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whole foods - COMPANY Whole Foods Market Inc I Summary...

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COMPANY: Whole Foods Market, Inc. I. Summary Whole Foods Markets, Inc. is the largest natural foods retailer in the US. The company sells natural and organic foods in over 100 stores and in the following categories: produce, grocery, meat and poultry, seafood, bakery, prepared foods, specialty (beer/wine/cheese), nutritional supplements, body care, pet products, floral, household products, and an alternative pharmacy. WFMI has approximately 20,000 SKUs of food and non-food products All valuation results indicate that it is difficult to justify Whole Food’s current stock price. Its historical growth in revenues and profits are quite impressive and the company will continue to grow moderately. However, we believe that its growth will level off over the long-run due to a saturation of the market because of increased competition. We do feel that this company is well managed but we also feel that much of the present stock price has future expansion possibilities already incorporated. We would consider this company a good “Buy” opportunity if it were trading in the $30 to $45 range as our valuation indicates. However at its current market price of about $54, our recommendation is to “Hold”. II. Significant business and industry discussion The retail grocery market was examined through Michael Porter’s five forces framework. 1. Rivalry Among Existing Firms The range of competitors within the overall industry include chain and independent supermarkets (Krogers, Safeway, others); mass merchandisers and super centers (Wal-mart, Target); convenience stores; wholesale clubs (Sam’s); restaurants and fast food chains (who compete for consumer food dollars); natural food stores (Whole Foods, Wild Oats); local farmers’ markets, and internet grocers. Historically, the concentration of competitors has been fragmented by geography. However, through recent consolidations, the emergence of regional and national chains has started to prevail along with the decline of the independent/local shops. This trend may actually help alleviate some of the price competition in the industry that was previously driven by small, highly fragmented competitors. This consolidation trend will also eliminate any overcapacity in the industry over time. Furthermore, the M&A activity has allowed many companies to spread their fixed costs over a wider range of output, thus creating more efficiency in operations. Often, it is cheaper for a company to acquire an incumbent due to the location of their stores and access to customers rather than to raise the capital for entirely new stores. Also, these
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acquisition activities may help companies to gain enough economies of scale to better compete with the Wal-marts and Sam’s Clubs. The overall industry can be characterized as mature with relatively few options for growth outside of acquisitions. Growth is constrained by the small US population growth and increased consumer spending on food consumed outside the home.
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