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.