3. Case Update
Economy Legal
2005 Gross Domestic 2005 No pending
Product increasing litigation
2008 Gross Domestic 2007 Federal Trade
Product sharp drop Commission initiates
administrative court
hearing over the
acquisition of Wild Oats
stores.
2008 FTC appeal is
without merit
3
4. Case Update
Financial Growth S trategy
• •
2005 Comparable S tores S ales 12.8% 2005 Increase S ales 15 to 20 percent
• •
2005 S ales Per S quare Foot $870 2005 Comparable S ales Growth of 8% to 10%
• •
2005 Cash from Operations $411 M 2005 Increase S tore S quare Footage
• •
2005 Paid Cash Dividends $55 M to shareholders
•
2005 Reduced Long-term Debt by $152 M 2008 Conservative Growth and B usiness S trategy
• •
2008 Profit Maximization through cost containment
•
2008 Comparable S tores S ales 4.9% 2008 Increase range of lower priced items
• •
2008 S ales Per S quare Foot $882
•
2008 Cash from Operations $326 M 2009 S ales stabilized driven by store improvements of
• •
Wild Oats stores, continue differentiation, and increase
2008 S uspended Cash Dividends to shareholders
•
awareness of value-products
2008 Increased Long-term Debt by $995 M
•
FINA NCIA L HIGHLIGHTS
2008 2007 2006 2005 2004
GROWTH S INCE IPO
$7,953,9 $6,591,7 $5,607,3 $4,701,2 $3,864,9
CAGR
2008 2005 1991
S ales 12 73 76 89 50
Number of S tores 275 175 10 21.0%
Number of Stores at End of
S ales $8.0 B $4.7 B 276 30.0%
Fiscal Year 275 276 186 175 163 Earnings Per S hare $0.82 $1.98 $617,000 14.0%
A verage Weekly S ales per $570,00 $617,00 $593,00 $537,00 $482,00 Operating Cash Flow $325.8 M $410.8 M $3.4 M 31.0%
S tore 0 0 0 0 0
Team Members 52,900 38,000 0 31.0%
Comparable Store Sales S tock Price 20.64 128.87 5.8% 25.0%
4.9% 7.1% 11.0% 12.8% 14.9%
Growth
Identical S tore S ales Growth 3.6% 5.8% 10.3% 11.5% 14.5% Whole Foods M arkets A nnual Report 2008
4
Whole F oods M arkets A nnual Report
2008
5. Case Update
2006 Recommendations Actual Actions, 2006∆2008
Expand to South Eastern States by Acquired Wild Oats Markets
acquiring the Fresh Market Chain 1. Entry into 15 new markets and 5 new states
2. Replace Wild Oats brand with Whole Foods
1. Gain access to new markets
brands
2. Retain Fresh Market brand and introduce
Whole Foods brand to avoid customer attrition
3. Utilize its supply chain avoid interruptions
Expanded private label brands
1. Feature over 2,000 items of 365 Everyday
Establish a new “Whole Foods Value and 365 Organic brands
Brand” name 2. Increased range of lower priced grocery
items
1. Sell new brand in traditional groceries stores
2 Provide gateway experience
Customer Service unchanged.
Deploy Customer Relationship
Management program Challenging year for Whole Foods
Markets due to economic
1. Offer CRM membership specials and
discounts slowdown and depletion of
2. Delight customers savings and privileges
financial resources consumed for
store and sales growth
5
8. General
Economic Health
Federal Reserve Beige Book
Weak across all districts
Layoffs and pay freezes
Consumer spending is down
Retail is especially hard hit
Price discounting
8
9. Consumer
Confidence
Index down
240% since 2005
Expectations
Index is now
higher than the
Present Situation
Index
Have we hit
bottom with
nowhere to go
but up?
9
11. Five Forces Analysis
Rivalry (strong and getting
stronger)
Substitutes (Stronger from
grocery side, weaker from
restaurant side)
New Entrants (Strong from
substitutes)
Suppliers (moderate to weak,
but watch out for integration)
Buyers (Strong, but
weakening demand)
Analysis: Everyone is hurting
from the recession and
fighting to remain profitable
11
13. Driving Forces
Demand for
Economic
Value-
Recession
Pricing
The
Social Demand for
Acceptance Food Does
of Organics Not
Decrease
13
14. Merger of
Markets
The organic and general grocery market
have merged into one
This hybrid market has organic and non-
organic consumers
Organic differentiation is becoming more
commoditized
There is now a need for further
segmentation beyond organic vs. non-
organic
14
21. Competitive
Positioning
Organic
positioning is
on price and
core market
General
grocers offer
commodity
organic goods
Social-organic
retailers have
ethical
differentiation
21
22. Competitor
Market Share
This is total
grocery sales,
not just organic
Wal-Mart sells
more groceries
than all other
major
competitors
combined
Even Wal-Mart
offers discounted
organic goods
22
23. Market Growth/
Market Share
Traditional grocers
have market share
advantages
Slowing growth for
organic grocers
23
25. Primary
Competitors
Kroger
Business Model: increase annual earnings per share
through strong and sustainable sales growth, slightly
improved operating margins, and fewer shares
outstanding.
Strengths:
Significant market share in 44 markets covering 31 states
Well known regional brands
Weaknesses
High expansion cost
Has little quality control in its merchandise
25
26. Primary
Competitors
Safeway
Mission Statement: To be the first choice for those
customers who have the opportunity to shop locally in a
Safeway store.
Strengths:
High percentage of stores remodeled into “Lifestyle”
format.
Strong Private label brand
Weaknesses
Strong Labor Unions
Expensive real estate
26
27. Primary
Competitors
Supervalu
Mission Statement: To serve their customer
better than anyone else could serve them,
providing customers with value through our products
and services, committing ourselves to providing the
quality, variety and convenience they expect.
Strengths
Wide portfolio of store brands
Strong Market Share
National presence & supply chain capabilities
Weaknesses
Late entry into natural/organic market.
27
Wal-Mart Supercenter competition in key markets
28. Primary
Competitors
Trader Joe’s
Mission Statement: To focus on providing great
value to customers by having competitive prices
on all their products.
Strengths:
Attempts to make grocery shopping an exotic
experience
Fast inventory turnover rate
Large selection of privately labeled products.
Weakness:
Limited store sizes and locations.
No separation of organic and conventional food.
28
33. Key Success
Factors
A strong network of suppliers
Access to locations rich in the target
market
A strong brand name
Effective marketing communications
Products must be a fit with market
demand
33
35. Industry
Attractiveness
The organic industry will have a hard
couple of years
But, consumers do not want to
compromise their health and will continue
buying organic
Health-organic consumers will go for
value-priced goods
Social-organic will also like to see more
value, but will shop on ethics
35
38. General Business
Strategy
Whole Foods has two
narrow markets that it
serves
Organic differentiation
is the key-stone of
Whole Foods’ mission
This means Whole
Foods uses a focused
differentiation strategy
38
39. Product
Lifecycle
Revenues continue to increase
Net income is in steady decline since 2006
Suggests a pre-maturing of the brand
39
41. Core
Competencies
Highest-quality brand reputation
Dedication to the social ethics of organics
Industry best customer service
Strong supply chain
Private label program
41
46. Current Promotional
Strategy
Website Design
E-newsletter
signup
Cooking tips
Company blogs
Product and store
locators
Company and
investor
information
Links to Whole
Foods’ pages on
social networking
sites 46
48. SWOT
Strengths Weaknesses
Organic market leader Premium prices
Strong WFM-supplier High cost in expansion
collaboration High employee/customer
Finest quality of goods ratio
Good distribution system Large perishable inventory
Minimal level of expensive High inventory costs
advertising Shortage of inventory in
Well trained staff with certain categories
specialized skills Geographic limitations
Community involvement
Value price private-labels
48
49. SWOT
Opportunities Threats
Growing market through Growth relies on new
development and stores and acquisitions
penetration Weak economy resulting in
Popularity of healthy living reduction of consumer
spending
Cross-over of traditional
grocers Increased competition
Leveraging of our market Unionization
leading brand Government regulations
Consumers looking for
Limited capital
value-priced goods Debt
Consumers looking for
Stock price reductions
premium goods
Economic conditions could
affect goodwill
49
51. Balance Sheet
Ratios
•Current Ratio on gradual decline •Debt to Equity Ratio show debt
indicating Cash and Receivables averaging 50 percent of the
are insufficient to cover current equity stake in assets then
liabilities increases to 120 percent
•Debt to Asset Ratio shows rapid •Days of Inventory show 9 days
increase in debt from line of on average sell inventory
credit and long term loans and
capital leases •InventoryTurnover shows
monthly average to sell its
merchandise inventory.
51
52. Income Statement
Ratios
Gross Profit set by company to Pre-Opening and relocation as a
• •
achieve 34 percent as a percentage of Gross Margin
shows minimal consumption of
Gross Profit
Net Profit Margin averaging 5
•
percent of sales
Earning Per Share (EPS) favorable
•
from 2004 to 2007 but drops to
Direct Store Opening Expenses as
•
insufficient level in 2008
a percentage of Gross Margin
shows large consumption of Gross
Profit
52
54. Strategic
Advantages
The Whole Foods brand stands for best-
quality, organic goods
Whole Foods appeals to a greater social
responsibility
Whole Foods has a strong distribution
network
Private-label brands provide high-quality
at value-priceing
54
56. Central Issues
Revenues are flattening
Net income is plummeting
Consumer confidence and buying power is
shrinking
Debt/Equity ratio is unfavorable
56
59. Financial
Objectives
Grow Net Income
Cut Cost
Increase Revenue
Reduce Capital Expenditures
Raise Capital through Equity Shares and
Reduce Borrowing
59
60. Financial
Objectives
Grow Net Income Increase Revenue
Open 14 new stores and deploy
Impact of recession requires
Wild Oats stores
conservative growth
Reduce Capital
Open less stores and reduce
Expenditures
average square footage
Scale back on discretionary
No influence on deflating
spending , close stores, reuse
factors but some influence
equipment, and terminate leases
over cost
Raise Capital through
Equity Shares and Reduce
Cut Cost
Borrowing
Deflating prices provide
Sell shares of common stock to
opportunity to negotiate lower raise capital for new store
prices and rates with purchases
suppliers and landlords Equity capital will avoid debt
Savings will reduce supply through banking institutions
chain costs and cost of goods
60
61. Financial
Objectives
As Whole Foods Markets pursues more growth, it
will manage its operating expenses relating to new
stores and closing unprofitable stores
The pre-opening expenses for 14 new stores will
be $3 million and relocation, store closure, and
lease terminations costs will be approximately
$886 thousand based on closing 4 stores
These actions will reduce capital expenditures and
grow net income
61
63. Business
Strategy
Focused differentiation
Increase marketing and goodwill to grow
comparable store sales
Look for ways to decrease upstream
supply costs
Continue long-run expansion
63
66. Marketing
Recommendations
Target Market
Reaffirm Whole Foods’ commitment to its core,
social-organic market
Reach out to the price sensitive, health-organic
market
Target the cross-over market from the
restaurant industry, who are looking for less-
expensive dining options
Focus marketing efforts on the West Coast and
New England, regions with the highest organic
market density
66
67. Marketing
Recommendations
Price
Use ‘Value-Based Pricing’ to set goods prices
that reflect perceived value
A price skimming strategy should be continued
since Whole Foods’ COGS is higher than
competitors
Try to lower check-out aisle receipts without
discounting too deeply
67
68. Marketing
Recommendations
Product
Repackage goods to be sold as “Cook-at-home
Restaurant Boxes”
Increase private-label meat and seafood
offerings
Expand service offerings
Store-events
Online ordering
68
70. Marketing
Recommendations
Promotions
Product Placements
Top Chef
Hell’s Kitchen
Biggest Loser
70
71. Marketing
Recommendations
Public Relations
Use community outreach
to solicit media coverage
and publicity
Use store events and
goodwill for editorial
content
71
72. Marketing
Recommendations
Online Marketing
Website Functionality
Coordinate with the advertising campaign
Create a page targeted to restaurant cross-overs
Build on the advertising message
Program a compare-and-contrast function
Online Partnerships
Share users with sites having complementary content
Replace Whole Foods’ recipe page with an application
from Conde Nast
Imbed expansion ads into recipes
72
73. Marketing
Recommendations
Sales Promotions
CRM Loyalty Program
Discount club card
Require online sign-up
For every $1,000, get 10% off voucher
Collect direct marketing information
Track product preferences and sales accruement
Invite the highest ranked customers to customer
appreciation events
73
74. Marketing
Recommendations
Place
Reduce store openings by 30% of 2008 levels
Direct store growth in the Pacific Northwest and
build a presence in Britain
74
76. Community
Stewardship Strategy
Community Events
“Our Community Cares Days”
Donate 10% of specific days’, private-label sales to
participating charities
Promote the events through signage and publicity
Sponsorship
“Fitness Challenge”
Tie into product placements
Promote through social networking sites and publicity
76
79. Operations Strategy
20% reduction in work hours for hourly
employees
“A way to avoid further layoffs”
Affects 10% of employees
Save the company $28 million a year
Some of the money saved will be used to
finance R&D
79
80. Operations Strategy
Pay Freeze
Employees making more than $75,000 will not
get raises
Share the sacrifice with those who are losing
their hours
Pay bonuses in stock options
Exceptions to this rule for key management
80
81. Operations Strategy
Fund a R&D project to develop
computerized, customer assistance
modules
Size of an ATM machine
Gives “Farm-2-Fork” tracking
Provides nutritional information, cooking
instructions, and recipes
Activated by the Whole Foods loyalty club card
Tracks searches-to-sales
$20,000 to implement, paid through work hour
reduction 81
82. Operations Strategy
Use Whole Foods’ buying power to
pressure suppliers
Negotiate for lower wholesale prices
Threaten globalizing sourcing from Latin
America
Reduce COGS growth from 22.5% in 2008, to
20% in 2009-2011
82
84. Income Statement
Projection
Dire ctStoreExpe e ns
Num r of Store
be s
A ssumes continued operational costs and activation of Wild
S ustain revenue growth through 14 new stores and
Oats fleet of stores and new stores launches through S ales and
closing 6 underperforming stores
Marketing initiatives.
Conservatively grow stores to 2011
Pre pe
o ningExpe e ns s
Sale s
A ssumes regular new store openings through 2011
A ssumes average revenue based on total square
footage of all stores at $804 per sqft.
Re location, s reclos
to ureandle ete ination
as rm
Re nueGrow
ve th
A ssumes net store activity based on closing and terminating
A ssumes average store square footage of 40,000 sqft
leases and moving stores to more desirable locations.
multiplied by the 14 new stores which add 560,000
sqft.
A verage revenue per square foot multiplied by
added square feet increases revenue to $450 million
Cos Goo
tof ds
A ssumes a set gross margin of 34 percent, however,
margin could increase through savings negotiated
from the supply chain.
84
86. Balance Sheet
Projection
Current Liabilities (cont’d)
Curre ntAs e
s ts
AccountsPayable
Cas h
Negotiate with vendors to extend credit terms to net
Manage cash through tighter credit policies that
60 days.
require customer remittance net 30 days.
Note: C ollecting receivables net 30 days and paying bills net
60 days will create a positive cash flow which allows company
Me rchandis eInve ntory to meet its billing terms.
Manage M erchandise Inventory at lower levels to
reflect impact from recession, price negotiation with Payroll, bonus be fits
, ne
suppliers, and decline in consumer spending. A rrange work schedule for hourly employees to
reduce 40 hour work week to 32 hours
Prope , Plant, & Equipm nt
rty e
Reflect store lease improvements, new equipment, Divide ndsPayable
and computer systems required for new stores. S uspend dividends payable until company achieves
favorable net income
Curre ntLiabilitie s
Curre ntL/T de & capital le eo ations
bt as blig Longte rmde andcapital le eoblig
bt as ations
Renegotiate price per square foot on capital leases S ystematically terminate leases for closed stores and
to reflect current market rates. negotiate new lease rates
Com onStock
m
Increase stock offers to raise capital to fund new
stores and avoid bank debt
86
91. Conclusion
Whole Foods will probably have a difficult time
over the next few years
Revenue growth can be spurred through a
marketing campaign and community outreach
Costs can be controlled through reductions in
direct labor, using buyer power to push down
COGS, and reducing capital cost growth
Net income may not grow as much as Whole
Foods might like, but the company can remain
profitable
91
