Whole Foods or Whole Check?

Whole Foods offers natural, organic products and a fun customer experience but with high prices and new competition, is it sustainable?

In an industry plagued by low margins and commoditization, Whole Foods differentiates by offering premium quality products and service. It is an example of a company that effectively aligns its business and operating model. The company has created value by capitalizing on the growing trend in preferences for organic and healthy foods.  Whereas shoppers have typically associated the term “grocery store” with dry and packaged goods, Whole Foods reconnects consumers to the idea of pure, natural and fresh foods. Its product categories include beverages, body care, snacks, frozen, pantry staples, supplements and gift baskets and also eco-scaling cleaning products [1]. In addition to strategically choosing suppliers who offer products with natural ingredients, Whole Foods created their own 365 line of private label organic and natural products [2]. These premium products are a huge asset and translate to performance, since consumers are willing to pay more for higher quality foods. Whole Foods commands a profit margin around 5-6%, compared to the grocery industry average around 3%. For example, Kroger’s sales in its FY2014 reached nearly $97 billion with net income $1.5 billion. In the same period, Whole Foods posted sales of about $11.5 billion with net income $500 million. While Kroger had nearly nine times Whole Foods’ revenue, it only had three times the net income [3].

In addition to offering high quality products, Whole Foods focuses on providing an in-store experience.  Whereas many consumers consider grocery shopping a chore, Whole Foods provides a fun environment that attracts consumers to visit the store as a leisure activity. Whole Foods has several tangible in-store assets that contribute to the success of their value proposition. One asset is the large size of their stores. Whole Foods chose to invest in 50,000 – 80,000 square-foot stores, 166%-266% bigger than the average grocery store [4]. This space allows them to offer a wine bar and food stations with cuisine from around the world in high traffic locations, attracting shoppers not only to purchase groceries but also to stay for a bite or drink. These stores typically also offer cooking lessons, wine tasting, and other events that patrons sign up for ahead of time, creating a club-like feel. Whole Foods hires the right people – chefs, wine connoisseurs, etc. – who can connect with Whole Foods’ target market and cater to these events. While all of these assets add to Whole Foods’ cost, they service high revenue purchases and encourage brand loyalty and cross-selling.

Whole Foods is also employing digital technology to improve the customer experience. First, the company redesigned its mobile app last year, which resulted in 600,000 downloads within the first month. The app has new features such as shopping list creation and information about store sales and specials. Second, Whole Foods chose to partner with Instacart, the same-day grocery delivery smartphone app, which yielded carts that are 2.5 times the size of in-store shopping carts [5]. Finally, as we learned in the Marketing Apple Pay case, Whole Foods was an early adopter of Apple Pay, offering shoppers a seamless, contactless payment method. All of these recent technology moves are assets that expand and enhance the customer’s touch points with Whole Foods, which will in return increase sales.

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While Whole Foods pioneered the natural and organic grocery category and quickly rose to success, the company has faced stiffer competition in the past few years as mainstream retailers increase their natural and organic product offerings. As the image above reflects, stock price dropped 9% last quarter with competition and a decline is same-store sales. Whole Foods is revamping its strategy to lower prices and offer promotions while trying to maintain its position as a high-quality retailer [6]. Last quarter, Whole Foods announced that it will open a sister chain of smaller stores aimed at younger shoppers who are looking for more affordable alternatives [7]. These are examples of Whole Foods adapting their business model and developing new assets to support this model in order to create value in a changing marketplace. The future will tell whether these adaptations help Whole Foods sustain its profitability.

 

[1] Whole Foods Market on Forbes Lists. http://www.forbes.com/companies/whole-foods-market/

[2] How Whole Foods Market Created the Ultimate Successful Subcategory. https://www.prophet.com/blog/aakeronbrands/193-how-whole-foods-market-created-the-ultimate-successful-subcategory

[3] Whole Foods’ Business Model Makes It a Solid Investment. http://www.gurufocus.com/news/264529/whole-foods-business-model-makes-it-a-solid-investment

[4] USA Today on the Whole Foods Market “Shopping Experience.” https://www.organicconsumers.org/old_articles/organic/usatoday31005.php

[5] Apple Pay Helps Whole Foods Market Give Shoppers What They Want. http://www.fool.com/investing/general/2015/02/16/apple-pay-helps-whole-foods-market-give-shoppers-w.aspx

[6] Whole Foods Dives After Results; Announces $1B Buyback. http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html

[7] Whole Foods Plans Lower-Cost Chain. http://www.wsj.com/articles/whole-foods-market-profit-rises-on-higher-sales-1430944499

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4 thoughts on “Whole Foods or Whole Check?

  1. Thanks for the interesting post! Whole Foods’ current value proposition is providing organic, high-quality products and a fun in-store experience. Given that, it’s interesting to hear that they will be opening a chain of smaller less-expensive sister stores, as that seems to go against their current business model. I wonder how they will position the new stores in the competitive landscape and what about their operating model will have to change to support that.

  2. Great post, thanks for sharing.

    When reading about their declining stock price in the face of stronger competition, I was wondering whether Whole Foods, which advocates a more environmentally-friendly and healthy version of the traditional grocery store, might ever find itself actually fighting a trend toward greater health and environmental consciousness among its competitors. Even small changes made at traditional stores, with their far larger customer base, might have a larger impact on these issues than all of Whole Foods operations. In this sense, while Whole Foods’ success has helped further these components of their mission, it has also created copy cats that could threaten its future. It will be interesting to see how Whole Foods defends its turf.

  3. Thank you for a great post. I found it very interesting that in the face of stiffer competition on fresh and quality groceries, they are actually lowering prices and making themselves less differentiated than competitors. Intuition for me would have suggested to double down, maintain high prices and emphasize the in store shopping experience, service and quality levels as the justification for the difference. It will be interesting to follow how this strategy pans out.

    You also mention the declining life-for-life store sales. Given this declining top line, I wonder whether they will continue to open new stores in the US or actually start to focus more on their international strategy where they remain more unique. I know they now have c.10 stores in the UK, but could they spread further?

  4. Thanks for the insightful post. I’m wondering about the competitive threat that Whole Foods faces from the rise of food delivery services such as Blue Apron. With the broader consumer shift to being more aware about what we eat we are also witnessing a shift to additional convenience offering. Before consumers wanted cheap. Now they want healthy. But soon they will want to be inspired by an ever changing menu built from these healthy ingredients. I think the investment in inspiration type services such as wine tasting etc is wise as you really do need to provide shoppers with reasons to enter the store in an age when everything can be done on demand. On the marketing side I see an opportunity for Whole Foods to position themselves as a provider of social nourishment. This would extend beyond just what you are putting in mouth to the experience of creating a meal and sharing it with friends and family.

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