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To: John Mackey, CEO Whole Foods Market, Inc.

From:

Re: Whole Foods Competitive Position and Analysis

Date: January 26, 2011

Introduction

Whole Foods Market is a multi-national retailer of organic and natural foods. According tothe Organic Trade Association (OTA) and Nutrition Business Journal, the organic and natural foodsindustrys revenue is currently approximately $26 billion in the U.S.1 and $71 billion worldwide2.The OTA says that the organic and natural food category grew between 15% and 20% each year

through 2008 before being stifled by the economic downturn in 2009 with only 5.1% growth

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.Similar growth trends are expected for the next few years. With increased competition from moretraditional grocers like Kroger and Safeway, as well as supercenters like Wal-Mart and SuperTarget, is Whole Foodss fate in jeopardy?

Competitive Position

Whole Foodss position in the organic and natural foods sector is dominant. Withapproximately 33.6% market share in the U.S. in 2010, no other single competitor comes close to

the organic food volume of Whole Foods4. Exhibit 1 shows Whole Foodss revenue and marketshare from 2003 to 2009. Since 1980, Whole Foods has concentrated on offering the highestvariety of organic and natural food products5. With exception of Whole Foods, the organic andnatural food market is fragmented with many customer buying channels. Competition exists fromdirect competitors like The Fresh Market, extended product offerings from traditional grocers andsupercenters like Kroger and Wal-Mart, and local farmers markets and coops such as those foundaround Charlottesville, VA. The threat of new entrants is high as more existing food retailers chasethe product differentiation and variety of organic foods. Exhibits 2 and 3 show a list ofcompetitors, key figures, and strategies of those competitors.

Whole Foods has the advantage of being the first large mover in the organic retail industry.Substitutes in the organic and natural food segment are limited although more food retailers arenow offering organic food selections. Whole Foods takes advantage of its above industry averageselection with higher prices than most competitors on the hard to find organic products. With fewcomplete channels to buy organics, buyer power is low for those products with limited selection,and high for those organic products being offered in many channels. According to a United StatesDepartment of Agriculture (USDA) study, suppliers are limited but are growing to larger regionaland national positions

6. Unlike the traditional grocers and supercenters, Whole Foods has the

advantage of close partnerships with over 2,000 organic suppliers world-wide7. This enablesWhole Foods to retain control, get more products year round, and keep prices as low as possible forcustomers. A complete five forces analysis is found in Exhibit 4.


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parents on the benefits of organic foods. The companys website has a blog dedicated to organicfood cooking and healthy lifestyle tips

8. Overall, these capabilities are what the traditional grocers

and supercenters are currently lacking.

However, competitors are copying Whole Foodss success. Just this week, Wal-Martannounced plans to increase the number of healthy food items available at its stores. With supportfrom First Lady Michelle Obama, Wal-Mart will drop prices on fruits and vegetables. This planalso compliments their 2006 plan to increase organic food products available at its stores9. Publixhas launched a chain of stores to compete directly with Whole Foods called Publix GreenWiseMarkets

10. According to Willard Bishop, a food research firm, consumer demand for supercenter

groceries will grow by 7.3% per year compared to only 1.7% per year for the fresh format (organicand natural food) grocers

11. If the supercenter can offer more organic product offerings, Whole

Foods will suffer.

Changing Industry

According to Willard Bishop, the entire retail food industry generates approximately $1trillion of revenue in the U.S12. The industry is segmented into three main areas: 1) TraditionalGrocery (~47.5% of the total market) 2) Convenience Stores (~15.4% of the total market) and 3)Non-traditional Grocery (~37% of the total market)13. Whole Foods plays in the traditional grocery

segment under a subset called fresh format. The fresh format concentrates on a particular foodsegmentorganic and natural foods for Whole Foods. Exhibit 6 shows the breakdown of organicfood sales by channel in 2009. According to the OTA, the sale of organic and natural foods throughorganic and natural food retailers was 47% in 20059% higher than in 2009 14. The OTA says thatshifts in organic buying trends to traditional grocers, club stores, and supercenters are attributed tomore product availability in those channels, lower prices, and the growth of private-labeled organicproducts. For availability, the Food Marketing Institute says that 76% of traditional grocery storesnow offer some natural and organic food selection15. These shifts in consumer purchasing trends

and channels could be trouble for Whole Foodss future competitive position.

Additionally, there are other environmental factors affecting the industry. The USDA saysconsumer awareness of organic food benefits is high and will continue to grow. It is estimated that69% of consumers purchased organic products in 200816. Whole Foods, through its organic andnatural foods message, has driven much of the trend towards this food group. Supply for organicand natural foods does not always meet demand, particularly in areas of the country with loworganic farms density17. Exhibit 7 shows organic farms by location and size. Most are located in

the western U.S. As a result, according to a 2004 USDA study, approximately 38% of organichandlers had to import organic products to meet consumer demand. This effort is compounded bystrict USDA procedures and a three year waiting period before a farm can sell certified organicfoods18. One of Whole Foodss largest risks is the ability to get organic products as demandcontinues and more retailers fight for organic products.


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Page 3 of 10

Exhibit 1: Whole Foodss Revenue and Market Share Trend19,20


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Exhibit 3: Competitor Analysis


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Page 7 of 10

Exhibit 5: Whole Foods Capability Analysis25


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Page 8 of 10

Exhibit 6: U.S. Organic Food Sales by Channel (2009)26


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Page 9 of 10

Exhibit 7: Organic Farms by Location, Number, and Acreage (2008)27


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wholefoods analysis 6

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