Whole Foods Stock, Analyzing WholeFoods Business Model & How does WholeFoods Make Money
Well everyone knows what Amazon is! It needs no explanation. What needs an explanation is why a ZERO INVENTORY E-RETAIL company will buy out (in all cash) a 100% inventory driven PHYSICAL-RETAIL company like Whole Foods Inc.
For your surprise, I was shocked to read this as well. I have examined the terms of the deal as well as WholeFoods Business Model and Whole Foods Stock performance, read on to find out about the real reason why Amazon bought over Whole Foods.
About WholeFoods, Founder, Stock and Facts
Whole Foods Market Inc. is an American supermarket chain exclusively retailing (online-offline) food items without any sort of artificial preservatives, colors, flavors, sweeteners, and fats.
Well, that’s interesting! A Whole Business model around Whole Foods only, who could’ve thought this business also has the potential to do over $10 Billion a year in Revenues!
It is the United States’ first certified organic grocer i.e organic integrity of the products from the time they reach stores until they are placed in a shopping cart is maintained without the use of artificial chemicals/agents.
WholeFoods Founders: Whole Foods was not founded as Whole Foods but it was John Mackey Renee Hardy Laswon’s SaferWay store, founded in 1978, and Craig Weller and Mark Skiles’ Clarksville Natural Grocery, both in Texas, USA. These stores merged in the next 2 years to open the first Whole Foods Market Store, located in Austin, Texas (HQ).
As of 2017, it has 100,000 employees and 400+ stores in the United States, Canada, and the United Kingdom. It is the 30th largest retailer in the U.S., based on 2016 revenue.
WholeFoods Business Model
WholeFoods Business Model is simple, buy at X and sell at X+Y. That’s it!
There are two aspects to it – First, What’s important here is to figure out what to sell and at how much Y. Second is where to sell them?
What’s there to Sell? To Sell or Not to Sell! 🙂
WholeFoods at a global level and at a regional/local level have a manager dedicated to sourcing a single SKU, typically called the category manager or the procurement manager. These managers are responsible and typically the first point of contact for any potential seller. They are responsible for ensuring that each store is stacked with sufficient “local feel” by sourcing products locally at scale. The local feel is a very important element of wholefoods business model.
WholeFoods Business Model for Selecting Product
Business Model of WholeFoods revolved around selecting the right product. For almost two decades, Whole Foods was opening “perfectly local” stores in the right places the right time. The stores were located in plush upscale neighborhoods where the residents could easily afford its premium products.
Now these premium products are typically sourced at three levels (sometimes 4) these three levels were:
- Local Level: Where the sourcing manager would be typically based in that same store where the buying is being done, this was done to identify the taste of the market and prepare the winners from the local level for the nationwide launch. This is quite the norm for most retail products with Lori Greiner at the popular show Shark Tank. The Shark Tank guests have written some phenomenal books, I must tell you.
- Regional Level: Where the sourcing manager would be typically based in that region (state, cluster of large cities etc.). He would ensure that all the stores in that region are stacked with the flavor of the season for all stores in that region.
- National Level: Here the category manager is based in the HQ and is responsible for negotiating deals across sellers which can be consumed nationwide / globally.
Now, these products are typically US FDA approved, which people say can’t be rigged, but Theranos proved it otherwise! Anyways, Whole Foods doesn’t rely on any third party metric and thus it has its own set of standards which you need to qualify in order to sell at WholeFoods.
Once the products are approved at local (and respective hierarchical levels) the product owners/employees are to test out these products at the location of choice given by WholeFoods Management. Once it passes the tests at those locations, then the category manager decides in how many stores he would want to launch that product and at what price point.
The same products are also sold at the wholefoods website/app.
But the business model of WholeFoods doesn’t only rely on sourcing the right product but also the price point at which it is sourced.
Pricing Importance in WholeFoods Business Model
The pricing is arrived by calculating markups on the bare minimum cost of goods sold (COGS).
The product owner typically comes with a price of X at a quantity of Y, thereby totaling to Z (X * Y = Z), WholeFoods reverse calculates the price it would want to buy at which is (X – Margin (M)) thus gives out such an order (Y + N) that the whole deal will be lucrative to the product owner as well. Now the product owner goes back and renegotiates the prices at the source.
Pricing is also arrived at by introducing efficiencies of scale at the supply chain level, where WholeFoods would help in reducing wastage and price incurred in shipping the goods to the location.
But the WholeFoods business model has started developing complex problems which arrive at scale. Let’s see how is the whole foods stock performance and how it makes money despite these problems.
How does WholeFoods Make Money
These days, Whole Foods seems to be in the wrong places at the wrong time. Sales and store openings stalling, and whole foods stock has been heading south. This is one of the prime reasons to have this be sold to Amazon so that they can eliminate the space and market problem altogether, more on this towards the end of the article.
Other local retailers, who have been jumping into the e-retail market for natural and organic food, and competing for the mindshare of the customer with Whole Foods Market.
The market is saturated these days, with Amazon ruling most of the daily living touch points for the consumer. The company is running out of affluent neighborhoods to sell its products in. This has resulted in the most decline in the market cap of the company.
How does WholeFoods Make Money despite these problems
Well, it doesn’t! Yes, it really doesn’t! To counter this, WholeFoods business model took a U-turn and started opening its chain of 365 branded stores which would be smaller, economical as well. But that strategy seems to have backfired, as people would rather drive a mile longer to get the same product cheaper, thus this cannibalized the box-store sales.
Considering all these points, it made sense to look for a strategic exit and thus the Amazon sale makes perfect sense to me. One more thing to note here is that like other retail chains WholeFoods business model at one point also had own brands that were being sold inside the stores. These were primarily licensed foods that other manufacturers were manufacturing on behalf of WholeFoods. Licensing was an important part of WholeFoods Business Model.
Whole Foods Stock
Whole Foods stock has definitely been hammered the first quarter of this year because of the poor store-on-store sale numbers but recently has got spiced up because of the potential sale to Amazon.
Whole Foods Stock
Amazon has agreed to buy Whole Foods for $13.7 Billion i.e. at 27% premium to the day’s closing price when the announcement was made. The price of Whole Foods stock was estimated to by 42$ per share for the qualifying sale to Amazon. Now here comes the turn, since the announcement the stock has surpassed 42$ mark and thus Amazon will mostly get the company for free without paying any premium (well for the most part).
The WholeFoods brand as a company was in a free fall and Amazon needed something to sell groceries at. Thus this was the perfect match where Amazon will leverage tech to drive costs down (thereby making it more affordable) and use their physical presence to lure customers to buy many more things along with their fresh produce purchase. This way I feel Jeff got a steal! 🙂
Disclaimer: WholeFoods Business Model, Whole Food Stock Analysis are all a part of the writers understanding and are not to be used full or in part without consent. They do not represent the company’s view in any form or manner.