Organic and Inorganic Growth: The Story of Whole Foods

Listen to this episode

S1: Let’s put it this way, I covered this industry for like 20 years, up until about seven years ago, it was the most dull in the world of.

S2: John Springer is the executive editor of Winslett Grocery Business, a trade publication about the grocery industry. He says supermarkets are changing and the changes are accelerating and the companies with more resources and better technology are winning out.

S1: We’re getting to where scale and efficiency are more important than ever. And you can kind of see a future coming where there’s bigger, more powerful, more automated companies doing more and probably a little bit less on those guys who can’t afford to kind of play in that game.

Advertisement

S2: Wire scale and efficiency becoming more important

S1: because of an.

S2: In 2017, Amazon entered the grocery business by tossing Whole Foods in its shopping cart. Amazon spent more than 13 billion dollars to buy this 40 year old supermarket chain known for its organic merchandise and at times its sky high prices in the grocery world. The purchase was a cataclysmic event. Are people in the grocery business scared of what Amazon’s going to do just because it’s eaten up so many other businesses?

S1: Yeah, I mean, the acquisition of Whole Foods was the, you know, alarm bell that kind of started all these multi-billion dollar investments in digital grocery capabilities. It was like, oh, my God, we’ve got to do something about this.

Advertisement
Advertisement

S2: The covid pandemic shifted the industry’s focus toward food delivery, which only played further into Amazon’s strengths. And now people in the world of groceries, people on Wall Street, just people in general, are extremely curious about Amazon supermarket ambitions. Given the company’s habit of taking a wrecking ball to any market it gets involved with.

Advertisement
Advertisement
Advertisement

S1: Everything is done differently today because of Amazon, and the grocery industry is one of the last industries to come under that influence.

S2: But hold on a second. Let’s not put the shopping cart before the horse. What about the company Amazon acquired? It’s been around for a lot longer than Amazon has, and it’s got a saga all its own. How exactly did one health food store in Texas manage to revolutionize the entire grocery universe, and how did this hippy friendly organization and up hitching its cart to Jeff Bezos, and what role will this unholy marriage play in the new grocery revolution? Will it be a supermarket sweep or a cleanup on aisle three?

Advertisement

S3: I’m Seth Stevenson.

S2: Welcome to Thrilling Tales of Modern Capitalism. Today on the show, Organic and Inorganic Growth, The Story of Whole Foods.

S4: Before Whole Foods, my girlfriend and I decided to open up a small store called the Safer Way, Safer Way Natural Foods, and it was just three thousand square feet.

S2: John Mackey was a long haired hippie ish guy in Austin, Texas, who lived in a vegetarian co-op and was really into natural foods in 1978 when he was 25 years old. He and his girlfriend started their own little grocery store dedicated to healthy eating. Here’s Mackey talking to the editor of the Texas Monthly back in 2004.

S4: I never took a business class in my life, so I don’t have a Harvard MBA. We just wanted a business that would support us, provide a livelihood for us, and at the same time would help people, would be something we felt was doing good for society. So we went and hustled our friends and family and anybody we knew that had any money. And we found in the business for forty five thousand dollars. Forty five thousand.

Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

S2: In 1980, they merged their store with a rival and renamed it Whole Foods Market. They wanted to relocate to the site of a decrepit old nightclub. So Mackey went about trying to convince the landlord to listen to them.

S4: I think he loved my passion, had great passion for what we were going to do, and I remember one time he started laughing. He said, you’re so excited about this idea. I don’t think it’s going to work myself, but what the hell? Let’s do it anyway.

S2: That much larger Austin store was successful and Whole Foods began to expand. By 1985, they had four stores in Texas and several hundred employees. But John Mackey wasn’t done. He was not a laid back kind of health food nut. He was driven by his mission and he wanted to keep growing.

Advertisement

S4: And then we began to think we kind of run out of money from either our profits or from friends and family. And so we decided to take venture capital money in which we did in 1988. And once we took the venture capital money and we knew that we needed to grow faster. That was part of the promise we made to the venture capitalist and we grow out of state

S2: over the next few years. Wholefoods expanded into Louisiana, North Carolina and California, where Gary Fine, who’d been a veteran of the Bay Area natural food scene, first became aware of the brand

S5: one day ran into a friend of mine from the real food company where I had worked, and he was working for this place called the Whole Foods in Berkeley, which I had never heard of.

Advertisement

S2: Gary went over to visit that Whole Foods store, and he was impressed by the sheen of it, the attractive visual displays, the staggering selection. It was worlds away from the sort of dusty little health food stores most people were accustomed to. When Gary started working at Whole Foods in 1990, he discovered that the store appealed not just to health food nuts, but to genuine gourmands.

Advertisement
Advertisement
Advertisement
Advertisement

S5: There was an emphasis on Whole Foods, um, being the best, having the best cheese and having the best fish and having the best produce. You know, everyone would laugh at the whole paycheck thing, but when that was all happening, it was like Whole Foods really prided itself on bringing the best quality stuff in. So at that time, like foodie type people shopped there

Advertisement

S2: along with the attention to quality, what seemed to set Whole Foods apart from more countercultural health food grocers was its capitalistic streak. The company wasn’t Lucy Goosey when it came to its merchandise or its money. Its buyers could experiment with fun new food items, but they always had to make margin. And profit was the overriding goal. Gary Find rose through the ranks at Whole Foods, working there for more than twenty years, eventually becoming a store manager and working closely with the corporate brain trust in Austin. And over time, he got to observe John Mackey, the company’s founder,

S5: John Sharp, as a tack. And he had a business vision that was maybe different than the other folks. So he was having a good time. But he also had like his eye on the future. And my most vivid memory in those early times with John was he came to the Berkeley store and I was like, you know, we were working like on the chip aisle, you know, putting your ticket on the card. You put chips out and John came to me and John were working the chips. He had no ostentation. He was just one of the guys. He didn’t have to stock the chips on the chip aisle, but he was he was smart enough to know that that’s the way to get to know people and to work with people.

Advertisement
Advertisement
Advertisement
Advertisement

S2: In 1992, with 12 stores up and running, John Mackey started looking for more capital to expand further. So he took Wholefoods public, which Gary Fine had mixed feelings about. He worried that the things he loved about Whole Foods, the shared mission, the camaraderie might be endangered by new expectations coming from Wall Street.

S5: That changed the culture. You know what I mean? Like, we were all kind of tuned into that. But the other thing was a concern was like, this is going to change.

S2: In the mid 1990s, to boost its growth and to appease Wall Street, Wholefoods began to buy up big chunks of its competition, the bread and circus chain in the Northeast, Mrs. Gooch’s, natural food stores in Southern California and others all over the country. Bread of life, freshfields, markets, nature’s heartland, all these independent health food stores got swallowed up by the Whole Foods Leviathan. Meanwhile, as the Whole Foods chain got bigger, its individual stores quirks began to disappear. Decisions went from being made locally to regionally to nationally. Something else happened to as Whole Foods got more successful and became a household name. It changed the entire conversation around groceries. Suddenly, everyone wanted organic natural food, which created a new problem for Whole Foods. Other supermarket chains were upping their game.

Advertisement

S5: Whole Foods was a mission driven company, and the mission was to change the world, you know, have good stuff and to change the way people eat. Well, you know what? They want they want, but you can get organic food, you get natural foods everywhere, you can go to your little corner grocery store, you go to Safeway, it’s like, that’s great. That’s great. As a human being who believes that eating good food can change the world as a business model. Oh, little competition. All right.

Advertisement
Advertisement
Advertisement

S2: And that competition could take advantage of the fact that Whole Foods, or as people called it, whole paycheck, had gotten a reputation for high prices. Conventional grocery stores began to replicate Whole Foods organic offerings, but much cheaper. In 1997, Whole Foods started a private label line of products it called 365 Everyday Value. The idea was to offer some more affordable items, but it wasn’t enough. And by the mid 2000s, John Mackey realized that Whole Foods no longer stood out from the crowd. Here he is again in a 2004 interview.

Advertisement

S4: When we started out, our ideas were really on the fringe of the culture. And what’s happened over time is they’ve migrated from the fringe to sort of the cool and hip and now it’s entering into the mainstream.

S2: Whole Foods had expanded rapidly, far and wide, on the basis that it brought something new to every neighborhood it opened to store it. But once the mainstream caught up to what Wholefoods was doing and began to do it cheaper, the company’s luster started to fade. Gary Fine could feel it.

S5: So are we done with the beginning part? This is the harder part for me.

S2: More on that when we come back. In 2006, wholefood stock dropped almost 40 percent as competition ate into its sales in 2008 in the midst of the financial crisis. The stock went down 76 percent and John Mackey sold a piece of the company to a private equity group. Whole Foods bumped along for the next several years, but it faced increasing pressure from unhappy investors. And according to John Springer, the executive editor of the trade publication Inside Grocery News, the problem the company was up against was simple. The competition got stronger.

Advertisement
Advertisement
Advertisement
Advertisement

S1: Consumers no longer had to go to Whole Foods to get what you could find in Whole Foods.

S2: Conventional grocery chains like Safeway and Kroger, with their bigger scale and often greater efficiency, were offering organic food at cheaper prices in stores that were right around the corner from consumers all over the country. Once upon a time, Whole Foods had been able to defeat competitors by buying them up. But these rivals weren’t like those independent health food chains. They were bigger and well resourced, and they knew how to compete. Wholefoods was struggling. Was it a bit of a relief for them when Amazon swooped in and bought them?

S1: I think it was, you know, they were pretty much up against the wall here and Amazon kind of came out of the blue and said, here’s what we’re going to pay for you, let’s make a deal. And apparently it came together very quickly and that was a big relief for them.

S2: In 2017, Amazon bought Wholefoods for thirteen point seven billion dollars. For some, this was shocking news

S1: in the industry. It was received as a monumental blow in stock of all the conventional supermarkets and to Wal-Mart’s of the world just got devastated by this one announcement.

S2: The fear wasn’t so much about what Amazon would do with Whole Foods specifically, it was just the fact that Amazon big bad Amazon was finally entering the grocery business in a major way for Amazon. Acquiring Whole Foods was in part, just a way to encourage people to sign up for Amazon Prime memberships, joining Amazon’s powerful loyalty program in exchange for discounts on their groceries. But there’s more than that. A lot of people think Amazon saw buying and operating Whole Foods as a way to learn about the world of groceries and then to use that knowledge to launch a larger, more mainstream grocery chain. Now, the company may be taking its first steps toward doing just that. New stores are popping up around the country under the Amazon fresh banner.

Advertisement
Advertisement
Advertisement

S1: People anticipate that Amazon will roll out hundreds of these fresh stores, not just dozens, but hundreds in the years to come.

S2: Amazon fresh stores tend to be smaller and less extravagant than Whole Foods stores are, and they come without any of Wholefoods baggage.

S1: They’re a little bit more locally focused. They’re cheaper to build and run. And, you know, they don’t come with kind of built in reputational issues or expectations that a Whole Foods does in terms of you’re expecting a special experience at Whole Foods. And if they fall short of that, that’s a problem. They’ve got a price reputation to overcome in the consumer’s mind that an Amazon fresh wouldn’t necessarily have. And it’s not any more difficult or probably easier in some ways for Amazon to bring to bear the power of their prime program to a brand new store rather than trying to fit it over a store that was developed for a different purpose.

S2: But a massive nationwide chain of Amazon fresh stores might not even be the end goal for Amazon. Those fresh stores might just be Trojan horses for Amazon’s actual goal, which is same day grocery delivery to everybody everywhere. Online grocery shopping has been Amazon’s white whale for some time now. Groceries make up a consistent chunk of most people’s spending, and they’re kind of the only online shopping niche that Amazon hasn’t yet been able to dominate. Before the covid pandemic, online purchasing was only two or three percent of the 800 billion dollar grocery business. Since the pandemic started, it’s been hovering closer to 10 or 11 percent. Even as the pandemic recedes, people expect online grocery buying to keep ramping up. But it’s a tricky business with food.

Advertisement
Advertisement
Advertisement

S1: You’ve got multiple temperatures, a cool, frozen, fresh, delicate items, grapes, bananas, things that can crush, that need to be handled by somebody at the grocery store is such a great resilient thing because it’s efficient. They’re near your homes. You provide the labor to pick the items and pick out the particular ones that you want. So when you go online and order your groceries, now you’re trusting somebody or something else to make those picks for you, to make sure that the cold stuff stays cold, make sure that the frozen stuff stays frozen in the time it takes to get it to your home. It is a really complicated thing. And again, what Amazon saw in their experiments was that this was going to be difficult to do from a centralized warehouse in a 150 mile radius. We need to come very close to the consumer. That’s the advantage that the grocery stores have.

S2: A huge expansion of Amazon fresh stores might be a traditional grocery chain play, but it’s also a way to get food specific warehouses into every neighborhood ready to fulfill online grocery orders that people make through, of course, their Amazon accounts. But as Amazon attempts to scale up its grocery business, it’s meeting a familiar foe. Wal-Mart once followed Amazon into online shopping, hoping to catch up. And now Amazon is chasing Wal-Mart, the number one food seller in America when it comes to the grocery game.

S1: They have what the other lacks, essentially, right? Wal-Mart’s got twenty eight hundred stores or something like that in the US and are developing e-commerce business and Amazon’s got the e-commerce business and the small handful of stores.

Advertisement
Advertisement
Advertisement

S2: So here we’re talking about two corporate behemoths doing battle to consolidate and dominate the fastest growing sector of the grocery business. We’ve come a very long way from a 25 year old vegetarian in Austin opening the first Whole Foods market. Of course, John Mackey was always really more of a business guy than a hippie. He grew Whole Foods through rapacious acquisitions. He catered to Wall Street and to private equity. He’s been open about the fact that he’s not a fan of labor unions. Maybe an Amazon acquisition was always his destiny. Back in 2004, he defended the notion that a for profit business can be a force for good in the world.

S4: Corporations are seen by some people in our society as inherently evil. Capitalism is mistrusted as it exploits people. If you’ve become successful, you must have taken advantage of someone to do that. The idea of creating win win win scenarios is difficult for many people to accept, so they mistrust business.

S2: There’s no doubt a lot of people mistrust Amazon, they don’t trust its methods or its ambitions. Amazon plays rough and there’s something especially fragile, very delicate about food, about keeping people fed. As Amazon continues to operate Whole Foods, it might try to cut prices a bit more. And it will definitely work on upping the convenience factor, which is Amazon’s raison d’être. But for Gary Fine, who spent two decades at Whole Foods, it’s always been about the food. That’s what drew him to work there in the first place

S5: at that time. Again, Whole Foods was a mission driven store. You know, it sounds crazy, but people who really did feel that by selling people good groceries that they could change the world. There was a lot of people like that.

Advertisement
Advertisement
Advertisement

S2: Gary puts this in past tense, and I think given Wholefoods trajectory, I understand why. So here’s hoping that the next John Mackey is out there somewhere safe in a vegan co-op, getting ready to disrupt the supermarkets of the future, trying to make a buck, but also trying to change the world just by bringing people good, healthy food. That’s our show for today, but next week we’ll continue our tale about the world of modern groceries with a look at another side of the story.

S6: If you live in Whole Foods land, you probably never much run into a dollar general. But for a lot of Americans, that’s a primary source of grocery shopping.

S2: Stay tuned for more on that next week. This episode was produced by Jess Miller and Cleo Levin special thanks to Sophie Worthen Technical Direction from Merritt. Jacob Gabriel Roth is Slate’s editorial director for Audio. Alicia Montgomery is the executive producer of podcasts at Slate. June Thomas is senior managing producer of the Slate podcast network Ilesha Soldier as managing producer. I’m Seth Stevenson. See you next week for more thrilling tales of modern capitalism.