reducing costs of trade, WFM can look to import its own-branded products from its

domestic factories. As in the US, these products can help WFM target lower-income consumers.

Alternatively, WFM can outsource its own-brand production to an Asian manufacturer to reduce

costs, but this carries the risk of lower quality control.

Organisational structure

The Chinese operations should have decentralised vertical differentiation to ensure local

responsiveness. Each store should be managed by host-country nationals (HCN) with local know-

how and guanxi, supported by parent-country nationals who are operational experts. WFM should

exploit China’s cheap labour by training HCNs to carry out in-store and customer services adapted

to local tastes. For positions not involving on-floor sales, WFM should have a geocentric approach

to their staffing policy. WFM’s corporate culture, such as its open-door policy, should be

standardised to foster innovation and the transfer of best practices between operational units in all

countries.

Having analysed WFM’s entry mode into China, it is important to discuss the extent to which this

decision could influence the strategy and organisation of the MNE.

3.0 The influence of internationalisation decision on strategy and organisation

The internalisation decision could change a number of aspects of the firm’s strategy and

organisation. Firstly, to tackle aggressive pricing on the domestic market, WFM is opening a

discount chain in 2016, which analysts think could erode WFM’s strong brand equity (Petersen, 4

June, 2015). By internationalising, WFM would not need to rely as heavily on this strategy, as

international profits can hopefully finance lower prices on the domestic markets. Also, in line with

its transnational strategy, WFM should encourage a constant flow of best practices between its

Chinese and other operations to constantly improve its value chain in every country. Further, the

expansion may alter WFM’s global supply chain, e.g. if WFM discovers cheaper procurement

options in China that meet its strict quality standards. Finally, in terms of organisational structure,

the expansion means greater need for coordination control, pressuring WFM to create liaison roles

or even invest in coordination teams to integrate units.

WFM must acknowledge these factors when considering the internalisation decision, as they may

change the company for better or for worse.

11




4.0 Conclusion

On the basis of the Uppsala model, WFM has already taken the first steps to greater growth by

expanding to the UK and Canada. However, as domestic competition is increasing in the American

natural and organic food industry, WFM should seek further growth potential by expanding even

more. I believe that WFM could succeed in China, an internalisation decision that I have explored

throughout this paper using the OLI framework. Having studied WFM’s ownership-specific

advantages I have outlined multiple competitive advantages that WFM can transfer abroad, such as

excellent quality standards and customer service. Further, the study of China’s location-specific

advantages reflects the many possibilities for WFM do be profitable there. Such advantages include

China’s shifting demographics, consumer preferences and regulations that favour high-quality food.

Nevertheless, the stakes of entering China are also very high. When considering the proposed

expansion strategy, I recommend that WFM should focus on the aspects that allow the MNE to

transfer its core competencies to China. In particular, it must make the necessary investments to

select a partner that it can trust with guaranteeing a successful transfer of its reputable product and

service quality. WFM’s high quality control and high standards allow it to cut costs, but most

importantly it creates value that can differentiate the brand from its lower-cost competitors. Equally

as important for its brand equity is that WFM strictly follows China’s new food regulations if it

decides to enter China. One mistake can be the end to its high-quality reputation, thus also its

competitive advantage. Furthermore, the demand for natural and organic foods and products in

China is rising rapidly in line with growing disposable incomes. Hence, I recommend that WFM

moves quickly into the market before other companies beat it to it.

With these considerations, I deem China to have a profitable market for Whole Foods Market Inc.

to continue its internationalisation endeavours in.

12




Bibliography

Bajpai, Prableen. (June 11, 2015) Yuan Vs. RMB: Understanding the Difference.

Investopedia, http://www.investopedia.com/articles/forex/061115/yuan-vs-rmb-understanding-

difference.asp

Barney, Jay. (1991) "Firm resources and sustained competitive advantage." Journal of

Management , Vol 17(1): pp. 99-120.

CGFDC (n.d.), Statista 2015, Acreage of organically farmed land in China in 2014, by

region (in 1,000 hectares), http://www.statista.com.esc-web.lib.cbs.dk/statistics/448103/acreage-of-

organically-famed-land-in-china-by-region/

China, In-depth PESTLE insights (July 2015) MarketLine, Reference code: ML00002-035

www.marketline.com

Company Profile of Whole Foods Market, Inc. (21 August 2015) by MarketLine,

www.marketline.com, Reference Code: BD72666B-7DBD-4CB9-A94F-4FDC7997ECA7

“Fast Facts” (n.d.), Whole Foods Market website, http://media.wholefoodsmarket.com/fast-

facts/

FiBL; IFOAM; AMI (n.d.) Statista, Retail sales share of organic food worldwide in 2013,

by country, http://www.statista.com.esc-web.lib.cbs.dk/statistics/262347/worldwide-spending-on-

organic-products-by-country/

Hudson, S. and Moore-Mangin, A. (n.d) Ch.4 Opening Case, Carrefour’s Struggles in

China in Hill, Charles W.L. (2014) International Business: Competing in the Global Marketplace,

McGraw-Hill Education (UK), (10th edition), reference to Comparative Advantage theory from (pp.

89-90)

MarketLine Case study (November 2012), Whole Foods Market, The biggest Retailer of

organic and natural foods in the world, Reference Code: ML00007-032, www.marketline.com

Meador, Don; Britton, Mike; Phillips, Paige; Howery, Andrew (n.d.) Case analysis - Whole

Foods Market http://pnphillip.asp.radford.edu/whole%20Foods%20Case.pdf, Latest reviewed on

the 14/10/15

Hill, Charles W.L. (2014) International Business: Competing in the Global Marketplace,

McGraw-Hill Education (UK) (10th edition)

http://www.investopedia.com/articles/forex/061115/yuan-vs-rmb-understanding-

http://www.statista.com.esc-web.lib.cbs.dk/statistics/448103/acreage-of-

http://www.marketline.com/

http://media.wholefoodsmarket.com/fast-

http://www.statista.com.esc-web.lib.cbs.dk/statistics/262347/worldwide-spending-on-

http://pnphillip.asp.radford.edu/whole%20Foods%20Case.pdf

13




Hill, Charles W.L. (2014) International Business: Competing in the Global Marketplace,

McGraw-Hill Education (UK), (10th edition), reference to Comparative Advantage theory from

page 168.

“Our commitment to GMO labelling” (n.d.) http://www.wholefoodsmarket.com/our-

commitment-gmo-transparency

“Our Core Values” (n.d.), Whole Foods Market website,

http://www.wholefoodsmarket.com/mission-values/core-values

Paul, J. (2007) China’s Organic Revolution, Journal of Organic Systems 2007 2(1) 1-11,

School of Geography & Environmental Studies, University of Tasmania, Australia.

Petersen, Hayley (June 4, 2015, 7.19 PM) ‘Why Whole Food’s plan to open cheaper store

could backfire’, Business Insider UK, http://uk.businessinsider.com/why-whole-foods-plan-to-open-

a-cheaper-store-could-backfire-2015-6?r=US&IR=T

Porter, M.E. and the theory of Competitive Advantage in Hill, Charles W.L. (2014)

International Business: Competing in the Global Marketplace, McGraw-Hill Education (UK) (pp.

381-386)

Porter, Eduardo (25 August 2015) Political Risks May Foil Economic Reform in China, The

New York Times, http://www.nytimes.com/2015/08/26/business/economy/chinese-economy-faces-

risks-from-political-instability.html?_r=0

Ricardo, E. (March 14, 2014) Why China’s Currency Tangos with the USD.

http://www.investopedia.com/articles/forex/09/chinas-peg-to-the-dollar.asp

Shira, D. & Associates. Editor: Wright, K. (May 13, 2015) China Releases Harshest Food

Safety Law in History, China Briefing News, http://www.china-

briefing.com/news/2015/05/13/china-releases-harshest-food-safety-law-in-history.html

World Grain (10 May 2015) TPP agreement to boost agricultural trade, http://www.world-

grain.com/articles/news_home/World_Grain_News/2015/10/TPP_agreement_to_boost_agricul.asp

x?ID=%7B2B5314EA-DBED-49C3-B749-AA49B1AC30DD%7D&cck=1

Wright, Kimberly (June 30, 2015) Going Organic: Investing in China’s Growing Health

Foods Market, China Business Review, http://www.chinabusinessreview.com/going-organic-

investing-in-chinas-growing-health-foods-market/

http://www.wholefoodsmarket.com/our-

http://www.wholefoodsmarket.com/mission-values/core-values

http://uk.businessinsider.com/why-whole-foods-plan-to-open-

http://www.nytimes.com/2015/08/26/business/economy/chinese-economy-faces-

http://www.investopedia.com/articles/forex/09/chinas-peg-to-the-dollar.asp

http://www.china-/

http://www.world-/

http://www.chinabusinessreview.com/going-organic-

whole foods market inc. entry strategy into...

Documents