Whole Foods market positioning and competitive challenges

¶ … Whole Foods: Current market conditions

Market structure

The supermarket industry is highly competitive. However, Whole Foods has been able to garner a market advantage through specialization. Whole Foods is a national chain but offers exclusively organic items to customers, thus conveying additional value for a specific yet rapidly-expanding demographic of customers. Growth in the organics market remains strong, even though it experienced a downturn after the recession. "According to the Organic Trade Association, U.S. sales of organic food and beverages have grown from $1 billion in 1990 to $24.8 billion in 2009. That's 18.4% growth annualized over 19 years" (Beyers 2011).

As well as health-conscious consumers, Whole Foods also offers a wide array of international, gluten-free, peanut-free, and other specialty items. It is a relatively large chain, although still dwarfed in size by major national supermarket retailers like Wal-Mart. Thus, the market structure is that of a competitive market, with many niche-based subdivisions within the market.

Effect of new companies entering the market

Because consumers have such flexibility in selecting where they purchase their foods, new market entrants can profoundly shift the dynamic of the industry. Whole Foods offers a wide array of hard-to-find specialty products. However, a number of companies, including Wal-Mart, have entered the organic and specialty grocery market, offering organic produce and other niche items, like gluten-free baked products, to rival Whole Foods. Because the 'uniqueness' of Whole Foods products is so important in its positioning, the company is particularly impacted by more and more rivals striving to enter into its niche market.

Prices

Whole Foods has been nicknamed 'Whole Paycheck' because it is priced significantly higher than other chains. "Combining a supermarket's selection with a focus on organic and natural foods, Whole Foods makes no bones about its pricey goods" (Cavallaro 2009). Whole Foods sells an ambient store experience and presents food shopping as a necessary luxury, not merely a chore. However, recent economic uncertainty has caused many consumers to reduce their food budgets on items seen as optional, such as organic produce and prepared gourmet treats. Co-CEO Walter Robb said of the downturn in sales after the recession: "It was a lot of humble pie, because our sales experienced a drop that I have never seen in 32 years of retail. Customers left us in droves" very suddenly (Patton & Gruley 2009).

Technology

Although it offers an all-natural experience, Whole Foods uses technology, such as its store website, to promote its products' healthfulness and sustainability. This enables consumers to identify with the 'story' behind the food and the company, and encourages them to shop at the store despite its higher prices. Technology has also affected the supermarket industry in terms of the new technology that allows new food items to be produced, such as gluten-free baked goods and improved shipping and storage for imported and/or fragile, perishable items.

Productivity: Consider the law of diminishing marginal productivity

To continue to sustain its profits, Whole Foods has embarked upon an aggressive expansion strategy. "Whole Foods' business model has centered on rapid expansion driving revenue growth. With affluent markets reaching saturation, they have begun moving into lower income areas, bringing the organic retailer into direct competition with more established and lower cost competitors" (Cavallaro 2009). At some point the costs of opening new stores will not justify continued expansion and after the recession, Whole Foods was forced to curtail some of its plans (Cavallaro 2009).

Cost structure

In the food industry, companies operate at a relatively low margin. When input goods such as organics are high in price, the company must keep food prices higher. Whole Foods thus operates at a much higher price point than its rivals and its ability to profit off of sales is limited. It also does not operate at as great an economy of scale, compared with standard supermarkets.

Fixed and variable costs

In addition to the overhead of maintaining a grocery store, Whole Foods has additional costs to bear, given that organic produce and meats are more costly to farm and tend to than those raised through conventional agriculture. This means that there is a limit to how low Whole Foods can price its items, given its commitment to selling only organics. Deviating from its core principles is not an option, given that it is quality and sustainability that draw consumers to Whole Foods, not prices alone. However, the recent behavior of consumers during the recession indicated that shoppers are still price-sensitive. Whole Foods must strike a balance between idealism and practicality, given its high level of fixed costs.

Price elasticity of demand

Demand is highly elastic in the grocery business, and Whole Foods has had to modify its offerings accordingly despite its relatively high price point overall, relative to its standard supermarket competitors. Co-CEO Robb admitted: "We realized in January or February of 2008 that we were too expensive, as people perceived it," and this was having a negative impact both upon sales and public relations" (Patton & Gruley 2009). So "we've brought prices down. And people are telling us at the checkout stand. They notice the effort, and they appreciate it, and they're rewarding us with their business" (Patton & Gruley 2009). Premium prices were having a negative impact on Whole Foods because consumers had less discretionary income to spend on food (cutting back on non-necessary organics and specialty items like chocolates, coffees, and fancy olive oils is an easy way to save money); because even employed consumers were worried about their economic futures, and also because the image of Whole Foods was becoming to seem elitist rather than edgy.

Competitors

Wal-Mart's recent entry into the organics market has proven to be a challenge for Whole Foods. "A newfound competitor with Whole Foods...Wal-Mart has been a stalwart overachiever, enticing grocery shoppers with discounted prices, while pricier alternatives like Whole Foods struggle to maintain higher margins" (Cavallaro 2010). Wal-Mart does not offer the range of specialty items featured at Whole Foods, but because of the nature of supermarket shopping; even the most dedicated organic consumer can divert some of his or her food dollars to Wal-Mart vs. Whole Foods.

Trader Joes is another, cheaper grocery store that positions itself amongst a hippy/hipster crowd that likes to patronize Whole Foods, although it specializes more in prepared foods and discounted items rather than exclusively sells organics. "At Trader Joe's, you get a market that's sensitive to the politics of the plate while also keeping its prices low" (Le Tellier 2012). Trader Joe's has also responded to calls for more sustainable offerings from its critics. "Their decision to sign the Fair Food Agreement signals an awareness to better the lives of workers and consumers alike" (Le Tellier 2012).

Other competitors include local health food stores and farmer's markets. Farmer's markets are becoming increasingly popular because of a new interest in 'local' eating, versus simply selecting organic items that might be produced by a large, agricultural corporation. For some Whole Foods customers, the success of Whole Foods and its entry into mainstream culture is seen as a deficit, rather than a positive, in terms incentivizing them to shop at the retailer, although Whole Foods has tried to counterbalance this by offering more locally-based items.

Supply and demand analysis

One of the difficulties of the grocery business is the degree to which purveyors like Whole Foods are subject to the whims of customer demand and also the supply of goods. When customer demand for higher-end consumer goods such as organics begins to contract, Whole Foods is hurt. It is also limited to how much it can slash prices if there are difficulties in obtaining its products, such as a drought or an interruption in the supply chain. Its commitment to local growers further makes it dependent upon suppliers. There is a limit to how much it can lower prices, even when faced with a downturn in demand, if suppliers' items are scarce and the company must make up for higher input costs. Whole Foods cannot operate on an economy of scale like Wal-Mart, and because its range of offerings is limited to food, it cannot engage in 'risk management' like a big box store, by emphasizing more profitable aspects of its product lines. Costs of transportation of imported goods can also affect overall prices 'across the board.'

Effect of government regulations

Despite Whole Foods' desire to stock GMO (genetically modified organisms)-free items, this has grown increasingly difficult. "A representative for the corporation acknowledged in May of 2011 that the realities of the marketplace have forced a shift in the company's previous no-GMOs policy... Whole Foods does take steps to avoid GMO ingredients, but due to the massive use of genetically engineered ingredients in the food supply, it is currently impossible to avoid GMOs in conventional or 'natural' products" (Green 2011).

Standards of 'organic' foods are mandated by law, however. "The term, 'organic,' may only be used on labels and in labeling of raw or processed agricultural products, including ingredients, that have been produced and handled in accordance with the regulations" (Green 2012). This helps Whole Foods, given that products that are not truly organic are limited to the degree in which they can promote themselves as healthy, although they may try to fool customers by stressing that they contain 'healthy whole grains' or are 'all natural.'