Thriving on Health Food

By S.C. Gwynne/Austin

When a tiny natural-foods market called Whole Foods opened in Austin, Texas, in 1980, it served a comparably tiny clientele: an assortment of vegetarians, macrobiotic dieters and those seeming oddballs who took supplements such as ginkgo biloba and echinacea. Like other mom-and-pop organic shops that dotted the country, the store was friendly, cozy, intensely concerned with its products' purity and expensive.

Seventeen years and a quantum market shift later, natural and organic foods own the hottest corner of food retailing, in which soccer moms mingle with ponytailed herbalists in the aisles of sparkling new stores. Sales of organic products alone, a mere $178 million in 1980, have blossomed into more than $4 billion, while sales of "natural" products--a term that's slicker than soy paste--have tripled in the 1990s and now exceed $12 billion. The retail organic-and-natural-foods business is gorging itself on 20%-plus annual-sales increases, in contrast to a subsistence diet of 2%-to-3% increases at traditional grocery chains.

The chief beneficiary of the boom is Whole Foods Market, whose 900% growth in the 1990s has produced a billion-dollar juggernaut with 78 stores in 17 states. Whole Foods rose to dominance in a three-year buying spree during which it acquired New England's Bread and Circus, North Carolina's Wellspring Markets and California's Mrs. Gooch's. Last year the company swallowed its biggest rival, the 22-store East Coast chain Fresh Fields, leaving Whole Foods and Wild Oats Markets, based in Boulder, Colo.--one-quarter its size--as the only two national natural-foods chains.

When organic supermarkets started springing up, their investors figured that the aisles would be populated by a nation of granola eaters eager to pay extra for the halo of purity. They were dead wrong. We remain a nation of committed Twinkie eaters even while welcoming organic foods to the table. Consumers aren't willing to pay a hefty premium for organic, nor do they want to give up any of the conveniences of shopping in large stores that stock everything from soup to lug nuts.

Whole Foods has successfully bracketed these requirements. The stores offer chemical- and preservative-free foods, organic produce, hormone-free meats, cruelty-free cosmetics and ecologically friendly household products. But unlike the old niche stores, these markets are not ascetic: you can buy beer and wine as well as nonorganic produce, foods with refined sugar, and everyday household cleaners like Windex. The new stores, typically 30,000-plus sq. ft., also feature on-site bakeries and kitchens. The latter offer a wide assortment of meals, including vegetarian repasts to go.

Whole Foods has the requisite corporate counterculture too. Employee teams vote on hires and get financial statements, including sales and profit figures for their departments. They evaluate the salaries and performance of their bosses, ratings that are closely watched by top execs. "One of the keys to understanding this company is that the people who started it did not know how they were supposed to do it," says chairman and co-founder John Mackey. "This is the way our culture has developed." Indeed, Whole Foods was recently named by FORTUNE magazine as one of the top 100 places to work.

The friendly culture will soon be put to a severe test as a second wave of competitors emerges. In Boston, where Whole Foods has held sway with its five Bread and Circus stores, Star Markets, a billion-dollar conventional chain, has recently opened four natural and organic Wild Harvest supermarkets. Meanwhile, Wild Oats, while not as large, grew 75% last year and looks to become a formidable rival. In spite of that, Mackey still sees supermarkets as his main competition: chains like Albertson's and Safeway have vastly increased their natural-foods offerings. Such chains, however, may actually help organic stores, says Barbara Miller, who follows the food industry as an analyst for BT Alex Brown. The supers "have only so much aisle space. They end up introducing people to lots of new products and may very well pull them into a Whole Foods store," she says. Miller expects Whole Foods to grow 25% annually for the next five years.

Mackey is girding for battle. "We're trying to make it as difficult and as costly as possible for competitors to enter markets where we dominate," he says. Judging from what is happening in Boston, however, it seems more than a few companies may be willing to take that risk.