Whole Foods Market, Inc.

FOUNDED: 1980

Contact Information:

HEADQUARTERS: 601 North Lamar, Suite 300
Austin, TX 78703
PHONE: (512)477-4455
FAX: (512)476-1069
URL: http://www.wholefoodsmarket.com

OVERVIEW

Whole Foods Market (WFM) is the largest natural and organic supermarket chain in the world. In February 2002, it had 129 stores in 23 states and the District of Columbia. The company planned to open three to five stores in each quarter of 2002, about 25 percent of them in new markets such as Toronto and Las Vegas. Its stores are supported by regional distribution centers, bakeries, commissary kitchens that supply prepared foods, a seafood processing facility, a produce procurement and field inspection office, and a coffee roasting operation.

Year 2001 store openings included Whole Foods Market's first foray into Manhattan, a 40,000 square foot store in Chelsea, which it reports has become one of its ten highest volume stores—along with new stores opened in Denver and Washington, D.C. Whole Foods Market is a Fortune 1000 company, ranked in April 2002 by Fortune magazine the 633rd largest U.S. company, ranked the 41st largest U.S. supermarket company by Supermarket News in 2001, and ranked for five consecutive years as one of the Top 100 Companies to Work For by Fortune magazine.

Whole Foods Market nutrition departments display a wide offering of vitamins, supplements, herbs and teas, homeopathic remedies, and information on alternative healthcare. Departments are staffed with team members having product knowledge and are organized and well-marked not only by product but by purpose, such as Joint Health, Stress Reduction, and Men's Health. Included with many brands are products under the Whole Foods and 365 labels.

In the Whole Foods Market 2001 Annual Stakeholder's Report, Board Chairman, President, and CEO John Mackey cited the company's mission, core values, and national quality goals, saying "We do not carry natural and organic products to help boost our sales. We carry natural and organic products because we believe that food in its purest state—unadulterated by artificial additives, sweeteners, colorings and preservatives—is the best tasting and most nutritious food available. We actively support organic farming because we believe it is the best method for promoting sustainable agriculture as well as for protecting the environment and farm workers. It is our authenticity as a wellness lifestyle brand that is our major competitive advantage. . .To understand and truly appreciate Whole Foods Market one must recognize that we are a mission-driven company. . .Our motto—Whole Foods, Whole People, Whole Planet—emphasizes that our vision reaches far beyond just being a food retailer."

COMPANY FINANCES

Whole Foods Market's net sales have been steadily increasing since 1998 and this was projected to continue through 2002. To illustrate, 1998 net sales were nearly __BODY__.4 billion; net sales in 1999 were nearly __BODY__.6 billion; 2000 net sales were approximately __BODY__.8 billion; net sales in 2001 were nearly $2.3 billion; and 2002 net sales were projected to reach $2.6 billion.

Value Line, Fortune, and Stockgroup in company profiles describe World Foods Markets Inc. as the world's largest retailer of natural and organic foods, Fortune adding that WFM pioneered the health foods supermarket concept. Since its initial public offering on the NASDAQ at $8.50 per share in 1992, Whole Foods Market has twice announced a two-for-one stock split, the second coming in recession-plagued 2001. On April 4, 2002, its stock price was $44.58 with all cash dividends still being reinvested. It was classified by Value Line in February 2002 as a mid cap stock with a $2.3 billion market cap.

ANALYSTS' OPINIONS

On March 25, 2002, CBS MarketWatch reported its most recent analyst recommendations on Whole Foods Market stock: Bear Stearns rated it attractive, setting a $49 price target; REC Capital Markets rated it a top pick; and Merrill Lynch rated it an intermediate-term buy, setting a $50 price target.

Amy Schatz of Knight-Ridder/Tribune Business News reported on February 14, 2002 that Whole Foods Market profits for first quarter 2002 rebounded and were up 34 cents per share, or $20 million, due to stronger than expected sales. Her article indicated that this strong performance surprised analysts and was particularly significant because of WFM's failed ventures into mail-order vitamins and Internet sales leading to a loss of $49 million in 2000, and added, "The company's success at reaching beyond natural food junkies comes when its smaller competitors, notably Denver-based Wild Oats Market, Inc., have struggled."

Also in February 2002, Value Line raised its revenue estimates for Whole Foods Market based on its acquisition of the three Atlanta-area Harry's Food Markets perishable superstores. While cautioning that WFM's bottom line probably wouldn't benefit until at least fiscal 2003 because of Harry's recent negative comparable store sales and its former owner's financial inability to retain and attract customers, Value Line cited the Harry's acquisition as part of WFM's trend to larger-format stores, which shows strong sales performance. Value Line also expressed confidence in Whole Foods Market by increasing its estimate of the company's fiscal 2002 performance based on more than a ten percent increase in comparable store sales in 2001's faltering economy, the company's cautious setting of 2002 store growth at five to eight percent, and its increased recognition as a "lifestyle" brand by a loyal and economically stable customer base. Value Line ranked Whole Foods Market shares highest for year-ahead price performance and speculated that because WFM share earnings were near the top of their historical range, profit-taking might result.

HISTORY

In September 1978, John Mackey, Whole Foods Market Co-founder, Chairman, President, and CEO, opened SaferWay, a small health foods store in Austin, Texas; in 1979, the Clarksville Natural Grocery was opened in Austin by Craig Weller and Mark Skiles; and in September 1980, the three men joined forces to open the two stores as Whole Foods Market with a staff of 19.

Expansion began with the opening in August 1984 of a store in Houston and to April 2002 includes: the purchase of Bluebonnet Natural Foods in Dallas; the acquisition of three Wellspring Grocery stores in Raleigh, Durham, and Chapel Hill, North Carolina; the purchase of six stores from Bread & Circus, then the largest natural food retailer in the Northeast; the acquisition of Mrs. Gooch's Natural Foods Markets; the purchase of the San Francisco Bread of Life stores; the purchase of 22 Fresh Fields stores located in Washington, D.C./Baltimore, Philadelphia, New York/New Jersey/Connecticut, and Chicago markets; the acquisition of Florida Bread of Life stores; the acquisition of Amrion of Boulder, Colorado; the purchase of Allegro Coffee Company and Merchant of Vino stores; the acquisition of Nature's Heartland in Boston; the acquisition of Food for Thought in Northern California; the acquisition of three Natural Abilities, Inc. food stores in Sonoma County, California; and the merger of WholePeople.com with e-retailer Gaiam.com.

When Chairman and CEO John Mackey was asked about future growth, he said, "One of the concerns that has been expressed since we went public is: How big is this market? How big can it get? Seven or eight years ago, we didn't have any stores making $380,000 a week. Now that's the average. We're appealing to a broader range of customers. To me, this is all good news and it means we have a lot of expansion possibility ahead."

STRATEGY

In the mid-1990s, Whole Foods Market began to shift the purchase of products for retail sale from the store level to regional and national wholesale suppliers and vendors for better negotiation of volume discounts. In 2002, eight regional distribution centers distributed natural products, produce, and private label products to WFM stores in their respective regions. A Whole Foods Market seafood wharf, produce procurement center, specialty coffee roaster and distributor, and regional prepared food commissaries and bake houses also distribute products to stores.

In 1994 WFM's growth strategy turned to opening larger stores of between 30,000 to 50,000 square feet with expanded perishable departments, which in 2002 accounted for close to 65 percent of store sales. WFM believes that this larger store format with emphasis on high-quality perishables appeals to a broader customer base and is largely responsible for the strong new store performances it has been experiencing. The company also feels these larger stores are less vulnerable to competition over the longer term. In October 2001, to continue enlarging and improving its appeal to a more diverse customer base, WFM acquired three Harry's Farmers Markets—very large perishable superstores in the Atlanta area averaging more than 70,000 square feet each with approximately 75 percent of sales in perishables.

Because at year end 2001 Whole Foods Market regarded the natural foods retailing industry as highly fragmented into many smaller local and regional chains, its plan to open or acquire 15 to 20 stores in both fiscal 2002 and 2003 included the acquisition of smaller chains with desirable locations, markets, and experienced team members; relocation of existing stores; and new store openings. It also believed at that time that more future growth would come from developing new stores on premier real estate sites than from acquisition of existing stores.

New stores are generally located in high-traffic shopping areas, often in urban high-population locales, and are either free standing or in a strip center. Site selection is through internal analysis of potential markets based on criteria such as education levels, population density, and income levels. In 2002, about 95 percent of existing stores were located in the top 50 metropolitan areas.

A part of its mission and a major component of its growth strategy is the company's use of what it calls a "team approach" to store operations to promote a strong company culture, which it believes empowers employees much more than traditional supermarket operations. Whole Foods Market stores employ "team members" who are organized into up to 11 teams, each led by a team leader. There is also a store team leader (manager). Each team is responsible for a different product category or aspect of store operations. In this decentralized team approach where many personnel, merchandising, and operating decisions are made by teams at the individual store level, Whole Foods Market emphasizes that an effective store team leader is critical to the success of the store. Store team leaders are paid a salary plus an Economic Value Added-based bonus and are eligible to receive stock options. There also is a gainsharing program rewarding a team's labor productivity. Team members are eligible for stock options through seniority, promotion, or at the discretion of senior regional or national leadership. Team members can purchase restricted stock at a discount through payroll deductions. WFM stock is an investment option within the company 401(k) plan.

In fiscal year 1999, Whole Foods Market, Inc. adopted an Economic Value Added (EVA) management and incentive system. EVA is equivalent to net operating profits after taxes minus a charge for the cost of capital necessary to generate that profit. WFM corporate management credits EVA with improved business decisions across the company's decentralized culture, where decisions are made at the store level, close to the customer, and considers it one of WFM's strongest competitive advantages. Says Chairman and CEO John Mackey, "Rather than taking decision-making authority away from local areas as we grow, we instead are developing tools for our team members to use to help them make better decisions. As a result, EVA is strengthening financial discipline in decisions made throughout the company." At fiscal year-end 2001, more than 350 leaders throughout the company were on EVA-based incentive plans that cover senior executive leadership, regional leadership, and the store leadership team in all stores.

Whole Foods Market says it spends less on advertising than conventional supermarkets, instead relying primarily on word-of-mouth recommendations from customers. Stores spend most of their marketing budgets on in-store signs and other printed material and store events such as taste fairs, classes, and product samplings. WFM promotes a natural and organic lifestyle by customer education initiatives beyond the store, including proactive public relations programs. WFM also seeks generation of customer appreciation and loyalty through in-store education about natural and organic foods, health, nutrition, and the environment as well as on its corporate Web site.

INFLUENCES

The success of Whole Foods Market, Inc.'s corporate strategy was described by Chairman and CEO John Mackey in the company's 2001 Annual Stakeholder's Report: "We believe that much of our success to date is because we remain uniquely mission driven. We are highly selective about what we sell, we believe in providing an empowering work environment for our team members and are committed to sustainable agriculture. Our motto is Whole Foods, Whole People, Whole Planet. We obtain our products locally and from all over the world, often from small, uniquely dedicated food artisans. We strive to offer the highest quality, least processed, most flavorful and naturally preserved foods. We recruit the best people we can to become part of our team. We empower them to make many operational decisions, creating a respectful workplace where team members are treated fairly and are highly motivated to succeed. We look for team members who are passionate about food but who are also well-rounded human beings who can play a critical role in helping to build our stores into profitable and beneficial parts of their communities." Mackey went on to say: "We believe companies, like individuals, must assume their share of responsibility for our planet. On a global basis, we actively support organic farming, which we believe is the best method for promoting sustainable agriculture and protecting the environment and farm workers. On a local basis, we are actively involved in our communities by supporting food banks, sponsoring neighborhood events, compensating our team members for community service work, compensating our team members for community service work and contributing at least 5 percent of our after-tax profits in cash or products to not-for-profit organizations."

PRODUCTS

Whole Foods Market stores sell an average of 20,000 food and non-food items with a heavy emphasis on perishable foods designed to appeal to both natural, organic, and gourmet shoppers. Most products are natural or organic, but a limited selection of conventional national brands that meet Whole Foods Market quality goals are also sold. Product categories include produce, grocery, meat and poultry, seafood, bakery, prepared foods, beer/wine/cheese, nutritional supplements, body care, pet products, floral, household products, and educational products such as books.

WFM product quality goals and standards include evaluating every product sold; carrying featured and prepared foods free from artificial preservatives, colors, flavors, and sweeteners; a passion for great tasting food and for sharing it with each other; a commitment to foods that are fresh, wholesome, and safe to eat; using no genetically-modified organisms in WFM private-label products; seeking out and supporting sources of organically-grown foods; maintaining that seafood, poultry, and meat are free of added growth hormones, antibiotics, nitrates, or other chemicals; and featuring grains and grain products that have not been bleached or bromated. WFM does not sell food that has been irradiated and sells only household and personal products that have been proven safe through non-animal testing methods.

In 1991, Whole Foods Market launched its Whole Foods premium private label of products made by small producers with a regional focus and a reputation for authentic and flavorful food. There are more than 400 Whole Foods premium brand products, including organic chocolate from Switzerland, apple butter made by one of the last small cider mills in Pennsylvania, organic pastas from Italy, and an organic micro-brewed beer. Other Whole Foods Market product lines include 365 Every Day Value, which are all-natural commodity products that meet company quality standards; Whole Kids, the country's first organic product line developed just for kids, with a kids pre-production tasting panel to address the risk of toxic pesticides in the country's vegetables and fruits; the Lex Alexander Handpicked Selection line of international products; and the Allegro Coffee Company line of specialty and organic coffees, teas, and brewing equipment.

CORPORATE CITIZENSHIP

In March 2001, Business Ethics magazine ranked Whole Foods Market one of the country's "100 Best Corporate Citizens." To create good will and maintain a high profile within its community, each store has a separate budget for making contributions to a variety of philanthropic and community activities, contributing in 2001 at least 5 percent of after-tax profits in the form of cash or products to not-for-profit organizations.

GLOBAL PRESENCE

Whole Foods Market, Inc. makes global purchases for its Whole Foods premium private label food products. In 2002, its first store outside of the United States was scheduled to open in Toronto.

EMPLOYMENT

Whole Foods Market believes that many of its team members regard their job as an extension of their personal philosophy and lifestyle—that they are contributing to the good of others by selling clean and nutritious foods and contributing to long-term sustainable agriculture by promoting a pesticide-free and healthier environment. WFM provides paid time off to team members for working with qualified community service organizations.

SOURCES OF INFORMATION

Bibliography

"Analysts Information, Whole Foods Market, Inc.," 25 March 2002. Available from www.CBS.Marketwatch.com.

"Upgrades/Downgrades, Whole Foods Market, Inc.," 25 March 2002. Available from www.CBS.Marketwatch.com.

2001 Whole Foods Market, Inc. Annual Stakeholders Report. Austin, TX: Whole Foods Market, Inc., 20 December 2001.

Schatz, Amy. "Profits Rebound, Rise 34 Percent for Austin, Texas-Based Whole Foods Market." Austin American Statesman, Texas Knight Ridder/Tribune Business News, 14 February 2002.

Van Liew, Nils C. "Whole Foods Market." Value Line, 8 February 2002.

"The 2002 Fortune 500," 7 April 2002. Available at http://www.Fortune.com.

"Company Information, Whole Foods Market, Inc.," 7 April 2002. Available at http://www.Fortune.com.

"The Street Likes Whole Foods Market, Inc," 8 May 2001. Available at http://www.Stockgroup.com.

"Whole Foods Market At A Glance," 4 April 2002. Available at http://www.CNNMoney.com.

"Whole Foods Market, Inc. Quarterly Financials," 7 April 2002. Available at http://www.Hoovers.com.

Whole Foods Market Reports First Quarter Fiscal Year 2002 Results: Comparable Store Sales Increase Over Nine Percent for the Fourth Consecutive Quarter. Austin, TX: Whole Foods Market, Inc., 13 February 2002.

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Whole Foods Market's primary SICs are:

5411 Grocery Stores

5499 Miscellaneous Food Stores

Also investigate companies by their North American Industry Classification System codes, also known as NAICS codes. Whole Foods Market's primary NAICS codes are:

445110 Supermarkets and Other Grocery (except Convenience) Stores

445299 All Other Specialty Food Stores

446191 Food (Health) Supplement Stores