In 2016, the Whole Foods supermarket chain founded by John Mackey had more than 460 stores in the United States and revenue of 16 billion USD.
Amazon’s USD 13.7 billion acquisition of premium supermarket chain Whole Foods Market may be a wise decision for both sides: Amazon is entering grocery retail, while Whole Foods needs to hold its ground in the organic-food market it helped create. Notably, however, the 2 companies have very different origins and founding philosophies.
Amazon is the result of Jeff Bezos's obsession with the efficiency and scalability the Internet provides. The e-commerce giant's vision is to “build a place where people can find and discover anything they want to buy on the Internet” and deliver it to you in just one day. Amazon reached a market capitalization of nearly USD 475 billion because Americans are willing to pay for convenience.
Meanwhile, Whole Foods is the result of an ambition to change how people eat, make them healthier, and promote environmentally sustainable, ethically produced food.
After Whole Foods shares peaked at more than USD 60 in 2013, the company began to be pushed back by the very competition it had created. Giant supermarket chains such as Wal-Mart and Kroger also began selling organic food like Whole Foods, followed by startups such as Blue Apron, delivering fresh ingredients and recipes directly to customers. Whole Foods then faced many difficulties.
CEO John Mackey in a Whole Foods Market store today. Photo: CNBC/Whole Foods Market.
As a result, Whole Foods' share price fell by more than half, and activist investors such as Jana Partners began seeking control of Whole Food. This was unwelcome news for co-founder and co-CEO John Mackey, the only founder still with the company. Although he acknowledged that the company needed to change to move forward, Mackey opposed selling Whole Foods.
Mackey, who has accepted a USD 1 salary since 2006, will earn USD 8 million from selling Whole Foods to Amazon at USD 42/share. Jana Partners, meanwhile, will make a profit of USD 300 million.
Humble beginnings
Mackey, 63, grew up eating chocolate-flavored cereal for breakfast, hamburgers for lunch and mac’n’cheese for dinner. He did not recognize the value of a healthy plant-based diet until he moved into a vegetarian community at 23, after dropping out of university from boredom.
There, Mackey became the person who bought food for the rest of the community. He began to be fascinated by the potential of healthy eating.
Without degrees but with passion, Mackey and his then-girlfriend Renee Lawson Hardy decided to open a grocery store specializing in natural food. They planned to raise 50,000 USD but could only secure 45,000 USD. In 1978, they opened the shop on floor 1 of an old house in Austin, Texas, with a café on floor 2 and their living quarters on floor 3. Called SaferWay, the store sold no meat or anything containing sugar.
Two years later, Mackey and Hardy approached another grocery store with similar products, Clarksville Natural Grocery, then owned by Craig Weller and Mark Skiles. The 2 sides decided to join forces and opened the first Whole Foods Market in 1980. To attract more customers, they began selling meat, beer and wine.
The first Whole Foods Market store. Photo: CNBC/Whole Foods Market.
Whole Foods Market was successful from its very first day. “People were so excited about this first store. It was magical, and we hadn't done any advertising. We simply opened the doors,” Mackey recalled. “The power of word of mouth was incredible. Austin's entire hippie community knew about the store immediately.”
Dying and coming back to life
When Mackey was looking for a location for the first Whole Foods Market store, the landlord said it was in a vulnerable area: every 100 years, it flooded 1 time. With youthful enthusiasm, Mackey was willing to take the risk, which turned out to be a mistake.
In the spring of 1981, a major flood occurred. The entire store was submerged, sewage overflowed from the drains, inventory was destroyed, and many looters arrived. Mackey remembered wading through the black water to try to recover the cash in the safe.
Most frightening was that Whole Foods had no flood insurance. Mackey said: ‘We thought we were bankrupt. Whole Foods should have drowned in that flood. We had to rebuild the store, which would cost a lot, and we had no money, so we all thought it was over.’
Yet the Austin community joined forces to save Whole Foods. Customers came to help clean the store, investors contributed more money, banks extended credit limits, and employees worked without pay to revive it.
Mackey said: “We truly came together after that experience.” When the store reopened, he decided to expand. “I wanted to open a second store after the flood. We could not keep all our eggs in one basket.”
The ruins of Whole Foods Market after the flood. Photo: CNBC/Whole Foods Market.
In 1988, when Mackey approached venture capitalists to raise money for expansion, he was repeatedly rejected. One venture capitalist told him the market was too crowded: ‘You know, John, I think you have a pretty good company, but you seem like a group of hippies selling food to other hippies, and I do not think that is a big enough market.’ A decade later, the same person told Mackey that not investing in Whole Foods had been his worst decision.
But Mackey ultimately succeeded in raising capital: Whole Foods sold a 34% stake for 8.5 million USD, equivalent to around 15–20% of revenue. To raise more, Mackey listed Whole Foods in 1992, raising 28 million USD at a valuation of 100 million USD.
Since then, Whole Foods has grown strongly as healthy eating became popular. In 2016, it had over 460 stores in the United States, revenue of USD 16 billion and 87,000 employees.
“No One Loves Whole Foods Market More Than I Do”
Unable to withstand investors' pressure to sell the company, Mackey was caught between his ideals and finding a way to keep Whole Foods operating.
Mackey observed: “There is no point when you can say, ‘This is my final destination.’ What makes capitalism dynamic is that if you succeed, people copy you, and that is what happened to Whole Foods. Many people copied us.”
Today, Mackey still lives in Austin and often drives past the first Whole Foods store. He thinks about the past, but also understands that staying strong in business requires evolution.
Mackey said: “Nobody loves Whole Foods Market as much as I do. But building a business is somewhat like having children and watching them grow. You hope your children are healthy, happy, principled and do what is right. I think having a good founder matters, but great businesses continue after their founders leave. I hope Whole Foods will be one of them.”
