/n CASE 03 Whole Foods Market in 2014: Vision, Core Values, and Strategy Arthur A. Thompson The University of Alabama Founded in 1980, Whole Foods Market had evolved from a local

supermarket for natural and health foods in Austin, Texas, into the most visible and best-known leader of the natural and organic food movement across the United States, helping the industry gain acceptance among growing numbers of consumers concerned about the food they ate. The company had 2013 sales revenues of $12.9 billion and in spring 2014 had 379 stores in the United States, Canada, and Great Britain. Over the past 22 years, sales had grown at a compound annual rate of 25.2 percent, and profits had grown at a compound average rate of 30.4 percent. In 2013, Whole Foods was the 8th-largest food and drug retailer in the United States (up from 21st in 2009) and ranked 232nd on Fortune magazine's 2013 list of the 500 largest companies in the United States. Over 7 million customers visited Whole Foods stores in 41 U.S. states, Canada, and the United Kingdom each week, and Whole Foods was the number-two retail brand on Twitter, with 4 million followers. Whole Foods' mission was "to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available." The core of the mission involved promoting organically grown foods, healthy eating, and the sustainability of the world's entire ecosystem. For many years, the company used the slogan "Whole Foods, Whole People, Whole Planet" to capture the essence of its mission. John Mackey, the company's cofounder and co- CEO, was convinced that Whole Foods' rapid growth and market success had much to do with its having "remained a uniquely mission-driven company - highly selective about what we sell, dedicated to our core values and stringent quality standards, and committed to sustainable agriculture." Mackey's vision was for Whole Foods to become an international brand synonymous with carrying the highest-quality natural and organic foods available and being the best food retailer in every community in which a Whole Foods store was located. The company sought to offer the highest-quality, least processed, most flavorful and naturally preserved foods available, and it marketed them in appealing store environments that made shopping at Whole Foods interesting and enjoyable. Mackey believed that marketing high-quality natural and organic foods to more and more customers in more and more communities would, over time, gradually transform the diets of individuals in a manner that would help them live longer, healthier, more pleasurable lives. THE NATURAL AND ORGANIC FOODS INDUSTRY The retail grocery industry in the United States which included conventional supermarkets, supercenters, and limited-assortment and natural/gourmet-positioned supermarkets - had sales of approximately $603 billion in 2012, up 3 percent over 2011.¹ Within this broader category, retail 1 ¹ According to Nielsen's TDLinx and Progressive Grocer, as cited by Whole Foods Market in its 2013 10-K report, p. 1. sales of food products labeled "natural" were approximately $81 billion, a 10 percent increase over the prior year.² Foods labeled "organic" generated estimated retail sales across North America approaching $35 billion in 2013, up from $9 billion in 2002. Natural foods were (1) minimally processed, (2) largely or completely free of artificial ingredients, preservatives, and other non-naturally occurring chemicals, and (3) as near to their whole, natural state as possible. The U.S. Department of Agriculture's Food and Safety Inspection Service defined natural food as "a product containing no artificial ingredient or added color and that is minimally processed." Organic foods were a special subset of the natural food category and had to be grown and processed without the use of pesticides, antibiotics, hormones, synthetic chemicals, artificial fertilizers, preservatives, dyes or additives, or genetic engineering. Organic foods included fresh fruits and vegetables, meats, and processed foods that had been produced using: 1. Agricultural management practices that promoted a healthy and renewable ecosystem and that used no genetically engineered seeds or crops, petroleum based fertilizers, fertilizers made from sewage sludge, or long-lasting pesticides, herbicides, and fungicides. 2. Livestock management practices that involved organically grown feed, fresh air and outdoor access for the animals, and no use of antibiotics or growth hormones. 3. Food processing practices that protected the integrity of the organic product and disallowed the use of radiation, genetically modified ingredients, or synthetic preservatives. Organic food sales accounted for 5 to 6 percent of total U.S. retail sales of food and beverages in 2013. In 1990, passage of the Organic Food Production Act started the process of establishing national standards for organically grown products in the United States, a movement that included farmers, food activists, conventional food producers, and consumer groups. In October 2002, the U.S. Department of Agriculture (USDA) officially established labeling standards for organic products, overriding both the patchwork of inconsistent state regulations for what could be labeled as organic and the different rules of some 43 agencies for certifying organic products. The new USDA regulations established four categories of food with organic ingredients, with varying levels of organic purity: 1. 100 percent organic products. Such products were usually whole foods, such as fresh fruits and vegetables, grown by organic methods which meant that the product had been grown without the use of synthetic pesticides or sewage-based fertilizers, had not been subjected to irradiation, and had not been genetically modified or injected with bioengineered organisms, growth hormones, or antibiotics. Products that were 100 percent organic could carry the green USDA organic certification seal provided the merchant could document that the food product had been organically grown (usually by a certified-organic producer). 2 ² According to Natural Foods Merchandiser, a leading trade publication for the natural foods industry, as cited by Whole Foods Market in its 2013 10-K report, p. 1 2. Organic products. Such products, often processed, had to have at least 95 percent organically certified ingredients. These could also carry the green USDA organic certification seal. 3. Made with organic ingredients. Such products had to have at least 70 percent organic ingredients; they could be labeled "made with organic ingredients" but could not display the USDA seal. 4. All other products with organic ingredients. Products with less than 70 percent organic ingredients could not use the word organic on the front of a package, but organic ingredients could be listed among other ingredients in a less prominent part of the package. The USDA's labeling standards were intended to enable shoppers who were ingredient-conscious or wanted to buy pesticide-free or support sustainable agricultural practices to evaluate product labels on which the word organic appeared. The standards were not meant to imply anything about the health or safety of organic products (because there was no credible scientific evidence that organic products were more nutritious or safer to eat than conventionally grown products). The USDA also issued regulations requiring documentation on the part of growers, processors, exporters, importers, shippers, and merchants to verify that they were certified to grow, process, or handle organic products carrying the USDA's organic seal. In 2003, Whole Foods was designated as the first national "Certified Organic" grocer by Quality Assurance International, a federally recognized independent third-party certification organization. Major food processing companies like Kraft, General Mills, Danone (the parent of Dannon Yogurt), Dean Foods, and Kellogg had all purchased organic food producers in an effort to capitalize on growing consumer interest in purchasing organic products. Heinz had introduced an organic ketchup and bought a 19 percent stake in Hain Celestial 9/4/14 10:36 AM Confirming Pages CASE 03 Whole Foods Market in 2014: Vision, Core Values, and Strategy Group, one of the largest organic and natural food producers. Campbell Soup had introduced organic tomato juice. Starbucks, Green Mountain Coffee, and several other premium coffee marketers were marketing organically grown coffees; Coca-Cola's Odwalla juices were organic; Del Monte and Hunt's were marketing organic canned tomatoes; and Tyson Foods and several other chicken producers had introduced organic chicken products. Producers of organically grown beef were selling all they could produce in 2011-2013, with demand growing an estimated 20 to 25 percent annually; headed into 2014, the market share of natural, organic, and grass-fed beef was estimated to be 5 percent based on dollars and 3 percent based on volume. According to the most recent data from the U.S. Department of Agriculture, U.S. producers dedicated approximately 5.4 million acres of farmland 3.1 million acres of cropland and 2.3 million acres of rangeland and pasture to certified-organic production systems in 2011, up from a total of 2.1 million acres in 2001.³ Only About 0.8 percent of all U.S. cropland and 0.5 percent of all U.S. pasture were certified-organic in 2011. There were approximately 13,000 certified- organic producers in the United States in 2011, and perhaps another 9,000 small farmers growing organic products. All 50 states had some certified-organic farmland, with California, Oregon, 3 2 Economic Research Service, U.S. Department of Agriculture, www.ers.usda.gov, September 27 2013 (accessed February 14, 2014). New York, North Dakota, Montana, Minnesota, Wisconsin, and Texas having the most acres of certified-organic cropland. Farmers were becoming increasingly interested in and attracted to organic farming, chiefly because of the substantially higher prices they could get for organically grown fruits, vegetables, and meats. Since 2005, health-conscious chefs at many fine dining restaurants had begun sourcing ingredients for their dishes from local organic farmers and touting the use of organically grown products on their menus. Growing restaurant use of organically grown herbs, lettuces, vegetables, and fruits, as well as organic cheeses and organic meats, was spurring the growth of organic farming (since supplying local restaurants gave organic producers a ready market for their crops). Likewise, there was growing demand for locally grown organic fruits and vegetables on the part of many supermarkets growing numbers had begun promoting fresh, locally grown organic produce in their stores. Organic farmers were also experiencing strong demand for their products among consumers who shopped at local farmers' markets. Retailing of Organic Foods Organic foods and beverages were available in nearly every food category in 2014 and were available in over 90 percent of U.S. retail food stores. Increasingly, the vast majority of retail sales of organic products in 2013-2014 were made through mainstream supermarkets and grocery stores and through leading organic and natural food supermarket chains such as Whole Foods, Trader Joe's, and Fresh Market. Only a small portion of organic sales occurred through independent, small-chain natural grocery stores. Over the past decade, mainstream supermarkets had gradually expanded their offerings of natural and organic products for two reasons. One was because mounting consumer enthusiasm for organic products allowed retailers to earn attractively high profit margins on organics (compared to other grocery items, for which intense price competition among rival supermarket chains on general food products limited profit margins). The other was because consumer demand for organics was growing two to three times faster than the demand for traditional grocery products. Several factors had combined to transform organic food retailing, once a niche market, into the fastest-growing segment of U.S. food sales: A "wellness," or health-consciousness, trend among people of many ages and ethnic groups. • Heightened awareness of the role that food, nutrition, and good eating patterns played in long-term health. Among those most interested in organic products were aging, affluent people concerned about maintaining their health and eating better-for-you foods. • Increasing consumer concerns over the purity and safety of food due to the presence of pesticide residues, growth hormones, artificial ingredients and other chemicals, and genetically engineered ingredients. The growing belief that organic farming had positive environmental effects, particularly in contributing to healthier soil and water conditions and to sustainable agricultural practices. Organic food products were between 10 and 40 percent more expensive than nonorganic foods, chiefly because of the higher production, distribution, and marketing costs for organic products. Such higher prices were the primary barrier for most consumers in trying or using organic products. As of 2014, most supermarket chains stocked a selection of natural and organic food items including fresh produce, canned and frozen fruits and vegetables, milk, cheeses, yogurt, vinegars, salad dressings, cereals, pastas, and meats and the number and variety of organic items on supermarket shelves were growing. Fresh fruits and vegetables accounted for close to 40 percent of total organic food sales, with organic lettuces, spinach, broccoli, cauliflower, celery, carrots, and apples among the biggest sellers. Meat, dairy, grains, and snack foods were among the fastest-growing organic product categories. Leading supermarket chains like Walmart, Kroger, Safeway, Supervalu/Save-a-Lot, and Publix had created special "organic and health food" sections for nonperishable natural foods and organics in most of their stores. Kroger, Publix, and several other chains also had special sections for fresh organic fruits and vegetables in their produce cases in almost all of their stores. Walmart, Target, Safeway, Publix, and Kroger were stocking organic chicken and organic, pasture-raised beef at most of their stores. WHOLE FOODS MARKET Whole Foods Market was founded in Austin, Texas, when John Mackey, the current co-CEO, and three other local natural food grocers in Austin decided the natural food industry was ready for a supermarket format. The original Whole Foods Market opened in 1980 with a staff of only 19. It was an immediate success. At the time, there were less than half a dozen natural food supermarkets in the United States. By 1991, the company had 10 stores, revenues of $92.5 million, and net income of $1.6 million. Whole Foods became a public company in 1992, with its stock trading on the NASDAQ. In February 2014, Whole Foods operated 358 stores in 41 U.S. states and the District of Columbia, 8 stores in Canada, and 7 in Great Britain. Its stores averaged 38,000 square feet in size and $37.4 million in sales annually. More than 50 Whole Foods stores had average sales volumes of more than $1 million per week in fiscal 2013, up from just 6 stores in 2005; several Whole Foods stores averaged sales of over $2 million per week. Exhibit 1 presents highlights of the company's financial performance for fiscal years 2009-2013 (Whole Foods' fiscal year ended the last Sunday in September).