Whole Foods Case Summary

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

CASE
Whole Foods Market, Inc.
Arthur A. Thompson The University of Alabama

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Founded

in 1980 as one small store in Austin, Texas, Whole Foods Market had by 2002 evolved into the world’s largest retail chain of natural and organic foods supermarkets. The company had over 140 stores in the United States and Canada and sales of $2.7 billion; revenues had grown at more than 20 percent for 12 consecutive quarters. John Mackey, the company’s cofounder and CEO, said that throughout its rapid growth Whole Foods Market had “remained a uniquely mission-driven
company—highly selective about what we sell, dedicated to our core values and stringent quality standards and committed to sustainable agriculture.” The company’s stated mission was “to improve the health, well-being, and healing of both people and the planet”—a mission captured in the company’s slogan “Whole Foods, Whole People, Whole Planet” (see Exhibit 1). In pursuit of this mission, the company’s strategic plan was to continue to expand its retail operations to offer the highest quality and most nutritious foods to more and more customers, helping them to live healthier and more vital lives. During its 22-year history, Whole Foods Market had been a leader in natural and organic foods movement across the United States, helping the industry gain acceptance among growing numbers of consumers. The company’s long-term objectives were to have 400 stores and sales of $10 billion by 2010. John Mackey’s vision was for Whole Foods to become a national brand and be regarded as the best food retailer in every community it served.

The Natural and Organic Foods Industry
The combined sales of natural and organic foods—about $34 billion in 2001—represented about 5 percent of the roughly $685 billion in total U.S. grocery store sales. Natural foods are defined as foods that are minimally processed; largely or completely free of artificial ingredients, preservatives, and other non–naturally occurring chemicals; and as near to their whole, natural state as possible. The U.S. Department of Agriculture’s Food and Safety Inspection Service defines natural food as “a product containing no artificial ingredient or added color and that is minimally processed.” Sales of natural foods products had increased at double-digit rates in the 1990s, but

Copyright © 2003 by Arthur A. Thompson. All rights reserved.

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Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

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Exhibit 1

WHOLE FOODS MARKET’S SLOGAN: WHOLE FOODS, WHOLE PEOPLE, WHOLE PLANET

Whole Foods We obtain our products locally and from all over the world, often from small, uniquely dedicated food artisans. We strive to offer the highest quality, least processed, most flavorful and naturally preserved foods. Why? Because food in its purest state—unadulterated by artificial additives, sweeteners, colorings and preservatives—is the best tasting and most nutritious food available. Whole People We recruit the best people we can to become part of our team. We empower them to make their own decisions, creating a respectful workplace where people are treated fairly and are highly motivated to succeed. We look for people who are passionate about food. Our team members are also well-rounded human beings. They play a critical role in helping build the store into a profitable and beneficial part of its community. Whole Planet We believe companies, like individuals, must assume their share of responsibility as tenants of Planet Earth. On a global basis we actively support organic farming—the best method for promoting sustainable agriculture and protecting the environment and the farm workers. On a local basis, we are actively involved in our communities by supporting food banks, sponsoring neighborhood events, compensating our team members for community service work, and contributing at least five percent of total net profits to not-for-profit organizations.
Source: www.wholefoodsmarket.com, December 7, 2002.

growth slowed to 8.3 percent in 2001 and was running in the single digits in 2002. Even so, this was considerably higher than the flat 1–2 percent sales growth at conventional supermarket chains. The fastest-growing categories in Natural Foods Merchandiser’s annual market survey were nutrition bars (21 percent); in-store food service—deli, restaurant, and juice bars (16 percent); other beverages, excluding beer, wine, coffee, tea, and dairy (12 percent); and snack foods (10 percent). Organic foods included fresh fruits and vegetables, meats, and processed foods produced using: ■ Agricultural management practices that promoted a healthy and renewable ecosystem that used no genetically engineered seeds or crops, sewage sludge, longlasting pesticides, herbicides, or fungicides. ■ Livestock management practices that involved organically grown feed, fresh air, and outdoor access for the animals, and no use of antibiotics or growth hormones. ■ Food processing practices that protected the integrity of the organic product and did not involve the use of radiation, genetically modified organisms, or synthetic preservatives. In 1990, passage of the Organic Food Production Act started the process of establishing national standards for organically grown products in the United States, a movement that included farmers, food activists, conventional food producers, and consumer groups. In October 2002, the U.S. Department of Agriculture (USDA) officially established labeling standards for organic products, overriding both the patchwork of inconsistent state regulations for what could be labeled as organic and the different

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

CASE 1

Whole Foods Market, Inc.

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rules of some 43 agencies for certifying organic products.
The new USDA regulations established four categories of food with organic ingredients, with varying levels of organic purity: 1. 100 percent organic products: Such products were usually whole foods, such as fresh fruits and vegetables, grown by organic methods—which meant that the product had been grown without the use of synthetic pesticides or sewage-based fertilizers, had not been subjected to irradiation, and had not been genetically modified or injected with bioengineered organisms, growth hormones, or antibiotics. Products that were 100 percent organic could carry the green USDA organic certification seal, provided the merchant could document that the food product had been organically grown (usually by a certified organic producer). 2. Organic products: Such products, often processed, had to have at least 95 percent organically certified ingredients. These could also carry the green USDA organic certification seal. 3. Made with organic ingredients: Such products had to have at least 70 percent organic ingredients; they could be labeled “made with organic ingredients” but could not display the USDA seal. 4. All other products with organic ingredients: Products with less than 70 percent organic ingredients could not use the word organic on the front of a package, but organic ingredients could be listed among other ingredients in a less prominent part of the package. An official with the National Organic Program, commenting on the appropriateness and need for the new USDA regulations, said, “For the first time, when consumers see the word organic on a package, it will have consistent meaning.”1 The new labeling program was not intended as a health or safety program (organic products have not been shown to be more nutritious than conventionally grown products, according to the American Dietetic Association), but rather as a marketing solution. An organic label has long been a selling point for shoppers
wanting to avoid pesticides or to support environmentally friendly agricultural practices. However, the new regulations required additional documentation on the part of growers, processors, exporters, importers, shippers, and merchants to verify that they were certified to grow, process, or handle organic products carrying the USDA’s organic seal. Sales of organics were an estimated $9–$11 billion in 2001, up from $1 billion in 1990, and were growing at a 20–24 percent annual rate. The Organic Trade Association estimated that sales of organic food products would reach $20 billion in 2005. In 2002, organic products were sold in about 20,000 natural foods stores and about 70 percent of conventional supermarkets. According to the USDA, 2000 was the first year in which more organic food was sold in conventional U.S. supermarkets than in the nation’s 20,000 natural foods stores. In the past several years, most mainstream supermarkets had been expanding their selections of natural and organic products, which ranged from potato chips to fresh produce to wines. Fresh produce was the most popular organic product—in 2001, 5 percent of the lettuce and 3 percent of the apples produced in the United States were organically grown. Meat, dairy, and convenience foods were among the fastest growing organic product categories. A number of supermarket chains had added natural foods sections to their stores; Kroger had special sections for natural foods and organics in almost half of its 2,400 stores in 2002, and the number was growing. Wal-Mart’s newest retail division, the smaller-format Neighborhood Markets, had a special

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

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“healthy-living” section that included organic foods; Costco Wholesale was experimenting with a Costco Fresh store focused on gourmet foods and wine. 7-Eleven had begun selling organic cookies at 600 stores in California. A few grocery chains, including upscale Harris Teeter in the southeastern United States and Whole Foods Market, had launched their own private-label brands of organics. Most industry observers expected that, as demand for natural and organic foods expanded, conventional supermarkets would continue to expand their offerings and selection. Leading food processors were showing greater interest in organics as well. Heinz had recently introduced an organic ketchup and owned a 19 percent stake in Hain Celestial Group, one of the largest organic and natural foods producers. Starbucks, Green Mountain Coffee, and several other premium coffee marketers had introduced a number of organically grown coffees; Odwalla juices were organic; and Tyson Foods had introduced a line of organic chicken products. Lite House organic salad dressings had recently been added to the shelves of several mainstream supermarkets. Major food processing companies like Kraft, General Mills, Groupe Danone (the parent of Dannon Yogurt), Dean Foods, and Kellogg had all purchased organic food producers in an effort to capitalize on sales-growth opportunities for healthy foods that taste good. Dean Foods’ CEO, explaining the company’s acquisition of organic soy producer White Wave for $204 million in May 2002, said, “We believe that the trend toward organics is in its infancy.” Organic farmland in the United States was estimated at 2.4 million acres. An estimated 12,200 mostly small-scale farmers were growing organic products in 2002, and the number was increasing about 12 percent annually. The amount of certified organic cropland doubled between 1997 and 2001, and livestock pastures increased at an even faster rate. However, less than 1 percent of U.S. farmland was certified organic in 2002. Several factors had combined to transform natural foods retailing, once a niche market, into the fastest-growing segment of U.S. food sales: ■ Healthier eating patterns on the part of a populace that was becoming better educated about foods, nutrition, and good eating habits. Among those most interested in organic products were aging affluent people concerned about health and betterfor-you foods. ■ Increasing consumer concerns over the purity and safety of food due to the presence of pesticide residues, growth hormones, artificial ingredients and other chemicals, and genetically engineered ingredients. ■ Environmental concerns due to the degradation of water and soil quality. ■ A “wellness,” or health-consciousness, trend among people of many ages and ethnic groups. The Nutrition Business Journal estimated in 2001 that 0.3 percent of U.S. adults, or about 600,000 people, were heavy purchasers of organic foods, spending an average of $200 per month. Another 1.5 percent, or 3.3 million people, were light users, spending about $50 monthly. About 8 percent of American consumers bought organic products occasionally. The 90 percent of shoppers who bought no organic products at all was seen as offering excellent long-term market potential for being converted to organics, but was not viewed as the best short-term target for sales growth. Exhibit 2 shows 2001 data for the 10 largest U.S. supermarket retailers.

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

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CASE 1

Whole Foods Market, Inc.

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Exhibit 2

TEN LARGEST U.S. SUPERMARKET CHAINS, 2001 2001 Sales Revenues (in billions) $65.3 50.1 37.9 34.3 23.2 21.3 20.5 18.4 15.1 Share of Total U.S. Grocery Sales ($682.3 billion) 9.6% 7.3 5.6 5.0 3.4 3.1 3.0 2.7 2.2

Company Wal-Mart Supercenters Kroger Albertson’s Safeway Ahold USA Supervalu Costco Wholesale Sam’s Clubs Publix Super Markets Delhaize (Food Lion, Kash ’n Karry, Hannaford Bros.)

Number of Stores 1,060 2,392 2,541 1,759 1,600 463 369 500 684

1,461

14.9

2.2

Source: www.supermarketnews.com, December 10, 2002.

Whole Foods Market
Whole Foods Market was founded in Austin, Texas, when three local businessmen decided the natural foods industry was ready for a supermarket format. The three founders were John Mackey, owner of Safer Way Natural Foods, and Craig Weller and Mark Skiles, owners of Clarksville Natural Grocery. The original Whole Foods Market opened in 1980 with a staff of only 19. It was an immediate success. At the time, there were less than half a dozen natural foods supermarkets in the United States. By 1991, the company had 10 stores, revenues of $92.5 million, and net income of $1.6 million. In 1997, when Whole Foods developed the “Whole Foods, Whole People, Whole Planet” slogan, John Mackey said: This slogan taps into perhaps the deepest purpose of Whole Foods Market. It’s a purpose we seldom talk about because it seems pretentious, but a purpose nevertheless felt by many of our team members and by many of our customers (and hopefully many of our shareholders too). Our deepest purpose as an organization is helping support the health, well-being, and healing of both people (customers and Team Members) and of the planet (sustainable agriculture, organic production and environmental sensitivity). When I peel away the onion of my personal consciousness down to its core in trying to understand what has driven me to create and grow this company, I come to my desire to promote the general well-being of everyone on earth as well as the earth itself. This is my personal greater purpose with the company and the slogan perfectly reflects it. Complementing the slogan were five core values shared by both top management and company personnel (see Exhibit 3).

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

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Exhibit 3

WHOLE FOODS MARKET’S CORE VALUES

Our Core Values The following list of core values reflects what is truly important to us as an organization. These are not values that change from time to time, situation to situation or person to person, but rather they are the underpinning of our company culture. Many people feel Whole Foods is an exciting company of which to be a part and a very special place to work. These core values are the primary reasons for this feeling, and they transcend our size and our growth rate. By maintaining these core values, regardless of how large a company Whole Foods becomes, we can preserve what has always been special about our company. These core values are the soul of our company. Selling the Highest Quality Natural and Organic Products Available
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Passion for Food We appreciate and celebrate the difference natural and organic products can make in the quality of one’s life. Quality Standards We have high standards and our goal is to sell the highest quality products we possibly can. We define quality by evaluating the ingredients, freshness, safety, taste, nutritive value and appearance of all of the products we carry. We are buying agents for our customers and not the selling agents for the manufacturers.

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Satisfying and Delighting Our Customers Our Customers They are our most important stakeholders in our business and the lifeblood of our business. Only by satisfying our customers first do we have the opportunity to satisfy the needs of our other stakeholders. ■ Extraordinary Customer Service We go to extraordinary lengths to satisfy and delight our customers. We want to meet or exceed their expectations on every shopping trip. We know that by doing so we turn customers into advocates for our business. Advocates do more than shop with us, they talk about Whole Foods to their friends and others. We want to serve our customers competently, efficiently, knowledgeably and with flair. ■ Education We can generate greater appreciation and loyalty from all of our stakeholders by educating them about natural and organic foods, health, nutrition and the environment. ■ Meaningful Value We offer value to our customers by providing them with high quality products, extraordinary service and a competitive price. We are constantly challenged to improve the value proposition to our customers. ■ Retail Innovation We value retail experiments. Friendly competition within the company helps us to continually improve our stores. We constantly innovate and raise our retail standards and are not afraid to try new ideas and concepts. ■ Inviting Store Environments We create store environments that are inviting and fun, and reflect the communities they serve. We want our stores to become community meeting places where our customers meet their friends and make new ones.
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Team Member Happiness and Excellence Empowering Work Environments Our success is dependent upon the collective energy and intelligence of all of our Team Members. We strive to create a work environment where motivated Team Members can flourish and succeed to their highest potential. We appreciate effort and reward results. ■ Self-Responsibility We take responsibility for our own success and failures. We celebrate success and see failures as opportunities for growth. We recognize that we are responsible for our own happiness and success. ■ Self-Directed Teams The fundamental work unit of the company is the self- directed Team. Teams meet regularly to discuss issues, solve problems and appreciate each others’ contributions. Every Team Member belongs to a Team. ■ Open & Timely Information We believe knowledge is power and we support our Team Members’ right to access information that impacts their jobs. Our books are open to our Team Members, including our annual individual compensation report. We also recognize everyone’s right to be listened to and heard regardless of their point of view.
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Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

© The McGraw−Hill Companies, 2004

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Exhibit 3
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(continued)

Incremental Progress Our company continually improves through unleashing the collective creativity and intelligence of all of our Team Members. We recognize that everyone has a contribution to make. We keep getting better at what we do. ■ Shared Fate We recognize there is a community of interest among all of our stakeholders. There are no entitlements; we share together in our collective fate. To that end we have a salary cap that limits the compensation (wages plus profit incentive bonuses) of any Team Member to ten times the average total compensation of all full-time Team Members in the company. Creating Wealth Through Profits & Growth Stewardship We are stewards of our shareholders’ investments and we take that responsibility very seriously. We are committed to increasing long term shareholder value. ■ Profits We earn our profits everyday through voluntary exchange with our customers. We recognize that profits are essential to creating capital for growth, prosperity, opportunity, job satisfaction and job security.
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Caring About Our Communities & Our Environment Sustainable Agriculture We support organic farmers, growers and the environment through our commitment to sustainable agriculture and by expanding the market for organic products. ■ Wise Environmental Practices We respect our environment and recycle, reuse, and reduce our waste wherever and whenever we can. ■ Community Citizenship We recognize our responsibility to be active participants in our local communities. We give a minimum of 5% of our profits every year to a wide variety of community and non-profit organizations. In addition, we pay our Team Members to give of their time to community and service organizations. ■ Integrity in All Business Dealings Our trade partners are our allies in serving our stakeholders. We treat them with respect, fairness and integrity at all times and expect the same in return.
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Source: www.wholefoodsmarket.com, December 9, 2002.

Whole Foods Market grew at a rapid clip in the 11 years following its founding, with sales rising to $2.7 billion—a compound rate of almost 36 percent—and profits increasing to $84.5 million. Average weekly sales at the company’s stores were climbing:
Fiscal Year 1997 1998 1999 2000 2001 2002 Average Weekly Sales $277,054 293,390 309,836 324,710 353,024 392,837

The company’s growth strategy was to expand via a combination of opening its own new store and acquiring existing stores. About 40 percent of the company’s store base had come from acquisitions; since 1991, the company had acquired 60 stores through 13 acquisitions (see Exhibit 4). Since the natural foods industry was highly

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

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Exhibit 4
Year 1992 1993 1996

MAJOR ACQUISITIONS BY WHOLE FOODS MARKET Company Acquired Bread & Circus Mrs. Gooch’s Fresh Fields Number of Stores 6 7 Acquisition Costs $20 million plus $6.2 million in common stock 2,970,596 shares of common stock 4.8 million shares of stock plus options for 549,000 additional shares Approximately 1 million shares of common stock $24.5 million $25.7 million, plus assumption of certain liabilities $35 million in cash plus certain liabilities

Location Northeast United States Southern California East Coast and Chicago area Detroit area Boston area Sonoma County, CA

22 6 4 3

1997 1999 2000

Merchant of Vino Nature’s Heartland Food 4 Thought (Natural Abilities, Inc.)

2001

Harry’s Farmer’s Market

Atlanta

3

Source: Company documents.

Exhibit 5

GROWTH IN THE NUMBER OF STORES IN THE WHOLE FOODS MARKET CHAIN Number of Stores at End of Fiscal Year 10 25 42 49 61 68 1997 68 7 2 (2) 75 1998 75 9 6 (3) 87 Number of Stores at End of Fiscal Year 75 87 100 117 126 135 2000 100 17 3 (3) 117 2001 117 12 0 (3) 126 2002 126 11 3 (5) 135

Year 1991 1992 1993 1994 1995 1996

Year 1997 1998 1999 2000 2001 2002 1999 87 9 5 (1) 100

Store Counts Beginning of fiscal year New stores opened Stores acquired Relocations and closures End of fiscal year
Source: Company documents.

fragmented, consisting of close to 20,000 mostly one-store operations and small and regional chains, Whole Foods’ management planned to continue to pursue acquisitions of smaller chains that provided access to desirable locations and markets as well as to experienced team members. However, the company expected to grow more by opening new stores than by acquiring existing stores. Exhibit 5 summarizes the company’s historical store growth.

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V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

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CASE 1

Whole Foods Market, Inc.

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In late November 2002, the company had 19 stores in varying stages of development, averaging 41,000 square feet. The company expected to open 6–8 stores before the end of 2002, giving it a total of more than 140 stores going into 2003.

Store Size and Product Line
The company’s stores had an open format and generated average annual sales approaching $21 million. Stores more than five years old averaged about 25,000 square feet, stores less than five years old averaged about 35,000 square feet, and the company’s newest stores ranged between 25,000 and 50,000 square feet (the new stores of supermarket chains like Safeway and Kroger averaged around 55,000 square feet). The company sought to locate its new stores in the upscale areas of urban metropolitan centers—95 percent were located in the top 50 statistical metropolitan areas. In 2002, Whole Foods had stores in 25 states and 33 of the top 50 U.S. metropolitan areas. In 2001, the company opened its first stores in New York City (Manhattan), Denver, Boca Raton, and St. Louis. In 2002, the company entered Portland; Albuquerque; Kansas City; Colorado Springs; and Toronto, Canada. Whole Foods Market had announced plans for a new 80,000 square-foot landmark store in Austin. Most stores were in high-traffic shopping locations, some were freestanding, and some were in strip centers. Whole Foods had its own internally developed model to analyze potential markets according to education levels, population density, and income. After picking a target metropolitan area, the company’s site consultant did a comprehensive site study and developed sales projections; potential sites had to pass certain financial hurdles. New stores opened 12 to 24 months after a lease was signed. The cash investment needed to ready a new Whole Foods Market for opening varied with the metropolitan area, site characteristics, store size, and amount of work performed by the landlord; totals ranged from as little as $2 million to as much as $16 million—the average for the past three years was $8.6 million. In addition to the cost of readying a store for operation, it took approximately $750,000 to stock the store with inventory, a portion of which was financed by vendors. Preopening expenses had averaged approximately $600,000 per store over the past three years. Whole Foods’ product line included roughly 26,000 food and nonfood items that appealed to both natural foods and gourmet shoppers: ■ Fresh produce—fruits; vegetables; displays of fresh-cut fruits; and a selection of seasonal, exotic, and specialty products like cactus pears and cippolini onions. ■ Meat and poultry—natural meat, turkey, and chicken products from animals raised on wholesome grains, pastureland, and well water (and not grown with the use of by-products, hormones, or steroids). There were 20 varieties of house-made sausages. ■ Fresh seafood—a selection of fresh fish; shrimp; oysters; clams; mussels; homemade marinades; and exotic items like octopus, sushi, and black tip shark. A portion of the fresh fish selections at the seafood station came from the company’s Pigeon Cove seafood facility and processing plant in Gloucester, Massachusetts. Seafood items coming from distant supply sources were flown in to stores to ensure maximum freshness. ■ A selection of daily baked goods—breads, cakes, pies, cookies, bagels, muffins, and scones. ■ Prepared foods—soups, canned and packaged goods, oven-ready meals, rotisserie meats, hearth-fired pizza, pastas, patés, salad bars, a sandwich station, and a ˆ

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V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

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■ ■ ■ ■ ■ ■ ■

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■ ■ ■ ■

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selection of entrées and side foods prepared daily. Many of the prepared foods came from the company’s sizable commissary operations. A worldwide selection of cheeses. Frozen foods, juices, yogurt and dairy products, smoothies, and bottled waters. A wide selection of bulk items in bins. An olive bar (with as many as 24 varieties). A selection of chocolates. Beer and wine—a wide selection of domestic and imported wines (selections varied from store to store). Organic wines were among those available. A coffee and tea bar. The company had its own Allegro brand of specialty and organic coffees and several of the newer stores had in-store coffee-roasting equipment that allowed customers to order any of 20 varieties roasted while they shopped. There were environmentally correct, premium exotic teas from remote forests. A nutrition and body care department containing vitamin supplements, herbs and teas, homeopathic remedies, soaps, natural body care and cosmetics products, yoga supplies, and aromatherapy products. All of these products were proven safe using nonanimal testing methods and contained no artificial ingredients. Pet products—natural pet foods (including the company’s own private-label line), treats, toys, and pest control remedies. Grocery and household products—canned and packaged goods, pastas, soaps, cleaning products, and other conventional household items. A floral department with sophisticated flower bouquets. A “365 Every Day Value” line of private-label products that included over 360 commodity-type natural products at very competitive price points. In addition, the company had a “Whole Foods” line of best-of-class premium and superpremium organic products and an organic food product line developed for children under the “Whole Kids” label. Educational products (information on alternative healthcare) and books relating to healing, cookery, diet, and lifestyle. In some stores, there were cooking classes and nutrition sessions. In 2002, the company launched its own cookbook written by chef Steve Petusevsky and Whole Foods team members from across the United States; most of the 350 natural foods recipes were contributed by team members, and some were recipes for the prepared foods coming from the company’s own kitchens. The cookbook, with its comprehensive glossary, healthful cooking advice, and menu planning tips, attempted to mirror the essence of Whole Foods Market.

Whole Foods stores had recently begun to stock conventional household products so as to make Whole Foods a one-stop grocery shopping destination where people could get everything on their shopping list. Perishables accounted for about 65 percent of store sales. According to one industry analyst, Whole Foods had “put together the ideal model for the foodie who’s a premium gourmet and the natural foods buyer. When you walk into a Whole Foods store, you’re overwhelmed by a desire to look at everything you see.”2 Prices at Whole Foods were higher than at conventional supermarkets; organics, for instance, cost 25 to 75 percent more than conventionally grown items. However, as one analyst noted, “If people believe that the food is healthier and

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Exhibit 6

WHOLE FOODS MARKET’S PRODUCT QUALITY STANDARDS AND CUSTOMER COMMITMENTS

Our business is to sell the highest quality foods we can find at the most competitive prices possible. We evaluate quality in terms of nutrition, freshness, appearance, and taste. Our search for quality is a never-ending process involving the careful judgment of buyers throughout the company. ■ We carefully evaluate each and every product we sell. ■ We feature foods that are free from artificial preservatives, colors, flavors and sweeteners. ■ We are passionate about great tasting food and the pleasure of sharing it with each other. ■ We are committed to foods that are fresh, wholesome and safe to eat. ■ We seek out and promote organically grown foods.
■

We provide food and nutritional products that support health and well-being.

Source: www.wholefoodsmarket.com, December 9, 2002.

they are doing something good for themselves, they are willing to invest a bit more, particularly as they get older…It’s not a fad.”3 Another grocery industry analyst noted that while Whole Foods served a growing niche, it had managed to attract a new kind of customer, one who was willing to pay a premium to dabble in health food without being totally committed to vegetarianism or an organic lifestyle.4 One of Whole Foods Market’s foremost commitments to its customers was to sell foods that met strict standards and that were high quality in terms of nutrition, freshness, appearance, and taste. Whole Foods guaranteed 100 percent satisfaction on all items purchased and went to great lengths to live up to its core value of satisfying and delighting customers—see Exhibit 6 for the company’s product quality standards.

Store Description and Site Selection
Whole Foods Market did not have a standard store design. Instead, each store’s layout was customized to fit the particular site and building configuration and to best show off the particular product mix for the store’s target clientele. Stores had a colorful decor, and products were attractively merchandised (see Exhibit 7). Most stores featured hand-stacked produce, in-store chefs and open kitchens, scratch bakeries, prepared foods stations, European-style charcuterie departments, sampling displays, and everchanging selections and merchandise displays. Whole Foods got very high marks from merchandising experts and customers for its presentation—from the bright colors of the produce displays, to the quality of the foods and customer service, to the wide aisles and cleanliness. Whole Foods’ merchandising skills were said to be a prime factor in its success in luring shoppers back time and again. One retailing consultant said of Whole Foods’ new store in Toronto, “The visual and sensory experience is superlative. Today, food is a way of defining who we are and Whole Foods has taken it up a notch.”5 The Toronto store had biographies of farmers suspended from the ceiling on placards; a list of Whole Foods’ core values and commitments to product quality greeted customers entering the store; a board calling attention to Whole Foods’ “Sustainable Seafood Policy” hung on a board above the seafood station; and recipe cards were at the end of key aisles. The company was continually experimenting with new merchandising concepts to keep stores fresh and exciting for customers. According to a Whole Foods regional manager, “We take the best ideas from each of our stores and try to incorporate them

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

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Exhibit 7

Scenes from Whole Foods Market Stores

Thompson−Gamble−Strickland: Strategy: Winning in the Marketplace

V. Cases in Crafting and Executing Strategy

1. Whole Foods Market, Inc.

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in all our other stores. We’re constantly making our stores better.”6 The company’s larger stores held expanded selections and displays of high-quality perishables—fresh produce, seafood, baked goods, and prepared foods. Management believed that the more extensive displays of high-quality perishables appealed to a broader customer base and were responsible for the larger stores showing higher performance than the smaller stores. Top management believed the acquisition of the three 70,000-squarefoot Harry’s Market superstores in Atlanta where 75 percent of sales were perishables would provide the company with valuable intellectual capital in all major perishables categories. To further a sense of community and interaction with customers, stores typically included sit-down eating areas; customer comment boards; and “Take Action” centers for customers who wanted information on such topics as sustainable agriculture, organics, the sustainability of seafood supplies and overfishing problems, the environment, and similar issues. A few stores offered valet parking, home delivery, and massages. Management at Whole Foods wanted customers to view company stores as a “third place” (besides home and office) where people could gather, learn, and interact while at the same time enjoying an intriguing food-shopping and eating experience.

Marketing and Customer Service
Whole Foods spent less on advertising than conventional supermarkets, relying primarily on word-of-mouth recommendations from customers. Stores spent most of their marketing budgets on in-store signage and store events such as taste fairs, classes, and product samplings. Store personnel were encouraged to extend company efforts to encourage the adoption of a natural and organic lifestyle by going out into the community and conducting a proactive public relations campaign. Each store also had a separate budget for making contributions to philanthropic activities and community outreach programs. At the corporate level, there was a marketing initiative under way to create greater public awareness of the Whole Foods brand. Since one of its core values was to satisfy and delight customers, Whole Foods Market strove to meet or exceed customer expectations on every shopping trip (see Exhibit 3). Competent, knowledgeable, and friendly service was a hallmark of shopping at a Whole Foods Market. The aim was to turn highly satisfied customers into advocates for Whole Foods who talked to close friends and acquaintances about their positive experiences with the company. Store personnel were personable and chatty with shoppers. Customers could get personal attention in every department of the store. When customers asked where an item was located, team members often took them to the spot, making conversation along the way and offering to answer any questions. Team members were quite knowledgeable and enthusiastic about the products in their particular department and tried to take advantage of opportunities to inform and educate customers about natural foods, organics, healthy eating, and food-related environmental issues. They took pride in helping customers navigate the extensive variety to make the best choices. Meat department personnel provided customers with custom cuts, cooking instructions, and personal recommendations.

Store Operations
Depending on store size and traffic volume, Whole Foods stores employed between 70 and 400 team members, who were organized into up to 11 teams, each led by a team leader. Each team was responsible for a different product category or aspect of store

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operations such as customer service and customer check-out stations. Whole Foods practiced a decentralized team approach to store operations, with many personnel, merchandising, and operating decisions made by teams at the individual store level. Management believed that the decentralized structure made it critical to have an effective store team leader. The store team leader worked with one or more associate store team leaders, as well as with all the department team leaders, to operate the store as efficiently and profitably as possible. Store team leaders were paid a salary plus a bonus based on the store’s economic value added (EVA) contribution; they were also eligible to receive stock options.7 Store team leaders reported directly to one of eight regional presidents. Management believed its team members were inspired by the company’s mission because it complemented their own views about the benefits of a natural and organic foods diet. In management’s view, many Whole Foods team members felt good about their jobs because they saw themselves as contributing to the welfare of society and to the company’s customers by selling clean and nutritious foods, by helping advance the cause of long-term sustainable agriculture methods, and by promoting a healthy, pesticide-free environment. In December 2002, the company had more than 24,000 team members. None were represented by unions, although there had been a couple of unionization attempts. Whole Foods had been ranked by Fortune magazine for six consecutive years (1998–2003) as one of the top 100 companies to work for in America. A team member at Whole Foods’ store in Austin, Texas, said, “I really feel like we’re a part of making the world a better place. When I joined the company 17 years ago, we only had four stores. I have always loved—as a customer and now as a Team Member—the camaraderie, support for others, and progressive atmosphere at Whole Foods Market.” According to the company’s vice president of human resources, “Team members who love to take initiative, while enjoying working as part of a team and being rewarded through shared fate, thrive here.”

Compensation and Incentives
Whole Foods’ management strived to create a “shared-fate consciousness” on the part of team members by uniting the self-interests of team members with those of shareholders. One way management reinforced this concept was through a gain-sharing program that rewarded a store’s team members according to their store’s contribution to operating profit (store sales less cost of goods sold less store operating expenses). The company also encouraged stock ownership on the part of team members through three other programs: 1. A team member stock option plan—Team members were eligible for stock options based on seniority, promotion, or the discretion of regional or national executives. 2. A team member stock purchase plan—Team members could purchase a restricted number of shares at a discount from the market price through payroll deductions. 3. A team member 401(k) plan—Whole Foods Market stock was one of the investment options in the 401(k) plan. Whole Foods also had a salary cap that limited the compensation (wages plus profit incentive bonuses) of any team member to 10 times the average total compensation of all full-time team members in the company—a policy mandated in the company’s core values (see Exhibit 2).

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The Use of Economic Value Added

In 1999, Whole Foods adopted an economic value added (EVA) management and incentive system. EVA is defined as net operating profits after taxes minus a charge for the cost of capital necessary to generate that profit. Senior executives managed the company with the goal of improving EVA. According to management, stores produced a very attractive EVA on average— in the fourth quarter of fiscal 2001, after-tax return on invested capital at stores open more than a year averaged 33 percent, and stores open more than five years showed an impressive 57 percent return. In fiscal 2001, store contribution averaged 9.5 percent of sales. However, in fiscal year 2001, the company’s overall EVA was a negative $30.4 million. Management used EVA calculations to determine whether the sales and profit projections for new stores would yield a positive and large enough EVA to justify the investment; EVA was also used to guide decisions on store closings and to evaluate new acquisitions. Team members used EVA estimates to guide their decisions. Bonuses paid to team members at a store were tied to the store’s EVA contribution. About 350 leaders throughout the company were on EVA-based incentive plans.

Purchasing and Distribution
Whole Foods’ buyers purchased most of the items retailed in the company’s stores from regional wholesale suppliers and vendors. However, store personnel sourced produce items from local organic farmers whenever possible as part of the company’s commitment to promote and support organic farming methods. In recent years, the company had shifted much of the buying responsibility from the store level to the regional and national levels in order to put the company in a better position to negotiate volume discounts with major vendors and distributors. Whole Foods Market was the largest account for many suppliers of natural and organic foods. In the seafood area, company buyers were on the docks each morning to check out not only the available local and international catches coming off of dayboats fishing deep waters but also the products of environmentally responsible aquaculture farms. The company operated eight regional distribution centers; the largest distribution center, in Austin, Texas, handled distribution of nutritional products to stores in Texas and Louisiana. In addition, the stores were supported by regional bake houses, four regional commissary kitchens that supplied many of the prepared foods, the Pigeon Cove seafood process facility in Massachusetts, a produce procurement and field inspection office, and a central coffee roasting operation.

Community Citizenship and Social Activism
Whole Foods demonstrated its community involvement in two ways: (1) by giving employees paid time off to participate in worthy community service endeavors, and (2) by donating a minimum of 5 percent of its after-tax profits in cash or products to nonprofit organizations. Further, John Mackey indicated the company was sincere in living up to its core values as they related to healthy eating habits and the environment; in the company’s 2001 annual report, he stated: We do not carry natural and organic products to help boost our sales, we carry natural and organic products because we believe that food in its purest state— unadulterated by artificial additives, sweeteners, colorings and preservatives— is the best tasting and most nutritious food available. We actively support

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Exhibit 8

WHOLE FOODS MARKET’S POSITION STATEMENT ON SEAFOOD SUSTAINABILITY

The simple fact is our oceans are soon to be in trouble. Our world’s fish stocks are disappearing from our seas because they have been over fished or harvested using damaging fishing practices. To keep our favorite seafood plentiful for us to enjoy and to keep it around for future generations, we must act now. As a shopper, you have the power to turn the tide. When you purchase seafood from fisheries using ocean-friendly methods, you reward their actions and encourage other fisheries to operate responsibly. At Whole Foods Market, we demonstrate our long-term commitment to seafood preservation by: ■ Supporting fishing practices that ensure the ecological health of the ocean and the abundance of marine life. Partnering with groups who encourage responsible practices and provide the public with accurate information about the issue. ■ Operating our own well-managed seafood facility and processing plant, Pigeon Cove Seafood, located in Gloucester, Massachusetts. ■ Helping educate our customers on the importance of practices that can make a difference now and well into the future. ■ Promoting and selling the products of well-managed fisheries.
■

Source: www.wholefoodsmarket.com, December 9, 2002.

organic farming because we believe it is the best method for promoting sustainable agriculture as well as for protecting the environment and farm workers. It is our authenticity as a wellness lifestyle brand that is our major competitive advantage. We recognize this and are very committed long term to strengthening our brand by remaining true to our mission, core values and quality standards. Exhibit 8 shows the company’s position statement on seafood sustainability. The company had similar position statements on why genetically engineered foods were risky and why organic farming was environmentally beneficial. The company disseminated information on these and other issues in its stores and on its website; the company’s website had a “legislative action center” that alerted people to pending legislation and made it easy for them to send their comments and opinions to legislators and government officials.

Whole Foods Market’s Financial Performance
From 1991 to 2002, Whole Foods Market’s net income rose at a compound average rate of 43.4 percent. The company’s net loss of $4.8 million in 2000 was partly attributable to management’s decision to dispose of the company’s NatureSmart business, which manufactured and sold (via direct marketing) nutritional supplements; the assets of NatureSmart were written down by $24 million in 2000 to reflect the realizable value of the business, which subsequently was sold for $28 million in May 2001. Also in 2000, Whole Foods incurred a $14 million loss in two affiliated dot-com enterprises (gaiam.com and WholePeople.com) in which it owned a minority interest. The company paid no dividends; 100 percent of the profits after taxes and charitable donations were reinvested in the business. Exhibits 9, 10, and 11 provide a fiveyear statement of operations, consolidated balance sheets, and selected cash flow data.

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Exhibit 9

WHOLE FOODS MARKET, STATEMENT OF OPERATIONS, FISCAL YEARS 1998–2002 (IN THOUSANDS) Sept. 29, 2002 Sept. 30, 2001 $2,272,231 1,482,477 789,754 574,503 215,251 82,440 3,129 8,539 9,425 — 111,718 (17,891) 1,628 95,455 38,182 5,626 51,647 Sept. 24, 2000 $1,836,630 1,205,096 633,534 460,044 173,490 60,054 2,246 10,497 — — 100,693 (15,093) (8,015) 77,585 34,584 14,074 28,927 Sept. 26, 1999 $1,492,519 985,000 507,519 363,892 143,627 58,511 1,198 5,914 5,940 — 72,064 (8,248) 1,800 65,616 25,590 — 40,026 Sept. 27, 1998 $1,308,070 873,088 434,982 313,698 121,284 45,931 1,153 3,979 — 1,699 68,522 (7,677) 2,303 63,148 23,454 — 39,694

Sales Cost of goods sold and occupancy costs Gross profit Direct store expenses Store contribution General and administrative expenses Goodwill amortization Preopening and relocation costs Store closure and asset disposal costs Merger expenses Operating income Interest expense, net Investment and other income (loss) Income from continuing operations before income taxes Provision for income taxes Equity in losses of unconsolidated affiliates Income from continuing operations Discontinued operations: Income (loss) from discontinued operations, net of income taxes Gain (loss) on asset disposal, net of income taxes Cumulative effect of change in accounting principle, net of income taxes Net income Basic earnings per share Weighted average shares outstanding Diluted earnings per share: Income from continuing operations Discontinued operations and effect of change in accounting principle, net of income taxes Diluted earnings per share Weighted average shares outstanding, diluted basis
Source: 2002 10K report.

$2,690,475 1,757,213 933,262 675,760 257,502 95,871 — 12,485 — — 149,146 (10,384) 2,056 140,818 56,327 — 84,491

— —

— 16,233

(9,415) (23,968)

— —

— —

— $ 84,491 $1.50 56,385 $1.40 $

— 67,880 $1.26 53,664 $0.92 $

(375) (4,831) $(0.09) 52,248 $ 0.53 $

— 42,155 $0.80 52,748 $0.73 $

— 45,395 $0.87 52,318 $0.72

— 1.40 63,340

0.29 1.21 56,185

(0.62) (0.09) 54,370

0.04 0.77 54,892

0.10 0.82 55,488

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Exhibit 10

WHOLE FOODS MARKET, CONSOLIDATED BALANCE SHEET, FISCAL YEARS 2001–2002 (IN THOUSANDS) Sept. 29, 2002 Sept. 30, 2001

Assets Current assets: Cash and cash equivalents Trade accounts receivable Merchandise inventories Prepaid expenses and other current assets Deferred income taxes Total current assets Property and equipment, net of accumulated depreciation and amortization Long-term investments Goodwill Intangible assets, net of accumulated amortization Other assets Deferred income taxes Net assets of discontinued operations Total Assets Liabilities and Shareholders’ Equity Current liabilities: Current installments of long-term debt and capital lease obligations Trade accounts payable Accrued payroll, bonus and employee benefits Other accrued expenses Total current liabilities Long-term debt and capital lease obligations, less current installments Deferred rent liability Other long-term liabilities Total liabilities Shareholders’ equity: Common stock, no par value, 150,000 and 100,000 shares authorized; 57,988 and 55,114 shares issued; 57,739 and 54,770 shares outstanding Common stock in treasury, at cost Accumulated other comprehensive income Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
Source: Company press release, November 19, 2002, and 2002 10K report.

$ 12,646 30,888 108,189 8,950 11,468 $172,141 $644,688 4,426 80,548 22,889 8,159 7,350 3,000 $943,201

$

1,843 24,859 98,616 9,151 8,549

$143,018 $542,986 4,706 67,258 24,028 8,513 20,287 18,375 $829,171

$

5,789 59,710 59,359 51,440

$

5,944 50,468 41,265 56,237

$176,298 161,952 12,091 3,774 $354,115

$153,914 250,705 11,653 3,542 $419,814

$341,940 — (422) 247,568 $589,086 $943,201

$251,679 (5,369) (30) 163,077 $409,357 $829,171

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Exhibit 11

WHOLE FOODS MARKET, SELECTED CASH FLOW DATA, FISCAL YEARS 19992002 (IN THOUSANDS) 1999 2000 $ 28,927 124,209 (41,671) (110,864) (25,700) (180,707) 88,000 (6,625) 10,032 77,873 395 2001 $ 51,647 173,036 (49,009) (103,896) — (156,928) 25,000 (78,383) 23,179 (30,204) 1,843 2002 $ 84,591 229,145 (61,385) (100,000) (35,978) (203,357) 32,000 (127,956) 66,964 (28,992) 12,646

Income from continuing operations Net cash provided by operating activities Acquisition of property and equipment Development costs of new store locations Payments for acquisitions, net of cash acquired Net cash used in investing activities Net proceeds from long-term borrowings Payments on long-term debt and capital lease obligations Proceeds from new stock issues Net cash provided by (used in) financing activities Cash and cash equivalents at end of year
Source: Company press release, November 19, 2002, and 2001 10K report.

$ 40,026 116,570 (53,496) (80,976) (24,500) (159,761) 49,000 (673) 7,049 36,437 3,582

Competitors
Whole Foods Market’s two biggest competitors in the natural foods and organics segment of the food retailing industry were Wild Oats Markets and Fresh Market. Another competitor with some overlap in products and shopping ambience was Trader Joe’s.

Wild Oats Markets, Inc.
Wild Oats Markets, Inc.—a 99-store natural foods chain based in Boulder, Colorado— ranked second behind Whole Foods in the natural foods and organics segment. The company’s stores were in 23 states and British Columbia, Canada; stores were operated under five names: Wild Oats Natural Marketplace, Henry’s Marketplace, Nature’s—a Wild Oats Market, Sun Harvest, and Capers Community Markets. Founded in 1987, Wild Oats had sales of $893 million in 2001 and was projecting sales of $1.05 billion in 2003. In 1993 and 1994, Wild Oats was named one of the “500 Fastest-Growing Private Companies in America” by Inc. magazine. Interest quickly spread to Wall Street, and in 1996 Wild Oats became a public company traded on the NASDAQ under the symbol OATS. Grocery analysts believed that Wild Oats had close to a 3 percent market share of the natural and organic foods market in 2002, compared to about 9 percent for Whole Foods. Wild Oats, under new CEO Perry Odak (formerly the CEO of Ben & Jerry’s Homemade until it was acquired by Unilever in 2000), was in something of a turnaround mode in 2002. The company’s prior CEO and founder, Mike Gilliland, had gone on an aggressive acquisition streak during the late 1990s to expand Wild Oats’ geographic coverage; store growth peaked in 1999 with the acquisition of 47 stores. But Gilliland’s acquisition binge piled up extensive debt and dropped the company into a money-losing position with too many stores, a dozen different store names, and a dozen different ways of operating. Product selection and customer service were inconsistent from one location to another. When Odak arrived in March 2001, he began a turnaround effort: He streamlined operations, closed 28 unprofitable stores, cut prices, trimmed store staffing by 100

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employees, and launched a new, smaller prototype store with a heavier emphasis on fresh food. Merchandising and marketing were revamped. The strategy was to draw in more “crossover” shoppers with lower-priced produce, meat, and seafood, along with a “Fresh Look” program stressing freshness and affordability to increase store traffic and raise the average purchase above the current $19 level. While the lower prices cut the company’s gross profit margin from 30.3 percent to 29 percent, the company was trying to get the margin back over 30 percent by concentrating its purchases with fewer vendors and getting better discounts. An agreement was reached in September 2002 for Wild Oats to obtain a substantial part of its store inventories from Tree of Life, one of the leading natural foods distributors. After posting losses of $15.0 million in 2000 and $43.9 million in 2001, Wild Oats was on track to return to profitability; the company reported net earnings of $4.3 million in the first nine months of 2002. Wild Oats’ new prototype stores were 22,000 to 24,000 square feet and featured a grocery-store layout, an expanded produce section at the front of the store, a deli, a sushi bar, a juice and java bar, and a reduced selection of canned and packaged items. Wild Oats believed the smaller format was suitable for profitable entry into lesspopulated markets. Wild Oats had just completed arrangements to sell 4.45 million shares at $11.50 to raise capital for opening 58 stores in the next three years (13 in 2003, 20 in 2004, and 25 in 2005) and remodeling a number of existing stores. Management expected that most of the new stores would incorporate the newly developed prototype. Whole Foods was scheduled to open a number of new stores in cities where Wild Oats had stores. Wild Oats, however, was targeting city and metropolitan neighborhoods for its new stores where there were no Whole Foods stores. Perry Odak expected that while conventional supermarkets would continue to expand their offerings of natural and organic products, the competitive threat posed by conventional supermarkets was only moderate because their selection was more limited than what Wild Oats stores offered and because they lacked the knowledge and high level of service provided by a natural foods supermarket. In his view, “they are introducing conventional shoppers to natural brands, which will benefit us in the long run.” Another of Wild Oats’ strategic thrusts was to drive a customer service mindset throughout the organization via training programs and enhanced employee communication. Odak wanted to position Wild Oats as a resource for value-added services and education about health and well-being.

Fresh Market
Fresh Market, headquartered in Greensboro, North Carolina, was a 34-store chain operating in seven southeastern states (Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia, and Kentucky).8 The company was founded by Ray Berry, a former vice president with Southland Corporation who had responsibility over some 3,600 7-Eleven stores. The first Fresh Market store opened in 1982 in Greensboro. Berry borrowed ideas from stores he had seen all over the United States and, as the chain expanded, used his convenience-store experience to replicate the store format and shape the product lines. During the 1982–2000 period, Fresh Market’s sales revenues grew at a 25.2 percent compound rate, reaching $193 million in 2000; revenues grew about 9.2 percent in 2001, to around $210 million. Berry believed the company’s strong financial performance was due to its commitment to service and quality. Fresh Market’s concept was to offer top-quality meats, fresh fish, produce, freshbaked goods, and specialty items, coupled with top-notch service, in neighborhood stores near educated, high-income residents. Fresh Market stores averaged 18,000

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square feet and were also stocked with “upscale grocery boutique” items such as freerange chicken; pick-and-pack spices; gourmet coffees; chocolates; hard-to-get H&H bagels from New York City; Ferrara’s New York cheesecake; fresh Orsini parmesan cheese; Acqua della Madonna bottled water; and an extended line of olive oils, wine, and beer. Stores also stocked a bare lineup of most general-grocery products but an expanded selection of products for cooks and entertainers, with 18 styles of designer napkins and six shelves of mustard. None of the meat and few of the deli products were prepackaged, and each department had at least one employee in the area constantly to help shoppers—the idea was to force interaction between store employees and shoppers. Fresh Market’s warm lights, classical background music and terra-cotta-colored tiles made it a cozier place to shop than a typical grocery store. The average store had 75 employees, resulting in labor costs about double those of typical supermarkets. Merchandisers at Fresh Market’s headquarters selected the stores’ products, but store managers placed orders directly from third-party distributors. According to Berry, Fresh Market didn’t have the concentration of stores that would make running its own warehouses profitable; Berry believed some grocers’ distribution operations had grown so big that they drove the retail business, rather than the other way around. Since 2000, the company had opened three to four new stores each year and annual growth had slowed somewhat to about 10 percent. Expansion was funded by internal cash flows and bank debt. Several public companies had shown interest in buying the chain. Ray Berry, age 60, had said, “If I can get what I think the company’s worth three years from now, I’ll sell it. But I won’t sell it for what it’s worth today because I’m having too much fun.” Without providing any details, Berry indicated that Fresh Market’s profitability outpaced the industry average.

Trader Joe’s
Based in Pasadena, California, Trader Joe’s was a specialty supermarket chain with 178 stores in Arizona, California, Connecticut, Illinois, Indiana, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, Virginia, and Washington. Trader Joe’s was known for bringing its customers the best-quality products at the best prices. The company described its mission and business as follows: At Trader Joe’s, our mission is to bring all our customers the best food and beverage values to be found anywhere, and the information to make informed buying decisions. There are more than 2,000 unique grocery items in our label, at prices everyone can afford. We work hard at buying things right: Our buyers travel the world searching for new items; we work with a variety of suppliers who make interesting products for us, many of them exclusive to Trader Joe’s; and we make special purchases which are presented to us throughout the year. All our private label products have their own “angle,” i.e., vegetarian, Kosher, organic, or just plain decadent, and all natural ingredients. Our tasting panel tastes every product before we buy it. If we don’t like it, we don’t buy it. If customers don’t like it, they can bring it back—no questions asked! We stick to the business we know: good food at the best prices! Whenever possible we buy direct from our suppliers, in large volume. We bargain hard and manage our costs carefully. We pay in cash, and on time, so our suppliers like to do business with us.

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The company stocked a variety of imported, exotic, and gourmet items, including seafood, baked goods (75 breads, muffins, and cookies from 30 bakeries), organic foods, vitamins, nuts and trail mixes, 80 cheeses from around the world, Trader Joe’s whole-bean coffees, fresh produce, fresh salads and entrées, a variety of fat-free and low-fat foods, a selection of meatless entrées, pet foods, frozen entrées, snack foods and energy bars, a selection of chocolates, wine and beer, and an assortment of natural, “cruelty-free” shampoos, lotions, and body care products. Trader Joe’s had recently announced that it would work with its vendors to remove genetically modified ingredients from its 800 private-label products. It had also discontinued sale of duck meat because of the cruel conditions under which ducks were grown. Stores were open, with wide aisles and appealing displays. Because of its combination of low prices, intriguing selections, and friendly service, customers viewed shopping at Trader Joe’s as an enjoyable experience. The company was able to keep the prices of its unique, exotic products attractively low (relative to those at Whole Foods, Fresh Market, and Wild Oats) partly because its buyers were always on the lookout for exotic items they could buy at a discount (all products had to pass a taste test and a cost test) and partly because most items were sold under the Trader Joe’s label.

Independent Natural and Health Food Grocers
Although two vitamin/supplement chains, General Nutrition Center and Vitamin World, dominated the vitamin/supplement segment with close to 6,000 stores, in 2002 there were approximately 14,000 small, independent retailers of natural and organic foods, vitamins/supplements, and beauty and personal care products. Most were single-store, owner-managed enterprises. Combined sales of the 14,000 independents were in the range of $13 billion in 2002. Most of the independent stores had less than 2,500 square feet of retail sales space and generated revenues of less than $1 million annually, but there were roughly 1,000 natural foods and organic retailers with stores in the size range of 4,000 to 12,000 square feet and sales of between $2 million and $5 million annually. Product lines and range of selection at the stores of independent natural and health foods retailers varied from narrow to moderately broad, depending on a store’s market focus and the shopper traffic it was able to generate. Inventories at stores under 1,000 square feet could run as little as $10,000, while those at stores of 10,000 square feet or more might run $400,000. Many of the independents had some sort of deli or beverage bar, and some even had a small dine-in area with a limited health food menu. Revenues and customer traffic at most independent stores were trending upward, reflecting growing buyer interest in natural and organic products.

Endnotes
1 As quoted in Elizabeth Lee, “National Standards Now Define Organic Food,” Atlanta Journal and Constitution, October 21, 2002. 2 As quoted in Marilyn Much, “Whole Foods Markets: Austin, Texas Green Grocer Relishes Atypical Sales,” Investors Business Daily, September 10, 2002. 3 Hollie Shaw, “Retail-Savvy Whole Foods Opens in Canada,” National Post, May 1, 2002, p. FP9. 4 See Karin Schill Rives, “Texas-Based Whole Foods Market Makes Changes to Cary, Charlotte, N.C., Grocery Store,” The News and Observer, March 7, 2002. 5 Quoted in “Produce That’s Picture Perfect,” National Post, May 9, 2002, p. AL6. 6 Quoted in “Whole Foods Market to Open in Albuquerque, N.M.,” Santa Fe New Mexican, September 10, 2002. 7 EVA at the store level was based on store contribution (store revenues minus cost of goods sold minus store operating expenses) relative to store investment over and above the cost of capital. 8 Much of the information in this section is based on M. E. Lloyd, “Specialty-Grocer Fresh Market Cultivates Upscale Consumers, Reaps Big Returns,” The Wall Street Journal, February 20, 2001, p. B11.