Brand Autopsy

Ugly Financials at Whole Foods

Retailers of all types are struggling. The October financials are in and things aren’t pretty for upscale and downscale retailers. Same store sales at upscale retailers are in a free fall: Neiman Marcus (-26.8%); Nordstrom (-15.7%); Saks (-16.6%). Same goes for comp sales at downscale retailers: Kohl’s (-9.0%); Target (-4.8). Ouch.

One company, near and dear to me, that’s struggling mightily is Whole Foods Market. Before this economic avalanche struck, Whole Foods was churning out strong sales and solid profits. Not now.

Whole Foods released fourth-quarter financials this week and the news is downright ugly. Net income for the quarter fell 96% to $1.5M. Same store sales increased by only 0.4%. (A year ago, same store sales were at 8.2%.) And, year-over-year transactions have fallen 1.5%. Net/net … fewer customers are buying fewer items, resulting in feeble sales at Whole Foods Market.

The feeble sales situation is made all the more complicated by the costs associated with Whole Foods acquisition of Wild Oats. For an excellent breakdown on how the Wild Oats acquisition has wrecked Whole Foods profitability, read Alyce Lomax’s column at The Motley Fool.

In her breakdown, Alyce notes Whole Foods has assumed $925M of debt, much of which is tied to the Wild Oats purchase and assimilation. She also notes the $425M cash infusion from a private equity firm will be used to help pay down this Wild Oats afflicted debt.

But Alyce isn’t souring on Whole Foods Market. She still believes in its mission, its model, and its merchandise. From Alyce’s perspective, Whole Foods is a cheap stock with upside once the indigestion of gobbling up Wild Oats passes and the economic climate rebounds.

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UPDATE (11/8): BusinessWeek chimes in with their take on the Whole Foods Market private equity cash infusion ... "The private equity money comes at a steep price and also reflects the retailer's serious problems." READ MORE

Re: Whole Foods Market in 2008

Jackie Huba, a fanatical Whole Foods Market customer evangelist, asked What Should Whole Foods Do? in response to its dismal third-quarter financials and its under-performing stock.

I was going to comment on her post but my comments were lengthy enough for a blog post. (So here it goes …)

As someone who has spent time inside Whole Foods Market (WFM), I have a few thoughts.

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FIRST, comp sales for WFM are the lowest they have ever been at 2.6%. Next quarter, comp sales will get a boost because the acquired Wild Oats locations will enter the WFM comp store base. From the conference call with analysts (transcript here), I learned the acquired Wild Oats stores are comping at 7.0%.

Even with the addition of Wild Oats locations to its comp base, sales comps will still be below the upper single-digit territory WFM is accustomed to earning.

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SECOND, since Starbucks and WFM appeal to consumers with discretionary income, they merit comparison. Starbucks is implementing discounting programs like a Treat Receipt happy hour ($2 iced coffee drinks) and doing far-from-coffee brand extensions like smoothies to drive sales. WFM, instead, is continuing to be guided by its “quality compass.”

When asked by a Wall Street analyst if WFM was considering loosening its quality standards (i.e. selling products with artificial ingredients) to help improve sales and margins, the company emphatically said … NO!

In particular, co-coo Walter Robb said, “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 and I think customers know that and appreciate it.”

Robb continued, “We’re not going to just start selling price items that’s not who we are but we are clearly offering the value items if that’s the choice that you want to make.”

Starbucks, on the other hand, is abandoning its quality compass and kowtowing to the drug of low price gimmicks and far-out brand extensions to drive sales. Kudos to WFM for staying true to its purpose. Mucho kudos.

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THIRD, my advice to WFM is to keep following its “quality compass” and not engage in unhealthy discounting tactics. The economy will rebound and when it does, so will WFM.

However, this financial hit should cause WFM to rebalance how much autonomy it gives regions and individual stores to make business-impacting decisions ranging from procurement, distribution, merchandising, marketing, and training.

Because regions and stores are given the freedom to make so many business-impacting decisions, redundancies galore exist. And those redundancies result in WFM spending excess monies to recreate the proverbial wheel to serve its regions and stores. This excess was never an issue when sales were strong. With sales slowing, these expensive redundancies become exposed.

The answer for WFM to better compete in rough economic times might be to centralize more business-impacting decisions in order to reduce costs and improve profits. Problem is, the WFM corporate culture isn’t about centralization … it is all about decentralization.

Whole Foods “Markets as Non-Conversation”

What?
Whole Foods Market has barred executive-titled employees, directors on its board, global vice presidents, regional presidents, and regional vice presidents from participating in any online conversation not sponsored by the company. This change in company policy is the direct result of kinky business behavior from its CEO, John Mackey.

In July, Mackey was outed by the FCC for having posted over 1,300 messages from 1999 to mid-2006 on the Yahoo! Financial boards. In these postings, Mackey hid behind an alias (“rahodeb”) and trumpeted Whole Foods while trashing Wild Oats. About eight-months after rahodeb’s last posting on Yahoo!, Whole Foods initiated a merger with Wild Oats.

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So What?
It is sad to hear a company is unable to trust its executives to be ethical, considerate, and appropriate when conversing online. It’s even more sad for Whole Foods to enforce such a strident ruling given it was founded upon core Libertarian beliefs of maximum freedom and minimum governance.

The Whole Foods business operates under the belief stores should have the freedom to meet the needs of its unique customers and team members. The only governing rule stores must dogmatically adhere to is all food sold at Whole Foods Market must be free from artificial preservatives, colors, flavors, sweeteners, and hydrogenated oils. The company has a Quality Standards Policy, which lists all unacceptable food ingredients. Products containing ingredients on this list are not allowed to be sold at Whole Foods stores.

Here’s where the company’s Libertarian ways truly come to life ... individual stores have the autonomy to stock whatever products they desire so long as the ingredients in the products adhere to these quality standards. The Whole Foods executive team trusts its stores to qualify and disqualify the products they sale.

Yet, Whole Foods is unable to trust its executives to qualify and disqualify how they can participate in online conversations about the company they work for. Interesting. Seems to me, the Libertarian answer to all of this is to develop a Blogging Standards Policy for every employee to follow. There are examples galore of corporate blogging guidelines for Whole Foods to use as a starting point.

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What Now?
As a former marketer at Whole Foods, I find the corporate mandate that execs cannot participate in online conversations disheartening. It’s a knee-jerk, short-sided, and regrettable decision.

However, I hope this spurs more Whole Foods Market team members (company term for “employees”) to blog on a company website blog or on a blog they create outside of the company. At the least, every Whole Foods Market location should have a company blog on the Whole Foods Website. And at the very, very least … Whole Foods should have a rich internal blog or some other internal online forum where team members can learn from one another and from those higher-up execs who have been barred from such online conversations outside of the company’s blog moat.

Sure, the company has an informative and snazzy cooking video blog called SECRET INGREDIENT as well a handful of podcasts and blogs. But there is so much more opportunity for Whole Foods Market to share their unique point-of-view on food and the natural food difference.

Here’s hoping enthusiastic Whole Foods Market team members start their own blogs and share their passions for changing the way the world eats, shops, and enjoys food.

Closure to the Whole Foods Market Merger Saga

UPDATE (8/23): The US Court of Appeals court denied the FTC's appeal to block the WFM & OATS merger. Whole Foods Market is now free to complete its merger with Wild Oats. As a WFM stockholder and vested marketer, I'm pleased. Phew. The end. Next.

UPDATE (8/17): The FTC is appealing the court ruling which okay'd the merger between WFM & OATS. So the saga will continue.

Despite all the hullabaloo from wide-ranging anti-competitive sentiments to wild-ass antics from John Mackey, a federal judge has ruled in favor of Whole Foods Market (WFM) by refusing to block its merger with Wild Oats (OATS). This ruling means WFM can finalize its merger with OATS.

Or does it? The Wall Street Journal is reporting the FTC hasn't confirmed it would not file an appeal.

No Business Leader is Perfect

Is it unrealistic for us to expect businesses leaders to be perfect? Are we setting ourselves up for disappointment by expecting businesses leaders to flawlessly deliver every single time? As employees, customers, and shareholders are we expecting perfection when perfection is unattainable? Is that fair of us?

I’m not trying to make excuses for when businesses leaders fail us. But failure happens. No businessperson is perfect. Yet, we seem to expect businesses leaders to be perfect all the time.

John Mackey, co-founder/CEO of Whole Foods Market, messed up BIG-TIME. No doubt about it. He failed employees, shareholders, and many customers. We now know Mackey is far from perfect. But was it realistic for us to expect him to be perfect?

No business leader is perfect. NONE. Business life is a game of progress, not perfection. No business leader will ever be perfect. It’s an impossibly unattainable goal. But while that goal is unattainable, the most admired, respected, and trusted business leaders always aspire to reach perfection. They always make progressive steps to improve their decisions made and how their business connects with stakeholders. Sure, they will stumble along the way. But the true measure of a business leader is how they recover and forge ahead making progress along the way to overcome their mistakes.

Just like no business leader — no person is perfect. NO ONE. As people we also mess up BIG-TIME. We constantly make bad decisions that harm others. We disappoint friends. We betray people’s trust. We cannot achieve perfection. Doesn’t mean we should give up and not try. The most admired, respected, and trusted people I know make progress every day to improve themselves and their relationships with others. And when people see progress being made, they are willing to forgive mistakes.

Thank goodness people are so forgiving. Otherwise, I wouldn’t have any friends. I’ve pissed off enough people in enough ways to not have friends. Lucky for me, people are forgiving. I still have some friends. Lost some along the way—but the ones I still have are great.

John Mackey (and Whole Foods Market) will recover. I think employees, shareholders, and customers have it in their hearts to forgive him for messing up big-time. It’ll take time though as well as diligent, proactive, and compassionate action from Mackey and Whole Foods to make progress in earning back trust from its stakeholders.

In GOOD TO GREAT, Jim Collins says one factor that determines which companies go from being good to being great is how they deal with adversity. He says that many of the good-to-great companies he studied faced a company-defining crisis. According to Collins, what separates the winners from the losers is how they confronted and responded to the crisis …

“The good-to-great companies faced just as much adversity as the comparison companies, but responded to that adversity differently. They hit the realities of their situation head-on. As a result, they emerged from adversity even stronger.”

John Mackey is regarded as a respected and admired business leader. How he and Whole Foods Market confront and respond to this unfortunate crisis will determine if they can continue down their path in becoming a great endearing and enduring business. I think they can and will.

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This essay was repurposed from an earlier blog posting.

Mackey Apologizes. Internal Investigation Launched.

At first he defended his anonymous postings. (Bad move.)

And now he apologizes. (Good move.)

Whole Foods has done some selective online editing by taking down all of Mackey's earlier blog postings. And removing Mackey's defensive stance on his "rahodeb" postings. (You can still read it here.)

Its Board of Directors has initiated an internal investigation into Mackey's kinky business behavior. (Good move.)

Wouldn't surprise me if Mackey loses his CEO title but retains his Chairman title. (Yeah, I'm going out on a limb here.)

The messiness continues. (Clean-up, aisle 7.)

Mackey’s Kinky Business Behavior

As a former Whole Foods Market team member and current WFM shareholder, I’m embarrassed by John Mackey’s kinky business behavior.

If you haven’t heard, John Mackey was outed for posting over 1,300 messages in the Yahoo! financial boards from 1999 to mid-2006. In these messages, Mackey hid behind an alias (“rahodeb”) and trumpeted Whole Foods while trashing Wild Oats. (Go here for lots of links on the story.)

This is behavior unbecoming of a CEO no matter the size of the company. This foolishness makes me want to question Mackey's character and judgment. Even when he was outed, Mackey didn't think his actions were wrong. Instead of admitting he made a mistake, Mackey defended his kinky business behavior by saying the FTC is out to embarrass him and that he got his jollies from debating all things Whole Foods-related on the message board.

Go ahead, read his defensive comments culled from the Whole Foods website...

“The FTC discovered my identity as rahodeb through one of the millions of litigation documents that Whole Foods provided to them. They are quoting rahodeb in some of their legal documents and no doubt seek to embarrass both me and Whole Foods through these disclosures. I want to make the following points about rahodeb here:

1. I posted on Yahoo! under a pseudonym because I had fun doing it. Many people post on bulletin boards using pseudonyms.
2. I never intended any of those postings to be identified with me.
3. The views articulated by rahodeb sometimes represent what I actually believed and sometimes they didn't. Sometimes I simply played "devil's advocate" for the sheer fun of arguing. Anyone who knows me realizes that I frequently do this in person, too.
4. Rahodeb's postings therefore do not represent any official beliefs, policies, or intentions by either Whole Foods Market or by me.
5. At no time did I reveal any proprietary information about Whole Foods on Yahoo!
6. All of rahodeb's postings should be read in the full context of the discussions that were taking place on the bulletin board at the time the postings were made. Reading them out of context may lead to serious misunderstandings.
7. All of rahodeb's postings also need to be understood in the context of the time that they were written. Because the competitive market has evolved so much in the last 5 years, older postings mean far less today than they did when they were written."

All of this shouldn’t have a bearing on the case to overturn the FTC’s decision to block the Whole Foods Market and Wild Oats merger. However, this SHOULD have a major impact on Whole Foods if they are allowed to merge with Wild Oats as it relates to new employee morale.

How happy will ex-Wild Oats employees be to work as new Whole Foods team members for a CEO that once had this to say about their old company?...

“Whole Foods is undervalued and OATS very much overvalued. Jennison and Fidelity didn’t buy a large stake in OATS, they chose Whole Foods. There is no value in OATS, it’s run is near the end, stock could be flat to negative for years, the fundamentals need to catch up, bad company, risky investment."

April 19, 2005 |Yahoo! Message board posting by “rahodeb” (aka John Mackey)

If you are interested in digging deep into John Mackey's business kinkiness, read all the "rahodeb" message board postings. You can also read analysis from USA TODAY showing that Mackey would sometimes make 17 postings in a day. Oh my...

This is messy, messy stuff.

John Mackey Sounds Off

I’m traveling and haven’t had the opportunity to fully digest the latest goings-on with the FTC and Whole Foods Market. But, here's a quick sum-up ...

Reports have surfaced John Mackey told the Whole Foods Market Board of Directors that the acquisition of Wild Oats would help avoid “nasty price wars” in markets where these two grocers compete. (I'm sure we will continue to read more about the statements Mackey shared with the Whole Foods board as it paints a different picture for why Whole Foods is seeking this acquisition.)

Mackey shares much more analysis and opinions with an impassioned 14,000 word blog posting. (Gotta give Mackey credit for being willing to express his views in such a public forum. I can't remember another CEO being so forthright with sharing their viewpoints for a merger in question by the FTC.)

The FTC has released their argument papers (pdf) outlining rationale for blocking the merger. (I've perused this document and it makes for very interesting reading.)

Samuel Fromartz, author of Organic Inc: Natural Foods and How They Grew, shares his thoughts on the matter. Plus, he links to sharp analysis from The Hartman Group. (The Hartman Group is intimately familiar with Whole Foods and the natural foods marketplace so their take on the matter is from an extremely knowledgeable vantage point.)

If I have anything else to add to all this, I will. But first, I need to digest all the latest goings-on.

Whole Foods Aggressive Move

Whole Foods Market is getting more aggressive in explaining their rationale for why acquiring Wild Oats will not be monopolistic. They’ve added a section on their website posting updates on the FTC Hearings process.

In the company-issued press release, John Mackey, Whole Foods CEO, says,

"Our approach at Whole Foods Market is to be as open and transparent as reasonably possible. This new section on our website, which includes a link to my blog, is an outlet for the Company to proactively share information. We hope it will help our stakeholders understand Whole Foods' position as we move though the legal process."

The first posting is a presentation deck (pdf file) shared with the FTC commissioners before their decision to block the merger. You can view a sample slide from this document below, but it if you aren’t a Wall Street analyst then this document will mean very little to you. Even if you are a financial-type, you will not takeaway much from this document as it is not compelling.

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I applaud Whole Foods for opening up and sharing their thought-process to the merger with us. However, this presentation fails in so many ways …
(1) It’s boring.
(2) It blames the FTC for not being able to read financials properly.
(3) It lacks compelling information.

There is still plenty of time for Whole Foods to improve their communication approach here. As a former marketer with Whole Foods, my recommendation is for Whole Foods to craft its message so it is appealing to its customers and to use video instead of boring powerpoint slides. Whole Foods also needs to give shoppers confidence that the merger will not result in higher prices and that the merger will allow Whole Foods to become a stronger retailer as competition from the major supermarkets intensifies.

Whole Foods should take a page from JetBlue’s playbook and videotape John Mackey speaking earnestly and passionately about his vision for natural/organic foods and how the combination of Whole Foods & Wild Oats will benefit consumers and benefit the natural/organic movement. (Remember David Neeleman’s video message to JetBlue customers following their February meltdown?)

Mackey is passionate about changing the way the world grows, shops, eats, and enjoys food. Seeing and hearing him speak from the heart through streaming online video will be much more compelling than flipping through dull bullet-pointed slides. Plus, the viral nature of online video will help to potentially create a quick groundswell of support for the merger from Whole Foods shoppers.

Whole Foods can get as wonky as it wants with dull presentation slides for the analyst crowd. But please keep those postings on the Investor Relations page. For direct links off its homepage, Whole Foods should stick to messages that are truly compelling to customers.

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For more ...read this Austin American-Statesman article.

Trader Joe’s … the Forgotten Supermarket Giant

There’s been much hullabaloo surrounding the FTC blocking the proposed merger between Whole Foods and Wild Oats. The FTC believes this merger will concentrate too much of the country’s natural/organic supermarkets in the hands of one retailer. And because of this, consumer choice will be reduced, leading to higher consumers prices for natural/organic foods.

In the lawsuit filed last week, the FTC contends, “Consumers have benefited directly from the price and quality competition between Whole Foods and Wild Oats. If this acquisition occurs, those [price/quality competitive benefits] will be lost.”

Many Wall Street analysts, lawyer-types, and highly-informed shoppers have chided the FTC for such irrational antitrust action. They cite the FTC is too narrowly defining this marketplace as only being defined by natural/organic grocers and not the larger supermarket industry. Plus, it has been noted that Wal-Mart, Kroger, and the other supermarket leaders are significantly increasing their natural/organic offerings to take advantage of this long-emerging trend.

As a former marketer with Whole Foods Market, I’ve been thinking a lot about this situation. What surprises me most is how much credit the FTC is giving Wild Oats. The FTC believes Wild Oats is Whole Foods biggest competitor and that there is a vibrant competitive battle between these two grocers. The FTC also seems to think Whole Foods strategizes to counter how Wild Oats prices its merchandise.

Not true.

Whole Foods long ago stopped considering Wild Oats as a competitor mainly because of the company’s continued weak financials. As for strategizing over how to handle Wild Oats pricing scheme, that’s not been a focal point for Whole Foods.

What has been and continues to be a major focal point for Whole Foods, as it relates to competition and pricing, is TRADER JOE’S. Trader Joe’s is the grocer that keeps Whole Foods in-check with prices, not Wild Oats.

Trader Joe’s, a privately-owned specialty grocer with over 280 locations in 32 states, has carved an interesting niche within the natural/organics retail industry that the FTC has failed to notice. They are nearly three-times as large as Wild Oats in store count and almost five-time larger in overall sales.

Since the company is private, financial numbers are hard to come by; however, the Supermarket News trade magazine estimates 2006 sales at Trader Joe’s were $5.0 billion. In his book, “The Trader Joe’s Adventure,” author and long-time retail industry journalist Len Lewis, estimates sales per square foot at Trader Joe’s approach $1,300. (For reference points, Whole Foods operates about 195 locations and 2006 sales were $5.6B. Sales per square foot at Whole Foods are around $900. Sales at Wild Oats in 2006 were $1.2B and the company generates about $450 in sales per sq. ft.)

Trader Joe’s targets price-conscious, healthy and gourmet-inclined shoppers who are willing to forsake consistency (in branded product assortment) for the delight of a bargain. (Think Dollar General’s discount ethos meets Costco’s selectivity meets Dean & Deluca’s foodiness and you get Trader Joe’s.)

The typical Trader Joe’s location stocks about 2,500 skus (stock keeping units) and store size is no more than 12,000 square feet. The really interesting aspect to Trader Joe’s is that 85%+ of their merchandise assortment is comprised of Trader Joe’s private-label goods. (The typical supermarket merchandise assortment will consist of about 20% private-label products with the rest being brand name products.)

Also interesting to note is Trader Joe’s sells a preponderance of natural and organic offerings which are free of artificial colors, flavors, and preservatives. Trader Joe’s clearly competes in the natural and organic grocery marketplace.

In the cities where Trader Joe’s and Whole Foods Market compete, you will see similar pricing in the brand name products that each sells. For example, Tom’s of Maine toothpaste sold at both Trader Joe’s and Whole Foods will be comparatively priced. Same goes for Kashi products, Nature’s Path products, and many other widely available natural/organic brands.

Not only will you see similar pricing in the brand name products each grocer sells, the similarity in private label offerings is also noteworthy. Trader Joe’s does brisk business with its wide array of ready-to-eat frozen foods. Each frozen meal offering from Trader Joe’s is branded in a light-hearted manner with Mexican meals under the "Trader Jose" name and Chinese dishes under the "Trader Ming" name.

Whole Foods noticed the success they were having with private-label frozen goods and strategized on how best to counter. What Whole Foods did was develop a wide array of private labels products with various names like Whole Catch (frozen seafood), Whole Treat (frozen deserts), and Whole Kitchen (frozen entrées).

I bring all this to our attention because in the FTC’s narrowly defined marketplace for natural/organic grocers, they seem to have forgotten about Trader Joe’s and its competitive positioning against Whole Foods. Remember, Trader Joe’s is growing rapidly. They currently have 280+ locations with sales estimated at $5.0B. Because they open 12,000 sq. ft. stores, Trader Joe’s can find suitable real estate locations easier and open up stores faster than can Whole Foods.

The FTC needs to recognize Trader Joe’s is a considerable threat to Whole Foods Market.

Trader Joe’s, along with Wal-Mart, Kroger, Wegman’s, Costco, and others will help keep prices down and competition high for shoppers seeking higher-quality natural/organic foods if the Whole Foods/Wild Oats merger is approved. I’m sure the lawyers prepping Whole Foods Market’s defense will make sure to point out the robust competition that Trader Joe’s and others bring to the supermarket space.

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Sources used for this post include:
Wild Oats wikipedia page; Trader Joe's wikipedia page; Trader Joe’s squidoo lens; THE TRADER JOE'S ADVENTURE (Len Lewis)

More on Whole Foods and the FTC

I'm still struggling to find the logic behind the FTC's decision to block the merger between Whole Foods Market (WFM) and Wild Oats. Everything I've read says WFM faces a major battle to convince the FTC that this merger promotes healthy competition within the grocery marketplace. One analyst gives this merger only a 10% chance of being approved.

If this deal doesn'™t go through, then who will step forward to purchase Wild Oats? WFM has exposed Wild Oats as an under-performing retailer with sales per square foot about half of what WFM generates. Without a buyer, Wild Oats will probably not be able to go it alone and survive with the likes of Trader Joe'€™s, Whole Foods, Wegmans, Publix, Vons, Kroger, and Wal-Mart as competition. (Hmm... I wonder what the FTC would say if Kroger were to step forward and acquire Wild Oats?)

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In the Truth on the Market blog, Geoffrey Manne sheds some unique perspective on how the FTC is defining the grocery retailer market...

"œBut notice something important. The FTC doesn'™t claim that the relevant market is the market for natural and organic food. The market is for natural and organic supermarkets. The agencies have been down this road before, mistaking channels of distribution for relevant markets."€

"œWhole Foods and Wild Oats may view themselves as operating in a different world than Wal-Mart. But their self-characterization is largely irrelevant. What matters is whether customers who shop at Whole Foods would shop elsewhere for substitute products if Whole Food€™s prices rose too much. The implicit notion that the availability of organic foods at Wal-Mart (to say nothing of pretty much every other grocery store in the US today!) exerts little or no competitive pressure on prices at Whole Foods seems facially silly." >> READ MORE

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Lily Rockwell, business reporter with the Austin American-Statesman, shares more insights into the Whole Foods/FTC hullabaloo. Worthwhile snippets from her article include:

• Depending on how it is calculated, a merger of Whole Foods and Wild Oats would account for 11 percent or more of the total organics market. That still leaves the vast majority of the market to the supermarkets, other natural and organic food grocers, farmers markets and online retailers. Wal-Mart Stores said it planned to have 400 organic products to sell by the end of 2006.

• About half of organic food sales in 2005 included traditional supermarkets, according to the Organic Trade Association. Since 2002, the entire natural and organic business has grown about 65 percent, from $15.9 billion to about $26 billion in sales in 2006, according to the Nutrition Business Journal.

• Whole Foods, which had $5.6 billion in sales in 2006, is now seen as a grocery industry heavyweight, competing with the big players such as $351 billion retail giant Wal-Mart.

• "As virtually all supermarkets now sell organic and natural products, we are surprised that the FTC appears to be narrowly defining the relevant antitrust market as only including natural and organic food stores," [Morgan Stanley analyst Mark] Wiltamuth wrote. >> READ MORE

FTC to Challenge the Whole Foods/Wild Oats Merger

THIS JUST IN … the Federal Trade Commission has filed a lawsuit to block the proposed merger between Whole Foods Market and Wild Oats (article). Anti-trust concerns are the issue as the FTC believes this merger would bring about anti-competitiveness in the marketplace.

Speculation is the FTC will “…argue the marketplace is defined by natural and organic food stores and not the broader supermarket industry.”

I’m a little close to this subject but it seems to me organics has infiltrated the entire supermarket scene to the extent that the separation between natural/organic grocers and conventional grocers no longer exists. I can go to Wal-Mart or Kroger now and buy organic produce and natural snacks just as I can at Whole Foods and Wilds Oats. I'm having a hard time understanding the logic behind the FTC's decision.

Could it be the strength of the Whole Foods Market brand is influencing the FTC's actions? The big picture view tells us Whole Foods has very little market share with customers, but its mind share with the public is huge. Or ... has swift politics persuaded the FTC to challenge Whole Foods?

When I shared my stance on the Whole Foods/Wilds merger earlier this year, I felt no reason to think the FTC would challenge it. Much more to come ...

Whole Lotta Whole Foods Happenings

Last time we chatted about Whole Foods Market, they had just announced their acquisition of Wild Oats. I followed-up that announcement with some opinionated implications sure to result from acquiring their largest competitor.

There have been a few notable happenings since then, such as …

On June 6th, Whole Foods Market will open their first branded location in London. A few years ago Whole Foods purchased the London-based Fresh & Wild grocery chain, but this marks the opening of the first Whole Foods Market branded location. And as with their recent openings in the States, this London location at the Barkers Building on Kensington High Street will be MEGA-SIZED. Its three stories tall, spanning 80,000 square feet, and Whole Foods is spending about $7.0 million-dollars in fiscal ’07 to bring this London location to life. London has seen nothing like this from a grocery store.

Lily Rockwell of the Austin American-Statesman shares more insights on the Whole Foods “London Invasion”. You can also learn more about the Kensington Whole Foods London location from this online magazine (PDF) published by Whole Foods.

That’s the good news. The bad news is … WFMI stock has been languishing for months now. Q2 financials acerbated the situation further by disappointing the Wall Street types. Plus, the Federal Trade Commission has delayed, for the third time, its approval of the Whole Foods/Wild Oats merger. Not sure what to make of this. Obviously, there is some hiccup in the approval process as someone at the FTC may feel this merger creates an anticompetitive retail atmosphere. (Hmm…)

On a different bent … Whole Foods Market began podcasting last year and now they are video blogging. SECRET INGREDIENT is the name of their vlog and it’s a well-produced show worthy of your viewing. Learn more about the “secret ingredient” of Prosciutto by viewing this…

RSS Readers … click here to view the Prosciutto video.

Whole Foods/Wild Oats Merger Implications

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*** This is a long post (1,250+ words). You’ve been warned. ***

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Before I express my thoughts on implications resulting from the Whole Foods/Wild Oats merger, I need to clearly express my position on the merger. As a former marketer at Whole Foods Market (WFM) and current shareholder … I’m supportive of their merger with Wild Oats.

I believe it’s a smart move for WFM to acquire real estate locations in existing and new markets which can be turned over quicker and cheaper than if they were to build those stores from scratch. I also believe WFM can use its in-store operational excellence to improve the current $459 sales per sq. ft. at Wild Oats locations to somewhere closer to the $919 per sq. ft. current WFM locations generate.

Yes, this is an aggressive and risky move for WFM. They saw a competitor in disarray with no long-term leadership in place and its troops spread way too thin to not make an aggressive move. John Mackey, WFM’s CEO, is a fierce competitor who couldn’t pass up this opportunity to acquire some Wild Oats locations in this risky game of business.

It’s important to note throughout WFM's history, they have grown by acquiring competitors. Since 1980, they have acquired 18 regional competitors. Of WFM's current 191 locations in its store base, probably 25% of them are from acquisitions. But this takeover of 100+ locations is by far the biggest percentage increase acquisition WFM has had to wrestle with.

Many times companies that are struggling to squeeze growth from existing operations will find growth through acquisitions. The thinking here is if a business cannot earn growth from within, they will need to look outside at acquisitions to grow. (Think HP & Compaq.)

But WFM isn’t struggling to find growth. Comp store sales are in the upper single-digits after years of double-digit comps. That’s very impressive, especially for a grocer. WFM is a healthy business today and because the company is healthy, it’s growing naturally.

In talking with business-minded folks, I usually refer to WFM as a business that’s in its late stages of puberty. (Stay with me here, I have a point.) The company was born in 1980. When it turned 12 years old in 1992, the company went public. At that moment it entered the adolescent phase of its life. Strange things began to happen. The company underwent a massive growth spurt. Pimples started to appear as the company made lots of little mistakes. Its brand voice began to change from only appealing to the granola crowd to now also appealing to the foodie crowd. People’s expectations of WFM were also changing. Whole Foods became a smart and respected teenager with tremendous promise. No longer was this company an ignorant and innocent child, it was maturing into a knowledgeable and trusted adult.

This merger with Wild Oats signals the final phase in WFM’s pubescent period. In two years when it fully emerges from this major acquisition, we will know if WFM can fulfill its tremendous promise. I have all the confidence Whole Foods Market will be able to fulfill its promise to be an endearing and enduring company that will change the world.

But before WFM fulfills its promise, there are a few implications I see from the merger.

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Corporate G&A Expenses
One of the selling points with any merger, as was mentioned on the WFM conference call announcement with analysts, is the reduction in corporate G&A expenses. Merged companies simply do not need two CEOs, two procurement VPs, two human resources VPs, etc. However, given the unique decentralized organizational structure at Whole Foods, the company might not realize significant reductions in corporate G&A expenses.

The organizational culture within WFM has strong Libertarian leanings. Meaning, the company believes in maximum freedom and minimum governance. WFM decentralizes nearly every business function to its 12 regions.

These 12 regions are essentially separate business units operating under the umbrella Whole Foods Market brand name. Headquarters controls very little. Instead, that control is pushed to the regions. Real Estate, Legal, and parts of Procurement and IT are controlled by WFM headquarters in Austin, TX. Nearly everything else is the responsibility of the regions to handle. This includes Marketing, Human Resources, Training, etc.

What I am getting at is WFM might not realize significant reductions in corporate G&A spend with this merger. Sure, some corporate G&A expenses at headquarters will be reduced with this merger but WFM’s 12 regions will need to beef up its corporate staff to handle the influx of new stores. WFM runs very lean at the corporate and regional levels with everyone behind-the-scenes working at full capacity. Many new regional corporate team members will be needed to make this merger work.

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Team Member Bench Strength
The good news is WFM has lots of bench strength within its team member (employee) base. From my work experience at WFM, I know there are two types of WFM team members—those that stay for 12 months and those that stay for 12 years. Because WFM treats its employees fabulously well, as evidence by its current ranking as the 5th best company to work for in America (Fortune Magazine), team members stay longer. And because team members stay longer, they are more knowledge, more competent, and more heavily-steeped in the culture/purpose/vision of the company. Filling the new positions created by this merger with knowledgeable, competent, passionate, and long-time team members will be easy to do for WFM.

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Access to New Markets
Wild Oats operates over 100 locations in the US and Canada. About 70% of Wild Oats locations are branded Wild Oats. They also operate 29 locations in California as Henry’s Farmers Market, 8 locations as Sun Harvest in Texas, and 3 locations as Capers in Vancouver, BC.

Because of the acquisition, Whole Foods will now be able to enter many new markets in states where they currently do not have stores. Such states include: Utah, Tennessee, Indiana, and Arkansas. Plus, there are states where WFM has weak store penetration that will be bolstered by this merger. States where WFM will benefit with new in-fill locations include: Oregon, Arizona, Florida, New Mexico, and Ohio.

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Potential Redundancies in Store Locations
On the conference call with analysts, WFM was upfront in saying they expect to close and or relocate a number of existing Wild Oats locations. There seems to be significant redundancies in the California market. Wild Oats operates 34 locations in California with 29 of those locations branded as Henry’s Farmer Market. Whole Foods operates 21 locations in California. I’m thinking many of the Henry’s locations will be closed or relocated because these stores are smaller in size and do not fit the size specs of WFM locations.

Colorado is another state where we will probably see some closures and certainly relocations of Wild Oats locations. WFM currently operates 7 locations in Colorado compared to 13 locations for Wild Oats. Colorado is a very prime market for Whole Foods. It’s stores in Colorado do very well that I’m certain the smart addition of choice Wild Oats locations will only serve to benefit WFM.

I’m thinking the Sun Harvest locations in Texas are not going to survive. These locations are sub-prime real estate and small in square footage. However, I hope WFM looks to experiment with some of these Sun Harvest locations. Maybe WFM could development a small store concept and use the Sun Harvest locations to pilot that experiment.

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Those are just a few implications I see from a marketer’s perspective. Financial and investment types no doubt have more intricate implications. I’m just a sclhub marketer with a few HMOs—hot marketing opinions.

“Chainsaw John Mackey”

In Whole Foods Market lore, there’s a company campfire store about John Mackey sending the original founder/CEO of Wild Oats the board game RISK along with a feisty note. Given their recent merger announcement, it seems apropos to share this snippet of a story.

At one point in the 1990s, Whole Foods Market and Wild Oats were fierce rivals. Both were upstarts in the staid supermarket industry and both began their existence in hippie hotbeds—Whole Foods in Austin, TX and Wild Oats in Boulder, CO.

As the company campfire story goes, Mike Gilliland (founder and former CEO of Wild Oats) once referred to John Mackey as “Chainsaw Al” Dunlap, the CEO notorious for cutting cuts and slashing jobs by any means necessary. Mackey didn’t take that swipe at his character too well.

In retaliation, Mackey sent Gilliland the board game RISK, which is a game of world domination. Attached to the game was a note from Mackey that read, “Forewarned is forearmed.” The note was signed “Chainsaw John Mackey.”

Whole Foods Acquires Wild Oats

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WHAT HAPPENED:

Whole Foods Market acquired is largest competitor, Wild Oats, for $565 million along with assuming Wild Oats' existing net debt of $106 million. When the deal closes, Whole Foods will operate more than 300 locations in 31 states along with stores in Canada and in the United Kingdom.

Founded in 1987, Wild Oats operates 110 stores with annual sales of $1.2 billion. In comparison, Whole Foods was founded in 1980 and operates 193 stores with yearly sales of $5.6 billion.

Wild Oats has historically underperformed. Its sales per square foot of $450 is half what Whole Foods is able to generate and the company is currently in a major transition period operating without a CEO or CFO.

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WHY DID IT HAPPEN:
On the conference call with Wall Street analysts, Whole Foods CEO, John Mackey, called the acquisition “highly opportunistic.” Mackey went on to say the timing was right to approach Wild Oats about a merger given the “strategic gap” at Wild Oats as evidence by the lack of a CEO and lack of a clear company vision.

Wild Oats has significant penetration in the Rocky Mountains, Pacific Northwest, and Florida ... regions where Whole Foods’ penetration is weak. Whole Foods believes it can significantly improve the operations of Wild Oats locations resulting in higher sales on a per-store basis. The addition of new stores and the productivity improvement in these stores will positively impact Whole Foods’ comp sales figures.

But the real benefit, as I see it from the perspective of a former Whole Foods National Marketing Director, is this acquisition helps to solve Whole Foods Market’s greatest challenge. As I wrote in this blog post, the biggest challenge facing Whole Foods is its inability to open new locations.

In 2006, Whole Foods opened only 13 new stores yet the company proudly informs Wall Street they have 90+ stores in the development pipeline. Given their current rate of opening new stores, it will take Whole Foods at least six years to open the 90+ stores they have in the pipeline today.

By swallowing Wild Oats’ 110 stores, this immediately solves Whole Foods new store opening challenge. Sure, Whole Foods will close some of the Wild Oats locations and relocate others but the net/net will be a significant increase in the Whole Foods store base. This increase in the Whole Foods store base will have a positive impact on comp store sales.

Remember, Wild Oats locations are only able to generate $450 per square foot compared to the $900 Whole Foods is able to generate. Whole Foods is very confident they can improve store operations at these locations to drive sales. On the conference call with analysts, Whole Foods management talked about how they have been able to successfully increase sales on a store-level basis in all 18 of their previous acquisitions.

And helping to increase efficiencies to drive profits will be the reduction of corporate expenses. Massive reductions in redundant corporate G&A overhead expenses will take place as Whole Foods doesn’t need two CFOs, two CIOs, two Procurement VPs, two Human Resources VPs, etc.

On a different angle, the hope is a bigger and more expansive Whole Foods will be able to better compete against the behemoth Wal-Mart and the ever-nimble Trader Joe’s.

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IMPLICATIONS:
I’m still sorting through the myriad implications this merger will bring. Expect a post this weekend detailing my thoughts on how this big-time maneuver will impact the Whole Foods Market company culture and its future success. This merger between Whole Foods and Wild Oats came as a complete shock to me. It's something I never anticipated happening.

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Shopping at Central Market and Whole Foods Market

We are fortunate in Texas to have two grocery stores that have transcended the commodity trap. Instead of competing on lowest possible prices, Central Market and Whole Foods Market compete on highest possible experiences. Both have strong points of view that grocery shopping shouldn’t be a chore but rather, a place to explore.

Central Market is owned and operated by the privately-held and San Antonio-based H.E.B Grocery Company. H.E.B. operates over 300 conventional grocery stores in Texas and Mexico under the H.E.B. brand. Currently, their Central Market concept has eight locations. The Central Market concept differs in that it appeals to the educated and well-paid customer who is attracted to indulgent shopping adventures. Their merchandise assortment runs from upscale gourmet to downscale ordinary. Meaning, you can expect to find familiar products/brands as well as an array of hard-to-find gourmet goodies at Central Market.

When people talk about Central Market, they’ll usually rave about its broad selection and its attractive in-store merchandising. They’ll also rant about Central Market’s forced-flow layout (think IKEA) and its somewhat elitist attitude towards gourmet food.

I’ve written a lot about Whole Foods on this blog partly because of my first-hand experience gained from being their Director of National Marketing in 2003 and 2004. Whole Foods has received lots of media attention for being a prototypical experience economy grocery store that has 180+ location in the US, Canada, and the UK. They are well-known for helping to popularize the organic/natural food movement. And they are well-known for higher prices. But Whole Foods customers believe its prices are appropriate because the food they sell is not only gourmet theater, but also healthy.

I bring all this up because both Central Market and Whole Foods recently opened new locations in the Dallas-area. While in Dallas for the Christmas holiday, I made sure to visit the new Central Market location in Southlake, TX and the new Whole Foods in North Dallas (Forest & Preston).

Being well-versed with the two grocers, I found little new or exciting with these recently opened locations. (Sure, the new Whole Foods has an upstairs Spa which to many is exciting. To this marketer, such a gambit in unfocused opulence concerns me. I’m concerned because Whole Foods is drifting far from its comfortable home of natural/organic food by operating a day Spa.)

While I found little new or exciting at these new stores … you might. So, I took along my Canon PowerShot SD500 camera and captured video of my cart strolling the aisles at the new Central Market and the new Whole Foods. If you’ve never shopped at one of these grocery stores, your eyes will quickly realize that these companies have transcended the commodity trap which entraps most grocers.

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Strolling through CENTRAL MARKET ...

RSS readers … click here to view the Central Market video

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Strolling through WHOLE FOODS MARKET ...

RSS readers … click here to view the Whole Foods video

Is it Making Money or Making Meaning?

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In the comments to my post on The Biggest Challenge Facing Whole Foods Market, Harry Joiner raises an interesting question. Does money matter more or does meaning matter more when hiring and retaining employees?

Being a recruiter, Harry has direct experience with this issue and his comments seem to indicate making money matters more in employee retention matters. Harry links to this letter that John Mackey, Whole Foods CEO, recently posted on his pseudo-blog where he explains the need to better compensate employees at the company in order to minimize the effect of poaching by recruiters.

[SIDE BAR: You gotta admire the transparency here as Mackey breaks down the corporate pay conundrum in a very, easy to understand way.]

I believe there is a difference when it comes to the matter of compensation as it relates to hiring and retaining employees.

My experience isn’t in the recruiting world, but my opinion is based upon working ten years at two values-based companies (Starbucks and Whole Foods). And from that experience, I found that making meaning is more important when hiring employees and making money is more important when retaining employees.

In the 90s, Starbucks attracted lots of candidates interested in working for a company they could believe in. That desire led many candidates to accept a lower salary in exchange for being happier on the job. I saw this time and time again where new hires signed on at Starbucks because of the opportunity to leave a company they didn’t believe in to join a company they did believe in. In this transition, they would be more willing to accept less pay for greater happiness.

However … once these new Starbucks hires became weathered and tenured employees, the aspect of making meaning and being a part of a company they believed in became less important. Remember, these folks signed on for less money and as the years went on, their salary increased with meager merit pay increases ranging from 2.0% to a maximum of 5.0%. (This was especially true if they remained in the same job with the same job title.)

Thus, job offers from the outside, with considerably higher salaries, start to look more attractive. In order to retain these employees, Starbucks would need to pay them more money.

Whole Foods Market is in a similar situation. Many of their current team members (employees) probably joined the company because of the making meaning aspect and the desire to a part of a company they could believe in. And after they get to enjoy those benefits, many of these team members may become enchanted with the idea of getting exactly what they believe they are worth somewhere else.

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What’s your experience here? Does money matter more or does meaning matter more when hiring and retaining employees? How does all this play out at companies that lack the feel-good juju Starbucks and Whole Foods enjoy? Is there a sweet spot?

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The Biggest Challenge Facing Whole Foods Market

There’s an interesting interview in today’s Wall Street Journal with Whole Foods Market’s CEO, John Mackey (sub. req’d).

Some turbulence has hit Whole Foods Market (WFM) with its stock price plummeting last month after the company informed Wall Street to expect same-store sales in 2007 to be anywhere from 6% to 8%. Those are solid comp numbers but not solid enough when Whole Foods has been recording double-digit comps (11.0% to 14.9%) in the last few years. Wall Street expects more and thus, dinged Whole Foods stock price for failing to meet expectations.

As a former director of national marketing at WFM, I’ve shared some thoughts on what makes this company so remarkable. One of the things I admire most about Whole Foods is the company’s passion to change the way the world shops, eats, and appreciates food. The company passionately celebrates the role natural/organic foods can play in helping people live happier, healthier, and more rewarding lives. Passion propels performance at Whole Foods.

Nevertheless, as a publicly traded company, WFM has to answer to Wall Street. And Wall Street is getting skittish with Whole Foods ability to deliver given the increasing number of WFM locations and rising competition from the likes of Wal-Mart which is now selling more organic/natural foods.

So how big of a threat does John Mackey view Wal-Mart. In the WSJ interview, Mackey says …

”It never pays to underestimate Wal-Mart or any competitor. So far, we haven't seen much impact from Wal-Mart, where we've gone head to head against one of their Supercenters that has a lot of organic. It hasn't affected us that much.”

And when asked about market saturation and the slowdown in same-store sales, Mackey says …

”Same-store sales are lower for a multiplicity of reasons. Greater competition. There's cannibalization. I read about the slowdown with the consumer, they're spending less. Is there saturation? Certainly, some of our markets have more stores than others. We've had three consecutive years of double-digit same-store sales growth and our sales per square foot are $900. It's harder to raise the bar if you keep raising it. You can't compound at the same rate. No retailer ever does.”

I laugh when Wall Street thinks market saturation is an issue for Whole Foods. It’s not. Whole Foods market share in the grocery world is tiny but its mind share is huge. Take the Dallas market. I’ve seen reports which show Whole Foods has a 1.2% market share in Dallas with Wal-Mart having nearly 30% market share.

However, Whole Foods mind share is a lot higher than its market share. That’s the beauty of having a strong brand—people talk about the brand … a lot.

Market saturation isn’t an issue for Whole Foods. Market unsaturation is.

The biggest challenge facing Whole Foods continued success is its ability, or inability, to open stores.

In 2006, they opened only 13 new stores. The most new stores WFM has ever opened in a 12-month time period is probably 15 new locations. That’s not enough. The company needs to open more stores. Yes, sales at existing WFM locations will be slightly cannibalized when more new stores open. But the “customer pie” increases with every new store Whole Foods opens. It’s the same growth philosophy Starbucks uses.

Every new store Starbucks opens cannibalizes sales at an existing store. A cannibalized Starbucks location can expect a 10% or so sales loss. But that loss is temporary. If the real estate decision is right, sales at the cannibalized location will climb back to “normal” in about six months. And sales at the new Starbucks location will eventually reach/exceed its sales pro forma expectations. By aggressively opening new stores, Starbucks takes advantage of opportunities to not only increase sales at individual stores, but also takes advantage of the opportunity to grow the “customer pie” by increasing its overall market share.

At every conference call with Wall Street, like the one from Nov.4, 2006, Whole Foods proudly informs investors they have nearly 90 stores in the development pipeline with more leases to be signed.

But the input doesn’t match the output.

If everything continues as is, it will take Whole Foods at least six years to open the 90 stores it has in its development pipeline today. And by the time Whole Foods opens those 90 stores, they will probably have 120 more stores in its development pipeline.

So why doesn’t the input match the output? It’s my contention that decentralization hampers the ability of Whole Foods Market to open new stores.

WFM is a decentralized organization with its 11 regions and 189 stores having tremendous autonomy to make decisions. However, it is my understanding the procurement of new real estate leases is a centralized function at the company. But the physical development/build-out of new stores is a decentralized, regional function. And unlike Starbucks, Whole Foods doesn’t build new locations using an established plug ‘n play kit of parts. Instead, Whole Foods starts from scratch every time it builds a new store.

The beauty of this start from scratch build-out philosophy is Whole Foods refuses to become complacent and is always striving to improve every store it builds to provide more dazzling experiences for shoppers. The tyranny of this approach comes down to an issue of time. Since Whole Foods is ALWAYS recreating the wheel by not having a set kit of parts to plug ‘n play, it takes more time to build-out new stores.

Generally speaking, the plug ‘n play kit of parts Starbucks uses constitutes 85% of every new store it builds. The remaining 15% build-out is store-specific so as to increase its local relevancy in the market. At Whole Foods, those percentages are probably reversed with 15% of every store being built from a kit of parts and 85% being store specific design decisions.

WFM could increase its output to match its input by reconfiguring the percentage of plug ‘n play kit of parts it uses in new stores. I’m not advocating an 85/15 split like Starbucks. I’d be satisfied with WFM using a 50/50 split.

So … as a WFM shareholder and former WFM marketing director, I’m much more concerned about its inability to open new stores than I am about anything else impacting the company.

Mimicking Whole Foods Market

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NOTE: updated to reflect the proper Giant Eagle name & logo

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USA Today reports how some grocers are doing their best to mimic Whole Foods Market (WFM). Publix is opening Publix GreenWise Markets, Giant Eagle is wooing foodies by opening Market District stores, Safeway is test marketing a lifestyle store in Boulder, CO, and Wal-Mart has just opened a snazzy new store in Plano, TX which highlights hundreds of natural/organic products.

For me this is like déjà vu all over again since I’ve not only done the marketing thing at Whole Foods but also at Starbucks. While at Starbucks, I saw many ambitious coffee competitors like Caribou, Cosi, Tully’s, Gloria Jean’s, CC’s, and others all trying to mimic Starbucks success in some way. And they all have fallen short in some way.

I’m certain this same fate of falling short will be the outcome of the grocers listed above trying to mimic WFM’s success.

Why am I so certain? It’s simple … competitors can replicate products and programs but they can’t replicate people.

Publix, Giant Eagle, Safeway, and Wal-Mart are all trying to replicate the products and experiences Whole Foods delivers, but they can’t replicate the people Whole Foods has delivering the products and experiences to customers. Products and programs do not create brands, people create brands. It’s the people that matter more in creating a brand than do products or programs.

WFM understands the power of a knowledgeable, caring, and passionate workforce in creating highly satisfied customers. They’ve created a company culture which connects with their team members (employees) and they in turn, pass that connection onto WFM shoppers.

If one were to take the WFM team member out from its business, Whole Foods Market would not be the successful company it is today. Try saying the same thing for Wal-Mart. You can’t. Right?

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For more Brand Autopsy marketing musings on Whole Foods Market, go here, here, here, and here.

Whole Foods Market on 60 MINUTES

Consider this a heads-up. CBS will be airing a profile on John Mackey and Whole Foods Market during this Sunday’s (June 4, 2006) edition of 60 MINUTES.

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For marketing insights into Whole Foods ... CLICK HERE.

John Mackey | American Made

For those wanting to learn more about Whole Foods Market and its visionary leader John Mackey, tune into CNBC tonight (Monday) at 8:00 PM (est) for a one-hour profile on a show called AMERICAN MADE.

I saw the premiere episode of AMERICAN MADE last month when it profiled Starbucks and its visionary leader Howard Schultz. Since Whole Foods has yet to receive a long-form television profile ... this episode should make for a way worthy watch.

Whole Foods CEO John Mackey is Blogging

For a much deeper dive into the business philosophy/social responisbility of Whole Foods Market, check out John Mackey’s Blog. Yep, late last month Whole Foods Market CEO began blogging.

Mackey’s initial posting is less a blog entry and more about giving us access to a very insightful article from Reason magazine on “Rethinking the Social Responsibility of Business.” The article is a debate pitting the business philosophies of John Mackey with uber-Libertarian Milton Friedman and ardent shareholder value advocate T.J. Rodgers, founder/CEO of Cypress Semiconductor.

As I mentioned, this article is a very deep dive into the philosophies of mixing business values and with social values so it ain’t casual reading … dig?

The great thing about Mackey’s blog is comments are open.

The Winning Ways of Whole Foods Market

An article in the October 24th issue of BusinessWeek takes a somewhat critical look at Whole Foods Market (WFM). It questions whether or not the company can sustain its sales gains, ambitious new store growth plans, and its cachet with customers. One of the business areas the article questions is WFM’s decentralized infrastructure.

”As Whole Foods gets scale, its ability to efficiently manage distribution becomes a greater issue, too. It has 11 geographic divisions, each boasting its own president and handling its own store network. That's fine for a regional player, but a company that aspires to have $10 billion in annual sales within the next few years requires a more centralized strategy. Right now, everything from transportation to product sourcing is local. "They don't have a professional supply chain," says one consultant familiar with the company. Whole Foods is working on these logistical issues, but faces less pressure to be efficient because of premium prices.” MORE

Having spent time as WFM’s Director of National Marketing, I experienced first-hand how the company’s decentralized infrastructure fosters bottom-up innovation (not top-down direction) to drive sales and build the brand. To give you a better insight into the unique business and marketing culture of Whole Foods Market, I’ve outlined 10 core philosophies the company follows.

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1 | Maximum Freedom. Minimum Governance.
WFM operates under the belief stores should have the freedom to meet the needs of its unique customers and team members. The only governing rule all stores must dogmatically adhere to is all food sold at WFM must be free from artificial preservatives, colors, flavors, sweeteners, and hydrogenated oils.

However, unwritten social rules do govern stores. These unwritten social rules come in the form of ‘best practices’ which its stores and regions openly share.

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2 | Small Pieces Loosely Joined
WFM is comprised of entirely teams. Every corporate/regional department is a team. Every store is a team. Every department in every store is a team. And every employee is a team member. The success of the company team is dependent upon the collective success of all the teams.

WFM believes in self-directed teams and its success is dependent upon the shared fate of all team members working together on every team. Every small piece is loosely joined and requires interdependence to reach store level and company level team goals.

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3 | Getting Bigger by Acting Smaller
WFM decentralizes nearly every business function. The regions are charged with procurement of product, training of store team members (store employees), PR/marketing activities, and making business critical decisions.

As WFM gets bigger, it actually gets smaller.

In 2002, WFM operated 140 stores with 9 regions. Today, WFM operates 176 locations with 11 regions. By decentralizing decision-making to the increasing number of regions, WFM is able to reduce corporate bureaucracy.

WFM seeks to make as many decisions as possible at the regional level, a level closer to understanding the local shopper than a centralized corporate entity ever could understand.

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4 | Food as Theater
A trip to a conventional grocery store is a shopping chore. While a trip to Whole Foods Market is a place to explore.

WFM emotionalizes the shopping experience by appealing to the five senses. Its stores are spotless and the merchandising displays are beautiful to the eyes. Shoppers are encouraged to taste and to touch everything in the store. WFM is a muzack-free zone and thus doesn’t sound like a traditional grocery store. And the smell of bread, coffee, smoked meats, and fruits waft throughout every WFM. WFM celebrates food like it is a theatrical production.

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5 | Shoppers as “Brand” Ambassadors
Through extraordinary customer service and exceptional customer experiences, WFM believes it can turn its shoppers into brand ambassadors who will voluntarily extol the virtues of WFM to their friends and family. So instead of using traditional advertising vehicles, WFM uses the influential power of customers as the advertising vehicle.

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6 | Education Leads to Appreciation
WFM appreciates and celebrates the role natural/organic foods can play in helping people live a happier, healthier, and more rewarding life. The company believes it can cultivate loyalty beyond reason with its shoppers by educating them on the natural/organic difference as it relates to better tasting food, healthier living, and the positive impact on the environment. At every opportunity, WFM communicates good food feels good.

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7 | Everything Matters
WFM’s well-defined quality standards force the company to always question everything about every product it sells. WFM will NEVER compromise its quality standards. To become certified as the first national “Organic” grocer, WFM had to go to extreme lengths to prove to Quality Assurance International (QAI) they maintain the organic integrity of every product they sell. There is not another grocer the size of WFM that has also been certified “Organic.”

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8 | Price to Value
WFM has no intentions to ever compete on low prices. WFM prices the products it sells to the value its customers have for the products. Shoppers value WFM’s values of pure, authentic, and flavorful foods so much so they will gladly pay more.

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9 | Profit is a Good Competitive Game
WFM is a relentless competitor. The company has very little quit in them and will work extremely hard to overcome any deficiencies in its game.

Deep inside, WFM is infatuated with profit because everyone profits from profits. Team members profit by having more job opportunities because profits enable WFM to grow. Customers profit by being able to enjoy the in-store theater made possible from profits. And the company profits by increasing shareholder wealth.

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10 | Team Members Make the Difference
WFM views its team members as being the company’s true competitive advantage. Competitors can replicate its products and programs, but they will never be able to replicate its people.

WFM does not take for granted the power of a knowledgeable, caring, and passionate workforce in creating highly satisfied customers. WFM has created a company culture which connects with their team members and they pass that connection onto WFM shoppers.

If one were to take the WFM team member out from its business, Whole Foods Market would not be the successful company it is today.

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Whole Foods Marketing Strategy

On Sunday, the Austin American-Statesman ran an article looking into how (and why) Whole Foods Market has grown to become a $4.5 billion dollar business WITHOUT relying on traditional advertising to do it. It’s a good read. Bonus points will be awarded to Brand Autopsy readers when you spot my name.

link: Whole Foods Shuns Ads | June 10, 2005 | Austin American-Statesman

Run, Gun, and Have Fun -- Whole Foods Market style

“Whole Foods is more like a fast-breaking basketball team. We’re driving down the court, but we don’t exactly know how the play is going to evolve.” -- John Mackey, Point Guard forWHOLE FOODS MARKET

Ya know … as a former bench player for Whole Foods Market, that’s probably the best way to describe the playing style of the company. Whole Foods fast break style is indeed frenetic, focused, and fabulous.

You can find more compelling candor from John Mackey, Whole Foods Market co-founder and CEO, in this liberated Texas Monthly interview (.doc). And when you read this interview, you’ll learn Mackey refuses to shop at Central Market, Whole Food’s biggest competitor in Texas.

Interesting. I wonder if he shops at Trader Joe’s ???

If not, he should. Trader Joe’s is positioning itself nicely to compete against the Whole Foods Market juggernaut.

Whole Foods Market in the Media

June has been a busy month for Whole Foods Market. Besides hitting an all-time high stock price, three major articles have been published profiling different aspects of what makes Whole Foods Market remarkable.

These articles are great examples of how a brand with some positive juju can effectively use PR to tell its story.

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New York Times Sunday Magazine (June 6)
focuses on the business practices/philosophies of WFM
[subscription required]

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Fast Company (July issue)
profiles the unique management style of WFM
[subscription required]

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Wall Street Journal (Wednesday, June 23)
dissects WFM's libertarian influenced health-care plan
[click below to read]