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Strategic Analysis

Team Dragon

CSU EMBA Class of 2018

Dave StoryHyrum Egbert

Megan ManningJim Hendricks

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•Current Performance Analysis and Evaluation

•External Factors Analysis Summary (EFAS)

•Internal Factors Analysis Summary (IFAS)

•Strategic Alternatives

•Implementation Plan

•Results Measurement

Table of Contents

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Whole Foods Market Current Performance – Key Factors

• Strong brand recognition and shopping experience

• High food and product standards

• Private label expansion

• Continuous new store openings

…which has led to solid financial performance

Whole Foods Market is a high performing company for four key reasons...

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The Whole Foods banner serves as an icon for health and quality1

• Whole Foods Market is the largest retailer of natural and organic foods and was the first certified organic grocer in the United States1

• Whole Foods Market has a first-mover advantage in a niche segment of the grocery market1

The first reason Whole Foods Market is high performing is because of its strong brand recognition and excellent shopping experience

1. Morningstar Equity Analyst Report, Whole Foods Market, 26 Aug 20162. Whole Foods Market 2015 Annual report3. http://www.fool.com/investing/general/2014/07/14/analyzing-whole-foods-markets-strengths-weaknesses.aspx4. Credit Suisse August 3, 2016 analyst report5. https://www.entrepreneur.com/article/224577

The Whole Foods Market experience:• Large organic selection ~25,000 SKUs2

• Large perishable selection ~66.5% of 2015 sales2

• Appealing stores in premium locations1,2

• Excellent customer service with of full- and self-service options1,2

• Leading Apple Pay retailer, in both transactions and sales2

“Whole Foods Market's strength stems from authenticity and a premium shopping experience as a true organic grocer”3

Selection Fresh Quality Store Condition

Customer Service

Shopping Experience

***** Broad and deep assortment of brands and items across categories, especially notable in produce and seafood.

***** Produce plentiful, excellent item condition. Seafood freshness and healthfulness underscored by labels and signs.

*****Stores well-lit, updated, and well-maintained with convenient layout and modern fixtures and displays.

*****Staff widely available and knowledgeable, in- stock levels high, no wait at service counters and checkout.

*****Pleasant, enticing and convenient.

Whole Foods performs best amongst competitors4

The Whole Foods shopper is slightly different in that he

or she is driven more by health and taste than by price5

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“Our Standards lead the industry”1

The second reason Whole Foods Market is high performing is its high food and product standards

1. Whole Foods Market 2015 Annual report2. Credit Suisse August 3, 2016 analyst report3. http://www.wholefoodsmarket.com/quality-standards

Highest quality

products due to highest quality

standards

Body Care Standards• Bans 50 ingredients

commonly found in conventional body care products

• never sell products tested on animals

• Premium Body Care™ standards bans more than 400 ingredients

Seafood Sustainability

Wild-caught seafood• Marine Stewardship• Monterey Bay

Aquarium Seafood Watch® program and The Safina Center

Farmed Seafood• Responsibly

Farmed

Meat Standards and Animal

WelfareGlobal Animal Partnership’s 5-Step® Animal Welfare Rating

Responsibly Grown

Introduced Responsibly Grown “Good, Better, Best” rating system for produce and flowers

GMO Transparency

• Will provide full GMO transparency by 2018

• Currently over 36,000 non-GMO products

Eco-Scale™First national

retailer to launch its own comprehensive

set of green cleaning

standards

Whole Foods commits to new

chicken standards4

• With Global Animal Partnership

• Slower growing breeds

• Less crowding• Natural light

“Standards that aren’t standard anywhere

else”3

4. http://fortune.com/2016/03/18/whole-foods-new-chickens/

“Broadest and deepest

assortment of organic products

and brands”2

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•“365 Foods” is the private label sold in Whole Foods stores 1

•In 2016, Whole Foods started opening smaller stores that specialize in these less expensive private-label groceries, called 365 by Whole Foods Market 1

– Makes shopping at the store more accessible to broader markets of multiple ages and incomes 1

– Still the same high quality organic food, just at lower prices 1

– This has caused some cannibalization in sales initially, which is an area of concern 1

– Estimated market share for fresh format/limited assortment is expected to rise, while traditional grocery store market share is expected to decrease 2

2

The third reason Whole Foods Market is high performing is its focus on private label expansion with exclusive new “365 by Whole Foods” stores

1. “Whole Foods is Ready to Convince You that It Can Do Cheaper” by Craig Giammona, www.bloomberg.com2. “Kroger is Whole Foods Greatest Threat” by Ashley Lutz, www.businessinsider.com

Fresh Format Market Share

Increasing Traditional

SupermarketMarket Share

Decreasing

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The fourth reason Whole Foods Market is high performing is it continues to open stores in the U.S., Canada and Great Britain

1. http://media.wholefoodsmarket.com/fast-facts/2. www.wholefoodsmarket.com/stores/list/development3. Whole Foods Market 2015 Annual ReportBloomberg 2015

•Whole Foods operates 456 stores in the United States, Canada, and Great Britain1

– 25 new stores this year, with 12 more expected2

– Over 100 leases for future stores3

– Projecting about 1,200 stores, including the new 365 Foods3

•Expands primarily through new store openings3

•Potentially pursue acquisitions of smaller chains (e.g. Wild Oats)

365 by Whole Foods Market

8

20072008

20092010

20112012

20132014

2015TTM

$-

$4,000

$8,000

$12,000

$16,000

$- $100 $200 $300 $400 $500 $600 $700

WFM Revenue & Income2,3Revenue Net Income

Rev

enue

(Mill

ion

$)

Inco

me

(Mill

ion

$)

These 4 key reasons led Whole Foods Market to solid revenue growth and profit margins…

1. Whole Foods Market 2015 Annual Report 5. S&P Capital IQ Stock Report, Kroger Co., September 3, 20162. S&P Capital IQ Stock Report, Whole Foods Market, August 27, 2016 6. Kroger Co. Qrtrly Press Releases, Q3, Q4 2015, Q1 20163. Morningstar Equity Analyst Report, Whole Foods Market, 26 Aug 2016 7. S&P Capital IQ Stock Report, Sprouts Farmer Market, September 3, 20164. Whole Foods Market 10-Q, Q4 2015; Q1, Q2, Q3 2016 8. Sprouts Farmers Market Qrtrly Press Releases, Q3, Q4 2015, Q1, Q2 2016

2010 2011 2012 2013 2014 2015 TTM0.0%

2.0%

4.0%

6.0%

8.0%WFM Net Profit

Margin2,4,5,6,7,8

Whole Foods

Per

cent

(%)

Q4 2015 Q1 2016 Q2 2016 Q3 2016-0.2% -1.8% -3.0% -2.6%

Comparable store sales4

…over the long term, but increased competition and a price reduction strategy has led to 4 quarters of decreasing comparable same store sales and decreasing margins2,3

• Consistent long term sales growth• Revenues from $93 million in FY 1991 to $15.4

billion in FY 20151

• A compounded growth rate of ~ 24% over 24 years1

Whole Foods Market “…superior in-store experience and reputation for quality, ultimately giving Whole Foods some pricing power (as evidenced by high store productivity and margins).”3

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External Factors Analysis Summary – EFAS Table

External Strategic Factors Comments/Rationale/Data

Whole Foods Market faces 4 external opportunities and 4 external threats

Opportunities1. Growing global demand2. High availability of global supply3. Increasing demand for low cost organic food in the U.S.4. Demand for prepared foods increasingThreats1. Other organic grocers2. Low cost providers3. Consumer trends and government intervention4. Economic change

Opportunities1. Global demand for organic food increasing at a higher rate than U.S. demand2. Many large markets for organic food supply outside of the U.S., and U.S. organic supply growth is not keeping up with demand3. Growth rate for organic food in the U.S. is more than double the growth rate of all food, and demand for lower costs is increasing.4. Fresh prepared food is the fastest growing segment in grocery stores

Threats1. Sprout’s and Trader Joe’s continue to grow and will provide more competition 2. Wal-Mart and Costco are growing their organic business3. Government regulations could cause industry disruptions4. The economy has a direct correlation with the organic industry and, in particular, Whole Foods

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• Global organic food market is projected to have a compound annual growth rate of over 16% from 2015 – 2020 1

– Drivers include growing health concerns, increasing awareness of the health benefits from organic food, increasing income levels, improving standard of living, and government initiatives aimed at encouraging widespread adoption of organic products

• Currently, Whole Foods has 436 stores in the U.S. and 20 stores outside the U.S.- 11 in Canada and 9 in the U.K. 2

– International sales account for 3.3% of total revenues for the company

– International revenues have a higher compounded annual growth rate (CAGR) than the CAGR of U.S. revenues (14.74% vs. 11.96%, respectively)

The first external opportunity presented to Whole Foods is a growing global demand for organic food

1. http://www.prnewswire.com/news-releases/global-organic-food-market-to-grow-at-over-16-by-2020-concludes-techsci-research-523104261.html

2. www.wholefoodsmarket.com/stores/list/development3. https://www.statista.com/chart/3681/organic-retail-sales-value-by-country/

Currently only operating in 3 of the top 12 country markets for organic food

Global Organic Food Growth > US Organic

Food Growth

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The second external opportunity presented to Whole Foods is high availability of global supply

1. http://www.wsj.com/articles/can-organic-food-feed-the-world-14367570462. https://www.weforum.org/agenda/2015/08/which-countries-have-the-most-organic-agricultural-land/3. http://www.businessinsider.com/10-states-consuming-most-of-organic-food-supply-2015-10

• Demand is growing more than supply in the U.S. 1

• In the U.S., 80% of total organic sales were within 500 miles of the farm 3

• It is important to have supply in every market that retail stores exist

• There are already millions of small and midsize organic farms world-wide 1

• Argentina and Australia currently have more organic agricultural land than the U.S. 2

U.S. Demand Growth > U.S. Supply Growth

1

2

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• Organic food sales continue to grow in the U.S. at around 10-12% annually 1

– This growth rate is more than double the annual growth rate forecast for all food sales

–

• Millennials are a large driver in the future growth of the organic food market 2

– Millennials are willing to pay for fresh and healthy food, and are willing to go to great lengths to find it

– Millennials have much less brand loyalty, and want to buy organic food at the cheapest price they can find

The third external opportunity presented to Whole Foods is an increasing demand for lower cost organic food in the U.S.

1. http://www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=59894&ref=collection&embed=True2. http://www.forbes.com/sites/bethhoffman/2012/09/04/how-millenials-are-changing-food-as-we-know-it/#65166df2339d

Organic food sales growing at 2x the rate of total food sales

Millennials want organic food, but will buy the option with the lowest

cost

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•Customers (Millennials, in particular) are buying more prepared, on-the-go meals for convenience, but also want fresh, healthy options. 1

– The number of consumers who at least somewhat agree that frozen dinners have little nutritional value increased 20% over the past 10 years 3

•Prepared food is the fastest growing segment in grocery stores, according to research firm Datassential. 1

•Fresh prepared foods sales are expected to continue to grow quickly 2

•Over half (57%) of shoppers are currently buying fresh ready-to-eat items 3

The fourth external opportunity presented to Whole foods is an increasing demand for fast and healthy prepared foods

1. http://www.chicagotribune.com/business/ct-grocery-conference-0622-biz-20160621-story.html2. https://www.atkearney.com/documents/10192/2916201/Fresh+Prepared+Foods-Cracking+the+Code+for+U+S++Retailers.pdf/aa2a3c6f-1ea1-444d-b22f-bf87c1ab84cb3. http://www.ift.org/food-technology/past-issues/2015/april/features/the-top-ten-food-trends.aspx?page=viewall4. http://www.preparedfoods.com/articles/118089-foodservice-vs-grocery-sales

5–6%

3–4% 3–4%

2–3%

0–1%

Sales growth in select U.S. food and beverage segments 2

Retail grocery food and beverages

Fresh PreparedFoods

Food service

6–7%

2007-2102

2012-2107

Meal at home

Restaurant meal

Carry-out

Drive-through

Grocery prepared

foods

0 10 20 30 40 50 60 70 80 90 100

Top 5 Methods of Food Consumption 4

Percentage

57% of people buying prepared foods

Prepared Food Sales Increasing

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Product Whole Foods Trader Joe's Difference

Lettuce $1.99 $1.99 $0.00

Yogurt $3.19 $3.19 $0.00

Milk $3.99 $2.29 $1.70

Almond Milk $3.69 $2.99 $0.70

Orange Juice $2.99 $2.29 $0.70

Cheese (Gouda) $5.33 $2.99 $2.34

Sliced Cheese $4.99 $3.99 $1.00

Sliced Turkey $6.99 $3.29 $3.70

Butter $3.49 $2.99 $0.50

Eggs $3.49 $1.49 $2.00

Ice Cream $6.85 $5.99 $0.86

Frozen Broccoli $1.69 $1.49 $0.20

Frozen Pizza $3.99 $4.49 -$0.50

Peanut Butter $2.49 $1.99 $0.50

Almonds $7.99 $6.49 $1.50

Oatmeal $3.19 $2.49 $0.70

Pasta $1.09 $0.99 $0.10

Olive Oil $6.99 $5.99 $1.00

$17.00

Whole Foods vs Trader Joes Price Comparison7

Total Difference

The first external threat facing Whole Foods is strong competition from other organic grocers

2013 2014 20152013 to 2015

% Change

# of Sprouts 167 191 217 130%# of Whole Foods 367 399 431 117%Sprouts Sales (millions) $2,438 $2,968 $3,593 147%Whole Foods Sales (millions) $12,917 $14,194 $15,389 119%Sprouts Income (millions) $51 $108 $129 151%Whole Foods Income (millions) $551 $579 $536 -3%

Sprouts vs. Whole Foods Growth Rate4

Sprouts vs. Whole Foods• BL: Sprouts is growing faster than Whole Foods• Sprouts is about one half the size of Whole Foods• Sprouts employs a strategy of lower margins on produce and meat, while

maintaining higher margins on boxed goods2

• Sprouts customers spend $28 per trip on average; compared to $31 from other supermarkets2

• Lower prices are attracting consumers that would otherwise not shop organic 4

Trader Joe’s vs. Whole Foods• BL: Trader Joe’s outsells Whole Foods on a store-to-store basis• Trader Joe’s has 453 stores to Whole Foods 436 U.S. stores• Trader Joe’s strong sales model maximizes sales per square foot

• Almost double sales/sq. ft. than Whole Foods• “Whole Foods, whole paycheck” has hurt the retailers image• Trader Joe’s offers comparable products at lower prices

• Produce products are especially noticeable

Sprouts is growing faster than Whole Foods

Sales per square footTrader Joe’s has the industry’s highest

Sprouts is growing sales faster

Sales / Sq Foot 2013 2014 20152013 to 2015

% Change

Sprouts $531 $565 $602 13%

Whole Foods $925 $936 $916 -1%

Sprouts vs Whole Foods Sales / Sq Foot4

Whole Foods made one mistake that blew the door open for competitors: not doing enough to shed its expensive, “Whole Paycheck” image1

1. http://www.businessinsider.com/whole-foods-biggest-problem-2015-52. http://www.bloomberg.com/news/articles/2014-08-20/sprouts-fights-whole-foods-putting-organic-kale-on-sale3. http://www.fool.com/investing/general/2016/03/25/whole-foods-vs-sprouts-farmers-market-which-is-a-b.aspx4. http://seekingalpha.com/article/3978549-whole-foods-market-investors-switch-sprouts5. http://www.businessinsider.com/trader-joes-sales-strategy-2014-106. http://www.forbes.com/sites/brandindex/2015/08/06/whole-foods-perception-still-negative-after-overcharging-accusation/#5b5807223a7d7. http://www.businessinsider.com/i-compared-the-price-of-whole-foods-365-items-to-trader-joes-heres-what-i-found-2016-2/#pasta-23

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The second external threat facing Whole Foods is low cost providers

1. http://www.slideshare.net/SherriHansell/whole-foods-market-brand-audit2. http://www.takepart.com/article/2015/05/29/americas-new-leader-organics-might-not-be-who-you-think3. https://www.thestreet.com/story/13398283/1/the-single-biggest-reason-kroger-is-destroying-whole-foods.html4. http://fortune.com/2015/10/28/kroger-natural-organic-food/5. Credit Suisse 2 Aug 16 Whole Foods Market Analyst Report

Sam’s and Target continue to add organic options to their grocery lines.

Wal-Mart draws customers from its everyday low price guarantee.

As of 2015, Costco officially sells more organic products than Whole Foods. Total revenue is expected to exceed $4 billion in 2015. ₂

• Traditional grocery stores are adding more organic items at a good pace• Stores offer both organic and non-organic options

• Every Day Low Price retailers, such as Wal-Mart are creating a greater stir• Lower costs mean lower margins and profitability• Provide greater opportunity to sell organic due to

increased visits (they sell everything)

₁

“Whole Food’s price premium on a basket of items…versus conventional grocers increased during the 4th quarter to 29.4% from 28%...”3

Kroger’s natural and organic sales top $11 billion4

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The third external threat facing Whole Foods is consumer trends and government intervention towards GMOs

1. http://www.wsj.com/articles/organic-vs-non-gmo-labels-whos-winning-14496191182. http://sandiegofreepress.org/2012/08/why-a-major-food-organization-is-teaming-up-with-monsanto-and-friends-to-block-your-right-to-know-whats-in-your-food/

Non-GMO products are more important to consumers than products being labeled as organic. Spending on Non-GMO surpassed organic sales in 2015.

Special interest groups, such as the Non-GMO project, are trying to push for labeling requirements mandated by the federal government. Several attempts to vote for GMO labeling laws have been unsuccessful, but how long before that changes?

₁ ₂

• Future costs and availabilities of products could lay in the hands of the government• Many are pushing for more government intervention in

labeling requirements• If government regulations pass, labeling would be

mandated for all non-GMO products

• Mandated labeling requirements would cause price increases for products• In addition, production would be reduced and

competition would tighten• Whole Foods would have to label foods with GMOs or

get rid of them altogether• Either option would be expensive

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The fourth external threat facing Whole Foods is economic change limiting future growth

1. http://www.ers.usda.gov/amber-waves/2013-october/growth-patterns-in-the-us-organic-industry.aspx#.V-H2SygrKhc2. http://www.bloomberg.com/news/articles/2015-05-14/whole-foods-walmart-costco-steal-growth-in-organic-groceries

₂

₁

• The US economy has a strong correlation with the growth of the organic market

• During the recession of 2009, dropped from over 15% to just under 5%

• Whole Foods noticed a stronger decrease in same store sales

• After the recession, the organic industry has failed to break 10% growth

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Internal Factors Analysis Summary – IFAS Table

Internal Strategic Factors Comments/Rationale/Data

Whole Foods Market has 4 internal strengths and 4 internal weaknesses

Strengths1. Personnel2. Procurement3. Management4. Strategic Planning

Weaknesses1. Declining Profit Margin2. Product & Process Improvement3. Advertising4. Pricing

Strengths1. Whole Foods’ empowered and happy employees increase productivity and enable high customer service2. By leveraging its brand name, Whole Foods has a strong procurement system3. Whole Foods’ senior executive team has steered the company with excellent results4. Whole Foods has an effective growth strategy

Weaknesses1. Whole Foods store sales are dropping2. After an inspection, Whole Foods has had several FDA violations3. Whole Foods lacks recognizable advertising4. Whole Foods is struggling to price its products effectively

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We Support Team Member Happiness and Excellence- Whole Foods Market core value1

Empowered & Self-directed store teams3

• Encourages competition and collaboration

• Set sales, growth, and productivity goals

• Final say in new hires

The first internal strength for Whole Foods is their empowered and happy employees

Whole Foods Market employee happiness

Egalitarian culture1

•Financial transparency & Executive pay capped at 19 times average worker salary•Gain sharing awards and benefits

Mission aligns with personal

beliefs2

1. Whole Foods Market 2015 Annual report2. Fortune’s 100 Best Companies to Work For 2016, http://fortune.com/best-companies/whole-foods-market-75/3. Whole Foods Case Study: A Benchmark Model of Management For Hospitality http://www.hospitalitynet.org/news/4059396.html4. In her book “Make More Money by Making Your Employees Happy.” Dr. Nelson cites a study from the Jackson Organization, a survey research consultancy5. How to Increase Productivity by Employee Happiness, http://www.forbes.com/sites/martinzwilling/2014/12/02/how-to-squeeze-productivity-from-employee-happiness/#3fc187df1de5

Whole Foods Market has been one of Fortune Magazine’s “100 Best Companies to Work For in America” 19 years straight, and one of only 12 companies to make the “100 Best” list every year since its inception.1,2

Happy Employees = Better Customer Service

Whole Foods believes full-time voluntary turnover “is very low for the food retailing industry and allows us to better serve our customers”1

Happy Employees = Productive Employees• “Companies that effectively appreciate employee value enjoy a return on equity & assets more than triple that experienced by firms that don’t. When looking at Fortune’s ’100 Best Companies to Work For’ stock prices rose an average of 14% per year from 1998-2005, compared to 6% for the overall market.”4

• “…big value from happy employees…an analysis of hundreds of studies showing an average of 31% higher productivity, 37% higher sales, with creativity three times higher.”5

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The second internal strength for Whole Foods is its strong local, regional, and national procurement system

1. Morningstar Equity Analyst Report, Whole Foods Market, 26 Aug 2016 4. https://www.entrepreneur.com/article/2245772. Whole Foods Market 2015 Annual report 5. https://www.thebalance.com/melt-organic-knows-how-to-sell-to-whole-foods-13263313. www.wholefoodsmarket.com

“…Whole Foods has ample negotiating leverage since its brand equity, and not that of a supplier or a supplier's product(s), is the primary driver of traffic and excess returns.”1

National and Regional Procurement•“The majority of procurement…(in order) to maximize volume discounts and provide fresh food”1

– United Natural Foods, Inc. (UNFI) is largest supplier1

• 32.0% of 2015 total purchases 20152

• Long-term distribution agreement through 20252

“Commitment to Local” Procurement2

•Over 6,500 local vendors3

•About 24% of produce2 •Actively seeking and supporting local vendors to diversify supplier base1,2

– Local foragers across nation3

– Local producer loan program dispersed $18M to 235 locals producers since 20072,3

– Must meet Whole Foods’ quality standards2,3

To some entrepreneurs,

the ultimate accomplishment

is snagging a spot on the shelves of

Whole Foods Market4

For producers, “Whole Foods is perceived as the "Holy Grail" in the

natural foods business.”5

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Morningstar assigns Whole Foods an Exemplary stewardship rating1

•Management's capital-allocation policies1

•The firm has been able to reinvest cost savings into lower prices, which improve its price perception1

•Wild Oats acquisition has proved to be value-accretive to shareholders1 •Management's decision to pilot a small-store concept…is prudent because the firm must address competition from low-priced competitors1

The third internal strength for Whole Foods is its strong senior executive team

1. Morningstar Equity Analyst Report, Whole Foods Market, 26 Aug 20162. Whole Foods Market 2015 Annual report3. http://www.hospitalitynet.org/news/4059396.html4. http://www.statesman.com/news/business/employment/at-whole-foods-team-management-goes-all-the-way-to/nRyBq/

“…a tightknit team of five senior executives have

functioned as a sort of CEO committee, collectively making decisions on

strategy, finances and other company matters…their style of leadership is an

outgrowth of the company culture…” 3Whole Foods Egalitarian company culture exemplified

by management•Senior executive compensation is below traditional grocery operator industry peers, despite much better performance. 1

•In 2007, Mackey voluntarily reduced his annual salary to $1 and elected to forgo any future bonus and stock option awards. 1

•For the other senior executives, annual salaries are capped at 19 times the company's average annual wages. 2

“…if we want to optimize trust then we must optimize transparency” 4 – Co-CEO Mackey

Whole Foods is an example of Conscious Capitalism“Whole Foods has inspired the Collective Management thesis, and practice…”3

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Measurable progress on strategic initiatives1:•Instacart partnership offering fresh grocery delivery to more U.S. homes than any other food retailer•Leading Apple Pay retailer, in both transactions and sales•Implementation of Workday for online HR management •Initial rollout of our new, unified point of sale system•Pilot of our Affinity program in Philadelphia

The fourth internal strength for Whole Foods is its effective strategies

1. Whole Foods Market 2015 Annual report2. http://www.fool.com/investing/2016/09/09/back-to-school-with-return-on-invested-capital-101.aspx 3. http://www.wsj.com/articles/whole-foods-works-to-reduce-costs-and-boost-clout-with-suppliers-144. http://www.wsj.com/articles/todays-top-supply-chain-and-logistics-news-from-wsj-14556215535. http://fortune.com/2015/10/14/whole-foods-retail-software/

Supply Chain Efficiencies: In progressConsolidating 12 cumbersome inventory-management systems into one3 •Cloud-based system will

– Automate item tracking, re-stocking, ordering3

– Enable traceability of product3

– Centralize some product decision making to lower costs4

• Meat and eggs procurement decisions already centralized3

• BL: Supply chain management will leap-frog competition5

Our strategy revolves around leading a race to the top in terms of a differentiated customer experience: continuing to raise the bar on quality and selection, providing new levels of transparency and accountability, and leveraging technology to deliver an improved shopping experience.1

Growth Strategy: EffectiveTo ensure continued growth and to address competitive environment, added:•Value strategy: Price reduction strategy to offset competition in organic food1

– Hurting margins in short term to retain market share1

•New store format: Makes sense from a capital and high ROIC (~13%) perspective2:

– In house brand offers competitive pricing– Smaller footprint allows openings in more locations– Cheaper to build & maintain than current stores– Effective replenishment technology enables less labor

Pricing and convenience

•Launch of our new mobile app•New capital allocation strategy•Introduction of a new labor scheduling tool

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•So far for 3rd Quarter 2016, store sales are down 2.4%1

•In 2015, Whole Foods sought to cut 1,500 jobs in order to bring down costs2

– Jobs that were being cut were regional and store positions– No positions within Headquarters were eliminated

•In an effort to reduce prices, as competition has increased from other grocery stores, Whole Foods Market has offered discounts, slashed prices, and perhaps launching a pilot loyalty program1

– Loyalty Program would create 10% discount on its "365" private-label brand items.3 

The first internal weakness facing Whole Foods is recent declining profit margins

•http://wwwwsj.com/articles/whole-foods-profits-falls-sales-slip-1469656674•http://www.wsj.com/articles/wholefoods-to-cut-1-500-jobs-1443442644•http://www.fool.com/investing/general/2013/12/23/3-potential-strategy-tweaks-for-whole-foods-in-201.aspx

Whole Foods Market is slashing prices to more effectively compete with

other grocers.

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•In February 2016, the FDA found "serious violations" in a Whole Foods Market food manufacturing facility in Massachusetts2

– "Your firm failed to manufacture, package, and store foods under conditions and controls necessary to minimize the growth of microorganisms and contamination as required by 21 CFR 110.80 (b)(2).“1

– "Your firm failed to maintain equipment in an acceptable condition through appropriate cleaning and sanitizing as required by 21 CFR 110.80(b)(1)."1

– "Your firm failed to sanitize and thoroughly dry, prior to use, food-contact surfaces which have been wet cleaned as required by 21 CFR 110.35(d)(1)."1

– "Your firm failed to take proper precautions to protect food and food-contact surfaces from contamination with chemicals, filth, and extraneous materials due to deficiencies in plant design as required by 21 CFR 110.20(b)(2)."1

– "Your firm's hand-washing facilities lack running water of a suitable temperature as required by 21 CFR 110.37 (e)."1

– "Your firm failed to properly identify toxic sanitizing agents in a manner that protects against contamination of food as required by 21 CFR 110.35 (b)(2)."1

The second internal weakness facing Whole Foods is FDA violations

•http://www.fda.gov/ICEEI/EnforcementActions/WarningLetters/2016/ucm506089.htm•http://www.wsj.com/articles/whole-foods-must-clean-up-its-act-fda-says-1465936379

Whole Foods had 6 serious FDA violations

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•While Whole Foods Market does utilize a brand campaign, it is not widely known or recognized. Whole Foods partnered with Partners & Spade, a New York-based company1

– Launched in 4th Quarter 2014, their advertising theme is “Values Matter”. Primarily digital ads, television, and print. Ads seek to focus on the impact and origins of the company’s products along with the standards behind them. 1

•Television ads targeting mainly prime time and late night television shows such as “Modern Family” or “Saturday Night Live”

The third internal weakness facing Whole Foods is a lack of recognizable advertising

1.http://media.wholefoodsmarket.com/news/whole-foods-market-launches-first-ever-national-brand-campaign

Whole Food's Market's advertising theme is

"values matter", emphasizing the

company's high standards.

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The fourth internal weakness facing Whole Foods is its high product pricing

•http://www.fool.com/investing/general/2014/07/14/analyzing-whole-foods-markets-strengths-weaknesses.aspx•http://www.fool.com/investing/2016/08/31/will-whole-foods-markets-new-loyalty-program-make.aspx•http://www.businessinsider.com/whole-foods-prices-compared-to-kroger-2015-11

- Whole Foods Market has taken strides to counter their “whole paycheck” reputation, but they’re still suffering from their 3rd consecutive quarter of declining same-store sales.1

- Management has admitted they’ve invested in the wrong mix of products and as a result, were forced to decrease their gross margin expectations from 36.4% to 34-35%.2

Whole Foods has reduced the gap in some of their products pricing.

Whole Foods vs. Kroger Basket Cost Comparison3

27

Potential Strategiesand

Recommended Strategies

28

Potential and Recommended Strategies, and a ‘Wild Idea’

Based on the EFAS and IFAS analyses, we have identified 15 potential strategies and a ‘wild idea’…

1. Expand stores into Western Europe

2. Expand supply/stores into Australia

3.  Increase amount of 365 stores in downtown areas

4. Focus on healthy fully prepared foods in 365 stores

5. Daily ready to cook meals (all fresh ingredients with recipe) 

6. Improve customer loyalty program

7. Expand targeted advertising audience

8. Host proper food preparation classes

9. Host healthy cooking classes

10. Centralize some purchasing decisions

11. Marketing campaign highlighting product differentiation

12. Marketing campaign highlighting local products

13. Marketing campaign highlighting organic and non-GMO selection

14. Gas station/convenient store

15. Offer free personal shopping assistant for first couple visits

16. Wild Idea – Deliver food and meals via drone

…and we recommend 4 of these strategies for implementation

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Key Components - Ready to Cook Fresh Meals•Recipe and all fresh, organic ingredients ready to cook in one convenient package•Ready for easy pick-up in all stores (Regular and 365 Stores)

– Especially targets Millennials / young professionals who can pick up meals quickly on their way home from work

– Each meal feeds 2 people•Different meal every day

– Vegetarian and Paleo recipe versions available•Recipes crafted by experienced chefs, specifically hired by Whole Foods for the meal plan service

– Key focuses include taste, nutrition, variety and short prep-time•Short meal preparation times (30 minutes or less)•No commitment or membership, can use the service on an as-needed basis

The key components of the ready to cook fresh meals strategy include meal of the day options and are ready to pick up in stores

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Benefits:• Capitalizes on the growing market for

prepared foods and fast, fresh organic meal options

• Already have the food supply and distribution in place, which could give them price and supply chain advantages over competing meal services

• High quality and brand recognition will give them a competitive edge

• No delivery fees will keep costs lower• Less wasteful than other services

– Extra ingredients from the day can be re-used in future meals

– Customers will use on an as-needed only basis, and won't get a set amount delivered weekly to their house, which they may not end up making

– Less packaging waste than current meal services in the market

…which present several benefits and risks to Whole Foods Market

Risks:• Increasing competition in this area of

business• Pressure to provide low prices

– Many existing competitors do not provide 100% organic ingredients or very high quality ingredients, allowing for lower, more attractive price

• May require increasing the amount of stores (especially in/near downtown areas) to increase coverage of the service

Key Benefits and Risks - Ready to Cook Fresh Meals Strategy

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Key Components of improve customer loyalty program•Featured items on sale every week and every day

– Vitamins & supplements, meat & seafood, produce•Customers can shop at either Whole Foods Market or 365 stores•Customers must download the app to receive current sales and deals

– App will target items which the customer frequently purchases for sales•No fee for enrolling in the loyalty program or app•Increase same-store sales•Capitalize on customer loyalty by personalizing the shopping experience

The key components of the improved customer loyalty strategy includes a mobile app and real time alerts to customers about current sales

32

Benefits:• Attract new customers, who might

otherwise avoid Whole Foods• Reward existing customers and

encourage continued shopping• Generate increased data for Whole

Foods about their customers likes and dislikes– Whole Foods will see which

promotions are effective and which aren't

• More personalized shopping experience for all customers

• Inexpensive to implement• Increase same-store sales

…which present several benefits and risks to Whole Foods Market

Risks:• Many competitors already provide

lower costs on similar products• Would require customer to use app

to receive discounts and earn their rewards

• Will be more complicated than setting uniform sale prices

Key Benefits and Risks of improve customer loyalty program

33

Key Components of gas station/convenience store•Gas stations will cater to alternative fuels such as electric, natural gas, and hydrogen

– Moderately high margins from the early adoption of alternative fuels will help establish profitability and help pay down debt for brick and mortar locations

•Ethanol fuel (sold as E85, etc.) will be offered to draw in as many clients as possible•Convenience store will take on a healthy alternative

– Organic snacks and foods will be sold throughout the store– Cold and hot beverages will be offered (organic teas, coffees, sodas, and beer)

•Ready to Cook (RTC) meals will revolutionize the way meals are prepared for healthy adults

– An assortment of RTC meals will be available at the convenience stores• The meals will be delivered from stores daily

– Customers will be able to customize dinners from their computer• Customized meals will be sent to the gas station for retrieval.

The key components of the gas station/convenience store strategy include alternative fuels and ready to cook meals

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Benefits:• Early adoption – quicker ROI than

traditional brick and mortar stations• Boost image as true all-natural

supplier• Cater to most vehicles, which will

bring prestige• RTC meals will provide a strong

revenue stream– Will bring others to stores through

RTC program• High snack and beverage prices will

help fund store ROI• Greater customer loyalty through

fuel points

…which present several benefits and risks to Whole Foods Market

Risks:• High startup costs• Adoption phase could be slower

than anticipated• RTC meals might not catch on• Snack foods and beverages sales

could be lower than normal convenience stores– Healthier people might not be impulse

buyers• Economic downturn could cause a

slow in spending– In turn, sales of new cars and those

that utilize alternative fuels could slow 

Key Benefits and Risks of gas station/convenience store

35

Key Components of Strategy deliver food and meals via drone•Customers order online, mobile phone is preferred method•Drone delivers to customer’s home or direct to mobile phone location•Fast delivery, 30 minutes or less for meals 1 hour or less for groceries•Meals can be ready to eat or ready to cook•Deliveries can weigh up to 55 lbs.•Drones via 3rd party (Instacart) or in house. If in house:

– Relatively low-cost/low-maintenance fleet– Battery powered drones emit no exhaust– No manpower dedicated to driving vehicles

•Customers liberated from tipping

The key components of the deliver food/meals via drone strategy include easy, fast and environmentally friendly delivery

36

Benefits:• Increased sales of high margin

prepared meals• Consistent with customer store

experience• Consistent with environmentally

friendly culture• Lower total shipping costs than

currently (Instacart)• Customers greater than a few miles

from store more likely to use drone than competitor for small purchases

• Positioned to grow share of grocery delivery market in established markets

…which present several benefits and risks to Whole Foods Market

Risks:• Federal, state and local regulations• Damage Instacart relationship with

its market penetration• Customers lose touch with in store

experience• Fewer impulse purchases• Liability associated with drone

crashes• Losses due to cyber and physical

attacks

Key Benefits and Risks of deliver food and meals via drone

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Ready to Cook Meal - Action Plan and Costs

The ready to cook meal strategy will take 18 months and cost approximately $7.7m to implement…

Item Description Item Owner Duration Units Start Date End Date Estimated Cost ReferenceEstablish team for research and implementation CMO 3 Months 1/1/2017 4/1/2017

- Six members to perform research on an ongoing basis 12 Months 1/1/2017 1/1/2018- 6 members at ave salary of $75k, 3 hrs daily, $675 per day 12 Months 1/1/2017 1/1/2018 $168,750

- Employ consulting firm to conduct surveys CMO 3 Months 2/1/2017 3/1/2017- Average cost of each survey = 10,000, 5 surveys 3 Months 2/1/2017 3/1/2017 $50,000

Create development team to report to COO COO 1 Months 1/1/2017 2/1/2017- Hire full-time Chef to develop recipes 1 Months 1/1/2017 2/1/2017

- 1 full-time chef at $57,000 annually 1 Months 1/1/2017 Ongoing $57,000 Website 1- Hire a full-time dietition with specialization in organic 1 Months 1/1/2017 2/1/2017

- 1 full-time Dietition at $67,000 annually 1 Months 1/1/2017 Ongoing $67,000 Website 2Lease test kitchen for R & D COO 12 Months 2/1/2017 5/1/2017

- Maintain kitchen, utilities, etc. 12 Months 2/1/2017 5/1/2017 $120,000 Website 3Marketing team to establish advertising program CMO 3 Months 5/1/2017 8/1/2017

- Local TV ads, 3 ads/wk, 3 months, $5,000/ad 3 Months 5/1/2017 8/1/2017 $180,000 Website 4- Internet ads, $1.50 pay/click, 3 months, $5,000 per month 3 Months 5/1/2017 8/1/2017 $15,000 Website 5

IT for App and Website upgrade CIO 12 Months 2/1/2017 Ongoing- IT to establish online ordering for customizable meals and interactive recipes 12 Months 2/1/2017 Ongoing

- 4 IT personell at $85k, 8 hrs, 6 mo, $1,360 per day 6 Months 1/1/2017 6/1/2017 $170,000- 1 Videographer for interactive recipes videos at $41k, 4 hrs, 3 mo, $680 per day 3 Months 1/1/2017 4/1/2017 $5,125 Website 9

- IT for App to establish reward program and in store purchase 3 Months 2/1/2017 5/1/2017- 2 IT personell at $85k, 4 hrs, 3 mo, $680 per day 3 Months 2/1/2017 5/1/2017 $21,250

Store Operations include one person for packaging of goods COO 3 Months 8/1/2017 Ongoing- Implementation will start in 20 traget stores 3 Months 8/1/2017 11/1/2017- One employee at $9/hr, 4 hrs, 20 stores, $720/day 3 Months 8/1/2017 11/1/2017 $60,480 Website 6

Reporting and Analytics CFO 12 Months 7/1/2017 Ongoing- 1 analyst to run reports on performance to goals (revenue, turns, etc.) 12 Months 7/1/2017 Ongoing

- Analyst salary $55k, 4 hrs/wk, $125 per day 12 Months 7/1/2017 Ongoing $55,000 Website 7- Reports will be used to monitor weekly and monthly ROI 12 Months 7/1/2017 Ongoing

After test is completed and if results are favorable, presented to CEO for approval CMO/CFO/COO 1 Months 11/1/2017 12/1/2017Expansion of program to all domestic stores 12 Months 12/1/2017 OngoingContinue aggressive marketing compaign CMO 7 Months 12/1/2017 6/1/2018

- National TV ads, 3 ads/wk, 3 months, $112,000 7 Months 12/1/2017 6/1/2018 $4,032,000 Website 8- Internet ads, $1.50 pay/click, 3 months, $5,000 per month 7 Months 12/1/2017 6/1/2018 $15,000 Website 5

Store Operations include one person for packaging of goods COO 12 Months 12/1/2017 Ongoing- One employee at $9/hr, 4 hrs, 431 stores, $25,860/day 12 Months 12/1/2017 Ongoing $5,647,824 Website 6

Total $10,664,429

1. http://www.payscale.com/research/US/Job=Executive_Chef/Salary2. http://www.nutritionist-world.com/nutritionist_salaries.html#texas3. http://smallbusiness.chron.com/estimated-cost-commercial-kitchen-small-business-74630.html4. http://smallbusiness.chron.com/much-television-advertising-really-cost-58718.html

5. https://www.hochmanconsultants.com/cost-of-ppc-advertising/6. http://www.payscale.com/research/US/Job=Retail_Sales_Associate/Hourly_Rate7. http://www.payscale.com/research/US/Job=Data_Analyst/Salary8. http://adage.com/article/news/costs-ad-prices-tv-mobile-billboards/297928/9. http://www.payscale.com/research/US/Job=Videographer/Salary

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Ready to Cook Meal Strategy - Key Implementation Considerations•Customer Survey considerations

– What company should we use for survey and demographic information?– Should we test more than taste preferences? Delivery preferences? Prep-time preferences?– How will we evaluate and respond to customer feedback?

•Process considerations– Delivery

• Should we add delivery options on top of in-store pick-up once the strategy gains momentum? If so, what would the additional costs for packing and shipping be?

– Product Procurement• Need to continue to support quality and “buy local” initiatives for all ingredients

– Packaging• Cost of different packaging methods• Use sustainable and recyclable packaging in line with Whole Foods' values• As demand grows, will we need to hire more employees to assist with packaging?

– Technology• Website and App enhancement for meal ordering, incentive program and interactive recipes

•Facility considerations– Will we need more space for storage, pick-up and displays?– What pick-up location makes the most sense (i.e. self-serve display, prepared food counter)?

…and there are several key implementation considerations that must be addressed for the ready to cook meal strategy to be successful

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Ready to Cook Meal Strategy - Financial and Customer Measures

Success of the ready to cook meal strategy will be assessed through financial and customer measures…

1. Whole Foods Annual Report 20152. http://www.businessinsider.com/whole-foods-foot-traffic-falls-2016-53. https://www.wholefoodsmarket.com/wfm-rewards

Measurement Area Baseline TargetFinancial 1 • Increase Revenue from $15.4b (2015) 1

• Increase Net Income from $536m (2015) 1

• Increase Total ROIC from 13.45% (2015) 1

1 Year Target• Increase Revenue by 4% ($15.9b)• Increase Net Income by 3% ($552m)• Increase Total ROIC to 15.0%

Customer 2,3 •As of 2q16, store transactions are down 2.1%, the third consecutive quarterly decrease in transactions2

• Whole Foods does not currently have a mechanism to track Brand Loyalty3

• Whole Foods Rewards in in pilot test3

• Add meal reward incentive tied to App4

• Add in store purchase capability to App4

• Track impulse purchases associated with meal pick up

• Increase transactions 4%• Transaction reports reviewed

monthly by store

• Repeat shoppers increased 10% in first year• 20,000 app downloads• Online/App meal orders 30/day per

store• 50 customers per store actively

using meal reward incentive• 10% of mobile payments via App• Impulse purchases average $5 per

meal pick up

4. http://www.wholefoodsmarket.com/apps

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Ready to Cook Meal Strategy - Business Process and Innovation and Learning Measures

…as well as through business process, and innovation and learning measures

1. Whole Foods Annual Report 20152. www.wholefoods.com 3. http://www.wholefoodsmarket.com/apps

Measurement Area Baseline TargetBusiness Process1,2,3 • 456 stores globally, with 38 new store

openings in 2015 & 30 in 20161

• Website offers limited ordering and non-interactive recipes2

• App offers coupons, non-interactive recipes, and shopping lists2,3

• App does not allow in store purchases or meal selection3

• Website and App do not track meal purchases for incentive2,3

• Website and App have no interactive recipes2,3

• Increase new store openings to 45/yr• Including main and 365 stores, with

a focus in 365 stores• Website hits increased 10%

• Online meal ordering available• 8 new interactive recipes monthly

• Accessed 50% more often• App allows in store payment and tracks

meal incentive program• 75% of ready to cook meals

purchased via App• 10% of mobile payments via App

Innovation and Learning Factors limiting innovation and learning:• Prepared Food teams success/

complacency• No customer satisfaction assessment tool

• No customer loyalty program• Customers demanding lower priced

products• Limited marketing

Focus on the following key initiatives to sell ready to cook meals:• Prepared Foods teams 100% trained:

• Add RTC meal product line• Meet RTC meal demand

• Customer product feedback via Website/App star rating• RTC meals, recipes, etc.

• Customer loyalty program w/incentives• RTC meal metrics• Coupons and rewards

• Targeted marketing

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The projected ROI of the ready to cook meal strategy is 200%

48840

19,520

$20$390,400

15%$3

$58,560$21,374,400

$10,664,429

200%

Average margin per meal

Number of Stores (2017 estimate)Daily number of meals per storeTotal meals per day

Average revenue per mealTotal revenue per day

Total margin per meal

Total daily marginAnnualized total margin

Total Cost of Implementation

Return on Investment