Undercut by rivals, it tries circulars, other age-old
grocery-store tactics
By Heather Haddon and Annie Gasparro
John Mackey won the battle for America's taste buds, but his
victory is proving costly.
As co-founder of Whole Foods Market Inc., the 63-year-old Texan
helped reshape how Americans approach eating, transforming health
food from a niche market into a booming retail sector attracting
millions of urbanites, soccer moms and baby boomers. Whole Foods
became a Fortune 500 company, and Mr. Mackey, a wealthy, foodie
celebrity.
Now competition has caught up to Whole Foods, and Mr. Mackey is
being forced to try conventional grocery-store pricing and other
supermarket tactics to reverse his company's flagging fortunes.
The pressure ratcheted up with the disclosure in a securities
filing Monday that activist investor Jana Partners LLC and several
allies had amassed an 8.8% stake in Whole Foods and want the
company to accelerate its overhaul and explore a possible sale.
Jana said in its filing it wants Whole Foods to more quickly
adopt standard grocery-industry practices it long had eschewed:
loyalty cards that would allow it to target shoppers with coupons
based on their buying habits; centralizing product purchasing to
improve efficiency; and advertising sales and discounts.
"We are confident in the actions we are taking to position the
company for continued success," Mr. Mackey said in a written
statement Tuesday, "and we remain open to ideas to create further
value for our shareholders and all our stakeholders."
Whole Foods owned the natural and organic market for years, so
Mr. Mackey was able to charge premium prices and didn't need much
promotion.
"When you average 8% same-store sales [growth] for 35 years, it
can breed a sense of, 'Why do we need to change? Things are
working,'" Mr. Mackey said in a recent interview with The Wall
Street Journal.
Other grocers, however, got into the organics game at lower
prices. Over the last 18 months, Whole Foods, which now counts 462
stores, notched its longest stretch of quarterly same-store sales
declines since going public in 1992. It is down as many as 14
million customer visits over the past six quarters, according to
Barclays PLC. Its shares have lost nearly half their value since
peaking in 2013.
Today, warehouse-club retailer Costco Wholesale Corp. says it
sells more organic food than any other retailer. In its last fiscal
year, Kroger Co., the nation's largest conventional supermarket
chain, reported natural and organic sales that surpassed all of
Whole Foods' revenue for the year.
"More conventional supermarkets are copying us," says Mr.
Mackey. "Every place we went bred the Midas touch. But it also bred
envy."
The U.S. grocery industry as a whole is mired in one of the most
challenging financial stretches in decades. With more places to
shop for food, consumers feel less loyal to their local stores.
Amazon.com has gotten into the grocery business, and European
deep-discount food retailers Lidl Stiftung & Co. and Aldi Sued
are expected to expand in the U.S. this year.
The longest slump since 1950 in the price of food commodities
such as eggs, meat and dairy has sparked a price war, eating into
grocers' razor-thin margins. Operating profits for grocery stores
declined by about 5% last year, according to Moody's Investors
Service. Stocks of food retailers are down 6.3% this year. Whole
Foods' shares, which rose 10% on Monday when Jana disclosed its
stake, are now up 9% this year.
Mr. Mackey, a strict vegan who favors jeans, fleece jackets and
athletic shoes, started in the business when he was only 25. He
scraped together $45,000 to open Safer Way Natural Foods in a
Victorian home in Austin, Texas, in 1978, after drifting in and out
of college for six years without graduating. He lived in a house
with a vegetarian co-op. A friend from that time recalled nothing
but tofu in his refrigerator.
In 1980, in partnership with two other local health-food-store
owners, he opened the first Whole Foods Market in Austin. The store
was large for its time, and the company expanded quickly. During
the 1990s and 2000s, it acquired 11 regional health-food
chains.
"He was so much more financially sophisticated than everyone in
our world," says Doug Greene, founder of New Hope Natural Media,
which hosts natural-products trade shows. "John was talking about
investment bankers and share prices when we were all talking about,
'Gee, do you think we can get a small business loan?'"
Mr. Mackey allowed his company's 11 different regions to act
nearly independently, fueling local creativity.
"He said, 'We can't figure out Florida. You will run Florida for
us and show us how to do it,'" recalls Richie Gerber, who sold his
Bread of Life Natural Foods Markets chain to Whole Foods in
1997.
In 2010, Mr. Mackey began sharing the CEO role with Walter Robb.
Their chain earned a cachet that health food hadn't had before. It
became known for healthier eating and unique, upscale ingredients.
It sold organic chia seeds in one aisle, and in another, smoked
chicken sausage on toast paired with wine chosen by a master
sommelier. Last year, Whole Foods' prepared foods and bakery sales
hit $3 billion.
"It still is the default if you want to go to a supermarket and
think what you find will be good," says food writer Mark Bittman,
whom Jana has retained as a consultant as part of its investment
initiative.
Mr. Mackey instituted animal-welfare standards and maintained a
strict and lengthy list of ingredients he won't allow in his
stores, such as the Red 40 food dye and the artificial sweetener
aspartame.
As the company opened new stores and acquired other retailers,
annual sales grew sixfold between 1995 to 2005, then more than
tripled over the next decade, corporate filings indicate.
Mr. Mackey bought homes in Austin and Boulder and took friends
on an all-vegan catamaran trip in the Caribbean. In 2007, saying he
no longer felt the need to work for money, he voluntarily began
drawing a $1 annual salary. As of December, he held 980,000 shares
of company stock, worth about $33 million. He routinely flies
coach.
His political opinions have drawn social-media criticism from
some customers. He is against government health-insurance mandates
and he believes society will be able to manage climate change.
In 2007, when Whole Foods was trying to acquire Wild Oats
Markets Inc., federal regulators revealed that Mr. Mackey had
written hundreds of anonymous posts on Yahoo Finance message boards
championing his own company's stock and criticizing rival Wild Oats
Markets. Regulators cited the posts as proof that Wild Oats was a
top competitor and a merger would violate antitrust laws. (The
Securities and Exchange Commission found no wrongdoing.) Mr. Mackey
apologized for the posts and Whole Foods completed the acquisition
in 2009 after agreeing to sell some Wild Oats assets.
In 2015, its image with customers took a hit when the New York
City Department of Consumer Affairs accused it of overcharging
customers in nine stores by putting incorrect weights on some
items.
A far bigger problem, however, was that conventional grocers had
begun carrying specialty products that once were exclusive to Whole
Foods -- at cheaper prices -- and offering their own high-end salad
bars and beer halls. At the same time, specialty grocers such as
Sprouts Farmers Market Inc. and Trader Joe's expanded and siphoned
off customers.
Certain health-food makers began stocking their products in
other stores.
"We take opportunities as they come, and right now, those
opportunities seem to be more at the conventional stores," says
Matt Oscamou, founder of Frontier Snacks, Inc. Frontier is taking
his latest granola to supermarkets such as Kroger instead of Whole
Foods because they are offering better shelf space.
As its sales softened, Whole Foods began lowering prices. In
September 2015, it announced it would cut 1,500 workers. Still, in
the fiscal year ending last September, its profit declined by more
than 5% and its comparable-store sales -- a key retailer metric --
fell 2.5%.
"They failed to recognize that as the category matures, price
becomes more important," says UBS analyst Michael Lasser.
Customers jokingly called the store "Whole Paycheck." Pricing
had been the subject of tense debate among senior managers for
years, according to people familiar with their thinking. Steps to
lower prices and offer discounts have eaten into profit margins,
but Whole Foods is still more expensive than its largest
competitors, analysts say.
"I would shop here for everything except for the price," said
Cathy Price, a 45-year-old mother of two, during a recent visit to
a Chicago Whole Foods. She returned some green peppers to the
shelf, she said, because they were too expensive.
Last fall, as the problems worsened, Mr. Mackey and Mr. Robb
began discussing ending their unusual dual-CEO structure. Mr.
Mackey said the company needed a clearer line of reporting. Both
men discussed becoming the sole CEO. Mr. Mackey, who for years had
focused on the company's long-term mission and his vision for the
brand, said he wasn't ready to step aside.
"I feel like I'm madly in love with Whole Foods Market right
now," says Mr. Mackey.
Some industry executives and analysts say Mr. Robb has more
experience running day-to-day operations, and they question whether
Mr. Mackey is up to the job. Mr. Robb, who remains a board member,
didn't respond to a request for comment.
Mr. Mackey says various senior executives run Whole Foods'
operations, including former Target Corp. executive Don Clark, who
is overhauling the company's global purchasing to run more like a
traditional retailer.
As part of what Mr. Mackey calls a "transformation phase," Whole
Foods formulated a nine-point plan to cut costs and focus on its
most loyal customers, a concession that it can't cater to all
markets or demographics.
Mr. Mackey acknowledges that some families can't afford Whole
Foods or don't care enough about his mission. The company doesn't
do as well "in the suburbs with people who have an expensive
mortgage, they have 3 1/2 children and a golden retriever," he
says.
In the past year, Whole Foods began buying television
advertising and distributing paper circulars, two moves that cut
into profit. Mr. Mackey abruptly abandoned plans to triple the
number of Whole Foods stores in the U.S., and said that
underperforming locations would close. Other planned stores are
being delayed indefinitely.
The company needs to cut costs, but layoffs already have thinned
store staffing, prompting customer complaints, former store
managers say. Centralizing purchasing will save money, but it will
mean fewer local brands on shelves, suppliers say.
A Whole Foods spokeswoman said the employee cutbacks targeted
redundant jobs, and it has new systems to help ensure sufficient
staff. Small suppliers still have access to shelves through
regional buyers, but big ones now need to pitch headquarters, she
said.
Some investors who have held company stock for years because
they believe in Whole Foods' mission say they will sell if the
company strays too far from that vision. "We'll change our minds if
their behavior changes," says Russ Piazza of Front Street Capital
Management, a small fund with a stake.
Wall Street analysts largely welcomed the news of Jana's
involvement, but many were unsure whether it would improve the
company's performance.
Mary Ellen Coe, a Google.com executive and Whole Foods board
member, says the company's problems are common in retail, and "the
urgency and the execution is there now."
Mr. Mackey, who identifies himself as a Libertarian, says he
views the explosion in natural-food offerings that is hurting Whole
Foods's finances as "fantastic," evidence that he achieved his goal
of bringing such products to the masses. "In capitalism; that's how
it works," he says.
He says he is confident that Whole Foods will survive and be on
surer footing in a year. "We have a billion dollars in the bank,"
he says. "We are not in crisis mode."
"When times are good, people think I'm like a visionary leader,"
he says. "And then the company hits a down cycle, and then
everybody questions that."
"I'm like a duck," he says. "The water goes off my back."
Write to Heather Haddon at heather.haddon@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
April 13, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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