No Preservatives No Unions Lots of Dough A Teva-wearing ex-hippie Texas libertarian has a recipe that's making organic food the hottest thing in the grocery biz.
By Julia Boorstin

(FORTUNE Magazine) – The Whole Foods Market in Manhattan's Chelsea neighborhood is a Friday-night scene. Singles flirt over a table of organic tomatoes on the vine, balls of fresh mozzarella, and fragrant bunches of basil. A well-dressed man marvels at a perfectly polished kohlrabi; his companion says into her cellphone, "I'm going with the wild salmon." The wood paneling, neutral colors, and mellow Latin music would suit a holistic spa. Shoppers leave glowing, their recycled bags brimming with healthy food and social responsibility. How can Albertson's possibly compete?

Ten years ago "health-food store" conjured up a cramped, ill-lit space reeking of wheat grass and stale carob chips. Employees were pale, pierced vegans who appeared to be in need of chicken-fried steak and sunshine. Mainstream shoppers stayed away.

They're not staying away from Whole Foods. The company that disdains hormones has financials that look as if they're on steroids. From a single shop in 1980, Whole Foods has expanded to 143 stores with 23,000 employees, making it the nation's largest natural-food chain and the fastest-growing company in the fiercely competitive grocery business. Its same-store sales growth has been more than 8% over the past two years--extremely impressive, say analysts, given that major grocers saw same-store sales dip into negative territory during that period. Its stock has risen 131% in three years. Its 2002 margins of 3.1% on continuing operations (they have increased in recent quarters) are almost twice those of Safeway. Revenues--$2.8 billion in 2002--have doubled in five years. (The company's only natural-food competitor, Wild Oats, with just one-third of Whole Foods' revenues, is recovering from losses in 2000 and 2001.) And Whole Foods is moving forward with plans for 260 stores and revenues of $10 billion by 2010.

That impressive growth is due partly to the increasing interest that aging boomers are taking in their families' health. But Whole Foods' surprising prosperity can be attributed mostly to its unconventional founder, John Mackey. Mackey, 50, hardly looks like a CEO. His uniform is a short-sleeved shirt, shorts, Teva sandals, and a ruddy tan acquired while roaming the 720-acre ranch outside Austin he shares with his wife, Deborah, a yoga teacher. He doesn't act much like a CEO either. Last year, during one of the worst economic slumps in decades, he took five months off to hike the entire length of the 2,168-mile Appalachian Trail. (His trail name: Strider.) You won't find him cultivating the press or rubbing elbows at Herb Allen's annual Sun Valley, Idaho, retreat: He assiduously shuns the spotlight.

Finally, Mackey doesn't talk like a CEO. Ask him about building his company, and he'll tell you he relies on a theory most people haven't heard since Psych 101: Abraham Maslow's hierarchy of needs. "Humans' needs move up from food and safety, to community and a sense of belonging, to the need for beauty," he lectures. "The next levels are education, esteem, and self-actualization."

Mackey, you see, has no business training. He's a former student of philosophy and religion who spent six years in the 1970s dropping in and out of two Texas colleges. (He never earned a degree.) He's a wacky combination of Texan don't-tread-on-me libertarianism and hippie social consciousness. In one breath he'll tell you earnestly that he strives to infuse "truth, love, and beauty" into his stores; in the next he'll say, "I believe in free minds and free markets." He's a committed vegetarian, but he sees no problem with peddling meat. He says he believes in empowering his employees, whom he calls "team members," but he actively opposes their unionization. Unions are "highly unethical and self-interested," Mackey says, contending that they would interfere with his company's principles of open communication and trust.

A voracious reader, Mackey draws on influences from Milton Friedman to Austrian philosopher Friedrich Hayek. His role models aren't social workers but rather industry-transforming CEOs like Bill Gates, Michael Dell, and Starbucks founder Howard Schultz. "Who has done more good for the planet: Mother Teresa or Bill Gates?" he demands. "No contest--Gates has helped far more people." And Mackey has plenty of respect for companies that don't follow his healthy-grub philosophy. "McDonald's pioneered fast food and gave people what they wanted," he insists. "Every company meeting customer desires is doing something good."

Mackey began honing his unconventional world view in 1978, a year after he joined a vegetarian co-op in Austin. He and his then girlfriend began looking for a feel-good way to support themselves. They raised $45,000 from friends and family and opened Safer Way, a vegetarian health-food store, on the first two floors of a Victorian house in town. In its first year the 3,000-square-foot store lost money as the business novices learned the basics: ordering products, marking them up, managing inventory. By its second year Safer Way was earning a modest profit, but Mackey realized that his store was too small to compete. And its strict focus on vegetarian foods discouraged shoppers who might have a yen for steak.

So Mackey closed Safer Way and in 1980 opened Whole Foods Natural Market, one of the first supermarket-style natural-food stores. The 10,000-square-foot store was a full-service supermarket alternative, not a "holy-foods market," Mackey says. It sold not only pesticide-free produce but also hormone-free meat and such preservative-free goodies as ice cream, candy, and potato chips. "We're not just about being organic," Mackey says.

In the earth-friendly 1980s, Whole Foods became one of a number of natural-food minichains; it acquired four stores and built seven in its first dozen years. In 1992 it broke from the pack with an IPO that raised $23 million and financed a decade of acquisitions. Whole Foods spread across the country as it bought small local stores, as well as companies like Bread & Circus in New England, Fresh Fields in the Mid-Atlantic states, and Mrs. Gooch's Natural Food Markets in California.

The company put the Whole Foods name on its new stores and absorbed the best of each chain's practices. In the beginning Whole Foods' bread and butter (so to speak) was dry goods; many of its perishable departments lost money. When Mackey acquired Bread & Circus in 1992, he was wowed by its high-quality--and highly profitable--produce, meat, and seafood departments. He quickly recreated them in his other stores. Those perishables became a huge draw for mainstream customers and now make up 65% of sales. After a take-home deli station became a hit in the Palo Alto store, every other location installed one. Features like that help Whole Foods earn annual average sales of $693 per square foot, vs. $350 to $450 for a regular supermarket.

The products of most supermarkets are backed by national ad campaigns that help create favorite brands. But the natural products at Whole Foods tend to be unfamiliar to shoppers. To take advantage of the lack of brand loyalty, Mackey introduced store-branded items in 1991. Today Whole Foods' store brands are the bestsellers in 90% of their categories.

Mackey knew that to lure customers from regular supermarkets, he had to make his stores one-stop shops. That's why they are big: The average new store measures 35,000 square feet. And they're comprehensive: Customers can buy paper towels and cat litter--all natural, of course--with their sushi and shade-grown coffee. Mackey set out to educate customers about the origin and benefits of his products so that they would understand and accept the premium pricing. Pamphlets explain meat safety and seafood sustainability; in-store signs define terms like "free range" and "certified organic." (In June the company became the first national grocer to receive the "certified organic" designation from the federally recognized group Quality Assurance International.) Mackey likes to compare Whole Foods to Starbucks: He wants natural foods to become as common as $4 lattes.

Even as his company moves toward the mainstream, Mackey continues to ignore some common grocery-store practices. For example, Whole Foods customers can find different items in different stores because regional directors and store managers choose local products. That is a drastic departure from the way supermarkets do business. They generally stock all stores the same way and collect fees from national vendors in return for favorable shelf placement for the vendor's products. At Whole Foods, maintains Mackey, "we're not going to turn down the best product if the vendor won't pay us $10,000."

Mackey's insistence on doing things differently stretches all the way down the food chain. For example, Whole Foods is the only supermarket that owns and operates a waterfront seafood facility. Located in Gloucester, Mass., the facility processes fish caught by 15 boats working exclusively for Whole Foods. Full control of the site allows the company to guarantee that its fishing practices are environmentally sustainable and that the fish are handled safely. While Mackey embraces such environmentally responsible practices because he thinks it's the right thing to do, he also concedes, "It's not all altruistic. Our customers want us to act in an environmentally responsible way. To maximize shareholder value, you'd better be a positive force in the community."

Not everyone sees him as a positive force. Animal-rights group PETA and vegetarian advocacy group VIVA picketed Whole Foods' annual meeting in April, alleging that some of its meat suppliers treat animals inhumanely. Mackey dismisses the complaints. "I'm a vegetarian, but we recognize that humans want to eat animals. Our animal-welfare standards allow those animals to flourish and fulfill their animal potential," he says with great seriousness.

Unions have also attacked Whole Foods, the nation's largest non-union food retailer after Wal-Mart. The National Labor Relations Board is investigating charges that the company coerced and retaliated against pro-union employees. Debbie Rasmussen, fired from the Madison, Wis., store last November, believes that management found an excuse to terminate her for pro-union activism. (A Whole Foods spokesperson says that Rasmussen was dismissed for "breaking the rules and store policy.") Rasmussen contends that Whole Foods, which "presents an image of empowering employees,... doesn't live up to the expectations it puts out to the public."

Mackey says he knows that workers turn to unions when they believe that they aren't being heard by management. "Maybe we've neglected our team members over the past few years," he says. "I'm putting that back in balance." One example he cites: Whole Foods will allow workers to vote on benefit plans to choose how much money they want to allocate for everything from health care to tuition reimbursement.

Meanwhile, Mackey is plowing ahead with his ambitious growth plans. CFO Glenda Flanagan predicts that the company will hit its $10-billion-a-year revenue target by the end of the decade with domestic growth alone. Analysts say that's a realistic goal, in part because Whole Foods has stores in only 35 of the top 50 U.S. markets. Organic and natural-food sales, which have risen 20% nationwide during the past two years, are expected to keep going up at least 7% annually over the next few years. But expansion also brings challenges. Whole Foods' success is largely due to its flexible, decentralized decision-making, says Morgan Stanley analyst Mark Wiltamuth. "That will be hard to maintain as the company grows."

Whole Foods also faces increased competition from mainstream grocery chains, many of which have established natural and organic stores-within-a-store. Mackey isn't concerned. "When customers make a lifestyle shift, when they say, 'I want my family to eat healthy,' they don't really want to buy those foods at Safeway," he says. "They want to make a statement about who they are by where they shop."