The implementation of market strategies allows companies to formulate long-term and future-oriented strategic plans that help develop a sustainable competitive advantage. Some companies may focus on utilizing the marketing mix that integrates the price, product, promotion, and place, while some business leaders will choose to remain innovative and invest in new marketing concepts. One such company is Whole Foods Market which employs the economic moat concept to create sustainable competitive advantage. Whole Foods’ economic moat as a market strategy has ensured that the company remains competitive through the maintenance of customer loyalty, higher-than-average profit margins, the ability to offer high-priced quality products, and its affiliation with Amazon.
Basic Description of Whole Foods Market
Headquartered in Austin, Texas, Whole Foods Market Incorporated is a supermarket chain with more than 500 stores in North America. Whole Foods specializes in the sale of organic food products. The popularity of the company’s products stems from the fact that they are free from artificial colors, fats, and preservatives. The company was formed after Clarksville Natural Grocery and SaferWay merged in1980. In 2017, Whole Foods market merged with Amazon, the world’s largest online retailer in a deal worth $13.7 billion (Aubrey, 2017). At the time, more Americans had begun online grocery shopping and the merger was seen as a way of consolidating the market to make it easier for customers to source their grocery products from online businesses. Whole Foods' purpose is “to nourish people and the planet” and “to set the standards of excellence for food retailers” (Whole Foods Market, 2018, par. 1). On the other hand, some of the company’s core values are supporting global and local communities, focusing on product quality, creating wealth, and supporting employee excellence.
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As a retailer of food products, Whole Foods has cut out a niche in the natural foods department. The food industry had been dominated by big corporates that had little or no interest in the provision of organic foods. Although consumers were aware of the benefits of organic food products, existing businesses were focused on profit maximization. However, Whole Foods was able to partner with small retailers, and this ensured that consumers had access to quality natural foods. Soon, there was a shift in the industry towards organic foods. According to Smith (2017), 44% of customers have a preference for naturally produced organic foods. Most of the companies that supplied genetically modified food products were forced to join Whole Foods Market’s organic revolution.
The rise of Whole Foods in the retail industry can be compared to the introduction of revolutionary products such as the smartphone and the television set. Through innovative strategies, the company has been able to remain competitive in the presence of fierce competition. Mansfeld, et al. (2010) allude that innovations allow companies to become internationally competitive and sustainably survive in the long term. The effectiveness of innovative strategies also depends on the individuals driving the said solutions. Whole Foods’ ability to invest in new and innovative ways of doing business has highly been reliant on the influence brought about by John Mackey, the company’s CEO. Under his watch, the company has gradually gained a competitive advantage by offering products at low prices, focusing on consumer health, diversifying its product base, and ensuring business transparency (Hutson, 2017). The prices of products such as organic avocado and chicken products have been considerably slashed to suit consumer preferences, while the company allows customers to track the production processes of their foodstuffs. Additionally, the company’s merger with Amazon enabled Whole Foods to diversify their product ranges, meaning that the company can cater to a wide range of market bases.
Negative consumer perception and a reliance on the American market are the company’s most significant weaknesses. Although Whole Foods Market commands a fair share of the organic and natural foods market in North America, it is widely perceived that the company offers expensive products. The company targets health-conscious consumers who are willing to pay extra for organic products. The production costs for organic products are higher than for genetically modified products. Therefore, the customers are forced to pay more for the premium offerings. This negative perception seems to isolate the lower and medium-income consumers who cannot afford Whole Foods products. As a multinational company, Whole Foods also tend to over-rely on the American market. Presently, Whole Foods operates in three key markets: the United States, Canada, and the United Kingdom. Nevertheless, the United States market is the largest in terms of sales share of the company’s products at 97% (Conway, 2019). An overreliance on the American market may prove non-profitable in the long run, unless the company diversifies its product offerings to suit the other two markets.
Whole Foods’ Competition
A business’ competitive environment affects its market share, consumer base, and profit margins. Often, competitors try to gain competitive advantage by innovating new ways of production and product delivery, lowering the prices of their products, or diversifying their product offerings. Therefore, when studying the market strategies employed by a business, it becomes important to understand its main competitors and how their market strategies differ. Walmart Inc. and The Kroger Co. are two of Whole Foods’ competitors in the retail industry. Although Walmart controls a chain of grocery stores, the company also operates several department stores and hypermarkets primarily in the American market. However, Walmart operates in close to thirty countries among them Japan, Mexico, and Argentina. Therefore, this acts as one of the company’s main competitive advantage in comparison to Whole Foods. On the other hand, Kroger Co. is the biggest supermarket chain in America based on annual revenue. Like Walmart, Kroger has diversified its portfolio. The company has invested in food processing, manufacturing, and the health sector through several pharmacies and clinics. Kroger’s portfolio also contains hypermarkets, department stores, and supermarkets where its products are sold. Although Kroger dwarfs Whole Foods in size, the company only operates in the United States.
Whole Foods’ Economic Moat as a Strategy
Whole Foods Market’s consumer experienced is high-quality and, hence, the company's leadership has succeeded in fashioning an economic moat by strengthening its brand value. Even after the company’s merger with Amazon, Whole Foods has maintained brand authenticity by ensuring that consumers continue to recognize with the brand. This economic moat has made Whole Foods more competitive compared to its competitors. The economic moat concept was first introduced by Warren Buffett when he famously stated that “economic castles protected by unbreachable moats” was one of the most important characteristics that he looks for before investing in a given niche (Manditch, 2018, p. 20). The effect of the concept’s introduction was that investors and business leaders today are actively using the economic moat strategy when seeking to gain competitive advantage.
Nevertheless, there are differences between an economic moat and the archetypal competitive advantage. Ideally, competitive advantages are those advantages that allow companies to earn more than their competitors. However, economic moats are more focused on sustainability that short-term competitive advantage. Therefore, Buffett’s economic moat concept alludes to ways in which companies can gain competitive advantages in the short-term, while also laying the groundwork for the attainment of competitive advantages in the future.
There are ways that investors can use to identify economic moats. The first factor that counts is the presence of intangible assets such as the maintenance of a loyal customer base, higher-than-average profit margins, or the ability of a company to offer high-priced quality products. Another characteristic is the presence of high customer switching costs. That is the provision of products or services that consumers cannot easily forsake for close substitutes. Additionally, economic moat can be identified by looking at a company’s cost advantage in terms of economies of scale and the presence of useful networks. According to Larson (2012) , when a company has been operating efficiently over a period of ten years, then this acts as a contributing factor to its economic moat. The ability to create and maintain sustainable networks, such as online social platforms, also helps a company to become more important to all the stakeholders involved.
Analysis of Whole Foods’ Economic Moat
Whole Foods’ economic moat has ensured that the company maintains a competitive advantage in comparison to its competitors. The company’s profit margins have been rising over the last ten years. For instance, the company’s numbers for the fourth quarter of 2017 showed that the company’s profits enabled the grocery and retail industries to grow by 6.5% and 5.3%, respectively. As long as the company’s main competitors do not make more direct investments in the natural and organic foods industry, then it can be expected that the sustainability of the company’s profits will enable it to remain competitive in the long run.
It is also important to note that although switching costs in the grocery market are essentially low owing to high competitiveness, Whole Foods has been able to maintain a loyal customer base, as well as continuously offering high-quality products. As stated earlier, one of the company’s key focuses is on customer satisfaction. The company has maintained its brand mainly because customers can identify certain products to the Whole Foods brand.
Additionally, through the introduction of premium products through the Amazon prime benefits platform, customers are constantly engaging with company management. Customers can create online accounts where they can get discounts on their purchases. The long term effect of this strategy is that customers become more aware of new products as they are introduced. The company is also in a position to make long term investments by banking on big data analytics. Through the collection of consumer data through the Amazon platform, the company is well-positioned to utilize the predictive nature of big data.
The ability of Whole Foods to address a specific market niche also makes the strategy highly effective. Today, consumers are concerned about how food products are produced and packaged. Well-educated middle-income households would rather spend more on natural and organic foods than consumer products that they believe will be harmful to their health. The government has also been receptive of sustainable ways of farming. Therefore, the fact that Whole Foods’ primary focus is on the natural and organic foods niche through the provision of premium products sets them apart from their competitors.
In conclusion, the employment of the economic moat by Whole Foods has offered the company a valuable market strategy that will allow it to remain competitive in the long run.
The implementation of market strategies allows companies to formulate long-term and future-oriented strategic plans that help develop a sustainable competitive advantage. The strategy has ensured that the company remains competitive through the maintenance of customer loyalty, higher-than-average profit margins, the ability to offer high-priced quality products, and its affiliation with Amazon. It is, thus, recommended that Whole Foods carries on with its current market strategy.
References
Aubrey, A. (2017, June 17). After the Amazon deal: what will shopping at Whole Foods feel like? Retrieved from https://www.npr.org/sections/thesalt/2017/06/17/533239065/after-the-amazon-deal-what-will-shopping-at-whole-foods-feel-like
Conway, J. (2019, January 7). Sales share of Whole Foods Market worldwide by region, 2017. Retrieved from https://www.statista.com/statistics/258676/sales-share-of-whole-foods-market-worldwide-by-region/
Hutson, S. (2017, September 3). Why you need to start shopping at Whole Foods. Retrieved from https://www.thelist.com/83998/need-start-shopping-whole-foods/
Manditch, E. (2018). Can Economic Moats Provide Investors With a Competitive Advantage?
Mansfeld, M. N., Hölzle, K., & Gemünden, H. G. (2010). Personal characteristics of innovators—an empirical study of roles in innovation management. International Journal of Innovation Management , 14 (06), 1129-1147.
Larson, P. (2012). The 5 Sources of Moat [Video file]. Retrieved from https://www.morningstar.com/articles/556881/video
Smith, K. (2017, May 12). 3 things we can all learn from Whole Foods' successes & failures. Retrieved from https://www.inc.com/katlin-smith/3-things-we-can-all-learn-from-whole-foods-successes-amp-failuresspan-styled.html
Whole Foods Market. (2018, June 1). Our Mission & Values. Retrieved from https://www.wholefoodsmarket.com/our-mission-values
