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Competition Fosters Success of Organic Food Industry

February 20, 2007 at 6:25 PM EDT
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JOHN MACKEY, CEO, Whole Foods: We seduce the customer with produce…

PAUL SOLMAN, NewsHour Economics Correspondent: Fifty-three-year-old college dropout John Mackey, CEO of Whole Foods Market.

JOHN MACKEY: Well, people buy food first with their eyes. I mean, we’re visual, tactile people.

PAUL SOLMAN: What began as a single, organic grocery in Austin, Texas, in 1978 is now a national chain, with nearly 200 stores, $9 billion a year in sales. Vegetable seduction is how the Whole Foods experience begins.

JOHN MACKEY: Beauty is a very important part of pleasure and how we interpret a food experience will be. So, yes, beauty is very important. Here we’ve got California artichokes, Mexican red peppers…

PAUL SOLMAN: Handsome, fresh, natural, often organic food has made the chain highly profitable, helped spawn a $15 billion industry. Yet Whole Foods is so socially responsible, it won’t sell live lobsters unless they’re treated humanely. This one’s from a competitor.

JOHN MACKEY: Based on our research, lobsters have pain receptors and they’re capable of pain.

PAUL SOLMAN: In short, Whole Foods sees itself as an alternative model. Its stock, publicly traded; its loyalty to its stakeholders, customers, community and employees, instead of just the shareholders who invest.

First, the customers. Why shop here?

WHOLE FOODS SHOPPER: Because it has a lot of organic products. And, obviously, I’m pregnant.

PAUL SOLMAN: So you are.

WHOLE FOODS SHOPPER: Yes.

WHOLE FOODS SHOPPER: It has a large selection of organic foods and, like, meat and dairy that are not treated with antibiotics or hormones. And I want to try to get pure food for my baby.

PAUL SOLMAN: Then there’s the community outside these walls, to which Whole Foods donates fully 5 percent of its profits. As for the employees, around here, they’re team members.

WHOLE FOODS EMPLOYEE: So staffing is good for this evening…

PAUL SOLMAN: Average pay of more than $15 an hour, full health benefits, and a say in running things. New flavors at the gelato stand, for example.

JOHN MACKEY: Pineapple and basil?

WHOLE FOODS EMPLOYEE: Yes.

JOHN MACKEY: How do you come up with these unique kind of recipes?

PAUL SOLMAN: It seems to work. Though Whole Foods is America’s second-largest non-union retailer, it ranks fifth among Fortune magazine’s best 100 firms to work for.

JOHN MACKEY: Every one of our produce items is organized by type of growing method.

PAUL SOLMAN: Whole Foods executives have their salaries capped at 19 times the worker average. The CEO’s pay?

JOHN MACKEY: I just cut my pay to one dollar a year.

PAUL SOLMAN: And why exactly?

JOHN MACKEY: That’s kind of hard to explain in a way that is able to — it’s the appropriate thing for me to do at this time in my life. I have enough money. I have enough money.

Competitors force a slowdown

PAUL SOLMAN: So good values, good eats, public investors, which leads to the big question: Can they keep it all going if times get tough? Last year when growth slowed, the stock swooned, says market analyst Scott Van Winkle.

SCOTT VAN WINKLE, Market Analyst: Went into the year with comparable store sales growing at about 13 percent; you exited the year with those comparable store sales growing at about 7 percent. So you had a slowdown. With the expectations are as high as they were, and you see a slowdown in that sales momentum on a per-store basis, it's affected the shares.

PAUL SOLMAN: Well, it's affected them dramatically, right?

SCOTT VAN WINKLE: Oh, 40 percent decline in 2006.

PAUL SOLMAN: A 40 percent decline, making Whole Foods, long a glamour stock, one of last year's dogs on Wall Street. What happened? Competition.

No surprise, says University of Texas economist Dan Hamermesh, who took us to his favorite grocer, Austin's rival Central Market, part of the huge Texas chain H-E-B.

DANIEL HAMERMESH, Economist: If you look around this store, for example, you see all these yellow signs, and they're all organic. These guys, if they're big enough, can go to the same farms or develop other ones and essentially compete on the organic stuff, as well.

PAUL SOLMAN: Just like Whole Foods, Central Market offers natural, organic, prepared delicacies, fresh bakery, wine-tasting, consumer education, even the gelato bar.

But now, I mean, this is not upscale the way the Whole Foods Market down the road is.

DANIEL HAMERMESH: That's correct. It's also a lot cheaper, too.

PAUL SOLMAN: By contrast, Whole Foods is so pricey that it's been called "Whole Paycheck."

WHOLE FOODS CUSTOMER: $213? I guess I owe you some more.

Stock on the decline

PAUL SOLMAN: Moreover, even Wal-Mart has now begun selling organic food. Competition is everywhere and, yet, John Mackey is philosophical about it.

JOHN MACKEY: Someone will come along and do it better than we do. I mean, that's always what happens. No business stays on top in its niche forever. Everything has a life cycle. It has its day in the sun, and then it fades. And that will happen to Whole Foods, as well.

PAUL SOLMAN: And here's how it might. If Whole Foods begins charging less to hold onto its customers, profits shrink, stock sinks, shareholders raise a stink.

Long-time business writer and editor Bo Burlingham admires companies like Whole Foods that balance an alternative culture with selling stock to investors.

BO BURLINGHAM, Author, "Small Giants": As long as you can continue to deliver the returns that you've promised these people when you took their money, they'll be happy to let you work on your culture and have your culture any way you want to.

PAUL SOLMAN: Burlingham's new book, however, "Small Giants," argues that it's easier for small, private firms to retain their purpose than large public ones, when competition slows their growth and profits.

BO BURLINGHAM: And it's at that point when you've got your investors over here saying, "Wait a minute. You should be spending your cash in order to maximize our return on investment. That's what you promised us when we gave you our money." And you have your culture, and your employees, and your customers, and, you know, the people you've done good for in the past saying, "No, no, no, this is the soul of the company. You've got to spend it here." And that's when problems develop.

PAUL SOLMAN: Indeed, this problem arose with our freelance cameraman, who asked Burlingham his prognosis for Whole Foods. We asked the cameraman to step in front of the lens, where he explained he bought Whole Food stock just last year.

YHEL HERZOG, Freelance Photographer: I'm one of those stockholders that owns Whole Foods. And I bought it about a year ago, and I really believe in what they do. I want to eat healthier. And I see all these new stores that they opened. And it feels like it's growing.

But it started -- you know, probably picked up 5 percent or 10 percent in the first two months, and then it's been going down, down, down. It's like minus 30 percent now on my investment.

PAUL SOLMAN: Will you stick with it?

YHEL HERZOG: Probably another 5 percent, and then I'm going to sell, because I don't want to lose everything.

Difficulty of finding suppliers

PAUL SOLMAN: Which highlights the main problem. Can Whole Foods sustain its unusual vision?

There are perhaps a few other reasons to wonder. Jo and John Dwyer run Angel Valley, an organic farm outside Austin that supplies Whole Foods, to the extent it can.

STEVE BRIDGES, Texas Organic Farmers and Gardeners Association: The demand is great, and the supply is small.

PAUL SOLMAN: Steve Bridges represents the organic farmers of Texas as a whole.

STEVE BRIDGES: There are not enough organic farmers in this country to supply all the grocery stores with organic food, so they're going to have to source this organic food from somewhere else. And where is that going to come from? Other countries, even China.

You know, I was even in Whole Foods the other day and found a 50-pound bag of black beans, certified organic from China. And you have to wonder about the integrity of some of this imported organic food that's coming from other countries that may not have as strong regulations as we do.

PAUL SOLMAN: In fact, local organic food only amounts to about 15 percent of the produce here. That number continues to grow, but Whole Foods has taken heat for creating the illusion of all local, with signs like these, to which the CEO replies....

JOHN MACKEY: We're celebrating our local suppliers. If anything, we're trying to promote them so that they'll sell more of their products.

Next step: animal compassion

PAUL SOLMAN: But Mackey and Whole Foods may still wind up relying less on local and organics while facing more competition. So can they find new ways to distinguish the store from its rivals? One is animal compassion, a value in which Mackey, a near-vegan, believes.

JOHN MACKEY: Well, a vegan eats no animal products or doesn't use animal products in any part of their life. I don't have -- this is not a leather belt, for example.

PAUL SOLMAN: It's non-leather.

JOHN MACKEY: It's non-leather, right.

PAUL SOLMAN: What's it made out of?

JOHN MACKEY: It's made out of plastic. I say near-vegan, because I have my own chickens, and I eat eggs from those chickens because I know how those chickens are raised. They're raised -- well, they're living in a chicken utopia, actually.

PAUL SOLMAN: He doesn't eat the chickens, mind you, just their eggs. Whole Foods will soon stock and push compassionately raised meat, chicken, beef and so on. It's still working out the standards, but its approach to salmon suggests the goal: A life, while it lasts, as natural as possible.

JOHN MACKEY: A wild-caught salmon that's out in the ocean is going to be much better exercised, it's going to have a more diverse diet, probably with more life force in it than a farm-raised product.

PAUL SOLMAN: Now, wait a second. I'm with you all the way to life force. Why do I care if my salmon has life force in it?

JOHN MACKEY: If something is fresher, it's going to be at a peak of nutritional value, expressing as much of its salmon nature as possible.

PAUL SOLMAN: Mackey is betting that consumers will care enough about the life force in their food to pay extra for it and keep Whole Foods in the swim. But if he's so stoical about competition and so intent on better eating, isn't he happy that he's inspired a national movement, including now even Wal-Mart?

JOHN MACKEY: I'm happy that it's fulfilling the greater mission of healthier food and healthier for the environment around to a bigger market space, not happy if it hurts Whole Foods. So there would be a mixed reaction to it.

PAUL SOLMAN: But if you think competition is inevitable, and that you'll be superseded...

JOHN MACKEY: Absolutely.

PAUL SOLMAN: So then....

JOHN MACKEY: Well, that doesn't mean it's fun being superseded. I can be philosophical about it. And, hey, you know, I'm going to die some day. I can be philosophical about that, but not be, "Yes, baby, I can't wait to die." I mean, it will still be something that I'm not looking forward to, but I recognize its inevitability.

PAUL SOLMAN: John Mackey and Whole Foods. It's hard for even an economic realist not to wish them both a long and happy life, or at the very least longer and happier than any of the vittles they so vitally dispense.