Grocery Industry

1. Grocery Industry Junichi Hara, Eddie Hjerpe, EwaNelip, Megan Wiethoff

2. Agenda: • Industry overview • Company strategies • Accounting Comparison • ROE • What-if’s: • Whole Foods expands internationally • Kroger expands their organic sector • Conclusion

3. Industry Overview

4. Grocery Store Industry • The Supermarkets and Grocery Stores industry makes up the largest food retail channel in the United States. • Key Economic Drivers: • Per capita disposable income • Consumer Confidence Index • Population • Revenue: $ 517.8 bn • Profit: $6.7 bn • Annual Growth 2008-2013: -0.4% • Expected Growth 2013-2018: 0.8%

5. External Key Drivers • Disposable income: • Less disposable income leads consumers to buy only staple items and substitute name brand items for generic • As disposable income increases, people eat out more resulting in less trips to the grocery store • Consumer Confidence • Low consumer confidence leads people to shop at grocery stores more, but buy less • Population • Determines the number of and types of stores in a particular area

6. Market Share

7. Industry Trends • Private Labels: • Consumers shop at more than one place • Companies expanding into Organic Foods • Online and Grocery Delivery

8. Company Strategies

9. Whole Foods • Founded in 1980 in Austin, Texas • Revenue: $13.30 bn • Market Cap: $18.84 bn • Employees: 78,400 • Market Price (as of 04/28/14): $50.65 • Number of Stores: 373

10. Whole Foods • Whole Foods continues to see strong revenue and earnings growth, lead by their continued store expansion • Whole Foods has suggested that the company increase store openings to 33 to 38 in 2014 and 35 to 40 in 2015 • Whole Foods has lowered the top end of its sales growth ranges for 2014. The company now expects sales growth in the 11% to 12% range.

11. Differentiation Strategy • Stores contain organic and natural foods that are unique and valued to a certain market of people. • Targeting population with a higher income level, that is interested in fitness and wellness, and want food that is in it's most organic state. • Allows the company to charge higher prices which results in higher profit margins.

12. Value Chain Activities Differentiation • Human Resource Management • Procurement • Marketing and Sales

13. Potential Problems with Differentiation Strategy: • The current recession has caused people to become more conservative with their money. Higher prices may no longer appeal to the target market if the economy is suffering.  • If big competitors (Kroger, Safeway) start changing their product lines to a healthier option, there may be some fierce competition.

14. Kroger • Founded in Cincinnati, OH in 1883 • Revenue: 98 Billion (Fiscal year 2013 sales) • Market Cap: 23.06 B • Employees: 343,000 • Market Price (as of 04/28/14): $45.15 • Number of Stores: 2,640 (grocery stores as well as fuel centers and wholesale warehouses)

15. Kroger Strategy • Kroger focuses on “identical supermarket sales” growth, not just number of stores • Increase shift to organic and fresh produce in the past few years • Kroger pursues the everyday shopper. They have a variety of products and price ranges for low to high income individuals • They expect margins to increase on organic food the next few years but eventually converge

16. What Makes Up Kroger • Non Perishable (50%), Perishable, Pharmacy, Fuel, and Other • Perishable is the portion of sales that Kroger is most bullish on • Very mature company • Risks include: cost of fuel, declining margins, health care and wage costs

17. Accounting Ratios Comparison

18. ROE Analysis

19. Two Generic Strategies

20. Accounting Relationship Cost Leadership Same RNEA EATO EATO Differentiation EPM

21. Return on Net Enterprise Assets

22. 2013 RNEA Comparison RNEA 14% RNEA 16% EATO EPM

23. Leverage

24. Return on Equity

25. ROE Breakdown

26. What-if’s Scenarios

27. What-if’s Scenarios • Whole Foods expands internationally • Kroger expands their organic sector

28. Whole Foods expands internationally

29. Whole Foods Expands Internationally • International Federation of Organic Agriculture Movements reported that organic food is now a $63 billion industry worldwide. From 2002-2011, the industry grew 170%, averaging about 19% per year. • The growth is slowing down to 15% in 2013, with the highest rate of growth coming from Asia. • In terms of sales, the U.S. and Europe combined account for more than 90 % globally in the organic foods market.

30. Assumption 2013 2024

31. No International Expansion

32. International growth projection

33. International Expansion

34. Impact on WFM Price Without International With International $51.41 $57.47

35. Kroger is stable

36. Kroger expands organic sector

37. History repeats itself

38. History repeats itself

39. Q4 2013 Analyst Call Stephen W. Grambling - Goldman Sachs Group Inc., Research Division Great. And then I have a quick follow-up to I think it was Ken's question. And you had mentioned last quarter that you would expect the margin on natural organic items to converge over time with conventional.

40. Prediction • Kroger complete organic expansion in 5 years • No significant impact on Kroger’s margins • Whole Foods’ margins will be compressed

41. No competition

42. EPM Projection Margins will go flat

43. With competition

44. Impact on WFM Price No competition With competition $51.41 $38.97

45. Conclusion • Whole Foods and Kroger following different strategies • Business strategies reflected in accounting numbers • Whole Foods should consider international expansion due to domestic competition