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Porter Five Forces Analysis of Whole Foods Market


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A Porter "Five Forces" analysis of Whole Foods Market, written for my Capstone MBA class.

A Porter "Five Forces" analysis of Whole Foods Market, written for my Capstone MBA class.

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  • 1. Running Head: PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET 1 Porter Five Forces Analysis: Whole Foods Market Teresa J. Rothaar Wilmington University
  • 2. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET Porter Five Forces Analysis: Whole Foods Market Introduction Founded in 1980 in Austin, Texas, Whole Foods is a natural and organic foods grocer operating over 360 stores in North America and the U.K. Much of the company’s growth has been not from new construction, but acquisitions and mergers (Whole Foods Market, n.d.). While Whole Foods operates in the natural and organic foods niche, it competes directly with mainstream grocers, warehouse stores, and small, local farmers’ markets and specialty stores. Threat of New Entry The threat of new entrants into the industry is low. Due to the high-cost, low-margin nature of the grocery industry, the competitive landscape is stilted towards large corporations that can operate efficiently while selling in volume; the largest 50 companies are responsible for about 70% of revenue (Hoovers, n.d.). It would be very difficult for a brand-new chain to emerge on the scene and compete with the giants; the threat comes from existing competitors. Supplier Power The threat of supplier power is medium to high. Whole Foods prides itself on sourcing as much food as it can from small producers local to each store. However, the company makes all of its suppliers abide by very strict quality standards, which, by its own admission, make it difficult to locally source meat and seafood products in particular (Omer, 2014). Two factors are exacerbating this problem: 1. As of 2011, only about 0.8% of cropland and 0.5% of pasture in the United States was certified organic (USDA, 2013). Organic suppliers are limited. 2. Just like the grocery industry, the organic and natural foods production industry has seen significant consolidation over the past two decades. In 1995, there were 2
  • 3. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET 81 independent organic food processing companies in the U.S. Today, there are only 15. Multinational corporations such as Coca-Cola, ConAgra, and Nestle produce nearly all of the organic food sold in U.S. stores (Remington, 2014). While Whole Foods can throw its weight around when dealing with small, local farmers, these local companies are being purchased by multinationals, leaving Whole Foods purchasing from an increasingly smaller number of small suppliers, and having to buy from multinationals. Buyer Power The threat level from buyer power is low to medium. Massive consolidation in the grocery industry in recent years, coupled with the fact that everyone has to eat, means that buyers wield little power. In 2012, 53.6% of Americans’ grocery money was spent at four chains: Wal- Mart, Kroger, Safeway, and Target, with Wal-Mart capturing nearly 1/3 of grocery sales that year (Spector, 2013). However, after the 2008 economic crash, many Americans found themselves unemployed or underemployed. While money-challenged consumers cannot stop buying food completely, they can choose lower-priced options. This shift impacted the natural and organic foods niche heavily, including Whole Foods, which responded with offering more private-label products at a lower price (Senauer & Seltzer, n.d.). Competitive Rivalry Competition in the grocery industry is intense; this threat level is high. The natural and organic foods niche is growing, but this growth potential has attracted stiff competition for Whole Foods, particularly from Costco and Kroger. As a result, over the past quarter, Whole Foods slashed prices on many major items. Its most recent quarterly report was poor, and upon its release the company’s share price tumbled more than 8% (Singh, 2014). 3
  • 4. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET While, as noted above, it would be difficult for a brand-new chain to enter the market, it is very easy for existing competitors to offer more natural and organic food products. In addition to Kroger and Costco, Whole Foods faces growing competition from specialty grocers, especially Trader Joe’s and Sprouts Farmers Market, both of which are growing quickly (Gaar, 2013). Gaar reports that while Whole Foods is growing more quickly than ever itself, it is no longer in a position to buy out every emerging competitor, the way it could previously. Threat of Substitution This threat level is high, and closely tied with the threat of industry competition. As noted above, mainstream grocers are jumping into the natural and organic foods market with gusto; consumers can choose to buy their “health food” at the same stores where they do the rest of their grocery shopping, and in the case of superstores like Target, all of their shopping. Consumers can also choose to patronize local farmers’ markets, or just buy “regular” food. Conclusion The biggest and most imminent threats to Whole Foods Market come from product substitution, supplier power, and existing competitors, with buyer power an emerging threat. Large national grocers are increasing their organic and natural foods options, and smaller specialty chains are growing. Superstores like Wal-Mart, Target, and Meijer are of particular concern, since they offer a one-stop-shopping experience where customers can buy grocery and non-grocery items at the same location, in one trip. While consolidation means that buyers do not wield a lot of power in the grocery industry as a whole, they can choose to purchase lower-priced alternatives to expensive premium organic foods, and are doing so, which has hurt Whole Foods. Meanwhile, natural and organic foods manufacturers are consolidating as well, which means that Whole Foods has fewer choices and faces higher prices on the wholesale level. 4
  • 5. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET In light of its recent financial results, Whole Foods may wish to slow or even stop its growth for the time being, and focus on providing its existing customers with a superior shopping experience and the best value on upscale food products, in particular its private label products. 5
  • 6. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET Figure 1. Michael Porter’s “Five Forces” Model for Whole Foods Market. This figure illustrates Porter’s “Five Forces” as they apply to Whole Foods Market. 6
  • 7. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET References Gaar, B. (2013, December 21). Whole Foods Chain is Growing, but Facing Increasing Competition. The Columbus Dispatch. Retrieved from Hoovers. (n.d.). Grocery Stores & Supermarkets Report Summary. Retrieved from Omer, T. (2014, February 26). Whole Foods Forages for Local Suppliers to Stock New Hyannis Store. The Martha’s Vineyard Times. Retrieved from new-hyannis-store/ Remington, J. (2014, February 20). The Truth About Who Owns Organic Food Companies, In One Chart. PolicyMic. Retrieved from truth-about-who-owns-organic-food-companies-in-one-chart Senauer, B., & Seltzer, J. (n.d.). The Changing Face of Food Retailing. Choices Magazine. Retrieved from Singh, V. (2014, March 30). Dump Whole Foods Market To Buy Kroger And Costco. GuruFocus. Retrieved from market-to-buy-kroger-and-costco Spector, K. (2013, December 16). How Big Food Creates an Illusion of Choice at the Supermarket. AlterNet. Retrieved from creates-illusion-choice-supermarket United States Department of Agriculture. (2013, September 27). Organic Production Documentation. Retrieved from 7
  • 8. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET production/documentation.aspx#.UzxK9q1dUoo Whole Foods Market. (n.d.). Whole Foods Market History. Retrieved from 8