A Porter "Five Forces" analysis of Whole Foods Market, written for my Capstone MBA class.

1. Running Head: PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
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Porter Five Forces Analysis: Whole Foods Market
Teresa J. Rothaar
Wilmington University

2. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
Porter Five Forces Analysis: Whole Foods Market
Introduction
Founded in 1980 in Austin, Texas, Whole Foods is a natural and organic foods grocer
operating over 360 stores in North America and the U.K. Much of the company’s growth has
been not from new construction, but acquisitions and mergers (Whole Foods Market, n.d.).
While Whole Foods operates in the natural and organic foods niche, it competes directly with
mainstream grocers, warehouse stores, and small, local farmers’ markets and specialty stores.
Threat of New Entry
The threat of new entrants into the industry is low. Due to the high-cost, low-margin
nature of the grocery industry, the competitive landscape is stilted towards large corporations
that can operate efficiently while selling in volume; the largest 50 companies are responsible for
about 70% of revenue (Hoovers, n.d.). It would be very difficult for a brand-new chain to emerge
on the scene and compete with the giants; the threat comes from existing competitors.
Supplier Power
The threat of supplier power is medium to high. Whole Foods prides itself on sourcing as
much food as it can from small producers local to each store. However, the company makes all
of its suppliers abide by very strict quality standards, which, by its own admission, make it
difficult to locally source meat and seafood products in particular (Omer, 2014). Two factors are
exacerbating this problem:
1. As of 2011, only about 0.8% of cropland and 0.5% of pasture in the United States
was certified organic (USDA, 2013). Organic suppliers are limited.
2. Just like the grocery industry, the organic and natural foods production industry
has seen significant consolidation over the past two decades. In 1995, there were
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3. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
81 independent organic food processing companies in the U.S. Today, there are
only 15. Multinational corporations such as Coca-Cola, ConAgra, and Nestle
produce nearly all of the organic food sold in U.S. stores (Remington, 2014).
While Whole Foods can throw its weight around when dealing with small, local farmers,
these local companies are being purchased by multinationals, leaving Whole Foods purchasing
from an increasingly smaller number of small suppliers, and having to buy from multinationals.
Buyer Power
The threat level from buyer power is low to medium. Massive consolidation in the
grocery industry in recent years, coupled with the fact that everyone has to eat, means that buyers
wield little power. In 2012, 53.6% of Americans’ grocery money was spent at four chains: Wal-
Mart, Kroger, Safeway, and Target, with Wal-Mart capturing nearly 1/3 of grocery sales that
year (Spector, 2013).
However, after the 2008 economic crash, many Americans found themselves unemployed
or underemployed. While money-challenged consumers cannot stop buying food completely,
they can choose lower-priced options. This shift impacted the natural and organic foods niche
heavily, including Whole Foods, which responded with offering more private-label products at a
lower price (Senauer & Seltzer, n.d.).
Competitive Rivalry
Competition in the grocery industry is intense; this threat level is high. The natural and
organic foods niche is growing, but this growth potential has attracted stiff competition for
Whole Foods, particularly from Costco and Kroger. As a result, over the past quarter, Whole
Foods slashed prices on many major items. Its most recent quarterly report was poor, and upon
its release the company’s share price tumbled more than 8% (Singh, 2014).
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4. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
While, as noted above, it would be difficult for a brand-new chain to enter the market, it
is very easy for existing competitors to offer more natural and organic food products. In addition
to Kroger and Costco, Whole Foods faces growing competition from specialty grocers,
especially Trader Joe’s and Sprouts Farmers Market, both of which are growing quickly (Gaar,
2013). Gaar reports that while Whole Foods is growing more quickly than ever itself, it is no
longer in a position to buy out every emerging competitor, the way it could previously.
Threat of Substitution
This threat level is high, and closely tied with the threat of industry competition. As noted
above, mainstream grocers are jumping into the natural and organic foods market with gusto;
consumers can choose to buy their “health food” at the same stores where they do the rest of
their grocery shopping, and in the case of superstores like Target, all of their shopping.
Consumers can also choose to patronize local farmers’ markets, or just buy “regular” food.
Conclusion
The biggest and most imminent threats to Whole Foods Market come from product
substitution, supplier power, and existing competitors, with buyer power an emerging threat.
Large national grocers are increasing their organic and natural foods options, and smaller
specialty chains are growing. Superstores like Wal-Mart, Target, and Meijer are of particular
concern, since they offer a one-stop-shopping experience where customers can buy grocery and
non-grocery items at the same location, in one trip. While consolidation means that buyers do not
wield a lot of power in the grocery industry as a whole, they can choose to purchase lower-priced
alternatives to expensive premium organic foods, and are doing so, which has hurt Whole Foods.
Meanwhile, natural and organic foods manufacturers are consolidating as well, which means that
Whole Foods has fewer choices and faces higher prices on the wholesale level.
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5. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
In light of its recent financial results, Whole Foods may wish to slow or even stop its
growth for the time being, and focus on providing its existing customers with a superior
shopping experience and the best value on upscale food products, in particular its private label
products.
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6. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
Figure 1. Michael Porter’s “Five Forces” Model for Whole Foods Market. This figure illustrates
Porter’s “Five Forces” as they apply to Whole Foods Market.
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7. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
References
Gaar, B. (2013, December 21). Whole Foods Chain is Growing, but Facing Increasing
Competition. The Columbus Dispatch. Retrieved from
http://www.dispatch.com/content/stories/business/2013/12/21/healthy-but----.html
Hoovers. (n.d.). Grocery Stores & Supermarkets Report Summary. Retrieved from
http://www.hoovers.com/industry-facts.grocery-stores-supermarkets.1535.html
Omer, T. (2014, February 26). Whole Foods Forages for Local Suppliers to Stock New Hyannis
Store. The Martha’s Vineyard Times. Retrieved from
http://www.mvtimes.com/2014/02/26/whole-foods-forages-for-local-suppliers-to-stock-
new-hyannis-store/
Remington, J. (2014, February 20). The Truth About Who Owns Organic Food Companies, In
One Chart. PolicyMic. Retrieved from http://www.policymic.com/articles/82881/the-
truth-about-who-owns-organic-food-companies-in-one-chart
Senauer, B., & Seltzer, J. (n.d.). The Changing Face of Food Retailing. Choices Magazine.
Retrieved from http://www.choicesmagazine.org/magazine/article.php?article=154
Singh, V. (2014, March 30). Dump Whole Foods Market To Buy Kroger And Costco.
GuruFocus. Retrieved from http://www.gurufocus.com/news/253338/dump-whole-foods-
market-to-buy-kroger-and-costco
Spector, K. (2013, December 16). How Big Food Creates an Illusion of Choice at the
Supermarket. AlterNet. Retrieved from http://www.alternet.org/food/how-big-food-
creates-illusion-choice-supermarket
United States Department of Agriculture. (2013, September 27). Organic Production
Documentation. Retrieved from http://www.ers.usda.gov/data-products/organic-
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8. PORTER FIVE FORCES ANALYSIS: WHOLE FOODS MARKET
production/documentation.aspx#.UzxK9q1dUoo
Whole Foods Market. (n.d.). Whole Foods Market History. Retrieved from
http://www.wholefoodsmarket.com/company-info/whole-foods-market-history
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