The latest trend or “craze” per say of the twenty first century has been that of organic foods. The U.S market for organic food at one time was growing at a pace of 20% per year, which is significantly greater as compared to the 3-4% of the food sector as a whole.
This undeniable growing demand in organic foods caught the attention of Douglas Degn, an executive vice president of the wildly popular organization, Wal-Mart. With the demand of organic products often outstripping supply, Degn was faced with the decision of whether or not to jump on this shortage and give people what they want out of organics from Wal-Mart, or if he should continue to build on the products they already offer to consumers, in order to raise profits.
After analyzing the market and production for organic food and reviewing Wal-Marts business strategy, it is recommended that Wal-Mart pass up the temptations of the organic food industry, and should commit their money and energy in improving the products they already offer. The reasons why Wal-Mart should stray away from dipping into the organic food pool are many.
First and foremost, Wal-Marts business scheme that has driven their organization is buying in mass, bulk quantities, being able to sell these products while largely undercutting their competitors, and still be profitable. In the organic food market, supply has been overpowered by demand, so there is no possible way Wal-Mart would be able to continue this strategy, as there is just simply not enough supply. While the company had mentioned the opportunity of global sourcing, and importing these fresh foods from Chile and elsewhere, this would taint the whole “organic” reputation, and would turn consumers off of their product.
Even if they tried to go local, it would be a very tedious task to find enough farmers to fit their quota, and organic farmers would not tolerate them asking to produce more beyond what they are capable of because they are especially concerned with the watering down of standards for organic products. Another reason is concerning the fact that Wal-Mart management considered making price premiums 10% above the similar non-organic items. When comparing these numbers to the worlds current largest retailer of organic products, Whole Foods, who charges a price premium of 20-30%, one would think Wal-Mart is better off.
However Wal-Mart must take into account the fact that consumers of organic food are willing to pay 50% more for foods that have not been genetically modified. This contradicts with Wal-Marts low pricing of organic foods in that these customers are going to wonder how they are able to sell organic products at such a discounted price, and it may lead them to believe that their organic products are faulty.
Consumers are going to be suspicious of why such a highly valuable product, is being given to them at such a low value price. Bottom line is that these consumers are willing and expecting to pay a high premium price, for a high premium product.
Even if Wal-Mart decided to charge these high premium prices in order to appeal to the higher income organic consumers, they run the risk of corrupting their image to current consumers, and lower income consumers may think that they are no longer wealthy enough to shop at Wal-Mart, and they could lose a countless amount of loyal consumers.
Those same loyal customers, which attributed to $192 billion in revenue in the U.S alone; do they want to jeopardize that? Again, in comparing Wal-Mart to Whole Foods; they are company that is solely committed to selling produce and other grocery items, this is their specialty. Wal-Mart on the other hand also sells a wide variety of household items, clothing and toys, they don’t have one specific product group focus. Organic consumers are not going to feel comfortable buying their premium organic foods from the same place they could buy cheap home appliances, children’s toys, or unfashionable clothing.
What it is recommended Wal-Mart do in order to boost their sales is to improve the image of the products they already have, so customers will buy more. The one area in which they could highly benefit improving is their apparel, which is a higher-margin section that is lagging behind in sales.
By shifting into selling more upscale, trendy clothes and housewares, Wal-Mart would enable itself to appeal to higher income consumers, possibly reaching out to that 15% of the population who do not shop at Wal-Mart, or even enticing current consumers to purchase these high margin products. They could accomplish this by creating a “fashion merchant” position that would tour Wal-Mart and competitors stores, and suggest ways to adapt merchandise, floor plans and apparel to different groups.
Degn should reconsider the fact that Wal-Marts business strategy of “everyday low prices” is what has made them into the successful company they are today and shouldn’t stray to far from what has made them successful in order to increase profits. Degn should work on improving the products Wal-Mart currently sells instead of focusing on organic food, which is something they have never done before. If they are able to revamp some of their higher margin products such as their clothing or housewares, they should be able to reach out to a wider variety of customers, and be able to get current customers to buy more, as this is the area Wal-Mart is lagging in.
By working with what they know and have Wal-Mart should be able to increase sales, instead of risking the losses that are likely to occur if they tried to get into the organic food business, as it is a business that isn’t currently reputable in their company image. Right now, organic food to Wal-Mart is like McDonalds trying to sell a fine cut of steak. Unimaginable.