Wild Oats Market, Inc.

– A Case Study

Misti Walker

Wild Oats Market, Inc. – A Case Study

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Wild Oats is pursuing a market penetration strategy. Its private label brands are
increasing at a steady rate and many different retail channels are being employed to
reach new consumers and increase brand awareness. Despite a troubled credit rating,
the company will also open ten new stores and refurbish six existing sites this year.
Prior to 2006, the company was focused on consolidation – a SKU rationalization
program to eliminate slow-moving products, the closure of 17 underperforming stores, a
focus on increasing sales at existing stores, and a company-wide effort to increase
consistency and controls. At this time, the company was striving to be the low-cost
differentiator in the health food space. This is evident in the claims that Wild Oats
offered better products at better prices than Whole Foods, its top competitor.

Currently, the organic/health food market serves a relatively small number of grocery
buyers. By streamlining processes, introducing more private label brands, investing in
IT, and centralizing buying, merchandising, and pricing, Wild Oats is striving to attain
cost leadership in its market. In other words, a focused low-cost approach is being
used. This is not an attractive position for Wild Oats because traditional grocers, with
more buying power and more efficient processes, are beginning to enter this high-
growth market. Whole Foods, the market leader, has promised a pricing war to combat
the threat of Wild Oats expanding into its territory, pointing out that its company is better
equipped to handle such price attrition. To combat these threats and the subsequent
erosion of sales growth, Wild Oats is planning on opening several large prototype stores
with increased food offerings - especially goods with higher margins. Also, the
company is offering its private label brands through several online retailers and select
traditional grocers. With the entry of mass merchants, Wild Oats will lose its price
advantage. The company is effectively losing its competitive advantage by attempting
to widen its market appeal. To be competitive in this high-growth market, the company
needs to differentiate.

Instead of trying to mimic the feel of large, mass-merchant grocery stores, the company
must differentiate to remain competitive. When employing a focused or niche strategy,
there are risks. In new, high growth industries such as this one, competition is a major
concern. This competition could come from a large multi-brand that competes across
several segments, rivals in complementary segments, or newcomers attracted to the
high profit potential. The current competitive strategy employed by Wild Oats does not
address these threats.

Another alarming trend is that the company is looking only at short-term prosperity
instead of crafting and adhering to a long-term strategy that monopolizes on market
opportunities, threats, and the company’s core competencies. The company started as
a convenience store/college hangout with a party atmosphere, complete with
employees drinking beer on the job. Realizing stellar growth rates with the first store,
the 25-year old couple opened another location with similar success. Next, the
company attempted to cross the convenience store model with gourmet and natural
foods. While this venture did not become profitable, it led to the acquisition of a natural,
vegetarian food store, and the Wild Oats brand was born. The owners enjoyed this
work and saw more potential in this market. Subsequently, the firm was dedicated to
wholesome, natural food that was socially and environmentally responsible.

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In the next decade the company experienced rapid growth, with acquisitions happening
at a staggering rate. The mergers proved troublesome from a management perspective
but analysts were optimistic. The company catered the look and feel, and even the
merchandise, to the local market, with no stringent controls or best practices. The
company also set a goal to increase its private branded line of items, as these products
had higher profit margins. This, along with many small, geographically remote
acquisitions comprised the company’s growth strategy. While profits and sales were up,
the company had acquired too much debt as a result of its growth. Individual stores
were performing well, but the company had too much corporate overhead. In 1999,
Wild Oats changed some of its smaller, less expensive stores into People’s Market
stores, with limited selection of products, lower prices, and narrower margins. This was
a good move because the company was able to attract a different clientele without
eroding its brand image. Incidentally, this was the only time that Wild Oats achieved a
higher inventory turnover rate than Whole Foods.

Beginning in 2000, following expansive growth, the company began consolidating its
properties from a federation of regional grocers operating under 12 different banners,
serving the local market to a branded chain with a more consistent look and product
offering across locations. However, as Gilliland pointed out, Wild Oats consumers were
not particularly fond of a cookie-cutter chain of grocers. He goes on to say that “our
customers have an anti-chain mentality”. This is important because the company need
not worry about losing consumers to mass merchants. From an operational standpoint,
the changes that CEO Odak implemented after joining the company made good
business sense. However, from a strategy standpoint, the changes were disastrous.
Another strategic misstep during this time was the introduction of Wild Oats branded
products to traditional grocers and internet retailers in an attempt to broaden its appeal.
In another industry, these changes could be well received but the health food market
serves a much different type of shopper than do traditional grocers. An anti-chain
approach would be effective in retaining current customers and could be used to attract
new consumers.

By 2006, the company was saddled with too much debt to compete effectively with
Whole Foods and its pricing war. The company was expanding into traditional Wild
Oats market footholds, further eroding profit. At the same time, Wild Oats was making
many changes in its business model that made it further resemble its rival. Also, the
company was facing a takeover threat from a billionaire grocery store investor, who had
“accidentally” acquired 17% ownership in the company. Slow growth plagued the
company despite growing market demand. To make matters worse, there was a
shortage of organic items due to increased buying by walmart and other grocers.

As previously mentioned, Wild Oats lacked a strategy that accounted for its unique
capabilities, instead, changing its business model with changes in the industry. To
illustrate, the SWOT analysis of Wild Oats is as follows:

Strengths – loyal customer base, flexibility in local markets, private brand labels,
human resources, community activism, socially and environmentally responsible,
unique in-store experience, customer service

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Weaknesses – high levels of debt, lack of procedures and controls, insufficient IT
systems, large overhead, lack of a clear strategy, overdependence on one supplier,
rapid expansion

Opportunities – high-growth market, vertical backward integration, national focus on

health, rising buyer demand, e-commerce

Threats – organic food shortage, intense and growing competition, price wars with
rivals, increased supplier bargaining power

While this industry is a potentially very attractive one, Wild Oats must capitalize on its
unique capabilities and differentiate from current and emerging competitors.
Specifically, instead of attempting to appeal to a wider audience, the company should
focus on the niche market that provided its early success by retaining a flexible, anti-
chain store way of doing business. To continue on the path of mass merchants will
mean alienating core consumers.

As far as competing with other specialty health food sellers, such as Whole Foods, the
company needs to outperform them, compete in a different market, or win on price.
While Wild Oats claims to be the price leader in this space, Whole Foods asserts the
same claim. It is clear, though, that because Wild Oats is operating with more debt, its
opportunities for growth are jeopardized and it will not be able to win on price without
compromising profit margins. With less debt, Whole Foods is in a better position for
lower margins due to pricing wars. Also, Whole Foods had lower corporate overhead
and higher sales per store. Overall, Wild Oats was remaining competitive with Whole
Foods on profit margin until 1998 when Whole Foods entered the Boulder market, a
long-time Oats stronghold. This severely affected the company’s growth potential. With
a niche differentiation strategy, the company could curb the loss of consumers to its
low-cost rival.

CEO Odak was brought onboard in 2001 when the company was experiencing financial
turmoil. He was obviously hired to turn the company around and the fact that he hailed
from Ben and Jerry’s meant he already had experience serving this customer
demographic. Odak’s attempts to streamline processes and curb overhead were much
needed and long overdue for a company this size. However, attempts to standardize
store layouts, product offerings, and even merchandising went against everything this
company stood for. The founders of the company ditched a loyalty savings program
after customers objected because it seemed too much like bulk grocers. Gilliland
asserted that Wild Oats’ customers preferred the hometown marketplace to a chain of
stores. You might say the clientele is anti-establishment. This important fact was
overlooked by Odak. Traditional business rules do not apply.
In order to effectively turn the company around, some problems need to be addressed.

• Supplier problems must be addressed. One effective way to do this is backward

integration.
• Lower costs to improve profitability and provide an appropriate ROI for shareholders.
• Slow acquisitions in order to pay down debt and improve stability.

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• Most importantly, define a strategy keeping with the company’s heritage that at the
same time defines the company’s competitive position, that is a focused
differentiator strategy.