Whole Foods Is A Loose Cannon on Target

When John Mackey dropped out of his second university, his aspirations to open a natural foods supermarket looked shaky. He had no money, no business training, and no degree. He hoped to open a vegetarian store in the carnivorous state of Texas. His mother thought he was wasting a good mind to become a grocer.

But Mackey, an unmotivated student, had suddenly found a purpose in natural foods while working at a collective, and he wasn’t going to let it go. Along with his girlfriend Renee Lawson, Mackey rustled up $45,000 from family and friends to start the business.

Mackey and Lawson opened Safer Way in 1978, knowing full well that health food was a gamble. When the couple used their apartment to store food, they were thrown out and forced to move into the second floor of Safer Way, where they showered with a hose.

But Texan customers embraced this unlikely supermarket, and Mackey soon had the confidence to merge with Clarksville Natural Grocery, partly by hinting to owners Mark Skiles and Craig Weller that he would put them out of business. Together, they opened a larger natural foods store in 1980 that would one day change the supermarket game. They called it Whole Foods.

Today, Whole Foods is a $8 billion company with over 300 stores spread across the US and the UK. Many stores span an incredible 40,000 square feet. The organic grocery market is now so big that Walmart and other supermarkets have copied Mackey’s health food model.

Most important to Mackey, however, is his personal mission of Conscious Capitalism, a philosophy of running a business not just for profits but also with purpose, that is starting to gain ground. Companies now understand that Conscious Capitalism doesn’t just mean ‘corporate social responsibility’, and it doesn’t mean short term.

But it didn’t happen easily; it’s taken nearly three decades for Whole Foods to get where it is.

 The year Whole Foods opened, the entire store was flooded, all inventory was wiped out, and losses (they had no insurance) were at $400,000. But the supermarket was salvaged by customers, neighbours, creditors, vendors, and investors who quickly responded with aid. The moment would have a huge impact on Mackey’s thinking.

In 1985 Mackey set down a “Declaration of Interdependence” (see box on page 136), stating that Whole Foods would adopt a stakeholder philosophy. Instead of just chasing profits and working for investors, they would at all times keep in mind the needs of employees, customers, suppliers, the environment and community as well.

Mackey’s hope was that Whole Foods would work toward a “new business paradigm” of more responsible capitalism, though he wasn’t sure exactly what that was, or how to do it.
Mackey’s model wasn’t without dissenters. Co-founder Mark Skiles left Whole Foods in the mid 80s because he was worried about the business. “If we have guys who come in to buy a bag of sprouts and then sit around all day reading we’ll go out of business quick,” he told New Yorker Magazine in a recent article on Whole Foods.

But others were sure Mackey’s idealistic style of shop-keeping could work. Walter Robb, now co-chief executive officer and director of Whole Foods, who joined the company in 1991, says, “We began with the idea that we could change the world. Not that we knew what we were doing. When you’re young it’s very inspiring to think you are doing worthwhile work. The purity and intensity of intent was there from the beginning”

The funds certainly weren’t. Robb describes the early years as being always in “survival mode”, with no money to speak of. “We were scrapping, just trying to make it.”

By the late 80s, Whole Foods wasn’t scrapping so much. The supermarket expanded outside of Texas, including to Palo Alto, California, which provided the opportunity to drum up nearby venture capital. Whole Foods went public in 1992, raising $23 million to list on the Nasdaq Stock Exchange.

Meanwhile, Mackey decided Whole Foods would adopt a non-traditional management model, in which decision making would be decentralised. He wanted to ensure even lower-rung employees would be able to make bigger decisions.

A blogger and former Whole Foods employee named ‘Tzimisce’ who has criticised Whole Foods admitted that the opportunities she got at Whole Foods were something she’d be unlikely to get at another corporate job. Employees also embraced Whole Foods’ benefits, which employees voted for themselves and included health insurance for even part-time employees. Starting in 1998, Whole Foods was on the Best Places to Work for the next 12 years to follow.

Whole Foods soon became the United States’ first national “certified organic” grocer. But Mackey knew he’d have to present food in a desirable way to get not just hippies but also foodies in his store. Instead of the traditional crunchy-granola approach, Mackey set up Whole Foods aisles with gleaming stacks of fruits and vegetables, perfectly arranged exotic sushi stations, and glossy, overflowing cheese and chocolate counters. When the customer leaves a Whole Foods store, the smell of freshly baked bread follows them back to their car. Mackey says this shows Whole Foods commitment to its consumer; Forbes called it “food porn”.

 

 Infographics: Malay Karmakar

As Whole Foods mushroomed, Mackey became more fervent about and defensive of his new business paradigm. The company made a big commitment in founding the Whole Planet Foundation, in which Whole Foods would give micro-credit to whatever communities it traded in. “The narrow interpretation is that we’re taking shareholders money and giving money away. What they can’t see is how much that has improved the morale of our company, and made the team members who work for Whole Foods prouder,” says Mackey. “What Whole Foods has gotten out from these activities is so much greater than the amount of money that we’ve given away.”

Whole Foods also started “5 percent days” three times a year, where 5 percent of that day’s sales were donated to a charity; Mackey also created the Animal Compassion Foundation.

In late 2006, Mackey sent a letter to employees telling them that from now on he would take a salary of just $1 a year. He would continue to have the same benefits as other employees including health insurance, but would donate his future stock options to the Whole Planet Foundation.

Mackey is impatient when asked how his model fits in with the traditional business notion that tradeoffs are necessary among stakeholders. For example, if compensation is raised for employees, the belief is that customers will have to pay for it with higher prices.

“You can also make the point that if you raise compensation, you will get better quality people which will benefit customers and shareholders,” Mackey insists.

In 2007, Mackey found a kindred spirit after the publication of Firms of Endearment, a book on how businesses can profit from having passion and purpose. He read the book and was excited to find that the co-authors had a similar idea about the way business could operate. Mackey met author Rajendra Sisodia, and along with several other businesspeople and academics, decided to start holding meetings to attract interest in this yet-to-be-named movement.

Further motivated, Mackey pushed Whole Foods to start a “Whole Trade” programme, which meant Whole Foods would have to have better product quality, give more money to producers, provide better wages and working conditions for workers, follow sounder environmental production practices, and support poverty eradication. Whole Foods immediately began donating one percent of product sales to the Whole Planet Foundation. The company also announced that it would provide up to $10 million in low-interest loans to local producers; it gave its first in 2007.

All looked rosy for Whole Foods. That was until it purchased its largest competitor, natural foods store Wild Oats in 2007. The US Federal Trade Commission saw the purchase as proof Whole Foods was trying to create a monopoly over the “premium natural and organic supermarket”.

When the US Securities and Exchange Commission investigated Whole Foods, it found out Mackey had been writing on a Yahoo Message board under a pseudonym for eight years. His messages disparaged Wild Oats, praised Whole Foods, and even complimented his own haircut.

But the trade commission allowed the Wild Oats deal to go through. The problems did not end there. There was a maelstrom on the blogosphere over the number of Wild Oats employees that lost their jobs after the merger. Walter Robb insists that the merger was done in a responsible manner. “The way we brought the companies together was very conscious, we put the people first.”

Mackey continued to deeply involve his employees in decision-making processes. He conducted an experiment with employees asking them which of Plato’s three purposes for business Whole Foods fulfilled: Good, true or beautiful? Mackey took the liberty to add “heroic” to the list.

He got an overwhelmingly uniform response from employees across the country: Heroic. “Team members clearly were articulating something else across the country, that we were the heroic. I realised they were more conscious than I was. So I embraced the hero myth; that Whole Foods is trying to improve the world. I stopped fighting lots of other things, and things fell into place. That’s when I started the Conscious Capitalism movement.”

As the movement took shape, however, it was rife with disagreement. Should it be called ‘Responsible Capitalism’ or ‘Conscious Capitalism’? Some people thought it was socialism. Others were cynical about the entire thing.

Nonetheless, Mackey soon became an evangelist for Conscious Capitalism, publishing essays, speaking about it at universities, building an alliance for businesses, and starting a Conscious Capitalism summit.  The first Conscious Capitalism Conference was held in 2008 in Texas and is now expanding around the world. India held the conference in March 2010.

Mackey’s commitment to the Conscious Capitalism movement was again put to the test during the global recession last year. As salaries dropped in America, Whole Foods, which often sells high-priced organic and natural food, was re-dubbed “Whole Paycheck” by consumers. Whole Foods’ stock suffered and sales went down by more than half.

But Mackey says they responded quickly. “We didn’t cut back services, we increased them. We enhanced our value image. You used to see products like $10, $20 wine on display when you came into the store. Now you’ll see wine that’s $3.99,” says Mackey.

All executives were put on a wage freeze, more emphasis was put on its private and less expensive label, “365”, and it brought in more local fare.

In August 2009, Mackey publicly announced that Whole Foods was repositioning itself. He would take the company back to its original purpose: To sell healthy, nourishing food. “We sell a bunch of junk,” he told the Wall Street Journal, vowing to replace the likes of fried banana chips with more real bananas.

Several months later, Mackey appeared in WSJ once again, this time writing an op-ed to criticise President Barack Obama’s proposed healthcare reform plan. Though the article represented Mackey’s personal views, the title was The Whole Foods Alternative to ObamaCare.

The same month, Mackey again angered liberals when he told a New Yorker writer he didn’t believe in climate change.

Alan Brochstein, principal analyst and founder of AB Analytical Services (who has bought stock in Whole Foods but doesn’t hold it currently) thinks Mackey’s comments go against the very idea of Conscious Capitalism.

“He’s a loose cannon. The whole thing with the Yahoo board cost shareholders considerable angst if not money. We can all say what we want, but you don’t want a CEO to do that. If you want to be CEO, you need to not put your own personal needs above those of shareholders. If in Conscious Capitalism, everyone’s needs need to be balanced, why are his needs so high? He has an ego need, and it’s a big issue for the company.”

But Mackey has not been deterred by controversy; he vocalises the movement more fiercely now than ever before. Recently, Whole Foods donated more than $2.7 million for aid in Haiti. In January, it launched a healthy eating initiative in which more healthy employees and customers get up to 30 percent discount at the store.

Mackey says shareholders are also starting to understand that this new business paradigm is beneficial for the long term. He mentions that Leonard Green, a recent investor in Whole Foods, even attended a recent Conscious Capitalism Conference. “They know our culture and love it,” he insists.

Mackey and Ralph Sorenson, who is a  director on the Whole Food board, also say they see many other companies moving toward Conscious Capitalism, especially as consumers became disgusted with corporate business practices during the economic downturn last year.

They rattle off a list of businesses that includes Walmart, Pepsi, Container Store, Costco and Staples. “It’s the next stage in the natural evolution of capitalism. But we have to make sure not to throw the baby out with the bathwater,” says Sorenson, emphasising that Conscious Capitalism is still very much capitalism.

“There is a lot of interest in it, but it is at an early stage. It hasn’t yet penetrated the mainstream. But I think Conscious Capitalism will start to move closer to the centre now,” says Mackey, with stoic confidence. In Firms of Endearment, the authors identify 30 companies that have followed Conscious Capitalism instead of focusing strictly on profits.

After tracking the long-term stock performance of those companies and comparing it to the performance the S&P 500, they found the companies following Conscious Capitalism did up to seven times better than the others.

“This is no accident in my opinion. Rather, it is the result of all 30 firms creating a superior business model — the business model that I believe will become dominant in the 21st century,” writes Mackey. Coming from a broke, organic food-loving, college dropout who built an $8 billion business in a brand new market, Mackey might just be right.