The Whole Foods Rebellion | Tiny Acorns, Mighty Oaks | 2

0:10It's 1990 and Whole Foods CEO John Mackey is in Berkeley, California. He's on a visit to the company's newest store.

0:21As Mackey passes the picket line and reaches the store entrance, the protesters jeer at it.

0:31Once inside, Mackey makes a beeline for the store's manager. Who the hell are all those people out there? Do they even work for us? No, they don't. They used to work at the old co-op. The building that is now a Whole Foods used to be a grocery store run by the Berkeley Co-op. The Co-op was a darling of the city's progressive movement, but two years ago, it went bankrupt. Mackey gives the store manager a puzzled look. So why are they protesting against us? Because our workers voted against unionization. They see us as the evil corporation taking things over. Mackey rolls his eyes. Back when he lived in a hippie co-op, he thought like that too.

1:09Whole Foods may have grown out of the hippie movement, but Mackie remains profoundly opposed to unions. Without their demands for ridiculous wages, they might all still have jobs. Maybe, but it's a real problem for us, John. Customers don't want to cross a picket line every time they want to buy an apple. And the mayor's on their side, too. Okay, I better go talk to the mayor. Maybe I can make her see sense.

1:35The next day, Mackie meets with the mayor of Berkeley. Mr. Mackey, it's no use I support the union's position Whole Foods pays below market wages Your clerks get$8.50 an hour Safeway, Albertsons and others pay at least$5 more The numbers don't lie It's exploitation I disagree Many of our workers are college age How many other major chains employ so many people with so little experience? It's not just about the pay Your employees have to wait five years to get full medical coverage. Union clerks get that after three months. Our employees voted 86 to 5 against unionization. They have a right to say no.

2:20They should not be coerced into paying union dues. Unions make workplaces about us versus them. At Whole Foods, we have employee committees where disagreements are aired and settled by consensus. Our teams get to choose who to hire and fire. They get bonuses that are linked to productivity. They run the show. We don't want or need unions because we've evolved beyond unions. I haven't heard such nonsense since the 50s. You need to get a union in there. This isn't going to go away. Mackey's eyes narrow. In food stores like his, labor accounts for almost two-thirds of operating costs. To stay price competitive, Whole Foods needs to keep labor costs under control.

3:00The Berkeley Co-op didn't. And he's not going to make the same mistake. Whole Foods has a positive, non-hierarchical relationship with its workers. They share our values, share our mission, and those jobs are secure. We signed a 22-year lease in that building. Get used to us, because we're here to stay. Mackey leaves the meeting feeling strangely energized. This external resistance has only sharpened his belief in Whole Foods' mission. Whole Foods now has annual sales of$74 million. dollars. It's a large business and growing fast. Its success is built upon its image as an ethical corporation with a progressive sensibility.

3:44But as it expands, so will the tension between its hippie roots and its business needs. How can Whole Foods keep its credibility without getting sidetracked by the pursuit of profit?

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6:10From Wondery, I'm David Brown and this is Business Wars.

6:36In the last episode, John Mackey turned from hippie to organic supermarket pioneer. His pursuit of growth saw him clash with his co-founders and seek funding from venture capitalists. But now that he's used the venture capitalists' cash to break into California, Mackey's looking to reduce their power by taking Whole Foods onto the stock market. This is Episode 2, Tiny Acorns, Mighty Oaks.

7:09It's fall 1991, and nearly a year has passed since Whole Foods opened its store in Berkeley. The supermarket chain now runs 11 stores across Texas, Louisiana, and California. The company's appetite for expansion is, however, yet to be sated. It's driven by CEO John Mackey's mission to provide chemical-free foods to U.S. citizens and open new markets nationwide. And everywhere he looks, Mackey sees growing consumer interest in organic and natural foods. This is exactly what he hoped might happen. But the surge in attention also threatens Whole Foods. Across the country, new organic supermarket chains are forming.

7:52These local and regional chains now pose a threat to Whole Foods' goal of becoming the leading organic supermarket in the U.S. To stop that from happening, Mackey needs to expand fast. But that will require far more money than Whole Foods is making in annual profits. Mackey's already taken investment from venture capitalists. but he's come to realize that the investor's plans for the business might not include a place for him. So, he has decided to hold an initial public offering, an IPO, and sell shares in the company on the stock market. An IPO will raise capital from investors, which he can use to fund Whole Foods expansion.

8:35Getting listed on the stock market will increase Whole Foods visibility and credibility, although it comes with additional regulatory and financial reporting requirements. But to make the IPO a success, Mackey needs to convince investors to buy the first shares at the highest possible price. So, he beefs up Whole Foods with another acquisition. Mackey's new buyout target is Wellspring Grocery. It's a pair of natural food stores located in North Carolina. Mackey and his team buy the business mainly with stock in Whole Foods. The owners of Wellspring are happy to take the stock. They know that when Whole Foods does its IPO, that stock will gain value.

9:19In return, Whole Foods gains a presence in a whole new state. There are other unforeseen benefits, too. During the first executive meeting after the acquisition, Wellspring's co-founder stands up to address his new colleagues. but instead of talking about assets and growth, he talks about flavor and hands out samples of golden olive oil for everyone to taste. Wellspring's team cares deeply about the pleasure, beauty, quality, and artistry of the food they sell. It's something lost on Mackey. He sees natural food as functional, there to support help. The Wellspring team sees food as a pleasure, and their outlook will soon spread across the Whole Foods chain, allowing it to appeal not just to the health crowd, but to foodies too.

10:09It's a eureka moment for Mackey. He now sees that with every acquisition, Whole Foods can gain depth as well as scale if it's willing to learn from the companies it buys. But most importantly, by buying Wellspring, Whole Foods now has stores on the East Coast and the West. And that allows Mackey to tell Wall Street that the chain now covers the country coast to coast. On January 23, 1992, Whole Foods joins the Nasdaq Stock Exchange. Whole Foods isn't a big enough deal to ring the bell or have a confetti drop in Times Square, as often happens when major companies go public. But for Mackey, it's still a momentous occasion.

10:54He feels a heady mixture of excitement and satisfaction, but also a sense of being overwhelmed. He spends the day watching the movements of his company's stock price. The shares open at$17, then creep up until at the end of the first day of trading, a single share in Whole Foods is valued at nearly$25. The IPO raises$23 million for Whole Foods. Mackey's net worth now exceeds$7 million. After so many years of scrimping and saving, it feels bewildering to be worth so much, on paper at least. The IPO means Mackey no longer has to answer to the venture capitalists who he feared might try to remove him as CEO.

11:42It also arms Whole Foods with the funds it can use to buy smaller natural foods chains. What started as a solo natural food store, is about to become an empire. As Mackey mulls over Whole Foods' next step, he hears a welcome rumor. The owner of Boston's Bread and Circus, the rival he admires more than any other, is looking to sell.

12:13It's 1992, and nearly 15 years after Mackey first walked through the doors of Bread and Circus. At that time, he was struck by the quality of the store's fresh produce. Since then, Bread and Circus has grown. It now operates six stores in Massachusetts and Rhode Island, and a distribution center in Boston. Now, as he again enters one of Bread and Circus' stores, Mackey is amazed by what he sees. Lush, colorful, dewy mountains of perfectly hand-stacked fruits and vegetables. He also feels a little envy. As he surveys Brett and Serkis' fresh produce, its clear whole foods has yet to match the quality of its competitors' perishables, the term for vegetables, meat, milk, and other foods that have a short shelf life.

13:00Mainstream supermarkets use preservatives, wax coatings, and other chemical wizardry to extend the shelf life of their perishables. But organic food purveyors avoid using these artificial helping hands. That means in organic supermarkets, speed and timing is everything. Without careful management, the produce will spoil before it's sold. And few places manage it better than bread and circus. So, if he buys bread and circus, Mackey won't just establish a foothold in the Boston market. He'll also gain the company's perishables expertise. They can then apply that knowledge to the entire Whole Foods chain.

13:42So Mackey's come to Boston to convince Bread and Circus owner Anthony Harnett to let Whole Foods buy his store. Mackey asks Harnett if he would sell. Harnett says he'll only sell for$30 million. The figure hangs in the air. $30 million is far more than Mackey expected. Whole Foods IPO only raised$23 million for the company. But Harnett's in no hurry to sell, which means he can pretty much name his price, even if that price is equivalent to a third of Whole Foods' market valuation. Mackey tries to push him down, but Harnett won't budge. Mackey suspects that wealth isn't the only criteria for Harnett's selling.

14:27Mackey understands that to a founder, a business is not just a property to be traded. It's like a child, a creation that carries something of the founder's spirit and whose future they desperately want to guarantee. So Mackey changes tack. He reminds Harnett that they share the same values and underscores how Whole Foods will secure Bread and Circus' legacy. Harnett remains skeptical. He's not sure if these Texan hippies really have the business know-how to keep their hastily growing empire intact. act. But Mackey's assurances are enough to keep Harnett interested in continuing the conversation.

15:08Harnett asks Mackey to sign a nondisclosure agreement so Whole Foods can examine Bread and Circus's finances. But Mackey's 70-year-old dad is alarmed at the plan. He thinks Whole Foods will be better off without Bread and Circus. Since the IPO, his father's become increasingly conservative in his business judgments. But Mackey can't deny he has a point. Bread and Circus is losing money, or at best, breaking even. Why would anyone pay$30 million to acquire a failing business? Mackey counters that Bread and Circus's fundamentals are strong. It's making a 9 % profit margin on its sales, a good amount for a supermarket.

15:49But the companies losing money because their general and administrative expenses are too high. General and administrative expenses, or G &A, are accountant lingo for non-production costs like utility bills, executive salaries, and rent. Mackey's plan is to tamp down on those costs. Bread and Circus's G &A is 10 % of its sales. Whole Foods G &A is just 2%. Whole Foods keeps its G &A low by having a lean corporate structure and decentralized leadership. The thinking is if they brought those same practices to bread and circus, well, Whole Foods could make it highly profitable almost overnight. Mackey's dad appears won over.

16:35But at the next board meeting, the argument flares up again between the two men. Mackey's dad accuses his son of being delusional for thinking what works for Whole Foods in Texas and California will also work in Boston. Mackey sees red. He points out that he made his dad rich, yet his dad still treats him like a child. His father and son descend into a yelling match. The other directors sink into their chairs. These arguments are becoming increasingly familiar. Mackey and his dad are now pulling in different directions. The older man wants to rein in the growth. Mackie wants to speed it up. That night, Mackie reflects on how these family arguments must appear to the other directors.

17:22He feels a surge of shame. He's approaching middle age, but when faced with his father's criticism, he feels like a teenager all over again. Worse yet, Whole Foods is now a publicly traded company. These fights look grossly unprofessional, and Mackie worries someone might leaked details of these disagreements to the press. Something has to change.

17:50Meanwhile, Whole Foods continues negotiating with Bread and Circus's founder, Anthony Harnett. But Harnett's still not sure if he wants to cash out. Even with the promise of a multi-million dollar payday, Bread and Circus is his baby. Letting go is an emotional decision as much is a business one. He worries about Whole Foods' ability to run his stores. The chain might be on the stock market and doing good business, but Harnett feels its culture is unprofessional. He thinks Whole Foods stores are successful, but not great, whereas bread and circus stores are great. Rather than arguing back, Mackey invites Harnett to visit Whole Foods' new flagship store in Mill Valley, California.

18:35Mackey doesn't say it, but he believes the Mill Valley store to be superior to any run by Bread and Circus. Following day, Harnett flies out to California. Harnett comes away impressed by how far Whole Foods has come. He finally agrees to sell, but only if he gets the right to buy the stores back should Mackey run Whole Foods into the ground. Through clenched teeth, Mackey accepts. Whole Foods buys the Bread and Circus chain for$26 million. Six million in cash, the rest in Whole Foods stock. This is a major turning point, cementing the company's status as a national force. By now, Whole Foods is an expert at integrating acquisitions into its business, while also preserving what made the acquired company desirable in the first place.

19:29Bread and Circus teaches Whole Foods how to excel in perishables. Whole Foods schools Bread and Circus on how to give store employees more autonomy and create a happier workforce. Just as with Wellspring, Whole Foods isn't just buying stores, it's buying know-how. Know-how that's making it a better company. We learned a lot from Bread and Circus. They were the best at selling fresh food and they had this structure that kind of supported that. It was a very expansive experience. But as the company continues to grow at a fearsome rate, Mackey's clashes with his father are coming to a head. John, please don't do this.

20:12It's 1993 and Mackey is in his dad's home office in Houston. Tensions about the future of the business have reached fever pitch between the two strong-willed men. Their disagreements now flare up at every board meeting. He's decided to take drastic action. Dad, I want you to resign from the board. Mackey studies his father's weathered face. It hasn't been an easy decision to make. His father's always supported his natural foods dream. He invested his own money in Mackey when nobody else would. He steered and guided Mackey through tough decisions, even when he opposed them. Mackey knows that the success of Whole Foods owes a great deal to his dad's business acumen.

20:59Without him, Mackey surely would not be running a company worth$200 million. But he has also hardened his heart in preparation for this very moment. Mackey is 40. He's no longer a plucky young upstart, but a business leader entering the best years of his career. And his dad is 72, a man who should be winding down, enjoying his retirement. Mackey's father was previously his staunchest supporter. These days, he feels more like an adversary. Mackie knows he has to make the right decision for Whole Foods' future, not for its past. Please, son, this is the last thing I'm doing in my life that's actually relevant.

21:46Mackie can see the hurt in his father's eyes. For a second, he wavers. Is this truly the right decision? Then he remembers the embarrassing spats at the boardroom table and his father's increasingly conservative stance towards taking risks. He knows that his father's holding the business back. He has to go. Dad, these fights, they're ruining our relationship. We need them to stop for both our sakes. I know, I know. But look, we can change that. No, I don't think we can. This is the only way. Mackey leaves the room feeling an overwhelming sense of sadness. Asking his father to resign from the board is the most difficult decision of his life.

22:41You know, some say never go into business with your family. But as many successful entrepreneurs will tell you, those involved in the founding of a business become part of an extended family. and that makes breaking up hard to do. Mackey's early partners had different ideas about what Whole Foods should be. Some wanted stability and profitability. Mackey wanted to push forward, take risks, change what America eats. That difference led to painful splits, including a broken friendship and the firing of his own father from the company's board. Hindsight's 20-20, and Mackey wouldn't have gotten Whole Foods to where it is without all these people.

23:21But if you're starting out, think about the long haul. Align with partners who share your vision. Disagreements will happen, but if you're pulling in opposite directions, someone is going to get dragged. And in this case, it was Mackey's father. But now, that deed's done. Another obstacle has been removed. Now, there is nobody left to stand in Mackey's way. He's free to be the CEO he wants to be. Free to succeed. And to fail. And he's about to mess up. Big time.

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