Assignment
INSTRUCTIONS:
The objective of the integrated semester is to help you extend your knowledge of how the finance, operations, management, and marketing disciplines work and how they integrate their functioning in the real world of business. This assignment is an assessment of how well you understand this integration.
Below you will find a mini "base" case that broadly describes the current challenges faced by Whole Foods. Following the case are questions from each of your four "300" courses that reflect the impact of those challenges on the particular functional area and the implications for the other disciplines.
YOUR ASSIGNMENT IS TO ANSWER ALL OF THE QUESTIONS, IN A SINGLE DOCUMENT:
• The assignment should be prepared as a Word document, 12 -14 pages in length (approx. 3 pages for each discipline's questions).
• The document should be double spaced, using Ariel font #12.
• Label each section (e.g., FINANCE) to indicate which discipline's questions you are answering.
• Add any Appendices at the end of the Word document.
• Upload the entire Word file through the link on Canvas to eachof your Integrated Semester courses by the due date.
Note: Your reference sources, in addition to the base case and question sets, should be online sites and articles, Bloomberg terminals, your Integrated Semester textbooks and PowerPoint slides.
WHOLE FOODS MINI BASE CASE
Whole Foods Market Inc. is a publicly-held American supermarket chain specializing in natural and organic food that opened on September 20, 1980, in Austin, Texas. As of September 2015, the company had 91,000 employees and over 400 supermarkets in the United States, Canada, and the United Kingdom
Whole Foods founders John Mackey and Walter Robb are co-CEOs, with John Elstrott as chairman. Whole Foods Market became a Fortune 500 company in March 2005 and was the 30th largest retailer in the U.S. based on 2014 revenue
The company's stores are supported by its Austin Texas headquarters and its main produce procurement office in Watsonville, California as well as regional offices, distribution centers, bake-house facilities, commissary kitchens, seafood-processing facilities, regional meat and produce procurement centers, and a specialty coffee and tea procurement and roasting operation. The company's product selection includes grocery, meat, seafood, bakery, prepared foods and catering, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, and lifestyle products including books, pet products, and household products. The company's in-store brands, 365 and 365 Organic Everyday Day Value, account for approximately half of its inventory.
In the face of steep competition from major chains such as Walmart, Target and Kroger as well as specialty grocers like Trader Joes and Sprouts, WF suffered three successive quarters of disappointing earnings in 2015, and came under fire for overcharging customers in some areas. The company's stock price dropped 46% year over year, and in September WF announced that it would cut 1.6% of its workforce. Two months later, the CEOs detailed a nine-point plan to reduce expenses, promote lower prices, boost the prepared food business, expand digital reach and slow store growth.
Earlier in 2015, Whole Foods had presented a strategy for launching a new chain, to be called 365 by Whole Foods Market ("365" stores) in 2016 that would appeal particularly to millennials and budget-conscious shoppers. The first "365" stores are set to be located in various metropolitan settings, including the Pacific Northwest, Southern California and southeast Texas. While the chosen locales will contain residents of varying education and income levels, they will have in common substantial concentrations of consumers who are, in the words of John Mackey, Whole Foods' co-founder and co-chief executive, "hip, cool and tech-oriented". These so-called "hipsters" are typically younger consumers who want high-quality, organic foods but can't necessarily afford Whole Foods' prices. In announcing the creation of the "365" concept in 2015, Mackey stated that, along with lower prices, the new chain would feature a modern vibe and edgier aesthetic.
The company's plans and strategies have raised questions about how Whole Foods will prevent one brand of stores from cannibalizing the business of the other. According to a recent (2/12/16) report in The Washington Post:
WF's latest quarterly financial results underscored what a big challenge Whole Foods faces as it tries to hang onto the organics crown.Whole Foods reported that total sales in the most recent quarter rose 3 percent. However, sales fell 1.8 percent at stores open more than a year, and the company said that was due to both a decline in the number of transactions and a decrease in "basket size," or in how much money was spent per transaction.
Executives said on a conference call with investors that some of the decline was because the grocer has gotten more aggressive with promotions, offering deals such as a three-day sale on supplements. Those promotions are not going away anytime soon. Whole Foods announced it was launching digital coupons within its mobile app, and executives said they were continuing to find places to slash prices outside of temporary promotions.
"There are certain very important categories that we know that we need to be competitive on an everyday basis on and so we are working to systemically identify those and move pricing on those to make sure we're competitive," said A.C. Gallo, the company's president, on the investor call.
The boost in overall sales could be attributed largely to the fact that the grocer operates more stores than it once did. But that expansion appears to be slowing. Whole Foods added 38 stores in 2016, but has plans to add about 30 in 2016, including the new 365 outposts. In other words, that means the pressure is really going to be on for the chain to figure out how to deliver more sales from its existing stores, and from digital avenues such as its partnership with Instacart.
The renewed emphasis on price-cutting comes as Walmart, Target, Kroger and others have undercut Whole Foods with their own organics offerings. But the discount strategy is somewhat perplexing when you consider what the new 365 chain is supposed to be: Executives have billed it as a smaller store that allows the company to offer a more convenient experience and reach less affluent shoppers. If both concepts are going to be pushing hard to communicate value, are they really going to appeal to different types of customers or different shopping occasions?
That's not an idle concern. For the third straight quarter, Whole Foods said cannibalization among existing stores contributed to a decline in sales at stores open more than a year. If 365 isn't differentiated enough, the risk for that could only grow.
Co-chief executive John Mackey sought to draw distinctions between the two chains Wednesday, pledging that traditional Whole Foods stores would be more experiential, offer more prepared foods and be a destination for innovation. On the other hand, 365 would be more convenience-oriented and offer a tightly-edited assortment of goods.
And yet, go to the website for 365 by Whole Foods, and the lines seem less clear. The website says executives are looking for partner businesses whose services or products can be incorporated in the new chain, saying: "Record shops? Tattoo parlors? Maybe!"
If 365 were to include something as decidedly experiential as getting inked, it's hard to see how that is much different than the vibe executives want to cultivate in Whole Foods.
MARKETING ASSIGNMENT
The first of the "365" stores is set to open in 2016 in the Silver Lake neighborhood of Los Angeles, named America's No. 1 hippest hipster neighborhood by Forbes. The area is known for its large arts community, having risen to fame as the location of Walt Disney's first large studio in the 1930s. Silver Lake, is sometimes referred to as "the Los Angeles counterpart to Brooklyn's Williamsburg." Silver Lake is an ethnically diverse neighborhood with a high percentage of never-married men (52.6%) and women (38.6%) - often an indication of a high hipster factor. The median annual income is $54,339, according to U.S. Census Bureau data, which isn't too far off the national median household income of $53,046. In other words, the area may well be brimming with 365's target customers. The other announced locations have similar profiles. The Houston 365 store will open near the Houston Heights neighborhood, which has been compared to Silver Lake in terms of its hipster quotient. The cost of a two-bedroom rental there averages $2,000, and the median household income is $63,500. In Bellevue, Washington, where one of the other new 365 stores will be opening, the median household income is $90,333, and 62.1% of people over age 25 have a bachelor's degree. It is home to many employees in Seattle's tech scene, including Microsoft. A store will also open in Portland, Ore which has a demographic profile similar to Bellevue's.A 365 location in the Whole Foods headquarters city, Austin - the reigning city for hipsters in Texas - is currently planned but has not yet been announced.
Each of the new 365 stores is opening in an existing market for the company. Whole Foods typically has a set of guidelines when opening new locations, such as 200,000 people or more within a 20-minute drive and a large number of college-educated residents There are currently five Whole Foods Market stores in the Seattle area, and four stores in Portland, where two stores stand within 1.5 miles of each other.
Whole Foods management has stated "To best leverage our existing team member base and infrastructure, we expect most of our first 365 by Whole Foods Market stores will be in existing markets, complementing our Whole Foods Market stores. The streamlined store concept and efficient shopping experience will allow us to grow in both urban and suburban markets."
Questions:
1. In several markets, the proposed 365 store location is a mile or two from a traditional Whole Foods store so, in the role ofVP of Marketing, explain in some detail what strategy and actions you would recommend, with supporting rationale, to eliminate or minimize the probability of the 365 operation taking sales from the traditional Whole Foods store. Pick any one of the locations profiled above and make use of the demographic information supplied (and available online) in answering the question.
2. Explain the impact those marketing recommendations would or could have on the management, financing and operations of the stores
3. From class discussions about positioning, develop 2 positioning statements, one statement for the 365 line and one for traditional Whole Foods stores.
FINANCE ASSIGNMENT
Whole Foods Market (WFM) has experienced disappointing profits over the past few years despite increasing its revenues during the same interval. While WFM's total revenues increased by approximately 2% in 2016, and 8% in 2015, its net income (profit) declined by about 5% and 7% in 2016 and 2015 respectively, indicating higher costs of operating their businesses. The size of the WFM balance sheet has been growing larger; however, the WFM common stock experienced high volatility and posted a devastating loss to its value from a high of $65/share in October 2013 to about $31/share in December 2016. This performance was more distressing to WFM investors as the S&P 500 stock index experienced gains during the same interval. The decision to open the lower-cost 365 supermarkets has been made against this financial background, in addition to other concerns relating to the long-term healthiness and growth of its core upscale supermarket business.
Please answer the questions below. Use either the Bloomberg terminals located at the Feliciano School of Business or other reputable sources such as finance.yahoo.com, morningstar.com or Wall Street Journal etc. for the financial data you use in your answers. You need to citethesources you use for thefinancial data at the end of the finance portion of the term paper.
Questions:
1. Opening a series of new supermarkets,such as 365, is a major capital budgeting project for the company. A project of this scale requires coordinated planning across all functions of a business that you are studying in your Integrated Core classes. Choose and discuss three items each on the income statement and the balance sheet that you think will be impacted by this new undertaking (a total of six items). Explain why you chose those particular items, and how those items might be impacted by the marketing, management and operations decisions of the company.
2. Explain how the financial decisions regarding opening the 365supermarkets are related to management, marketing or operations decisions that the company must make (or has made) in light of the plans to open this new line of stores?
3. Choose and calculate five ratios for this company for the last two years. Make sure to select ratios that you think would be impacted by the opening of the new 365 stores, and explain your reasoning. Identify two competitors of WFM and contrast the ratios. Explain why you selected those competitors. Describe how the decisions made by management, marketing and operations functions of the company can impact, and hopefully improve, these financial ratios.
4. Calculate the annualized stock price return of WFM over the last 3, 5, and 10 years. How does it compare to the return of the competitors you selected in question 3 and the S&P 500 index over the same time periods? What kind of steps can the companytake regarding management strategy, operational efficiency and marketing policy to improve the disappointing performance of this company going forward?
MANAGEMENT ASSIGNMENT
Whole Foods Market is, in many aspects, an unusual corporation. As the base case illustrates, John Markey and his partners are not typical corporate leaders. Other noteworthy aspects include the Whole Foods' highly decentralized organizational structure, their team-oriented decision making and leadership style, and their unique human resources processes. Whole Foods Market is known for its attractive workplace environment; it is one of only three food retailers that have frequently appeared on Fortune's 100 Best Companies to Work For. The other two foods retailers on the list are Wegman's Food Market and Publix Super Markets. Although Whole Foods Market has recently had to lay off 1,500 employees, Walter Robb, a co-CEO, lamented "...this is a very difficult position, and we are committed to treating affected team members in a caring and respectful manner."
Whole Foods Market is also known for its programs in sustainability and corporate social responsibility. It is ranked 3rd on the Environmental Protection Agency's Top 25 Green Power Partners list. The company's core values include "the advancement of environmental stewardship." Co-CEO Walter Robb defended the company's high prices for salmon by stating that "Sure we could sell cheaper farmed salmon, but it is terrible for the environment." Whole Foods Market is also a major player in philanthropy with 3 active foundations: Whole Planet Foundation, Whole Kids Foundation, and Whole Cities Foundation. In addition, the company donates 5% of its earnings to charities.
Questions:
1. "Whole Foods Market Inc., which has long given its local managers and regional bosses broad discretion over everything from buying cheese to store design, is whittling away at some of that autonomy in an effort to reduce costs and boost its clout with suppliers." (Wall Street Journal, Feb 16, 2016).
The above-quoted statement represents a major shift in the management system at Whole Foods Market. Discuss how this shift will impact, positively and negatively, functional activities in:
a) Finance
b) Operations
c) Marketing
d) Management
2. Discuss:
a) The advisability and potential impact of the employee layoffs on Whole Foods' financial and physical operations, and
b) The challenges and/or benefits the reduction in force presents for the company as it prepares to staff and market the new line of stores.
3. Whole Foods Market has recently decided to drop its uncommon structure of the co-CEO position and return to the traditional single CEO position. Looking at this top management change from an Organizing and Influencing / Leadership perspectives:
a) Explain why Whole Foods Market might have experimented with the co-CEO position and
b) Why they have they decided to go back to the single CEO position.
OPERATIONS ASSIGNMENT
Whole Foods is expensive - but it shouldn't bethisexpensive.(CNN Money, June 15, 2015)
That's according to the New York City Department of Consumer Affairs, which says it has uncovered "systematic overcharging for pre-packaged foods" at the city's Whole Foods stores.
"Our inspectors tell me this is the worst case of mislabeling they have seen in their careers," said Julie Menin, the department's commissioner.
New York officials said that its investigation of 80 different types of pre-packaged products found none had correct weights, and that that 89% of packages violated federal rules for how much a package can deviate from actual weight.
The overcharges ranged from 80 cents for a package of pecan panko to $14.84 for a package of coconut shrimp. Among the other findings:
• Vegetable platters priced at $20 per package were overpriced by $2.50 on average. One package was overpriced by $6.15.
• Chicken tenders were overpriced by an average $4.13 a package.
• Packages of berries, going for $8.58, were overpriced, on average, by $1.15 a package.
"The overcharges were especially prevalent in packages that had been labeled with exactly the same weight when it would be practically impossible for all of the packages to weigh the same amount," said the city's statement.
The city said it found a "few instances" in which the listed weight was less than it actually was, which would have provided a savings for consumers.
Whole Foods(WFM)said it disagreed with what it termed "overreaching allegations" and said it would vigorously defend itself.
"Despite our requests to the DCA, they have not provided evidence to back up their demands nor have they requested any additional information from us, but instead have taken this to the media to coerce us," said Whole Foods spokesman Michael Sinatra.
The city said Whole Foods could be subject to millions of dollars of fines due to thousands of violations on pre-packaged foods.
Last year, Whole Foods agreed to pay nearly $800,000 in fines to the cities of Los Angeles, Santa Monica and San Diego after an investigation by state of California found widespread pricing violations there.
Questions
Assume that you are an intern at a new 365 store. The manager of your store wants to be prepared to deal with such a situation if it happened in her store. She wants to understand what might have led to the problem with the mislabeling.
1. Use one or more of the quality tools you've learned to identify the reasons why the mislabeling may have happened.
2. How might she prevent such issues from arising or fix them once they arise?
3. Which other functions would the manager have to work with to limit the damage done to the store's popularity and profitability? Describe specifically with reference to Marketing, Finance, and Management.