WHOLE FOODS CEO: BIGGER IS BETTER

Jon Springer

NEW YORK -- Its Columbus Circle store here "completely changed Whole Foods Market's thinking" and paved the way to the company's best year ever, John Mackey, chief executive officer of the Austin, Texas-based natural food retailer, said at the company's annual meeting across town here last week.

The 59,000-square-foot store near Manhattan's Upper West Side opened last April and became the highest grossing of the company's 168 stores. Its prepared- food business made it "the highest-volume restaurant in the United States," Mackey said. Its success validated the company's ongoing strategy of opening larger stores, he added. The company recently opened the largest store in the chain, an 80,000-square-foot unit in Austin.

"Our larger stores are doing far better than our smaller stores," Mackey said. "They appeal to a larger base of customers, and that makes them less vulnerable to competition."

Whole Foods currently has 58 stores in its development pipeline, with an average size of 50,000 square feet, he said. A 22% increase in average store size has accompanied an increase in average weekly sales of 58%, he added, as Whole Foods' larger stores are outperforming smaller stores in per-square-foot sales.

The new Austin flagship, which opened last month, is the company's largest store and is challenging the Columbus Circle store for highest weekly sales. Overall, Mackey said, Whole Foods' newer stores are averaging $575,000 in weekly sales, or $786 per square foot.

The new units and the growing Whole Foods brand led to the company's best year ever, Mackey told shareholders, with annual sales up 23% to $4.1 billion and comparable-store sales increasing by 14.9%. "That's unbelievable," Mackey said, especially as compared to conventional competitors "who basically had 0% growth," and Whole Foods' competitor in the natural/organic arena, Wild Oats Markets, which saw annual comp gains of 1.4%.

Mackey said the Whole Foods brand "tipped" in 2004 behind millions of media impressions. He added that brand strength sets Whole Foods apart from conventional supermarkets and allows it to benefit from conventional stores' entries into the natural/organic arena.

"Most conventional supermarkets don't have well-established brands," he said. "What exactly does Safeway mean? What does Albertsons mean? What does Kroger mean? We are Whole Foods Market: We have a very clearly defined message. Customers understand what our values are.

"Conventional operators are cherry-picking some of the organic products, but it is not hurting us," he added. "We are gaining market share at the expense of the conventional stores, despite their picking up our products. That leads us to conclude they are actually a gateway experience. They introduce people to these products, and they trade up to the authentic company that has a total commitment to it. That is Whole Foods."

In other matters, Mackey announced that Whole Foods would begin informing customers that its private-label brands are not made with genetically engineered ingredients. A proxy ballot proposal led by a coalition of investors that sought to require the company to label all products GMO-free did not garner sufficient votes and was defeated.

Shareholders voted in favor of the appointment of five directors to one-year terms; to ratify Ernst & Young as independent accountants; and to increase the number of shares reserved for the company employee stock-option plan. Shareholders also authorized doubling the number of shares from 150 million to 300 million, which would allow the company to execute a 2-for-1 stock split. All measures had the support of the company's board of directors.

A shareholder measure that would have required the company to redeem or vote on any active "poison pill" did not garner sufficient votes and was defeated. Whole Foods' board recommended its shareholders vote against this proposal, which was moot because the company does not currently have a "poison pill."