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Whole Foods' Fresh Start

Of the many businesses celebrating the unique opportunity a new year brings to shake off some of the difficulties of the past, Whole Foods is high on the list.  

To say 2015 was not a great year is something of an understatement. The headlines were not always kind — and sometimes just out and out embarrassing.

There was the pricing scandal that saw certain New York City locations uncharged for no clear reason that was followed by the $6 “Asparagus Water” issue, which saw bottles of water with three sprigs of asparagus stuffed in marketed as a refreshing artisanal beverage (before being mocked far and wide as a ridiculous abuse of consumer trust).

And while both of the issues are important, the amount of traction they go remains surprising to Whole Foods co-CEO John Mackey.

“I mean — not to say we don’t take it seriously — but the fact that got national coverage was a surprise to us,” Mackey noted.

“The New York [City’s Department of Consumer Affairs] event [saying we overpriced items there], was making a mountain out of a molehill in the sense that every year in every city you are going to have weights and measured mistakes, and that’s true of every supermarket of America. Perfection is not quite possible there,” he said.

But imperfection ended up costing Whole Foods — in this case a $500K fine to the City of New York to settle the accusations, making it a rather expensive molehill.

More costly, perhaps, however was the artisanal asparagus water situation, which Mackey notes was even more a non-issue than the charging.

“Do you realize … we only sold one bottle of asparagus water in one store that was mispriced? And the guy who did the pricing, it was his first day on the job. And it was national news. And I think trying to get that corrected, no one was interested. It was very frustrating for us,” Mackey said. “It’s kind of like when you are accused of something, it’s very difficult to prove your innocence in the court of public opinion when people want to believe what they want to believe.”

But embarrassments in the public arena showed up at precisely the wrong time for Whole Foods, as they are far from the only big chain in the organic grocery game. A victim of their own success in some sense, the farm to table, pure food movement they were instrumental in starting has now spread beyond their control and into the hands of enthusiastic competitors like Walmart and Costco (to name the two biggest) who are offering organic access, but not at the “Whole Paycheck” price point.

“The word on the street is everyone is selling the same food. Well, they ain’t,” Whole Foods co-CEO Walter Robb told Fortune. “I know there’s a difference. I want to communicate the difference and sell the difference.”

But in 2015 at least, Whole Foods had something of a hard time selling that difference. Same stores sales fell every quarter, revenues fell and share price suffered. And the ranks have fallen. As fall got underway, Whole Foods announced its plans to layoff 1,500 employees, or 1.6 percent of its workforce between Oct. 1 and Dec. 1 as part of a broader plan to lower prices and upgrade its technological systems.

“We believe this is an important step to evolve Whole Foods Market in a rapidly changing marketplace,” said Whole Foods Co-CEO Walter Robb.

However useful the move was in the long term, however, handing people pink slips 30-60 days before Christmas was not exactly popular — and managed another round of negative headlines and stock price dips.

However, in the midst of all this turmoil — and the unprecedented amount of national news coverage — there was a lot of good news that got missed, according to Mackey.

“We’re over $15 billion in sales, we have EBITDA (earnings before interest, taxes, depreciation and amortization) of $1.3 billion (for fiscal year 2015). We have great returns on investment capital. We have 91,000 team members.”

Mackey further observed that much of the difficulty with Whole Foods' share price rises from weakness in the same store sales numbers, which the market tends to greet with an unusually narrow focus.

“Plus, we’re the first to admit, we have a lot of competition because of our success. People are copying us. … We used to beg people to write articles about us. We were just seen as a bunch of hippies selling food to other hippies.”

And while they are no longer seen quite that way, being seen as the hippies that are ripping off Americans at the grocery store is not exactly a huge improvement — and is an image the firm is working hard to shed. This doesn’t mean they will chase discounting — in fact, the executive leadership team has explicitly said the opposite — but that they are looking to make the operation more streamlined  and more transparent for consumers.  

Mackey also denies rumors the firms is looking to go public, saying that they are “not planning anything” and that “it's just rumors and speculation.”

What is on the agenda for 2016? Mackey’s nine-point plan.

“I think the biggest thing that is going to happen for Whole Foods is the nine-point (plan). Some of the points that we emphasized there: We are cutting costs; we’ve cut significant amounts of money out of our cost structure already and we’ve pledged that by the end of 2017 we’ll have a run rate of $300 million reduced from the end of fiscal 2015. That’s a significant amount of money. And … some of that money is going to be invested in lower prices all through the store.”

“We are going to increase our differentiation," he continued. "We are going to innovate more. We are going to do a better job of marketing or explaining and communicating those differentiations of our quality standards. … The world of marketing is changing so rapidly to the digital revolution and social media. So we are going to double down in our investments in those particular areas.”

The question isn’t "do consumers want organic food?" — the jury is back in on that one, and it is undeniably the case that they do. But as the options for it proliferate, and Whole Foods remains the priciest comer in the category, the question they have to answer is why customers should pay that premium when Costco is offering something with the same putative quality certifications at 60 percent of the price.

Whole Foods says that what they sell is better — and this year they aim to prove that to consumers. We’ll watch for the rest of 2016, and let you know how that turns out.

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