Whole Foods Current Strategy Executive Summary Whole Foods Market, Inc. 25 Years Of Double Digit Revenue Growth $4.7B Organic Supermarket Industry Leader Whole Foods Current Strategy Expand Through New Store Openings Achieve $12 Billion In Sales By 2010

Competitive Strategy Analysis Executive Summary Competitive Strategy Analysis Supplier Power Dominates This Industry Current Strategy Lacks Aggressiveness Recommended Strategy Establish Partnerships With Traditional Supermarkets Achieve National Brand Equity

Overview Porter’s Five Forces Analysis SWOT Analysis of Whole Foods Recommended Strategy Questions/Discussion

Market Definition Market History Natural And Organic Food Industry Began About 30 Years Ago Whole Foods Market Is A “Founding Firm” USDA Established The “Organic Rule” In 2002 Early adopters were “social-cause” consumers – environmental and animal rights activists – think “hippies chewing on granola”.

Market Definition All Products Sold As “Organic” Must Now Meet The Requirements Of The USDA Organic Rule Approximately $13 Billion In Sales In 2005

Threat To Profits: High Sources Of Internal Rivalry: Many Sellers In The Market Differing Cost Structures Strong Exit Barriers

Differing Cost Structures Internal Rivalry Differing Cost Structures Consider A Wal-Mart Supercenter: > 100,000 Square Feet Average Supermarket Only 35,000 Square Feet Significant Economies Of Scale Difference And Wal-Mart Continually Drives Down Prices Strong Exit Barriers High Investment In Property, Distribution And Inventories

Entry Threat to Profits: Medium Originally, Health Food Stores Were Small, Expensive, And Unpredictable. Some Health Stores Grew Into Supermarkets: Sun Harvest Whole Foods Market Some Existing Supermarkets Re-Branded Wegmanns HEB: Central Market

New Supermarket Entrants Segment Entry Types Re-branded Supermarkets H.E.B. (Texas) Created “Central Market” Wegmans (New York) Upgraded Locations New Supermarket Entrants Growing Health Food Stores (GNC) New Firms Now that the market segment has incumbents, consumers have developed expectations and brand loyalty.

Barrier New Entrant Re-Branded Entrant Comparison Barrier New Entrant Re-Branded Economies of Sales Strong Moderate Government Protection N/A Brand Loyalty Access to Key Inputs Weak Experience Curve Network Externalities Competition Expectations Overall Threat: Low High Because the threat of entry of a new entrant is low, we will be focusing on the entry threat of existing super-market leaders.

Most Likely Segment Entrants Based On The Barriers To Entry Analysis, The Most Likely Entrants Into The Organic Segment Of The Supermarket Industry Are Established Firms Who’s Next?

Substitutes And Complements Health Industry Health Insurance Companies Health Care Specialists Fitness Centers Wellness Programs Substitutes Threat To Profits: Medium Health Food Stores Traditional Supermarkets Supercenters

Threat to Profits: High Supplier Power Threat to Profits: High Local Growers, Independent And Family Farmers, Large Corporate Farms, Co-ops And Food Brokers Organic Supply Chain Underdeveloped Growing Number Of Organic Food Grocers Gives growers all the power, organic chain is underdeveloped, there is not enough capacity. Not enough free range to “meat” demand.

Threat To Profits: Medium To High Buyers Have Options! Price Buyer Power Threat To Profits: Medium To High Buyers Have Options! Price Convenience Varying Levels Of Health Sensitivity Mixed Consumer Messages The buyer has substitutes and options

Porter’s Five Forces Summary Threat to Future Profits Internal Rivalry High Entry Medium Substitutes/Complements Supplier Power Buyer Power Medium to High

Whole Foods, Whole People, Whole Planet Strengths Whole Foods, Whole People, Whole Planet Corporate Culture Customer Experience Perishables Hip Image Double Digit Growth Largest Selection

Whole Foods: Whole Planet: Strengths Whole Foods: Reputation: Healthy, Local Food Whole People: Branding For Affluent And Health Conscious Positive Employee Environment Whole Planet: Environmentalist Reputation Encourages Brand Loyalty, Holds Off Commoditization

Whole Financing! Strengths Strong Cash Flow And Stock Position Provide Capital For Growth In The Most Highly Desired Locations 4.7 Billion Dollar Revenues Revenue Growth: 21.6 Percent From 2004 To 2005 15.8 Percent From 2005 To 2006 Returning Invested Capital (ROIC): 37% Capitalization Increased To 6.8 Billion: 6th On The List Of All Grocery Chains t Because of their stock situation low debt and incoming cash, they can afford to enter the best new locations.

Whole Planet? Weak International Operations Low Employee Efficiency Weaknesses “Whole Paycheck” Whole Planet? Weak International Operations Low Employee Efficiency Revenue per Employee = $138K versus Industry Average of $309K Only one int. planned – High level of service- happy employees, low efficiency.

Market Leadership in High Demand Segment Opportunities Market Leadership in High Demand Segment 2002 USDA Organic Rule – True Differentiation Organic and Natural Food Industry Focus on Consumer Education Media Coverage Health benefits of organic foods Suspicious of “contaminants” (e.g. hormones, antibiotics, etc.)

Private Label Brands Opportunities “Whole-X”, Where X = Kids, Ranch, Fields, Catch, Creamery, Diary, Treat Growth Of These Brands Is High Due To Lower Price Versus Contemporary Organic Brands Potential To Sell These Products In Traditional Supermarkets

Increased Competition Threats Increased Competition Re-branding Existing Supermarkets Wal-Mart Changes in Government Regulations Changes in Economic Conditions Impact of Consumer Spending

Whole Foods’ Current Strategy Corporate Strategy Whole Foods’ Current Strategy Expand Through New Store Openings ‘Build’ Versus ‘Buy’ New Stores Customized Stores To Local Preferences Open To Acquisition Opportunities Grow Store Space At A “Controllable” Rate Of 14% Preserve Corporate Culture Achieve $12B In Sales By 2010 Whole Foods is a well managed company with a strategy in place. Their managers may be to close to their market, unable to see the competitive landscape Store construction is in pipeline at least through 2008. Will this be enough given the recent changes in the competitive landscape?

Coordinated Campaigns To Enter New Markets Medium Term Strategy Coordinated Campaigns To Enter New Markets Prior To Store Opening, Establish Relationships With: Traditional Supermarkets Willing To Sell “Whole-X” Products Local Organic Suppliers And Growers Aggressive Advertising Upon Store Launch: Emphasize “Whole Foods, Whole People, Whole Planet”

Build National Brand Equity Long Term Strategy Build National Brand Equity Extend Partner Relationships Into Current Markets Increase Advertising Budget From 0.4% To The Industry Average Of 1.5% Focus On Building Brand Identity With Organics When Consumers Think “Organic”, They Think “Whole Foods” Shed The “Whole Paycheck” Image

Questions & Discussion