We just published a new IOI ChartBook on Whole Foods Markets (WFM) and the points below were the three most important take-aways from our research.
- Whole Foods’ first mover advantages in the organic grocery space are gone.
Organic food used to be a niche category, and Whole Foods was the undisputed king of that niche. Part of the secret to its success was the relationship it had with organic suppliers, which made it an almost unique supplier of these items at scale. However, the agricultural community has realized how many profits can be harvested from the trend toward organic items, and the acreage of cropland dedicated to organic production has expanded. This has allowed mainstream competitors (such as Kroger, Wal-Mart, and Target) to develop supply chain relationships and offer organic products in their stores. There are still excess profits to be found in the organic food world, but more and more of these will be soaked up by competitors that have greater scale and reach than Whole Foods, in our opinion.
- Whole Foods’ biggest weakness and threat deals with network dynamics.
If Whole Foods’ network becomes too dense, its stores will cannibalize each other’s sales. If Whole Foods’ network remains as dispersed as it is today, there is room for competitors to offer customers organic products more conveniently due to the competitors’ much denser networks. How many mainstream grocery stores offering organic tomatoes would you pass up for the privilege to buy organic tomatoes from Whole Foods?
- Network problems will likely cause the firm to be less profitable in the future.
To correct its network difficulties, Whole Foods must do at least two things: 1) it must expand its network in ways that will cause as little cannibalization as possible and 2) it must convince consumers that its organic offerings are superior to competitors’. The firm is embarking on the first strategy with its economy-priced 365 chain – smaller footprint stores designed to attract younger, less-affluent shoppers and compete with the likes of Trader Joe’s. It is embarking on the second strategy by making its first forays into traditional marketing, after relying upon word-of-mouth for its entire existence. Needless to say, both of these initiatives cost money. Increased marketing expense is the first thing owners are likely to notice, but longer term, the expense of maintaining a large network of ageing stores will likely also decrease profitability as viewed through the lens of IOI’s preferred measure – Owners Cash Profits (OCP).