Whole Foods CEO John Mackey In Hot Water
A Grocer's Brash Style Takes Unhealthy Turn:
Were Posts by Mackey, CEO of Whole Foods, A Case of Ethics, or Ego?
DAVID KESMODEL and JONATHAN EIG / Wall Street Journal 20jul2007
John Mackey has never needed the anonymity of the Internet to speak bluntly.
"I'm going to destroy you," the co-founder and chief executive of Whole Foods Market Inc. shouted at Perry Odak, CEO of Wild Oats Markets Inc., the first time the two men met six years ago at a retailing conference in Manhattan, according to Mr. Odak.
At that time, Mr. Mackey had already established a reputation as a maverick, whose growing chain of upscale natural-foods stores was shaking up the way traditional grocers did business. Officials at Whole Foods say Mr. Mackey tells a different version of the story — with milder language — but the confrontation has nonetheless become part of his food-industry legend. Mr. Mackey's combativeness became even more widely known with the revelation last week that he used an alias for nearly eight years to post messages on Yahoo Finance message boards, bashing competitors and praising everything from his company's quarterly financial performance to his own haircut.
On Tuesday, Mr. Mackey apologized and the Whole Foods board announced it will launch an internal investigation. The Securities and Exchange Commission is examining the chief executive's posts to see if they violated the law. Mr. Mackey's online alter ego came to light in a court filing by the Federal Trade Commission, which filed a lawsuit last month seeking to block Whole Foods's planned purchase of Wild Oats on antitrust grounds. Meanwhile, Mr. Mackey's critics and supporters alike find themselves struggling to explain his behavior.
While Mr. Mackey has declined interview requests, Whole Foods said in a statement last week that its chairman and CEO's online comments — attributed to Rahodeb, an anagram of his wife's name — were personal, not professional. But friends and colleagues of the vegan college dropout say that as Mr. Mackey built the world's largest natural-foods retailer, there was little distinction between his professional and personal sides. That's why few people close to him were surprised that he tooted his own horn and blasted his critics online. Their only surprise was that he did it anonymously.
Obviously, WFMI is no Wal-Mart (not yet anyway)! —Rahodeb, Nov. 29, 2000
Mr. Mackey's career, and a revolution in American supermarkets, began in a three-story building on Eighth Street and Rio Grande in Austin, Texas, late in the 1970s. There, Mr. Mackey and a girlfriend had a health-food store called SaferWay on the first floor, a restaurant on the second and a bed on the third.
A few years later, a handful of health-food-store operators from around the U.S. began gathering periodically to socialize and talk about the business. They were united by two things: their powerful belief in the importance of healthy and natural foods, and a sense that mainstream grocers dismissed them as a bunch of soy-milk-sipping hippies with no clue how to run a business.
"That brought us all together," recalls Harry Lederman, an independent consultant in the natural-food business whose wife founded a health-food chain in Southern California called Mrs. Gooch's. At one of their gatherings in the mid-1980s, Mr. Lederman recalls, Mr. Mackey casually mentioned that he thought local health-food stores ought to unite to form a national chain. He didn't press the point, and no discussion followed. "He just started doing it," Mr. Lederman says.
Mr. Mackey fit in nicely among the health-food industry's scrappy entrepreneurs. He was a six-time college dropout, curly haired and casually dressed. He spoke passionately about food (the natural kind), politics (the libertarian kind) and capitalism (the aggressive kind). Colleagues who knew him as a young man say he was — and remains today, at 53 — a man of opposing characteristics: forthright and yet distant, compassionate and yet cutthroat, idealistic and yet capable of compromise.
Mr. Mackey's mother was a schoolteacher in the Houston area. His father, William S. Mackey Jr., was an accounting professor who later became the CEO of a health-care company, Lifemark Corp. After 15 years of running the company, the elder Mr. Mackey engineered its sale in 1984 for about $900 million. Before that, he lent his son some money to help him get his grocery business off the ground.
In 1984, the younger Mr. Mackey, now calling his store Whole Foods, opened outlets in Houston and Dallas, and soon after expanded to New Orleans and Palo Alto, Calif. In the 1990s, he took Whole Foods public and went on a buying binge, eventually acquiring 10 small chains, including Mrs. Gooch's.
"We didn't have any clue how he put that together," says Philip Tauber, who, with his wife, Gayle, founded the Kashi cereal brand in 1984. "For him to do that, he needed to have a compulsive, highly competitive leadership quality."
As Whole Foods grew, Kashi and other brands grew with it. Foods once regarded as hopelessly unpopular — and even unpalatable — found a home and a customer base.
The way I see it the aging of the baby boomers and their quest for health and longevity will fuel Whole Foods' growth for many years to come. —Rahodeb, August 2001
Mr. Mackey broke not only from the mainstream grocery business, but also from many of his peers in the natural-food world. He built his stores big, with room for beer, wine and potato chips — items some health-conscious merchants refused to carry. He also expanded his audience by offering prepared foods from salads to gourmet soups and lasagna. In doing so, he assured that consumers would do more than pop in for a few items. They would make Whole Foods their primary food store.
Whole Foods today is a giant, with 39,000 employees and 196 stores in the U.S., Canada and the United Kingdom. In the fiscal year ended Sept. 24, 2006, it had a gross profit margin of 35% — compared with 24% at Kroger Co. and 29% at Safeway Inc. — and sales of $5.6 billion.
Yesterday, Whole Foods shares closed at $40.08 in 4 p.m. Nasdaq composite trading. That is up from a split-adjusted $3 per share in 1992, but below the stock's peak of around $79 in 2005. According to a March regulatory filing, Mr. Mackey owned 1.15 million shares, a stake now worth about $46 million.
Despite its size and fat profit margins, the company has maintained its reputation as a crunchy, counter-culture operation. Whole Foods donates at least 5% of its annual net income to charity. Some stores have solar panels.
In that sense, the company still reflects its founder's business-casual character. Mr. Mackey works from the early morning, when he reads about management or the environment from a tall stack of books at home, to well into the night, when he often sends emails to other executives. He often wears sandals and khaki pants or shorts to the office. He sticks to a vegan diet.
Friends and associates characterize Mr. Mackey as straightforward and transparent. A few years ago, Mr. Mackey was having dinner with Terry Dalton, who founded a Miami natural-food store called Unicorn Village Marketplace at about the same time Whole Foods started in Austin. Whole Foods acquired Unicorn in 1995 for $4.5 million in cash. Mr. Mackey and Mr. Dalton have remained friends.
During dinner, Mr. Dalton marveled that at the time, Whole Foods's market capitalization had exceeded those of familiar food-industry giants such as H.J. Heinz Co. Mr. Mackey was so astonished, Mr. Dalton recalls, that he pulled out his cellphone to call Whole Foods's chief financial officer to ask if she knew that their company was bigger than Heinz. (Whole Foods briefly approached Heinz's market capitalization in 2005, but Heinz is now larger.)
When Mr. Dalton heard about Mr. Mackey's online alias, he was stunned — in no small part because he had engaged in dialogue with Rahodeb on the Yahoo board a few years ago. Mr. Dalton was also using a screen name, he says, but doesn't now recall what it was. Mr. Dalton assumed at the time that Rahodeb was a Whole Foods regional president or finance executive, given his knowledge of the company. At one point, Rahodeb accused Mr. Dalton of being an industry insider, saying he knew too much to be a run-of-the-mill investor.
Mr. Mackey, in a statement on Whole Foods's Web site last week, said his anonymous statements didn't reflect his or his company's policies or beliefs. Some of the views Rahodeb expressed, Mr. Mackey said, didn't match his own beliefs.
Mr. Dalton says he doesn't believe Mr. Mackey would do anything unethical. "The last thing I would call John is hypocritical or dishonest," he says. "Maybe he has a little more vanity and ego than I thought."
Mr. Mackey's colleagues say the CEO has had an enormous influence on the marketplace. Today, thanks largely to the influence of Whole Foods, organic milk and yogurt can be found in virtually every grocery store in the country, including Wal-Mart. Among natural-food enthusiasts, it's not unusual to hear Mr. Mackey compared with Bill Gates and Steve Jobs.
"He's a rock star," says Jeff Metzger, publisher of Food World and Food Trade News, two regional grocery newspapers in the Northeast. "He is the company."
Mr. Metzger says the board may feel pressure to replace Mr. Mackey, depending on the outcome of the SEC and internal investigations. If that happens, he says, the food industry would lose a visionary leader. As for Whole Foods, he says, "There isn't a clear line of succession."
I am neither 'kneejerk' or a 'conservative.' My positions are very well thought out. They are based on years of life experience, encyclopedic reading, and clear, honest thinking. Conservative? Hardly. I'm more a revolutionary than anything else. My political views fall into the category of 'Independent' with a strong tilt towards 'Libertarianism.' Teach me to dance? That is very sweet of you. Thank you, but my life is pretty full right now. —Rahodeb, March 2003
Though Mr. Mackey felt compelled, as Rahodeb, to defend himself frequently on the Yahoo site — including one post on Christmas Day in 2005 — he has received relatively little substantive criticism during his tenure at Whole Foods. If there's been any rap, it's that some people have found him hard to work with and unpleasant when angered.
Industry analysts say several former senior company executives, including former president Peter Roy, left the company in part because they had difficulty dealing with Mr. Mackey. Mr. Roy declined to comment.
Walter Robb, one of two co-presidents at Whole Foods, acknowledges that Mr. Mackey has rubbed some people the wrong way and that he, too, has occasionally butted heads with his boss. But Mr. Robb says the no-nonsense style is refreshing and inspires loyalty. "He's not vanilla ice cream, but then we're not a vanilla ice cream shop, either," says Mr. Robb, who has worked at Whole Foods for 18 years. "John creates a space that allows you to bring your full creativity and potential to the company."
Mr. Mackey has also squared off with those outside the company, including the economist Milton Friedman; Michael Pollan, author of "The Omnivore's Dilemma"; and union leaders who have tried to organize workers at Whole Foods stores.
Perhaps his most energetic confrontations in recent years have been with executives from Wild Oats. At least 240 of Rahodeb's 1,300 or so posts, which can be seen on Yahoo Finance, mentioned the rival company.
After Wild Oats entered Dallas and a few other Whole Foods markets in the 1990s, Mr. Mackey retaliated by opening a store in Boulder, Colo., Wild Oats's hometown, and offering steep price discounts. He sent Mike Gilliland, co-founder of Wild Oats, the board game Risk, a simulated battle for world domination. Attached was a note, Mr. Gilliland says, that read: "Forewarned is forearmed."
In conversations with Mr. Gilliland over the years, Mr. Mackey "made no secret of the fact that he thought Whole Foods would eventually kick Wild Oats's butt," says Mr. Gilliland, who now runs a small Boulder-based chain of stores called Sunflower Farmers Market. "John is a little lacking in social graces."
In 2001, Mr. Odak replaced Mr. Gilliland as CEO of Wild Oats. Mr. Odak was new to the job when he attended the Manhattan conference, a Goldman Sachs global retailing event, where Mr. Mackey confronted him. Mr. Odak was in the audience during a breakout session in a small room, where Mr. Mackey discussed the latest news from Whole Foods.
"John, I want to introduce myself," Mr. Odak recalls saying to Mr. Mackey after the session. Mr. Mackey became angry that Mr. Odak had been sitting in, Mr. Odak says. The men haven't spoken since. Mr. Odak left Wild Oats in October 2006.
Mr. Mackey doesn't remember the incident the same way, according to Mr. Robb. "Yes, John gave him a competitive, passionate statement," but he said "it was something along the lines of, 'We're coming after these markets.' " Mr. Robb added that Mr. Odak's presence at a breakout session typically aimed at institutional investors was highly unusual.
The Company [Wild Oats] still stinks and remains grossly overvalued based on very weak fundamentals. The stock is up now, but if it doesn't get sold in the next year or so it is going to plummet back down. Wait and see. —Rahodeb, June 21, 2006
In February, Whole Foods announced plans for its biggest acquisition of all, offering $565 million, or $18.50 a share, for Wild Oats, which has 109 locations. The deal, if approved, would make Whole Foods roughly the 10th-largest U.S. grocery chain by number of stores.
But the FTC announced plans to block the acquisition, saying it would increase concentration in the health-food supermarket industry and drive up prices. Supporters of the deal, including Mr. Mackey, note that Whole Foods no longer competes with natural-food companies alone. Now its biggest rivals include many of the mainstream grocers that have embraced the products they once spurned.
Some antitrust experts say Mr. Mackey's Yahoo messages could hurt the company's case if the FTC uses Rahodeb's comments to show that Mr. Mackey viewed the health-food market as distinct from the mainstream grocery market.
Mr. Mackey's defenders say his anonymous comments — though boastful, provocative and impulsive — were no different from his public ones, and were never intended to disclose insider information or move stock prices.
For his part, Mr. Mackey told visitors to the Whole Foods Web site that he had made the online comments because he "had fun doing it." That explanation is consistent with Mr. Mackey's decision last year to cut his annual salary to $1 starting on Jan. 1 of this year. In a letter to company stakeholders at the time, he explained: "I have reached a place in my life where I no longer want to work for money, but simply for the joy of the work itself."
—Shelly Banjo contributed to this article.
source: p.A1 20jul2007