Is Whole Foods Losing Its Sustainable Luster?

Lost in the ear-splitting uproar over Whole Foods CEO John Mackey’s controversial venture into the health care debate, is a bigger, though less subtle story.

It’s a story about how a small, well-intentioned sustainable food company lost its way. It’s a story of how that company went from a single natural foods store in Austin, Texas to industry juggernaut, with every intention of dominating the natural foods retail category, in the nearly-identical way its conventional competitors came to dominate their sectors, i.e., achieving massive scale through acquisitions, new stores and eliminating smaller competitors.

Along the way, that company, Whole Foods, traded in any sense of purpose it had regarding regional food systems to pursue increasingly larger financial objectives, e.g., $12.0 billion in sales by 2010, up from $8.0 billion in FY08 sales and maintaining its 30% CAGR in sales since ’91 IPO. Today, Whole Foods, which publicly trades on the NASDAQ exchange (symbol: WFMI), owns the natural foods retail category, providing solid annual financial returns to its shareholders. Significant accomplishments considering Whole Foods’ humble beginnings.

But alongside this growth, a company with great potential to fundamentally change sustainable food lost its luster. Although shareholders, who have earned handsome returns over the years – 15% CAGR in stock price since IPO – cannot complain, sustainable food advocates can. Here’s why.

After acquiring 19 regional chains since 1991, beginning with New Orleans-based Whole Food Company and ending with its recent $565 million acquisition of Wild Oats (#2 national chain with 110 stores, compared to Whole Foods’ 191 stores), the resulting natural foods landscape now resembles the highly concentrated, conventional food retail space more than it does the regional food systems that sustainable food advocates identify as key to improving the food we eat.

The problem with Whole Foods isn’t necessarily its management or financial performance; it’s that the company has morphed into what amounts to a “sustainable” version of Wal-Mart and Kroger and every other multi-billion dollar supermarket chain. As evidence, the original Whole Foods Market opened in 1980 at 10,500 square feet, quite large compared to other natural foods stores at that time. By 2008, its 276 stores averaged 36,000 square feet, and it plans to open 70 new stores through fiscal year 2013 at an average size of 47,300 square feet, slightly above the conventional food supermarket median average of 46,755 square feet. Taken together, these stores will occupy over 13 million square feet of retail space, stocked with tens of thousands of packaged, processed and perishable items, purchased almost entirely through large national distributors, much like any other large supermarket.

There’s every indication that these massive Whole Foods “natural foods” stores will continue popping up in more regions, including smaller markets, e.g., Burlington, Vermont, a city of less than 40,000 citizens in a county barely breaking 150,000 people. Burlington is home to one of the more vibrant sustainable food communities in the country. There are no Whole Foods Markets or Trader Joes in this town. Instead, residents frequent food cooperatives, farmers markets and community supported agriculture (CSA) farms, purchasing above-average quantities of food from local farms and processors.

Whole Foods entering markets like Burlington begins the systematic weakening of the fabric of such vibrant regional food economies. Unintentional or not, Whole Foods’ very presence in these markets undermines established relationships between regional food retailers and suppliers, including farmers, processors and related service providers.

When you consider Whole Foods in this light, you see yet another national, multi-billion dollar corporate giant entering regional markets, amassing market share through lower prices (leveraging economies of scale from its large-scale distribution partner, United Naturals Food Inc.), chronically injuring or killing off local and regional businesses, and exporting massive financial value out of each region. Do they care that regional farmers and food processors are stuck having to find new channels to market or entirely new markets? Difficult to say, but smaller suppliers don’t work well within Whole Foods’ centralized distribution system, which clearly favors large-scale sustainable food suppliers, many of which are now owned by the world’s largest food processors, e.g., Stonyfield Yogurt, Kashi, Muir Glen (more).

The unfortunate part of all this is that most people associate Whole Foods with organic and sustainable food, which is deserved for the good work the company has done over the years, but less so when you consider the overall sustainability of the large-scale, nationally-controlled food system that Whole Foods is now part of. In my book, Whole Foods is only slightly better than Wal-Mart or Krogers, respectively the 1^st and 2^nd largest supermarkets in America, which is what the debate should really be focused on.

Perhaps there are reasons to “boycott” Whole Foods. One could protest its decision long ago to turn over its long-term objectives to shareholders, rather than considering all stakeholders, especially regional farmers and food processors; but that isn’t going to change Whole Foods, since it can’t undo what is done without certain financial ruin.

Rather than boycott, why not leverage Whole Foods’ evolution into a Kroger, Safeway or Albertsons-style supermarket in more sustainable clothing? Tell your friends, family and coworkers that they can get anything they are accustomed to buying at conventional supermarkets at a Whole Foods instead. Tell them doing so is more sustainable than those alternatives, which is generally true.

Then, knowing that your personal defection from Whole Foods will have little impact, start shopping at a local food store or regional chain offering produce, meats and other regionally-produced foods. Your challenge will be finding such businesses since they were likely acquired or put out of business by Whole Foods years ago.

In time, a new generation of Pro Food ventures will show up to fill this void, region by region. Until then, you might want to start a garden.

Seeing Through Food Industry’s “Personal Responsibility” Smoke Screen

I grew up in a home where family meals were the norm. Nearly every night, nine of us would crowd around the kitchen table to enjoy a home-cooked meal together, recount our days, laugh and argue, celebrating each unique personality’s contribution to the whole. Each meal made the fabric of our family stronger. Those experiences have stayed with me as I’ve grown and started a family of my own, where I happily continue the tradition of sitting down together nightly to share a meal and exchange stories.

For us, food is at the core of what makes us strong, happy and healthy as a family and as individuals. It isn’t about calories, nutrients, micro nutrients and so on. It’s about engaging our senses, strengthening our community by buying local foods whenever possible and sharing with our friends and neighbors. It’s about creating a healthy foundation for our growing children.

We knowingly spend a greater portion of our income on food than the average American household, which works because we forgo things that bring us less value, e.g., cable television, new cars, fancy vacations and more. This sort of conscious decision making is at the core of personal responsibility, and is something we work hard at every day. Living in a rural community, surrounded by farms and dairies and being outside the reach of most mainstream media surely helps.

But today, the individual’s ability to exercise personal responsibility has been severely compromised by our industrial food system. Yet defenders of the status quo consistently use “personal responsibility” as a smoke screen to cover the tracks of industrial food, tracks that run roughshod over the mirage of choice and personal responsibility.

It is clear that industrial food knowingly develops and promotes food-like substances that make us fat, spread diet-related diseases and disregard unsustainable impacts on our environment. Backed by hundreds of billions of dollars in product development, marketing, advertising and lobbying, along with government regulations favoring industrial food, there is seemingly nothing standing in their way.

Except for those who believe it is time to rein in processed foods. Our numbers are rapidly growing, making us increasingly capable of driving real, meaningful change, especially through entrepreneurial means (see Pro Food). These changes will take many forms, but here is one that I find particularly compelling.

First, we significantly reduce the number of highly processed food-like products (and the many empty calories they deliver). Next, we repopulate those now-empty shelves with whole and minimally-processed foods. Finally, with fewer processed foods, which take up considerable floor space in today’s supermarkets, we begin replacing these unsustainable retail dinosaurs with intimate, community-oriented food stores (<5,000 square feet), designed from the ground up, to help consumers expand in-home food preparation, what we used to call “cooking.” And with triple-bottom-line operating models (see Pro Food advantages), these new stores will sustainably balance people, planet and profits, something industrial food unfortunately can’t do without ultimately destroying itself.

Clearly, such changes would rock today’s industrial food system, but leaving it as is perpetuates the problems we face. As most major food companies are publicly traded they must increase sales, reduce costs or both, quarter after quarter, to increase shareholder value or face the consequences (Note: shareholders (owners) are not the same as stakeholders, which would include eaters, whose interests, beyond food expenditures, are secondary). This singular bottom line focus drives them to do whatever is necessary to maximize profit, which they typically achieve through sales of new products with high initial profit margins. That is upwards of 17,000 new “food” products are introduced every year.

These highly processed, engineered foods, never before seen, but often extending an established brand name, are not guaranteed financial success, so food companies invest tens of billions of dollars every year in sophisticated marketing programs and advertising campaigns to build demand, with a heavy emphasis on hawking heavily sugared wares to children and convenience to their ever more harried parents. Undeniably, these highly sophisticated product development and demand creation engines are significantly influencing consumers; worse, these campaigns are often coordinated to affect us in subconscious ways: the potent combination of food science and marketing at work!

Without continuous financial improvements, the value of food companies would suffer greatly. That isn’t happening. Consider that since 1979 (30 years ago) General Mills stock price is up 577%, while Wal-Mart has registered an astonishing 420,000% increase (from less than $0.12 per share to $49.14; hasn’t always been in food retail, but rapidly ascended to #1 in category). Then there’s Cargill with estimated revenues at $120 billion, which would make it a Top 10 publicly traded company. Clearly, food companies are meeting shareholder expectations, which doesn’t bode well for consumers, who are largely “responsible” for this financial success.

As for the significant financial pain and organizational upheaval the changes Pro Food envisions will have on the industrial food system, while the transition will be difficult, not sudden, America’s entrepreneurs will get a running start. And if there is one thing we can count on, it’s our entrepreneurs: the best in the world at picking themselves up, brushing themselves off and getting back to work.

The results of such a revolution in how we grow, process and consume food will be significant. Sustainable businesses will become the norm, offering rewarding careers for people interested in more than a single bottom line. Regional economies will begin rebuilding after being decimated for decades by large food retailers. Our food system, through hard work, sustainable technologies and a longer-term perspective, will regain its balance with nature. And, most important, food will become an enjoyable, enriching part of our daily lives, rather than just another accessory.

Join the Pro Food Revolution…already in progress.

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