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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.

Answer 1

1. The whole Foods started with the mission of finest natural and organic foods available to customers, maintain the highest quality standards in the grocery industry, and remain firmly committed to sustainable agriculture. They do started with the same a natural-food store and maintained the quality of food. Hence, they are successful initially.

The company lose its competitive advantages because during year 2008 -2009 due to deep recession that cut off the consumer’s budget. So consumers were more budget conscious. The company offers the product with premium price, hence company's performance deteriorated.

2. The company lose its competitive advantages because during year 2008 -2009 due to deep recession that cut off the consumer’s budget. So consumers were more budget conscious. The company offers the product with premium price, hence company's performance deteriorated. The competition in the market also increased rapidly as other basically all supermarket chains and retailers now offer organic food. As a result, sales performance has been declined. So, overall, Whole Foods Market has sustained a competitive disadvantage, underperforming not only its competitors, but also the broader market by a wide margin.

The company had mislabeled weights of several freshly packaged foods such as chicken tenders and vegetable platters, leading to overcharges which deteriorate the image of company as overpriced.

The national grocery chains such as Publix or Kroger offer a wide variety of organic foods at lower prices. Hence, at 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.

Hence, the Whole Foods end up being "stuck in the middle".

3. The changes that expected at Whole Foods following the integration with Amazon are as follows:

1. Ecommerce of whole Foods product under the Brand Amazon which does not have any retail grocery store would capture the large market base.

2. Technological change in the business process.

3. Bringing down the cost structure of Whole Foods by applying Amazon's world-leading logistics technology could significantly strengthen the grocer's strategic position.

4. Opportunity to Compete with the largest retailer in the world.

4. Amazon acquire Whole Foods because of following reasons:

1. They do not have retail grocery business.

2. They want to gather customer data so that shopping preferences can be known.

3. Amazon want to compete with the Walmart which is largest physical retailer in the world in U.S. grocery chain, accounting for some 15 percent market share.

Yes, I think the Whole Foods acquisition was a good move for Amazon because Amazon does not have any retail grocery business. They are outperformed in ecommerce business but the competitor such as Walmart have retail stores, ecommerce and every day lowest price strategy which captures the market base. Hence, until Amazon acquire the retail business of grocery stores they may not compete with the competitors in the market.