John Mackey, Whole Foods Market

Can a person actually fall in love with their supermarket? Strange question, perhaps, but for the residents of lower Manhattan, the arrival of a gleaming new Whole Foods Market earlier this year sent even the most jaded downtown shopper into a veritable swoon.

The Union Square store–Whole Foods’ third location in the BigApple and the chain’s first three-story structure–is more of an adventure than a shopping trip. An artsy design fuses with Old World flair to house acres of organic and natural bounty. Tightly stocked shelves are bathed in the type of lighting usually reserved for art galleries. An unobtrusive abstract chandelier, created especially for the location, softly glimmers above the street-level entrance as strains of George Benson’s “Turn Your Love Around” waft in the background.

Inside, typical supermarket sections have been reborn, Whole Foods style: The butcher offers a wide array of prime meats and poultry that are minimally processed, never fed animal byproducts and raised to the company’s exacting antibiotic- and hormone-free standards. A 38-foot-long seafood case holds naturally farmed fish; samples are abundant, just as they are in the nearby health and beauty products section.

And oddly enough, on a recent Sunday night, three long lines of shoppers–some with baby strollers in tow–snaked far past the checkout, with nary a complaint to be heard. As Harvey Fierstein has belted out on Broadway, “If that’s not love, what is?”

Credit these smitten masses to John Mackey, chairman and CEO at Whole Foods Market, who almost single-handedly has legitimized the organic and natural foods market to the point where industry giants–from Safeway to Wal-Mart–have been forced to respond. And he’s done so with only a little emphasis on traditional marketing, but a terrific focus on getting the customer experience right. In the process, he’s given hope to a whole generation of brand stewards who don’t have money to burn, yet want to create a premium brand in a mature category.

“Whole Foods is a blend of retail engineering and retail theater,” said Simon Williams, CEO at consultancy Sterling Brands, New York. “It sets out to wow people. They are magicians when it comes to merchandising.”

Whole Foods, also known in some circles as “whole wallet,” may not stock Tide detergent, Frito-Lay snacks, Sweet ‘n Low sugar substitute or other mainstream brands whose long list of artificial flavors or ingredients are verboten. But its shelves are a coveted destination for smaller natural products purveyors who’ve learned that if you’re playing in the alternative market and can get into Whole Foods, you can create demand (see related story, this page).

mackey, 52, entered the world of supermarket retailing in 1978, when he and partner Renee Lawson Hardy opened Safer Way Natural Foods, a health food store in Austin, Texas, with an initial investment of $45,000 borrowed from friends and family. The store was not a financial success and two years later, he merged with another local health food retailer, Clarksville Natural Grocery, to open Whole Foods Market.

Think Texas, think big. It was the first supermarket-style natural foods store in the country, with 10,000 square feet of space and 19 employees. By 1999, with 12 stores and $99 million in sales, Mackey took the company public. Through a series of acquisitions–among them, Bread & Circus 0992), Mrs. Gooch’s (1993) and Fresh Fields (1995)–and expansion, the chain would blossom to 170 stores in the U.S. and Canada and $3.9 billion in fiscal 2004 sales. This year, Whole Foods is celebrating its e5th anniversary with more than 36,000 employees and roughly 5.8 million square feet of retail floor space.

International expansion is clearly on Mackey’s radar, too. Having entered the U.K. market in 2004 with the acquisition of seven Fresh & Wild natural and organic food stores, the company in August revealed plans for the first flagship Whole Foods Market in central London, a 75,000-square-foot location on Kensington High Street expected to open in early 2007. In all, his stated goal is to hit a lofty $10 billion in sales by 2010.

All of which makes Mackey–who refused several requests for interviews–an atypical supermarket executive in another key way: His company makes money and is not in a defensive mode seeking Chapter 11 bankruptcy protection (a la supermarket chain Winn-Dixie) or exploring a possible sale (like Albertsons) due to the presence of the 4,000-pound gorilla, Wal-Mart, which has slowly begun adding natural-product SKUs to its own merchandising mix. And, unlike at many of its competitors, growth has come without significant media outlays.

Albertsons spent $134 million on media in 2004 and Kroger $191 million for its various divisions, per TNS. Safeway launched a $100 million effort to tell customers that it was redesigning many of its stores, whose description came “this close” to depicting the interior of a typical Whole Foods environment. Whole Foods earmarked nearly $18 million for total marketing support in 2004, though it spent a mere $3.3 million on measured media for the year; $1.8 million through July 2005, per Nielsen Monitor-Plus. Most of those dollars went for local media, per the discretion of regional managers, and in-store efforts.

“In the beginning, we couldn’t afford to advertise,” Whole Foods co-president Walter Robb told the Austin American-Statesman in July. “We did lots of advertising experiments. They didn’t work, didn’t deliver results.” So the company funneled its money into improving store infrastructure (for example, merchandising, signage, a revamped Web site), consumer outreach and employee training.

Word-of-mouth also helps. When Whole Foods opened its new flagship store in Austin this past March, it attracted national media for a “Whole Block Party” that included sampling from the store’s 600 varieties of cheeses and tastings from Candy Island, which features a chocolate (natural, of course) fountain.

“They are growing because the product they offer consumers is just better,” said Ken Harris of retail consultancy Cannondale Associates, Evanston, Ill. “And they’ve communicated their message without using traditional media, but rather focused on a grass roots approach that is aligned with their message of genuine goodness.”

Unlike other high-end stores where salespeople can bristle when asked a question, Whole Foods employees are encouraged to be enthusiastic helpers-who can explain the complexities of “light” and “medium” roasts of its private label Allegro coffee and how a bean actually goes from tree to store, or offer “express” passes to harried customers during busy hours at the checkout.

“Mackey has instilled a service mentality in the Whole Foods culture that is rare in today’s retail environment. They became ‘big’ before other conventional retailers could respond in any effective way,” added Harris.

Mackey, who once took off five months from work to hike the 2,168-mile Appalachian Trail, prefers a Japanese-style, highly decentralized approach to management. It prizes input from “team members” (employees) who have broad powers that range from deciding what products to buy and from which vendors, to voting for their preferred health insurance plans, to how in-store signs should look and which community events should be sponsored.

“Mackey is smart enough to know not only the marketing but the operational strategy needed to make his vision possible,” said John Stanton, a professor of food marketing at St. Joseph’s University in Philadelphia. “He knew he couldn’t have a company structure like most traditional retailers where it takes a year to make a decision because of the bureaucratic red tape.”

It’s worth noting that, like Wal-Mart, Whole Foods is strictly a non-union shop, yet team members seem not to mind. Since 1998, Whole Foods has ranked among Fortune’s top 100 best companies to work for, coming in at No. 30 in 2004.

“There is a passion in that business that is clearly Mackey’s. It’s felt by both consumers and employees,” said Williams. “And it gives the brand a rhythm that is flawless and necessary in today’s retailing environment. Look at the passion and spirit of its workers; they believe they are all vested in the welfare of the chain.”

That dedication has helped Whole Foods pull off a seemingly impossible task: Post consistent double-digit gains of at least 20% for the past five years in an industry where conventional food retailers are happy to grow 5% a year. Profits climbed 31% in the third quarter ended July 2005, while same-store sales rose 19.6% in the period, higher than what Whole Foods itself had anticipated. The surprise prompted Goldman Sachs analyst John Heinbockel to rave: They “breathe the rarified air of true retailing excellence that most companies aspire to, but most, inevitably, are doomed to fall short of.”

Overall, natural and organic food and beverage sales are strong-$10.3 billion in 2004, up 18% from the prior year, per the Natural Marketing Institute–but are just a fraction of the nearly $500 billion in total U.S. food sales. While that leaves Mackey a very targeted demo to cater to, there is strong evidence that American appetites for healthier, natural fare is growing closer to European tastes.

That could spell a big opportunity for food industry giants like Kraft Foods, Dean Foods, Wal-Mart and others, who are currently lobbying Congress to relax organic standards by “approving a broad list of synthetic ingredients and processing aids” in organic production, per a Web site posting for the Organic Consumers Association, a group which has raised a firestorm of protest over the proposed addition to the 2006 Congressional Agriculture Appropriations Bill. On Sept. 21, the Senate reached a compromise amendment calling for further study of the issue.

For natural food purists, Mackey’s strict approach to organics at Whole Foods is the gold standard.

He’s even lobbying the Department of Agriculture to label milk as “organic” only if it comes from dairy cows that can freely graze in pastures, not just those fed organic feed that is free of antibiotics and growth hormones. Barring federal action, Mackey is expected to issue his own “compassionate” guidelines for the treatment of cows within a year.

Annie’s Homegrown, a mainstay organic brand, has 35 SKUs at Whole Foods nationwide. “When we create a new product, we do so keeping in mind Whole Foods and their standards,” said Sarah Bird, vp-marketing for parent firm Homegrown Naturals.

It is safe to say that Whole Foods’ presence is being felt by traditional supermarkets nationwide: Publix, Shaw’s, Dominick’s and Stop & Shop have all recently either launched or expanded natural/organic store-within-a-store concepts. Cities like St. Louis are courting Whole Foods as an anchor tenant for proposed shopping centers.

Where else might Mackey roam?

Whole Foods last month said it will open its first “lifestyle” outlet offering environmentally friendly clothing, housewares and more in a separate 2,000-square-foot store adjacent to its location in West Hollywood, Calif. The concept, first tested at the Austin flagship, will offer a range of items including organic blue jeans, recycled handbags, organic baby clothes, toys, paint and natural shoes.

Whether the Whole Foods brand can stretch that far is still an open question, one that will likely require Mackey to keep checking his compass.

Said Stanton: “There’s no question in [Mackey’s] mind what he has to do. Because if you’re going to lead the troops into the unknown land, then you better know where you are going.”

From Truffles to Bison, Naturally

Whole Foods carries an extensive line of private label goods, including organic items, under the “365” brand. Lest one think it’s all granola and nuts, consider that the line covers everything from pantry staples to frozen fish fillets to cappuccino dusted truffles. The latter hews to Mackey’s understanding that natural consumers have sophisticate palates and don’t want to equate good-for-you foods with “boring.”

Mackey extended that concept to healthier meat products when he approached restaurateur George McKerrow, CEO of Ted’s Montana Grill, a chain of 41 eateries in the Midwest and Northeast, to produce a line of its popular Bison Chili to augment the fresh bison meat offerings Whole Foods was already selling. After all, McKerrow should know a thing or two about bison, given that his partner is media titan Ted Turner, who also happens to be the largest bison rancher in the U.S.

For McKerrow, it was a seamless partnership of two companies that share similar values on what it means to be organic. “We admire the way they do business. We share similar philosophies of steroid-, pesticide- and hormone-free,” said McKerrow. “They were ahead of the curve in making bison more widely available to their consumers who are looking for healthier, more natural sources of protein.”

Bison Chili is one of the more popular items at the three-year-old eatery, whose menu is a celebration all things bison, which McKerrow stressed is lower in fat than chicken, is cholesterol-free and contains healthy omega 3s.

For two months last year, McKerrow and his team tested batches of the chili recipe, per Mackey’s standards. Pinto beans, for instance, were nixed from the chili sauce because they were deemed too high in preservatives. The finished product would ultimately be sold as a frozen, not shelf-stable, product in an 18-oz. container that (naturally) used recyclable paper and bio-friendly plastic. McKerrow and Turner’s images are on pack.”They are flying off the shelves,” McKerrow reported last month. More bison items–meatloaf, pot roast and stew–are in the works. Meanwhile, McKerrow plans to open a Ted’s Montana Grill in New York City next year. Could a restaurant-within-a-store concept be far behind?

Photograph by Mark Matson