Whole Foods' CEO intends to stop growth slippage

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AUSTIN, Texas -- Since its founding here in 1980, Whole Foods Markets Inc. has pushed organic asparagus and cage-free eggs into the mainstream. With sales last year of $5.6 billion at 189 stores, it has redefined the American grocery experience on its way to becoming the world's largest organic and natural grocer. Lately, though, the highflying company has lost altitude, raising questions about who will define the next step in the evolution of organics: Whole Foods, or a mass-market retailer like Wal-Mart Stores Inc.?

Last month, Whole Foods presented an unusually grim portrait to investors, projecting same-store sales growth in fiscal year 2007 of 6 percent to 8 percent, down from 11 percent in 2006 and a peak of 14.9 percent in 2004. While most other retailers can only dream about that pace of growth, for Whole Foods, it represents the first significant sales bump after years of fast, steady growth. On Nov. 3, the company's stock tumbled 23 percent. John Mackey, Whole Foods's 53-year-old vegan co-founder, announced he would cut his annual salary to $1 starting Jan. 1. With less than a 1 percent stake in the company, he had earned $356,000 (excluding bonus and other compensation) in the fiscal year ended Sept. 25, 2005, the last period for which data are available.

In a series of interviews, Mr. Mackey talked about that decision, the future of natural and organic food and why he thinks unions aren't necessary at Whole Foods. Excerpts:

WSJ: Is the natural and organic movement a fad and is it fading?

Mr. Mackey: Something that's been going on for 30 years is hardly a fad. For people who are really interested and committed to an organic-food lifestyle, it's not a fad for them any more than Christianity is a fad for Christians, or Judaism is for Jewish people. It's a value system, a belief system. It's penetrating into the mainstream. I don't see that disappearing anytime soon.

WSJ: Is the market saturated? Is that why your same-store sales are growing more slowly?

Mr. Mackey: 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.

WSJ: How big a threat is Wal-Mart?

Mr. Mackey: 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. There isn't a team of people in Austin trying to figure out what to do. We have this empowered, decentralized culture, and a high percentage of them are trying to figure out how to make their stores better, how to improve the customer experience.

WSJ: How much autonomy do individual stores have and why?

Mr. Mackey: Competition is on a local basis. And this is a reason to be decentralized. The basic philosophy is, we have a culture of empowerment. If it's a globally sourced product, like private-label, then we'll want team members to sell that in the store. We also allow each store to customize its product mix. If you go to the Austin store, there will be all kinds of small, local producers and vendors -- from salsas to tofu to tabbouleh to hummus, to hundreds and maybe thousands of products that are unique to that store. There'll be local tomatoes that we might sell in an Austin market, and certainly not in Chicago. It's the team leaders making those decisions.

We're being more aggressive on price. If (a competitor carries) the exact same product, then we're going to sell it at a matching or lower price. Those are decisions being made locally. We've got 189 stores. They're all faced with their own unique competitive environments. It's not necessary for me to know everything that's going on everywhere. I could find out, if there's a reason.

WSJ: Why are you cutting your salary to $1?

Mr. Mackey: It's hard for me to explain this in ways that people will understand. I've always followed my own heart, and this is what my heart is telling me is the appropriate thing to do right now. I have enough money, and the deeper motivations for me are to do service and try to do good in the world. It may not make sense for other people who don't have the same inner experiences that I'm having. I'm not advocating other CEOs to do it. I don't think of myself as particularly special or noble for doing it. It's just what I want to do.

WSJ: How much of your salary-cut decision has to do with decelerating same-store sales growth?

Mr. Mackey: None. Zero.

WSJ: What's the potential for organic and natural foods to be the standard, rather than the exception, and what will it take to get there?

Mr. Mackey: It'd have to be cheaper. Most people shop based on price. That's what people mostly value in American culture -- something that's inexpensive. There are others who value quality more, but they're in a relative minority. What's mainstream that isn't cheap or inexpensive? I seem to think natural and organics will always be higher quality, and therefore always be a bit more expensive. So I think it can continue to penetrate, as the culture becomes wealthier.

WSJ: What's the business case for your advocacy of humane treatment of animals, and overhauling the nation's farming system?

Mr. Mackey: There are a lot of customers who don't want to become vegetarians or vegans, but who are concerned about the way livestock animals are treated. There are enough of those customers willing to pay a little bit more for animal products that have been raised with more awareness, with their welfare as a higher priority. We'll be launching products like that in early 2007, and we'll see how it goes. This is another one of our innovations that we'll be doing that will differentiate ourselves.

WSJ: Will we ever see organic and natural food in fast-food restaurants like McDonald's and Subway?

Mr. Mackey: It's possible, if the trend lines continue, and it continues to move into the mass market.

WSJ: You're a vegan. Would you eat at a fast-food restaurant that serves organic and natural food?

Mr. Mackey: I eat at restaurants that aren't necessarily vegan restaurants all the time. I can't say that I patronize fast-food restaurants very often. If the food tasted better and was high quality, maybe. I haven't seen too much of that at quick-service restaurants.

WSJ: What have you heard from investors, given how Whole Foods' stock has performed?

Mr. Mackey: I've been in New York, and they want to know about competition, how we're going to respond to the competition. They're mostly Wall Street guys who are short-term investors. We don't know why our comps (same-store sales) went down so much. We know we've got more competition. We're going to be innovating, and we're going to get better. We always have in the past.

WSJ: You've been outspoken on the relationship between investors and companies. What rights should investors have in defining a company's purpose -- especially when the entrepreneur is still present?

Mr. Mackey: Investors are participating in the business, so they have the right to express their opinions, and the legal right to fire management if they're unhappy with their performance. It's not an issue of who controls the business. The stockholders should ultimately control the business. The mistake people make is equating the power to hire and fire with the power to set purpose. Purpose is created or discovered by the entrepreneurs who create the business. In Whole Foods' case, the investors came in later, after the purpose of the business was decided on. They were looking for return on their capital, not to define the purpose of the business.

WSJ: What do you make of unions, and would you welcome them at Whole Foods?

Mr. Mackey: It's often said by labor unions that we're preventing unions from organizing. That's a lie. The fact of the matter is there's been little evidence that our team members have any interest in labor unions. At Whole Foods Market, we pay better. We have better benefits, better working conditions, an empowered working environment. There's very little that unions can add in terms of value to our team members. There's a lot of harm they can inflict by lowering the cooperation in the store, which is ultimately what pays the wages.

WSJ: You're 53. How much longer do you plan on staying in this job?

Mr. Mackey: As long as I'm having fun. As long as I get a sense of personal meaning out of it. There might come a time when there's another leader with the right vision for the next evolution of Whole Foods Market. I hope when that happens I'll have the wisdom to step aside. I have no plans to do that soon.

WSJ: How has your day-to-day role changed in the last couple of years?

Mr. Mackey: It has always evolved. I still have a strategic role. I have to be thinking about the future. I spend time talking with the media, to team members. I've been in New York talking with investors. As CEO of Whole Foods, I have expectations that are made of me to do things in a public way. And that requires a lot more time than it used to.

WSJ: Do you like all of that?

Mr. Mackey: To be perfectly honest, I don't like it all that much. I enjoy my privacy, my time with my wife and my close friends. Doing a lot of ceremonial stuff, it's just kind of boring to me. I'd much rather be reading a good book or having a good conversation with someone.

WSJ: What'd you have for lunch today?

Mr. Mackey: Steamed vegetables and rice, some kind of eggplant-roasted-bell-pepper sandwich, and water.



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