Thursday, April 13, 2017

Whole Foods reacts to competition from grocery stores

Whole Foods practically invented the PNOS segment (Premium-Natural-Organic-Supermarket), "transforming health food from a niche market into a booming retail sector attracting millions of urbanites, soccer moms and baby boomers. Whole Foods became a Fortune 500 company, and Mr. Mackey, a wealthy, foodie celebrity."

But now, competition has caught up to Whole Foods, as Kroger pushes their own in-house organic store brand and discount rivals like ALDI and LIDL expand at the low end. In response, activist investors are pushing Whole Foods start behaving more like a normal grocery store:
Jana [activist investor] ... wants Whole Foods to more quickly adopt standard grocery-industry practices it long had eschewed: loyalty cards that would allow it to target shoppers with coupons based on their buying habits; centralizing product purchasing to improve efficiency; and advertising sales and discounts.

Whether these changes cause Whole Foods to lose its foodie cachet (where else can you buy organic tofu tikka masala from a social justice warrior with a neck tattoo?) will determine its long run viability.

BOTTOM LINE:  it is not the strongest who survive, but those willing to adapt.

11 comments:

  1. Whole Foods is pretty rigid in their approach and their current appeal is the prestige. The products are mostly overpriced and the grocer is not willing to keep up with the current trends. More and more shoppers are looking to save money while still eating natural and healthy foods. This is where Aldi comes in. Aldi is a discount grocer who produces their own brand which stocks 90% of their shelves. They also have long had a large, and still increasing, array of organic and gluten free options available. Aldi also has a very stable relationship with their suppliers, making a good situation for all parties involved. Overall, they have competitive priority over many competitors for their low price points. As Aldi grows, it will take more customers away from Whole Foods, especially if they continue their inflexibility. To make matters even worse for Whole Foods, Aldi’s biggest competitor, Lidl, will be coming stateside. This means that Lidl could take even more customers from Whole Foods.

    Loeb, W. (2015, July 10). Aldi and Lidl Are Ready To Invade the U.S. Beware Walmart and Target! Retrieved from https://www.forbes.com/sites/walterloeb/2015/07/08/aldi-and-lidl-are-ready-to-invade-the-u-s-beware-walmart-and-target/#7c64107842b7 

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  4. Founded in 1978, Whole Foods Market currently has 435 stores and 2015 revenues of 15.72 billion (Market watch). For over 30 years WFM was able to differentiate itself by offering all natural products and organic products without artificial colors, dyes and preservatives in an industry that otherwise seemed to have embraced the artificial additives to food and was enjoying financial rewards that the cheaper ingredients and longer shelf life seem to bring to the industry.
    Along with most other industries, the food industry has a sensitive elasticity of demand. A 10% increase in a price of a products such as soda can reduce consumption by 8 – 10% (Andreyeva et al 2010). Wholefoods differentiated itself by offering a guarantee that consumers will not find any of the much spoken about, possibly harmful, not natural ingredients in food product that are sold in WFM stores. On its website, WFM maintains a publicly available list of ingredients that are banned in all foods that are sold in its stores ( Whole Foods Market 2016). This strategy of differentiation allowed Whole Foods to charge prices that are much higher than the rest of the industry while maintaining growth and expansion. Whole Foods Market’s high prices even earned it a “Whole Paycheck” nick name ( Sanders 2015)
    Whole Foods Market’s growth as well as the growing popularity of natural/organic foods, caused several major food manufacturers to introduce natural lines. As the national infrastructure for natural/organic foods developed it became easier for large grocers to integrate these foods into their line ups and hurt Whole Foods Market with the same pricing strategy that made them large to begin with. As a result, in 2016 Whole Foods Market was only number 6 on the list of the largest sellers of organic foods in America (Chait 2016). Walmart, Costco, Kroger, Target and Safeway al sell more organic food than WFM. Additionally WFM is now facing stiff competition from Trader Joes, a company known for being all natural while being significantly cheaper than WFM ( Elkins 2016). With slowing same store sales and increased competition WFM realizes that it will soon find itself backed into a corner with its high prices and is currently running an experiment with cheaper stores under the brand 365 (Tuttle 2016). The investors also think that WFM high prices will lead it to struggle in the face of widespread competition and its stock price is trading at a 5-year low at a time when the rest of the market has been on a historic rally (Nasdaq 2017). As WFM prepares for the rough waters ahead, it even ended the Co-CEO arrangement that had been previously forced by investors on the founder John Mackey (Wahba 2016)


    Andreyeva T, Long M, Brownell K ( 2010) https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2804646/

    Chait J ( 2016) https://www.thebalance.com/organic-retailers-in-north-america-2011-2538129

    Elkins Kathleen ( 2016 ) http://www.businessinsider.com/i-compared-the-price-of-whole-foods-365-items-to-trader-joes-heres-what-i-found-2016-2

    Federal Trade Commission ( 2009) https://www.ftc.gov/enforcement/cases-proceedings/0710114/whole-foods-market-inc-wild-oats-markets-inc

    Market Watch ( 2016) http://www.marketwatch.com/investing/stock/wfm/financials

    Nasdaq ( 2017) http://www.nasdaq.com/symbol/wfm/stock-chart

    Sanders M, ( 2015) http://www.npr.org/sections/thesalt/2015/05/08/405125477/whole-foods-to-open-chain-of-lower-priced-stores

    Tuttle Brad (2016) http://time.com/money/4340938/365-by-whole-foods-prices-selection-how-different/

    Wahba P ( 2016 ) http://fortune.com/2016/11/02/whole-foods-corporate-structure/


    Whole Foods Market ( 2016) http://www.wholefoodsmarket.com/about-our-products/quality-standards/food-ingredient

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  5. It’s not surprising that WholeFoods is facing competition from grocery stores. WholeFoods sells quality and organic products/produce, however to a standard consumer their prices are certainly extremely high. This as the result pushes many customers away. The next new competitor which does very well is Trader Joes. Many customers shop here as well. Somehow their products are much more affordable and quality as well. Wholefoods, the organic food chain is certainly struggling and their sales have declines significantly. Wholefoods is now looking to new 365 chain to help reignite growth, Giammona, C. (July 27, 2016). Therefore, in order for WholeFoods to improve it needs to be willing to adapt. They will also need to think about their long-term sustainability. Lastly, they must think about creating value for the customers. Sky High Prices are not attractive and a terrible approach. It only pushes customer away instead of attracting them. However, it is up to the consumer to decide what’s best and what they are willing to pay for service/product.

    References:
    Giammona, C. (July 27, 2016). Organic-Food Competition Hurts Sales. Retrieved from: https://www.bloomberg.com/news/articles/2016-07-27/whole-foods-market-misses-sales-estimates-as-competition-mounts

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  6. Making a decision when there is uncertainty such as Whole Foods response to its competition can stir a business around. Competition amongst other grocery stores is how they are learning to be brand conscience and price effective. Whole Foods groomed their customers to being specific shoppers and health gurus. High prices never stopped customers from enjoying their organic peanut butter spread, but it is the way that competition is starting to pick up on where Whole Foods might fall short might be a threat or challenge. Unlike a typical grocery store, Whole Foods has entered into a two-part industry where they are represented on the retail end as well as the food industry side. As the blog mentions, there are some people like the activist who was quoted wishing that Whole Foods operated as a normal grocery store. The uncertainty part to this whole thing is how will their loyal customers respond their needs as well as the general population. As the text presents us with help on deciding factors to better make these final decisions, one of them that stood out is running experiments. The text points out ‘business analytics’ is information that can be used toward a more clearer decision. The text also mentions that if a business does not run experiments will lead to someone misinterpreting results. I believe that Whole Foods should try and isolate a few of their locations and make a couple of test stores to rule out the overall true final decision.


    Froeb, McCann, Shore, & Ward. (2016). Managerial Economics(4th ed.). Boston, MA: Cengage Learning.

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  7. It is absolutely true that those who are willing to adapt will survive, not the strongest. Whole foods prides themselves on selling organic food, and from what I've researched (I have never actually been to one to know) it seems like that is primarily all of their sales. In the beginning stages of opening whole foods, they were probably one of the only grocery stores to sell organic foods. With times changing, there are competitors like Walmart coming in where they are selling organic and not organic food in the same place, and for reasonable prices. Whole foods has not adapted to this and their reluctancy to adapt is how they are going to go under. Selling organic food already limits your market. Some people will choose non organic food because its cheaper rather than the health benefits of it. So Whole Foods already has a limited market of prospective buyers. If they would open up their minds to integrating other food into their stores, they will be better off.

    https://www.bloomberg.com/news/articles/2015-05-14/whole-foods-walmart-costco-steal-growth-in-organic-groceries

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  9. Todd Barton-MBA Student SUNY Empire State CollegeNovember 28, 2017 at 7:00 AM

    It is true that those that adapt survive and not necessarily the strongest. One example that comes to mind happened to my home a company located where I live in upstate New York which is Kodak. They were once a juggernaut and one of the most recognizable brands in the world up until the 1990’s when they choice not to adapt. Whole Foods has taken the grocery world by storm from their business model of marketing and selling healthy, organic and locally grown (when possible) food. Whole Foods differentiation from it’s competitors has been facilitated by offering a guarantee that consumers will not find any harmful ingredients in food product that are sold in stores. (Whole Foods Market 2016) This strategy of differentiation has allowed Whole Foods to grow and expand while charging prices much higher than the rest of the grocery industrial peers and competitors. By differentiating, Whole Foods has reduced the elasticity of demand of their products which allows them to increase prices. As Froeb (2016) states, “The first strategy, cost reduction, is self-explanatory. Low-cost strategies are usually found in industries where products are not particularly differentiated and price competition tend to be fierce…We can interpret the second strategy, product differentiation, as a reduction in elasticity of demand for the product. Less elasticity leads to an increase in price because the optimal margin of price over margin cost is related to the elasticity of demand” (P.132).

    References:
    Froeb, L., McCann, B., Shor, M., & Ward, M. (2016). Managerial Economics. Boston, MA: Cengage Learning.

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  10. Todd Barton-MBA Student SUNY Empire State CollegeNovember 28, 2017 at 7:02 AM

    However, competition is targeting the customers, revenue and profit that Whole Foods has amassed. Kroger, Target, Walmart and even my local grocery store Wegmans all have expanded their product offering with an expansive organic food offerings. Additionally, Aldi, a discount grocery chain, has expanded their offerings of organic and gluten free options available. Aldi’s competitive strategy is low cost source and gives it a competitive advantage over many competitors for their low price points. Whole Foods competitors are ensuring there is a market equilibrium which drives down prices that Whole Foods will be able to charge customers. As Froeb (2016) states, “The sellers will compete with one another by offering to sell at a lower price. We say excess supply exerts downward pressure on price.” (P.99). As Walmart, Kroger, Target and Aldi expand their organic foods, it will take more customers away from Whole Foods, especially if they continue to not adapt to their competition.

    Jana, the activist investor, wanted Whole Foods to adapt and change with the grocery industry on such things as loyalty cards in order to acquire buying pattern data of customers. Interestingly enough, when Whole Foods was acquired by Amazon this year, they implemented Amazon Prime to replace the Whole Foods loyalty program. Amazon has mastered customer data and understanding buying trends, this will help Whole Foods to adapt and survive. As (Petro, 2017)Petro (2017) contends, “With massive amounts of data from Whole Foods shoppers, Amazon will ultimately be able to tailor the grocery shopping experience to the individual. Amazon has already mastered the process of upselling, i.e. offering additional items that go with the items the consumer is looking to buy. With consumables like groceries, Amazon will know when you run out of cereal and will present you with the offer to buy more at precisely the right time. Alternatively, the new box of cereal may just show up at your door at the moment you take that last bite.” Amazon is facilitating Whole Foods adaptation for survival.

    References:
    Froeb, L., McCann, B., Shor, M., & Ward, M. (2016). Managerial Economics. Boston, MA: Cengage Learning.
    Loeb, W. (2015, July 10). Aldi and Lidl Are Ready To Invade the U.S. Beware Walmart and Target! Retrieved from https://www.forbes.com/sites/walterloeb/2015/07/08/aldi-and-lidl-are-ready-to-invade-the-u-s-beware-walmart-and-target/#7c64107842b7
    Petro, G. (2017, August 2). Amazon's Acquisition of Whole Foods is About Two Things: Data and Product. Retrieved from Forbes: https://www.forbes.com/sites/gregpetro/2017/08/02/amazons-acquisition-of-whole-foods-is-about-two-things-data-and-product/#420352e8a808

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  11. Froeb et al (2014) teaches us that succeeding in the face of competition requires that your first find a way to create an advantage and then figure out how to protect that advantage. With steep competition Whole Foods needs to develop a strategy to keep profit from eroding and create a sustainable competitive advantage. As this blog cites, Whole Foods was responsible for "transforming health food from a niche market into a booming retail sector attracting millions of urbanites, soccer moms and baby boomers. In this case, the IO (industrial organization) perspective focuses on the industry. Froeb et al (2014) reminds us that Michael Porter believes the essence of this paradigm is that a firms performance in the marketplace is critical on the characteristics of the industry environment in which it competes’. Whole Foods could create barriers to entry by creating proprietary products and lowering prices. The New York Post (2017) reports, in the first week of the Amazon takeover in late August and lowered prices, the upscale grocer gained nearly 10 percent of the scrappy German-owned grocer’s customers compared with a year ago, according to a report by Thasos Group, a research company, which tracked shoppers’ mobile phone location data.
    https://nypost.com/2017/10/03/whole-foods-dominating-the-competition-since-amazon-takeover/
    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial economics: A problem solving approach (4th ed.). Boston, MA: Cengage Learning.

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