Apendix and Cases

7/23/2019 Apendix and Cases

1/302

RATIO

HOW

CALCUTAIED

IVHAT

IT SHOWS

Profitability

Ratios

1.

Cross

profit

margin

2.

()pertinfl

proiil rn.rrgin

(or

retu

rn

on

sles)

J.

Net prof it

margin

(or

nct rcturn on salcs)

.+.

Return

on total

assets

5.

Return on stockholder's

equ

rry

7.

Ea

rn ings per

share

Liquidity

Ratios

1.

Current

ratio

2.

(luick

ratio

(or

.id-test

rtrol

3.

Working

carital

Sales

CosL

oi

goo


2/302

Appendix

HOW

CATCUTATED

WHAT

IT

SHOWS

Leverage

Ratios

1.

Debt-to-assets

rato

2.

Debt-to-equ

ity

ratio

3.

LongJerm debt-to-

equ

ity

rato

4, Times-interest-earned

(or

coverage)

ratio

Activity

Raos

1

. Days of

inventory

2. Inventory tu

rnover

3.

Averagc

collecton

period

1. Dividend

yield

on

commcln

stock

2. Price-ea

rn

ngs

ratio

3.

Dividend

payout ratio

4. lnternal

cash

flolv

Total debt

Total

assets

Total dcbt

Totl

stockholders'

equ

ity

Cost

ofgoods

sold

:

365

Cost

of

goods sold

Inventory

Accounts

receivable

Tota

I sales

+

365

Annual dividends

per

share

Current

market pricc

per share

Current

market

price

per

share

-Ta,-niqg-s

rr;ilare

After

tax

profits

+ l)eprccation

After tax

profts

+

Depreciation

-

Capital

Expcnd itures

-

Dividends

Measures the

extent

to which borrowed

funds

have

been

used to

finance

the

firm's operations.

Low

frctions

or

ratios are

better-high

frac

tions

indicale

overuse

of debt and

greater rtsk

of

ban

kruptcy.

Should

usually be

less

than

1.0. High ratios

(especially

above

1.0)

signal

excessive

debt,

lorver cred

itworth rness, and

weaker

balance

sheet strength.

Shows

the balance between

debt and

equity

in

the firm's

long-term captal structure.

Low

ratios

indicate

greater capacity

to borrow additional

fu

nds

if

needed.

Measures

the

ability

to

pay

annual

interest

charges.

Lenders

usually

insist

on a

mrnrmum

ratio of 2.0, but

ratios above

3.0 signal better

cred

itworth

iness.

Measures inven

tory

management

efficicncy.

Fewer days

of

inventory are usually

better.

Measures the

number

of rnvcntory turns

per

year H

igher

is

better.

Indicates

the

avcrage

length of

trme

the firm

must

lvait

after

making

a

salc

to receive cash

payment.

A

shorter

collection

time

is

better.

A

measure

of

the

return to

o\,vners

received

tn

the

form of d

ividends.

P-e

ratios above

20

indcatc strong

nvestor

confidence

in

a

firm's

outlook and

earnings

growth;

irms whose future

earnings are

at risk

or likely to

grow

slowlr typically

have

ratios

below

1

2.

Indicates

the

percentage

o after-tax

profits paid

out

as

dividends

A

quick and rough estmatc

of

the cash

a

company's

business

is

Senerating

after payment

of operating

expenses, interest,

and

txes. Such

amounts can

be used

for dividend

payments

or

funding caprtal

cxpend rtures.

A quick and

rouSh estimate

of

the cash

a

company's

business

is

generating

after

pay-

ment of

opcratrng expenses,

interest, and

taxes,

dividends, and

necessary reinvestments

in

the

business. Such

amounts

can bc

used

to fund

additional

capital expenclitures,

acquisitions,

share

repurchase

plans,

higher dividend

pay-

ments,

or

new

strategic

nitiatives,

or

Accounts

receivable

Average daily

sales

Other

lmportant

Measures

of tinancal

Performance

Lons-term

debt

Total

stockholders'

equity

Annual divrdends

per share

Earnings

per share

5.

Free cash flo,,v


3/302

Mystic Monk

Coffee

David L.

Turnipseed

Uniuersity

of South Alabama

As Father

Daniel

Mary,

the

Prior

of the

Carmelite

Order of monks

in

Clark.

Wyoming,

walked

to

chapel to

preside

over

Mass,

he

noliced

the

sun

glistening across

the

four-inch

snowfall rom

the

previous

evening.

Snow

in

fune

was

not

unheard

of

in

Wyorning,

but

the

late

2009

snowfall

and

the

bright glow

of the rising sun

made

him

con-

sider the

opposing forces

accompanying

change

and how he might

best prepare

his monastery

to

achieve

his vision

of

creating

a new Mount

Carmel in the Rocky Mountains.

His

vision

of

transforming

the small brotherhood

of

13

monks

living in

a

small

home

used

as makeshift rectory

into

a 500-acre

monastery

that would include

accommodations

for

30

monks,

a

Gothic church,

a

convent

for

Carmelite nuns,

a

retreat

center

for

lay visitors, and

a

hermitage

presented

a

for-

midable

challenge.

Howeve, as

a former high-

school

football

playe4,

boxer, bull rider, and

man

of great faith,

Father

Prio Daniel

Mary was

uraccustomed

to

shrinking from

a

challenge.

Father

Prior

had

identified

a

nearby

ranch

for

sale

that met the requirements

of

his vision

per-

fectly,

but its

current listing price

of

$8.9

million

presented

a

financial

obstacle to

creating

a

place

of

prayer,

worship,

and

solitude in

the Rockies.

The

Carmelites

had

eceived a

$250,000

dona-

tion

that

could be used

toward

the ourchase

and the monastery

had

earned nearly

575,000

during the first

year

of

its

Mystic Monk

Coffee

operations, but more money

would

be needed.

The

coffee roaster

used

to

produce packaged

coffee

sold to

Catholic consumers

at

the Mvstic

Copyrght

@

zoro

by Davd

L.

Turnpseed.

Al[

rghts reserved.

945

Monk

Coffee Web

site

was reaching

its

capac-

ity,

but a

larger roaster

could

be

purchased

for

$35,000.

Also, local

Cody,

Wyoming,

business

ownes had begun

a foundation for

those

wish-

ing to donate

to the monks' cause. Father Prior

Daniel

Mary did

not

have

a

great deal

of

expe-

rience

in

business matters,

but he

consideed

to what

extent the monastery

could

rely

on

its

Mystic Monk

Coffee operations

to

fund

the

purchase

of

the ranch.

If Mystic Monk

Coffee

was

capable

of making the vision a

reality,

what were

the next

steps

in turning the

coffee

into

land?

The

Carmelite Monks

of Wyoming

Carmelites

are

a

religious

order of the Catholic

Church that was formed

by men

who came to

the Holy Land

as

pilgrims and

crusaders and

had

chosen

to remain near

Jerusalem

to seek

God. The men established their

hermitage

at

Mount

Carmel because

of

its beauty,

seclusion,

and Biblical importance

as the site where Elijah

stood against

King Ahab

and the false proph-

ets

of

Jezebel

to prove

fehovah

to

be the

one

true God.

The Carmelites

led

a

life

of solitude,

silence,

and

prayer at Mount

Carmel

before

eventually returning

to

Europe and

becom-

ing

a

recognized

order of

the

Catholic Church.

The

size of the

Carmelite Oder varied widely

throughout

the

centuries

with

its

peak coming

in the 1600s

and

stood at approximately

2,200

friars

living

on all inhabited

continents at

the

beginning

of

the

21st

Century.


4/302

The Wyoming Carmelite

monastery

was

founded in

2003

by

Father Daniel

Mary who

lived as a

Carmelite

hermit in

Minnesota before

moving to Clark,

Wyoming,

to establish

the new

monastery.

The Wyoming

Carmelites

were a

cloistered

order

and wcre

allowed to leave the

monastery

only by pcrmission of

the

bishop

for

medical

needs

or

the deaih of

a

family

mernbe.

The Wyoming

monastery

abbey bore

little

resem-

blance

to thc great stone

cathedrals and monas-

terics of

Europe ard was confined

to

a

rectory

that

had

once

been

a ranch-style

four-bedroom

home and

an adjoining

42

aces of

land

that

had

been donated to the monastery

n2007.

There were 13 monks dedicated

to

a

life

of

prayer

and worship

in

the

Wyoming

Carmel-

ite

monastery

in

2009. Since

the

founding of

the

monastery

in

2003,

there

had

been more

than 500

inquiries

from

young

men consider-

ing becoming

a Wyoming Carmelitc.

Father

Prior

Daniel Mary wished to cventually

have

30

monks ranging

from 19 to 30

years

old who

would

live

out

their lives in the monastery.

However, the selection criteia

for acceptance

into

the

monastery were

rigorous,

with

the

monks

making

certain

that

applicants under-

stood

the reality

of

the vows of

obedience,

chastity, and

poverty

and

the sacrifices

associ-

ated

rvith

living a

cloistered

religious

life.

The Daity Activities

of a Carmelite

Monk

Each day began

at

4:10

a.m.

for

the Carmelitc

monks when thev

arose

and

wcnt to

chapel

for

worship wearing traditional brown habits and

hand-made sandals. At about 6:00, the

monks

rested

and contemplated

in

silence

for one

hour

before

Father

Prior

began

morning

Mass.

After

Mass, the

monks went about their

manual

labors. In performng their

labors,

cach

brother

had

a

special

set

of skills

that cnabled

the mon-

astery

to

independently mairtain

its

opera-

tions. Brother

Joseph

Marie \\as

an

excellent

mechanic,

Brother

Paul u-as a carPenter,

Brother

Peter

Joseph

(Brother

Cook)

worked

in thc

kitchen, and S-foot

4-inch Brother Simon

Mary

(Little

Monk)

was

the sccretary

to

Father Daniel

Mary. Brother Elias, affectionately

known as

Brother

Java,

was Mystic

Monk Coffee's master

roaster, although

he

was not

a coffee

drinlcer.

The daily work

performed

by each

monk took

up to six hours

per day; however, the monks'

primary

focus

was

on

prayer,

with eight

hours

of

each

day spent

in

prayer.

At

11:40,

the

monks

stopped

work

and

went

to

Chapel.

Afterward

they had

lunch,

cleaned

the

dishes,

and

went

back to work, At

3:00

p.m.,

the

hour that

fesus

was believed

to have died on the

cross,

work

stopped

again for prayer

and worship.

The

monks then

returned

to work until the

bell

was

rung for

Vespers

(evening

prayer)

The monks

then

had

an

hour

of

silent contemplation,

their

evening

meal, and morc prayers.

The

New

Mount

Carmel

Soon after arriving

in

Wyoming, Father Daniel

Mary had

formed

the

vision

of

acquiring

a

larger

parcel of

land-a

new

Mount

Carmel-and

building

a

monastery

with

accommodations

for

30

monks,

a

retreat center

for lay

visitors,

a

Gothic church,

a convent for Carmelite

nuns,

and

a

hermitage.

In

a

letter

to

supporters

posted

on

the monastery's Web site

in February

of

2009,

Father Daniel

Mary

succinctly

stated

his

vision:

"We

beg

your

prayers,

your

friendship

and

your support

that this vision,

our

vision

may come to

be

that

Mount

Carmel

may be

refounded

in Wyoming's Rockies

for

the

glory

of

God."

The brothers

located

a 496-acre

ranch

that

was

offered

for sale

that

would

satisfy

all of

the requirements to create

a

new Mount Carmel.

The

Irma

Lake

Ranch

was

located

outside

Cody,

Wyoming, and

included

a

1

7,800-square-foot

remodeled

residencc,

a

1,700-square-foot

care-

taker

house,

a

2,950-square-foot guesthouse, a

hunting

cabiry

dairy

and horse

barn,

and for-

ested

land

for those

wishing

to live as

hermits.

Lake

Irrna

Ranch was at the end of

a seven-

mile

private gravel

road, about

21

miles

out-

side

of

town, and

was bordered on

one side

by the private

Hoodoo Ranch

(100,000

acres)

and

on

the other by the

Shoshone

National

Park

(2.4

million

acres). Although

the price

of

the ranch

was

S8.9

million,

the

monks

believed


5/302

Part

Two:

Section

A:

Crafting

Strategy in

Single-Business Companies

they would be able to acquire

the property

through donations and

the

profits generated by

the monastery's Mystic Monk Coffee

(MMC)

operations.

The

monastery had received a

donation of

$250,000

from an

individual

wish-

ing

to support the

Carmelites that could be

applied toward whatever purpose

the monks

chose.

Additionally, a

group of Cody business

owners

had

formed

the New Mount

Carmel

Foundation to help the monks raise funds.

Overview

of

the

Coffee

Industry

About 150 million

consumers

in the

United

States

drank

coffee

with

89

percent

of

U.S.

cof-

fee

drinkers

brewing their own

coffee

at

home

rather than purchasing ready-to-drink

coffee

at

coffee shops and

restaurants

such as Starbucks,

Dunkin Donuts,

or

McDonald's.

Packaged cof-

fee used to

brew

coffee at

home

was

easy to find

in

any

grocery store and typically

carried a retail

price

of

$4-$6

for

a

12-ounce

package in 2009.

About 30 million

coffee

drinkers in

the United

States

preferred premium-quality

specialty

cof-

fees

that sold for

$7-$10

per

12-ounce

package

in 2009.

Specalty

coffees were made

from

higher

quality

Arabica

beans

instead

of

the

mix

of

lower

quality

Arabica

beans

and

bitter

and less flavor-

ful

Robusta coffee

beans

that was

used by the

makers

of

value

brands. The wholesale

price

of

Robusta

coffee beans

averaged

$1.15

pei pound

in

July

2008,

while mild

Colombian Arabica

wholesale

prices

averaged

$1.43

per pound.

Prior to

the

1990s,

the market

for premium-

quality

specialty coffees

barely existed in

the

United

States,

but Howard

Schultz's

vision for

Starbucks

of

bringing the

ltalian

espresso bar

experience to

America helped specialty

coffees

account

for approximately

20

percent

of coffee

industry

sales

by

2008.

The

company/s pur-

suit

of

its mission "To

inspire

and nurture

the

human

spirit-one

person,

one cup, arrd one

neighborhood

at a time" had allowed

Starbucks'

revenues

to incease from

$465

million

in

1995

to

nearly

$10.4

billion

in 2008.

The company's

rapid

growth had

given rise

to a

number of

competing

specialty

coffee

shops

and

premium

brands

of

packaged

specialty

coffee,

including

Seattle's

Best, Millstone,

Green

Mountain

Coffee

Roasters,

and

First

Colony

Coffee and Tea.

Some

producers such

as First

Colony had difficulty

gaining shelf space in

supermarkets and

con-

centrated on private{abel roasting

and packag-

ing for fine department

stores

and other retailers

wishing

to

have a proprietary

brand

of

coffee.

Specialty

coffees sold.

under

premium

brands

might be made from

shade grown

or organi-

cally grown coffee beans

or

have

been

pur-

chased from

a

Brower

belonging

to a

World

Fair Trade

Organization

(WFTO)

cooperative.

WFTO cooperative

growers

lt'ere

paid

above

market

prices to better support the cost

of oper-

ating their farms-for

example, WFTO certi-

fied

organic

wholesale

prices averaged

$1.55

per

pound

in July

2008.

Many

consumers

who

purchased

specialty

coffees

were

willing

to

pay

a

higher

price for

organic,

shade

grown, or

fair

trade

coffee because

of

their

personal

hcalth

or

social concerns-organic coffees were grown

without

the

use

of synthetic

fertilizers

or pesti-

cides,

shade

grown

coffee

plants were

allowed

to

grow beneath the

canopies

of

larger

indig-

enous trees, and fair

trade pricing made

it

eas-

ier for

farmers

in

developing

countries to pay

workers

a

living

wage.

In

2007,

the

retail

sales

of

organic

coffee

accounted

for

about

$1

billion

of

the

$13.5

billion

specialty

coffee

market

in

the

United States and had grown

at

an arurual ate

of

32

percent between

2000

and 2007.

Mystic

Monk Coffee

Mystic

Monk

Coffee was produced using high

quality fair

trade

Arabica

and fair trade

organic

Arabica

beans. The

monks produced

wholebean

and

ground caffeinated and decaffeinated vari-

eties in

dark, mcdium,

or light roast and in dif-

ferent flavors. The most

popular

Mystic

Monk

flavors

were Mystical

Chants

of Carmel, Cow-

boy Blend,

Royal Rum

Pecary

and

Mystic Monk

Blend.

All varieties

of

Mystic Monk

Coffee

were

sold via

the

monastery's

Web

site

(wu'w.mystic-

monkcoffee.com)

in

12-ounce

bags

at

a price

of

$9.95

with the

exception of sample

bags,

which

carried a retail

pricc

of

$2.99.

All purchases


6/302

Mystic Monk Coffee

from the MMC Web site were delivered by UPS

or

the United States

Postal

Service.

Frequent

customers

were given the

option

of

joining

a

"coffee

club"

n'hich offered

monthly delivery

of

1

to

6 bags

of

preselected

coffee.

Purchases of

3

bags or more were shipped to

MMC

custom-

ers free

of

charge.

MMC

also

sold

T-shirts,

gift

cards,

CDs

featuring

the

monastery's

Cregorian

chants,

and

coffee

mugs

at

its

Web site.

Mystic Monk Coffee's target market was

the

segment

of

the U.S. Catholic population

who drank coffee and wished to support the

monastery's mission. In 2009, more than 69

mil-

lion

Americans were members

of

the Catholic

Church-making

it

four

times

larger than the

second

largest Christian denomination

in the

United States.

An

appeal

to

Catholics

"fo

rs

their

cntholic

coffee

dollar

for

Christ

and

his

Catho-

lic church" was published on the

Mystic Monk

Coffee

Web

site.

Mystic Monk

Coffee

Roasting Operations

After

the

moming religious services

and break-

fast,

Brother

Java

roasted

the green coffee beans

delivered each week

from

a

coffee

broker

in

Seattle,

Washington.

The

monks

paid the

Seattle

broker

the

prevailing

wholesale price per

pound,

which

fluctuated

daily

with global

supply

and

demand. The capacity of MMC's

roaster

lim-

ited

production

to

540

por-rnds

per day although

production was

also

limited by time devoted to

prayer,

silent

mcditation, and

worship. As

of

2009, demand for Mystic Monk

Coffee had

not

exceeded

the roaster's

capacity, but

the

monas-

tery

plamed

to purchase a

larger 130-pound

per

hour roaster when

demand

further

approached

its

capacity.

The monks

had received a

quote of

$35,000

for

the

new

larger

roaster.

Marketing

and

Web

Site Operations

Mystic

Monk

Coffee

was promoted

primarily

by

word

of

mouth among loyal customers

in

Catholic

parishes across the United States.

The

majority

of

MMC's

sales n'ere made through

its Web site. but on occasion, telephone orders

rn'ere

placed with its

secretary

who worked out-

side the cloistered

part

of the

monastery. Mystic

Monk

Coffee

also

offeed secular

Web

site

opera-

tors

commissions

on its

sales

through

its Mvstic

Monk

Coffee

Affiliate Program that placed ban-

ner

ads

and text

ads

on

participating

Web

sites.

Affiliate

sites earned an

18

percent

commission

on sales made to customers

who

were

directed

to www.mysticmonkcoffee.com

from their

site.

The

aff

iliate

program's

ShareASale

participation

level allowed affiliates to refer new affiliates to

MMC and earn 56 percent of the new affiliate's

commission.

The

monks expanded MMC's

business

model

to

include

wholesale

sales

to

churches

and locai

coffee

shops

in mid-2009.

Mystic MonKs

Financial

Performance

At the

concluson of

MMC's

first

year

in

opera-

tion

(fiscal

2008),

its

sales

of

coffee

and

coffee

accessories

averaged

about

$56,500

per month.

Its

cost

of

sales

avcragcd about 30 percent of

revenues,

inbound

shipping

costs

accourted

for

19

percent of

revenues,

and broker fees

were

3

percent

of

revenues

for a total

cost

of

goods sold

of

52

percent.

Operating

expenses

such

as utilities,

supplies,

telephone,

and

Web

site

maintenance averaged 37 percent

of

rev-

enues.

Its

net profit margin during fiscal

2008

averaged

11

percent of

revenues.

Realizing

the

Vision

During a welcome

period

of solitude

before

his

evening

mea1,

Father

Prior

again contemplated

the

purchase

of

Lake Irma

Ranch. He realized

that

his vision

of

purchasing the

ranch n

ould

require

careful

planning and execution.

For

the

Wyoming Carmelites,

coffee sales were

a

means

of

support from the outside

world that

might

provide the financial

resources

to purchase the

land.

Father

Prior

understood

that the

clois-

tered

monastc

environment

offered

uniquc

challenges

to

operating

a business cntcrprise,

but also provided opportunities

that were

not

available

to

secular

businesses.

He resolved to

develop an execution plan that

would enable

Mystic Monk

Coffee

to minimize the effect of

its

cloistered

monastic constraints,

maximize

the

potential

of

monastic opportunities,

and

rcalize

his vision

of

buying the

Irma Lake ranch.


7/302

Whole

Foods

Market

in

zooS:

Vision,

Core Values,

and Strategy

Arthur A.

Thompson

Tbe

Uniuersity of

Alabama

Founded

in

1980, Whole Foods Market evolved

from

a

local

supermarket

for natural

and health

foods

in Austin,

Texas,

into

the

world's

largest

retail

chai of natural and

organic

foods

super-

markets. The

company

had 2007

sales of

$6.6

billion

and

in

early

2008

had

276

stores in the

United States. Canada. and

Great

Britain. Rev-

enues

had grown

at a compound annual rate of

30

percent

since

199L

and

20

percent

since

2000.

Management's near-term growth

objectives

for

Whole Foods were

to have

400 stores

and

sales

of

$12

billion

in fiscal year

2010.

During

its 27-year

history, \{hole

Foods

Mar-

ket had

been

a

leader

in

the

natural

and organic

foods

movement

across the

United States, help-

ing

the

industry

gain

acceptance among grow-

ing

numbers

of consumers concerned about the

food they ate.

The

company sought

to

offer

the

highest

quality,

least

processed,

most flavor-

ful and naturally preserved foods

available.

fohn

Mackey,

the

company's cofounder and

CEO,

believed

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 rntenational

brand

s),nonymous

not

iust

with natural

and

organic

foods

but

Copyright

@

2oo8

by

Arthur A. Thompson.

Al[ rights

reserved.

246

also with being the best food retailer in every

community in which \

hole

Foods stores were

located.

He

wanted

lAihole Foods

Market

to

set the standard

for

excellence

ir

food retail-

ing. Mackey's philosophy was that marketing

high-quality natural and

organic

foods to more

and

more customers

in more and more

com-

munities would over time

gradually

transform

the

diets of individuals

in

a manner that would

help

them

live

longer, healthier, more pleasur-

able

lives. But

as

the company/s

motto,

"Whole

Foods, Whole People, l\hole Planet," implied,

its

core

mission

extended well beyond food

retailing-see

Exhibit

1.

At

its

Web site,

the

company

proclaimed

that its deepest

purpose

as an organization was helping support the

health, well-being, and healing

of both

people-

customers, team members, and business

organi-

zations in general-and

the

planet.l

The Natural And Organic

Foods

lndustry

The

combined sales

of

foods and beverages

labeled

as

"natural"

or

organic-about

$62

bil-

lion in

20O7-represented about

7.3

percent of

the

roughly

$850

billion in total

U.S.

grocery

store

sales.

Nafuralfoods

aredefined

as

foods that

are

minimally

processed;

largely or completely

free

of artificial ingredients,

preservatives, and

other

non-naturally

occurring

chemicals;

and

as

near

to their

whole, natural

state

as

possible.


8/302

Exhibit

1

Whole Foods

We obtain our

products

locally and

irom

all

over

the world, often from small, uniquely dedicated food

artisans.

We

strive

to offer the

hrghest

quality,

least processed, most

flavorful and naturally

preserved foods.

We

believe

that

tbod

n

its

purest

sate-unadu

lteratcd

b;,

artificial

additivcs, swcctcncrs, colorings, and

p

rcscrvativcs-

is

the best tasting

and most nutritious food available.

Whole People

We recruit

the best

people

we can to become

part

of our

team.

We

empower them to

make many

operational

decisions,

creatng a

respectful rvorkplace

r,r,here

team

members

are treated

farrly and

are

hrghly motivated

to

succeeci. Wc look or tcam mcmtcrs who arc passionate about food, but also well-rounded human berngs who

can

play a crltical role in helping build our Company

into

a

profitable

arrd berrelicial

part

of every corrmunity

in rvhich we

oDerate.

Whole

Planet

We

believe companies,

like individuals,

must assume

their

share

of responsibility for our planet. We actively

support organic farming on

a

global

basrs because

we believe it

is the best

method for promotng

sustainable

agriculture and protecting

the

envronment

and

arm

,,vorkers

On

a

local

basis,

w,e re

actively involved in our

communities by supporting

food

banks,

sponsoring neighborhood

events, ancl

contributing

t

least

5

percent

of

our after-tax

profits in

the

orm

of cash

or products to not for profit organizations.

Source

(ompnyovervrew,postedatrvrr,,,,'rrlrrrcirrrrrl..,rrk('r

(orni.cessedMarch21,200l),and200/I0-Kreport,p.5.

The U.S. Deparlment of Agriculture's

Food

and

Safety

Inspection

Service defines

flntLtrnl

food

as

"a

product

containing

no artificial

ingrcdi-

ent

or

added

color

and that is minimally

pro-

cessed." While

sales

of natural

foocls

products

had

increased

at double-digit

rates

in

the

1990s,

growth

had slowed

to

the

7-9

percent

range

since 2000.

Organic

foods n'ere

a special subset

of

the

natural foods

category;

to be labeled as organic,

foods had to be

grown

and

processed

rt'ithout

thc usc of

pcsticidcs, antibiotics,

hormones,

syn-

thctic

chcmicals,

artificial fertilizers,

preserva-

tives, dyes or additives, or genetic engineering.

Organic

foods included fresh

fruits

and vegeta-

bles,

meats,

and

processed

foods that

hacl

been

produced using

any

or

all

of

the

following:

.

Agricultural

management practices that

promoted

a

healthy and renewablc cco-

system.

These

practices could

include no

genetically engineered seeds or crops,

petroleum-based

fertilizers, fertilizers

made

from

sewage sludge, synthetrc

pesticides,

herbicides,

or

fungicides.

.

Livestock management

practices

that

involved

organically

grown feed, fresh air

and

outdoor

access

for the animals, and no

use

of

antibiotics

or

growth

hormones.

.

Food processing practices that protected

the

intcgrity

of thc organic product

and

did not involve the use of radiation, geneti-

cally

modified

organisms, or

synthetic

presen'atives.

In 1990,

passage

of

the Organic

Food

Pro-

duction

Act

started

the

process

of

establish-

ing national

standards

for

organically

grown

products

in

ihe

United

States, a movement

that included farmers, food activists, conven-

tional

food producers,

and

consumer

groups.

In

October

2002, the U.S.

Department

of

Agriculture

(USDA)

offically

established

labeling

standards

for

organic products,

ovcrriding both

the patch-

work

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

USDAregulations

established

four

categories

of

food with

organic

ingredients,

with

varying

levels

of

organic

puritv:

1.

100

percent orgnnic products; Such

prod-

ucts

were usually whole

foods,

such

as

fesh

fruits

and

vegetables,

grown

by


9/302

Part Two:

Section

A:

Crafting

Strategy

in

Single-Business Companies

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

irra-

diation; and

had not

been

genetically

modified

or

injected with bioengineered

organisms,

growth

hormones, or

antibiot-

ics. Products that

were

100

percent

organic

could carry

the

green

USDA organic certi-

fication

seal,

providcd thc

merchant

could

document that the food

product

had been

organically grown

(usually

by a certified

organic

prociucer).

2.

Organic

products:

Such

products,

often

processed,

had

to

have

at

least

95

percent

organicallv certified

ingredients.

These

could

also

carry

the green

USDA organic

certification

sea1.

3.

Made

with

organic ingredients:

Such

prod-

ucts

had

to

have

at least

70 percent

organic

ingredients; they could be labeled

"made

with

organic

ingredients" but could not

display

Lhe

USDA

seal.

1.

All

other

products

tuith organic

ingredients:

Products

with

less

than

70

percent organic

ingre

dicnts could not usc thc word organic

on

the front

of

a

package,

but

organic

ingre-

dients

could

be

listed

among other

ingredi-

ents

in a

less

prominent part of

the package.

An

official

with the

National Or;anic

Pro-

gram, commenting

on

the appropriateness

and

need

for

the new USDA regulatrons,

said,

"For

the first time,

when

consumers see the

word

organic

on

a

package,

it will have

consistent

meaning."2 The new labelilg

program

was not

intended

as a

health

or safety proram

(organic

products

have

not

been

shor,r.n to be

more

nutri-

tious than

conventionally

grown

products,

according

to

the American Dietetic Association),

but

rather

as

a

marketing

solution. An organic

label had long

been

a selling point for

shop-

pers

wanting to avoid

pesticides

or

to

support

envionmentally friendly agricultural

practices.

However, the

new

regulations

required

docu-

mentation

on

the part

of

growers,

processors,

exporters,

importcrs,

shippers,

and

merchants to

verify that they were certified to grow, process,

or handle organic products carrying the USDA

s

organic seal. In 2003, lzVhole Foods was desig-

nated

as the

first national

"Certified

Organ.ic"

grocer

by

Quality

Assurance

International, a

federally recognized independent third-party

certifica

tion organization.

According

to

the

Organic Consumers

Asso-

ciation,

sales

of organic foods in the Unitcd

States

hit

$17

billion in 2006,

up

22

percent

from

513.8

billion in 2005. When natural foods

and beverages

(defined

narrowly as those with

no

artificial

ingredients) were

lumped in with

organic

foods

and

beverages,

the U.S.

retail

sales

total came to

$28.2

billion in 2006, up from

$23.0

billion in 2005. Natural and organic

foods

and beverages were pro.iected to

reach nearly

$33

billion

in

2008.

Organic

food

sales

were

said

to represent about

3

percent of

total

U.S.

retail

sales

of

food and beverages. About 31 percent

of overall organic sales

in

2006 were through

mainstream

supermarkets/grocery

stores, and

24

percent

were through

the leading natural

food

supermarket chains such

as \A4role Foods,

Wild

Oats,

and

Tradcr

Joe's.

Another 22

percent

of all organic

sales

were through independent,

small natural grocery store chains. Organic

foods

and

beverages

were

available

in

nearly

every

food

category

in

2008

and were

avail-

able

in

over

75 percent of

U.S.

retail food

stores.

Most

observers

believed that

organic

prod-

ucts

had

staying

porver

in

the marketplace

as

opposed

to

being a

passing

fad.

Major food processing companies like Kraft,

General

Mills,

Groupe

Danone

(the

parent

of

Damon Yogurt),

Dean Foods, and

Kellogghad

all purchased

organic

food producers

in

an effort

to capitalize on grolving consumer

interest in

purchasing organic

foods-

Heinz

had

introduced

an

organic

kctchup and bought

a

19

percent

stake in Hain

Celestial

Group, one of the larg-

est organic and natural foods producers. Camp-

bell 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

Flunt's were


10/302

Case

2

Whole Foods

Market in zooS: Vision,

Core Vatues,

and

Strategy

marketing

organic canned tomatoes; and

Tyson

Foods

and

several

other chicken

producers had

inhoduced

organic

chicken

products. Producers

of

organically grown

beef were selling

all

they

could produce, and

sales were

expected to

grow

30

percent annually

through 2008.

Organic

farmland in

the

United

States

totaled

4.1 million acrcs

(about

1.7

million acres

of

crop-

land and 2.4 million

acres

of

rangeland

and

pas-

ture) in

2005,

up from

2.1

million acres in

2001.3

Thee

were

8,400

certified

organic farms

in 2005,

and perhaps

another

9,000

small farmers

grora,-

ing

organic products.

All 50

states

had

some

cer-

tified

organic farmland,

with

Califomia,

North

Dakota. Montana,

Minnesota,

Wisconsin,

Texas,

and Idaho having

the largest

amount

of certified

organic

cropLand.

\hile

only about

1

percent

of

U.S.

farmland

was

certified

organic in

2005,

farm-

ers

were

becoming

increasinglv

interested

in

and

attracted to organic farming,

chiefly

because

of

the

substanaliy higher

prices

they

could get for

organically grown fruits,

\,egetables,

and

meats.

Retailing

Of Organic

Foods

According

to the

USDA,

2000

r,r.as

the first

year

in which more

organic

food

was

sold in conven-

tional

U.S. supcrmarkets

than

in

the nation's

14,500

natural foods

stores.

Since 2002, most

mainstream

supermarkets

had been

expanding

their

selections

of natural and

organic products,

n'hich

ranged from

fresh

produce

to

wines,

cere-

aLs, pastas,

cheeses,

yogurts, vinegars,

potato

chips, beef,,

chicken,

and

ca-rned and

frozen

fruits and

vegetables. Fresh

produce

was the

most

popular organic

product-lettuce,

broc-

coli, cauliflower,

celery

catrots,

and

apples

were

the biggest

sellers.

Meat, dairy,

brcad, and

snack

foods were among the

fastest-growing organic

product

categories.

Most

supermarket chains

stocked a

selection

of

natural

and

organic

food

items, and

the

number

and variety

of

items

they

carried

was

growing. Leading

supermarket

chains like

Walmart, Kroger, Publix,

Safer,r'ay,

and

Supen alu/Save-a-Lot

had

created spe-

cial

"organic

and health food"

sections

for non-

perishable items

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

most

of their

stores

in

2007 .

Safeway,

Publix,

and Kroger

were stocking

organic

beef and

chicken

in

a numbe

of

their

stores, while

Whole

Foods

was

struggling

to

find

organic beef

and

chicken

suppliers

big

enough

to supply all its

stores. Two

chains-upscale

Harris Teeter

in the southeastern

United

States

and

\Atrhole

Foods

Market-had launched

their

own

private-label

brands of

organics. Exhibit

2

shows the leading

supermarket rctailers

in

North

America

in 2006.

Whole Foods Market

n as ranked

24th

lul.2006,

up from

26th

ilr

2004.

Most industry

obsen'ers expected

that, as

demand for

organic foods

increased,

conven-

tional

supcrmarkets

would

continue to

expand

their

offerings

and

selection.

Supermarkets

were

attracted to merchandising

organic foods

for

several reasons:

Consumer demand

for

organic foods

was

growing at

close

to 20

per-

cent annually, and

mountrng

consumer enthu-

siasm for

organic products

allorru.ed

retailers to

command

attractively high

profit mar;ins

on

organic products.

In

contrast, retail

sales

of

gen-

eral food

products were growing

slon4y

(in

part

because more and more

consumers

were

eat-

ing out rather than cooking

at

home) and

price

competition among

rival

supermarket

chains

was

intense

(which

dampened

profit

margins

on many

grocery items).

Several factors

had

combined

to

transform

organic

foods

retailing,

once

a

niche

market, into

the fastest-growing

segment

of

U.S.

food

sales:

o

Healthier

eating patterns

on

the part of a

populace

that n'as

becoming better

edu-

catcd about foods,

nutrition,

and

good

eat-

ing

habits.

Among

those

most interested

in organic

products

wcre

aging, affluent

people

concemed about health and better-

for-you

foods.

.

Increasing

consumer

concerns over the

purity and safety

of

food

due to

the

ptes-

ence

of pesticide residues,

growth

hor-

mones,

atificial

in;redients,

chemicals,

and genetically

engineered ingredients.


11/302

RANK/COMPANY

Part Two:

Section

A:

Crafting

Strategy

in

SingLe-Business

Companies

NUMBER OF

STORIS

2OO6

SALES

REVENUES

flN BttUON5)

SHARE

OF

TOfAL U.5.

CROCERY

sALES

($850

BttUON)

Exhibit

2

1.

Walmart

2. Kroger

3.

Costco

4.

Sam's

(-lub

5.

Safewa,v

6. Su

perva lu

7,

Loblaw'

B.

Ahold USAs

9.

Publix Supermarkets

1 0. Delhaize

I'

1

1. Meijer

24.

Wholc Foods Market

) )q7

2,477

458

580

1,767

434

1,072

827

BB5

1

,544

17fr

1BB

s?ng

q

,

66.1

b

59

0'

42.2

'

40.5

37

.4"

2

6.5

21.0

21

.7

17

.3

t3

2

56

I

4"/"

7.8

4,3

3.0

4.8

4.4

3.1

2B

2.6

2.0

1.6

0.7

^

Sales

revenue

numbers

nclude

all store iterns in \ .llmarl

Dlscout Storcs

and

Superceters,

not

jLrst

those

relaied to

ftrocl ancl

groceries.

Sales

of

grocery, candy, tobacco,

and health and

beauty a

ds

represente.l al)oul

l8

percent of total

salcs

t

Walmart

DiscoLrnt

itores

nd Supercenters

lvalmart's mrket share

rercentag,e

is

based

on

groccry

nd

supermarket

item sles

of

$79.lJ

btllton

(38

percenl

of

$209.9

billion)

,Sales

data for

Kroger

(whose

supermarket

brancls

sc

include City Mrkct,

King Sooper,

Ralph's, and

11

smaller

chainsl include

reveues

rom ll company orvned

retail

oLrtlets

(fuel

centers, drrrgstores,

apparel,

and

jerveLryl

lhat arc

not

supermrket

re atcd

The sales

revenue

figure for Costco includcs

all

itcms sold

at

Costco

stores; sales

of

only

Srocerv

items

(food,

sundries,

frcsh

produce,

gasolinc,

and

pharmacy)

were

336.6

bl ion; the

market

shate

perceniage is

b.rsed

on tht $16

6

bil

ion.

of $25

7 bLlion.

,

Sales

data

for Supervalu

ncludes

t,

l6lJ

supermarkets

(including

l, 124

o

which

were recently acquired

irom Alherlson'si, l0l corporle-


12/302

WhoLe

Foods

Market

n

2oo8: Vision,

Core

Values,

and Strategy

(73

percent),

nondairy

beverages

(32

percent),

bread

or

baked

goods

(32

percent),

dairy

items

(24.6

percent),

packaged goods

such

as

soup

or

pasta

(22.2

percent), meat

(.22.2

percent),

snack

foods

(22.1

percent), frozen foods

(16.6

percent),

prepared

and ready-to-eat

meals

(12.2

percent),

and baby

food

(3.2

percent).

The higher

prices

of

organic

products nere

the primary

barrier

for

most

consumers

in try-

ing

or using

organic

products-7S

percent

of

thosc participating

in the

2005

Whole Foods

survcy believed

organics

were too

expensive.

Othcr

reasons

for not

consuming

more organics

were

availabiliry

$6.1

percent)

and loyalty

to

non-organic

brands

(36.7

perccnt).

Whole

Foods

Market

Whole

Foods Market was founded

in

Austin,

Texas,

when

John

Mackey,

the current

CEO,

and

two

other

local

natural foods

grocers in Austin

decided

the natural foods

industy

was

ready

for

a supermarket

format. The

original

lAihole

Foods

Market

opened in 1980

with a

staff of

only 19. Tt was

an immediate

success.

At

the

time. there were fewcr

than

half

a dozen nat-

ural

foods

supermarkets in

the

United States.

By

1997,

the company

had

10

stores, revenues

of

$92.5

million,

and net income

of

91.6

mil-

lion. Whole

Foods

became

a

public company in

7992,

wth its

stock trading

on the NASDAQ;

Whole Foods

stock was aclded

to the

Standard

& Poor's Mid-Cap

400

Index

in May

2002

and

to the NASDAQ-1O0

Index

in December

2002.

Core Values

In 1997,

when

Whole Foods

developed the

"Whole

Foods,

Whole

People,

Whole

Planet"

slogan,

John

Mackey,

known

as a

go-getter

with

a

"cowboy

way

of doing things,"

said:

This

slogan taps

into

perhaps the deep-

est purpose

of

Whole Foods

Market. It's

a

purpose

we

seldom

talk

about because

it

seems

pretentious,

but

a

purpose

neverthe-

less

felt

by

manv

of our team

members and

by

many

of

our

customers

(and

hopefully

many

of

our

shareholders too).

Our dcep-

est

purpose

as

an organization

is

helping

support

the

health,

well-being,

and healing

of both

people

(customers

and Team Mem-

bers) and

of the planet

(sustainable

agricul-

turc, organic

production,

and environmental

sensitivity).

When

I

peel

arl,ay the

onion

of

my

personai

consciousness

down to its corc

in

trying to

understand what

has

drir.en me

to

create

and grou'

this companr,,

I

come

to

my desire

to

promote

the general

well-being

of evervone

on

earth

as n

ell

as

the

earth

itself.

This is

my

personal

grcater

purpose

with

the company and

the slogan

perfectly

reflects

it.

Complementing

the slogan were

five

corc

val-

ues

shared

by

both top management

and com-

panypersonnel

(see

Exhibit

3). In the

company's

2003

annual report,

John

Mackey

said:

Ou

core values

eflect the

sense

of

collec-

tive

fate

among

our

stakeholders

and

are

the

soul

of our

companv.

C)ur

Team

Mem-

bers,

sharcholders,

vendors,

community

and

cnr.ironment

must flourish

tosether

through their

ffiliatir-rn with

us

or

-e

are

not

sr.rcceeding

as a business. it is

leader-

ship's role

to balance the needs and desires

of all our stakeholders

and increase

the

pro-

ductivity

of

lVhole

Foods

Market. By

grow-

ing

the collective

pie, we create larger

slices

for

all of our shareholders.

Growth Strategy

Since

going public

in 1991, \ trhole

Foods'

growth

strategy had

been to

expand

via

a

combination of

opening

its own

new

stores and acquiring

small,

o\

ner-managed

chains that hacl

capable per-

sonnel and were located

in

desirable

markets-

the company's most significant

acquisitions

are

shown in Exhibit

4. But since the retailers

of

nafural and

organic foods

r,r'ere

mostly

one-store

operations

and

small,

regional

chains having

stores

in

the

5,000-

to

20,000-square-foot range,

attractive

acquisition

candidates were hard.

to

find. From

2002

to

2006,

\Ahole Foods'

manage-

ment

decided to drive

growth

bv

opening 10

to

15

decidedly bigger

stores

in metropolitan

areas

each

year-stores

that ranged

from

40,000

square

feet

to

as

much as 70,000

square

feet

and were

on

the same

scale

or even larger

than

the

standard

supermarkets

operated

by

Kroger,

Safeway,

Pub-

lix, and

othcr chains.


13/302

Exhibit

3

Part

Trvo: Section

A:

Crafting Strategy

in

Singte-Business

Companies

Our

Core

Values

The

follorving

list

of

core

values

reflects

rvhat

is

truly

mportant

to

us

as

an organizatic-rn.

These

are

not

vlues

that

change

from

tme to

time,

situation

to

situaton

or

person to person, but

rather

they

are

the

underpinning

of

our companv culture. Many people

feel

Whole

Foods

is

an

exciting company

of

lvhich to

be

a

paft

and

a

very

special

place

to lvork.

These core

values

are

the

primary

reasons

{or

this

feeling, and thcy transcend

our

size and

our

growth

rale.

Bv

maintaining

thcse core

values, regardless

of

how

large a

company

Whole

Foods bccomes,

we

can

preserve

w,hat has always been

special

about

our

company. These core

values are

the soul of our

conrpany.

Selling

fhe Highest

Qualily

Natural and Organic

Products

Available

.

Passion for

Food We appreciate

and celebrate

the

ditterence

natural

and

organic

products can

make

in the

('rualitv

of one's

life.

.

Quality

Standards-We

have high standards and our

goal is to

sell

the highest

quality

products wc

possibly

can.

We define

quality

by evaluating

thc

ngredients,

freshness, safety,

taste,

nutrtive

value,

and appearance

of all of

the

products

lve carry

We

are

buyrng agents for our

customers

and

not

the

sclling agents

or

the

manufacturers.

Satisfying and

Delighting Our

Customers

. Our

Customers-They

are

our

most important

stakeholders

in our

business

and the

lifeblood of our

business.

Onlv by satisfying

our

customers

first do we

have the

opportunty

to

satisfy

the

needs

of our

othcr stakeholders.

.

Extraordinary Customer Service-We

go to extraordinary

lengths

to

satisfy and

delight our

customers.

We want

to

mect or cxceed their expectatons

on every

shopping

trip

We know

that

by doing so we

turn

customers

nto advocates

for our

business. Advocates

do more than

shop

with

us; they

talk about

Whole

Fcrods to their

lriends

and others-

We want to serve our customers

competently,

eificienrly,

knowledgeabl,r.l

and

with flair.

.

Education

We

can

generate greater

apprecation

and

loyalty from all

of our stakeholders by educating

them about

natural

and

organic foods,

health,

nutrition,

and

the environment

.

MeaningfulValue-We

offcr value

to

our

customers

by

providing them

rvith high

quality products,

extraordinary

service, and a

competitive

price. We

are

constantly

challenged

to improve

the value

orooosition to our

customers.

.

Retail

Innovation We

value retail experiments.

Friendly competition

within

the

company

helps

us

to

continually improve our

stores.

We constantly

innovale and

raise

our

retail

standards

and

are

not

afraid

to

try new

ideas

and

concepts.

.

lnviting

Store

Environments-We

creatc

store

environments

that are

inviting

and

fun, and

reflect the

communities

they

serve.

We want our

stores

to become

communitv meeting

places'uvhere

our

customers meet therr

friends and

make

new

ones.

Team

Member

Happiness

and

Excellence

.

Empowerng

Work

Environments-C)u

r succcss is

dependent upon

the collective

energy

and

intel-

lisence of all

of

our Tem

Members.

We

strve

to

create a

rvork environment

where

motivated Team

tttmbers can

floursh and

succeed

tc-r their

highest potental.

We apprcciate eftbrt and

reward

results.

o

Self-Responsibility

We

take

responsibility

for our

own success

and

failures.

\\'c

celebrate success

and

see

failures

as

opportunitrcs or growth. We recognize

that

we

are responsible

for our

own

happiness

and

success,

.

Self-Directed

Teams-The

funclmental

work unit of thc company

is

the

self-directed

Team. Teams

meet

regularly to discuss

issues, solve

problems,

and appreciate

each

others' contributions.

Every

Team

Ment-

ber bclonss to

a

Team.

.

Open

&fmely

Information-We believe

knowledge

is

power

and

we support ourTeam

Mcmbers'

right to

access

information that

impacts thcir

jobs.

Our books are

open to ourTeam

Menrbers,

including

our annual

individual compensatiorr

report.

We

also

recognize

everyone's

rrght

to be

listened

to

and

heard

regardless

of their

point of view.

.

Incremental

Progress Our company

continually

improves through

unleashing

the

collective

creativity

and intclligcncc of all of ourTeam

Members.

We recognize

that

everyone

has a contribution to

make.

We

keep gettng

bcttcr

at rvhat

lve

do.


14/302

Exhibit 3

(continued)

.

Shared Fate-We

recognize

there

is

a

community of

interest

among all

of our

stakeholders.

Thcrc

are

no

entitlements; we

share

together in our

collective

fate.

To that end rvc have a saiary cap

that limits

the

compensation

(wages

plus prort

ncentve

bonuses)

of

any Team

Member

to fourteen

times the average

total compensaton of all full-time

Team

Menrbers in

the company.

Creating Wealth Through

Profits &

Growth

.

Stewardship-We

are stewards

of our shareholders'

investments

and

we takc

that

responsibility

verv

seriously.

We

are

committed

to increasing long-tcrm shareholder

value.

.

Profts-Wc

earn

our profits

every

day

through voluntary

exchange

with

our

customers. \rye recognze

that

profits

are essenlial

Lo creatinB

capital

ior

growth,

prosperty,

opportunitv,

job

satisaction,

and

job

secu

rity.

Caring

About

Our

Communities

& Our

Environment

.

Sustainable Agriculture-We

supporl

organic farmers, growers,

and

the environment

through our

commitment

to

sustainble

agricultr.rre and by

expanding

the

market for

organrc

products.

.

Wise Envionmenlal

Practices

We respect

our environment and rccyclc,

reuse,

and

reduce

our waste

wherever

and

whenever

we

can.

.

Community

Citizenship--Wc

recognize

our

responsibility

to

be

active

participants

in our

tocal

communitlcs. We

Sive

a

minmum

of 5

percent

of

our

profits

every year

to

a

wide variety

of community

and non-profit organizalions.

In

addition,

"ve

pay

our

Team

Members to give of lheir time to

communitv

and service

organ izations.

.

Integrity in All Business

Dealings

Our trade

partners

are our allics in serving

our

stakeholders.

We

treat

them

with

respect,

fairness,

and intcgrty

at

all

times and expect the

sme

in

return.

Source

rrrr

rr'.n

hLrict(nrdsrrk(1

conr

accessecl

March

2

l,

2008J.

Exhibit

4

NUMBER

OF

YEAR

COMPANY

ACQUTRED

TOCAT|ON

STORES

ACQU|S|T|ON

COSTS

1992 Bread

& Circus

Northeastern

Unted

Sttes

I993 Mrs. Cooch's

Southern California

1996 Fresh Fields

Markets East

Coast and

Chicago area

1997 Merchant

of

Vino Dctroit

area

$20

million

plus

$6.2

million

in

common

stock

2.970,596

shares

of common

stock

4.8 million

shares

of stock

plus

optons

for

549,000 additional

shares

Approximately 1 million

shares of

common

stock

2 200,000

shares of common stock

4

$24.5

million in cash

3

$25.7

million in

cash,

plus

assumpton

of certain liablitics

3 Approximately

$35

million in cash

7

$20

million

in

cash

plus

219,000

shares

of common

stock

74

(atter

sale

$565

million plus the assumption

of

of

35 stores)

$137

million

in debt;

however,

Whole

Foods

received approximately

$166

million

for

the

35

stores that

were

subsequently sold

(out


15/302

Part

Two: Section

A:

Crafting

Strategy in

Single-Business

Companies

tltt:

r' llI)

OATS

i\l'\l{l(ET

ACQUISI-

T I() \

In 2007,

Whole Foods moved

to pur-

chase

struggling

Wild

Oats

Markets-Whole

Foods' biggest

competitor

in natural

and

organic

foods-for

$700

million.

Wild Oats

operatcd

109 stores

in 23 states

under the

Wild

Oats

Mar-

ket,

Henry's

Farmer's

Market,

and

Sun

Harvest

brands

and

had total annual

sales

of

about

$1.2

billion.

The

Fcderal

Trade Commission

(FTC)

opposed

the acquisition

on grounds

that

the

competition

in

the organic foods

retailing seg-

ment would

be

weakened;

however, a U.S.

dis-

trict

court

found that the

FTC's

Position

lacked

merit. When

the district court's

ruling

n'as

upheld on appeal,

Whole Foods was legally

cleared

to complete

its acquisition of Wild Oats

in

late

August

2007. Acquiring Wild Oats

gave

Whole

Foods

entry

into

15

new

metropolitan

markets and 5

new

states. Whole

Foods then

quickly sold

35

Henry's and Sun Harvest stores

in

California

and

Texas

previously

acquired

by

Wild

Oats,

along

with

a

California

distribu-

tion

centef,

to Los

Angeles food retailer Smart

&

Final, realizing almost

$166

million from

the

sale

and reducing its net

purchase

price

for

Wild Oats Market

to

about

$534

million

(r+'hich

included the assumption

of

$137

million

in

Wild

Oats'

debt).

In

addition,

Whole

Foods

immediately

closed

nine WiId

Oats

stores

that

did

not

fit

with

its brand strategy or

real

estate

strategy

and began planning

to relocate seven

smaller

Wild

Oats

stores to existing or soon-to-

be


16/302

Exhbit

5

Case

q

Whole

Foods

Market in zooS: Vision,

Core Vatues,

and Strategy

NUMEER OF

STORES

AT END

OF

FISCAI. YEAR

1991

1992

1993

1994

1995

't996

1997

1998

r

999

2000

2001

2002

2001

2004

2005

2006

2007

10

?q

42

49

61

68

75

87

100

117

126

r35

't

45

163

175

186

276

FISCAT

YEAR

Store sales

(000s)

Average weekly

sales

Comparable store sales

growth*

Total square footage

of

all

stores, end

of

year

Average slore size, end

of year, in

square

feet

Cross margin, all-store

averaSe

Store contibution,

all-store averaget

$

1

,838,630

$324,710

8.6"/"

3,180,207

27,18'l

34.5"k

9.40k

$2,690,475

$392,837

10.0%

4,098,492

30,359

34.6y"

9.60/"

$3,864,9s0

5482,061

1

4.9"/,

5,14s,261

31

,566

34.20/"

9.3v"

$4,701

,289

$53

6,986

12

.80/"

5,819,843

33,200

35.1y"

9.60/"

$5,607,376

$593,43

9

't

1 .o"/.

6,376,817

34,284

34.9,,/.

9.6Vo

$6,591

,773

s61

6,706

7

.1yo

9,312.107

33,710

34.8'/o

8.9y"

*Defined

as

average annual sales ncreases

at stores open a

full

ycar

or morc; fepresents

the

rate

at

rvhich sales at exsling stores are

increasing annually cln average.

+l)efined

as

gross

proit

minus

direct store expenses, where

gross prof

t equals slore revcnucs

less

cost of

goods

sold

Sources:

Infornration postcd

at

wrvn,

rvhcr

cioodsnrrkel.com

(accessed

Mrch 14, 2008), and the compan,v's 2(X)7

'l0-K

report-

\4lhole Foods had its

own internally developed

model to ana\yze potential

markets according

to

education

levels,

population density,

and

income

within certain drive

times.

After

picking

a

target

metropolitan

area, the company's

site

consultant

did

a

comprehensive site study and developed

sales

projections; potential

sites had

to

pass cer-

tain financial

hurdles.

New

stores

opened

12

to

24 months

after a

lease was

signed.

The

cash investment needed

to

get

a

new

\4trhole Foods Market

site

ready for

opening

varied

with

the metropolitan

area, store

size,

amount

of

work performed

by the landlord, and

the

complexity

of site development

issues-the

average

capital

cost was

$15.1

million

in 2007.7In

addition to the

capital

cost

of

a

new

store,

it took

about

$850,000

to

stock a store

with

inventory,

a portion

of

which

was

financed

by

vendors.


17/302

Part

Two: Section

A: Crafting Strategy

in Single-Business

Companies

Pre-opening

expenses

(incLuding

rent) averaged

92.6

million for

the 21 new

stores

opened

and

relocated

in fiscal

2007.

Product Line

\Arhile

product and

brand selections

varicd

from

store to store

(because

stores

wcrc differ-

ent

sizes

and had diffcrent clientele),

Whole

Foods' product

line included

some

30,000

nat-

ural, organic,

and gourmet

food

products

and

nonfood items:

.

Fresh

produce-fruits

and

vegetables,

lncluding

seasonal,

exotc,

and specialty

products

like

cactus

pears,

cippolini onions,

and

J

apa nesc

eggplant.

.

Meat and

poultry-natural

and

organic

meats,

house-made

sausages,

turkey,

and

chicken

products

from animals raiscd on

rvholesome

grains, pastureland,

and

r.r'ell

water

(and

grolvn

without the

use

of

by-products, hormones, or steroids).

.

Fresh

seafood-a

sclection of

fresh fish;

shrimp; oysters;

clams; mussels;

homemade

marinades; and exotic

items

like

octopus,

sushi,

and black

tip shark.

A portion of

the

fresh fish

selections

at the seafood station

came

from

the

company's

Pigcon Cove and

Select

Fish

seafood

processing subsidiaries.

Seafood

itcms coming

from distant supply

sources

were

flown in to stores

to

ensure

maximum

freshness.

.

A

selection

of daily

baked

goods-breads,

cakes, pies, cookies,

bagels,

muffins, and

scones.

.

Prepared

foods-soups,

caned

and pack-

aged goods, oven-ready

meals,

rotisserie

meats,

hearth-f\red

ptzza,

pastas, pats,

salad

bars,

a sandwich station, and a

selec-

tion

of

entres

and

side

foods

prepared

daily.

.

Fine-quality cheeses,

olives

(up

to

40

varieties in

some stores),

chocolates, and

confections.

.

Frozen

foods,

juices,

yogurt and dairy

products,

smoothies, and bottled

waters.

A

wide

selection

of dried

fruits, nuts, and

spices

(either

prepackaged

or dispensed

from bins).

Becr and

wines-the

selection of domestic

and imported wines varied

fom

store

to

store.

Organic wines were among

those

available.

Coffees

and

teas-the

company's

Allegro

coffee

subsidiary supplied

all stores

with

specialty

and

organic

coffees,

and several

of

the newer

stores

had in-store

coffee-

roasting equipment

that allowcd customers

to

order

any of

20 r'arieties to be roasted

while

thev

shopped.

The

tea

selections

included environmentally correct,

premium

exotic

teas

from remote

forests.

Most

stores

had

a

coffee

and

tea

bar where shoppers

could enjoy

freshly

brewed drinks.

A body

care

and

nutrition department

containing

a

wide

selection

of

natural

and

organic

body

care

products and cosmetics,

along

with

assortcd

vitamin

supplements,

homcopathic

remedies, yop;a supplies, and

aromatherapy

products-all

items entailed

the use of

non-animal testing

methods and

contained

no artificial ingredients.

Natural and organic

pet foods

(including

the

company's own private-label linc),

treats, toys,

and

pest

control

remedies.

Grocery and

household products

-canncd

and packaged

goods,

pastas/ soaps,

clean-

ing products, and other conventional

houschold items that helped make

Whole

Foods' larger

stores a

one-stop

grocery

shopping destination

where people could

get

everything on

their shopping

list.

A

floral department

with

sophisticated

flower

bouquets and

a

selection of

plants

for inside and outside

the

home.

A

"365

Everyday Value"

line and

a

"365

Organic

Everyday Value"

line

of

private-

label products

that n'ere

less

expensivc

than comparable

name

brands, as rt'ell

as

a family of privatc-label products

with

consistent logos and

packaging for specific

departments---examples

included

"\Alhole


18/302

Kitchen" for

prepackaged fresh and

frozen

grocery

items;

"Whole

Treat" for

cookies,

candies,

and

frozen

desserts;

"Whole

Pan-

try" for herbs,

spices,

and

condiments;

and

"Whole

Catch" for prepackaged fresh and

frozen

seafood

items.

.

Educational

products (information on

alternative

health

care)

and books

relating

to

healing, cookery, diet, and lifestyle.

In

some stores,

there were

cooking

classes

and

nutrition sessions.

Whole Foods

was

the world's biggest seller

of organic produce.

Perishables

accounted for

abort

67

percent

of

Whole Foods'

sales

n2007,

considerably

higher than

the

40-50

percent

that

perishables represented

at

conventional super-

markets.

The acquisition

of

the

three

75,000-

plus-square-foot Harry's Market

superstores

in

Atlanta, where

75

percent

of sales

were per-

ishables, had

provided

the

company

with

per-

sonnel

having valuable intellectual

capital

in

creativcly merchandising all major perishables

categories.

Management believed that the

Apendix and Cases

Documents

Transcript of Apendix and Cases