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