Back to Basics for Whole Foods Market

ROBERT VOSBURGH, Group Editor, SN Whole Health

FACED WITH A MILESTONE BIRTHDAY, Whole Foods Market is taking a good hard look in the mirror. Life is good, and it shows. The chain is prosperous, worth $8 billion; it has exposed untold millions to a better life through diet; and it still leads the way among food retailers in promoting organic foods and sustainability.

Yet, the reflected image also reveals signs of age. The retailer has gotten a bit pudgy with products that are anything but healthful; the reputation of its chief executive officer has been wrinkled by controversy; and profits have sagged from their all-time highs.

This is Whole Foods Market at 30.

As the country emerges from the depths of the recession, Whole Foods is also coming out of its own dark period. The economy and some corporate missteps broke the long strides the 285-store arbiter of the organic lifestyle had made into the world of mainstream food retailing. Now, with the days of double-digit comps and steamroller store growth over, and a new landscape populated by consumers who are choosier in what they buy, and how much they are willing to spend, Whole Foods has been forced to pause and reassess its role in the marketplace. Most recently, the focus has been on once again establishing itself as a wellness destination — a move that brings it back the beginning.

Building Up

Any regular shopper of Whole Foods knows the chain's offbeat history. John Mackey opened the first store in September 1980 in Austin, Texas, with his then-girlfriend and 19 other people. A photo from that period shows a lot of men with beards, women in bandanas and everyone smiling. Inexplicably, one man is barechested.

To mark the special anniversary, the retailer has begun posting on its website the recollections of a few employees from that time, and they all remark how vibrant the store was. One recalled the 1981 flood that inundated Austin and nearly forced the young store to close.

“The kindness, trust and equality shown to all made a tremendous impression on me,” wrote Peggy Hayes, who is still with the company. “We faced hard work and those who chose to stay were paid and as you know the store not only survived but thrived. It was great fun working in the original Whole Foods Market.”

The idea that retailing could be fun comes from Mackey himself. In a recent interview with the New Yorker magazine, the 56-year-old CEO remembered the point during his aimless college years in the mid-'70s when he found his niche while working at a local vegetarian co-op.

“I loved retail,” he told the magazine. “I loved being around food. I loved natural foods. I loved organic foods. I loved the whole idea of it.”

With borrowed money, Mackey (who has consistently refused interviews with trade publications, including SN) opened his first version of a store, a riff on the Safeway chain, called SaferWay, in 1978.

Mackey freely admits his lack of formal training in running a retail business. The first Whole Foods, occupying an old nightclub, measured 10,500 square feet and sold the usual bulk foods and organic produce, but also beer and wine and other items that fell outside of the crunchy lifestyle.

Still, something clicked. From the start, all the products Whole Foods stocked were held to certain ethical and environmental standards. In turn, employees (forever called “team members”) labored under a short set of ideals that emphasizes — above all else — quality, service and authenticity.

“One of the hallmarks of Whole Foods is that you can talk to almost anybody in one of the service departments, and they're extremely knowledgeable,” said Jim Hertel, managing partner at consulting firm Willard Bishop. “Those kinds of things move Whole Foods beyond simply being a natural and organic retailer.”

As the chain grew, it adopted the slogan, “Whole Foods, Whole People, Whole Planet.” Over the years, the phrase has constantly been reviewed, weighed against market forces and built upon, so that it's constantly current and relevant to shoppers. At the height of the chain's influence, Mackey told stockholders that Whole Foods was much more than a purveyor of food.

“What exactly does Safeway mean? What does Albertsons mean? What does Kroger mean?” he asked. “We are Whole Foods Market. We have a very clearly defined message.”

Many might have dismissed Mackey's hubris as his way of impressing investors. Yet company watchers point out that the chain has never wavered from its founding principles, even during its explosive growth throughout the 1990s and most of the 2000s.

“Consumers are going to remember the 2000s as a time when the quality of food retailing dramatically improved,” said Scott Van Winkle, who covers the company as a managing partner for Canaccord Adams. “And Whole Foods can take some of the credit for that.”

Even during the depths of the recession in 2008, when Whole Foods was struggling to retain even its core customers, management emphatically resisted calls for it to loosen standards in order to make prices more competitive and attract more mainstream shoppers.

“Quality is our compass and we're going to continue to steer by it because that's who we are and that's who we are in the marketplace,” said Walter Robb, co-president and chief operating officer. “And I think customers know that and appreciate it.”

Tipping Point

Whole Foods observers say no single acquisition after the chain's 1992 IPO brought about the shift to upmarket goods that shoppers encounter in stores today. It was certainly on full display in 2005 when the company opened its new 80,000-square-foot flagship store in Austin.

“It is our largest store and offers 1,800 wines, 400 beer selections in a walk-in cooler, 600 varieties of cheeses, 70 cuts of fresh meats, 32 varieties of sausages, 50 fresh-baked hearth breads daily, 40 varieties of olives, 18 flavors of handmade gelatos and several sit-down eating venues within the store where customers can enjoy made-to-order salads, seafood and pasta, and sip a glass of wine as they watch the chefs at work,” Mackey wrote in that year's annual report.

A distinctly gourmet patina began to color the business as the natural/organic lifestyle attracted more and more affluent customers. Despite earning the “Whole Paycheck” nickname, the company was praised for redefining what a “natural” food store could be. However, selling imported, small-batch balsamic vinegars, exotic cheeses and handcrafted bar soaps meant the pressure was on to build larger stores and to bulk up the offerings. Soon, the company's mass approached that of upscale conventional operators.

“There are two factions within the company struggling for philosophical control,” noted Jay Jacobowitz, president of Retail Insights, a natural-food consulting firm. “The first 15 years, the natural faction was ascendent. For the next 15 years, until now, the foodie faction was dominant.”

The meltdown on Wall Street and the bursting of the real estate bubble in 2007 put a rude stop to market growth. The timing was especially bad for Whole Foods.

“It seems that, three or four years ago, when they were comping at 10% or 12%, I think they got a little heady, and maybe a little ahead of themselves, in terms of how big the market could be,” said Hertel of Willard Bishop.

In February of 2007, Whole Foods announced a deal to buy competitor Wild Oats for $565 million. The Federal Trade Commission weighed in opposing the acquisition, and it was during that time that Mackey was unmasked as “Rahodeb,” a frequent visitor to an online Whole Foods discussion board who played up the company's stock. The Securities and Exchange Commission and the board of Whole Foods both eventually cleared Mackey of wrongdoing, and a modified version of the Wild Oats deal was allowed to close, but the tandem events took a toll on the company's stamina and Mackey's reputation.

“It was a costly distraction, and Mackey is on record as saying that if he had to do it all over again, he wouldn't do it,” said Jacobowitz.

Mackey again came under public scrutiny just this past summer, when he penned a controversial editorial in the Wall Street Journal on health care reform that alienated core shoppers disappointed in his “big business” view of the matter.

For his part, Mackey responded by saying, “We need to move people away from the idea that business is bad because it tries to make money.”

However, issues like these paled in comparison to the deepening recession, and the toll it was taking on the company. In November 2008, Whole Foods sold a $425 million, 17% equity stake to the firm of Leonard Green & Partners. The investment seemed to break the troubling cycle, and gave the company time and space to reassess its structure and its goals.

“The financial condition, going into the economic environment with a very dramatic growth model, caused Whole Foods to step back and look at everything from their cash flow to their operating margins,” noted Van Winkle.

Mackey seemed to acknowledge that Whole Foods had gotten too far away from some of the fundamentals that helped make it a leader in the marketplace.

“We sell a bunch of junk,” he famously told the Journal in a candid moment last summer.

Back to Basics

Just after the new year, Whole Foods unveiled an ambitious companywide initiative designed to lessen the “junk” aspects that Mackey was talking about. Known as Health Starts Here, the program is based on three basic tenets: Eat plant-based foods; make them nutrient-dense; and choose foods that are whole, fresh and natural.

The measure is a first, in that it was introduced after a new core value was added to the company's mission statement in October 2009 — “Promoting the health of our stakeholders through healthy eating education.”

“We've decided if Whole Foods doesn't take a leadership role in educating people about a healthy diet, who the heck is going to do it?” Mackey told the Journal.

Team members are not only expected to lead the charge in getting customers to adopt healthier lifestyles, they're expected to participate as well. The company is offering deeper employee discounts to those who quit using tobacco or otherwise meet set health criteria related to blood pressure, body mass index and cholesterol. But what of the specialty and artisan foods?

“It's the same shopping experience, but the efforts seem to be more on what brought Whole Foods to where it is today,” said Van Winkle. “That's what's resonating with their core consumer.”

The deepening commitment coincides with a preliminary rebound in the company's finances. Eager to point out the improving outlook, CEO Mackey used the chain's fourth-quarter earnings call last November to highlight the fact that sales for the quarter increased 2.3%, to $1.8 billion.

“We believe our sales have stabilized and officially turned the corner,” he said. “Our comparable-store and identical-store sales trends improved for the second quarter in a row and, after five quarters of year-over-year declines, so far in the first quarter are up 1.6% and 0.4%, respectively.”

The retailer had been successful in promoting lower prices through its “Whole Deal” savings program, rolled out at the beginning of the recession, and it also bumped up the profile of its many private-label offerings, which currently include approximately 2,400 SKUs led by the chain's primary brands, 365 Everyday Value and 365 Organic.

For fiscal year 2009, total private-label sales across all categories accounted for approximately 11% of the chain's retail sales, up from 10% the year before. Those watching the company believe sales are due to increase even more in the coming year. Jacobowitz says Whole Foods has been diligent in highlighting the value items in its offerings, particularly in the perimeter of the store, as opposed to the foodie items.

“They have both ends of the spectrum. It's just that, for the past few years, they were really riding the wave of economic momentum and naturally, emphasized the high-dollar items,” he said. “What's forward is the value end of the spectrum. They haven't changed the standard, it's just what they're emphasizing in their marketing.”

Consumers, too, are shifting in their attitudes. Sonya Tarnow Brown, a principal at Summit Partners, a private equity firm, feels that past economic downturns have demonstrated that, while consumers are unwilling to sacrifice their health and wellness, they often migrate to services and products that deliver better value for their dollar. It's an approach to shopping they'll maintain for some time to come.

“Consumers are going to be more apt to spend on premium food items especially if they have the health and wellness benefit, than they are to be spending on premium luxuries like bags and sunglasses,” she said.

Looking ahead, analysts see two long-term impacts from the recession that will likely benefit Whole Food's long-term outlook.

First, the economic environment and capital situation forced Mackey and the board to focus on operating performance and more conservative growth. This will likely translate into more profit per dollar of sales in each of its stores going forward.

The other consequence is less obvious, but perhaps more powerful. As consumers refocus their food dollar on value, Whole Foods may find some much-needed time out of the spotlight.

The recession “has led a fairly significant retrenchment by competitors away from growing organic products and store formats,” said Van Winkle. “Two years ago, all the talk was about Safeway's lifestyle stores, and the growth of organics at Kroger. They're not trying to emulate Whole Foods anymore.”

As mainstream attention swings back to the value side of the business, there are expectations that Whole Foods will renew its position as the premier health and wellness food store it once was. In a sense, then, Whole Foods — like the planet it strives to embrace — will have come full circle.