WholeFoods Case Study
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Transcript of WholeFoods Case Study
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Whole Foods Lawsuit Crisis Case Study
Qiurong (Sunny) Zheng
Johns Hopkins University
Nov.16th, 2015
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Executive Summary
In June, Whole Foods Market was sued for its high prices. Whole Foods’s sales declined
because of the lawsuit and it is vital to come up with ways to cope with the problem and retain
customers. This case study specifically focuses on crisis analysis and ways to retain customers
and reestablish positive public image by opening a new sister chain store with lower prices.
After researching online materials, conducting survey randomly with customers near the
store and having a short conversation with one of the employees, I gained extensive information
pertaining to the addressed issue and proved feasibility of the new store plan. Based on annual
reports and thorough comparison with Trader Joe’s, H mart, this report concludes that Whole
Foods Market should open a sister chain store and implement lower pricing strategy. The high
prices of commodities and negative public impression are key challenges that Whole Foods
should overcome. Kindly provide the following recommendations for reference:
a. Using pop-out discount strategy in the new sister chain store under the brand of
‘365’(home-owned cheap brand)
b. Communicating with the public and the press on the issue
c. Lowering advertisement costs and control internal costs
In the long-term development, Whole Foods will need to generate profits and attract more
customers. Expanding business is one requirement and a more sustainable, appropriate pricing
plan should come into effect.
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Background
On June.26th, 2015, a group of Whole Foods customers filed a lawsuit against the store,
arguing that Whole Foods charged high prices by using falsely labeled foods. In addition,
customers complained about the food quality and quantity. The Department of Consumer Affairs
investigated into the problem and weighed more than 100 types of items at ten cities’ Whole
Foods Store. They found out that more than 80% of labels are inaccurate with the weight and
many goods were priced more than 30% of the original prices.
During the lawsuit, the company’s share prices slumped greatly because of the negative
public image and the company’s revenues declined about 8%. Manager of Whole Foods
responded that they never intentionally used incorrect labels to deceive customers and explained
that their high costs come from supply chain and advertisements. They also said that they are
fully committed to customers and will make a remedy on dividends to shareholders.
Influence
The lawsuit revealed the hidden problems of Whole Foods and influenced the public in
three aspects. First, the mispricing problem aroused customers’ dissatisfaction and affected the
sales. They turned to other stores and no longer believe in the prices labeled. Second,
shareholders and investors will withdraw money invested. Whole Foods will have difficulty
raising money and expanding business. Third, the press revealed the problem and exerted
negative influence on the store’s reputation with rumors and complaints. In addition, the Food
Administration and Department of Consumer Affairs will be affected because of insufficient
monitoring and supervision.
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Methodology
In order to tackle with the problem, I looked into the supply chain and investigated how
organic foods are produced and transported, and how they are priced including the standards,
weights and production process. Additionally, I reviewed reports and materials on the official
website about their revenue and cost distribution. Furthermore, I went to other supermarkets like
Wal-Mart, H Market, Giant and compared their prices with those of Whole Foods. I researched
how quality and price or other factors influence company reputation using Mathematics
Regression on three-year statistics released by annual reports of Whole Foods and Trader Joe’s.
With research in the nature of cost profit model, I found out that how profit would be maximized
by lowering commercial expenditures and keeping overall cost at a constant level.
Findings
New Store Improves New Customer Acquisition
Whole Foods has lost forgone profit of 26 million and more than 10 thousand customers
during the fiscal year. The growth rate and earnings per share also decreased. A customer
segmentation model could allow for the effective distribution and allocation of social scarce
resources and the maximization of ‘cross and up selling’ chances. (Colombo, R., & Jiang, W.,
1999) For the specific case in Whole Foods, enlarging customer segmentation to young people
and poor people could improve whole Foods’ customer services and gain higher customer
retention rate.
According to Josee Johnston (2008), the case of WFM indicates that, rather than meeting
the needs and wants of consumers and citizens, what they should do is to advertise and
propaganda in order to attract people’s attention and try to accommodate their interests:
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
consumer choice, status distinction, and ecological cornucopianism. (Basically means buying
choice, customer segmentation and boosted passion) Customers are the most direct, effective
sources of income and profit, also the best way through which Whole Foods establish reputation
and get rid of the bad impression.
Pricing Strategy Really Helps—Review of Nordstrom Rack Case
In 2007, in order to increase sales and lower prices, Nordstrom opened a branch store
named Nordstorm Rack with lower prices. The store focuses on promotion and discount strategy,
achieving 67% increase in profit. The previous case shows that pricing low actually could raise
the overall bottom line in retail stores and separate low prices from the original high prices. The
inventory turnover ratio also increases to 0.7.
In Whole Food Case, a penetration pricing strategy could be used as it is designed to
occupy market share by entering the market with a low price relative to the competition to attract
buyers. (Verhoef, P. C., & Donkers, B. 2001) The statistics shows 92% of customers would be
willing to buy products that are steeply discounted, with 85% of them care much about the
quality. It is not difficult to discover that Wholefoods rarely conducts discount activities. Even
they intend to do so, the campaign has no power and the price is usually not so poped-up on the
label. For instance, a big red $99 is psychologically "less" in the minds of consumers than
$100. (Kim, J., Suh, E., & Hwang, H. 2003) It would be of higher value if Whole Foods sets up
a timeline with beginning dates and deadlines in red on sales promotion and encourages
customers to act in advance.
Problem of New Store Construction
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Despite the merits of discount model and pricing strategy, building up a new store will
have some cons. To begin with, the location of the store matters a lot with the sales and store
reputation. Take Baltimore for example, the new store should not be built near Harbor East
because most of the rich people care more about brand reputation but it is also inappropriate to
put the store too far away from the old one because Chain Effect is important to help propaganda
new store and advertise. (Hoekstra, J. C., & Huizingh, E. K. R. E, 1999) In addition, high costs
should be considered because Whole Foods will lower prices but need costs in advertising and
decorations.
Recommendation
Kindly suggest opening a cheaper sister chain store and lowering prices. I would like to
research and develop an implementation plan and strategy to improve Whole Foods reputation
and sale revenues, holding back those customers who have prejudice and misunderstandings.
Opening a cheaper grocery store will not only attract more low-income people, but also
provide options for more young people to pursue good quality and fair price.
Lowering prices will help company expand business and run more efficiently
Communicating with the public and the press will aid Whole Foods in higher reputation,
which would allow the company to fight back the lawsuit and retain customers
Qualitative and Quantitative Evidence
Survey Result and Customer Segmentation Expansion
After conducting survey of 50 people near Whole Foods and short conversation with one
of the employees, it is not difficulty to find that the main customer segmentation is senior people.
Young people do not have sufficient disposable income to buy Organic Foods but they show
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
strong enthusiasm in survey. 80% of young people say that they will like to shop at the new store
if prices are lower. By opening a new sister chain, Whole Foods could expand customer
segmentation and gradually retain reputation.
Comparison of Prices and Low Price Effect
After review of several stores, we can conclude the variety of foods, prices and services.
The following is the comparison of main stores:
To Whole Foods, Trader Joe’s is the most competitive store that also focuses on Organic
food. But their food prices are 13.4% lower than those of whole Foods. Under the same
circumstance, they offer more variety of foods. For instance, Whole Foods does not provide
dining appliances but Trader Joe’s has portable bowls, chopsticks, forks and knives.
H mart also sells Organic Foods but because of the location, sales are lower than Whole
Foods and Trade Joe’s. The well-rounded store sells Korean Foods and the Organic Foods
revenue occupies only 10.25% of the total revenues.
Whole Foods offers fresh vegetables and fresh milk with own brand named ‘365’. The
supply chain of Whole Foods is the strongest among three because the logistic team has
cooperation with the fastest food supply chain company. In Baltimore, they will distribute fresh
milk every morning at 6 am and have fresh vegetables delivered at about 7 am.
Analogy with Nordstrom Rack
In 1973, Nordstrom Rack is established as a branch of Nordstrom to rescue the dilemma
and increase sales. Nordstrom charges high prices for more luxurious brands while Nordstrom
Rack charges lower prices. The outcome shows that Nordstrom Corporation achieved 30%
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
increase in revenues. Nordstrom Rack, the Sister Store, achieved more than 25% of the previous
sales and the opening of stores really made a hit. By comparison, the cheaper store of Whole
Foods has great possibility of achieving good revenues because of low prices, different customer
segmentation and previous successful example.
Conclusion
The paper reinforces that lowering prices and opening a new store facing more poor
people is necessary and useful. From theoretical base, the discount model and pricing strategy
launched by economists have proved that price and quality are the key points when people
choose to buy, especially for organic food. From customer segmentation perspective, poor
people are increasingly fond of organic food but price is the key determinant. According to
analogy, Nordstrom Case also indicates that opening a cheaper sister chain store is effective. To
sum up, in order to save the business, Whole Foods Market should open a cheaper chain store.
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Reference
Colombo, R., & Jiang, W. (1999). A Stochastic RFM Model. Journal of Interactive Marketing, 13(3), 2-12
Hoekstra, J. C., & Huizingh, E. K. R. E (1999). The lifetime value concept in customer-based marketing. Journal of Market Focused Management, 3(3-4), 257-274
Jain, D., & Singh, S. S. (2002). Customer lifetime value research in marketing: a review and future directions. Journal of Interactive Marketing, 16 (2), 34-45.
Johnston J. (2008). The citizen-consumer hybrid: ideological tensions and the case of Whole Foods Market. Theor Soc, 37:229-270
Kim, J., Suh, E., & Hwang, H. (2003). A model for evaluating the effectiveness of CRM using the balanced scorecard. Journal of Interactive Marketing, 17(2), 5-19
Verhoef, P. C., & Donkers, B. (2001). Predicting customer potential value an application in the insurance industry. Decision Support Systems, 32, 189-199.
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Survey on Whole Foods ImpressionPrepared by Qiurong(Sunny) Zheng
Dear friends, we all know Whole Foods Market and what do you think of Whole Foods Market? Kindly help me respond the following questions and many thanks in advance. ^_^
1. How often do you shop at Whole Foods Market in a week?a. Almost every day b. More than twice a week c. Twice d. Once e. Never
2. What do you think of the prices of goods in Whole Foods?a. Very expensive b. Expensive c. Normal d. Cheap e. No idea
3. Do you often buy Organic Foods?a. Almost every day b. More than twice a week c. Twice d. Once e. Never
4. If Whole Foods opens a new store with lower prices near Harbor East, will you often visit?
a. Definitely yes b. It depends c. Will not visit
5. Do you wish discounts with the foods?a. Yes and keep quality good b. No because quality is more important
6. What do you like Whole Foods Market most?a. Food Variety b. Fair Pricing c. Organic Foods d. Fresh vegetablese. Good shopping environment f. Distance to home
7. Choose the stores that you will shop if they are near to you?a. Giant b. H mart c. Great Wall supermarket d. trader Joe’s
8. Will you stick to Organic Foods with fair prices?a. Yes b. No c. It depends
9. Briefly explain why you will or not stick to Organic Foods?
Thanks again for your time and Patience.
Sunny ZhengCarey Business School
All information above will only be used in academic investigation and will not be revealed to other sources.
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng
Whole Foods Lawsuit Crisis Qiurong(Sunny) Zheng