Thursday, October 11, 2007

Thursday Talking Points Memo

Category Marketing Dominance: How Whole Foods Market, Inc. Became King of the Supernatural Retail Grocery Category and Why it Will Continue to Reign For Some Time

The ultimate purpose of any marketing strategy is not to just build a brand but to dominate a category. For example, Google dominates the search category, Campbell's the canned soup category, Starbucks the premium coffee category and Whole Foods Market Inc. the supernatural retail grocery category. Among the many things these category kings have in common is they also have built strong brands. To paraphrase an old saying: "Dominate your category and the brand equity will follow."

Our discussion today is about Whole Foods Market, Inc. and how it's positioned itself as the supernatural retail grocery category king. In fact, it's become more than the dominant category leader--it's now the category's only real member.

How did this happen? Whole Foods has employed seven key marketing strategies in the mere two decades it's been in existence to take it from an entrepreneurial one-store start-up to the sole player of any significance in the supernatural grocery category.

These seven key strategies are: The creation of a corporate retail purpose/mission and the building of a culture to advance and sustain it, development of innovative, lifestyle-oriented retail merchandising methods, shrewd buying practices, competitor acquisitions, alliance building, 24/7 communication and community relations practices, and rapid new store growth. These aren't the exclusive strategies the grocer has used to get where it is today but they are the primary and key marketing strategies which have made Whole Foods the category owner it is today.

Let's examine each of these marketing strategies briefly. First, from its early entrepreneurial beginnings under CEO John Mackey, Whole Foods saw the importance of creating and building a unique culture based on a purpose and a mission other than merely being a natural foods retailer. These precepts have been refined throughout the years and infuse everything the grocer and its associates do in the stores.

Second, Whole Foods is a perfect example of "continuous improvement" when it comes to its merchandising philosophies and practices. Observing the grocer over the years shows a progression from an orthodox, food co-op type of retail merchandising philosophy to today's mix of upscale, natural foods/lifestyle-oriented merchandising in its stores. Retail as theatre is a good description of retail merchandising in today's Whole Foods stores. Food is clearly at the center but it's much more, including social aspects, fun, creativity and the creation of good feelings for store shoppers.

The third marketing strategy, shrewd buying practices, is less sexy but no less important than the other five. Whole Foods has developed, from it corporate buying headquarters to its stores, a policy and practice of getting the absolute best cost of goods it can from its distributors, suppliers and vendors. Store-level associates are rewarded economically for doing this--and even more importantly they take great personal pride in cutting a better deal (some vendors say too much pride) than the guy or gal at the Whole Foods store down the street. These buying practices from the top down to store-level have helped the supernatural grocer obtain the highest gross margins among food retailers anywhere in the world.

Whole Foods' strategy of acquiring competitors in the natural foods retailing sector is no less brilliant. From the grocer's early acquisitions of Mrs. Gooch's in Southern California and Bread & Circus in the Eastern U.S., to its recent acquisition of rival Wild Oats (and many other acquisitions in between), Whole Foods has used acquisitions as a two-pronged marketing strategy not only to grow more rapidly and enter markets with a critical mass of stores but also as a way of eliminating competitors (and potential competitors) in the supernatural retail grocery category.

The fifth key marketing strategy, alliance building, has and continues to serve Whole Foods well. The grocer builds alliances with a vast network of stakeholders ranging from farmers and chefs to non-profit, environmental, consumer and non-governmental organizations in the U.S. and globally. Whole Foods' sixth strategy, 24/7 communications and community relations, ties into alliance building. The grocer conducts a very comprehensive marketing communications program both from its headquarters and at store-level, telling its story to the media and other constituents. Most impressive, Whole Foods makes sure its core purpose, mission and culture is weaved into these stories which constantly reinforces its clear leadership and dominance in its category.

Lastly, coupled with its aggressive acquisition strategy, Whole Foods pursues a super-aggressive new store building program. What's most important about this besides the sheer growth it is providing is that the grocer continues to "up the anti" with its new stores. Rather than build similar size and format stores like most food retailers do Whole Foods stores keep (generally) getting bigger and more lifestyle-oriented. They also continue to incorporate new concepts (like a day-spa in the recently opened Campbell, California store) and formats (like the European food hall store just opened in Oakland, California). Furthermore, since the grocer has a decentralized culture its able to localize its stores in ways other large food retailers have yet to duplicate.

These seven marketing strategies form the core of the process Whole Foods has used to not only dominate its category, but now that its acquisition of Wild Oats has been finalized and is proceeding along well, position itself as the only real member of the supernatural retail grocery category.

This post Wild Oats acquisition category dominance can be evidenced by what has happened with Whole Foods' publicly traded stock in the little more than a month since the U.S. Federal Court gave the green light for the acquisition. As soon as the acquisition was approved Whole Foods stock went from a near all-time low in July, 2007 to a 33% jump in a week or so. Today the stock is up 48% over that July low.

MSN's popular "Top Stocks" columnist and investment expert Robert Walberg believes Whole Foods' stock will rise even more in the coming months--much more in fact. Walberg says "what makes Whole Foods such an exciting long-term investment is that it has changed how we perceive the supermarket experience, much like Starbucks changed coffee retailing 20 years ago. The produce, meat, specialty food and wine/cheese areas provide a feast for the senses. Meanwhile the focus on natural and organic products throughout the store gives consumers a place to shop where they can find an abundance of healthy and nutritious food choices for their families," he says. "Toss in a knowledgeable staff that prides itself on being friendly and helpful and you have a winning mix of product and service."

We couldn't agree more with Walberg in terms of Whole Foods' current positioning. Further, the supernatural grocer's category dominance which it has achieved using the marketing strategies we've discussed is what we believe will enable the grocer's stock share value to grow even more in the near term. Even more importantly though it's this category dominance which will allow the supernatural grocer to grow aggressively as a formidable food retailer for some time without any major competition in its category.

Whole Foods' major competition will come as the lines between natural foods super retailing and supermarkets and mass merchandisers continue to blur. As more retailers like Safeway, with its Lifestyle format and H.E.B with its City Market format for example, continue to "up their respective anti's" in terms of increased upscale natural foods-oriented and lifestyle merchandising, Whole Foods will find itself under increasing competition--not in its category but from a new, blurred category.

An analogy or similar example to this is where long-time carbonated beverage category king Coca Cola currently is. It remains the most recognized brand in the world according to most research, however since the carbonated beverage category has blurred so much (waters, new-age beverages) ,Coke is having to reinvent itself as its category melts away. That's why Coca Cola calls itself a "hydration" company today. Soda pop remains its flagship product but is being overtaken by bottled waters, juices and new-age brands within the company.

Whole Foods won't find itself in this situation for a long time however--and perhaps its next challenge won't even be from a Safeway, H.E.B or the other numerous supermarket chains that seem to be moving more and more into a Whole-Foods type niche with many of their retail banners. In fact, the history of category dominance tends to be led by entrepreneurial rather than established companies. Google, Starbucks, Microsoft and Whole Foods all began as fairly recent entrepreneurial companies and today own their respective categories. As such, it's quite probable that Whole Foods' is as likely to face a category challenge down the road from something and someone new in addition to a more established retailer. Of course with Whole Foods' track record as a dynamic, innovative company, if and when that time comes the grocer just may have already intentionally morphed itself into something different than it is today.

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