Reference no: EM131376216

WHEN FOUR YOUNG entrepreneurs opened a small natural-foods store in Austin, Texas, in 1980, they never imagined it would one day turn into an international supermarket chain with stores in the United States, Canada, and the United Kingdom. Some 35 years later, Whole Foods now has more than 420 stores, employs more than 90,000 people, and earned $15 billion in revenue in 2015. Its mission is to offer the finest naturaland organic foods available, maintain the highest quality standards in the grocery industry, and remain firmly committed to sustainable agriculture.

Whole Foods differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on increasing the perceived value created for customers, which allows it to charge a premium price. In addition to natural and organic foods, it also offers a wide variety of prepared foods and luxury food items, such as $400 bottles of wine. The decision to sell high-ticket items incurs higher costs for the company because such products require more expensive in-store displays and more highly skilled workers, and many fresh items are perishable and require high turnover. Moreover, sourcing natural and organic food is generally done locally, limiting any scale advantages. Taken together, these actions reduce efficiency and drive up costs. The rising cost structure erodes Whole Foods’ margin.

Given its unique strategic position as an upscale grocer offering natural, organic, and luxury food items, Whole Foods enjoyed a competitive advantage during the economic boom through early 2008. But as consumers became more budget-conscious in the wake of the deep recession in 2008–2009, the company’s performance deteriorated. Competitive intensity also increased markedly because basically every supermarket chain and other retailers now offer organic food. As a result, sales growth of existing Whole Foods stores (“same-store sales,” an important performance metric in the grocery business) has been declining between 2013 and 2015. To make matters worse, same-store sales growth is now close to zero. Overall, Whole Foods Market has sustained a competitive disadvantage, underperforming not only its competitors, but also the broader market by a wide margin (since 2014).

To revitalize Whole Foods, co-founder and co-CEO John Mackey decided to “trim fat” on two fronts: First, the supermarket chain refocused on its mission to offer wholesome and healthy food options. In Mackey’s words, Whole Foods’ offerings had included “a bunch of junk,” including candy. Mackey is passionate about helping U.S. consumers overcome obesity in order to help reduce heart disease and diabetes. Given that, the new strategic intent at Whole Foods is to become the champion of healthy living not only by offering natural and organic food choices, but also by educating consumers with its new Healthy Eating initiative. Whole Foods Market now has “Take Action Centers” in every store to educate customers on many food-related topics such as genetic engineering, organic foods, pesticides, and sustainable agriculture.

Yet, a mislabeling “scandal” in New York—city officials found in 2015 that Whole Foods had mislabeled weights of several freshly packaged foods such as chicken tenders and vegetable platters, leading to overcharges of up to $15 an item—reinforced the public’s image of Whole Foods as overpriced. Mackey made a video apology and said that this was an unfortunate but isolated incident caused by inadvertent errors of local employees. He also emphasized that the problems were found in only nine out of 425 stores.

Second, Whole Foods is trimming fat by reducing costs. To attract more customers who buy groceries for an entire family or group, Whole Foods now offers volume discounts to compete with Costco, the most successful membership chain in the United States. Whole Foods also expanded its private-label product line, which now includes thousands of products at lower prices. Whole Foods also launched a new store format, “365 by Whole Foods Market,” based on its “365 Everyday Value” private label. The 365 stores focus exclusively on Whole Foods’ discount private labels, primarily to address the rise of discount competitor Trader Joe’s. The risk, however, is that this strategic initiative will cannibalize demand from the higher-end Whole Foods Markets, rather than taking away customers from Trader Joe’s.

To offer its private-label line and volume-discount packages, Whole Foods is beginning to rely more on low-cost suppliers and is improving its logistics system to cover larger geographic areas more efficiently. It still plans to grow threefold in the future and believes that the United States can profitably support some 1,200 Whole Foods stores. Larger scale and more efficient logistics and operations should allow the company to drive down its cost structure. It remains to be seen if Whole Foods can strengthen its economic value creation (V—C) to yet again gain and sustain a competitive advantage.

DISCUSSION QUESTIONS

1. Why was Whole Foods successful initially? Why has it lost its competitive advantage and is underperforming its competitors?

2. What value driver is Whole Foods using to remain differentiated in the face of competitors selling organic foods?

3. Given Whole Foods strategic initiatives to reduce its cost structure, does the firm risk being “stuck in the middle”? Why or why not?

4.  What other strategic initiatives should/could Whole Foods launch to more successfully drive its business strategy?