Title: Bigger, Riper, Juicier Analyzing the Retail Natural and Organic Food Industry
1Bigger, Riper, JuicierAnalyzing the Retail
Natural and Organic Food Industry
2What is the retail natural and organic food
industry?
- Retail outlets ranging from small, local farmers
markets to large, international supermarkets,
that supply natural and organic foods.
3What are Organic Foods?
- Produced using practices that promote and enhance
agro- and eco-system health and use no
genetically engineered inputs. - Livestock are given organically-grown feed,
treated humanely, and given no antibiotics or
growth hormones. - Food processing preserves the integrity of the
organic product and uses no preservatives.
4What are natural foods?
- Minimally processed or largely free of artificial
material, preservatives, or other non-natural
chemicals
5Why is this industry so exciting?
- A 12 billion dollar industry, but still only a
niche of the 600 billion food industry overall. - Growing at 20 a year with plenty of
opportunities for expansion
6Tremendous Growth Whole Foods Markets
International
7What is the Basic Technology in this industry?
- Labor intensive using organic practices
- Weed and Pest Control Hand Weeding
- Fertilization Green Manure
8How are production costs financed?
- Small organic food retailers rely on small
business loans and private funds. - The big firms in the industry are public
companies (WFMI and OATS) - Certain states to subsidize the initial costs of
Organic certification up to 500. - State specific financing programs are also a
large help for firms entering this industry.
9Minnesota Financing
- The Shared Savings Loan Program of the state of
Minnesota offers up to 25K per firm, at an
interest rate of 3, for firms transitioning from
traditional to organic farming. - Their Demonstration Grants offer an additional
25K per firm, to subsidize the documentation
costs required for organic certification.
10Who buys organic food products?
- Educated and trendy yuppie consumers
- Sophisticated Sandal brigade
- People who value products that are healthy,
environmentally conscious, or are perceived as
more flavorful. - Often, these consumers also tend to have
relatively higher incomes. (for example, 50,000
mean income at Whole Foods vs. 35,000 at
Wal-Mart)
11How are products distributed?
- United Natural Foods- Largest Supplier
- 2.1 Billion
- 19 annual growth over the next five years
- They are not dependent on WFMI for business. 26
of business is from WFMI.
12Other Suppliers
- Goods supplied from big distributors often come
from California and abroad. - Regional distributors supplied by local farmers
and suppliers.
13Industry Figures
- Items typically cost 50-100 more than
traditional counterparts (e.g. bread ranges from
1.19 at Kroger to 2.69 at Whole Foods) - Employment 39,000 employees in Whole Foods,
which represents 31 of the total market. - Output 12 Billion in sales.
- Imports and Exports 10 of Organic foods (milk
and citrus) are imported into the US.
14Competitive Structure
- Dominant Firms
- Quasi Natural and Organic Food Supermarkets
- Competitive Fringe
- Traditional supermarkets
- Small, local businesses
- Farmers markets
- Nutrition stores
- Specialty gourmet retailers
15Dominant Firms
- Whole Foods Market Incorporated
- Stores 181
- Employees 39,000
- Market Capitalization 8.88 billion
- Market share 31
- Wild Oats Markets Incorporated
- Stores 113
- Employees 8,596
- Market Capitalization 505.91 million
16Quasi Natural and Organic Supermarkets
- Characteristics
- Often privately owned
- Products and pricing strategies can vary widely
- Generally regionally located
17Competitive Fringe
- Varies by local market
- In Charlottesville
- Integral Yoga Natural Foods, CVille Market,
Rebeccas Natural Foods, the farmers market,
Foods of All Nations, Harris Teeter and other
traditional grocers, and GNC.
18Bertrand Dominant Firm and Competitive Fringe
Model
- Dominant firms can earn positive economic
profits. - Whole Foods reported 136,351,000 net income
after expenses in September 2005, or an average
of 826,369.50 per store. - Dominant firms still cannot efficiently serve the
entire market.
19Profits Attract Entry
- Industry becoming more competitive as large
retailers expand and the fringe meets more demand - Barriers to Entry
- Capital costs
- Large firms have established supply chains and
often their own private labels - Leasing or renovating run-down buildings is an
alternative - Many markets cannot support more than one large
organic supermarket
20Entry and Exit
- Entry is difficult do to the high costs of
maintaining organic certification. - Establishing a food retail outlet involves a lot
of start up costs including establishing
distribution networks and logistics. - As with Wal-mart, Whole Foods is a massive
competitive force against mom and pop stores.
21Product Differentiation
- Products are often widely differentiated. Most of
the larger supermarkets carry their own private
labels. - Pricing differences can exist
- Organic and fair trade certification
- Local preferences and trend shopping
- Government certifications (e.g. 100 Organic)
22Governments Role in the Industry
- The government is responsible for certifying and
regulating organic foods and establishing
standards.
23Government Standards
- "100 Organic"
- Product must contain only organically produced
raw or processed material, excluding water and
salt. - The name of the certifying agent must appear on
packages, and use of its certifying seal is
optional. Use of the USDA "organic" seal is
optional.
24Government Standards
- "Organic"
- Product must be at least 95 organically produced
ingredients. - The label may also state the percentage of
organic ingredients. - The name of the certifying agent must appear on
packages, and use of its certifying seal is
optional. Use of the USDA "organic" seal is
optional.
25USDA Seal
- The USDA has developed a special seal that
organic producers can choose to place on their
products that meet the federal requirements for
"100 Organic" or "Organic" labeling. While
voluntary, the USDA Organic seal provides yet
another level of assurance of organic integrity.
26Organic Rule
- All products labeled as Organic must carry the
USDA seal. This ensures that the product was
produced, handled, and stored according to the
Organic definition. - Organic products cannot even come into contact
with traditional products.
27The Effect of Government Intervention
- Firms use this label to justify higher prices.
- The high marginal costs of ensuring an organic
certification limits entry into the market.
28Whole Foods Role in Government Regulation
- WFMI was the only retail outlet representative
involved in the drafting of the Organic Rule. - They are exercising capture or lobbying for
regulation. This is obviously a rational,
economic act to bar new firms for entry.
29Organization
- Smaller companies produce baked goods and
prepared meals such as sandwiches and salads. - Large firms are semi-vertically integrated and
have the resources and networks to offer their
own private food label. - Inputs are largely purchased from outside
suppliers.
30Whole Foods Private Labels
- WFMI owns are variety of private label food
subsidiaries. - This includes 365, 365 Organic, Whole Kids,
Whole Paws, Whole Catch, Allegro Coffee, Whole
Ranch, and Whole Fields
31365 Profits
- These private labels account for 12 of their
sales and are directly responsible for the
companys solid profit margins.
32Price Discrimination
- As with any food retail store, organic markets
offer sales and specials to entice people into
the store. - They already know they are attracting people with
a higher willingness to pay. - Whole Foods has the resources to offer cheaper,
private label brands.
33Labor Practices
- Many larger firms pay employees wages higher
than the union standard, and frown upon labor
unions. - Team members at Whole Foods
- Hawaiian shirts at Trader Joes
34Business Practices
- Advertising Relies mostly on word of mouth and
brand reputation - WFMI Spends less than .05 of sales on
advertising. - Whole Foods invests in educating the public on
the benefits of organic foods.
35Business Practices
- Decentralized Environmentalism- Whole Foods
grants operating freedom to their stores allowing
them to take advantage of local environmental
subsidies. - John Mackey, President of Whole Foods, says that,
We see the environment as a stakeholder in the
business.
36Business Practices
- Corporate Leadership in Environmental
Stewardship, and the positive image that firms
project to their consumers. - Whole Foods combines idealism -- selling organic
food and making environmentally conscious
business decisions -- with an eye still focused
squarely on the bottom line driven by aggressive
growth.
37Business Practices Real Estate
- Whole Foods takes advantage of their real estate
market power, choosing locations in high-end
mixed-use developments . - Whole Foods is able to negotiate rent rates
significantly lower than competing grocery
anchors. WFMI is currently located in 39 of the
top 50 US metropolitan markets.
38Investment Analysis
- Pro
- Potential for expansion into new markets
- Whole Foods estimates opening 25-30 new stores
beginning in 2007 and doubling annual earnings by
2010. - Con
- The market may be a fad
- Earnings estimates may be too high
- More fringe competition may hinder growth
39Stock History
- Whole Foods Market Incorporated (WFMI)
- Stock Price 63.91
- P/E Ratio 60.87
- Earnings per Share 1.05
- Wild Oats Markets Incorporated (OATS)
- P/E Ratio 161.18
- Stock Price 17.73
- Earnings per Share 0.11
40Verdict Whole Foods and Wild Oats Stock
Jim Cramer on Whole Foods Even though the
retailer's fundamentals still look strong, this
is one falling knife that I wouldn't try to catch
and I believe that Wal-Mart's push into the
organic grocery market adds just one more
potential land mine to the equation.
41An Alternative Venture Capital
- Trader Joes philosophy buy old, dilapidated
buildings and turn them into successful retail
outlets for specialty foods - Private labels
- Buyout less lucrative large retailers
- Potentially less expensive than outright stock
ownership, but also potentially more risky
42Strategy for Managers
- Managers should expect increased competition as
fringe firms seek to enter the market. We
recommend that managers - Continue to avoid labor unions, and embrace
sandals brigade type employee teams. - Practice decentralized environmentalism
- Promote stricter government legislation for the
industry, in conjunction with leadership in
environmental stewardship. - For large stores, keep the product unique by
focusing on cafes and other value-added services
(valet service, specialty bagging, consumer
culture) - Whole Foods should consider marketing their
private label as competition from traditional
retailers move into the organic food industry.
43Whole Foods Real Estate Strategy
- Managers at Whole Foods should avoid locating
stores where demographics are driven by
condominium constructions. - Managers should avoid high priced locations in
new markets, unless there are very healthy
demographics supporting the site.
44Sources
- www.wholefoodsmarket.com
- Wild Oats Markets Inc. MarketWatch . 23 Apr.
2006. www.marketwatch.com - Whole Foods Market Inc. MarketWatch. 23 Apr.
2006. www.marketwatch.com - Armstrong, Larry. Trader Joes, the Trendy
American Customer. BusinessWeek - Online. 24 Apr. 2004. http//www.businessweek.com/
magazine/content/04_17/b3880016.htm - Trader Joes Specialty Gourmet Stores Trader
Joes Homepage. 23 Apr. 2006. Traderjoes.com - Cramer, Jim. Mad Money Mailbag Whole Foods not
as Tasty The Street.com. 23 Mar. - 2006. www.thestreet.com
- Whole Foods Market. Whole Foods Market
Homepage. 23 Apr. 2006. - www.wholefoodsmarket.com
- Whole Foods Targets Sales Goal of 12 Billion.
The Gourmet Retailer. 3 Mar. 2006. - www.gourmetretailer.com
45Sources Continued
- The Economist. "Face Value A Wal-Mart for the
Granola Crowd." July 28th 2005. - http//www.economist.com/PrinterFriendly.cfm?story
_id4222115 - Whole Foods Market Press Release "Whole Foods
Market Makes Largest Ever Purchase of Wind - Energy Credits in United States."
http//www.wholefoodsmarket.com/company/pr_01-10-0
6.html - Whole Foods Market Company Facts.
http//www.wholefoodsmarket.com/company/facts.html
- Borden, Mark. "Producer Michael Funk/United
Natural Foods." Fast Company Magazine. - March 2006.
- Aina, Abiodun and Cruise, Bill. Whole Foods
Market Inc. Yale School of Management 2005. - Gogoi, Pallavi. Wal-Marts Organic Offensive.
Business Week. March 29, 2006. - Warner, Melanie. A Struggle Over Standards in a
Fast Growing Food Category. The New York Times.
Nov. 1, 2005 - Wild Oats Markets Inc. MarketWatch . 23 Apr.
2006. www.marketwatch.com - Whole Foods Market Inc. MarketWatch. 23 Apr.
2006. www.marketwatch.com - Armstrong, Larry. Trader Joes, the Trendy
American Customer. BusinessWeek - Online. 24 Apr. 2004. http//www.businessweek.com/
magazine/content/04_17/b3880016.htm
46Sources
- Whole Foods Targets Sales Goal of 12 Billion.
The Gourmet Retailer. 3 Mar. 2006. - www.gourmetretailer.com
- Wild Oats Natural Marketplace. Wild Oats
Homepage. 23 Apr. 2006. - www.wildoats.com
- Integral Yoga Natural Foods Integral Yoga
Homepage. 23 Apr. 2006. - www.iyfoods.com
- The Store to Explore Foods of All Nations
Homepage. 23 Apr. 2006 - www.foodsofallnationsl.com
- Quinn, Steve. Whole Foods Impresses Customers,
Investors. AP Business. 16 Apr. - 2006. www.ap.org.
- The Economist. "Face Value A Wal-Mart for the
Granola Crowd." July 28th 2005. - http//www.economist.com/PrinterFriendly.cfm?story
_id4222115 - Whole Foods Market Press Release "Whole Foods
Market Makes Largest Ever Purchase of Wind
47Sources
- Whole Foods Market Company Facts.
http//www.wholefoodsmarket.com/company/facts.html
- Borden, Mark. "Producer Michael Funk/United
Natural Foods." Fast Company Magazine. - March 2006.
- Desmond, A. Jolly. Statistical Analysis of
Organic Foods Consumers. Cooperative Extension
Specialist, Department of Agricultural Economics,
University of California, Davis. - Harrison, Christy. The (still) high cost of
organic food. Grist Magazine. 22, Apr. 2006.
www.grist.org - Midwest Food Connection. The Natural Food
Network Homepage. 27, Mar. 2006.
www.naturalfood.com - The Federal Register Rules and Regulations.
United States Department of Agriculture. 29,
Mar. 2006. www.aphis.usda.gov/ppd/rad/webrepor.ht
ml
48Thank You!!