Why Did the Brand That Led America's Organic Food Boom Stumble Just as the Market Took Off?

What did Whole Foods do wrong?

“At this point, to move the company forward to its next phase, it's the right move to streamline the structure.” That is how Whole Foods co-CEO Walter Robb answered questions about the shake-up in the company's leadership on an investor earnings call.

Starting next January, he will no longer be a CEO of the company. John Mackey, the other co-CEO and a co-founder, becomes sole CEO again.

Announced alongside that decision were Whole Foods's fourth-quarter and full-year results for fiscal 2016: full-year revenue of $1.1 billion, with profit down 8.3%. Annual comparable-store sales fell for the first time since 2009, by 2.5%.

Brian Yarbrough, an analyst at the financial services firm Edward Jones, said the trouble Whole Foods is in has been pushing the two CEOs further apart: “It's probably easier to reach consensus when things are going well.” The board is now betting that Mackey deciding alone can bring back the company's old glory.

From 2010 to 2013, Whole Foods's comparable-store sales grew 7% or more every year, and the stock peaked in 2013. It was the best-known organic supermarket in America, aimed at middle-class shoppers and up, and one of those lifestyle brands people held up as a model.

When Mackey opened a grocery store called Safer Way in Austin in 1978 with his then-girlfriend, Renee Lawson, he probably never guessed the little shop would grow into Whole Foods, with 464 stores in the United States, Canada, and the United Kingdom. Back then they didn't even sell meat, sugar, or coffee — a direct reflection of how Mackey himself ate.

Safer Way did poorly at first. It later merged with another local natural-foods grocer, Clarksville Natural Grocery, and Whole Foods was born.

The first store sold more than vegetables and oats. It also sold meat, beer, and wine. That fit what Whole Foods would become: it urged customers toward a healthy life without making the shelves feel like a lecture, and without demanding that anyone follow a rule to the letter. Kevin Kelley, a consultant who once worked for Whole Foods, said you could buy vegan cheese there and cheesecake too; what the store preached was “healthy indulgence.”

Mackey later said in an interview: “One of the funny things about building a successful business is that you let things change — but on the other hand, if you don't change them the way people want, you won't succeed.” Mackey, whose own diet ran to extremes, did not entirely approve of what his store sold: “We sell a bunch of junk.”

Either way, the first Whole Foods was a hit locally. In 1984 they began opening branches in Houston and Dallas, then grew by buying up grocery stores around the country while opening new ones of their own.

Unlike Walmart, Whole Foods put its stores in dense city centers, which followed from the customers it wanted. It also weighed who lived nearby, down to how much schooling they had: one of its site-selection measures was the number of college graduates within a 16-minute drive.

Because it sold itself on green, organic, and healthy, Whole Foods also pushed local sourcing — now a popular way to eat across the United States.

So one thing set Whole Foods apart from other supermarket chains: it let each region run itself. Whole Foods split the country into more than a dozen regions, and each regional team could pick its own managers and its own products. The Portland store sold live lobster; at the Brooklyn store, customers could drink craft beer at a rooftop bar beside an enormous greenhouse. They worked with local bakers, cheesemakers, egg farmers, and other suppliers to stock organic food you could buy nowhere else.

In 2011 Whole Foods announced it would grow from its then 300-plus stores to 1,000, no longer sticking to places where shoppers already knew organic and natural food but moving into smaller cities too. Plenty of people doubted it, arguing that nobody out there would pay a premium for more humanely raised pork. But Whole Foods stores in cities of 200,000 to 300,000 people were welcomed anyway, because until then those places had barely any organic option at all. Whole Foods once put that success down to the business waiting in “food deserts.”

What Whole Foods sold its customers was not a product but a way of living. From the day it opened in 1980, it refused to stock anything with artificial colors, artificial additives, or preservatives. It also kept a very long list of banned food ingredients, high-fructose corn syrup and aspartame among them. Before the U.S. Food and Drug Administration had rules of its own, Whole Foods was already making suppliers list every ingredient on the package. In 2013 it said it would label all genetically modified ingredients by 2018.

The road was not always smooth. According to a 2007 report in The Wall Street Journal, Mackey, then the CEO, had spent eight years posting on a Yahoo stock forum under the alias Rahodeb, much of it attacking his competitor Wild Oats, praising Whole Foods, and complimenting its CEO — himself — on his looks. Shortly before the story ran, Whole Foods had bought Wild Oats, and the Securities and Exchange Commission opened an investigation into whether the deal was clean. The public turned on Mackey fast, and the stock fell with him.

The acquisition eventually survived the investigation, but in 2010 Whole Foods switched to a two-CEO system, and Walter Robb, until then the COO, became co-CEO and joined the board. In a blog post, Mackey wrote that the investigation had eaten up much of his time on matters that had nothing to do with running the company, while Robb's contribution to its success was beyond measure and had never gotten the public credit it deserved.

By 2014 Whole Foods was one of the most successful retailers anywhere: compared with 2007, revenue had doubled and profit had tripled. Much of the credit for teaching Americans to like organic and natural food belongs to Whole Foods: “Though it accounts for just 1% of the U.S. grocery market, there's no question it has changed the way Americans produce, buy, and eat food.”

Huge numbers of shoppers had been turned into organic enthusiasts — seven million customers walked into Whole Foods every week. And then the trouble started.

As in plenty of other industries, once a small company leads a trend in consumption and grows the market, the big incumbents pile in, new companies show up with similar products and services, and competition tightens all at once.

Mass-market chains like Walmart and Costco had started selling organic food, and selling it cheaper. There were also organic grocers positioned much like Whole Foods — Sprouts, Trader Joe's. Whole Foods had more and more rivals, and next to them its own prices were nothing special. “Whole Foods's problem now is that it's hard for them to attract new customers, or to win back customers who've stopped shopping there. Traditional grocery stores have all increased their selection of Whole Foods-type products, and at lower prices,” said William Kirk, an investment analyst at RBC Capital.

Shoppers might not even have to leave the house. They could buy fresh food on Amazon or order from meal-kit companies like Blue Apron. Few places still went without organic food the way they once had.

Whole Foods knew the bind it was in. It tried a cheaper sub-brand, 365, to pull in young people who liked organic food but didn't have much money, and so widen its customer base.

The first 365 opened in Los Angeles, four kilometers from the nearest Whole Foods. About half the fruit and vegetables in the store were not organic, a higher share than at Whole Foods, and there were no fishmongers, butchers, or wine experts on hand to talk shoppers through their choices. 365 cost less to run than Whole Foods, took up less space, and sold cheaper goods. It also started to look a lot like the competition.

Whole Foods stores tried cutting prices to win shoppers back as well. But Mackey now insists the cutting has a limit: “Investment in promotions and price is an essential part of the business, but we are not going to engage in a race to the bottom.”

Clearly, if Whole Foods ever got caught in a price war with Walmart, it would have almost no chance of winning — and every price cut would carry it further from its upscale image and eat into its brand premium.

So Whole Foods tried something else to win its customers back: talking about values. In October 2014 it launched a huge advertising push, with ads on television, in print, online, on billboards, and in every store. Instead of stressing local sourcing and pushing its 365 house brand, as it had before, the ads showed food being grown, raised, and harvested, and told shoppers they could trust everything on the shelves — that Whole Foods was “America's healthiest grocery store.”

The campaign cost $15 million to $20 million. Before that, the most Whole Foods had ever spent on advertising in a year was $8.4 million, in 2010. This year it even tried to trademark the phrase “World's Healthiest Grocery Store,” and the U.S. Patent and Trademark Office turned it down.

The awkward part, for the company that opened up the organic market, is that Americans keep spending more on organic food. A report published this year by the Organic Trade Association put U.S. organic product sales at $43.3 billion in 2015, 11% higher than the year before. Organic made up 5% of all food sold in 2015, and the share is still climbing.

Whole Foods's market value has fallen 13% this year, but the stock rose 5% after the company announced the change at the top. Wall Street, like the board, seems to think that putting Mackey back in full control of operations might turn things around.

The turn had better come quickly. With more and more supermarkets and grocery stores taking organic food seriously, Whole Foods does not have many chances left.

Cover image: Whole Foods, forknplate.com