Question

Case Study:

Can Amazon Trim the Fat at Whole Foods?

WHEN FOUR YOUNG entrepreneurs opened a small natural-foods store in Austin, Texas, in 1980, they never imagined it would one day turn into an international supermarket chain with stores in the United States, Canada, and the United Kingdom. Some 35 years later, Whole Foods has about 450 stores, employs 85,000 people, and earned $16 billion in revenue in 2016.

Whole Foods' mission is to offer the finest natural and organic foods available, maintain the highest quality standards in the grocery industry, and remain firmly committed to sustainable agriculture. The grocery chain differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on increasing the perceived value created for customers, which allows it to charge a premium price. In addition to natural and organic foods, it also offers a wide variety of prepared foods and luxury food items, such as $400 bottles of wine. The decision to sell high-ticket items incurs greater costs for the company because such products require more expensive in-store displays and more highly skilled workers, and many items are perishable and require high turnover. Moreover, sourcing natural and organic food is generally done locally, limiting any scale advantages. Taken together, these actions reduce efficiency and drive up costs. The rising cost structure erodes Whole Foods' margin.

Whole Foods Market:

Stuck in the Middle

Given its unique strategic position as an upscale grocer offering natural, organic, and luxury food items, Whole Foods enjoyed a competitive advantage during the economic boom through early 2008. But as consumers became more budget-conscious in the wake of the deep recession in 2008—2009, the company's performance deteriorated. Competitive intensity also increased markedly because basically all supermarket chains and other retailers now offer organic food. As a result, sales performance of existing Whole Foods stores ("same-store sales," an important performance metric in the grocery business) has been declining since 2013. Overall, Whole Foods Market has sustained a competitive disadvantage, underperforming not only its competitors, but also the broader market by a wide margin. Over five years, Whole Foods Market underperformed the broader stock market by some 200 percentage points!

To revitalize Whole Foods, co-founder and CEO John Mackey decided to "trim fat" on two fronts: First, the supermarket chain refocused on its mission to offer wholesome and healthy food options. In Mackey's words, Whole Foods' offerings had included "a bunch of junk," including candy. Mackey is passionate about helping U.S. consumers overcome obesity

to help reduce heart disease and diabetes. Given that, the new strategic intent at Whole Foods is to become the champion of healthy living not only by offering natural and organic food choices, but also by educating consumers with its new 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.

Yet, a 2015 mislabeling scandal in New York—in which city officials found that Whole Foods had mislabeled weights of several freshly packaged foods such as chicken tenders and vegetable platters, leading to overcharges of up to $15 an item—reinforced the public's image of Whole Foods as overpriced. Mackey made a video apology and said this was an unfortunate but isolated incident caused by inadvertent errors of local employees. He also emphasized that the problems were found in only nine out of 425 stores (at that time).

Second, Whole Foods is trimming fat by reducing costs. To attract more customers who buy groceries for an entire family or group, it now offers volume discounts to compete with Costco, the most successful membership chain in the United States. Whole Foods also expanded its private-label product line, which now includes thousands of products at lower prices. The company also launched a new store format, "365 by Whole Foods Market," based on its "365 Everyday Value" private label. The 365 stores focus exclusively on Whole Foods' discount private labels, primarily to address the rise of discount competitor Trader Joe's. The risk, however, is that this strategic initiative will cannibalize demand from the higher end Whole Foods Markets, rather than taking away customers from Trader Joe's. To offer its private label line and volume-discount packages, Whole Foods is beginning to rely more on low-cost suppliers and is improving its logistics system to cover larger geographic areas more efficiently.

Mackey indicated that he planned to grow threefold in the future and believes the United States can profitably support some 1,200 Whole Foods stores. Larger scale and more efficient logistics and operations should allow the company to drive down its cost structure.

Whole Foods got stuck in the middle. It was outflanked on the low end by national grocery chains such as Publix or Kroger that offer a wide variety of organic foods at lower prices. At the higher end of the market, Whole Foods Market was outperformed in urban centers by more specialized grocery stores focusing on specific segments such as seafood, meats, breads, cheese, or wines.

Amazon Acquires Whole Foods

Mackey's turnaround initiative failed. This became more apparent as activist investors honed in on Whole Foods' poor performance and highlighted the strategic shortcomings of the organic grocery chain. Even though Whole Foods Market attempted to strengthen its strategic position and also changed its board of directors, bringing in more large-chain retail experience, it was too little, too late. In 2017, Amazon acquired Whole Foods Market for close to $14 billion.

With the acquisition of Whole Foods, Amazon continues its vertical integration along the value chain into physical retail spaces. Two aspects about this acquisition are particularly noteworthy. First, the Whole Foods acquisition is 10 times larger than any other acquisition the Seattle-based technology firm has undertaken (its second-largest acquisition, Twitch, a live-video streaming site was acquired for less than $1 billion in 2014). Second, Amazon chose to make an acquisition in the grocery business and not in any other retail space. Why?

Amazon already dominates categories such as consumer electronics; therefore, it has no need to acquire a retail outlet such as Best Buy. The Whole Foods acquisition also offers Amazon a slew of new benefits: The organic grocery has a national footprint, which allows the ecommerce firm to test its latest technology on a much larger scale. For example, it has experimented with Amazon Go, a grocery concept without checkout counters. Shoppers fill their carts, and software automatically tallies the bill and deducts it from the person's account. This technology could be rolled out at Whole Foods Market. Amazon will also be in a position to gather more data about shopping behavior. Grocery shopping is a particularly important need for consumers, and Amazon reasons if shoppers start associating groceries with Amazon, they will want to buy other items online also. In addition, Amazon is notoriously cost conscious. Bringing down the cost structure of Whole Foods by applying Amazon's world-leading logistics technology could significantly strengthen the grocer's strategic position.

Finally, Amazon bought Whole Foods to compete more effectively with Walmart. The largest physical retailer in the world is the largest U.S. grocery chain, accounting for some 15 percent market share. In addition, the grocery business is Walmart's most profitable, and is the strongest draw for customers to the big-box stores. In recent years, Walmart has been more aggressively moving to combat Amazon's dominance in ecommerce. The Bentonville, Arkansas, retail chain purchased Jet.com for more than $3 billion in 2016, just one year after the site was launched. Jet. com offered lower prices than other retailers, expecting that many consumers would be willing to wait a bit longer for their shipments. The entrepreneurs were correct in making this assumption. In addition, Jet. com's strategic approach was tailor-made to enhance Walmart's online presence. Walmart.com has become a star performer as the site's user-friendliness has improved. Walmart has also been at the forefront of implementing a hybrid retail concept where consumers order goods online and pick them up in stores.

The stage is set for a battle of the retail giants, with the number-one old-line physical retailer in one corner of the ring and the ecommerce leader in the other. Stay tuned!

DISCUSSION QUESTIONS

1.    Why was Whole Foods successful initially? Why did it lose its competitive advantage and underperformed its competitors?

2.    Why did Whole Foods end up being "stuck in the middle"?

3.    What changes do you expect at Whole Foods following the integration with Amazon?

4.    Why did Amazon acquire Whole Foods? What are some operational and strategic reasons for this decision? Do you think the Whole Foods acquisition was a good move for Amazon? Why, or why not? Explain.

(Must be at least 2 pages long)

Answer 1

Why was Whole Foods successful initially? Why has it lost its competitive advantage and is underperforming its competitors?

Whole Foods started as a natural food business. Its strategy was to offer high quality; natural organic foods obtained through sustainable agriculture which was one of its own kinds when Whole Foods came into existence. They strived for finest nature land foods, high quality standards and were highly devoted to sustainable agriculture. This unique strategy of Whole Foods gave it a great success and it made able to Whole Foods to open 420 stores in 3 major English countries in 35 years. Besides the organic food, Whole Foods also offers prepared foods and luxury food items. These costly items in turns require high carrying cost.

These carryings costs and other refresh food items those go obsolete after certain time if not sold out increased its costs very high. Other than that most of the organic foods obtained locally which decrease its efficiency by depending mostly on local market where it losses the opportunity of different price margins for same items. It could be beneficial to find outsourcing to take advantage of price and quality for the Whole Foods. Furthermore, organic food is available on almost every supermarket-chains and big grocery stores now days. Therefore, I think the above mentioned reasons were enough to incur high costs and reduce its revenue margin to make Whole Foods underperform in the food market.       

Why did Whole Foods end up being "stuck in the middle"?

Yes, it does. In my opinion Whole foods’ new store format ‘365 Everyday Value’ which focus mainly on providing discounts on private labels (Whole foods now sells foods at low prices under private labels) and were established against other discount competitors like new rising ‘Trader Joe’s’. but with this strategy it also faces some challenges by itself like it may divert customers from its own Whole Foods chain store to ‘365 Everyday Value’ rather than give competition to the other stores. Its private-label product-line of a huge number of lower price products can stole its own high quality, premium price product consumers and reduce its base organic food sale.

What changes do you expect at Whole Foods following the integration with Amazon?

Another big transaction that occurred on the same day was ignored by the Amazon Whole Foods purchase: the purchase of Bonobos by Walmart for 310 million dollars. This move has been one aspect of a greater push — headlined by Jet.com's $3.3-billion acquisition — to boost the Amazon-Whole Foods agreement, and its e-commerce services and to cater to younger, higher audiences. It is increasing the distribution of food across the country and purchasing parcel in New York to improve its supply capacity on the same day.

Walmart began constructing a large Pickup Tower network, where consumers would find their orders online. Alliances with Google and Postmates have been developed by the company, and recent reports indicate that Walmart is talking with Microsoft about Amazon Go-like technology which the technology giant is creating. To boost its delivery company, Kroger invested in British online grocer Ocado and bought the Home Chef menu package. Such transfers cost nearly 450 million dollars in total.

Why did Amazon acquire Whole Foods? What are some operational and strategic reasons for this decision? Do you think the Whole Foods acquisition was a good move for Amazon? Why, or why not? Explain.

The changes in Whole foods will be in their supply chain as to how they operationalize their business post-acquisition by Amazon. Also, the product mix of Whole foods will be altered to make it more optimized and Amazon will make sure of ripping in more benefits by integrating the product mix of Whole foods with that of the Amazon platform.Amazon Acquired Whole foods because of the nature of business of Whole foods and the increasing market for the products of Whole foods, Hence it was a strategic Decision by Amazon to Acquire Whole foods and make its entry into the high growth potential market.

The acquisition of Whole foods will also help Amazon in operational parameters where the strong operational retail presence of Whole foods can be leveraged by Amazon to spread out its product offering and enter the retail space and compete with the likes of Walmart and Target.The Acquisition of Whole foods by Amazon was a good strategy and Acquisition because this acquisition will help Amazon increase its retail presence which it can use to diversify its business and further use the retail network to spread its own business. Hence, It was a good acquisition.