Mini-Case 10 - Trimming Fat at Whole Foods Market PDF

Preview

Summary

Download Mini-Case 10 - Trimming Fat at Whole Foods Market PDF

Description

Introduction The mini-case being addressed in this response is Mini-Case #10 titled “Trimming Fat at Whole Foods Market” and is outlined on page 452 in the Strategic Management: Concepts 3e textbook by Frank T. Rothaermel. The chapter that goes along with the case is chapter 6. The mini-case discusses the changes Whole Foods has made to their company in an attempt to remain in the top of their industry. Whole Foods success originally came from offering top-quality foods obtained through sustainable agriculture. (Rothaermel, 2017, p. 452) In addition, they have successfully been able to offer luxury food items at premium prices. However, the sale of high ticket items equates higher prices resulting in higher costs for the company. They were able to maintain a competitive advantage in their industry given their exclusive strategic position until 2008 when the economy entered a deep recession and consumers became more cognizant of spending. Since 2014 Whole Foods has continued to maintain a competitive disadvantage not only against competitors but also within the market. CEO, John Mackey decided to “trim fat” in two ways: refocusing the organizations mission to offer healthy foods and reducing costs. However, I think their struggle partially comes from attempting to combine two different business strategies at the same time, a cost-leadership strategy, focused on low cost, and a differentiation strategy, focused on delivering unique features and services. (Rothaermel, 2017, p. 176) Due to this, the company risks being “stuck in the middle” since they are trying to be everything to everyone. Whole Foods now has more than 420 stores, employs more than 90,000 people, and earned $15 billion in revenue in 2015. (Rothaermel, 2017, 452) In the future, they still hope to grow threefold through the profitable support of 1,200 stores in the U.S. Key problems within the mini-case: 

How is the popularity of organic foods in other supermarkets causing a decline in Whole Food sales?



Is the “scandal” of mislabeled weights of products in 2015 still causing issues for Whole Foods profitability?



What has been done to “trim fat” in order to help the company regain profitability? If these options aren’t fully working what can be done additionally?

Thesis Statement: After analyzing the mini-case components, course text, and additional resources, it can be determined that alternatives to maintaining competitive advantage in the grocery store Industry will be necessary for Whole Foods Market. All selected alternatives will be explored and after weighing all of the practicalities against the unfavorable options, a clear solution will surface. Background Whole Foods Market is the largest American chain of supermarkets, specializing in natural and organic foods. John Mackey, Renee Lawson Hardy, Craig Weller, and Mark Skiles all joined forces to open the first Whole Foods store in Austin, Texas in September 1980. Whole Foods offered a

wider selection of food and it was slightly larger than a typical healthy food store. When they began expanding, Mackey assumed leadership of the company and began opening new stores in Austin, Houston, and Dallas. The first store out of Texas to open was in New Orleans in 1988. In the next 10 years, Whole Foods became a national company by purchasing existing natural food chains: Wellspring Grocery (North Carolina, 1991), Bread & Circus (Massachusetts and Rhode Island, 1992), Mrs. Gooch’s (southern California, 1993), Fresh Fields (northeastern and midAtlantic states and Illinois, 1996), Bread of Life (Florida, 1997), Merchant of Vino (Michigan, 1997), and Harry’s Farmers Market (Georgia, 2001). (Lewis, 2017) In 2002, Whole Foods moved into Canada and in 2004, the United Kingdom after purchasing Fresh & Wild. Their largest purchase happens to be Wild Oats Market, which operated 109 stores in Canada and the U.S. The merge took place in 2007 when Whole Foods operated more than 190 stores. Soon after, Whole Foods sold 13 stores to satisfy objections by the Federal Trade Commission which had predicted an adverse effect on competition in the market for natural and organic groceries. (Lewis, 2017) In addition, Whole Foods image was tarnished due to a mislabeling scandal in 2015 where the weights of certain products were labelled incorrectly leading to extra charges of $15 per item. To this day, the scandal still appears to be a struggle for Whole Foods. Whole Foods profits declined 22% from a year ago to $120 million. Overall sales rose 2% to $3.7 billion, which was a record for the quarter, but still a far cry from the company's double-digit sales growth just two years ago. (Gillespie, 2016) With an increase in popularity of organics, many general supermarket/grocery store chains have begun selling healthier organic foods. The biggest threat appears to be Kroger. In the last year and a half, Whole Foods has lost about 14 million customers to Kroger who has ramped up its supply of organic foods in a bid to steal market share from Whole Foods and other niche grocers such as Sprouts Farmers Market and Fresh Market. (Peterson, 2017) With the development of their “Simple Truth” brand, Kroger now offers several aisles of natural and organic products. In addition, Kroger grossed $16 billion in organic and natural foods in the past year compared to Whole Foods $15.8 billion. To remain differentiated in the face of competitors selling organic foods, Mackey decided to “trim fat” in two ways. One was through the Healthy Eating initiative. Whole Foods Market now has “Take Action Centers” in every store to educate customers on many food-related topics such as genetic engineering, organic foods, pesticides, and sustainable agriculture. (Rothaermel, 2017, p. 452-53) Second, reducing costs by offering volume discounts, expanding its privatelabel product line at lower prices, and launching a new store format, “365 by Whole Foods Market,” based on its “365 Everyday Value” private label. These stores focus on the discount private label to compete with competitor Trader Joe’s. However, the problem with this strategic initiative is it will only take away demand for higher end products at Whole Foods rather than take business away from Trader Joe’s. While I think each of these strategies have the potential to be good, it seems that Whole Foods should remain more focused on a single business strategy rather than taking on more than one at a time.

Alternatives For this situation, in order to obtain a competitive edge in the industry, some potential alternatives for Whole Foods Market are as follows: 1. Create or become a membership club – To increase profits, Whole Foods could transition to a membership club where people would be required to purchase a membership card in order to shop there. This would be good because they would have a steady annual revenue and can offer benefits of membership to keep people coming in. If they made it optional instead of mandatory like certain places like Sam’s Club, they could really stand out from the competition. The only problem is that due to the price-gouging scandal they faced, consumers may not fully wish to invest in a membership that they think they won’t receive value for. 2. Develop a focused differentiation strategy – Since originally Whole Foods offered luxury items at premium prices, they could focus on the higher quality of the items. In doing this, they may be able to focus on other aspects of the business by delivering products or services with unique features. (Rothaermel, 2017, p. 178) For example, they could focus on developing their vegan section more. Many grocery stores don’t have vegan items, but I know Whole Foods actually has a rather large section of vegan products. The main issue with this is that they originally began losing money due to the high costs that were incurred from marketing for the higher-end items. 3. Develop a focused cost-leadership strategy – This would be very beneficial for Whole Foods because they would be delivering products or services at a lower cost. (Rothaermel, 2017, p. 178) This would save them a lot of money; however, the downside is that the products they would be offering wouldn’t be the best of quality. Provided the time and resources, all alternatives are feasible. In terms of time and money, option one would probably take a while to implement because they would have to do a lot of marketing which would also cost a lot of money, in addition to the costs of the member cards. This also might be bad for the company because they already are losing business so many people definitely won’t want to pay to shop there in the first place. Options two and three both seem plausible to me although there are downsides to both. Option three can be implemented very quickly and will save the company the most amount of money, however, there still won’t be any difference from the competition which may cause them to continue maintaining competitive disadvantage. Therefore, option two appears to be the best option in my opinion. Although there still may be some costs involved, I think the company really needs to focus on differentiating itself from the competition. I’ve heard about their vegan products section and think that if they focused more on marketing as an organic and vegan supermarket, they may end up coming back on top. Personally, my roommate and I are hoping to transition to vegan. After researching and looking closely at products in major supermarkets like Walmart, Kroger, and Jungle Jim’s, I’ve noticed how many products are truly unhealthy and how difficult it is to

find things that are vegan. In developing their vegan products, they can better appeal to a larger market of consumers who can’t find those products elsewhere. Proposed solution All alternatives are plausible, however, the best solution in terms of maintaining competitive advantage would be to develop the differentiation strategy. “A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V − C) is greater than that of its competitors.” (Rothaermel, 2017, p. 180) Although they faced a scandal in 2015, this may be a great way for them to come back from that. This solution was selected because it seems to provide the best competitive advantage over competitors. While option one would pretty much just cause them to lose money and customers, option three would only lower costs while maintaining the current market status. Offering a large and wide variety of vegan products is something that other supermarkets haven’t been doing much of. Therefore, I think option two, differentiation strategy is the best solution and will also heavily benefit consumers because it offers one of the healthiest options, making vegan products easily accessible. Recommendations I think it’s important to understand different strategic positions and how to separate them. A firm that attempts to implement two semi-conflicting strategies at once can result in a competitive disadvantage. A business must be firm about it’s mission and to do that, it must decide what is most important, value or cost. While both can be of equal importance, usually higher value equates higher costs. Understanding the competition will help determine who has the best cost and value drivers. The firm with the highest value and lowest cost will maintain competitive advantage in the industry. Although increased value creation is a defining feature of a differentiation strategy, managers must also control costs. Rising costs reduce economic value created and erode profit margins. Indeed, if cost rises too much as the firm attempts to create more perceived value for customers, its value gap shrinks, negating any differentiation advantage. (Rothaermel, 2017, 181) Therefore, for this situation, I would like to suggest three strategic recommendations. 1. Invest in R&D – Investing in research and development will help Whole Foods gain the knowledge to determine which products will do well in the market and what prices to set. For the chosen solution, R&D will be beneficial in identifying what vegan products are popular and will sell the most. It will also help them acquire the information to discover the best price range to set for the products. 2. Identify marketing strategies – This process will also require a lot of research; however, the first step would be to identify the goals of selling the products and then develop a plan to market them. Some information, like potential customers and competition may change since vegan is a major lifestyle change that not everyone makes, and many stores

don’t sell the products. After understanding these things, the company can then begin to market their new vegan product line. 3. Create value while maintaining cost parity – Since Whole Foods will be selling many vegan products, this will set them apart from other supermarkets. Maintaining costs should be fairly simple considering other supermarkets don’t sell the products, however, it’s important to look into costs for online vegan stores. Even if a firm fails to achieve cost parity, it can still gain a competitive advantage if its economic value creation exceeds that of its competitors. (Rothaermel, 2017, 180) This will definitely create value for the company to regain competitive advantage since many other businesses in the industry have not fully implemented something like this. Conclusion After analyzing this mini-case, I was able to identify possible alternatives to maintaining a competitive advantage for Whole Foods Market in the grocery store industry. While option one provided the biggest loss for the company, options two and three proved to be the most viable solutions. However, the preferred alternative two, developing a focused differentiation strategy, offers the best value and highest level of competitive advantage resulting in the largest gain for the company. References Gillespie, Patrick. “Whole Foods struggles to get back on its feet.” CNN. 27 July 2016. Accessed 10 Mar. 2018 Retrieved from http://money.cnn.com/2016/07/27/investing/whole-foodsearnings-july/index.html Lewis, Robert. “Whole Foods Market.” Encyclopedia Britannica. 10 May 2017. Accessed 9 Mar. 2018 Retrieved from https://www.britannica.com/topic/Whole-Foods-Market Peterson, Hayley. “Shoppers Appear to Be Ditching Whole Foods for the Organic Food at ... Kroger?” Business Insider. 27 Mar. 2017. Accessed 9 Mar. 2018. Retrieved from http://www.slate.com/blogs/business_insider/2017/03/27/kroger_s_organics_are_threatening _whole_foods_popularity.html Rothaermel, F. T. (2017). Strategic Management, 3e. New York, NY: McGraw Hill Education....