Rhapsody in Chow
Hip and health-conscious Whole Foods has set the table for success
AUSTIN--Enter Market Hall at the gargantuan new Whole Foods Market here, and mountains of colorful fruits and vegetables overflow their wooden crates in a high-definition display of organic bounty. A few aisles away at the Northside Trattoria, diners dip into Gorgonzola ravioli in garlic cream sauce and sip Chianti as if they were in Northern Italy. And around the bend at Fifth Street Seafood, fishmongers in yellow waders hawk the catch of the day ("Frehhhh-sh fish. Hee-ah!") as if it had just been reeled in off the coast of Austin.
But look a little closer, and those crates of sumptuous produce reveal false bottoms and specially constructed clear glass fronts that actually only create the appearance of such abundance. The Northside Trattoria gets its name not from a village in Italy but from a Texas suburb. And that right-off-the-boat feel of the fish market? Everyone knows Austin is landlocked.
If the 80,000-square-foot store, adjacent to the company's headquarters, has its share of playful artifice, there is nothing phony about the success of Whole Foods, which has rapidly become one of the hottest grocery chains in the country. Fueled by an increasing number of shoppers willing to pay a premium for healthful fare and a hip and entertaining store to buy it from, Whole Foods has grown from a single store run by hippies for hippies to a $3.9 billion company that caters to upscale foodies who would never dream of buying bulgur wheat in bulk.
Last quarter, the company racked up $1.1 billion in sales, an increase of 20 percent over the same period last year. Same-store sales, a critical indicator of success, were up a whopping 11.6 percent. (Most grocers, under pressure from Wal-Mart, are lucky to reach 5 percent.) And Whole Foods stock is up more than 25-fold since 1992, when the company went public. "By positioning its markets as a great place to take care of your family, Whole Foods has expanded its reach dramatically beyond the die-hard natural and organic consumer," says Jon Hauptman, a food industry consultant with Willard Bishop Consulting in Barrington, Ill. "People believe Whole Foods is helping them live a healthier life."
And not just in traditional suburban markets. With its huge array of prepared foods (150 different dishes a day), fancy cheeses (more than 600 varieties), and fresh produce (organic sea beans to purple artichokes), Whole Foods also is winning over urbanites in supermarket-starved cities like New York and San Francisco. Patrons eagerly pay $10.99 a pound for ready-to-eat rosemary chicken (free-range) and $3.49 a pound for organic peaches, rather than conventional prepared chicken at $6.99 a pound (with hormones) or pesticide-grown peaches at $1.99 a pound from a typical store. The Columbus Circle store, which opened in February 2004 on Manhattan's tony Upper West Side, for instance, moves enough spicy tuna hand rolls and carne asada to make it the highest-volume restaurant in the country. The three-level Whole Foods in Union Square could rival Grand Central Station for traffic at lunchtime. The markets also have become prized tenants in mixed-use developments, like condo complexes, that use them to lure buyers.
Fulfilling the mission. At last count, there were 170 Whole Foods stores up and running and another 58 in the pipeline. But for founder and CEO John Mackey, that's still not enough to fulfill what he refers to simply as "the Mission": Whole Foods, Whole People, Whole Planet. Mackey, a 51-year-old vegan (he occasionally eats eggs laid by his own chickens), intends to nearly double the number of stores by 2010. By 2012, he predicts, annual revenue will quadruple. "People are more aware about food, they want to eat healthier, and they want to live longer," says Mackey, whose corporate uniform consists of a polo shirt, shorts, and hiking boots.
According to projections by Bishop Consulting, market share for traditional supermarket operators will decline to less than 50 percent by 2008, down from about 56.3 percent in 2003. The lion's share of any growth in the industry is expected to come from nontraditional supermarket operators at the opposite ends of the price spectrum such as Whole Foods and Central Market at the high end and Wal-Mart and Costco at the low end. Much like the retail apparel industry, it's the broad-based traditional retailers in the middle, such as Safeway Stores, Kroger, and Albertsons, that are struggling to find a way to fit into the ever more polarized market. In 2004, Safeway actually closed more stores than it opened. "The market has been niche-ified, and the mainstream grocers aren't growing," says Jonathan Ziegler, a food industry analyst with J M Dutton Associates in El Dorado Hills, Calif., noting that Whole Foods' profit margin is more than three times the industry average of just below 1 percent. "They need to rethink what they want to be when they grow up."
Many of them wouldn't mind being more like Whole Foods, with its glittering organic produce, yoga mats, artisan breads, and as many as 32 different types of sausage. The market for natural and organic food is worth about $48 billion annually and getting bigger each year. Nearly 60 percent of supermarkets now offer a separate natural and organic section in their stores, according to the Food Marketing Institute. And competition is heating up. Kroger, for instance, is converting some of its mainstream stores into upscale Fresh Fares, offering fresh and prepared food and a bigger variety of produce. Wild Oats Markets, which has 110 stores mainly in the West, has been struggling to stay afloat for years. But it may be headed for a comeback. In March, supermarket magnate and turnaround artist Ronald Burkle spent $25 million for a 9.2 percent stake in the company.
All the better for Whole Foods, says Mackey, who views competition as a free training ground for future Whole Foods shoppers. "These stores are actually a gateway for us. They introduce people to some of the products we carry, and soon their customers trade up to us." But it's going to take a whole lot of trading up for the company to reach its lofty growth targets, which if accomplished would put Whole Foods on par with major companies such as the Gap and Delta Airlines.
Plain and fancy. To succeed, millions of red-state, red-meat-eating Americans will not only need to embrace their inner tempeh eaters but also overcome Whole Foods' premium prices, which have earned the company the barb: "Whole Foods; Whole Paycheck." The stores do offer a lot of expensive gourmet products, such as Trou du cru, an exotic French cheese, at $48 a pound ("You can taste the love," says the man behind the cheese counter) and $29-a-pound exotic blue-foot mushrooms. But shoppers can also find affordable Parmesan cheese and conventional mushrooms at conventional prices. The company offers a store brand as well, "365 Everyday Value," which is comparable to name brands at traditional grocery stores. So far, shoppers have been happy to pony up for products that are free of additives and chemicals and are rich in taste. "Whole Foods customers see food as an opportunity to enrich their lives, and they are willing to pay a premium to do that," says Darrell Rigby, head retail consultant at Bain & Co. in Boston.
But that could change, analysts say, if Whole Foods loses its specialness by getting too big too fast or if the economy hits a rough patch. Although Mackey can't control the latter, he's all over the former. Finding new products from around the world and telling their stories to consumers are a near obsession at Whole Foods. "We think of ourselves as investigative grocers," says Michael Besançon, president of the company's Southern Pacific Region, who is forever pursuing little-known foods and vegetables like the young, green coconut. Its milk, according to lore, is so nutrient-rich that it was used in WWII as a plasma substitute. When one buyer discovered the aromatic and rare sea herb kritamo in Greece, her find was heralded with a press release detailing the herb's story ("infused with salt water every night, harvested by hand on the northern coast of Crete") and announcing its arrival at the Whole Foods olive bar.
Professional buyers aren't the only ones on food patrol. Each store manager gets to spend up to $125,000 a year without approval on store improvements, including bringing in unusual local or ethnic products or setting up a special event such as a cooking demonstration or crawfish boil. "What really sets Whole Foods apart is the company's constant willingness to innovate and tweak the model," says food consultant Hauptman. "And the level of employee knowledge and service is exceptional."
Stock options. If employees seem to be high on life, it could be because they earn better wages than most supermarket workers and are more involved in the decisions that affect their lives and livelihoods. In a practice nearly unheard of in corporate America, every employee's gross income--executives included--is listed in a wage disclosure report. A salary cap limits compensation to 14 times the average total of all the company's full-timers (Mackey earned $342,000 last year), and more than 90 percent of stock options awarded in 2004 went to nonexecutives.
Employees are allowed to perform community service on company time, and when big decisions are made, they are consulted. Last year, for instance, when the company switched to a consumer-based health plan, employees (dubbed "team members") were allowed to vote on which benefits they wanted. Pet-bereavement leave got a serious hearing but ultimately didn't make the cut. Yet the fact that it was even considered is one reason Whole Foods is consistently ranked by Fortune magazine among the top companies in the country for workers.
If there were an award for animal quality of life, Whole Foods would probably earn that one as well. The company requires that its meat be free of hormones and dangerous additives and that it come from animals that are allowed to roam at least somewhat freely. The company's Animal Compassion Foundation works with farmers to improve conditions for farm animals. And the grocery's sheer size has given it the clout to make demands about how its products are farmed. Mackey knows he's made himself an easy target for cynics by discussing the importance of, say, duck relationships while counting what's in the register drawer. But he'll take the digs. "We've got pig producers trying to out-compassion each other," he beams. "And more companies are going to have to be like us, because we're going to win." That makes Mackey a vegetarian in hog heaven.
AT A GLANCE
Founded: 1980 in Austin
CEO and founder: John Mackey
Annual sales: $3.9 billion
Net 2004 income: $129.5 million
Number of stores: 170
Employees: 32,000
Most popular products: Sonoma chicken salad, kung pao tofu, forbidden rice, chocolate-chip peanut butter
This story appears in the June 20, 2005 print edition of U.S. News & World Report.