Whole Foods Market is an organic and natural foods grocer, based in Texas, United States, consisting of over 270 stores in North America and the United Kingdom. A food retailer of natural and organic foods, Whole Foods Market also sells a selection of conventional brands, consistently ranking it among the most socially responsible businesses.
In 1978, twenty-five-year-old John Mackey and Rene Lawson opened the doors of a small natural foods store called Safeway in Austin, Texas. Two years later, John Mackey partnered with Craig Weller and Mark Skills to merge Safeway with their Clarksville Natural Grocery, resulting in the opening of the original Whole Foods Market on September 20, 1980. In the beginning of 1984, Whole Foods began its expansion out of Austin, first to Houston and Dallas and then into New Orleans with the purchase of Whole Foods Company in 1988. In 1989, the company expanded to the West Coast with a store in Palo Alto, California. While opening new stores, the company fueled rapid growth by acquiring other natural foods chains throughout the 90's such as Wellspring Grocery of North Carolina, Bread & Circus (banner retired in 2003) of Massachusetts and Rhode Island, Mrs. Gooch's Natural food markets in Los Angeles, Bread of Life of Northern California, Fresh Fields Markets on the East Coast and in the Midwest, Florida Bread of Life stores, Detroit area Merchant of Vine stores.
Whole Foods Market's product categories include anything from produce and seafood to hygiene products, pet and household products, and catered cuisine. Moreover, the company provides a different shopping experience for its customers by having well-trained store staff and extra services such as delivery, cooking classes, massages, and valet parking. By positioning itself as a high-quality retailer, rather than using price to differentiate itself from competitors, Whole Foods Market has created for itself a distinctive niche market of above-average income earners. Thus, as a business strategy, Whole Foods Market identifies itself as differentiated within a focused market.
Aligned with its differentiating methods, the company's corporate-level strategy is defined through the company's operations and the related diversification of products. As well, the various employee units depict a unique structure implemented by Whole Foods Market. Retail workers are placed in work teams with team leaders (managers) and are directly involved in decision-making for their individual store. With 172 stores in the U.S., Canada, and the U.K., Whole Foods has high hopes of eventually increasing its reach. The objective, according to John Mackey, is to earn revenues of $10 billion with 300-plus stores by 2010 without sacrificing product quality or current valued reputation.
Whole Foods Market also maintains social responsibility by carrying unadulterated food and engaging in ethical business practices like its contract of animal rights, sustainable Code of Conduct, and continuous charitable donations.
Whole Foods products can be simplified into three main groups. One of Whole Foods product categories is sustenance items which was the start of the Whole Foods product line. This line, being their original product line, met great success thereby allowing Whole Foods to expand into their other two main product categories: specialty items and retail products. All of these three products share the common theme: healthy lifestyle promotion, environmental responsibility, and product purity.
Their sustenance items include anything one may expect to see in a typical grocery store. However, upon closer inspection, Whole Foods sustenance products, including produce, seafood, meat and poultry, eggs, and prepared foods, are of unequalled quality, and many of them withstand an independent organic certification process. As outlined on the corporate website, Whole Foods maintains the following standards: careful evaluation of sold goods, foods that are "free of artificial preservatives, colours, flavours, sweeteners, and hydrogenated oils," a "passion about great tasting food," a commitment to safety and freshness, the search and promotion of organically grown goods, and the provisions of food and nutritional products.
Whole Foods specialty items include imported cheeses, wine (in states other than Pennsylvania) breads and bakery items, and coffee. Lastly are Whole Foods retail goods. These are items that are not consumed in a traditional grocery-store product sense, but are rather purchased for other uses. Whole Foods sells gift cards, floral arrangements, body-care products, nutritional supplements, and gift baskets.
Interpretation: the whole food is maintaining its current ratio efficiently. In 2002, the current ratio is 1.412 which is sharply maintained till 2005 but a slight decrease is seen in year 2006 to 1.224 which is because of decrease in cash holding.
Interpretation: the whole food has optimal amount in debt. In 2003, it was 35 percent of its all assets and it is maintained up to 31.3 percent in 2006 which provide whole food tax advantage causing an increase in Net Income.
Interpretation : In 2003 Debt to Equity was 54 percent but there is a considerable decrease in the ratio up to 38 percent in year 2005 which is due to decrease in other liabilities.
Interpretation: The Net profit margin of whole food market decreased but witnessed a sharp increase since 2005 which is due to increase in sales revenue.
Interpretation: This ratio shows the contribution of Assets in the Net Income. Whole Foods is consistently improving its return on Assets and since 2005 the efficiency of Asset utilization has increased.
Interpretation: ROE shows the percent of return to the shareholder. ROE was 13.3 percent in 2003 but decreased in 2003 and since 2005 it has been increasing sharply and is 14.5 percent in 2006.
Interpretation: It shows earnings available to the shareholders. Whole food has a good EPS since 2004 and a great EPS for 2006 has been seen which is 1.463, and it is better than its competitors.
Interpretation: It is the dividend available to each shareholder. As compared to past years 2006 was great year for the share holders because higher dividend was available to them.
Overview of stock performance:
Whole food stock performed very well from year 2002 to year 2005 as it reached from a price of USD 24 to USD 73.5 in year 2005. but since then the share price started to fall with minor recoveries seen in year 2006 in which the share price recovered from USD 58 to USD 62 but the downward trend continued and its share value kept suffering and hit the record low of USD 36.91 in July 2007, but since then there has been a steep rise in WFM share value and presently its share price is about USD 45.31on a growing trend.
At the end of 2002, Whole Foods Market (WFMI) was added to the Nasdaq-100 Index. Afterwards, the share price obtained a positive growth for consecutive 3 years.
WFMI paid 15 cents to shareholders on January 2004, which is the first dividend ever paid. With considerable amount of profit, the company acquired Fresh & Wild and expanded itself into the UK; at the same time, they opened their largest grocery store in Manhattan. At the end of 2004, their Board of Directors announced a 19% growth in last quarter and shareholders enjoyed dividend of $0.19 per share. Compared to 2002, the stock price of WFMI was almost doubled at the end of 2004; nevertheless, the growth of Nasdaq-100 Index was only 60%.
In the year 2005, the company has reached its peak. On April, Board of Directors approves 32% increase in quarterly dividend to $0.25 per share, which induced a sharp rise in stock price within 3 months: The price of each share has risen for more than 10%. Meanwhile, the Nasdaq-100 Index shown no significant increase, WFMI seemed to have a better performance than other corporations.
On November 2005, Board of Directors approved 20% increase in quarterly; a $0.30 dividend and a special $4.00 per share dividend were announced. This made the share price continued to rise until the end of 2005. Between 2002 and 2005, price per share of WFMI has been increased for about 3.4 times, while the Nasdaq-100 Index only shown a growth of 1.8 times.
However, the pendulum has thrown to the other way. After reaching its top in 2005, share price of WFMI drop continuously. The decrease trend has started on 2006 and continues till now, although the price has rebounded for a moment, soon it drops and could not maintain a relatively stable situation. Between 2002 and October 2007, the growth of Nasdaq-100 Index is about 2.3 times; on the other hand, WFMI, has a growth of 2.2 times. Although WFMI has an outstanding period which makes their price go upwards sharply, this situation could not last for long.
The all information about the dividends for this report was accrued at July 1, 2007. According to the report, the future dividends paid will at the discretion of the Board of Directors. About the payments - the amount of such dividends and the form (cash or stock), there are many factors such as the results of operations and the financial condition of the WFMI will influenced. In July 1, 2007, the expected dividend yield is 1.80%, and 1.26% for July 2, 2006.
Industry Analysis: 5 Forces
Organic food retailers are part of a growing industry in which the threat of new entrants is moderate in strength. Minimal switching costs and the lack of government restrictions ease the entrance of new firms. Furthermore, investment into retail stores is only somewhat costly but since economies of scale are possible, new entrants are threatened by the strength of already established companies. Additionally, since the access to distribution channels is limited, organic raw materials are difficult to acquire, and effective relations with suppliers are necessary, many companies are deterred away from the industry. On another note, many companies differentiate themselves on the basis of service and quality to gain customer loyalty, thereby raising the barriers to entry. Only a few large organic retailers dominate the industry; Whole Foods Market, Wait Rose, and Mark n Spencer, but many supermarkets have started to sell organic food too. Thus, there is the possibility for new entrants to suffer retaliation from existing firms. Moving along, the industry consists of limited raw organic material suppliers. With a lack of other substitutable resources, suppliers have a high power. There are also high switching costs for the retailers, as suppliers are in few numbers. Therefore, reliable supplier relationships are crucial to obtaining discounts on orders of mass quantities.
In terms of buyer power, customers have the choice of shopping at other stores but the differentiating services offered by each retailer make each experience unique and irreplaceable. Generally, buyers are loyal and products are differentiated on the basis of quality. As a result, there is a low to moderate threat of losing customers to competitors.
Progressing to the threat of substitute products, the risk is quite low since the only alternative to organic food is non-organic, natural food. Generally, people accustomed to consuming healthy organic food are not always willing to change their habits.
Lastly, competitor rivalry is intense within the organic retail industry, particularly because there are low switching costs. Also, the emergence of supermarkets with sections for organic food allows customers one-stop shopping. The only hindrances of high rivalry amongst existing firms are the reasonably low exit barriers from the industry.
Overall, with moderately low threat of new entrants, relatively low buyer power, and the weak threat of substitute products makes the industry appear to be attractive, however the high power of suppliers and intense rivalry among competitors causes the industry to be less attractive. Nonetheless, with the trend toward organic food consumption gradually increasing, the industry faces the possibility of becoming more attractive. Competitive advantage for firms is gained when core competencies are correctly correlated with industry opportunities and threats.
Whole Foods Market maintains its early mover advantage against its most direct competitors, Wait Rose and Mark n Spencer, through constant innovation, customer loyalty, market share, and product value that distinguish them apart from their rivals. However, competitors do have some market power. Wait Rose, for example, has a concentrated niche. Its upscale nature and low cost structure allow it to maintain margins while keeping a competitive advantage. Each competing firm possesses capabilities that other companies do not, thus industry knowledge is essential for all players. In this Oligopoly, quality is valued over all else, so businesses aim to have the best customer service.
Investing In the UK Market and Potential Competitors
In the US because Whole Foods occupies a niche position in the high-end market. In the UK, that position is already taken with retailers, increasing organic demand is not a trend that has escaped the attention of mainstream UK retailers. The major supermarket operators, Tesco, Sainsbury's, Wal-Mart's Asda, and, to a lesser extent, Morrison's, as well as premium chains Marks & Spencer and Waitrose, already boast extensive and expanding ranges of organic foods.
British stores range from the no-frills, lower-end Tesco to Marks & Spencer, which sells upscale clothing and gourmet food. Another competitor is grocery chain Waitrose, which caters to organics customers. Marks & Spencer "is clearly trying to carve out a space in the organic area before Whole Foods makes a huge impact, and they are expecting Whole Foods to give them a good run for the money.
Whole Foods is already familiar with the London market. In 2004, it bought Fresh & Wild, a chain of seven natural and organic food stores. The stores were a way to learn about a foreign market, and they continue to operate under the Fresh & Wild name. In June 2007, Whole Foods opened a large store in Kensington, a posh neighbourhood in central London. But the costs and challenges have been considerable. Aside from the considerable cost of converting the store, Whole Foods needed to build a new supply system from scratch, including finding dozens of local farmers to provide everything from produce to meat to dairy products. It seems that Whole Foods has done an exceptional job of building out and managing a supply chain" in the U.S. but it is difficult to leverage this supply chain in Europe and also grocery stores in the U.K. are more organic-friendly, and U.K. shoppers are savvy when it comes to shopping organic.
The UK challenge might be the biggest challenge for Whole Foods. The company has an established brand in the United States and a reputation as a pioneer in the natural and organic foods market. In Britain, it's an unfamiliar name venturing into a competitive, crowded grocery market.
However, the new big store's location in London is a key to Whole Foods' success. Kensington is the "Beverly Hills of the U.K.," and Whole Foods should not have a problem selling some of its higher-end goods there. Whole Foods has included a few nods to the U.K. lifestyle. There is a "huge Indian section. Portion sizes are smaller. The coffee and tea department was designed "completely different" to account for the popularity of home-brewed tea. There are also more "ready meals," which are freshly prepared foods that can be taken home, heated and eaten. Whole Foods proves that it understands the importance of ready meals to the U.K.
Internal Environment Analysis
For Whole Foods Market, value is created through differentiation. Its business-level strategy effectively emphasizes the company's core competencies, including: the company's superior reputation of high-quality products and services, very efficient human resource management, and strong relationships with customers and suppliers. All the aforementioned capabilities are rare, valuable, costly to imitate, and non-substitutable.
Efficient human resource management is another core competency that creates value for Whole Foods Market. As a first mover, the firm owns a group of well-trained, experienced, and knowledgeable employees that other competitors do not. To retain its workers, Whole Foods increases job security and grants employees autonomy in the workplace by providing a team-based environment. Retail stores function independently with respect to decision-making, a process directed by the "store team leader" (manager).
Finally, effective customer service distinguishes Whole Foods from competitors, with its unique shopping experience and extra services. The firm uses a specific formula to pick store locations and meet demands of local communities. Furthermore, it maintains high turnover rates for inventory and hence customers are willing to pay higher price for Whole Foods fresh product and services. By successfully bundling its core competencies with its business strategy, Whole Foods Market has established a competitive advantage.
Backwards Vertical Integration
Supplier accounts for 40% of purchases in 2006. Whole Foods would modify its current business-level strategy from one focused on differentiation to integrated cost-leadership and differentiation. Accordingly, the firm would gain a competitive edge over its biggest rivals, Tesco, Wait Rose, M&S.
Since the firm would own a major supplier, intermediaries would no longer be needed and cost synergies would result. Speed to market would also increase and there would be improved co-ordination between the procurement centre and the supplier. This is essential as it is important for Whole Foods Market to sell fresh produce amidst growing health concerns. Vertical integration would, in addition, enable the firm to exercise more control over a supplier of scarce raw material that will both improve its ability to meet future demand of organic food and serve as a barrier to entry.
However, it is imperative that the integration process is both effectively and efficiently managed to avoid disastrous consequences such as losing key personnel, having clashing corporate cultures, wasting valuable time, and damaging relationships. Since the firm's cash position was very low at end of 2006, the acquisition would likely to be funded by high levels of debt, which would reduce its credit rating and increase likelihood of bankruptcy if the combined firm fails to perform up to expectations. Lastly, the combined firm may become too large to properly control without using bureaucratic, formalized controls, which clash with the existing decentralized structure that encourages creativity and flexibility of decision making to teams within each store.
WHOLE FOOD FUTURE PLAN
Presently whole food suppliers accounts for 40% of their cost of revenue, 80% of whole food sales revenue is generated from their Dairy division, Meat division and Bakery division the major suppliers of these division are listed below:
- Dales Food Creamery, Gloucestershire
- Manor farm, organic milk producer
- Jefferson seafood
- Dorset hams
- Hobbs house bakery, chippings Sudbury, Gloucestershire
- The village bakery, Penrith, Cambria
Cost of Project
The estimated costs for buying out the above named suppliers will be 25million pound which will make whole foods supply chain more efficient and cost effective. After investment, the cost of sale revenues will be decreased by 16% which will increase the gross profit causing positive increase in the net income which will eventually lead high returns to the share holders.
Methods of Financing
The project is estimated to have a NPV of about $4,684,690 which will have an initial investment of about $50,000,000.
Whole food will be financing this project choosing external financing that is issuing fresh equity in the market worth up to $25 million which is 50% of the total cost of the project, the remaining 50% cost will be financed using long term debt.
Benefit of Backward Integration to Whole Food
- The company cost of revenue will decrease by 16% which will increase the gross profit and eventually increase the net income.
- Backward Integration will cost the profit margin to increase by approximately by 9.63%.
- Dividends are expected to grow at 8% per year after acquiring this project.
All the above factors such as increase in a gross profit, increase in net income, increase in profit margin and increase in a dividend rate will lead to the over-all increase in firm value which will be beneficial for both the equity holder and debt holders.