1. Discuss the trends in retailing of organic foods and the impact of these trends on Whole Foods Market.
According to the U.S. Department of Agriculture’s Food and Safety Inspection Service, natural or organic foods are the products that have been minimally processed and do not contain artificial colours or ingredients. They are divided into 4 categories according to the level of purity: 100% organic, organic, products made with organic ingredients and all other food made with organic ingredients. The sales of organic products have been increasing during the 1990s, however the growth rate has slowed down in the 2000s. The growing interest for the organic foods has pushed the major food processing companies to include natural products or ingredient into their product offering (Gamble & Thompson, 2011).
In 2006 most of the products (31%) were sold through traditional retailers, 24% through organic food retailers, such as Whole Foods, and 22% through small grocery stores. The growth in the industry was mainly fuelled by the increasing concerns about nutrition, healthier lifestyle, and the belief that organic products are more environmentally friendly (Gamble & Thompson, 2011).
The demand for the organic items was growing by almost 20% annually and the enthusiasm about these products allowed retailers such as Whole Foods to charge high price premium, which was especially rare in the mature, saturated and highly competitive foods market (Gamble & Thompson, 2011). The combination of the increasing number of health-conscious customers, high profitability and growth of the organic food industry made it an attractive opportunity for Whole Foods .
2. Evaluate the competitive environment of the firm: Apply Porter’s model and analyze each factor relative to the company.
Threat of new entrants in the organic industry is high, due to the fact that it is a lucrative and a growing business, where the entry barriers are relatively low. The main threat is posed by the traditional food store chains that expand their product offering into organic items, while exploiting synergies with non-organic products.
Threat of substitution for Whole Foods products is high due to the fact that people increasingly prefer to eat out and since conventional food items are more widely available and are cheaper than organic foods.
Bargaining power of buyers is medium in the industry. Organic foods consumers are represented by affluent and health conscious customer segment, therefore they are few compared to the mainstream market and rather consolidated.
Bargaining power of suppliers is relatively low for Whole Foods due to the fact that the company is vertically integrated and since there are many non-consolidated organic farms compared to the number of organic food retailers.
Intensity of competition within the organic food market is relatively low, since there are few major players that focus on this market segment, and the growing industry offers significant opportunities for growth. However, in the long run, as more retailers will enter the business and industry will mature, the competition will become fiercer. Moreover, the competition with traditional supermarket chains is already high.
3. Discuss which environmental factor poses the most significant threat to Whole Food and what the company can do to combat it.
The main threat for the company is the entry of the traditional supermarket chains in the organic foods industry. These retailers are able to offer lower prices through scale economies and to exploit synergies with the existing distribution channels. In order to address this threat Whole Foods should differentiate their product offering even further, for example by offering own brands, as well as to enhance customer loyalty and shopping experience that can be hard to duplicate by traditional retailers.
4. Complete a SWOT analysis and identify significant opportunities and threats facing the organization.
Strengths
Whole Foods is a niche player in the food market and employs a focus strategy with the emphasis on organic and health products, therefore the company can has gained a competitive advantage and distinguished itself from the rivals.
Since Whole Foods is present in several countries (the U.S., Britain and Canada), it can explore the potential of several markets and derive synergies from large scale operations (Gamble & Thompson, 2011). Moreover, the choice of location in the affluent and central areas with high customer traffic enhances brand awareness and captures a significant number of target customers.
Whole Foods offers a large variety of high quality products and it pays a lot of attention to creating a special atmosphere in the stores, which enhances customer experience. Hence, it is able to charge price premium, and thus to generate higher margins.
Whole Foods pursues customer orientation. Therefore, its shops offer a unique shopping experience and the product offering as well as store designs are customized according to the local preferences.
Vertical integration and the ownership of the farms, including the field-to-store gardens, allow controlling production processes and the quality of products in the Whole Foods stores. Moreover, the company can derive economies of scale from mass procurement and production, thus lowering unit cost and maximizing profits.
The reputation of Whole Foods and its strong commitment to social responsibility has always been one of the main strengths of the company, since it enhances customer trust and loyalty (Gamble & Thompson, 2011).
Weaknesses
Although high prices for the Whole Food’s products are common in the organic foods industry, consumers are becoming more price-sensitive due to the recent economic turmoil. High prices have been quoted as the main reason for consumers to choose conventional retail stores and food. Therefore the high cost – high quality model of the Whole Foods may not be sustainable in the future.
While Whole Foods operates more shops than most of its organic foods competitors, the number of stores is still below that of traditional retail chains. Limited availability decreases the number of potential customers, and it has been named as the second major reason for choosing conventional food items over organic ones.
The company puts little emphasis on advertising and relies mostly on the word of mouth marketing and on the central store location. This approach limits company’s access to new consumers and customer groups (Gamble & Thompson, 2011).
Opportunities
Healthy life-style and nutrition is a strong trend worldwide. It offers Whole Foods an opportunity for further expansion and growth both in the countries, where it is already present and in the new markets.
Purchasing local products and operating field-to-store gardens may help the company to reduce costs, while offering an opportunity to charge a price premium for fresh and locally grown items (Parsons, 2010).
Private label products may help the company to diversify and to differentiate from other retailers. Moreover, it can help to expand customer base, by introducing a product line with relatively low prices.
Subsidies that have been recently given to the farmers, who produce organic products, reduce their output cost, thus offering Whole Foods an opportunity for further cost reduction (Lockeretz, 2007).
Threats
Economic downturn in 2008 has threatened the success of Whole Foods. Decrease incomes could lead to a more cost-sensitive behaviour; therefore, Whole Foods can face declining sales and growth in the future.
The market for organic products is limited to the affluent and health conscious customers. Since it is still a growing segment, Whole Foods has experienced high profitability and growth. However, with the achievement of market saturation it will be hard for Whole Foods to expand further.
High competition from conventional supermarkets that offer also organic products at lower prices is especially important in the light of the recent economic crisis.
5. Discuss how Whole Foods can use it strengths and opportunities to achieve a sustained competitive advantage in the marketplace.
Firstly, Whole Foods can continue its growth due to the increasing importance of healthy lifestyle and nutrition for the customers. Moreover, since this trend is spreading worldwide, Whole Foods can explore the opportunities for further international expansion. The possibility to sell private label products can help the company to differentiate even further from the rivals. Moreover, the decrease in input cost due to vertical integration, additional subsidies to the organic farmers and the reduction of transportation cost due to local purchasing strategy help Whole Foods to lower the overall costs and to offer lower prices to the price-conscious customers. Customer orientation and shopping experience has always been in the core of the company’s business strategy, that is why Whole Foods should continue exploiting this advantage in order to differentiate from competitors and to create customer loyalty.
References
Gamble, J., & Thompson, A. A. J. (2011). Essentials of strategic management: The quest for
competitive advantage. (2nd ed.). New York, NY: McGraw-Hill/Irwin.
Lockeretz, W. (2007). Organic farming: An international history. Wallingford, UK: CABI. Parsons, S. (2010, June 25). Whole foods to grow its own produce. Change.org, Retrieved
from http://news.change.org/stories/whole-foods-to-grow-its-own-produce
