Whole Foods - It’s Not Just the Food, Stupid

Note: this post was
carried today on Wallstrip

Overview

Whole Foods is a unique enterprise. The melding of capitalist objectives (read: making money) with social
objectives (read: giving access to healthier, more wholesome food to an
ever-broader community via a work environment that is supportive,
nurturing and fair) is a slippery slope that has led to much
consternation among managements, shareholders and social crusaders
alike. This very issue was just dealt with in Saturday’s New York Times.
However, the folks at Whole Foods have done an especially good job
balancing these multiple objectives, as their happy shareholders and
happy customers can attest. From a market perspective they’ve really
only scratched the surface of the opportunity that exists to spread
their word (and their products) the world over. However, they have
clearly bitten off a lot, and the more financially successful they
become the more heat they’ll invariably feel from those with deep
agendas on the social side of the ledger. I am confident, however, that
management has the vision, the skills and the focus to continue walking
this tightrope in order to do what Milton Friedman specifically thought
was a bunch of hokum - doing well by doing good.



Free to Choose - Milton Friedman vs. Whole Foods

Milton Friedman published his famous article, The Social Responsibility of Business is to Increase its Profits, in the New York Times Magazine
in 1970. Friedman raised a variety of issues that would seem to imply
that Whole Foods is pursuing a strategy that is irresponsible and
directly against the best interests of its shareholders (and,
therefore, it owners):

The discussions of the “social responsibili­ties of
business” are notable for their analytical looseness and lack of rigor.
What does it mean to say that “business” has responsibilities? Only
people can have responsibilities. A corporation is an artificial person
and in this sense may have artificial responsibilities, but “business”
as a whole cannot be said to have responsibilities, even in this vague
sense. The first step toward clarity in examining the doctrine of the
social responsibility of business is to ask precisely what it implies
for whom.

Presumably, the individuals who are to be responsible are
businessmen, which means in­dividual proprietors or corporate
executives. Most of the discussion of social responsibility is directed
at corporations, so in what follows I shall mostly neglect the
individual proprietors and speak of corporate executives.

In a free-enterprise, private-property sys­tem, a corporate
executive is an employee of the owners of the business. He has direct
re­sponsibility to his employers. That responsi­bility is to conduct
the business in accordance with their desires, which generally will be
to make as much money as possible while con­forming to the basic rules
of the society, both those embodied in law and those embodied in
ethical custom. Of course, in some cases his employers may have a
different objective. A group of persons might establish a corporation
for an eleemosynary purpose–for exam­ple, a hospital or a school. The
manager of such a corporation will not have money profit as his
objective but the rendering of certain services.

I would argue that Whole Foods’ strategy is directly in line with
Friedman’s doctrine. Its customers have demonstrated the willingness to
pay a premium price for high-quality organic foods, support of organic
farmers, attractive, easy-to-navigate stores and a work culture that is
enveloping and supportive. Sure, what Whole Foods is doing on its face
may seem like social engineering without a profit motive, but I have to
disagree. Management is incredibly smart, understanding the
relationship among building a brand, building customer loyalty and
being willing to invest real dollars (via a more expensive to deliver
product than conventional grocery stores) in order to cement its value
proposition as a premium product. This is not some hippie-dippy crusade
- this is a money-making juggernaut that happens to do some good stuff
in the process. Friedman would be proud.

Organics are Highly Profitable - So What does this mean for Competition?

Whole Foods is the undisputed leader on the organics front, which
has led to some highly attractive sales per sq. ft. economics - $880 to
be exact, per their recent earnings call. Compare this to Safeway, a North American supermarket behemoth, whose 1,767 stores generate
a sales per sq. ft. of $433. And FYI, Wal-Mart - you know them -
generates around $400 per sq. ft. in their stores. As you can see, they
both pale in comparison (in fact, less than half the productivity) to
Whole Foods.

These days, everyone wants to get into organics, most notably
Wal-Mart (is it any wonder after looking at the sales per sq. ft.
comparison?). But does this, in and of itself, mean that the big,
powerful chains will be successful in cutting into Whole Foods’ market
share and slowing its metoric growth? Let’s take a look at the
discussion around Wal-Mart’s move into organics to get a feeling for
sentiment and likelihood of success.

From Triple Pundit. This entry is from March 2006. First read then entry and then some of the comments that follow:

Wal Mart Stores plan to double their organic grocery
offerings next month, in addition to a strong commitment to responsibly
caught seafood and organic cotton in clothing (AP Article here). The
best thing about this is the inevitable effect on Wal Mart’s massive
supply chain - increasing the likelyhood that many other retailers and
suppliers will follow their lead. The assumption is still that organic
is more costly, and is therefore part of a Wal Mart strategy to lure
“more affluent” shoppers. Hopefully, however, with a move this
sweeping, it will start to bring the price down for everyone, and
expose Wal Mart’s regular clientelle to something a little more savory.

Wal*Mart is going to have to do a hell of a lot more than have organic food to get this “affluent” shopper to shop there.

» Icelander at March 27, 2006 05:23 AM

I will be interested in seeing who in the organic field is the first
sell out. I know the product price is high, now we will see the price
for their values and beliefs. Walmart may bring them mainstream but at
what cost.

» Laurence Kincaid at March 27, 2006 01:59 PM

I belive that the prices for organic food are high, i question a player
like walmart, will bring down the standards of organic, once farmers
need to make a living. Being i can afford not to go to Walmart, i will
continue not to support what they do do American Society. They have
cheapened everything they have done. I feel sorry for the people that
work for Walmart.

» Andy at July 22, 2006 05:15 PM

Could you detect just a little cynicism around a company whose
identity couldn’t be further away from “organic” moving into organics?
Kind of gives you the sense the the Whole Foods value proposition goes
well beyond organics - It’s not just the Food, Stupid. Check out some
more recent posts.

From Zen Flower on MySpace:

I was a little unprepared. The commercial came on and I
heard the familiar ukulele strums of the late Hawaiian singer Israel
Kamakawiwo’ole’s famous and famously beautiful version of “Over the
Rainbow” (I know, but it really is quite lovely) and my first reaction
was merely to cringe and wince as yet another exquisite and plaintive
song was whored out to the advertising demons, just one of thousands.

But then came the barrage of images: the requisite shot of the
Perfect Mom feeding her Perfect Child some sort of Perfect Food, all
bathed in soft morning breakfasty light with happy trees peeking
through the windows of the Perfect Kitchen in some utopian hunk of
Perfect America, a bizarre scene that of course does not exist anywhere
on this planet given how there weren’t three empty wine bottles and
some used underwear and a stack of dirty dishes and a fresh bottle of
Xanax and an open newspaper offering up giant headlines about murders
and nuclear warheads and Korean sex slaves anywhere in sight.

And then it happened. The logo. The product shot. The soothing
voice-over. It was a commercial for a brand-new product: Kellogg’s
Organic Rice Krispies. And your heart goes, Ugh.

You say it aloud and the words tend to catch in your throat and make
you sort of gag. Kellogg’s Organic Rice Krispies, with “organic” in big
scripted flowing font across the top of the box, all steeped in bogus
warmth and happiness and false notions of health and nature and
protecting your Perfect Child from the millions of icky poisons and
unhealthy crap churned out by giant megacorps exactly like, well,
exactly like Kellogg’s.

Kellogg’s Organic Rice Krispies. It’s sort of like saying “Lockheed
Martin Granola Bars” or “Exxon Bottled Spring Water.” Self-immolating,
and not in a good way.

That’s when I heard it. The plaintive wail, the sigh, the crack and
the moan and the whimper, like a tree shooting itself in the head. It
was the final death knell of the “true” organic movement, breathing its
last.

And the post goes on to discuss Whole Foods:

Whole Foods? Perhaps the greatest mixed blessing of all,
an amazing company that has single-handedly done more to bring the
organic movement to the mainstream and raise awareness of healthy foods
and improve farming and meat-quality standards across the board, not to
mention the pleasures of food shopping overall. Yet at the same time,
merely by its sheer size and success, they’ve simultaneously done more
to dilute the real meaning of “organic” than any other company.

Put another way: Unless you shop at farmers’ markets or quasi-hippie
co-ops or unless you do your homework and find a true family-run farm
within 100 miles of your home and establish a relationship with them
and really begin to buy local, the odds that the next “organic” product
you buy truly meets the original definition is about as likely as
finding real breasts at the Playboy mansion. And for now, maybe this is
just the way it has to be.

This post is great because it really drives home the delicate
balancing act Whole Foods lives with day in, day out, to continue its
growth and build its following without being perceived as a corporate
sell-out. Perhaps it is useful to think of Whole Foods as a kind of
Starbucks redux. Core values, clearly communicated, high quality,
premium product that has drawn more than its share of criticism during
its period of rapid growth. Shareholders have done well, however,
buying on dips and riding out the bumps.

It’s the Model that Matters

Another interesting online dialogue is taking place between Michael Pollan of the New York Times and the President of Whole Foods, John Mackey, taking place on his blog. First, a post from Michael Pollan:

As we discussed, the company’s shift a few years ago
from “backdoor sales” to a regional distribution system has made it
more difficult, if not impossible, for small local farmers to sell
directly to individual Whole Foods stores. For some farmers, this may
be a boon as you suggest, but for the many Bay Area farmers I have
spoken to, it has shut them out – they don’t grow enough to supply a
distribution center, or the centers are too far from their farms. You
write that all of your stores are in fact free to buy locally, which I
was surprised and delighted to hear. I hope you’ll take steps to
encourage them in that direction. I have interviewed dozen of organic
farmers for whom selling to Whole Foods over the years has been
critical to their success; for what it’s worth, they feel much less
welcome since you moved to the regional distribution model. Which leads
me to my next question: is there anyone, at the regional level, charged
with the specific mission of locally sourcing as much food as possible?
And do Whole Foods buyers have the authority to pay a premium for local
produce, in the same way they now routinely pay a premium for organic?
Such a commitment by Whole Foods to local sourcing – not everything,
but whatever and whenever possible – could go a long way toward
rebuilding local food systems across America.

John Mackey responds with clarity and force:

I’ll only say a couple of things as an introduction. One
of these is that I’m disappointed that you didn’t respond at all to my
short section on the history of the organic foods movement and how
difficult it was for Whole Foods Market to develop sufficient supply
and scale to actually get authentic organic foods into the hands (and
mouths) of millions of people. You completely ignored that section.
Without Whole Foods Market’s pioneering work and without the growth of
our stores and distribution centers, it is very unlikely that the
organic foods movement would be where it is today. You obviously admire
the retail food co-op movement (which I supported myself in Austin
prior to co-founding Whole Foods Market), but in fact this movement has
never been large enough to successfully grow the organic foods
movement. In 2005 the total sales of all the retail food co-ops in the
United States combined was only about $700 million (source–National
Cooperative Grocers Association), which was less than 15% of Whole
Foods Market total sales that year. The simple truth is that the
organic foods movement was largely a fringe movement with the number of
adherents numbering only in the thousands before Whole Foods Market
came into existence. The year-round supply of organic foods across the
United States today consumed by millions and millions of people is in
large part due to the success and growth of Whole Foods Market. Why do
you not understand or appreciate this truth?

Wow. I love this. This is kind of reaction I have to Jonathan Schwartz of Sun Microsystems and his blog, which I have written
about previously. He takes the criticism and issues raised head-on, and
responds with lucidity and passion. John’s bottom line - Whole Foods
has really created a category all unto itself. It has the culture, the
brand, the deep understanding of the motivations of its customer base
and the supply chain relationships with local growers and large scale
distributors that enable it to deliver such a broad palette of value on
such a grand scale. For others to effectively compete they need to do
all these things, and do them well. I’d say John and the entire Whole
Foods crew has created an immense set of barriers to entry.

Let’s look one more time at John Mackey’s blog:

I regret that you did not engage in any serious research
about how Whole Foods Market actually does business or you would have
discovered that we support local and small farm food production all
over the United States as well as in other parts of the world. Whole
Foods Market, despite its size, does not operate as a typical
monolithic corporation such as Wal-Mart (with which you associate Whole
Foods Market several times in your book). Our company continues to
operate on a decentralized model wherein each of our 11 regions, as
well as each store, has a high level of autonomy. Differences in
product offerings, suppliers, and seasonal availability result in a
significant variation of items on our shelves from region to region and
even store to store within the same city. However, our strict quality
standards, the highest in the industry, are observed with every
supplier and retail outlet. In other words, you may find a variation in
the types and kinds of products, but each has been screened by our
rigorous quality standards.

Awesome, John. Your shareholders must touch those stock certificates
every day and give thanks that you are sitting in the seat of power.
You rock.

Conclusion - It’s Not Just the Food, Stupid

Can’t you hear it now - the Wal-Mart purchasing manager needing to
fill his stores with massive quantities of high-quality chickens,
speaking to an organic farmer about his requirements: “I need 10
million free range chickens - now. Huh? What do you mean I can’t get 10
million? Are you kidding me? We’re Wal-Mart.” Compare with the
conversation likely being had between the Regional Manager for Whole
Foods and the same farmer: “Hi, Bob, our customers really loved the
chickens you sent us and I wanted you to know that. They literally flew
off the shelves! Now, I really need to increase our supply. Do you
think you can help us, either with your own stock or with a local
organic farmer you know that might be interested in becoming part of
our family?”

I really don’t think I’m too far from the truth here. Whole Foods
has built a smart local distribution engine, while Wal-Mart and others
really represent large scale mass-production and distribution. I am not
confident this approach is going to work in the highly fragmented,
highly people-driven organic game. Wal-Mart’s advantages in one system
(massive production/distribution) cannot be assumed to translate to the
other (fragmented production/distribution). Whole Foods created this
category and, most importantly, is laser focused on the needs and wants
of its stakeholders. And this is one of those situations where, I
believe, the issues of stakeholders and shareholders are tightly
aligned. While it costs more to be a socially and environmentally
conscious corporation, there is no doubt that a big part of the reason
people are willing to pay Whole Foods’ premium prices is because the
feel good about shopping there for both food and non-food reasons. And
this is why the bottom line is: It’s Not Just the Food, Stupid. And for
a shareholder, this should be music to your ears.

Thanks for Rob Passarella for helping to research this post.

The author does not currently hold securities in Whole Foods.