In an interview with the WSJ, Whole Foods CEO John Mackey unveiled a new health emphasis at the company, saying the company is going back to its roots and away from its 15-year emphasis as a foodie Mecca. (Frank Talk From Whole Foods' John Mackey - WSJ.com.)
Mackey: The biggest thing that is going to happen is beginning in the fall. We're going to begin a Healthy Eating Education initiative. We've just added a seventh core value (to the company's mission), which is Healthy Eating. Basically, we used to think it was enough just to sell healthy food, but we know it is not enough. We sell all kinds of candy. We sell a bunch of junk. There will be someone in a kiosk to answer questions, they'll have cookbooks and health books, there will be some cooking classes. It will be about how to select food, because people don't know."
WSJ: Will you get rid of the unhealthy items? You have aisle after aisle of absolutely delicious looking candies and chocolates and fudge and cakes and then you'll have someone up front at a kiosk looking through cookbooks?
Mr. Mackey: "Customers, we hope, are going to vote them out. You're just seeing the most tentative efforts at this point because the details are not ready for public release. You need to be fair. I've got to plan the revolution."
The key statement -- "customers, we hope, are going to vote them out." It's clear in the current recession that people are holding back from the more expensive food items, but my question is whether they will actually shift towards the whole foods and bulk bins that Mackey notes were a key component in the company's early days. Now those foods represent just 1% of sales and he recognizes that people aren't cooking -- hence, the plethora of prepared foods that the company also sells. In a nearby store in Virginia, for example, the prepared foods section now takes up perhaps 20% of the store, far bigger than it had until a renovation in the past year. Will bulk foods now be given more store real estate and be easier to navigate? Will the company reduce the number of packaged goods?
To push this initiative, Whole Foods will also have to become more transparent on the contents of its prepared food items (like providing calorie labeling in addition to an ingredient list at its salad bar and prepared foods counter). That seems like an easy fix, with more information steering people towards healthier choices.
As Mackey says, "Americans are sick of being sick and fat." That's true but whether this sentiment will prompt them to cook -- as Michael Pollan advocated in his Times piece this Sunday -- and thus lose weight is another issue altogether. I, for one, hope so, and will be curious to see how Whole Foods fares with this new strategy.
- Samuel Fromartz
Alice Waters launches a frozen food line, which her office described as “a crossover product making sustainability accessible to a wider audience," Civil Eats reports.
Rock on Alice! Oh, wait, that was yesterday's news...
After, what, nearly two years now, the FTC and Whole Foods settled their legal battle over Whole Foods acquisition of Wild Oats.
As I wrote many times previously, I thought the heavy handed federal action was misguided because its premise -- that Whole Foods would control the natural and organic marketplace -- was flawed. They didn’t then and certainly don’t now.
So here’s what happened to the original 109 Wild Oats stores bought by Whole Foods in February 2007 for $565 million.
- 14 stores were closed and 6 were relocated.
- 35 stores were sold to Apollo Management in June 2007.
That left 54 stores, 12 of which are now for sale (plus one additional Whole Foods Market store) under the deal. If the stores don’t sell in one year, then Whole Foods gets to keep them. If they do sell, then Whole Foods ends up with 42 of the original 109 stores it bought.
In addition, the closed stores -- which total 19 if you include those shuttered by Wild Oats before the deal -- will be sold, along with Wild Oats trademarks. Presumably those shuttered stores were already on the auction block.
The FTC said:
The consent order will restore competition in 17 geographic markets that were impacted by the acquisition. In addition to requiring the transfer or divestiture of all rights to 32 stores, Whole Foods also is required to divest related Wild Oats intellectual property, including unrestricted rights to the “Wild Oats” brand, which retains significant name recognition and loyalty among consumers. These assets will allow one or more Commission-approved buyers to re-establish competition with Whole Foods in the majority of the markets in which the agency alleged the acquisition would reduce competition and harm consumers through higher prices and reduced quality and services.
But the way I see it, this battle costing untold millions came down to 12 operating Wild Oats stores -- or 11% of the total Whole Foods acquired. Those stores created a monopoly? Go figure.
- Samuel Fromartz
NPR's marketplace had a quick segment on organics in light of Whole Foods earnings report due out on Wednesday.
I'm quoted noting that organic consumers who believe strongly in organics will stick with it, but they will seek out value. They key for Whole Foods is how well they execute in value categories and shift their image. (They are succeeding beyond expectations in organic milk, their private label supplier tells me). My overall point was perhaps missed: organic consumers in this climate are shopping value, wherever it is, which is why Whole Foods is emphasizing the segment with products and even tips from its shoppers.
- Samuel Fromartz
By Samuel Fromartz
When the commodity boom and rising food prices took hold last year, optimists argued that this might cause people to switch to organic and sustainable foods, because the premium was no longer so high compared with mass market fare.
I was skeptical of the argument then, and even more so now. There are ample signs that consumers are cutting back in the face of a slumping economy and if anything, downsizing to discount retailers that skew towards cheaper food. Sales of Spam are growing. The more committed organic food shoppers will always be there, but much larger number of dabblers are scaling back, unable to see the real value above the cost.
At Whole Foods, which has built a business on sustainable, organic and high quality perishable foods, sales growth is at a historic low, leading the company to cut back on new store openings and eliminate its quarterly dividend. Executives are emphasizing its value products, many sold under the 365 store brand, and trying to shake its Whole Paycheck image.
I can see why they are concerned. I was shopping in the Whole Foods store in Denver last Sunday in the middle of the day, before heading up to the mountains with the family. Last year, when I was in the same store in Cherry Creek on the exact same weekend, I recall it was bustling. This year, there were fewer shoppers, the aisles sparse.
In contrast, the Whole Foods Markets in Washington, D.C., are still crowded on the weekend to the point of discomfort. But DC or New York City -- where a high number of shoppers don’t drive at all -- might be the exception.
In an interview in May, Whole Foods CEO John Mackey pointed out that people were driving less, which meant fewer trips to the store. What shoppers seem to be maintaining, or even increasing, are buying trips to discounters -- hence the single-digit sales gains at big box retailers like Costco. (Wal-Mart, which has cut food prices in the face of the slowing economy, is also doing well, though I don’t view them in the same retail universe as Whole Foods. Costco likely has greater overlap).
Whole Foods is not unusual on the retail landscape since many companies are experiencing a sales slowdown, or worse. But the more interesting question is what this means for all the grass-fed beef ranchers, artisan cheese makers, organic produce farmers and even organic dairy farmers. Are their products now viewed as a “luxury” that must now be economized out of the family budget? Is this a road bump in the real food movement, or a more fundamental end of the road?
Right now, I’d argue it’s a road bump, though it's uncertain how long or how big the series of bumps will be. The length, depth and vast impact of this current credit-infused economic downturn is unknown. The wisest assessment I’ve heard is that no one knows, because the financial engine of the economy -- banks, insurance companies, mortgage companies, and the like -- keep surprising on the downside with ever increasing credit losses. If the finance companies don’t know the depth of their losses, evident by the repeated quarterly write-offs they take, how can anyone pretend to know when the worst will be over? Or to put it in simple turns, how can anyone predict how large the mortgage bust will be and what will be left when it's over.
This is a horrendous climate for any company but look at the long-term trends. I’ve repeatedly stated that organic foods, sustainable foods, farmers’ markets, and the like, are not a fad. They have only been growing against a troubling drumbeat of news about food safety and health. There is ever growing awareness about rising obesity, tainted food, and what we’re actually putting down our gullets. This supra-economic food trend is evident in everything from the nutritional information now demanded on New York City menus to the fear of imported food from China. Cheap, we know, has a price, and more than a few of us are unwilling to pay it regardless of our shrinking family budgets.
Do you think the questions about where food comes from, how it’s produced, and what it’s doing to our bodies, or more importantly, our kids bodies, will suddenly disappear because we are now more budget-conscious?
You can actually make a convincing counter-argument that values become more important in tough economic times. You jettison the superfluous in favor of what’s really important -- and for some, that might be humanely raised meat rather than premium cable-TV. If you must economize, you might peruse 101 Cookbooks for a great tofu or soba noodle recipe rather than throw in the towel and buy industrially raised meat or pesticide-laden foreign farmed shrimp.
Local foods present a good case. As consumers grow more concerned about the economy and the foreign provenance of foods, local will become more pertinent. Just as in 9/11, when restaurant sales dipped in favor of home-cooked meals, local food might well see a long boom in the face of growing economic pressures. In tougher times, sure, people want to economize but they also huddle closer to one another, want to connect to and help their local communities, and support their farmers. Community provides solace, and what better way to define community than around food.
In an interesting case in Petaluma, California (about 90 minutes north of San Francisco), an inventive non-profit called Petaluma Bounty started an urban organic farm and a series of community gardens to produce food for low-income people. Now it is gleaning fruit from trees growing in people’s backyards -- 20 tons of it that would have rotted on the ground -- and distributed it to food pantries. This work connects locally produced organic food with a larger social mission in tough economic times.
So sure, in a tough economy, consumers will scale down and look for ways to save money. They might cut out superfluous purchases, like the $4 afternoon latte, $5 chocolate bar, or grass-fed T-bone steak. They might spend more at big box discounters. More recent dabblers in organic and sustainable foods -- who don’t really get the compelling reasons for buying this food -- may decide it’s an unafforable luxury.
But the worst mistake retailers and sustainable foods companies can make right now is too lose their sense of their mission and alienate the core customers who do get the argument, who do find real value in this food and who are economizing in other areas of the household budget in order to buy it.
These core shoppers, many of who are young, well educated, but on tight budgets, are looking for ways to save money too. Who doesn’t like a sale for organic or grass-fed ground beef or a 79 cent can of organic black beans? But they are not going to economize at the expense of deeply held values. The case for sustainable food is simply too strong. They might look for more affordable options, but they are not jettisoning their deeply held values.
Neither will the smarter companies in this business as they batten down the hatches and ride out the storm. They will stand out from the perhaps less-committed companies who got in, like so many companies nowadays, for a touch of the green aura. Those wannabes will be the first to exit, concerned about a shrinking consumer base and fears about fading fads. Let them go. They never understood what this was all about in the first place, which is about changing the food we eat and the way it's produced.
Those values -- and the trends driving them -- will be around long after this shake out is over.
The first couple of minutes of this video is hilarious -- kids discussing food and explaining issues like fair trade. It was produced by the Syracuse Real Food Coop in New York state.
As the saying goes, it ain't over til it's over.
The U.S. Court of Appeals for the District of Columbia Tuesdayreversed a lower court decision that allowed the world's largest organic and natural foods grocery chain, Whole Foods Market, to buy its rival Wild Oats Markets.
In a 2-1 split, the appeals court ruled that that a lower court made an error when it gave Whole Foods approval last summer to go ahead with the merger, despite the request by the Federal Trade Commission (FTC) for an injunction to block the deal.
The decision sends the lawsuit back to the U.S. District Court for the District of Columbia, where Judge Paul Friedman had presided over the case before being appealed. Although the lower court was instructed to give further consideration to the case, the ruling does not undo the merger.
To date, Whole Foods has sold almost 40 Wild Oats stores, closed a dozen and converted many more to Whole Foods stores.
In a recent interview with ChewsWise, Whole Foods CEO John Mackey said: "We paid all the shareholders, we sold off the Henry stores, we integrated Wild Oats into our system, we’ve shut down several stores, changed the name of many of the stores – so the eggs are scrambled and mostly eaten."
The question now is whether the court will try to unscramble the digested eggs.
The Wall Street Journal opines: "The ruling ... may give the FTC a shot at forcing Whole Foods to sell some operations to meet competitive concerns raised by the merger."
“We await the U.S. District Court’s response so this issue can be resolved,” Whole Foods said in a statement. “Meanwhile, it is business as usual.”
- Samuel Fromartz, with contributions from Sustainable Food News
If you’re considering grilling this weekend, you might consider this recent report, Finding Animal Friendly Food, from the World Society for the Protection of Animals. It surveyed 23 supermarket companies and rated them on humane meat -- the latest in surveys of this type.Read More
In the second installment of the interview with John Mackey, CEO of Whole Foods, the focus is on humane meat, sustainable seafood and local food. The first part of the interview can be found here.
Fromartz: There has been a bit of buzz about your humane meat program, which institutes a five-star rating system based on the humane practices of the livestock producers. When will it roll out?
Mackey: We'll roll it out this summer. It got delayed because we were doing it under the Whole Foods-funded Animal Compassion Foundation but we're now shifting it to a third party, the Global Animal Partnership. We think from a credibility standpoint, third party certification is better. Organic is third party, Fair Trade is third party and we think that will have more credibility with our customer base. But this summer, you will start to see the one-through-five rating. (One being the most basic rating and five, the highest, with background here and here).
Fromartz: Have you found enough livestock producers to fill out the meat case? Are there enough grass-based producers, for instance?
Mackey: Well, it's not just for our grass-based producers. All of our meat will be in the program eventually because if they want to sell at Whole Foods, they have to be rated. But if you're asking, have we found that many producers that have the highest ratings, like three, four, and five? The answer is we don’t have enough yet but we think what will happen. As we create more transparency into welfare practices, the desire to have a higher rating is going to kick in. Customers are going to prefer the better ratings, so we're going to see those getting one's and two's try and get three's and four's
Fromartz: Do you expect those with a three or four rating get a premium over the one's and two's?
Mackey: I do. To even get a three, it has to be a pasture-based system, which rules out almost all meat sold in the United States right now. And I don't mean just access to outdoors but a real pasture-based system.
With chickens for example, "free range" is a myth – the birds are not in cages but they are in a big barn. When the consumer thinks of free range, they think the chickens are out running around in pasture but that's not the case. So to get a three under the Global Animal Partnership ratings system, animals will have to live outside and have access to shelter, rather than the other way around - living indoors with supposed access to outdoors. Once there's more transparency and the ratings are out there, the consumer demand is going to be push a lot more producers to get into organic and animal welfare production – they're going to get better scores, a premium and more brand loyalty.
Fromartz: So when are you going to do more in seafood?
Mackey: In terms of sustainability?
Fromartz: You are selling some MSC-certified fish but it's not across the board. (The Marine Stewardship Council certifies whether wild populations of fish are sustainably harvested).
Mackey: We've had quite a few meetings on aquaculture and are coming with standards this summer on farmed fish. That's probably the biggest initiative we've got.
But sustainability in seafood is a huge issue, and I don't have any good answers to it, because world demand for seafood is doing nothing but going up. I think having good aquaculture standards will help. But of course, as you know, demand is very strong for wild caught – and wild caught is hunting and gathering with very efficient technology. It's the tragedy of the commons. I was just looking at our stores in the New York area, and the only certified fish we had was salmon from Alaska and some sea bass. We need a lot more than that.
Fromartz: Yes, in my opinion, your fish case needs the most work.
Mackey: I hear you but is there someone else that's doing more? We're out there working, we're doing monitoring, we've cut off some species. We recently stopped selling orange roughy, and we don't have a lot of species because of sustainability issues. It puts us at a competitive disadvantage against other retailers who do sell those fish.
I think we need someone other than MSC to do sustainability certification, to encourage competition. When we started our Whole Trade label (Whole Food's fair trade designation), we started working with Transfair and Rainforest Alliance. The competition between the two has been intense and that leads to innovation. On the seafood front, there's only one game in town, MSC. We need half a dozen competing to certify sustainable fisheries.
Overall, though, I am very frustrated about it and I don't feel we're going enough. But frankly, I don't know what to do about it.
Fromartz: You've also put a lot of emphasis recently on local foods. Is it growing?
Mackey: I do think it's a fundamental trend, and it's going to grow. But I don't think the locavore movement is going to sweep America.
The simultaneous trend along with local is ethnic and international foods – Asian food, Middle Eastern Food, Mediterranean food. It's not just in the big cities, there's been a big explosion in different cuisines and that's happening at the same time as local, but they both reflect a growing awareness people have about food. People are looking for authentic artisan food rather than industrial food, or fast food.
Fromartz: Both trends -- imports and local -- are rising?
Mackey: Yes. And there's also whole trade, ethical trade, that's a huge trend that's only going to grow. As Peter Singer said in his book (The Way We Eat: Why Our Food Choices Matter), the local food movement sometimes lacks a perspective on the globe. Developing countries need to sell in other markets and fair trade gives them a premium when they do that.
Fromartz: So fair trade is growing too?
Mackey: Our goal is to have 50 percent of our foods from developing world be ethically traded in the next 10 years. Right now it's substantially less than that.
Fromartz: I know you need to wrap this up, but one last question: Does anything in the business keeping you awake at night?
Mackey: The truth is the last year was a terrible year for me personally and I had plenty of sleepless nights, while I was being investigated. I feel like I've gotten out of jail, with the SEC dropping its inquiry and not recommending any enforcement actions. Symbolically and emotionally, I feel like I've been liberated. That's really how I feel.
We've got some short term concerns. We've got to integrate Wild Oats, we've got some additional competition, we've got a slowdown in some of our comp sales, and we have an economic environment like I've never seen in my 30 years in this business. I've never seen $133 a barrel oil, I've never seen this kind of real estate crash, we got the Iraq war dragging on, we're sort of in turbulent white water and I don't know what rocks lie ahead because I've never been down this river before.
Fromartz: And your stock price is at the lowest since 2003.
Mackey: The stock was definitely overvalued, trading at 60-70 times earnings. It was a bubble and it popped. But I'm looking to get past 2008 and our earnings back on an upward track. I anticipate that happening next year.
Fromartz: Thanks for the time.
John Mackey, the outspoken CEO of Whole Foods Markets, has been at the center of the natural and organic food business for three decades. But he had stopped talking to the media and shut down his blog because of an investigation by the Securities and Exchange Commission into his anonymous posts on a Yahoo message board.
Once the SEC ended its investigation without taking action last month, Mackey began talking again. "I feel like I've been liberated," he told me. In a wide ranging interview, he talked about the Wild Oats deal, rising food prices, the company's soon-to-be-launched humane meat ratings system, and the prospects for sustainable seafood.
The interview, conducted by phone in late May, has been edited and condensed. It will run in two installments.
Fromartz: Well you're finished with the SEC, but the FTC is still trying to block your deal to acquire Wild Oats.
Mackey: The FTC is still appealing the court decision made last August (which was in Whole Foods' favor), which is unfortunate because the merger's done. We paid all the shareholders, we sold off the Henry stores, we integrated Wild Oats into our system, we’ve shut down several stores, changed the name of many of the stores – so the eggs are scrambled and mostly eaten.
Fromartz: Ignoring the FTC for the minute, was it a good deal in retrospect?
Mackey: It's a difficult question. Because if I could go back in time, we wouldn't have done the Wild Oats acquisition. We spent tens of millions of dollars in legal fees, we've been investigated, it's been highly disruptive. I didn't realize it would cause so much grief.
But if you're saying has it been a good deal aside from that, well, it's very early in the process. And we have to invest money before we get returns on it. We always say it takes about two years to integrate a company we acquire and with Oats we're about 8 months into the process. I'd say we're pretty happy so far but can't say with an absolute certainty until the 24 months have passed. But moral is very high and we've seen a lot of good sales increases.
Fromartz: You've made a lot of acquisitions. Was this one the most difficult?
Mackey: No, I wouldn't say it's the most difficult one. Usually in a merger, there's resistance – the good old days stand firm in the minds of employees. But here, Wild Oats people were waking up from a nightmare of uncertainty. They were glad to have some leadership and some security. We didn't lay anyone off, we've raised pay, raised benefits, and did a lot of training, and they haven't been resistant.
Fromartz: You even offered job security at the stores that were closed?
Mackey: Correct. All the stores we closed were in markets where we already had stores, so they were offered alternative positions. First of all, that's the right thing do, and secondly, if people have a lot anxiety that they could lose their jobs, that inhibits their ability to learn and to adapt. I feel you've got to offer security if you want to get people to move forward. Otherwise they're too scared.
Fromartz: As you've said, the deal was distracting. But did it inhibit your ability to compete with up-and-comers in the supermarket business or even more mainstream players nibbling at your heels?
Mackey: You said nibbling. Well, they're doing a lot more than nibbling. They're very aggressive and coming from a lot of angles. The whole idea that Whole Foods doesn’t have competition (as the FTC argued in its case) actually boggles my mind – we have more competition than we've ever had before. It isn't from Wal-Mart, which the media was talking about a couple of years ago. It's from Trader Joe's, and Safeway's Lifestyle stores. HEB is difficult in Texas, Wegmans has expanded up and down the East Coast and is now targeting Boston. You've got Sunflower and Sprouts and Henry's that are going after the lower end and then the whole phenomenon of farmers' markets. You add all that stuff up and we have a lot more competition.
Fromartz: And you've been feeling that competition in less robust sales?
Mackey: Our comps (year-over-year store sales gains) have declined. We don't know for certain all the causes of that but it's not unreasonable to assume competition's one of the factors. A year ago, the media was making a lot about competition. The theme this year is trading down. I have to read about it every day, how people all over the United States, apparently hundreds of millions of people, aren't going to shop at Whole Foods markets anymore, and it almost becomes self-fulfilling because it's such a theme.
Our comps last quarter were pretty strong at 6.7 percent, which means we gained market share at the expense of our competitors. But the way it's been portrayed, you would think customers were abandoning us in droves. An objective look indicates Whole Foods had more customers in the last month, or in the last year, than ever before, but we're not gaining them quite as fast as we used to. Is competition a factor in that? Yes.
Fromartz: On food price inflation, have you retooled to react?
Mackey: I don't know if I would say we retooled. We respond mostly on a local level. I always thought Whole Foods had good value if people would take an objective view of it, but they seldom do. An article came out in the Twin Cities on May 17, and it just showed – surprise, surprise – Whole Foods was just about as cheap as Trader Joe's, but almost no one does the objective research. We're tagged with the name Whole Paycheck, and we have expensive things, but we also have 30,000 items. So we're trying to respond by emphasizing value in our stores to our customers.
Fromartz: Like emphasizing private label products?
Mackey: Well, just communicating to customers the value products we have, just trying to get the message out there but it's sort of a message most people don't want to hear because they associate Whole Foods with Whole Paycheck. They don't register that we have products with good value. They've got us in a category and don't want to change.
One of things that hurts price is perishable foods. In areas like meat and seafood, Whole Foods isn't cutting corners. Our core mission is selling the highest quality organic and natural foods. And the highest quality and the lowest price – they don't go together.
Fromartz: But is that precisely the areas people are going to cut back on, to lower their grocery bill?
Mackey: In Whole Foods case, I think what's affecting us more is gas prices. Customers driving 10 miles or more to our stores may not drive as often. Plus with the real estate crash, people don't feel as wealthy. I mean I don't feel as wealthy. Whole Foods stock has fallen 65 percent in the past two years and by any objective standard I'm wealthy, but compared to two years ago, I'm a lot less wealthy. So people are more concerned and cautious.
Fromartz: So you've seen a slowdown or slump in perishables?
Mackey: We have seen a little of that, but I'm not going to disclose any more information than I already made in our earnings call.