Future Directions of Whole Foods Markets, Case Study Example

The organic and natural food movement has come a long way since James Stewart comically tried to avoid working in the business in the 1941 movie Pot o’ Gold. We can expect it to go further still as more and more traditional grocery shoppers see their Vons and Ralphs stores try to bring an increasingly organic, specialty store ambience to their produce sections; as  more produce clerks solicitously ask their customers whether they need help in finding anything there (a level of care not usually encountered in the aisles); and as (in the case of Vons) hardwood floors are brought in to lend an implied fresh-off-the fields, warehouse-seeming atmosphere.

That last point is not necessarily a trivial one. Increasingly (and in contrast to its serious rival Trader Joe’s) WFM has been seen by its customers as a big-box store. This is of course a fundamental change in perception, and not a particularly good one. The future direction of WFM may be put in a nutshell by asking what, if anything, WFM is prepared to do, should do, or can do to fight that perception: shall it change its substance or its appearance?

Market Position

I will begin by summarizing the present competitive position of WFM in the retail grocery industry. It says a lot about WFM that it is a player outside of the organic and natural foods market-segment of the grocery industry; that is, it is a competitor not only to expected chains like Trader Joe’s, but to Costco, Kroger, Safeway, and Walmart as well. WFM has very little debt and many view it as best-positioned to exploit the expected growth of premium foods in an increasingly international market, especially since WFM tailors its stock to each store’s locale. Barring a collapse of the European Union and attendant economic chaos that would result, Whole Foods earnings are expected to grow 17% annually over the next five years (Seghetti, 2012). However, this sanguine view is not universal. Some view that the current stock-price range implies an unsustainable valuation premium, indicating an overly optimistic stock market projection of the company’s future. We should expect some short-selling if the price goes much higher (“Why you should,” 2012).

Regarding WFMs position against organized labor, I believe our opposition to it remains a tenable one, and should be continued. In attempting to advance their position in the public arena, unions seem incapable of anything save the worse sort of propaganda (Lubov, 1998). They show no sign of resonating with our customer-base, and can be resisted and ignored.

Major Trends

What major trends are likely to impact the grocery industry and WFM in the future? Probably the biggest single trend will be the growing role of Walmart in the food business, both organic and conventional. It promises to close what some people see as a demographic gap: there are the low-income, less educated shoppers of low-cost, relatively low-quality groceries (not factoring the fast-food that this segment of shoppers also favors); and then the higher income and higher educated shoppers found at places like WFM and Trader Joe’s (although the latter focuses on low prices for higher-educated customers and carries the food such people favor). With the entry of Walmart, traditional Walmart shoppers will be increasingly exposed to higher-quality food at Walmart prices. This change indicates a general revolution in food and food expectations among more and more customer-demographics, both here and abroad. The upper and upper-middle incomes led the way, and now the lower-middle and working classes are catching up. Many of the technological factors that made WFM a success will increasingly be characteristic of the industry in general, not just a handful of specialty stores.

Within the next five years, the factor that will decide WFM’s fate at the hands of Walmart and Trader Joe’s will certainly be the economy. It boom times, people are simply more willing to spend their discretional income on premium food bought in premium stores — it reflects the fact that more and more people identify with the idea of treating themselves to what they perceive as the best and building a lifestyle around that. But such an attitude cannot stand the heat of a major recession, at least not for the next wave of new customers — new customers that all chain-stores must harvest if they are to grow. Nor are WFM’s present set of customers going to retain their “loyalty” if doing so means spending just too much money on food they can, after all, get somewhere else cheaper (i.e., at Walmart) even while still being organic.

Strategy

What strategy should WFM pursue to strengthen its competitive position in the industry? In my view, WFM should make two fundamental changes to its business model. First, it should start building smaller stores in border areas it would normally might avoid. Of course, in response to the recession it has already reduced its store size about 20%, to between 35,000 and 50,000 square feet. But consider an example of Walmart doing the same thing, but with an eye towards a new demographic: in Los Angeles’s Chinatown, Walmart has applied for a 33,000 square-foot store there in a building long zoned for a store. The building has been vacant for twenty years. Yet the idea of a Walmart in Chinatown has stirred up a firecracker string of opposition. Many of the residents fear that it would put the area’s smaller stores out of business. (It’s a justifiable fear.) But would a WFM application in the same building result in the same level of resistance, or any resistance at all? It doesn’t seem likely, because of WFM’s status as a premium store with premium prices, thus leaving the established Mom and Pop shops a good deal less threatened. WFM would also enhance the area by bringing outsiders into Chinatown on a regular, ongoing basis, fulfilling one of the rules of a successful neighborhood as stipulated by the late urbanologist Jane Jacobs (Jacobs, J. (1961). (Walmart would too, but perhaps somewhat less effectively, given the lower economic demographic of many of its customers, as compared to a WFM store.) So WFM should consider smaller stores in edgy demographics as a permanent strategy, apart from being a reaction to the economy slowdown since 2008. In the case of Los Angeles’ Chinatown, it may be feasible to actually apply for a permit for the same store eyed by Walmart, should that application be rejected, an increasingly likely possibility.

My next strategy you will find positively incendiary: to educate our customers on the realities of genetically modified (GM) foods and organisms (GMOs). Currently, WFM and the organic and natural foods industry in general takes the view expressed by Harry Lederman, husband of Sandy Gooch of Mrs. Gooch’s stores (purchased by WFM in 1993): GMOs are being allowed into the system. They snuck in as feed for animals, and they ended up getting into our food system. I’m concerned because I think our bodies are a fine piece of machinery. I don’t think they were designed to deal with the potential problems that GMOs will [create] for our own [bodies’] health system (“Sandy Gooch” 2011).  Listening to such talk, one would think that genetically modified foods are a known carcinogen, or demonstrably toxic to humans, and that the stores that sell them are being willfully negligent of their customers’ health. But this is hardly the case. Consider a quote from Norman Borlaug, the Nobel Peace Prize–winning (1970) agronomist and “Father of the Green Revolution”. Asked about the claim that organic farming is better for the environment and human health and well-being, he replied: That’s ridiculous. This shouldn’t even be a debate . . . If people want to believe that the organic food has better nutritive value, it’s up to them to make that foolish decision. But there’s absolutely no research that shows that organic foods provide better nutrition. As far as plants are concerned, they can’t tell whether that nitrate ion comes from artificial chemicals or from decomposed organic matter. If some consumers believe that it’s better from the point of view of their health to have organic food, God bless them. Let them buy it. Let them pay a bit more. It’s a free society. . . But don’t tell the world that we can feed the present population without chemical fertilizer (Miller, 2001).

People have been eating the fruits (and meats and vegetables) of Borlaug’s pesticide-supported Green Revolution for forty years with no documented ill effects beyond what are found in any kind of system of mass distribution, including organic. There are occasionally cases of food poisoning, but E. coli is not uniquely partial to GM foods. If anything, it is partial to organic foods, because organic fertilizer is often composed of animal feces (and in one known food poisoning case, human feces), and feces will make you sick if it isn’t washed off thoroughly enough. That happens. Synthetic fertilizer, by contrast, does not contain bacteria of any kind.

Genetically modifying food is just a high-tech innovation for what has been done to plants and animals for thousands of years. By choosing plants with certain desired traits, such as higher yields and richer flavor, farmers inadvertently excluded undesirable genes and included desirable genes in each new generation of crop. But they could only paint with a broad brush.

The history of traditional agriculture is full of selective breeding and transplants that went wrong, failed outright, were poisonous, or wasted time and money. The GM process is much more specific. There is no real difference here save in technology, and certainly if Gregory Mendel had figured out a way to splice a gene from a bacterium found in soil to protect his peas from a particular kind of aphid, we may safely assume he would have done so, and written about it. As per that hypothetical example, GM foods in actuality are increasingly using less pesticide (and less fuel to deliver the pesticides to the fields, and less energy to create the pesticides), because the pesticide is built in, originally designed by nature, to kill a specific pest, virus, or bacteria, while being harmless to humans and animals (and we may be certain that growers and retailers alike have a vested interest in guaranteeing that harmlessness).

This reality makes nonsense of some of WFMs official statements, such as The company believes that the best tasting and most nutritious food available is found in its purest state — unadulterated by artificial additives, sweeteners, colorings, and preservatives. What’s artificial? Also, organic farming benefits indirectly from conventional farming that uses petroleum-based fertilizers, containing chemicals such as phosphorus and potassium, because such fertilizers have over the years increased the nutrient level of all soils, including those soils used later by organic farmers. Such nutrients turn up in animal manures and crop residues. By various routes, such surplus nutrients, originating at conventional farms, find their way to organic farms. Organic farming could not exist without that past, continuing, and future exchange.

On a mass scale, organic farming would be unsustainable, and more and more people are realizing that. More and more of those people are going to be WFM customers. Therefore it behooves WFM to consider whether or not its own ideology of pure organic food is itself a sustainable one. I submit that it is a subject fit for serious discussion. Although my concern is premature from the standpoint of planning an immediate new marketing campaign, on the other hand, how long can a marketing strategy defy science and common sense and get away with it? My position is that the sooner WFM confronts this matter — if only from the perspective of being a matter of discussion — the better, because organic food is an increasingly scarce commodity (Harasta & Hoffman, 2005). As of 2005, organic crops accounted for only 3 per cent of US farmland usage because organic standards yield a lower quantity of output. Whole Foods foresees that the growing demand for organic foods may negatively affect its earnings. It makes a point of informing its investors as such. Organically grown GM foods may ultimately be the only way to alleviate this looming supply problem.

Implementation

As a first step, WFM should consider taking this topic to the public, its staff, and its customers. We should bring the matter up on our website, and solicit opinions, and post the results. That done, we can then consider some hypothetical but practical steps to take. First, WFM can consider introducing selected high-quality GM foods into its stores for free taste-testing purposes. The point would be to first gauge the actual results, particularly whether customers showed any interest or not. A lack of interest may not indicate hostility, merely indifference, an indifference that might be subject to marketing persuasion. In-store taste-tests, somewhat in the manner of the Pepsi Challenge, would demonstrate to interested customers the fact that selected GM foods are perfectly capable of tasting as good as selected organic foods, if the GMs are fresh and come from a good crop. The important point here is that such in-store tests would follow an extended discussion of the topic online, perhaps even generating news-media interest as well. It would be a gamble, but the issue will have to be confronted eventually.

I further suspect that for most WFM customers (and indeed most grocery customers, whatever the brand), the issue has never really been one of organic food versus conventional food per se. Instead, it is one of quality and price. There are customers who want a quality store to visit, and quality assistance from the staff, and quality food. They are willing to pay a premium price for this experience, which is necessarily elitist. Since by your own statement WFM does not compete on price for its customers, there would be nothing wrong with admitting some GM fruits and vegetables as long as they are clearly labeled as such and were not marketed in any way as discount produce. Indeed, it may be that the entire issue of GM versus organic food has really just been one of labeling all along, and that WFM customers would be more than willing to choose GM foods, just as long as they were clearly identified and worth the premium.

As a second step, WFM should consider the possibility of selling its own location-specific organic GM foods. Under current federal law, “organic GM foods” is an oxymoron: GM foods cannot legally be labeled as organic. But there is no law against growing GM foods from GM seeds under organic conditions and then saying so. This may be the next stage of organic food, constituting an initial kind of side-market that may work for some foods better than others, depending on the particular locality where individual varieties of foods are preferred. The key factor making all this at least theoretically possible is that GM foods will increasingly contain their own natural pesticides, and so will not need them sprayed on. As for the thought of eating a tomato which contains a gene spliced in from a soil bacterium, that is strictly a matter of education. Like Trader Joe’s, WFM positions its stores where the concentration of college-educated customers is highest — within a sixteen minute commute, in the case of WFM. How long will that demographic be able to shiver like a ten-year-old at the thought of eating GM food? This is the next marketing challenge. If WFM doesn’t take it up, then someone else will.

It could be almost anyone who does. We can be sure that manipulating organic molecules will someday become as decentralized as the electronics and computer-programming. It will be done at home. People will literally grow their own, either in soil or water. Most such efforts will fail, making clear that there is less to fear from the specter of gene manipulation then we might think. But the point is that more and more people will realize that GM isn’t Frankenfood any more than Mendel’s peas were. That will be as great a revolution in the food business as the success of high-end organic and natural food itself.  The only question now is whether WFM should beginning seriously thinking about it now or go the safer way, playing catch-up later.

References

Harasta, P., & Hoffman, A. (2005). Whole Foods Market 2005. Case Studies, 566-576. Retrieved from http://academic.cengage.com/resource_uploads/downloads/ 0170186288_243678.pdf

Jacobs, J. (1961). The death and life of great american cities. New York : Vintage.

Lubov, S. (1998, April 6). New age capitalist Forbes, 161(7), 42-43.

Miller, N. (2001). Environmental politics casebook: Genetically modified foods. (p. 249). Boca Raton: CRC Press. Retrieved from http://www.crcpress.com/

Sandy gooch – natural foods retailing pioneer. (2011, September 6). Retrieved from http://www.youtube.com/watch?v=-1vxbj6ufQI

Seghetti, N. (2012, August 10). Daily finance. Retrieved from http://www.dailyfinance.com/2012/08/10/3-college-savings-strategies-as-easy-as-abc/

Why you should be bearish on whole foods market. (2012, July 23). Retrieved from http://seekingalpha.com/article/739021-why-you-should-be-bearish-on-whole-foods-market