The healthy, conscious capitalist, w/Whole Foods Market co-founder John Mackey

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1:31I'm Maddie Elling. I'm one of the co-founders of Hosta Hill and we're based in the Berkshires in western Massachusetts. We make a crimson kraut, which is red and green cabbage with carrots and radish and onions in it. And that one has a beautiful red-purply color that people just love. We make a daikon radish kimchi, which is cubed radish, and a kimchi pepper paste with ginger, garlic, and a mushroom paste for the umami flavor. We have a beautiful rainbow of colors in our product line. The colors really pop. When we first started out, we were farming, and we were cutting the cabbage by hand and throwing salt on it and packing it into five-gallon buckets.

2:17It's a really small batch and all by hand. When we first started in 2011, we were just doing farmer's markets and we were doing all of our deliveries ourselves. So we quickly got very busy. Eventually, our local food co-op wanted our products and then it was farm stores and then restaurants and cafes, too. So we reached this inflection point where we had to go with a distributor and they helped increase our sales and getting in front of more customers. We eventually started working very closely with farmers on contract. You know, we'd tell them each year, can you grow X amount of Napa cabbage for us and X amount of onions?

3:02And they specifically plant seeds for us. Now we are stocked in over 100 grocery stores in the Northeast, including over a dozen Whole Foods. The first Whole Foods we got into was a store in Hadley, Massachusetts, out in the Pioneer Valley.

3:25Hosta Hill is one of more than 13 ,000 suppliers providing high-quality, locally-sourced food products to Whole Foods. If we didn't have great suppliers, then where would Whole Foods be? John Mackey, Whole Foods co-founder and longtime CEO, credits suppliers like Hasta Hill for much of his company's success. Our business was only as good as the suppliers who ended up producing amazing craft artisanal cheeses and craft beers and all the different wonderful foods that I've watched people create and invent. They were partially responsible for our success. Whole Foods' impact has been felt across the grocery industry, especially when it comes to increased access to organic and natural foods.

4:07The company has also helped raise awareness around food sourcing, quality standards, and ingredient transparency. With over 500 stores, the company has locations in nearly every major city across the United States and Canada. On today's episode, we're in conversation with John. His new book, The Whole Story, shares the history of the now world-famous Whole Foods brand from its founding in 1980 to John's retirement in 2022. Both his personal story and his book overflow with unconventional lessons of scale, from a focus on quality over quantity to a unique approach to real estate, lessons that many business leaders, creators, and founders can apply to their own personal challenges and opportunities.

4:51You've got to have incredible talent at every position. It's like this huge push. There are fires burning when you're going home. Can you believe it? Such an idiot. And then you go back to, this is totally going to be amazing. There are so many easy ways. I have no idea what to do. Sorry, we made a mistake. But you have to time it right. Oops. Working out of a three-bedroom apartment. Stuff that just seems absolutely nut balls. Ten years later, we're like, well, that's just how you do it. We haven't made it just how you do it.

5:22This is Masters of Scale.

5:30I'm Jeff Berman, your host. Among the major grocery store chains like Safeway and Kroger, Whole Foods stands apart. While its nearly$14 billion sale to Amazon in 2017 made headlines everywhere, it's been in the zeitgeist for as long as most of us can remember. Its size is a fraction of its biggest competitors' footprints. But this natural foods grocer has played an outsized role in driving the mainstream availability and acceptance of healthy, organic food products. It's even inspired a slew of copycats, like Sprouts and natural grocers. John Mackey didn't start Whole Foods with the hopes of making it into the cultural and social force that it has become.

6:15He simply wanted to provide healthy food to his community. His journey began as an aimless college student in Austin, Texas, a college student seeking meaning and adventure. I was young and I had no sense of purpose or direction, but I was increasingly felt like I was an outsider for various reasons. Got off the path that my parents were programming me for. It was a psychedelic LSD trip I took back when I just turned 22. It was in August of 1975, and I had an ego death. I merged back into the one. After I was coming down, I ran into this philosophy professor on a walk, Professor Robert Solomon.

7:05And he was an existentialist and somebody I really looked up to. I thought, wow, this guy's so smart. So I asked him, I said, Professor Solomon, you know, you teach that there's no objective meaning. And I really don't see if you really believe that there's no real purpose to anything. Then I don't really see how you could be very happy. And he looked at me and he said, you're right. I'm not very happy. And then I continued the walk and I thought, well, I want to be happy. And I want community. I want love. I want purpose and meaning. And so I decided I was no longer an existentialist. And then after that, I moved into a vegetarian housing co-op and I became a vegetarian.

7:47I learned how to cook. I got passionate about food and health. And that was sort of the genesis. At the vegetarian co-op, John met Renee Lawson Hardy. The two became a couple. John got a job at a small natural food store in Austin where inspiration hit him. One day, I was closing up the store, and I was looking around, and I felt all this love. I thought, wow, I really like doing this. I'm friends with everybody that works there. I get to serve the customers. We're selling healthy food. And I thought, this is in my realm of competence. I can do this. I'm good enough to do this. And I went home to the co-op, and I ran into Renee, and I just looked her in the eyes, and I grabbed her hands, and I said, hey, Renee.

8:36what do you think if we open up our own natural food store? And she looked at me right in the eye and she said, oh, Maco Man, that would be so cool. We were both hippies. Let's do it.

8:53You're probably not surprised that investors didn't come running to this hippie couple, but with some help from friends and family, the two raised$45 ,000, barely enough to start the one store. They hired friends to do the plumbing and electrical work, bought used appliances, and moved into an old Victorian home in Austin. It's called Saferway, which was a pun on, or joke on, Safeway. I always say, I didn't have a grand vision for opening up a chain of stores, but when you're, I was 24 and Renee was 20 when we started working on the store. One of the great things about being young is you don't yet know what you can't do.

9:31But we learned. We got smarter and better. Despite losing more than half of what they raised that first year, John and Renee used the experience to learn what it takes to push a business forward. We were at a competitive disadvantage before I knew what competitive disadvantage meant. I could see that we weren't going to win this game, that we needed to get bigger. Ultimately, you made an offer to acquire one of your competitors. that feels like a critical moment in your scale journey going from one store where maybe you're earning a good living and doing some good in the world and living your values to actually building something that's got scale.

10:11So we found the location first, and then one of the competitors that we were friends with because we bought things together, and I started pitching them about closing their store down and merging in it. And by putting it together, we had a one-stop big store. This merger was a big moment for the company. Instead of trying to out-compete their competitors, they approached them with a logical offer. We can be bigger, better, and more efficient together than we are apart. With the merger, the first Whole Foods market opened in 1980 in downtown Austin. People ask me how long it took that first Whole Foods market to be successful.

10:53I say until about three o 'clock in the afternoon on the first day. It just exploded out of the gate. So within six months, we were the highest volume natural food store in the United States. Less than a year after the store opened, tragedy struck. A flash flood tore through their uninsured building. We should have died. We had eight feet of water in our store. We were wiped out. And we were literally saved by our stakeholders, although I didn't have that name back then. But they came and the neighbors helped clean up our store. And our employees worked for free. We couldn't take the payroll while they got us reopened.

11:25So I just had a sense of debt that I began to see that there's a system. The stakeholders are all interdependent, that Whole Foods is a platform, and we're creating value for all of these constituencies. And once you see that, you can't unsee it. And back then, what was happening in the food scene is kind of interesting. The supermarkets were, they were really ugly, very sterile, kind of like a hospital. And Walmart was on the march. And all the supermarket companies wanted to compete with Walmart on price. So they began to cut labor, cut back on their capital expenditures. That made them more price competitive, but their stores were less attractive to shop in.

12:14And that became Whole Foods opportunity because we made beautiful stores and we gave great service. And yeah, we were a little more expensive, but lots of people were willing to pay for a better experience and higher quality food. John's focus on the quality of the experience rather than only on profits is what created that intense loyalty among the customers, team members, and suppliers, his stakeholders. But one successful Whole Foods market location does not an empire make. The next step to growth was to reach additional investors. and not everyone saw the value in healthy foods like John did.

12:50Initially, the hardest barrier, Whole Foods, for us scaling, was convincing people that there was a market for what we were doing. Venture capitalists didn't believe it. We got turned down again and again and again. I was told, you guys are a bunch of hippies selling food to other hippies and we don't think that's a very big market. We were a counterculture store and the counterculture was gaining speed. what they didn't understand was the world was changing. They couldn't see that change. I didn't necessarily see it myself. I just was doing what I was passionate about. And it turned out, it's one of the ways to be successful in business, make sure that you catch the wave.

13:28If you're trying to open a business and nobody wants what you have, you're going to fail. But there was a generational change that was beginning to happen in the United States. While John did not see the enormity of the coming wave of the organic and healthy foods movement, he could sense the sea change. From his vantage point, it was a no-brainer. His customers were not the fringe, even if they were, at the time, a niche. And they were exactly the type of customer you want, loyal and willing to evangelize. John was confident that the market for natural foods would continue to grow, and that Whole Foods was in prime position to take advantage of that opportunity.

14:06But not without some very tough challenges. One of the reasons we were successful in the early days so much was my dad. He had been an accounting professor at Rice University, and he had a very successful business career. And I didn't have any business background. He didn't know what to make of me. It's like, what the hell are you going to do with your life, son? And when I found passion about these natural foods, he wasn't interested in natural foods. But he was very happy that I was interested in business. And so we got very close. And my dad ended up being one of my closest friends. He was my best man at my wedding.

14:42And he mentored me for the first 16 years of the business from 1978 to 1994. Ultimately, when I turned 40 years old, we were fighting in these board meetings all the time. Whole Foods was now public. We went public in 1992. And we acquired Bread and Circus, which was the natural foods crown jewel of the East Coast, and Mrs. Gooch's, which was the crown jewel in Southern California. It was like those three companies together, that was the DNA that we needed to become a national brand. But my dad opposed both deals. Why did he oppose them, John? He just thought we were trying to grow too fast, trying to do too much.

15:22I asked him to resign from the board because it was ruining our relationship, and I wanted to run the company without us fighting all the time. How did you have that conversation with your dad? It's hard enough to end a relationship with a board member, But when it's your father, your best friend, the best man at your wedding, your conciliary, how did you have that conversation with him? Well, it was – that was the most difficult thing I've ever had to do in business, to be honest. But I had to do it. And I was basically pitched to him. I said, Dad, listen, we're both very passionate guys. I'm a lot like you.

15:53We both see our point of view. We're good debaters. And we've tried to change. We can't do it. I really think you need to leave the board. But then I came around to his desk and said, but you're still going to be my main advisor. So it was a difficult decision, but it was such a milestone for me, Jeff, because after that, even though I did consult with my father, that was really the first time I really felt like I was actually kind of in charge of the company. I'd been the CEO and chairman of the board, but this was a big step in my own personal growth as a leader. It's not easy to fire anyone But as a leader, he knew it was necessary for the transformation of the company With the training wheels off, John and the company were on a fast track to exponential growth Acquiring competitors was the first step Next, we hear how Whole Foods capitalized on its unique ability to identify real estate for its new stores And why the romance with Amazon was a match made in heaven After the break

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17:53And here's the best part. Join AWS Activate today and you could score up to$100 ,000 in AWS credits tailored to your stage and network. Go to aws.amazon.com slash activate and start building. Expanding your business in the U.S. can feel like a maze. Every state has its own payroll, benefits, and compliance rules, which can pull your focus away from growth. That's why founders use Deal. Deal is the professional employer organization, or PEO, that gives you a dedicated HR expert plus Fortune 500-level benefits for your team. The National Association of PEOs says businesses can grow twice as fast if they use one.

18:37So if you're scaling, make it simple with Deal. Go to deel.com slash MOS and get up to three months free. We're back with John Mackey, co-founder and for more than 35 years CEO of Whole Foods Market. Between 1992 and 1997, Whole Foods went public, acquired more than half a dozen local natural grocers on both coasts and in the Midwest, and grew to$1 billion in annual revenue. Whole Foods markets were popping up seemingly everywhere, including in my neighborhood at the time in Washington, D.C. John, I remember the era that ensued quite well because I bought my first house in 1999 on a one block street that the police called Heroin Alley.

19:29You can imagine what that was like. Oh, my gosh. Good story. About a year after I moved in, Whole Foods opened up six blocks away. And it really anchored the transformation of that entire neighborhood. That's a gross understatement. I mean, it really was. Is this the P Street store? That's exactly right. The P Street store. That's exactly right. Yeah. And so I'm curious about the scale journey after your dad left the board and in the 90s into the early 2000s, because it felt like you all weren't just growing a business. You were transforming neighborhoods and lives as part of what you were doing.

20:05So I'd love to hear about that phase of the journey. Well, what a lot of companies do, they decide they're going to go into a market and then they just, they talk to real estate brokers to find 10 locations in the next two years. So find us 10 sites. and they deliver the best sites available. And if we didn't find a great location, we wouldn't do it. I remember I wanted to go to San Francisco first when we came to the Bay Area. We looked and we just looked, we couldn't find a location that met our criteria. So our first one was in Palo Alto. The second one was in Berkeley. The third one was in Marin County in Mill Valley.

20:39And it wasn't our fourth store when we finally got to San Francisco, but it was worth the wait because that San Francisco store became for a while the highest volume store in the whole company for us. So patience and not forcing the growth, because this is one of the most important competitive advantages Whole Foods had. I watched all our competitors make bad decisions. They wanted to get the stores open. They took B locations and they paid the price for it, whereas we just held out for great locations. And that's one reason we were able to successfully scale. How did you assess what was a good location for Whole Foods that a realtor might have thought was a disaster or what a realtor thought was a great location that you knew was going to be wrong?

21:24Well, first it starts with demographics. Obviously, population density is very important. In our case, the biggest indicator was college degrees. Who has a college degree? And the places that had the most college degrees, not surprisingly, also had the highest income. Not perfect correlation because a university town might not have the highest income, but they have the highest education levels. And we would do well there even if the income wasn't quite as high. But when you get the combination of high incomes and high education levels, that would always be a slam dunk for us. And then it was just the basic retail.

22:01Does it have good parking? Does it have visibility from the street? Is it at an intersection? You don't want to be mid-block. We had to learn that the hard way. Mid-blocks where people can't easily make left or right hand turns in because people are ultimately about convenience. If you make it easy for them to shop, easy for them to pull in, get their stuff and be out on their way 10 minutes later, if that's what they want to be, that's going to give you a competitive advantage. John's strategy and the Whole Foods team's strategy to prioritize location was based on what they had learned about their customers from deep research and experience.

22:38Waiting to enter a potentially lucrative market until real estate conditions are ideal is contrary to the blitzscaling ethos that many companies follow. But it paid off. By the mid-2000s, Whole Foods continued to grow nationally and internationally, including locations in the United Kingdom and Canada. But the decade was not without controversy. John faced several challenges to his leadership, including from members of his board, a unionization effort at a store in Wisconsin, and an acquisition that was challenged by the Federal Trade Commission. Perhaps no controversy was more public than his editorial criticizing Obamacare in The Wall Street Journal.

23:17Back in 2009, I wrote an op-ed piece in The Wall Street Journal about health care. I really thought Whole Foods Market had a really good system for the way we were handling health care that could be adopted on a more widespread scale. But it was very controversial. We had protests all around the country, 350 ,000 people. And within a couple of weeks signed a Facebook petition to boycott Whole Foods Market. Hundreds of letters were sent to our board of directors demanding that I be fired. So it was like, whoa, I've learned a valuable lesson here. The mistake I made was I couldn't distinguish between my personal views because I was the co-founder of the company and the only CEO it had ever had.

23:58My views were seen as the company's views. I just thought I was speaking for myself. I wasn't speaking for Whole Foods. John took his own advice and stuck to his wheelhouse when he wrote a book in 2013 called Conscious Capitalism, a subject dear to his heart. I love capitalism. I love business. When I first got into business, I was skeptical of business. But what I found out about business is that business done in a conscious way is creating value for all of these constituencies. Teachers educate. Architects design buildings. Engineers construct things. And yet they all make money. They're making money because they're creating value for other people.

24:38And business is a tremendous value creator for other people, not merely their investors or their owners. They create value primarily first for their customers. I just think a lot of business people don't see it. They see it as a bunch of trade-offs rather than a bunch of synergies. And once you begin to manage it as a system, you can optimize the system at a higher level. I could see how if you cheat any of your constituencies, any of your stakeholders, or try to sell them short, you can get away with it in the short term. In the long run, feedback loops are created and your business sub-optimizes.

25:14So I just realized to create the most value for shareholders too, you have to optimize the entire stakeholder system. And yeah, some people are strictly motivated by money, but most of the entrepreneurs I've known are just very passionate people and they're excited to realize their ideas in the world. They make money too. They have to make money in order to be successful. But frankly, it's about the dream that really drives them even more than the money. It's one of the ideas that we at Masters of Scale are keen to highlight. A business should create value beyond profits for shareholders. Corporate decision-making should include other stakeholder considerations.

25:53Considerations of team members, customers, suppliers, the environment, and society at large. A capitalist system can be a force for good when the interests of all stakeholders are prioritized. In 2017, John faced a new problem that tested his resolve. More competition meant that Whole Foods was losing market share in the natural foods sector. So a group of shareholders mounted a challenge to his leadership and demanded the company lower its prices. We were being attacked by shareholder activists, the people that think only profits matter. They just said, look, we're going to take over your company.