Managerial Economics and Strategic Analysis

Whole Foods

Managerial economics

Managerial economics: Whole Foods

In many ways, Whole Foods defies current assumptions of what constitutes a successful company strategy. It is an organic niche supermarket that prices its products relatively high in relation to its competitors. Yet it has become wildly successful in recent years, even defying conventional predictions of its likely demise during the credit crisis of 2008. This paper will explore the 'secret' of Whole Foods success using the core principles of managerial economics. Concepts germane to managerial economics include: exploiting the elements of effective leadership; ethics programs and the ethical orientation of the company; risk-taking; optimizing organizational structure; optimizing strategic control; and the need for balance between rewards, culture, and boundaries.

The elements of effective leadership and ethics

When Whole Foods began as the brainchild of current CEO John Mackey, its product was what distinguished it from its competitors. Mackey has been called an effective leader because of his ability to identify an emerging niche market and his unique integration of ethics into the company worldview. Whole Foods, unlike most grocery stores began with the concept that it would offer organic produce alone to consumers and rather than focus upon price it would sell an ethos of an ambient store in which shoppers felt 'good' shopping. Later, it expanded to offer more and more specialty food items spanning from vegan to vegetarian; gluten-free to nut-free. However, many of these items are far more expensive than conventionally-produced foods. This is partially how the store earned its moniker 'Whole Paycheck' given that organic and ethically-raised products are invariably more expensive than the alternatives found in standard supermarkets. However, by fulfilling an unmet need, Whole Foods remains buoyant, given that it does not compete on slashing prices alone. Unlike conventional supermarkets which offer a wider range of goods, there is often a struggle to out-price Wal-Mart. But Whole Foods prides itself on offering something unique. And while more grocery stores are offering organic alternatives (including Wal-Mart); Whole Foods still offers a far wider array of products in this area. Finally, the store is an 'experience:' unlike most grocery stores, the shopping area is pleasantly designed and ambient. Much like Starbucks, it is an affordable luxury which consumers delight in 'experiencing' not merely going to as a chore and they feel good going there, thanks to the stress placed upon ethical consumption.

Risk a company may take and pros and cons of different organizational structures

Whole Foods has become even more specialized in its offerings and more determined to link its philosophy with its product offerings, even vowing to cut out some of its popular 'healthy junk food' or at least reduce it. "Mackey, in a stroke of corporate transubstantiation, declared that Whole Foods would go on a diet, too. It would focus on stripped-down healthy eating. Fewer organic potato chips, more actual potatoes. He told the Wall Street Journal in August, "We sell a bunch of junk" (Paumgarten 2010). Mackey has been called a risk-taker because of his willingness to even challenge customer preferences for popular items because of his personal ideology.

However, while this iconoclastic attitude might seem like an odd and careless way to run a business, it really does not behoove Whole Foods to soften its stance on health-related concerns. The only way it can justify its higher prices and store offerings is through its focus on niche marketing. Even consumers who are not exclusively organic expect a certain level of purity at Whole Foods, even though they may buy cheaper paper towels and dish soap at a conventional grocery store. The utility derived from Whole Foods is not defined by saving money.

Whole Foods also has a relatively non-hierarchical team-based structure of running the company that does encourage some local responsiveness (Fishman 1996). Each individual store is divided into 'teams' that provide input about customer needs and mangers have discretion in terms of what is ordered, presentation and pricing. This was instrumental when Whole Foods had had to reevaluate its approach to pricing somewhat in recent years, given the softening of the economy. It has expanded its lower-cost lines of in-store brands. "To counter its reputation for being expensive, Whole Foods is offering more price promotions and discounts in all of its stores, and lately it has held many of its grocery prices flat despite its own costs rising. The idea is for customers to feel that while there may be certain product prices that are going up, they are finding plenty of good deals to make up for that, said executives, who call the strategy 'price perception'" (Gasparro 2012).

Depending upon the area, although consumers may be willing to pay more for certain goods such as vegan, vegetarian or gluten-free options or products about which they have particular health concerns about like meat or berries, even a specialty grocery store must be aware of the fact that there is a price point beyond which the average consumer will not transcend, given that the opportunity cost of purchasing the item is too great. However, by virtue of targeting higher-income consumers as its core demographic, Whole Foods has actually been more protected against some of the difficulties caused by the recession. Higher-income consumers are less likely to live paycheck to paycheck and are not exclusively dependent upon their salaries, meaning that economic downturns affect them less.

Still, given that Whole Foods has recently expanded into many suburban areas, it has had to acknowledge certain demographic changes amongst its consumers and alter its sales policy accordingly. While "rent is lower, square footage is smaller and competition for natural, organic food isn't as heated" in the suburbs, suburban consumers are more likely to experience 'sticker shock' than urban consumers at Whole Foods prices (Gasparro 2012). Competition is heating up within the organic marketplace, and Whole Foods is eager to find areas that are not super-saturated and must tailor its emphases to the needs of the suburbs.

Types of strategic control and the need for balance between rewards, culture, and boundaries

It should be noted that the organizational emphasis of Whole Foods is not purely non-hierarchical and 'hippy' in nature: its CEO wields considerable control over how goods and services are produced and marketed for the company, but flexibility allows for regional preferences and needs that ultimately is an advantage for the reputation of something as variable as food tastes. Also, strategic control is enforced by dividing staff into teams. Different teams compete against one another within the store (for example, the 'bread team' versus the 'meat team) and for meeting productivity goals teams get financial rewards. Thus, competition is still encouraged as a way to ensure the company keeps standards high (Fishman 1996).