Whole Foods Market: The Deutsche Bank Report – Case Solution

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Whole Foods Market: The Deutsche Bank Report Case Answers

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1.) Explain the situation Whole Foods Market is in. How would you define Whole Foods Market’s industry and its competitors? How does this affect Karen Short’s prognosis?

Whole Foods Market operates within the grocery industry in the United States. Due to high competition, a historical characteristic of this industry is low margins. Furthermore, the growth of this industry is closely related to population growth.

In general, the sector can be divided into 4 subsectors: 1. Conventional supermarkets, 2. Retail supercenters, 3. Natural and organic groceries, 4. Wholesalers. Typically, in this industry, larger companies have greater bargaining power with suppliers and this is a great advantage due to the flexibility in pricing this gives them.

Whole Foods Market is in the natural and organic grocery subsector. Regarding this sector, due to consumer awareness regarding food health, a growth at a compound rate of 20% has been observed since 1990. This can be seen in the fact that the leaders of this subsector were having higher EBITDA margins than the conventional stores.

However, other competitors in the market began selling organic products at lower prices. This led to health food stores no longer being the main source of organic foods. This implies a reduction in Whole Foods’ expansion and market share.

Deutsche Bank headed by Karen Short reported that Whole Foods’ stock was at $60 USD, however, when looking at the context and financial situation other trends can be observed.

It was previously mentioned that Whole Foods is suffering from low revenue and margins due to competition and investment will need to be made in order to regain some market share. This is reflected in a reduction in free cash flow and equity estimates for future periods. This negatively affects Karen Short’s report, since the share price should decrease if future cash flows decrease.

2.) Based on the company’s performance and the environment in which it operates, what are the aspects that would justify the purchase of Whole Foods? Which ones would justify the sale of Whole Foods? Based on the above, do you agree with Deutsche Bank’s forecasts for 2014 and 2015?

Regarding the aspects that justify the purchase of Whole Foods, different aspects can be found that can be key when generating value.

First, Whole Foods had the ability to maintain its margins in the target range when making price adjustments. This type of flexibility allows the company to compensate for reduced sales.

Secondly, Whole Foods began to produce its own brand of food, which is an important new source of income, since these products managed to maintain the promised high quality and their price was more accessible.

Finally, the other companies in the sector marketed standard products under misleading labels, while Whole Foods makes a point of correctly informing consumers about the quality of its food. The company has important recognition and positioning in the market and has the capacity to manage crisis stages.

On the other hand, you have the aspects of the company that suggest it is advisable to…