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Thompson-Gamble-Strickland: Strategy: Winning in the Marketplace V. Cases in Crafting and Executing Strategy 1. Whole Foods Market, Inc. © The McGraw-Hill Companies, 2004 CASE 1 Whole Foods Market, Inc. Arthur A. Thompson The University of Alabama C-1 in 1980 as one small store in Austin, Texas, Whole Foods Market had by 2002 evolved into the world’s largest retail chain of natural and organic foods supermarkets. The company had over 140 stores in the United States and Canada and sales of $2.7 billion; revenues had grown at more than 20 percent for 12 consecutive quarters. John Mackey, the company’s cofounder and CEO, said that throughout its rapid growth Whole Foods Market had “remained a uniquely mission-driven company—highly selective about what we sell, dedicated to our core values and stringent quality standards and committed to sustainable agriculture.” The company’s stated mission was “to improve the health, well-being, and healing of both people and the planet”—a mission captured in the company’s slogan “Whole Foods, Whole People, Whole Planet” (see Exhibit 1). In pursuit of this mission, the company’s strategic plan was to continue to expand its retail operations to offer the highest quality and most nutritious foods to more and more customers, helping them to live healthier and more vital lives. During its 22-year history, Whole Foods Market had been a leader in natural and organic foods movement across the United States, helping the industry gain acceptance among growing numbers of consumers. The com- pany’s long-term objectives were to have 400 stores and sales of $10 billion by 2010. John Mackey’s vision was for Whole Foods to become a national brand and be re- garded as the best food retailer in every community it served. The Natural and Organic Foods Industry The combined sales of natural and organic foods—about $34 billion in 2001—repre- sented about 5 percent of the roughly $685 billion in total U.S. grocery store sales. Natural foods are defined as foods that are minimally processed; largely or completely free of artificial ingredients, preservatives, and other non–naturally occurring chemi- cals; and as near to their whole, natural state as possible. The U.S. Department of Agri- culture’s Food and Safety Inspection Service defines natural food as “a product containing no artificial ingredient or added color and that is minimally processed.” Sales of natural foods products had increased at double-digit rates in the 1990s, but Copyright © 2003 by Arthur A. Thompson. All rights reserved. Founded

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Page 1: Whole Foods

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

CASE 1Whole Foods Market, Inc.

Arthur A. ThompsonThe University of Alabama

C-1

in 1980 as one small store in Austin, Texas, Whole FoodsMarket had by 2002 evolved into the world’s largest retail

chain of natural and organic foods supermarkets. The company had over 140 stores in theUnited States and Canada and sales of $2.7 billion; revenues had grown at more than 20percent for 12 consecutive quarters. John Mackey, the company’s cofounder and CEO,said that throughout its rapid growth Whole Foods Market had “remained a uniquelymission-driven company—highly selective about what we sell, dedicated to our corevalues and stringent quality standards and committed to sustainable agriculture.”

The company’s stated mission was “to improve the health, well-being, and healingof both people and the planet”—a mission captured in the company’s slogan “WholeFoods, Whole People, Whole Planet” (see Exhibit 1). In pursuit of this mission, thecompany’s strategic plan was to continue to expand its retail operations to offer thehighest quality and most nutritious foods to more and more customers, helping themto live healthier and more vital lives. During its 22-year history, Whole Foods Markethad been a leader in natural and organic foods movement across the United States,helping the industry gain acceptance among growing numbers of consumers. The com-pany’s long-term objectives were to have 400 stores and sales of $10 billion by 2010.John Mackey’s vision was for Whole Foods to become a national brand and be re-garded as the best food retailer in every community it served.

The Natural and Organic FoodsIndustry

The combined sales of natural and organic foods—about $34 billion in 2001—repre-sented about 5 percent of the roughly $685 billion in total U.S. grocery store sales.Natural foods are defined as foods that are minimally processed; largely or completelyfree of artificial ingredients, preservatives, and other non–naturally occurring chemi-cals; and as near to their whole, natural state as possible. The U.S. Department of Agri-culture’s Food and Safety Inspection Service defines natural food as “a productcontaining no artificial ingredient or added color and that is minimally processed.”Sales of natural foods products had increased at double-digit rates in the 1990s, but

Copyright © 2003 by Arthur A. Thompson. All rights reserved.

Founded

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Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

growth slowed to 8.3 percent in 2001 and was running in the single digits in 2002.Even so, this was considerably higher than the flat 1–2 percent sales growth at con-ventional supermarket chains. The fastest-growing categories in Natural Foods Mer-chandiser’s annual market survey were nutrition bars (21 percent); in-store foodservice—deli, restaurant, and juice bars (16 percent); other beverages, excluding beer,wine, coffee, tea, and dairy (12 percent); and snack foods (10 percent).

Organic foods included fresh fruits and vegetables, meats, and processed foodsproduced using:■ Agricultural management practices that promoted a healthy and renewable eco-

system that used no genetically engineered seeds or crops, sewage sludge, long-lasting pesticides, herbicides, or fungicides.

■ Livestock management practices that involved organically grown feed, fresh air,and outdoor access for the animals, and no use of antibiotics or growth hormones.

■ Food processing practices that protected the integrity of the organic product anddid not involve the use of radiation, genetically modified organisms, or syntheticpreservatives.

In 1990, passage of the Organic Food Production Act started the process of establish-ing national standards for organically grown products in the United States, a movementthat included farmers, food activists, conventional food producers, and consumergroups. In October 2002, the U.S. Department of Agriculture (USDA) officially estab-lished labeling standards for organic products, overriding both the patchwork ofinconsistent state regulations for what could be labeled as organic and the different

C-2 PART FIVE Cases in Crafting and Executing Strategy

Exhibit 1 WHOLE FOODS MARKET’S SLOGAN: WHOLE FOODS,WHOLE PEOPLE, WHOLE PLANET

Whole Foods

We obtain our products locally and from all over the world, often from small, uniquely dedi-cated food artisans. We strive to offer the highest quality, least processed, most flavorfuland naturally preserved foods. Why? Because food in its purest state—unadulterated byartificial additives, sweeteners, colorings and preservatives—is the best tasting and mostnutritious food available.

Whole People

We recruit the best people we can to become part of our team. We empower them to maketheir own decisions, creating a respectful workplace where people are treated fairly and arehighly motivated to succeed. We look for people who are passionate about food. Our teammembers are also well-rounded human beings. They play a critical role in helping build thestore into a profitable and beneficial part of its community.

Whole Planet

We believe companies, like individuals, must assume their share of responsibility as tenantsof Planet Earth. On a global basis we actively support organic farming—the best method forpromoting sustainable agriculture and protecting the environment and the farm workers.On a local basis, we are actively involved in our communities by supporting food banks,sponsoring neighborhood events, compensating our team members for community servicework, and contributing at least five percent of total net profits to not-for-profit organizations.

Source: www.wholefoodsmarket.com, December 7, 2002.

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Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

rules of some 43 agencies for certifying organic products. The new USDA regula-tions established four categories of food with organic ingredients, with varying levelsof organic purity:

1. 100 percent organic products: Such products were usually whole foods, such asfresh fruits and vegetables, grown by organic methods—which meant that theproduct had been grown without the use of synthetic pesticides or sewage-basedfertilizers, had not been subjected to irradiation, and had not been genetically mod-ified or injected with bioengineered organisms, growth hormones, or antibiotics.Products that were 100 percent organic could carry the green USDA organic certi-fication seal, provided the merchant could document that the food product hadbeen organically grown (usually by a certified organic producer).

2. Organic products: Such products, often processed, had to have at least 95 percentorganically certified ingredients. These could also carry the green USDA organiccertification seal.

3. Made with organic ingredients: Such products had to have at least 70 percent or-ganic ingredients; they could be labeled “made with organic ingredients” but couldnot display the USDA seal.

4. All other products with organic ingredients: Products with less than 70 percent or-ganic ingredients could not use the word organic on the front of a package, but or-ganic ingredients could be listed among other ingredients in a less prominent partof the package.

An official with the National Organic Program, commenting on the appropriatenessand need for the new USDA regulations, said, “For the first time, when consumers seethe word organic on a package, it will have consistent meaning.”1 The new labelingprogram was not intended as a health or safety program (organic products have notbeen shown to be more nutritious than conventionally grown products, according tothe American Dietetic Association), but rather as a marketing solution. An organiclabel has long been a selling point for shoppers wanting to avoid pesticides or to sup-port environmentally friendly agricultural practices. However, the new regulations re-quired additional documentation on the part of growers, processors, exporters,importers, shippers, and merchants to verify that they were certified to grow, process,or handle organic products carrying the USDA’s organic seal.

Sales of organics were an estimated $9–$11 billion in 2001, up from $1 billion in1990, and were growing at a 20–24 percent annual rate. The Organic Trade Associa-tion estimated that sales of organic food products would reach $20 billion in 2005. In2002, organic products were sold in about 20,000 natural foods stores and about 70percent of conventional supermarkets.

According to the USDA, 2000 was the first year in which more organic food wassold in conventional U.S. supermarkets than in the nation’s 20,000 natural foods stores.In the past several years, most mainstream supermarkets had been expanding theirselections of natural and organic products, which ranged from potato chips to freshproduce to wines. Fresh produce was the most popular organic product—in 2001,5 percent of the lettuce and 3 percent of the apples produced in the United States wereorganically grown. Meat, dairy, and convenience foods were among the fastest grow-ing organic product categories. A number of supermarket chains had added naturalfoods sections to their stores; Kroger had special sections for natural foods and organ-ics in almost half of its 2,400 stores in 2002, and the number was growing. Wal-Mart’snewest retail division, the smaller-format Neighborhood Markets, had a special

CASE 1 Whole Foods Market, Inc. C-3

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Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

“healthy-living” section that included organic foods; Costco Wholesale was experi-menting with a Costco Fresh store focused on gourmet foods and wine. 7-Eleven hadbegun selling organic cookies at 600 stores in California. A few grocery chains, in-cluding upscale Harris Teeter in the southeastern United States and Whole Foods Mar-ket, had launched their own private-label brands of organics. Most industry observersexpected that, as demand for natural and organic foods expanded, conventional super-markets would continue to expand their offerings and selection.

Leading food processors were showing greater interest in organics as well. Heinzhad recently introduced an organic ketchup and owned a 19 percent stake in HainCelestial Group, one of the largest organic and natural foods producers. Starbucks,Green Mountain Coffee, and several other premium coffee marketers had introduced anumber of organically grown coffees; Odwalla juices were organic; and Tyson Foodshad introduced a line of organic chicken products. Lite House organic salad dressingshad recently been added to the shelves of several mainstream supermarkets. Majorfood processing companies like Kraft, General Mills, Groupe Danone (the parent ofDannon Yogurt), Dean Foods, and Kellogg had all purchased organic food producersin an effort to capitalize on sales-growth opportunities for healthy foods that tastegood. Dean Foods’ CEO, explaining the company’s acquisition of organic soy pro-ducer White Wave for $204 million in May 2002, said, “We believe that the trendtoward organics is in its infancy.”

Organic farmland in the United States was estimated at 2.4 million acres. An esti-mated 12,200 mostly small-scale farmers were growing organic products in 2002, andthe number was increasing about 12 percent annually. The amount of certified organiccropland doubled between 1997 and 2001, and livestock pastures increased at an evenfaster rate. However, less than 1 percent of U.S. farmland was certified organic in2002.

Several factors had combined to transform natural foods retailing, once a nichemarket, into the fastest-growing segment of U.S. food sales:■ Healthier eating patterns on the part of a populace that was becoming better edu-

cated about foods, nutrition, and good eating habits. Among those most interestedin organic products were aging affluent people concerned about health and better-for-you foods.

■ Increasing consumer concerns over the purity and safety of food due to the pres-ence of pesticide residues, growth hormones, artificial ingredients and other chem-icals, and genetically engineered ingredients.

■ Environmental concerns due to the degradation of water and soil quality.■ A “wellness,” or health-consciousness, trend among people of many ages and

ethnic groups.

The Nutrition Business Journal estimated in 2001 that 0.3 percent of U.S. adults, orabout 600,000 people, were heavy purchasers of organic foods, spending an average of$200 per month. Another 1.5 percent, or 3.3 million people, were light users, spendingabout $50 monthly. About 8 percent of American consumers bought organic productsoccasionally. The 90 percent of shoppers who bought no organic products at all wasseen as offering excellent long-term market potential for being converted to organics,but was not viewed as the best short-term target for sales growth.

Exhibit 2 shows 2001 data for the 10 largest U.S. supermarket retailers.

C-4 PART FIVE Cases in Crafting and Executing Strategy

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V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

Whole Foods Market

Whole Foods Market was founded in Austin, Texas, when three local businessmen de-cided the natural foods industry was ready for a supermarket format. The threefounders were John Mackey, owner of Safer Way Natural Foods, and Craig Wellerand Mark Skiles, owners of Clarksville Natural Grocery. The original Whole FoodsMarket opened in 1980 with a staff of only 19. It was an immediate success. At thetime, there were less than half a dozen natural foods supermarkets in the United States.By 1991, the company had 10 stores, revenues of $92.5 million, and net income of$1.6 million.

In 1997, when Whole Foods developed the “Whole Foods, Whole People, WholePlanet” slogan, John Mackey said:

This slogan taps into perhaps the deepest purpose of Whole Foods Market. It’sa purpose we seldom talk about because it seems pretentious, but a purposenevertheless felt by many of our team members and by many of our customers(and hopefully many of our shareholders too). Our deepest purpose as an orga-nization is helping support the health, well-being, and healing of both people(customers and Team Members) and of the planet (sustainable agriculture, or-ganic production and environmental sensitivity). When I peel away the onion ofmy personal consciousness down to its core in trying to understand what hasdriven me to create and grow this company, I come to my desire to promote thegeneral well-being of everyone on earth as well as the earth itself. This is mypersonal greater purpose with the company and the slogan perfectly reflects it.

Complementing the slogan were five core values shared by both top management andcompany personnel (see Exhibit 3).

CASE 1 Whole Foods Market, Inc. C-5

Exhibit 2 TEN LARGEST U.S. SUPERMARKET CHAINS, 2001

2001 Sales Share of TotalNumber Revenues U.S. Grocery Sales

Company of Stores (in billions) ($682.3 billion)

Wal-Mart Supercenters 1,060 $65.3 9.6%

Kroger 2,392 50.1 7.3

Albertson’s 2,541 37.9 5.6

Safeway 1,759 34.3 5.0

Ahold USA 1,600 23.2 3.4

Supervalu 463 21.3 3.1

Costco Wholesale 369 20.5 3.0

Sam’s Clubs 500 18.4 2.7

Publix Super Markets 684 15.1 2.2

Delhaize (Food Lion, Kash ’n Karry, Hannaford Bros.) 1,461 14.9 2.2

Source: www.supermarketnews.com, December 10, 2002.

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V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

C-6 PART FIVE Cases in Crafting and Executing Strategy

Exhibit 3 WHOLE FOODS MARKET’S CORE VALUES

Our Core Values

The following list of core values reflects what is truly important to us as an organization. These are not values thatchange from time to time, situation to situation or person to person, but rather they are the underpinning of our com-pany culture. Many people feel Whole Foods is an exciting company of which to be a part and a very special place towork. These core values are the primary reasons for this feeling, and they transcend our size and our growth rate. Bymaintaining these core values, regardless of how large a company Whole Foods becomes, we can preserve what hasalways been special about our company. These core values are the soul of our company.

Selling the Highest Quality Natural and Organic Products Available

■ Passion for Food

We appreciate and celebrate the difference natural and organic products can make in the quality of one’s life.■ Quality Standards

We have high standards and our goal is to sell the highest quality products we possibly can. We define quality byevaluating the ingredients, freshness, safety, taste, nutritive value and appearance of all of the products we carry.We are buying agents for our customers and not the selling agents for the manufacturers.

Satisfying and Delighting Our Customers

■ Our Customers

They are our most important stakeholders in our business and the lifeblood of our business. Only by satisfying ourcustomers first do we have the opportunity to satisfy the needs of our other stakeholders.

■ Extraordinary Customer Service

We go to extraordinary lengths to satisfy and delight our customers. We want to meet or exceed their expectationson every shopping trip. We know that by doing so we turn customers into advocates for our business. Advocatesdo more than shop with us, they talk about Whole Foods to their friends and others. We want to serve our cus-tomers competently, efficiently, knowledgeably and with flair.

■ Education

We can generate greater appreciation and loyalty from all of our stakeholders by educating them about natural andorganic foods, health, nutrition and the environment.

■ Meaningful Value

We offer value to our customers by providing them with high quality products, extraordinary service and a competi-tive price. We are constantly challenged to improve the value proposition to our customers.

■ Retail Innovation

We value retail experiments. Friendly competition within the company helps us to continually improve our stores.We constantly innovate and raise our retail standards and are not afraid to try new ideas and concepts.

■ Inviting Store Environments

We create store environments that are inviting and fun, and reflect the communities they serve. We want our storesto become community meeting places where our customers meet their friends and make new ones.

Team Member Happiness and Excellence

■ Empowering Work Environments

Our success is dependent upon the collective energy and intelligence of all of our Team Members. We strive to cre-ate a work environment where motivated Team Members can flourish and succeed to their highest potential. Weappreciate effort and reward results.

■ Self-Responsibility

We take responsibility for our own success and failures. We celebrate success and see failures as opportunities forgrowth. We recognize that we are responsible for our own happiness and success.

■ Self-Directed Teams

The fundamental work unit of the company is the self- directed Team. Teams meet regularly to discuss issues, solveproblems and appreciate each others’ contributions. Every Team Member belongs to a Team.

■ Open & Timely Information

We believe knowledge is power and we support our Team Members’ right to access information that impacts theirjobs. Our books are open to our Team Members, including our annual individual compensation report. We alsorecognize everyone’s right to be listened to and heard regardless of their point of view.

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V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

Whole Foods Market grew at a rapid clip in the 11 years following its founding,with sales rising to $2.7 billion—a compound rate of almost 36 percent—and profits in-creasing to $84.5 million. Average weekly sales at the company’s stores were climbing:

The company’s growth strategy was to expand via a combination of opening itsown new store and acquiring existing stores. About 40 percent of the company’s storebase had come from acquisitions; since 1991, the company had acquired 60 storesthrough 13 acquisitions (see Exhibit 4). Since the natural foods industry was highly

CASE 1 Whole Foods Market, Inc. C-7

Exhibit 3 (continued)

■ Incremental Progress

Our company continually improves through unleashing the collective creativity and intelligence of all of our TeamMembers. We recognize that everyone has a contribution to make. We keep getting better at what we do.

■ Shared Fate

We recognize there is a community of interest among all of our stakeholders. There are no entitlements; we sharetogether in our collective fate. To that end we have a salary cap that limits the compensation (wages plus profit in-centive bonuses) of any Team Member to ten times the average total compensation of all full-time Team Membersin the company.

Creating Wealth Through Profits & Growth

■ Stewardship

We are stewards of our shareholders’ investments and we take that responsibility very seriously. We are committedto increasing long term shareholder value.

■ Profits

We earn our profits everyday through voluntary exchange with our customers. We recognize that profits are essen-tial to creating capital for growth, prosperity, opportunity, job satisfaction and job security.

Caring About Our Communities & Our Environment

■ Sustainable Agriculture

We support organic farmers, growers and the environment through our commitment to sustainable agriculture andby expanding the market for organic products.

■ Wise Environmental Practices

We respect our environment and recycle, reuse, and reduce our waste wherever and whenever we can.■ Community Citizenship

We recognize our responsibility to be active participants in our local communities. We give a minimum of 5% of ourprofits every year to a wide variety of community and non-profit organizations. In addition, we pay our Team Mem-bers to give of their time to community and service organizations.

■ Integrity in All Business Dealings

Our trade partners are our allies in serving our stakeholders. We treat them with respect, fairness and integrity at alltimes and expect the same in return.

Source: www.wholefoodsmarket.com, December 9, 2002.

Fiscal Year Average Weekly Sales

1997 $277,054

1998 293,390

1999 309,836

2000 324,710

2001 353,024

2002 392,837

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V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

fragmented, consisting of close to 20,000 mostly one-store operations and small andregional chains, Whole Foods’ management planned to continue to pursue acquisitionsof smaller chains that provided access to desirable locations and markets as well as toexperienced team members. However, the company expected to grow more by open-ing new stores than by acquiring existing stores. Exhibit 5 summarizes the company’shistorical store growth.

C-8 PART FIVE Cases in Crafting and Executing Strategy

Exhibit 4 MAJOR ACQUISITIONS BY WHOLE FOODS MARKET

Company Number AcquisitionYear Acquired Location of Stores Costs

1992 Bread & Circus Northeast United States 6 $20 million plus $6.2million in common stock

1993 Mrs. Gooch’s Southern California 7 2,970,596 shares of common stock

1996 Fresh Fields East Coast and 4.8 million shares of stockChicago area 22 plus options for 549,000

additional shares

1997 Merchant of Vino Detroit area 6 Approximately 1 million shares of common stock

1999 Nature’s Heartland Boston area 4 $24.5 million

2000 Food 4 Thought (Natural Abilities, Inc.) Sonoma County, CA 3 $25.7 million, plus

assumption of certain liabilities

2001 Harry’s Farmer’s Market Atlanta 3 $35 million in cash plus certain liabilities

Source: Company documents.

Exhibit 5 GROWTH IN THE NUMBER OF STORES IN THE WHOLEFOODS MARKET CHAIN

Number of Stores Number of Stores Year at End of Fiscal Year Year at End of Fiscal Year

1991 10 1997 75

1992 25 1998 87

1993 42 1999 100

1994 49 2000 117

1995 61 2001 126

1996 68 2002 135

Store Counts 1997 1998 1999 2000 2001 2002

Beginning of fiscal year 68 75 87 100 117 126

New stores opened 7 9 9 17 12 11

Stores acquired 2 6 5 3 0 3

Relocations and closures (2) (3) (1) (3) (3) (5)

End of fiscal year 75 87 100 117 126 135

Source: Company documents.

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V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

In late November 2002, the company had 19 stores in varying stages of develop-ment, averaging 41,000 square feet. The company expected to open 6–8 stores beforethe end of 2002, giving it a total of more than 140 stores going into 2003.

Store Size and Product LineThe company’s stores had an open format and generated average annual sales ap-proaching $21 million. Stores more than five years old averaged about 25,000 squarefeet, stores less than five years old averaged about 35,000 square feet, and the com-pany’s newest stores ranged between 25,000 and 50,000 square feet (the new storesof supermarket chains like Safeway and Kroger averaged around 55,000 square feet).The company sought to locate its new stores in the upscale areas of urban metropoli-tan centers—95 percent were located in the top 50 statistical metropolitan areas. In2002, Whole Foods had stores in 25 states and 33 of the top 50 U.S. metropolitanareas. In 2001, the company opened its first stores in New York City (Manhattan),Denver, Boca Raton, and St. Louis. In 2002, the company entered Portland; Albu-querque; Kansas City; Colorado Springs; and Toronto, Canada. Whole Foods Markethad announced plans for a new 80,000 square-foot landmark store in Austin.

Most stores were in high-traffic shopping locations, some were freestanding, andsome were in strip centers. Whole Foods had its own internally developed model toanalyze potential markets according to education levels, population density, and in-come. After picking a target metropolitan area, the company’s site consultant did acomprehensive site study and developed sales projections; potential sites had to passcertain financial hurdles. New stores opened 12 to 24 months after a lease was signed.The cash investment needed to ready a new Whole Foods Market for opening variedwith the metropolitan area, site characteristics, store size, and amount of work per-formed by the landlord; totals ranged from as little as $2 million to as much as $16million—the average for the past three years was $8.6 million. In addition to the costof readying a store for operation, it took approximately $750,000 to stock the storewith inventory, a portion of which was financed by vendors. Preopening expenses hadaveraged approximately $600,000 per store over the past three years.

Whole Foods’ product line included roughly 26,000 food and nonfood items thatappealed to both natural foods and gourmet shoppers:■ Fresh produce—fruits; vegetables; displays of fresh-cut fruits; and a selection of

seasonal, exotic, and specialty products like cactus pears and cippolini onions.■ Meat and poultry—natural meat, turkey, and chicken products from animals raised

on wholesome grains, pastureland, and well water (and not grown with the use ofby-products, hormones, or steroids). There were 20 varieties of house-madesausages.

■ Fresh seafood—a selection of fresh fish; shrimp; oysters; clams; mussels; home-made marinades; and exotic items like octopus, sushi, and black tip shark. A por-tion of the fresh fish selections at the seafood station came from the company’sPigeon Cove seafood facility and processing plant in Gloucester, Massachusetts.Seafood items coming from distant supply sources were flown in to stores to en-sure maximum freshness.

■ A selection of daily baked goods—breads, cakes, pies, cookies, bagels, muffins,and scones.

■ Prepared foods—soups, canned and packaged goods, oven-ready meals, rotisseriemeats, hearth-fired pizza, pastas, patés, salad bars, a sandwich station, and a

CASE 1 Whole Foods Market, Inc. C-9

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© The McGraw−Hill Companies, 2004

selection of entrées and side foods prepared daily. Many of the prepared foodscame from the company’s sizable commissary operations.

■ A worldwide selection of cheeses.■ Frozen foods, juices, yogurt and dairy products, smoothies, and bottled waters.■ A wide selection of bulk items in bins.■ An olive bar (with as many as 24 varieties).■ A selection of chocolates.■ Beer and wine—a wide selection of domestic and imported wines (selections var-

ied from store to store). Organic wines were among those available.■ A coffee and tea bar. The company had its own Allegro brand of specialty and or-

ganic coffees and several of the newer stores had in-store coffee-roasting equip-ment that allowed customers to order any of 20 varieties roasted while theyshopped. There were environmentally correct, premium exotic teas from remoteforests.

■ A nutrition and body care department containing vitamin supplements, herbs andteas, homeopathic remedies, soaps, natural body care and cosmetics products,yoga supplies, and aromatherapy products. All of these products were proven safeusing nonanimal testing methods and contained no artificial ingredients.

■ Pet products—natural pet foods (including the company’s own private-label line),treats, toys, and pest control remedies.

■ Grocery and household products—canned and packaged goods, pastas, soaps,cleaning products, and other conventional household items.

■ A floral department with sophisticated flower bouquets.■ A “365 Every Day Value” line of private-label products that included over 360

commodity-type natural products at very competitive price points. In addition, thecompany had a “Whole Foods” line of best-of-class premium and superpremiumorganic products and an organic food product line developed for children underthe “Whole Kids” label.

■ Educational products (information on alternative healthcare) and books relating tohealing, cookery, diet, and lifestyle. In some stores, there were cooking classes andnutrition sessions. In 2002, the company launched its own cookbook written bychef Steve Petusevsky and Whole Foods team members from across the UnitedStates; most of the 350 natural foods recipes were contributed by team members,and some were recipes for the prepared foods coming from the company’s ownkitchens. The cookbook, with its comprehensive glossary, healthful cooking ad-vice, and menu planning tips, attempted to mirror the essence of Whole FoodsMarket.

Whole Foods stores had recently begun to stock conventional household productsso as to make Whole Foods a one-stop grocery shopping destination where peoplecould get everything on their shopping list. Perishables accounted for about 65 percentof store sales. According to one industry analyst, Whole Foods had “put together theideal model for the foodie who’s a premium gourmet and the natural foods buyer.When you walk into a Whole Foods store, you’re overwhelmed by a desire to look ateverything you see.”2 Prices at Whole Foods were higher than at conventional super-markets; organics, for instance, cost 25 to 75 percent more than conventionally grownitems. However, as one analyst noted, “If people believe that the food is healthier and

C-10 PART FIVE Cases in Crafting and Executing Strategy

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they are doing something good for themselves, they are willing to invest a bit more,particularly as they get older…It’s not a fad.”3 Another grocery industry analyst notedthat while Whole Foods served a growing niche, it had managed to attract a new kindof customer, one who was willing to pay a premium to dabble in health food withoutbeing totally committed to vegetarianism or an organic lifestyle.4

One of Whole Foods Market’s foremost commitments to its customers was to sellfoods that met strict standards and that were high quality in terms of nutrition, fresh-ness, appearance, and taste. Whole Foods guaranteed 100 percent satisfaction on allitems purchased and went to great lengths to live up to its core value of satisfying anddelighting customers—see Exhibit 6 for the company’s product quality standards.

Store Description and Site SelectionWhole Foods Market did not have a standard store design. Instead, each store’s layoutwas customized to fit the particular site and building configuration and to best show offthe particular product mix for the store’s target clientele. Stores had a colorful decor,and products were attractively merchandised (see Exhibit 7). Most stores featuredhand-stacked produce, in-store chefs and open kitchens, scratch bakeries, preparedfoods stations, European-style charcuterie departments, sampling displays, and ever-changing selections and merchandise displays. Whole Foods got very high marks frommerchandising experts and customers for its presentation—from the bright colors ofthe produce displays, to the quality of the foods and customer service, to the wideaisles and cleanliness. Whole Foods’ merchandising skills were said to be a prime fac-tor in its success in luring shoppers back time and again. One retailing consultant saidof Whole Foods’ new store in Toronto, “The visual and sensory experience is superla-tive. Today, food is a way of defining who we are and Whole Foods has taken it up anotch.”5 The Toronto store had biographies of farmers suspended from the ceiling onplacards; a list of Whole Foods’ core values and commitments to product qualitygreeted customers entering the store; a board calling attention to Whole Foods’ “Sus-tainable Seafood Policy” hung on a board above the seafood station; and recipe cardswere at the end of key aisles.

The company was continually experimenting with new merchandising concepts tokeep stores fresh and exciting for customers. According to a Whole Foods regionalmanager, “We take the best ideas from each of our stores and try to incorporate them

CASE 1 Whole Foods Market, Inc. C-11

Exhibit 6 WHOLE FOODS MARKET’S PRODUCT QUALITY STANDARDSAND CUSTOMER COMMITMENTS

Our business is to sell the highest quality foods we can find at the most competitive pricespossible. We evaluate quality in terms of nutrition, freshness, appearance, and taste. Oursearch for quality is a never-ending process involving the careful judgment of buyersthroughout the company.■ We carefully evaluate each and every product we sell.■ We feature foods that are free from artificial preservatives, colors, flavors and sweeteners.■ We are passionate about great tasting food and the pleasure of sharing it with each other.■ We are committed to foods that are fresh, wholesome and safe to eat.■ We seek out and promote organically grown foods.■ We provide food and nutritional products that support health and well-being.

Source: www.wholefoodsmarket.com, December 9, 2002.

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Exhibit 7 Scenes from Whole Foods Market Stores

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in all our other stores. We’re constantly making our stores better.”6 The company’slarger stores held expanded selections and displays of high-quality perishables—freshproduce, seafood, baked goods, and prepared foods. Management believed that themore extensive displays of high-quality perishables appealed to a broader customerbase and were responsible for the larger stores showing higher performance than thesmaller stores. Top management believed the acquisition of the three 70,000-square-foot Harry’s Market superstores in Atlanta where 75 percent of sales were perishableswould provide the company with valuable intellectual capital in all major perishablescategories.

To further a sense of community and interaction with customers, stores typicallyincluded sit-down eating areas; customer comment boards; and “Take Action” centersfor customers who wanted information on such topics as sustainable agriculture, or-ganics, the sustainability of seafood supplies and overfishing problems, the environ-ment, and similar issues. A few stores offered valet parking, home delivery, andmassages. Management at Whole Foods wanted customers to view company stores asa “third place” (besides home and office) where people could gather, learn, and inter-act while at the same time enjoying an intriguing food-shopping and eating experience.

Marketing and Customer ServiceWhole Foods spent less on advertising than conventional supermarkets, relying pri-marily on word-of-mouth recommendations from customers. Stores spent most of theirmarketing budgets on in-store signage and store events such as taste fairs, classes, andproduct samplings. Store personnel were encouraged to extend company efforts to en-courage the adoption of a natural and organic lifestyle by going out into the commu-nity and conducting a proactive public relations campaign. Each store also had aseparate budget for making contributions to philanthropic activities and communityoutreach programs. At the corporate level, there was a marketing initiative under wayto create greater public awareness of the Whole Foods brand.

Since one of its core values was to satisfy and delight customers, Whole FoodsMarket strove to meet or exceed customer expectations on every shopping trip (see Ex-hibit 3). Competent, knowledgeable, and friendly service was a hallmark of shoppingat a Whole Foods Market. The aim was to turn highly satisfied customers into advo-cates for Whole Foods who talked to close friends and acquaintances about their posi-tive experiences with the company. Store personnel were personable and chatty withshoppers. Customers could get personal attention in every department of the store.When customers asked where an item was located, team members often took them tothe spot, making conversation along the way and offering to answer any questions.Team members were quite knowledgeable and enthusiastic about the products in theirparticular department and tried to take advantage of opportunities to inform and edu-cate customers about natural foods, organics, healthy eating, and food-related environ-mental issues. They took pride in helping customers navigate the extensive variety tomake the best choices. Meat department personnel provided customers with customcuts, cooking instructions, and personal recommendations.

Store OperationsDepending on store size and traffic volume, Whole Foods stores employed between 70and 400 team members, who were organized into up to 11 teams, each led by a teamleader. Each team was responsible for a different product category or aspect of store

CASE 1 Whole Foods Market, Inc. C-13

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operations such as customer service and customer check-out stations. Whole Foodspracticed a decentralized team approach to store operations, with many personnel,merchandising, and operating decisions made by teams at the individual store level.Management believed that the decentralized structure made it critical to have an effec-tive store team leader. The store team leader worked with one or more associate storeteam leaders, as well as with all the department team leaders, to operate the store as ef-ficiently and profitably as possible. Store team leaders were paid a salary plus a bonusbased on the store’s economic value added (EVA) contribution; they were also eligibleto receive stock options.7 Store team leaders reported directly to one of eight regionalpresidents.

Management believed its team members were inspired by the company’s missionbecause it complemented their own views about the benefits of a natural and organicfoods diet. In management’s view, many Whole Foods team members felt good abouttheir jobs because they saw themselves as contributing to the welfare of society and tothe company’s customers by selling clean and nutritious foods, by helping advance thecause of long-term sustainable agriculture methods, and by promoting a healthy,pesticide-free environment.

In December 2002, the company had more than 24,000 team members. None wererepresented by unions, although there had been a couple of unionization attempts.Whole Foods had been ranked by Fortune magazine for six consecutive years(1998–2003) as one of the top 100 companies to work for in America. A team memberat Whole Foods’ store in Austin, Texas, said, “I really feel like we’re a part of makingthe world a better place. When I joined the company 17 years ago, we only had fourstores. I have always loved—as a customer and now as a Team Member—the cama-raderie, support for others, and progressive atmosphere at Whole Foods Market.” Ac-cording to the company’s vice president of human resources, “Team members wholove to take initiative, while enjoying working as part of a team and being rewardedthrough shared fate, thrive here.”

Compensation and IncentivesWhole Foods’ management strived to create a “shared-fate consciousness” on the partof team members by uniting the self-interests of team members with those of share-holders. One way management reinforced this concept was through a gain-sharing pro-gram that rewarded a store’s team members according to their store’s contribution tooperating profit (store sales less cost of goods sold less store operating expenses). Thecompany also encouraged stock ownership on the part of team members through threeother programs:

1. A team member stock option plan—Team members were eligible for stock optionsbased on seniority, promotion, or the discretion of regional or national executives.

2. A team member stock purchase plan—Team members could purchase a restrictednumber of shares at a discount from the market price through payroll deductions.

3. A team member 401(k) plan—Whole Foods Market stock was one of the invest-ment options in the 401(k) plan.

Whole Foods also had a salary cap that limited the compensation (wages plus profit in-centive bonuses) of any team member to 10 times the average total compensation of allfull-time team members in the company—a policy mandated in the company’s corevalues (see Exhibit 2).

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The Use of Economic Value Added In 1999, Whole Foods adopted aneconomic value added (EVA) management and incentive system. EVA is defined as netoperating profits after taxes minus a charge for the cost of capital necessary to gener-ate that profit. Senior executives managed the company with the goal of improvingEVA. According to management, stores produced a very attractive EVA on average—in the fourth quarter of fiscal 2001, after-tax return on invested capital at stores openmore than a year averaged 33 percent, and stores open more than five years showed animpressive 57 percent return. In fiscal 2001, store contribution averaged 9.5 percent ofsales. However, in fiscal year 2001, the company’s overall EVA was a negative $30.4million.

Management used EVA calculations to determine whether the sales and profit pro-jections for new stores would yield a positive and large enough EVA to justify the in-vestment; EVA was also used to guide decisions on store closings and to evaluate newacquisitions. Team members used EVA estimates to guide their decisions. Bonusespaid to team members at a store were tied to the store’s EVA contribution. About 350leaders throughout the company were on EVA-based incentive plans.

Purchasing and DistributionWhole Foods’ buyers purchased most of the items retailed in the company’s storesfrom regional wholesale suppliers and vendors. However, store personnel sourced pro-duce items from local organic farmers whenever possible as part of the company’scommitment to promote and support organic farming methods. In recent years, thecompany had shifted much of the buying responsibility from the store level to the re-gional and national levels in order to put the company in a better position to negotiatevolume discounts with major vendors and distributors. Whole Foods Market was thelargest account for many suppliers of natural and organic foods. In the seafood area,company buyers were on the docks each morning to check out not only the availablelocal and international catches coming off of dayboats fishing deep waters but also theproducts of environmentally responsible aquaculture farms.

The company operated eight regional distribution centers; the largest distributioncenter, in Austin, Texas, handled distribution of nutritional products to stores in Texasand Louisiana. In addition, the stores were supported by regional bake houses, four re-gional commissary kitchens that supplied many of the prepared foods, the Pigeon Coveseafood process facility in Massachusetts, a produce procurement and field inspectionoffice, and a central coffee roasting operation.

Community Citizenship and Social ActivismWhole Foods demonstrated its community involvement in two ways: (1) by giving em-ployees paid time off to participate in worthy community service endeavors, and (2) bydonating a minimum of 5 percent of its after-tax profits in cash or products to nonprofitorganizations. Further, John Mackey indicated the company was sincere in living up toits core values as they related to healthy eating habits and the environment; in the com-pany’s 2001 annual report, he stated:

We do not carry natural and organic products to help boost our sales, we carrynatural and organic products because we believe that food in its purest state—unadulterated by artificial additives, sweeteners, colorings and preservatives—is the best tasting and most nutritious food available. We actively support

CASE 1 Whole Foods Market, Inc. C-15

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organic farming because we believe it is the best method for promoting sustain-able agriculture as well as for protecting the environment and farm workers. It isour authenticity as a wellness lifestyle brand that is our major competitive ad-vantage. We recognize this and are very committed long term to strengtheningour brand by remaining true to our mission, core values and quality standards.

Exhibit 8 shows the company’s position statement on seafood sustainability. The com-pany had similar position statements on why genetically engineered foods were riskyand why organic farming was environmentally beneficial. The company disseminatedinformation on these and other issues in its stores and on its website; the company’swebsite had a “legislative action center” that alerted people to pending legislation andmade it easy for them to send their comments and opinions to legislators and govern-ment officials.

Whole Foods Market’s Financial PerformanceFrom 1991 to 2002, Whole Foods Market’s net income rose at a compound averagerate of 43.4 percent. The company’s net loss of $4.8 million in 2000 was partly attrib-utable to management’s decision to dispose of the company’s NatureSmart business,which manufactured and sold (via direct marketing) nutritional supplements; the assetsof NatureSmart were written down by $24 million in 2000 to reflect the realizablevalue of the business, which subsequently was sold for $28 million in May 2001. Alsoin 2000, Whole Foods incurred a $14 million loss in two affiliated dot-com enterprises(gaiam.com and WholePeople.com) in which it owned a minority interest.

The company paid no dividends; 100 percent of the profits after taxes and charita-ble donations were reinvested in the business. Exhibits 9, 10, and 11 provide a five-year statement of operations, consolidated balance sheets, and selected cash flow data.

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Exhibit 8 WHOLE FOODS MARKET’S POSITION STATEMENT ONSEAFOOD SUSTAINABILITY

The simple fact is our oceans are soon to be in trouble. Our world’s fish stocks are disap-pearing from our seas because they have been over fished or harvested using damagingfishing practices. To keep our favorite seafood plentiful for us to enjoy and to keep it aroundfor future generations, we must act now.

As a shopper, you have the power to turn the tide. When you purchase seafood fromfisheries using ocean-friendly methods, you reward their actions and encourage other fish-eries to operate responsibly.

At Whole Foods Market, we demonstrate our long-term commitment to seafoodpreservation by:■ Supporting fishing practices that ensure the ecological health of the ocean and the abun-

dance of marine life.■ Partnering with groups who encourage responsible practices and provide the public with

accurate information about the issue.■ Operating our own well-managed seafood facility and processing plant, Pigeon Cove

Seafood, located in Gloucester, Massachusetts.■ Helping educate our customers on the importance of practices that can make a difference

now and well into the future.■ Promoting and selling the products of well-managed fisheries.

Source: www.wholefoodsmarket.com, December 9, 2002.

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CASE 1 Whole Foods Market, Inc. C-17

Exhibit 9 WHOLE FOODS MARKET, STATEMENT OF OPERATIONS, FISCAL YEARS1998–2002 (IN THOUSANDS)

Sept. 29, Sept. 30, Sept. 24, Sept. 26, Sept. 27, 2002 2001 2000 1999 1998

Sales $2,690,475 $2,272,231 $1,836,630 $1,492,519 $1,308,070

Cost of goods sold and occupancy costs 1,757,213 1,482,477 1,205,096 985,000 873,088

Gross profit 933,262 789,754 633,534 507,519 434,982

Direct store expenses 675,760 574,503 460,044 363,892 313,698

Store contribution 257,502 215,251 173,490 143,627 121,284

General and administrative expenses 95,871 82,440 60,054 58,511 45,931

Goodwill amortization — 3,129 2,246 1,198 1,153

Preopening and relocation costs 12,485 8,539 10,497 5,914 3,979

Store closure and asset disposal costs — 9,425 — 5,940 —

Merger expenses — — — — 1,699

Operating income 149,146 111,718 100,693 72,064 68,522

Interest expense, net (10,384) (17,891) (15,093) (8,248) (7,677)

Investment and other income (loss) 2,056 1,628 (8,015) 1,800 2,303

Income from continuing operations before income taxes 140,818 95,455 77,585 65,616 63,148

Provision for income taxes 56,327 38,182 34,584 25,590 23,454

Equity in losses of unconsolidated affiliates — 5,626 14,074 — —

Income from continuing operations 84,491 51,647 28,927 40,026 39,694

Discontinued operations:

Income (loss) from discontinued operations, net of income taxes — — (9,415) — —

Gain (loss) on asset disposal, net of income taxes — 16,233 (23,968) — —

Cumulative effect of change in accounting principle, net of income taxes — — (375) — —

Net income $ 84,491 $ 67,880 $ (4,831) $ 42,155 $ 45,395

Basic earnings per share $1.50 $1.26 $(0.09) $0.80 $0.87

Weighted average shares outstanding 56,385 53,664 52,248 52,748 52,318

Diluted earnings per share:

Income from continuing operations $1.40 $0.92 $ 0.53 $0.73 $0.72

Discontinued operations and effect of change in accounting principle, net of income taxes — 0.29 (0.62) 0.04 0.10

Diluted earnings per share 1.40 1.21 (0.09) 0.77 0.82

Weighted average shares outstanding, diluted basis 63,340 56,185 54,370 54,892 55,488

Source: 2002 10K report.

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C-18 PART FIVE Cases in Crafting and Executing Strategy

Exhibit 10 WHOLE FOODS MARKET, CONSOLIDATED BALANCE SHEET,FISCAL YEARS 2001–2002 (IN THOUSANDS)

Sept. 29, Sept. 30, 2002 2001

Assets

Current assets:

Cash and cash equivalents $ 12,646 $ 1,843

Trade accounts receivable 30,888 24,859

Merchandise inventories 108,189 98,616

Prepaid expenses and other current assets 8,950 9,151

Deferred income taxes 11,468 8,549

Total current assets $172,141 $143,018

Property and equipment, net of accumulated depreciation and amortization $644,688 $542,986

Long-term investments 4,426 4,706

Goodwill 80,548 67,258

Intangible assets, net of accumulated amortization 22,889 24,028

Other assets 8,159 8,513

Deferred income taxes 7,350 20,287

Net assets of discontinued operations 3,000 18,375

Total Assets $943,201 $829,171

Liabilities and Shareholders’ Equity

Current liabilities:

Current installments of long-term debt and capital lease obligations $ 5,789 $ 5,944

Trade accounts payable 59,710 50,468

Accrued payroll, bonus and employee benefits 59,359 41,265

Other accrued expenses 51,440 56,237

Total current liabilities $176,298 $153,914

Long-term debt and capital lease obligations, less current installments 161,952 250,705

Deferred rent liability 12,091 11,653

Other long-term liabilities 3,774 3,542

Total liabilities $354,115 $419,814

Shareholders’ equity: Common stock, no par value, 150,000 and 100,000 shares authorized; 57,988 and 55,114 shares issued; 57,739 and 54,770 shares outstanding $341,940 $251,679

Common stock in treasury, at cost — (5,369)

Accumulated other comprehensive income (422) (30)

Retained earnings 247,568 163,077

Total shareholders’ equity $589,086 $409,357

Total liabilities and shareholders’ equity $943,201 $829,171

Source: Company press release, November 19, 2002, and 2002 10K report.

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Competitors

Whole Foods Market’s two biggest competitors in the natural foods and organics seg-ment of the food retailing industry were Wild Oats Markets and Fresh Market. Anothercompetitor with some overlap in products and shopping ambience was Trader Joe’s.

Wild Oats Markets, Inc.Wild Oats Markets, Inc.—a 99-store natural foods chain based in Boulder, Colorado—ranked second behind Whole Foods in the natural foods and organics segment.The company’s stores were in 23 states and British Columbia, Canada; stores wereoperated under five names: Wild Oats Natural Marketplace, Henry’s Marketplace,Nature’s—a Wild Oats Market, Sun Harvest, and Capers Community Markets.Founded in 1987, Wild Oats had sales of $893 million in 2001 and was projecting salesof $1.05 billion in 2003. In 1993 and 1994, Wild Oats was named one of the “500Fastest-Growing Private Companies in America” by Inc. magazine. Interest quicklyspread to Wall Street, and in 1996 Wild Oats became a public company traded on theNASDAQ under the symbol OATS. Grocery analysts believed that Wild Oats had closeto a 3 percent market share of the natural and organic foods market in 2002, comparedto about 9 percent for Whole Foods.

Wild Oats, under new CEO Perry Odak (formerly the CEO of Ben & Jerry’sHomemade until it was acquired by Unilever in 2000), was in something of a turn-around mode in 2002. The company’s prior CEO and founder, Mike Gilliland, hadgone on an aggressive acquisition streak during the late 1990s to expand Wild Oats’geographic coverage; store growth peaked in 1999 with the acquisition of 47 stores.But Gilliland’s acquisition binge piled up extensive debt and dropped the company intoa money-losing position with too many stores, a dozen different store names, and adozen different ways of operating. Product selection and customer service were incon-sistent from one location to another.

When Odak arrived in March 2001, he began a turnaround effort: He streamlinedoperations, closed 28 unprofitable stores, cut prices, trimmed store staffing by 100

CASE 1 Whole Foods Market, Inc. C-19

Exhibit 11 WHOLE FOODS MARKET, SELECTED CASH FLOW DATA, FISCAL YEARS 1999-2002 (IN THOUSANDS)

1999 2000 2001 2002

Income from continuing operations $ 40,026 $ 28,927 $ 51,647 $ 84,591

Net cash provided by operating activities 116,570 124,209 173,036 229,145

Acquisition of property and equipment (53,496) (41,671) (49,009) (61,385)

Development costs of new store locations (80,976) (110,864) (103,896) (100,000)

Payments for acquisitions, net of cash acquired (24,500) (25,700) — (35,978)

Net cash used in investing activities (159,761) (180,707) (156,928) (203,357)

Net proceeds from long-term borrowings 49,000 88,000 25,000 32,000

Payments on long-term debt and capital lease obligations (673) (6,625) (78,383) (127,956)

Proceeds from new stock issues 7,049 10,032 23,179 66,964

Net cash provided by (used in) financing activities 36,437 77,873 (30,204) (28,992)

Cash and cash equivalents at end of year 3,582 395 1,843 12,646

Source: Company press release, November 19, 2002, and 2001 10K report.

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employees, and launched a new, smaller prototype store with a heavier emphasis onfresh food. Merchandising and marketing were revamped. The strategy was to draw inmore “crossover” shoppers with lower-priced produce, meat, and seafood, along witha “Fresh Look” program stressing freshness and affordability to increase store trafficand raise the average purchase above the current $19 level. While the lower prices cutthe company’s gross profit margin from 30.3 percent to 29 percent, the company wastrying to get the margin back over 30 percent by concentrating its purchases with fewervendors and getting better discounts. An agreement was reached in September 2002 forWild Oats to obtain a substantial part of its store inventories from Tree of Life, one ofthe leading natural foods distributors. After posting losses of $15.0 million in 2000 and$43.9 million in 2001, Wild Oats was on track to return to profitability; the companyreported net earnings of $4.3 million in the first nine months of 2002.

Wild Oats’ new prototype stores were 22,000 to 24,000 square feet and featured agrocery-store layout, an expanded produce section at the front of the store, a deli, asushi bar, a juice and java bar, and a reduced selection of canned and packaged items.Wild Oats believed the smaller format was suitable for profitable entry into less-populated markets. Wild Oats had just completed arrangements to sell 4.45 millionshares at $11.50 to raise capital for opening 58 stores in the next three years (13 in2003, 20 in 2004, and 25 in 2005) and remodeling a number of existing stores. Man-agement expected that most of the new stores would incorporate the newly developedprototype. Whole Foods was scheduled to open a number of new stores in cities whereWild Oats had stores. Wild Oats, however, was targeting city and metropolitan neigh-borhoods for its new stores where there were no Whole Foods stores.

Perry Odak expected that while conventional supermarkets would continue to ex-pand their offerings of natural and organic products, the competitive threat posed byconventional supermarkets was only moderate because their selection was more lim-ited than what Wild Oats stores offered and because they lacked the knowledge andhigh level of service provided by a natural foods supermarket. In his view, “they are in-troducing conventional shoppers to natural brands, which will benefit us in the longrun.” Another of Wild Oats’ strategic thrusts was to drive a customer service mindsetthroughout the organization via training programs and enhanced employee communi-cation. Odak wanted to position Wild Oats as a resource for value-added services andeducation about health and well-being.

Fresh MarketFresh Market, headquartered in Greensboro, North Carolina, was a 34-store chain op-erating in seven southeastern states (Florida, Georgia, North Carolina, South Carolina,Tennessee, Virginia, and Kentucky).8 The company was founded by Ray Berry, a for-mer vice president with Southland Corporation who had responsibility over some3,600 7-Eleven stores. The first Fresh Market store opened in 1982 in Greensboro.Berry borrowed ideas from stores he had seen all over the United States and, as thechain expanded, used his convenience-store experience to replicate the store formatand shape the product lines. During the 1982–2000 period, Fresh Market’s sales rev-enues grew at a 25.2 percent compound rate, reaching $193 million in 2000; revenuesgrew about 9.2 percent in 2001, to around $210 million. Berry believed the company’sstrong financial performance was due to its commitment to service and quality.

Fresh Market’s concept was to offer top-quality meats, fresh fish, produce, fresh-baked goods, and specialty items, coupled with top-notch service, in neighborhoodstores near educated, high-income residents. Fresh Market stores averaged 18,000

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square feet and were also stocked with “upscale grocery boutique” items such as free-range chicken; pick-and-pack spices; gourmet coffees; chocolates; hard-to-get H&Hbagels from New York City; Ferrara’s New York cheesecake; fresh Orsini parmesancheese; Acqua della Madonna bottled water; and an extended line of olive oils, wine,and beer. Stores also stocked a bare lineup of most general-grocery products but an ex-panded selection of products for cooks and entertainers, with 18 styles of designer nap-kins and six shelves of mustard. None of the meat and few of the deli products wereprepackaged, and each department had at least one employee in the area constantly tohelp shoppers—the idea was to force interaction between store employees and shop-pers. Fresh Market’s warm lights, classical background music and terra-cotta-coloredtiles made it a cozier place to shop than a typical grocery store. The average store had75 employees, resulting in labor costs about double those of typical supermarkets.

Merchandisers at Fresh Market’s headquarters selected the stores’ products, butstore managers placed orders directly from third-party distributors. According to Berry,Fresh Market didn’t have the concentration of stores that would make running its ownwarehouses profitable; Berry believed some grocers’ distribution operations had grownso big that they drove the retail business, rather than the other way around.

Since 2000, the company had opened three to four new stores each year and an-nual growth had slowed somewhat to about 10 percent. Expansion was funded by in-ternal cash flows and bank debt. Several public companies had shown interest inbuying the chain. Ray Berry, age 60, had said, “If I can get what I think the company’sworth three years from now, I’ll sell it. But I won’t sell it for what it’s worth today be-cause I’m having too much fun.” Without providing any details, Berry indicated thatFresh Market’s profitability outpaced the industry average.

Trader Joe’sBased in Pasadena, California, Trader Joe’s was a specialty supermarket chain with178 stores in Arizona, California, Connecticut, Illinois, Indiana, Maryland, Massachu-setts, Michigan, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, Vir-ginia, and Washington. Trader Joe’s was known for bringing its customers thebest-quality products at the best prices. The company described its mission and busi-ness as follows:

At Trader Joe’s, our mission is to bring all our customers the best food and bev-erage values to be found anywhere, and the information to make informed buy-ing decisions. There are more than 2,000 unique grocery items in our label, atprices everyone can afford. We work hard at buying things right: Our buyerstravel the world searching for new items; we work with a variety of supplierswho make interesting products for us, many of them exclusive to Trader Joe’s;and we make special purchases which are presented to us throughout the year.All our private label products have their own “angle,” i.e., vegetarian, Kosher,organic, or just plain decadent, and all natural ingredients.

Our tasting panel tastes every product before we buy it. If we don’t like it,we don’t buy it. If customers don’t like it, they can bring it back—no questionsasked!

We stick to the business we know: good food at the best prices! Wheneverpossible we buy direct from our suppliers, in large volume. We bargain hardand manage our costs carefully. We pay in cash, and on time, so our supplierslike to do business with us.

CASE 1 Whole Foods Market, Inc. C-21

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1. Whole Foods Market, Inc.

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The company stocked a variety of imported, exotic, and gourmet items, includingseafood, baked goods (75 breads, muffins, and cookies from 30 bakeries), organicfoods, vitamins, nuts and trail mixes, 80 cheeses from around the world, Trader Joe’swhole-bean coffees, fresh produce, fresh salads and entrées, a variety of fat-free andlow-fat foods, a selection of meatless entrées, pet foods, frozen entrées, snack foodsand energy bars, a selection of chocolates, wine and beer, and an assortment of natural,“cruelty-free” shampoos, lotions, and body care products. Trader Joe’s had recently an-nounced that it would work with its vendors to remove genetically modified ingredi-ents from its 800 private-label products. It had also discontinued sale of duck meatbecause of the cruel conditions under which ducks were grown.

Stores were open, with wide aisles and appealing displays. Because of its combi-nation of low prices, intriguing selections, and friendly service, customers viewed shop-ping at Trader Joe’s as an enjoyable experience. The company was able to keep theprices of its unique, exotic products attractively low (relative to those at Whole Foods,Fresh Market, and Wild Oats) partly because its buyers were always on the lookout forexotic items they could buy at a discount (all products had to pass a taste test and a costtest) and partly because most items were sold under the Trader Joe’s label.

Independent Natural and Health Food GrocersAlthough two vitamin/supplement chains, General Nutrition Center and Vitamin World,dominated the vitamin/supplement segment with close to 6,000 stores, in 2002 therewere approximately 14,000 small, independent retailers of natural and organic foods,vitamins/supplements, and beauty and personal care products. Most were single-store,owner-managed enterprises. Combined sales of the 14,000 independents were in therange of $13 billion in 2002. Most of the independent stores had less than 2,500 squarefeet of retail sales space and generated revenues of less than $1 million annually, butthere were roughly 1,000 natural foods and organic retailers with stores in the size rangeof 4,000 to 12,000 square feet and sales of between $2 million and $5 million annually.

Product lines and range of selection at the stores of independent natural and healthfoods retailers varied from narrow to moderately broad, depending on a store’s marketfocus and the shopper traffic it was able to generate. Inventories at stores under 1,000square feet could run as little as $10,000, while those at stores of 10,000 square feet ormore might run $400,000. Many of the independents had some sort of deli or beveragebar, and some even had a small dine-in area with a limited health food menu. Revenuesand customer traffic at most independent stores were trending upward, reflecting grow-ing buyer interest in natural and organic products.

Endnotes

1As quoted in Elizabeth Lee, “National Standards Now Define Organic Food,” Atlanta Journal and Constitu-tion, October 21, 2002.2As quoted in Marilyn Much, “Whole Foods Markets: Austin, Texas Green Grocer Relishes Atypical Sales,” In-vestors Business Daily, September 10, 2002.3Hollie Shaw, “Retail-Savvy Whole Foods Opens in Canada,” National Post, May 1, 2002, p. FP9.4See Karin Schill Rives, “Texas-Based Whole Foods Market Makes Changes to Cary, Charlotte, N.C., GroceryStore,” The News and Observer, March 7, 2002.5Quoted in “Produce That’s Picture Perfect,” National Post, May 9, 2002, p. AL6.6Quoted in “Whole Foods Market to Open in Albuquerque, N.M.,” Santa Fe New Mexican, September 10, 2002.7EVA at the store level was based on store contribution (store revenues minus cost of goods sold minus storeoperating expenses) relative to store investment over and above the cost of capital.8Much of the information in this section is based on M. E. Lloyd, “Specialty-Grocer Fresh Market Cultivates Up-scale Consumers, Reaps Big Returns,” The Wall Street Journal, February 20, 2001, p. B11.

C-22 PART FIVE Cases in Crafting and Executing Strategy