How the company is expanding into new and unexpected markets — and changing the way the country eats, one kale smoothie at a time.
By Beth Kowitt, Fortune magazine (April 28, 2014 edition)
When will I be able to get wheatgrass in my smoothie? Do you sell dehydrated pineapple? They want how much for this organic coconut oil? It is the kind of earnest banter you might hear at any Whole Foods Market (Stock Symbol: WFM ) store in Manhattan or San Francisco — only these snippets were among the full-on foodie conversations picked up in the aisles of Whole Foods’ lone store in Detroit, a gleaming 21,000-square-foot food and natural-products emporium that opened in June 2013, six weeks before the city filed for bankruptcy protection.
Detroit’s financial affairs and its struggling population (42% live below the poverty line) make the city an unlikely spot for the upscale grocer. But if not for the local touches — the lights over the checkout lines are made from re-purposed Motown records and the walls are decorated with murals by Detroit artists — you’d be hard-pressed to distinguish the store from any of Whole Foods’ 374 other locations. It has the same overwhelming variety — 19 types of honey, 13 kinds of chicken or turkey sausage — and dizzying range of products. If you have $20 to spare, you can buy a “conventional” (industry-speak for non-organic) bonsai plant or cough up $22.99 for acai powder. The more cost conscious can find a can of cannellini beans or a one-pound bag of pasta for under a dollar.
Translation: Whole Foods didn’t alter or dumb down its formula for Detroit, and why should it? The Austin-based chain is one of the country’s most successful retailers — its revenue has doubled and profits have tripled since 2007 — defying dismal grocery industry trends by offering consumers a mix of organics, truly delicious prepared foods, and an expanding array of staples under its 365 house brand. Now, having conquered affluent suburbs and trendy urban areas, Whole Foods is out to win over the rest of America, setting up shop in previously unthinkable places such as Detroit and Boise, and opening multiple locations in existing markets both large (San Francisco and Manhattan each have seven) and small (two apiece in Tulsa and West Hartford, Conn.).
This may come as a surprise to those who still think of the retailer as “Whole Paycheck,” an overpriced natural-food haven for yoga-practicing, juice-cleansing Prius drivers or hipsters obsessed with artisanal baking soda. And while Whole Foods’ prices are rarely the cheapest in town — and, yes, you may very well run into a Lululemon-clad hybrid driver in the checkout line — it’s appealing to a wider array of shoppers than ever before. When Whole Foods went public in 1992 with 10 stores, co-founder and co-CEO John Mackey thought perhaps the chain could open 100 locations, and even that goal, he tells Fortune, was “outlandishly optimistic.” In December he upped Whole Foods’ projected U.S. store count to 1,200, from an earlier plan of 1,000. (The company also operates stores in Canada and the U.K.)
Whole Foods’ vision is a bold gambit when you consider the state of its competition. Supermarkets lost 10 points of share between 2001 and 2013 to the slew of nontraditional players that have gotten into the food game, according to Nielsen. (The erosion finally has started to slow.) Wal-Mart, for example, calls itself the nation’s largest grocer, with $156.5 billion in its U.S. division’s sales coming from grocery, up from $137.8 billion in fiscal 2010. Whole Foods, with $12.9 billion in sales, is tiny by comparison, but it’s had an outsize impact on the industry and defied the headwinds facing its brethren by dominating in the food category that’s growing — one that, not coincidentally, it helped create. Healthy, organic, and natural products, a segment few know better than Whole Foods, make up an estimated $150 billion market that’s expected to grow by about 50% by 2018, according to industry tracker Penton’s Next division. “They’re a leading national authority on health and nutrition,” says BB&T Capital Markets analyst Andrew Wolf, “and unequivocally the leading retailer on the link between food and health.” That lead has translated into healthy stock market gains: The share price is up about 12-fold since its November 2008 recession-era low, vs. 130% for the S&P. Amazingly, much of the senior team leading the corporation has worked together or known each other since the company’s early days.
Whole Foods has borrowed from the playbook of traditional supermarkets while avoiding their pitfalls. It’s built out a successful, value-oriented private-label program but has maintained a stringent list of banned ingredients for the products it stocks. It has managed to keep its stores and inventory from being commoditized by localizing each location and perpetuating the novel idea that a visit to the grocery store can be not only painless but also pleasant. At the San Francisco Market Street store, for example, you can check out the pop-up oyster-shucking station after you get your shoes shined. In Brooklyn you can enjoy a local craft brew on a rooftop bar next to a 20,000-square-foot greenhouse.
To be sure, Whole Foods has never been easy to love unconditionally, while rival Trader Joe’s has secured an unabashed cult following. On one end of the spectrum, it has irritated the customer who couldn’t care less about its animal-welfare standards and is peeved that she can’t find Diet Coke; on the other end, plenty of Mackey’s fellow vegans think he’s a hypocrite for selling meat and dairy products. It has dropped popular brands, such as Chobani, causing consumers to scratch their heads. And Mackey, a vocal libertarian, has challenged the public’s expectations of what a health-food CEO’s politics should be.
But consumers flock to Whole Foods nonetheless — to the tune of more than 7 million customer visits per week. And the chain enjoys a popularity and buzziness that previous “health food” stores never achieved. That’s because Whole Foods preaches healthy eating but doesn’t judge. It lets us feel good about the food we buy without forcing us to live an ascetic, fringe lifestyle. It makes flax seem less scary. Kevin Kelley, whose consultancy Shook Kelley has done work for Whole Foods, says the company embodies the idea of the “healthy indulgence.” You can buy vegan cheese at Whole Foods, but you can also buy cheesecake. “They’ve changed how we think about food, our relationship with food, and our questions about food,” Kelley says. Says co-CEO Mackey: “We’ve helped people to see what’s possible, and re-envisioned what a supermarket is.”
The precursor to the first Whole Foods was Safer Way, a health-food store that Mackey and his then-girlfriend ran out of a Victorian home in Austin. The store didn’t sell meat, sugar, or caffeine — a reflection of Mackey’s food ethos at the time. “We were really hardcore, but we didn’t do very much business,” Mackey says. He knew he’d have to attract a broader base of customers if he wanted to run a real grocery store, not just be the food police. “The interesting thing about building a successful business is that you do help change things,” he says. “But on the other hand, if you’re not going the way people want to go, you won’t be successful.”
The idea that natural and organic foods were a healthier alternative was still countercultural when Mackey cofounded Whole Foods in 1980. The first store was a success by health-food standards, but it wasn’t in the same league as a supermarket. He likes to tell the story of how one venture capitalist said, as he declined to invest, “I think you guys are just a bunch of hippies selling food to other hippies.”
To expand, Whole Foods started buying up small natural-food chains, such as North Carolina’s Wellspring Grocery, Bread & Circus out of New England, and Mrs. Gooch’s in California. But when the company pursued Colorado-based Wild Oats in 2007, the Federal Trade Commission tried to block the acquisition. Whole Foods prevailed, but it was such a painful experience that management shifted more toward opening new stores rather than buying existing ones. Another lesson: Wild Oats had found success in smaller communities, which helped Whole Foods executives recognize the opportunity to peddle quinoa and organic Swiss chard in cities like Little Rock and Tulsa.
The real estate team has learned the hard way that some second-tier cities often have more potential than initially thought. The company picked a spot right in the center of town for its first, and what management thought would be its only, 50,000-square-foot store in Omaha. Now Whole Foods believes the market could support three locations there. But with one already right in the heart of the city, it’s hard to figure out where to put the other two. So when securing a site in Des Moines, Whole Foods went for West Des Moines with the thought that the population could support another store on the other side of the metro area. “We’re putting stores closer together than we ever thought possible,” says Jim Sud, who heads up growth and business development. “We find that there’s some initial cannibalization, but then we quickly recoup that, and the size of the overall market continues to grow.” In January when the company launched its fifth location in the Austin area, its oldest market, the store had a record-breaking opening day despite being less than two miles from another site.
Traditional grocery principles don’t always apply to Whole Foods, so it’s had to create its own. Sud and his team at one time used a variation of the supermarket industry standard, the gravity model, to predict sales volumes when considering a new store. The gravity model takes into account all the grocery business done within a certain trade area and assumes a new store will gain a percentage from each competitor. But sales at new Whole Foods stores kept outstripping the gravity model’s projections. “What we’ve found is Whole Foods creates volume that isn’t really there,” Sud explains. Now the company uses its own proprietary model.
The density of college graduates used to be the best indicator of whether an area’s consciousness was ripe for a Whole Foods. While that’s still true, “consciousness has gone beyond just being well-educated when it comes to healthy food,” Mackey says. “Now I would say, give us enough population density in an area, and we’ll get our share and we’ll be successful. Detroit and New Orleans already proved that, and Newark and inner-city Chicago and some of the other markets we’re looking at will just reaffirm that.” Mackey still views Whole Foods as a niche retailer — it’s just that its niche has gotten bigger.
Even with a more accurate model for projecting sales volume, a Whole Foods in Detroit wasn’t supposed to work. Analytically it made no sense. “I was definitely one of the most skeptical people,” Mackey says. His co-CEO, Walter Robb, was the one who championed the Detroit store. Whole Foods is a purpose- driven company, and Robb wanted to explore how it could reach people who hadn’t traditionally been seen as Whole Foods customers. “This criticism of organic food and natural food as being an elite thing, or only for some people, was really gnawing on me,” he says.
Robb and Midwest regional president Michael Bashaw visited Detroit in June 2010 to check out the city’s urban agriculture movement. Amanda Musilli, a native Detroiter and marketing team leader for the Michigan stores, showed them around, and afterward they asked her to start investigating the city’s culinary scene. “Once we started to learn about Detroit,” she says, “we saw people who were incredibly passionate about food.” For Whole Foods it wasn’t about creating a food movement in the city but about tapping into one that was already there… [Article continues]
This article originally appeared in the April 28, 2014 issue of Fortune magazine and online.