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Business Observer Friday, Feb. 18, 2005 14 years ago

W'holy' Grail

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John Mackey explains why shareholders don't come first at Whole Foods Market. Not that they're complaining.
by: Janelle Makowski Staff Writer

W'holy' Grail

By Sean Roth

Real Estate Editor

Sarasotans welcomed the arrival of the Whole Foods Market to downtown on Dec. 8 with fanfare and pomp. Some might have wondered what the fuss was about.

But Whole Foods Market is the darling of the industry and the keystone of the city's plan to bring more people to the downtown. The store is unique in both how it operates and in how much the city spent to bring it here.

The city contributed about $6.6 million in incentives - tax increment financing, land and more - to ensure the Whole Foods Market, along with the rest of the retail and 90-unit condominium project proposed by Casto-Zenith LLC, was built at 100 Central Ave.

Mackey's Whole Food Market follows the Ritz-Carlton business model more closely than other grocery giants - it chooses to focus more on quality than price. Dubbed "Whole Paycheck" in the industry, the company mass-markets and wholesales organic, natural and upscale foods. It puts a heavy emphasis on perishable items at its stores. In the U.S. and Canada, the organic food industry brings in $13.5 billion each year.

A recent Forbes Magazine article described Austin, Texas-based Whole Foods Market's business plan under the sensational title of "Food Porn." Whole Foods officials, including spokesperson Kate Lowery, say the headline was inaccurate, but they agree on the article's inherent premise: the company emphasizes the pleasurable aspects of eating good quality food.

Whole Foods is a shareholder darling. The stock has gone from $4.25 per share in 1992 to $99.55 on Feb. 14, even after a 2-for-1 split. An initial $500 investment would be worth about $23,424 today.

Over the past five years, the company had the highest long-term growth rate of any publicly owned grocery store at 20%.

For the quarter ended Jan. 16, company sales increased 22% to $1.37 billion, driven primarily by same store sales, which increased 10.7% for the quarter.

The Sarasota Whole Foods store opening set a new sales record for store openings in Florida, says Karen Mathis, regional marketing director for Florida.

"It is just an awesome store," says Mark Gallagher, who has made a living for about 40 years analyzing and running groceries stores, most recently as co-owner of Florida Capital Business Brokers Inc., which specializes in the sale and financing of independent grocery stores.

"Whole Foods is just a great company," he says. "They are going to make everyone a lot more competitive. It doesn't necessarily mean someone is going to go out of business. As long as the economy continues to be good, it's going to do well."

The man behind the store

Mackey is as eclectic as the food sold at his stores; his style unorthodox. Not that Wall Street argues with the results.

Mackey, a vegan, regularly practices meditation and yoga with his wife, Deborah. When it comes to politics, he is a strong supporter of the Libertarian party. He emphasizes a decidedly pro-environmental and pro-animal rights platform for the company.

On the employment front, Mackey is often accused of being anti-union. Yet it's the employees who decide who gets hired and who doesn't. They also control health-insurance decisions and choose what products are carried in each store.

Executive pay is capped at 14 times the average pay of frontline team workers; Mackey made $460,000 in 2004 in salary and bonuses. But he was also granted 13,750 stock options for the year.

In addition, the company maintains a book with employees' salaries at every store. Any employee can see last year's gross salary for each company employee, including the executives. In January, Whole Foods Market rose to number 30 on Fortune magazine's "100 Best Companies to Work For." The company, which has been on the list since its inception in 1998, was ranked fifth out of the 37 largest companies.

Mackey was 25 in 1978 when he borrowed $10,000 from his father and raised another few thousand dollars to co-found Safer Way Natural Foods with then girlfriend Renee Lawson. Two years later, he and Lawson teamed up with Craig Weller and Mark Skiles, owners of Clarksville Natural Grocery, to create Whole Foods Market, a 10,000-square-foot store on Lamar Boulevard in Austin. The store was one of the first supermarket-style natural foods stores in the country. From that point, the company grew both through the building of new stores and the acquisitions of competitors.

The $5.9 billion-company now has 167 stores in the United States, Canada and the United Kingdom, with another 50 stores in development.

John Mackey, who spoke to GCBR from his Austin headquarters, explained the Whole Foods management style and his speech planned for Feb. 19 in Sarasota.

What do you mean by the topic of your speech: 'A New Paradigm For Business'?

I think in business the emphasis has been put purely on profit. That has led us down the wrong path. Saying that what a business is. ... What its purpose is too maximize profits. It has caused people to see corporations as only concerned with their own self-interests ... with greed.

At its essence the new paradigm for business is about not making money or maximizing profits. There are much more important, more transcendent concerns.

In Whole Foods our goal is to provide the highest-quality natural and organic food. I find that it is a much more important maxim than returning value to shareholder.

The stockholders ... the shareholders are not the most important interest. In a retail business, the most important focus is the customers. Any business decision should be centered around meeting their needs.

I would argue that meeting the needs of your employees is also more important. In the retail business, management's job is to make sure that employees are well trained. An employee that is happy at their job makes customers happy, which results in happy shareholders.

Basically our model is not putting profits first.

You have said that 24.1% of every dollar in sales is spent on employee salaries or benefits. Why spend so much on employees?

For every dollar that comes in at the cash register, most goes out to pay for the products. That is about 60-65 cents that goes right back out. We pay 24% to our team members in wages and benefits. The next 8 cents goes to rent, utilities and depreciation. Leaving only about 3% left over for shareholders.

I think it is a fairly appropriate relationship between capital and labor. The difference, 3%, is kept in company to build the business.

It follows my philosophy that workers who are happy and fulfilled at work - our team workers - make happy customers.

We hear the Sarasota location is an excellent performer. Why are Sarasota and Whole Foods a good fit?

A store and a community have to be a good match. The Sarasota location is a good store. It is hardly our highest-volume store. It is outperforming expectation, but it is not in the top 10% of all stories nationwide.

I am very happy with way it opened up. I think Sarasota is a great market for us. It is not hugely populated.

But most of our customers come from two big categories. There are the people that want natural and organic foods. We only sell the best fresh organic and natural food we can. The second group is people, who don't really care about organic foods, but that want the best quality of food they can ... the sophisticated food customer. They are reasonably affluent, and they are willing to pay for the very best food they can. They want organic foods because they are interested in living healthy. Sarasota has a lot in both categories particularly for its population base.

Whole Foods is not known for low food prices, is it?

People on a budget can eat very well at Whole Foods. We have an entire private label called 365 Everyday Value. (The items) still have the highest quality standards but everything we put in the 365 line needs to be very low priced. It is also possible through the bulk section to eat at Whole Foods for very little money. We think we are as competitively priced as just about anywhere.

However, we also have all the highest quality foods, and it is true you get what you pay for. You can get imported Brie cheese for $25 a pound. But we also have a good Monterey jack or cheddar cheese for (far less). So there are different foods available for different folks.

For the best quality food, there is a correlation with the price of it. It's true of automobiles, and it is true for most every type of food. Our goal is not to be the cheapest. Our mission is about selling the highest-quality food. It's hard to have the highest-quality food and be the cheapest.

Industry experts say that in comparably-sized stores, Whole Foods stores consistently outperform the world's most dominant retailer and grocery store Wal-Mart. How does Whole Foods manage such high same store sales and sales growth?

I believe this really happens when you build the business around making customers happy. This goes back to the new business paradigm, rather than putting our profits first. It's not that hard. When you really put customers first.

So many institutions are not built around the customer.

Who has a similar outlook in the business world to Whole Foods?

Nobody is quite like Whole Foods Market. There are a few unique customer-services focused high-quality businesses. Businesses like Starbucks or REI, an outdoor product store and consumer coop. Southwest Airlines is also another customer-focused, employee-driven business.

How did you come up with the unique Whole Food employee rules, such as employee approval for all new store hires?

It didn't evolve like that. It really changed over time. We are a very experimental company for a lot of reasons.

There is really no set formula for a Whole Foods. Unlike McDonalds there is no set process that just gets replicated. Wasn't it Holiday Inn's ad for a while "No surprises." At a Whole Foods there are a lot of surprises. All of them are different. It is our culture that connects them all together.

We evolved things like the team member vote over time. It wasn't in our first store. We thought if we are going to create a team that is truly self-managed they needed to have that power. The power to select who is on the team is a power that belongs to the team, if the team is truly empowered.

Who was your business mentor?

That would be my father (Bill Mackey). I was 24 when I started (developing my first natural food store). Before that I was in and out of schools; I usually studied philosophy and religion. I never took a business course. I had started Whole Foods for more idealistic reasons.

My father was more of an experienced businessperson. He had a firm foundation in business and was good at accounting. He taught me how to conduct business in a professional-type manner, something I didn't know how to do.

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