Category Archives: Whole Foods Market Inc

Whole Foods Market, Inc. – Company View

A statement by John Mackey, Chairman of the Board, Chief Executive Officer, and Co- Founder Whole Foods is given below. The statement has been taken from the company’s annual report for the year ended September 2007.

Dear Fellow Stakeholders:
I would like to begin by appreciating our Team Members for their hard work and dedication and our customers, suppliers, and shareholders for their continued support. This year was another great year of growth for our company and stakeholders. On a 52-week to 52-week basis, our sales increased 15% to $6.6 billion driven by 7% comparable stores sales growth and 18%* ending square footage growth. Our average weekly sales for the year were $632,000* per store, a 7% increase year over year, translating to sales per square foot of $923*.
We opened a record 21 new stores, a significant increase over the 13 new store openings we averaged over the previous five years. Our new flagship store in London set new opening-day and first-week company sales records, and we hope to announce additional sites in the U.K. in the near future.We also opened our fourth store in New York City and completely revitalized our brand image in the Chicago area with the opening of four new stores.
After a very lengthy and expensive legal battle with the Federal Trade Commission, we successfully completed our merger with Wild Oats Markets in the fourth quarter. One of the exciting benefits from this merger is that we gained immediate entry into 15 new markets and five new states.
We quickly sold the Henry’s and Sun Harvest stores and closed nine Wild Oats stores not fit our overall brand or real estate strategy. Over time, we plan to relocate seven smaller stores to larger stores that we currently have in development. As a result of the merger, each of our 11 operating regions added stores, with our three smallest regions benefiting the most. At year end, we operated 276 stores totaling 9.3 million square feet with locations in 37 states and the District of Columbia, Canada and the U.K.
We believe our merger with Wild Oats will create long-term value for our customers, vendors and shareholders, as well as exciting opportunities for our Team Members. Over time, we expect to recognize significant synergies through G&A cost reductions, greater purchasing power and increased utilization of our facilities. Tremendous strides have already been made operationally and culturally thanks to the hard work and dedication of our Team Members, both existing and new.
While the Wild Oats stores on average are older and smaller than our stores, we believe that over time we will raise their sales productivity to levels in line with our stores. Sales at the stores are already rapidly improving as customers are enjoying an improved shopping experience thanks to the expanded product offerings, particularly on the fresh foods side, as well as price cuts on over one thousand items.

We plan to invest approximately $45 million in remodels and re-brand the stores as Whole Foods Market stores in 2008. In a short time, this integration has gone faster, further, and deeper than the integration of any of our prior mergers. We feel very positive about the results we have seen so far, and we expect these stores to drive robust sales growth in fiscal year 2008 and higher comparable store sales growth in fiscal year 2009 and beyond.
Over the past four quarters, we announced 28 new store leases, growing our development pipeline to 87 stores, including 14 new markets and 22 relocations. These stores average 51,000 square feet, with 13 stores over 65,000 square feet in size. We have continued to sign and open smaller stores, typically in markets where it is hard to find larger store locations, while experimenting with opening some very large format stores. Our “sweet spot” for most markets is a footprint between 45,000 and 60,000 square feet which allows us to create the exciting shopping experience for which we are known while simultaneously maximizing our return on invested capital. We plan to continue selectively signing sites for larger format stores, which showcase extensive prepared foods and sit-down venues, but they will predominantly be in dense urban markets or relocations of successful existing stores. For the fiscal year, we produced approximately $399 million in cash flow from operations and received approximately $54 million in proceeds from the exercise of stock options. We invested $530 million in capital expenditures and $596 million to acquire Wild Oats, repurchased $100 million of stock and paid shareholders $97 million in dividends. We ended the year with $2 million in restricted cash and total debt of approximately $761 million. In conjunction with our fourth quarter and fiscal year-end earnings release, we announced our fifth dividend increase since declaring our first dividend in November 2003.
Our fiscal year was very positive for the many reasons stated above, but as expected our earnings growth was negatively impacted by our below historical average sales growth combined with materially higher pre-opening expenses related to our acceleration in new store openings.
In addition, as a percentage of sales, our direct store expenses increased to levels above our historical averages. We remain committed to providing above-average wages and benefits to our Team Members, and while we are experiencing increases in health care costs, our annual increases and our costs per Team Member are still well below industry norms. Our goal is to continue to educate our Team Members on how to best use the medical resources available, to avoid emergency room visits for less urgent care, and to encourage wellness programs and overall good health steps.
We walk our talk when it comes to our core values.
Our primary goal is to satisfy and delight our customers. Through constant experimentation and innovation, we are redefining the retail food marketplace and further differentiating our shopping experience from other food retailers. We continue to expand and adapt our product offering in ways that speak to our core customers and to our authenticity and leadership role within natural and organic products including:

Private Label.

Over the last several years, we have significantly expanded our private label resources and offerings, which currently feature over 2,000 SKUs led by our primary brands 365 Everyday Value™ and 365 Organic™. Our private label sales increased to 18% of our total grocery and Whole

Body sales this year, and we expect an even higher percentage over time as we continue to focus on the rapid development and growth of our product lines.

Buying Local.

We have further empowered our individual store and regional buyers to seek out locally grown products that meet our high quality standards, particularly those produced in an environmentally friendly, sustainable way. We provide space in many of our store parking lots, working in concert with existing farmers’ markets when possible, for local farmers to sell their products directly to our customers. In addition, we created a Local Producer Loan Program offering up to $10 million in annual financial assistance through which we have already administered over $1 million in low-interest rate loans to small-scale food producers and growers from 12 states.

Buying Global.

In March, we launched our Whole Trade™ program, a new buying initiative that brings together a set of strict criteria for products from developing countries to ensure: exceptional product quality; more money for producers; better wages and working conditions; sound environmental production practices; and support for eliminating poverty through a donation of 1% of sales to our Whole Planet Foundation™. The Whole Trade Guarantee label is currently featured on over 400 items, and sales of $8 million to date have generated close to $80,000 in donations to the Whole Planet Foundation. Our goal is to have over 50% of our imported products from the developing world meet our Whole Trade qualifications within 10 years.

Five-Step Animal Welfare Rating Program.

With the opening of our new London store in June, we debuted our five-tiered meat and poultry labeling program which provides shoppers with a clear and transparent way to make informed buying decisions based solely on animal welfare considerations. We hope to roll out the program in our U.S. stores in 2008.
Above and beyond offering the highest quality natural and organic products, we are also known for our emphasis on perishables, beautiful stores uniquely designed for each market, and exceptional customer service, which all translate into a fun shopping experience that is hard to replicate.
We support Team Member happiness and excellence and were very pleased to have earned the No. 16 spot on FORTUNE’s annual list of the “100 Best Companies to Work For.” We are one of only 14 companies to be ranked every year since the list’s inception 11 years ago.

WHERE DID THE MONEY GO?
In keeping with our core value of caring about our communities and the environment, we made charitable donations of just under $15 million, or about 8% of our after-tax profits in fiscal year 2007. In addition, our Whole Planet Foundation, which seeks to create economic partnerships with the poor in the developing-world communities that supply our stores with product, committed over $5 million in grants to five micro-lending projects in five countries: Costa Rica, Guatemala, Nicaragua, Honduras and India. We hope to expand to Indonesia, Kenya and Tanzania in 2008. For our commitment to advancing the development of the nation’s green power market, we were awarded the Environmental Protection Agency’s Green Power Partner of the Year award for a second consecutive year.

Our business model is very successful and continues to benefit all of our stakeholders.
We are executing at a high level, continuing to produce higher sales growth, comparable store sales increases and sales per square foot than our public competitors. In fiscal year 2008, we expect higher-than-average sales growth of 25% to 30%, of which approximately 10% is expected to come from the Wild Oats stores, and comparable store sales growth of 7.5% to 9.5%.
We believe we will return to our more historical comparable stores sales growth rate despite increasing competition, a greater degree of cannibalization, and the possible negative impact of any slowdown in consumer spending. Our expectation is based on our continued positive sales growth trends along with easier year-over-year comparisons, a greater number of new stores entering the comparable store base, and the transfer of sales from some of the Wild Oats’ store closures.
While we expect higher-than-average total sales growth, we do not expect to produce operating leverage for the year due primarily to a decrease in store contribution as well as flat G&A expense year over year as a percentage of sales. Store contribution is expected to be negatively impacted by a higher percentage of sales coming from new and acquired stores which have a lower contribution than our existing stores, and continued, though more moderate, increases in health care costs as a percentage of sales, as well as investments in labor and benefits at the Wild Oats stores. G&A is expected to be flat as a percentage of sales primarily due to costs related to the Wild Oats acquisition, including integration costs and costs related to fully staffing our three smallest regions which gained the greatest number of stores as a percentage of their existing store base.
We have produced very consistent gross margin, direct store expenses, and G&A as a percentage of sales over time and believe that, over the long term, we will continue to deliver healthy earnings growth through strong sales growth rather than through significant operating leverage. We believe the investments we are making today in our new, acquired and existing stores will result in substantial earnings growth in the near future.
We are well positioned to achieve our goal of $12 billion in sales in fiscal year 2010.
With fewer than 300 stores, the majority of which are in the top metro markets, we have significant growth opportunities ahead of us. None of our current markets are saturated; the top markets allow for a dense concentration of stores, the majority of which are still underserved; the success we are seeing in some of our new markets indicates there are a lot of opportunities in secondary markets, and we are very excited about what lies ahead of us in terms of international expansion.
Given our recent merger, solid historical sales growth, significant store development pipeline, and acceleration in store openings, we believe we are well positioned to achieve our goal of $12 billion in sales in the year 2010. Over the longer term, however, we believe the sales potential for Whole Foods Market is much greater than $12 billion as the market continues to grow and as our company continues to improve.

We have grown our stock price at an average compound annual rate of 22% since going public, and we encourage our shareholders to stay focused on the long term. We are constantly evolving, innovating and maturing and have a demonstrated track record of competing, executing and delivering compelling results.
Our motto—Whole Foods, Whole People, Whole Planet™—emphasizes that our vision reaches far beyond just food retailing. We look forward to sharing our vision with the rest of the world.

*Excludes acquired Wild Oats stores.

Whole Foods Market, Inc. – Locations and Subsidiaries

Head Office
Whole Foods Market, Inc.
550 Bowie Street
Austin
Texas 78703-4644
USA
P:1 512 477 4455
F:1 512 482 7000
http://www.wholefoodsmarket.com

Other Locations and Subsidiaries

Allegro Coffee Company 12799 Claude Court Bldg B, Dock 4 Thorton

Colorado 80241 USA

Whole Foods Market

Florida

7700 Peters Road

Plantation

Florida 33324

USA

Whole Foods Market

Mid-Atlantic

6015 Executive Blvd

Rockville

Maryland 20852-3810

USA

National Procurement Center

3 Hangar Way

Suite B

Watsonville

California 95076

USA

Whole Foods Market Pacific Northwest 888 116th Ave NE Bellevue

Washington 98004 USA

Whole Foods Market

905 River Road

Edgewater

New Jersey 07020

USA

Whole Foods Market, Inc. – Top Competitors

The following companies are the major competitors of Whole Foods Market, Inc.

  • Safeway Inc.
  • Weis Markets Inc
  • Winn-Dixie Stores, Inc.
  • Nutraceutical International Corporation
  • Pathmark Stores, Inc.
  • Wal-Mart Stores, Inc.

Whole Foods Market, Inc. – SWOT Analysis

Whole Foods is one of the world’s largest retailer of natural and organic food products.Whole Foods recoded strong financial performance in the recent years. In 2007, the company’s revenues grew by 17.6% over 2006, to reach $6,591.8 million, in 2007. The Strong revenue growth has helped the company to pursue its expansion plans and improve its bargaining power in the market. However, a slowdown in the US economy could adversely affect the sales of the company in the long run.

Strengths

Weaknesses

Strong revenue growth Focused growth strategy Wide product portfolio

Weak international operations Conservative international policy Increasing rental expenses

Opportunities

Threats

Higher demand for organic products

Expansion in the UK

Growth in private label products

Increasing competition Labeling and other regulations Slowdown in the US economy

Strengths

Strong revenue growth
Whole Foods recoded strong financial performance in the recent years. In 2007, the company’s revenues grew by 17.6% over 2006, to reach $6,591.8 million, in 2007. The company’s revenues grew at a compounded annual growth rate CAGR (2005-2007) of 18%. The increase in revenue was driven by 14% square footage growth, excluding acquired Wild Oats locations, and comparable store sales growth of 7.1%. Whole Foods recorded sales per gross square foot of $923 in 2007, an increase of approximately 7% over 2006. The Strong revenue growth has helped the company to pursue its expansion plans and improve its bargaining power in the market.

Focused growth strategy

Whole Food’s focuses on expansion, primarily through new store openings. During 2007, the company opened 21 new stores across the US and Canada. For instance the company opened its first store in Maine, the US, in February 2007. The store has a retail space of 48,000 square feet which offers many unique features not found at an average supermarket, including a coffee bar, an all-natural taffy-pulling machine, a sit-down sushi bar, and a trattoria with an oven featuring hot Italian entrees and a variety of items grilled to order.The company continued its growth strategy in 2008, by opening its new store in Napa, California, in January 2008. The new store also includes a wine bar. Further, the company has signed leases for 87 stores scheduled to open through fiscal year 2010 totaling approximately 4.5 million square feet, or approximately 48% over the existing selling space.
The company has also grown through mergers and acquisitions, with approximately 32% of its existing square footage coming from take-over’s. In August 2007, the company merged with Wild Oats markets based in Boulder, Colorado Since, the natural foods retailing industry is highly fragmented and comprised of many small local and regional chains, mergers and acquisitions have provided the company access to desirable markets, locations and experienced team members.
A focused growth strategy has helped the company to reach a wide customer-base and diversify its revenue streams.
Wide product portfolio
The company offers a broad product selection in all its stores, including seafood, grocery, meat and poultry, bakery, prepared foods, specialty (beer, wine and cheese), whole Body (nutritional supplements, vitamins, body care and educational products such as books), floral, pet products and household products.

In its larger stores (between 60,000 to 80,000 square feet), it stocks an even larger selection of organic food and non-food products. These stores also have catering services where customers can purchase made-to-order foods. Moreover, the company’s emphasis on fresh food gives the company an edge over its competitors who usually just offer packaged foods. Wide product portfolio allows the company to address multiple customer segments, apart from insulating it from any significant fall in demand for any specific product or segment.
Weaknesses

Weak international operations

The company has weak international operation with just three stores in Canada, and six in the UK. The company’s operations in the UK and Canada are not yet large enough to derive economies of scale in purchasing and distribution, resulting in relatively high product prices. These higher prices erode the competitiveness of the company relative to its established international rivals, who have larger scale operations and, therefore, leaner economics.Whole Foods’ weak international operations are likely to prove a drain on the resources of the company.

Conservative advertising policy

Whole Foods relies heavily on word-of-mouth publicity, a disadvantage in comparison to its competitors who aggressively use print, television and online media. The company spends meager amounts on advertising and marketing relative to its competitors. In 2007, the company spent 0.5% of its total revenues on advertising. Since, demand for organic foods is increasing; there is scope to further step up the growth rate through aggressive advertising assuming that consumer awareness of organic products is still relatively low. Competition in the organic product segment is also increasing as more retailers begin to offer organic products. With Whole Foods still relying heavily on word-of-mouth publicity, its new stores may take longer than usual to break even.

Increasing rental expenses
Whole Foods is committed under certain capital leases for rental of equipment and certain operating leases for rental of facilities and equipment. In the recent years company’s rental expenses has increased significantly. During 2007, the company’s rental expense was approximately $201 million as compared with that of $99.9 million in 2004. Moreover the company also paid contingent rental of approximately $9.9 million in 2007 as compared with that of $4.8 million in 2004. Increasing rental expenses have a negative impact on the margins of the company.

Opportunities

Higher demand for organic products
Natural and organic food products segment is one of the fastest growing categories in food retailing. There is an explosive growth in the demand for organic foods because of the increasing preferences among consumers for healthy food. The US, Germany, and the UK would be the key geographical areas of growth for the organic food market.The US organic food market grew by 12.3% in 2006 to reach a value of $15.9 billion.

The US organic food sales are expected to reach almost $24 billion in 2010.The organic food market in Germany is anticipated to grow at a CAGR (2007–2011) of 12%. Japan will be the leading Asia in terms of organic food market revenue and its market is anticipated to grow at a CAGR (2007–2011) of 29.8%.

Although organics represent just about 2% of the total food and beverage sales in the US, the market is growing 20% annually. More and more consumers across the US prefer natural, fat-free and healthy food products. Food items containing trans-fat are losing market share to low calorie, low fat, natural and organic products. Increasing customer preference for organic foods is likely to favorably impact the company’s sales, given its leading market position in the segment.

Expansion in the UK
Whole Foods entered the UK with the acquisition of Fresh & Wild in 2004. Further, in June 2007 the company opened its first flagship store in London. The 80, 000 sq ft store, could be a major step in company’s expansion initiatives outside US. The company currently operates six stores in the UK including new store and the stores acquired from Fresh & Wild.The sales of organic food and drinks in the UK have doubled in recent years and approximately two thirds of British adults consume organic food and drinks.The UK market for organic food and drinks is expected to increase by 72% to reach a value of £2 billion by 2010. The strong growth in the UK organic food and drinks market would eventually translate into higher demand for the company’s products.
Growth of the UK organic food and drinks market provides an opportunity for Whole Foods to expand its existing operations, resulting in economies of scale in supply chain.

Growth in private label products
Private label products in the US are witnessing a strong growth in sales. Consumer spending on private label food, drinks and personal care in the US is expected to rise from $108 billion in 2005 to $137 billion by the end of 2011. Private brands now account for one of every five items sold in US retail stores, drug chains and mass merchandisers. Approximately 41% of the US shoppers currently buy private labels as compared to 36% five years ago. Private labels account for 20% of the items sold in US supermarkets, drug chains, and mass merchandisers. They account for more than $50 billion of current business at retail. It is estimated that US groceries shoppers derive approximately $15.8 billion in annual savings by purchasing private label products.
Whole Foods’ private label offerings feature over 2,000 stock keeping units (SKUs). The company markets its private label products under the following corporate brands: 365 Everyday Value, 365 Organic and the Whole Brands family. Additionally, the company has number of store-made and regionally-made fresh items sold under the Whole Foods Market label. It also offers specialty and organic coffees and teas through its Allegro Coffee Company subsidiary.

The 365 Organic Everyday Value brand provides the benefits of organic food at lower prices. The company has expanded this program to non-grocery departments, including a line of organic fresh vegetables.Whole Kids Organic is an organic food product line developed for children under the Whole Kids label. Whole brands include Whole Kitchen (frozen grocery), Whole Treat (frozen desserts and candies), Whole Catch (frozen seafood items), Whole Fields (produce and produce support items), Whole Pantry (pantry items such as flavored olive oils and vinegars), Whole Creamery (cheeses), Whole Dairy (eggs) and Whole Ranch (frozen burgers and franks).
Private label brands provide higher margins than branded products for the retailer and Whole Foods Market already has an established portfolio of strong private label brands.This increased acceptance of the private label products will have a favorable impact on the company’s margins.

Threats

Increasing competition
Whole Foods’ competitors include natural foods supermarkets, conventional and specialty supermarkets, other natural foods stores, warehouse membership stores, small specialty stores and restaurants. These businesses compete with it in one or more product categories. In addition, some traditional and specialty supermarkets are also expanding more aggressively in marketing a range of natural foods, thereby competing directly with the company for products, customers and locations. For example during 2006, Wal-Mart announced that it will focus on the organic segment. The retail giant aims to become the low-price leader in organics, not just in food but clothing, electronics and other household products. Wal-Mart has already doubled its organic range in fresh produce, dairy and dry food items during 2006.
Some of these existing and potential competitors have greater financial or marketing resources than Whole Foods, and may be able to devote greater resources to sourcing, promoting and selling their products. Increased competition may have an adverse effect on profitability as the result of lower sales, lower gross profits and/or greater operating costs such as marketing.

Labeling and other regulations
As the company operates in the natural and organic foods market, its stores and products are subject to several laws and regulations relating to health, sanitation and food labeling. Several federal agencies and departments including the Food and Drug Administration (FDA), the Federal Trade Commission (FTC), the Consumer Product Safety Commission (CPSC), the United States Department of Agriculture (USDA) and the Environmental Protection Agency (EPA) set critical standards for the manufacture, processing, formulation, packaging, labeling and advertising of products.
Failure to comply with these standards could result in penalties and seizure of marketing and sales licenses.These regulations also result in additional compliance costs, which could reflect in reduced margins.

Slowdown in the US economy
The US is the key market for Whole Foods. According to the Organization for Economic Cooperation and Development (OECD), GDP growth in the US is expected to slowdown in 2008.The GDP growth of the US economy is forecast to slow down from an estimated 3.3% in 2006 to 1.9% in 2008. A slowdown in the US economy would depress the purchasing power of the retail customers, which in turn will depress revenue growth and reduce margins of Whole Foods. Slowdown in the US, the key market for Specialty retail chains such as Whole Foods Market, will put pressure on the revenues of the company.

Whole Foods Market, Inc. – Revenue Analysis

The company recorded revenues of $6,591.8 million during the fiscal year ended September 2007, an increase of 17.6% over 2006. The company derives majority of its revenues from its domestic market – the US.
The company operates in only one reportable segment – natural and organic foods supermarkets.
Revenues by Division
The company operates in only one reportable segment – natural and organic foods supermarkets and derives all its revenues from this business.

Revenues by Geography
The company derives majority of its revenues from its domestic market – the US.