Perspective

John Mackey, Whole Foods, and meaningful work

John Mackey, the co-founder and outgoing CEO of Whole Foods, went viral last week for comments he made on a Reason podcast:

“They don’t seem like they want to work,” Mackey told Reason about younger generations in the workplace. 

“Younger people aren’t quick to work because they want meaningful work,” was Mackey’s diagnosis of the problem, referring to the well-known importance to Gen Z of finding work with some kind of social significance. This is a mistake, he said. “You can’t expect to start with meaningful work. You’re going to have to earn it over time.”

This is a very dunkable statement – what law of the universe makes it impossible to start with meaningful work? – but it is worth examining in the context of Mackey’s career.

At the time of this June 2017 Texas Monthly profile of Mackey, Whole Foods was struggling badly. The stock price was down by over 50% despite the ongoing bull market, same-store sales had been negative for a year and a half, and Jana Partners had recently launched an activist campaign that would shortly end in a sale of the company to Amazon.

Whole Foods had long been the dominant player in what the FTC would later define as the “premium and organic supermarket” segment of the retail market. Their stores were known for peddling gourmet foods at eye-watering prices, which earned them their well-deserved “Whole Paycheck” moniker.

By Mackey’s own reckoning, Whole Foods’ growth was long fueled by a weak competitive environment:

In the late nineties and early aughts, Walmart got into the grocery business in a big way, and mainstream grocers were “scared to death,” Mackey says. “Walmart was coming in and just taking away all their share, so they all tried to become more like Walmart. They cut their costs, they cut their labor at their megastores, didn’t invest as much into them, and the stores got to be kind of crummy. That created an opening for Whole Foods Market, which wasn’t trying to compete with Walmart on having the lowest prices. We transitioned over to a middle-class customer that we never thought we were going to get.”

By the late-00s, competitors like Safeway and Kroger were showing signs of catching up, improving their organic and prepared foods offerings. Still, when Whole Foods moved to buy smaller organic rival Wild Oats in 2007, the FTC blocked the deal, on the grounds that they both participated in a defensible retail submarket that they would then monopolize. (Hindsight is 20/20.)

Whole Foods would expand through the early 2010s, but by 2016, competition was taking its toll:

The regular grocery, in time, became good enough on quality—and usually better on price.

“Some of those middle-class customers, who weren’t really our customers from the philosophical standpoint but came to us just because our stores were nice, began to drift back to H-E-B and Safeway and whatnot,” Mackey says. Meanwhile, Trader Joe’s began to blanket America with its combination of smiling Hawaiian-shirt-clad salesclerks, low prices, small and convenient (and thus cheaper) store layouts, and clever, only-at-Trader-Joe’s packaged products.

This is the conundrum that has dogged Whole Foods for much of the past ten years. It continued to grow handsomely as it added more stores and ever more in-house dining areas and special services, but eventually the competition caught up to it. “They didn’t evolve,” says Phil Lempert, a longtime food-industry analyst and the editor of supermarketguru.com. “I think the chain really had blinders on and thought they were so far ahead of everyone else that they didn’t have to pay attention to competitors. The reality is, I can go to Kroger and buy the same or similar goods at a lower price—it’s that simple.”

A March 2017 Barclays research note by Karen Short (as summarized by Reuters) underscored the depth of the challenge:

Whole Foods is losing millions of customers to what was once an unthinkable threat: Kroger.

The organic-food chain has lost as many as 14 million customers in the past six quarters, according to Barclays analyst Karen Short.

Most of those customers are instead going to Kroger and probably won't ever go back to Whole Foods, Short said in a recent research note.

"The magnitude of the traffic declines ... is staggering," Short said. "As most retailers know — once traffic has been lost, those patterns rarely reverse."

Kroger — a conventional grocer not known for organic offerings — has not historically been regarded as a significant threat to Whole Foods.

…

Kroger's sales of organic and natural food totaled $16 billion in the past year, compared to $15.8 billion at Whole Foods, according to Barclays.

…

As Kroger's share of the organic-food market grows, Whole Foods' is shrinking.

Whole Foods' same-store sales fell 2.4% in 2016. That metric is expected to fall another 2.5% this year. Meanwhile, Kroger's same-store sales grew 1% in 2016.

The Jana 13D from April 2017 was very blunt about Whole Foods’ operational shortcomings:

JANA…intends to have discussions with the Issuer's board of directors and management regarding topics including:

…

[(4)] pursuing opportunities [for Whole Foods] to improve performance by advancing its brand development and by addressing core operating deficiencies in areas including customer loyalty and analytics, category management and analytics, technology and digital capabilities, procurement and buying practices, pricing strategies and value proposition communication, and online offerings, 

(5) improving in-store execution, including labor scheduling and management, management of inventory and shrink levels, stocking practices, product layout, in-store signage, private label program strategy and management, and assessing broader cost structure and operating opportunities, 

(6) evaluating opportunities to re-engineer the Issuer's suboptimal and cost-disadvantaged grocery procurement and distribution strategy, such as by internalizing distribution or pursuing other hybrid strategies…

In plain English, they had fallen behind in technology, they didn’t have a loyalty card program, and their distribution and in-store operations were inefficient and uncompetitive.

It’s hard not to feel a little bit of sympathy for Mackey and Whole Foods here. For years, they had been focused on innovation and growth, and understandably they never developed the scale or operational efficiency of a Kroger or a Safeway. Then, one day, Kroger and Safeway started copying their innovations, and on the other side, Trader Joe’s and Amazon came in with innovative models of their own.

This is the fundamental challenge for an innovative company: how to turn an early competitive lead into an enduring moat before another startup or an entrenched incumbent copies your innovations and executes on them better. As Netflix’s Ted Sarandos memorably put it in 2013 before they released House of Cards, “The goal is to become HBO faster than HBO can become us.”

There is no guarantee that this will turn out well for the innovator. Ford dominated the early automotive market, only to be crushed by General Motors. Apple had a near-death experience after losing their initial lead in PCs to Microsoft and Intel. Diners Club has long since given way to Visa and MasterCard.

How did Mackey react to the Jana activist campaign?

The timing was intentional,” Mackey says curtly … “They hijacked my book tour. It’s not that I think that they were trying to harm the book tour. It’s just like, ‘Okay, the CEO is going to be distracted. He’s not going to be able to give full attention to this.’ ”

We humans are self-centered creatures. The shareholders were thinking of the billions of dollars they were losing, the employees were worried about their jobs, and Mackey, the guy who was supposed to be accountable for the direction of this struggling company, was thinking about missing his book tour!

Which brings us back to his comment about the younger generation being entitled. Of course each successive generation is going to be more entitled. As long as the economy keeps growing, more productive companies will have to bid up wages to snatch workers away from less productive enterprises. This means that each new generation will have the ability to make increasing demands on employers, including demands for non-pecuniary benefits, like (gasp!) meaningful work.

The CEO of a less productive company (like Whole Foods), will always feel like the Red Queen, forced to run faster and faster just to stay in place. From their perspective, they are offering the same wages they did before, but suddenly workers are turning them down. They are charging the same prices they did before, but somehow customers are defecting to competitors. Therefore the problem must be external, not internal. 

The logic is absurd, of course – even if you had never watched a game of basketball, you could be a successful NBA GM today if you were somehow able to pay players 1980s-level salaries – but considered as a product of motivated reasoning, the mistake is understandable.

Being human, they invent convoluted narratives to explain what they see – a mysterious sudden societal tidal wave of wokeness, entitlement, or laziness – to avoid the simple explanation that is obvious to all, which is that they are simply no longer able to effectively compete in the marketplace. Notice that the executives of successful companies somehow never report experiencing these supposed problems! John Mackey’s comments illustrate an example of what I believe Gen Z now calls “copium”.

The truth is, we are all John Mackey. We make excuses, we vent, we contort ourselves into pretzels to avoid accepting reality. The difference is, we do not run a $15 billion company, so we do not have a platform to offer ourselves as thought leaders on “conscientious capitalism”.¹ (Riddle me this: what the hell is conscientious about charging $8 for a dozen eggs?) When we say dumb or offensive stuff in public, no one notices. (Usually. Don’t try that at home.)

Of course the younger generation is not “entitled” for having things better than the previous generation. That's just economic progress. “Entitled” might be a word you apply to a CEO that is publicly fretting about his personal brand and book tour while his company is falling apart.²

The hardest thing to do in the world is to truly consider something from the perspective of someone else. We subconsciously invent narratives and belief systems that justify our behavior. The trick is to build the self-awareness necessary to consciously know that we subconsciously invent narratives and belief systems that justify our behavior, and moderate our beliefs and public comments accordingly. 

1. Not that Mackey ever needed much of a platform. During the FTC’s suit to block the Wild Oats deal in 2007, it came out that Mackey had been an enthusiastic anonymous poster on Yahoo! Finance message boards since the late 1990s, pumping Whole Foods and badmouthing Wild Oats. Here are some select posts:

"I admit to my bias," he wrote in 2000. "I love the company and I'm in for the long haul. I shop at Whole Foods. I own a great deal of its stock. I'm aligned with the mission and values of the company ... Is there something wrong with this?"

"While I'm not a 'Mackey groupie,'" he wrote in 2000, "I do admire what the man has accomplished."

[In 2005:] "13 years from now Whole Foods will be a $800+ stock before splits." [It was at $94 at the time, and the comparable sale price to Amazon in 2017 was $168 before splits.]

"I like Mackey's haircut. I think he looks cute!"

2. In Mackey’s defense, he did build the company into what it was, and he did turn down a salary, but on the other hand, all of the stakeholders in Whole Foods would probably have preferred to have a fully focused and qualified CEO, even one that was getting paid eight figures.