Strategy Diamond - Wfm Analysis 4i3g3q

According to the definition of strategy: it is consists of pattern of actions that management takes to:  

Pursue its organization’s mission Achieve its objectives

The mission of Whole Foods Market (for the sake of everyone’s time, I will call it WFM here onwards) is short, clear and makes very good business sense. The seven core values of WFM are clearly chalked out and directly link to company’s mission. These guide the pursuit of its mission and are not ‘cosmetic’. They derive their strategy or “pattern of actions” from the values. Arenas

Market Segment: Organic Foods Retailing Segment Product Categories  Fresh produce – Fruits, vegetables, meat and poultry and seafood  Baked and other prepared foods  Fine quality cheeses and wines  Household products, Body-care and nutritional  Organic pet food  Floral department  Education material on health Geographic Area:  Upscale urban metropolitan areas  US, UK and Canada  High traffic shopping locations and other premier real estate sites  Average store size: 45,000 to 60,000 Target Audience: Niche clientele – willing to pay prices for healthy foods and a organic lifestyle

Organic & Natural Foods

Whole Foods

Highest Quality Standards

Team Member Happiness & Excellence

Vehicles 1992 – 2002 Proactive Strategy: Open new stores + Acquire small owner managed chains with capable personnel Unanticipated change: Attractive acquisition candidates were hard to find: 2002 – 2007 Reactive Strategy: Decided to open 10-15 intended bigger stores in metropolitan areas each year Unanticipated change: Wild Oats acquisition completed but was divested after FTC filed a suit against WFM Reactive Strategy: Going forward growth strategy would be based on opening new stores

Economic Logic 

Whole People

Customer Delight

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Profits & Growth

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Win-win partnerships with Suppliers

Caring about communities & environment Whole Planet

Healthy Eating Education

Unique product offering: selective product range, strong mission and core values that were applied aggressively, stringent quality standards and commitment to sustainable agriculture. Pricing: Customers enchanted with product offerings & shopping experience overlooked the high prices. Spent less on national marketing & advertising: relied mainly on word-of-mouth recommendations from customers. Team member compensation was tied to store profitability – motivating the employees and increasing store contributions. Before entering into new leases, projections had to specified profitability hurdles above the capital that would be invested in the new store. Purchases were made regionally or nationally leading to economies of scale. Private label – offerings were cheaper and widely available within store.

Differentiators Quality/Reliability  Strict Quality Standards – Extensive list of unacceptable ingredients (2008 the list had 81 chemicals) Customization  Each store layout customized to fit the particular site  Best show off the particular product mix chosen for that store s target clientele Image  Project as authentic retailer of healthy organic products Styling  Colorful décor & attractive product displays  Cleanliness Product design  Wide variety of vegan and vegetarian products Services  Valet parking, massages, personal shopping and home delivery  Education about healthy foods  Locally made offerings and extensive international sections; grilled to order dishes

 Friendly and knowledgeable store personnel Pricing  Competitive Prices  In-value store guide Whole Deal created that contained cents-off coupons, etc. 

Private label offerings that were less expensive

Distribution  Purchased from local, regional and national whole sale suppliers to gain economies of scale  Two procurement centers, ten regional distribution, eight regional bake houses, five regional kitchens, four seafood processing centers and Allegro – exclusive coffee distribution operation.

Please zoom in the image.

Staging Speed of Expansion

Sequence of Initiatives  2003 – WFM designated as first national Certified Organic grocer by Quality Assurance International.  1991 – 2008– emphasis on expanding geographically  2008 – 2009 recession – scaled back expansion  Swift cost containment measures, sales improved again by first quarter of fiscal 2010.

Five elements that make up strategy diamond:     

Arenas Vehicles Differentiators Staging Economic Logic

But strategy is more than choices on these five fronts. It is an integrated, mutually reinforcing set of choices – choices that form a coherent goal. == Basically, WFM we need to explain not only the strategy diamond, but: 1. How it is derived from its mission to its core values and from there the strategy. And how the choices they make on each of the five fronts are mutually reinforcing. The link among them is very important.

Mission: Whole Foods, Whole People, Whole Planet. 7 core values were actually converted into strategic and financial objectives and the co. strategy was truly derived from it. From selling highest quality organic and natural food to delighting customers, retail innovation and educating customers and team about healthy living, team member happiness by providing great growth opportunities and excellent work environment, maximizing profits for shareholders and caring about communities and environment. Arenas: Market Segment: Organic Foods Retailing Segment Target Audience: o

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WFM served a niche clientele, but also managed to attract a new kind of customer - one who was willing to pay a to dabble in health food without being totally committed in vegetarianism or organic lifestyle. Food lovers who were willing to pay a to get pleasurable taste and indulgence for what they saw as a high quality gourmet experience.

Geographic Area:    

Upscale Urban Metropolitan Area US, UK and Canada High traffic shopping location Premier real estate sites: freestanding, strip centers, high density mixed-use projects

2001-2009: store footprint – 45000-60000 square feet. Internally developed model to analyze potential markets according to education levels, population density, and income within certain drive times. Economic Logic Cash investment: Calculate the total.

Vehicles: How to get to the arenas? WFM – Growth Strategy: 1. Combination of opening new stores and acquiring small, owner managed chains that had capable personnel and were located in desirable markets. 1991 – 2002  Open new stores + Acquire small ones.  Proactive Strategy Unanticipated Change: Attractive acquisition candidates were hard to find. Therefore, WFM reacted to this change and evolved its strategy: 2002 – 2007  Management decided to drive growth by opening 10 – 15 intended bigger stores (40,000 -80,000 square feet) in arenas: metropolitan areas staging: each year. Arenas: These stores were on the same scale or larger than the conventional super markets operated by Kroger, Safeway, Publix and other chains. Change: Unanticipated/Anticipated? – Purchased Wild Oats Market for $565 million. Unanticipated Change: WFM completed the acquisition in Aug 2007 after FTC opposed the acquisition but a US district court gave a go ahead. But in 2008, the US Court of Appeals reversed the lower court’s order and reopened the proceedings. Reactive Strategy: Post the problematic settlement was made, management decided that going forward WFM growth strategy would be primarily based on opening new stores rather than on making acquisitions.

Differentiators Image | Customization | Price | Styling | Quality/Reliability 

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WFM was the world’s biggest seller of organic produce - from 20000 items in small stores to 50000 items in largest stores - including natural, organic, gourmet food items, household products, body care and nutrition, education materials related to healthy eating, organic pet food, floral department and other beverages. Sell foods that met strict standards and that were of high quality in of nutrition freshness, appearance and taste. WFM quality standards team maintains an extensive list of unacceptable ingredients – in 2008, there were 81 chemicals on this list. WFM clientele were enchanted by their product offerings and shopping experience that they overlooked the high prices and patronized the store in increasing numbers. Image & Customization: Each store layout was customized to fit the particular site and building to show off the particular product mix chosen for that store’s target audience. o Colorful décor, products displayed in attractive manner to welcomed inspection and stimulated buying. o Project as authentic retailer of healthy organic products, lifestyle brand and a supermarket playground with unusually appealing food selections. Great customer service, wide aisles and cleanliness. o Product design: o All non-food items entailed the use of non-animal testing methods and contained no artificial ingredients. o Private-label offerings led by its “365 Everyday Value” and “365 Organic” brands which were less expensive and were available in many product categories. Pricing: o Sell at most competitive price as possible. o Higher prices as compared to conventional supermarkets were due to the higher cost of growing, distributing and marketing organic products. o Unanticipated Change: 2008-09 recession  WFM executives had to act swiftly and decisively to change the co. strategy to better match the economic climate: aggressive campaign to emphasize the number of value-priced items and communicate with the customers about how prices stacked up at WFM as compared to their rivals. Services: o Education about healthy foods and living and cooking classes. o Some of the stores had valet parking, massages, personal shopping and home delivery. o Locally made offerings and international sections from around the world – Lebanon, Morocco, India, Thai, Greece & Hungary. o Fresh Grilled – to – order dishes. o Personal attention by store personnel.

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Distribution: o Purchased from local, regional and national whole suppliers. o At Regional and national levels to gain economies of scale. o In 2007, emphasis on buying directly from manufacturers and producers. o Two produce procurement centers o Ten regional distribution, eight regional bake houses, five regional commissary kitchens and four seafood processing centers to supply its stores. o Allegro – central coffee roasting operation

Staging Growth Strategy: Acquisitions + Open new stores. After the problematic Wild Oats acquisition events, management decided to rely only on opening new stores rather than acquiring other organizations.

Increase in stores 90

100 80 60 40 20

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15 17 7

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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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This graphs shows that WFM was aggressively expanding by opening and acquiring new stores until 2007 (The spike at 90 in 2007 was because of the Wild Oats acquisition) but then in 2008-09 recession hit US, and the company had to scale back its store expansion program. New stores opened after 12-24 months of g the lease.

Economic Logic

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After acquiring Wild Oats in 2007, WFM quickly sold 35 Henry’s and Sun Harvest stores previously acquired by Wild Oats for approx. $165 million, reducing its net purchase price for Wild Oats to $535 million. Scaled back expansion program after recession in 2008-09. Swiftly and aggressively changed the co. strategy to better match the economic climate: emphasize the number of value-priced items and communicate how prices stacked up against rivals. Spent less on marketing and advertising. Relied mainly on word-of-mouth recommendations from customers. Marketing budget was used in the in-store value guide, e-newsletter and other promotional activities at individual stores. Knowledgeable and friendly store personnel proactively helped customers so that the customer had pleasurable experience shopping at WFM and advocated their positive experiences to their friends and family. Team member compensation was tied to store profitability and stock option rewards were given. This promoted strong corporate culture and kept the employees motivated enough. Local Producer Loan Program – provided $10 million in low interest loans to promote organic farming to small farmers. Their fresh produce was sold at the market. Before entering into a new lease for new stores, the projections had to specified profitability hurdles over and above a return on the capital invested in the store. EVA based bonus system that linked profits after taxes and cost of capital to executive’s compensation. At store level, it meant linking store performance to the team working in it.

Fit Test: How well does the strategy fit the company’s situation? External  

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A strategy has to be well matched to industry and competitive conditions. – Compare what the others are doing in the industry. Company’s best market opportunities – o In 1980, when WFM opened with a staff of 19, there were less than half a dozen natural foods supermarkets in US. By 1991, co. had 10 stores with revenues of $92.5 million and a net income of $1.6 million, over the next 18 years, sales grew at a compound annual rate of approx. 28% to over $8 billion. Business environment: Organic Foods Retail Segment (Detail required)

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Strategy must be tailored to the company’s resources and competitive capabilities: o Acquisition of Harry’s Market superstore in 2002 where 75% of sales were perishables, had provided WFM with personnel having valuable intellectual capital in creatively merchandising all major perishable categories. Strategy must be ed by a complementary set of functional activities – SCM, operations, sales and marketing, so on. o Employees in each store were divided into teams, headed by team leader. They were empowered to make many decisions to customer satisfaction. This was to keep team motivated enough to go to great lengths to satisfy and delight customers and operate store as efficiently and profitably as possible. Strategy must be compatible with a co. ability to execute the strategy in competent manner.

Dynamic Strategy must evolve over time in alignment with the co. situation as external and internal conditions change. o Unanticipated Change: 2008-09 recession: Reactive Strategy:  WFM executives had to act swiftly and decisively to change the co. strategy to better match the economic climate: aggressive campaign to emphasize the number of value-priced items and communicate with the customers about how prices stacked up at WFM as compared to their rivals.  In Nov 2007, the company announced it was scaling back its store expansion program.  In Nov 2007, the company announced it was scaling back its store expansion program. Reduction in a gross square footage of stores in development from 4.5 million in Nov 2007 to 3.3 million in Nov 2008 and 2.9 million in 2009.

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Average store size was lowered to 44000 in Feb 2010 as compared to 56000 in Nov 2006. Leaner and more disciplined approach to design and build, smaller stores with simpler décor and less labor intensive departments to lower costs. Management instituted series of cost containment measures – cost of goods sold, direct store expenses, general and expenses, hiring and salary freeze. Steps to monitor and adjust work hours according to store traffic and workforce reduction through normal attrition without involuntary layoffs.

Competitive Advantage Test Can the strategy help the company achieve a sustainable competitive advantage? Long term sustainability. The bigger and more durable the competitive advantage, the more powerful it is. 

WFM merchandising skills were one of the prime factors in its success to gain market share and lure shoppers. Sales per square foot were double as compared to that of Kroger and Safeway.

The Performance Test Is the strategy producing good co. performance? Two kinds of performance indicators: 1. Competitive strength and market standing. o

WFM clientele were enchanted by their product offerings and shopping experience that they overlooked the high prices and patronized the store in increasing numbers.

2. Profitability and financial strength. 

Financial performance o Sales revenues grew 20% annually during 2000-2007. o Profitable every year except 2000. o Very strong cash flows from operations prior to Wild Oats acquisition. o Dividend from 2004 o Unanticipated change: 2008-2009 recession:  Result: In Feb 2010, management was pleased with the results of its new pricing strategy and emphasis on value. Sales growth per store for the first quarter of fiscal 2010 was 3.5% and total revenues were up 7% over the first quarter of fiscal 2009.  Cost containment measures result: gross profit improved from 34.03% in fiscal 2008 to 34.29% in fiscal 2009 and 34.34% in first quarter of fiscal 2010. These measures also produced very strong cash flows from operations. This money

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was then used in repaying long-term debt that was taken while the acquisition of Wild Oats was going on. Gain in market share o WFM clientele were enchanted by their product offerings and shopping experience that they overlooked the high prices and patronized the store in increasing numbers. o Competitive position Profitability