Whole Foods Market Inc. Company Analysis

Date:        December 5th, 2015

Re:        Memo: Whole Foods Market Inc. Company Analysis

Introduction

The purpose of this memo is to present an analysis conducted on the Whole Foods Market Inc. (WFM). The content of this memo will focus on a business review, financial performance analysis, and a valuation of the firm. WFM is the first “certified organic” grocer and has operated in the natural and organic segment since the 1980’s. WFM is the 7th largest supermarket chain in the United States based on sales with a 2.5% market share. There are currently 399 stores spread across the US, Canada and UK. They are a fortune 500 company, ranking 218, with over $14.2 billion in annual sales and an EBITDA of $1.3 billion as of 2014, generating 96.7% of this income in the U.S alone. Overall, Whole Foods has sustained remarkable profitability and growth over recent years with almost zero fixed interest debt. However, an overpriced reputation, rising costs, increasing competition, limited international exposure and a negative investor sentiment has cast Whole Foods in a negative light leading to a drastic decrease in their stock price1. The below analysis will reveal that the current negative perception of Whole Foods overshadows a financially strong company. Whole Foods could be a bargain investment depending on how the management team balances consumer expectations and successfully launch their new affordable 365 markets.  

Product and Services

WFM is the leading organic grocer who offers the broadest selection of high quality natural and organic products with a strong emphasis on perishable foods. A key driver of their business is their renowned quality standards, which bans hundreds of ingredients and numerous manufacturing, farming, fishing and ranching practices. However, such practices translate to a premium product cost and price. To combat this issue head-on, WFM has introduced several private label brands, such as 365 Everyday Value, which offers a lower cost item to their premium products. Additionally, each WFM location strives to create a dynamic shopping experience by designing stores with lively inspiration atmospheres aimed at initiating customer gathering creating a unique shopping atmosphere1. WMF tries to balance a complimentary lifestyle environment that offers premium organic products. This use to be unique; however, many substitutes are becoming available offering the same advantages at a more affordable price distracting customers. WFM needs to maintain their relationship with their core customer base while developing lower priced goods (365 Everyday) to expand their appeal.

Customers

WFM maintains an intimate relationship with their target consumer that is supportive of their lifestyle and community. The target market of WFM can be summarized as: well-educated, wealthy, health and environmentally conscious with a salary greater than $70,0003. Rather than pay for advertisement, WFM depends on earned media through their community outreach programs, social media and traditional word of mouth. WFM publishes 1200 messages a day through 830 social medial channels and utilizes a newsletter to communicate with their 1.7 million subscribers. Their value add strategy focuses on engaging consumers through lifestyle complimentary products, educational services on health, in-store experiences and strategic investments in the community through non–profit partnerships1. WFM has a strong connection with their customers and community that cannot be rivaled amongst its competition.

Competition & Industry

The degree of rivalry is extremely high in the grocery store industry but with a low concentration do to a constantly divided market. Each firm caters to a different segment’s needs such as: low cost, bulk buyers, convenience, product assortment or prepared foods3. The threat of new players to compete on growing trends like organic life-styles is moderate while big players can benefit from economies of scale. From 2010 to 2014, the industry experienced a compounded annual growth rate, CAGR, of 3.5% while the organic food niche experienced a CAGR of 10.4%. WFM’s main competitors in the industry based on market share are: The Kroger Company 15.4%, Safeway Inc. 6.2% and Publix Super Markets 5.5% while the remaining 72.9% is divided amongst minor players4. However, new market entrants specializing in organic foods as well as traditional market players offering organic products are becoming more prevalent. Even though WFM is the captain of their niche market, they should expect to see a large increase in competition and respond accordingly to maintain and grow their market share.

Management and Labor

The senior leadership team has primarily been promoted from within and has served the company for decades. Even the original founder, John Mackey, still leads the company of 87,200 team members. A non-unionized labor force and a decentralized management structure promote optimized labor costs. Furthermore, a profit-sharing program has been established at each branch to reinforce teamwork. The firm also offers an expensive competitive benefits package to all employees above the Affordable Care Acts requirements correlating to an industry leading turnover rate of 11% in 2014. However, the management’s previous efforts to decrease costs have not been sufficient. A new plan has been established to reduce cost by focusing on by focusing on internal distribution, purchasing and labor in response to sluggish sales1. It was recently announced that the WFM’s corporate team would lay off 1,500 employees as the executive team tries to lower prices, upgrade technology in response to a lower sales volume and declining margins². WFM has a strong corporate team with direct experience who has grown the firm with little to no debt.

Purchasing and Distribution

WFM has a diverse supply chain that utilizes a variety of regional and national suppliers that is conducive to negotiating volume discounts. Individual branches even have the autonomy to locally source goods. United Natural Foods Inc., UNFI, is their largest third party supplier accounting for 32% of all purchases with an agreement that extends until 2020. Any disruptions with their UNFI relationships could lead to considerable issues. Additionally, WFM benefits from an integrated operation based on procurement centers, distribution centers, a specialty coffee and tea roasting center, bake houses and regional commissary kitchens1. The diverse and localized supply chain is a benefit to WFM as they are not solely reliant on one major supplier. However, rising commodity costs should be concern for the firm to maintain high margins while any disruptions with UNFI would create significant impact in their service.