A Whole Foods Story
In the spring of 1982, I had selected Austin, Texas, as the most promising market in which to start my idea of big discount bookstores, BOOKSTOP. Unable to find a big enough space in the heart of the city, I considered a shopping center at the then-remote northwest edge of the city. In his efforts to convince me the site would work, the leasing agent told me about a young sort-of-hippie entrepreneur, John Mackey, who with his partners operated one “Whole Foods Market” in downtown Austin, but who was considering opening a second store in the new shopping center. “He seems like a smart guy, and I think you will like him.”
I went to a warehouse in then-cheap-rental East Austin, where my partner and i met the tall, skinny, athletic guy with curly hair and a mustache who was the driving force behind this health food store idea. We opened our stores in September of 1982 and both were highly successful. Over the years I got to know John better, and observed their growth from the tiny Austin start. From 1988 to 1992, when Whole Foods expanded beyond Texas and became a publicly owned company, I served on their Board of Directors alongside early venture capital investors.
The venture capitalists who funded BOOKSTOP asked me what I thought of Whole Foods – was the health food trend a temporary flash in the pan, or was it “for real” and the “big grocers” would quickly come in and steal the opportunity? I told them “neither.” John Mackey and his great team were nothing short of “health food nuts.” They were dedicated to their cause. They wanted to change the world. Above all else, they were indeed smart, and they were learners, experimenting with new ideas, not afraid of failure, willing to test the envelope. I believed in the company then and believe in it today.
In those intervening 35 years, John and his colleagues built a highly profitable company generating $15.7 billion in annual revenue. For 19 years in a row, the company has made Fortune magazine’s exclusive list of the best places to work in America, now providing great jobs to 90,000 people. Whole Foods serves millions of customers in over 450 stores. The company has generated shareholder value of $13.7 billion, with Amazon’s Jeff Bezos willing to step up and pay that price in a deal announced last week.
Grocery Industry Turmoil
The stock of Kroger, the largest pure supermarket chain, dropped substantially after disappointing projections followed by the announcement of the Amazon-Whole Foods deal in the same week. German-owned off-price powerhouses Lidl and Aldi have announced massive, multi-billion dollar expansions in the United States. Idaho’s employee-owned WinCo, which operates circus-like high volume discount food stores, has entered the big Texas market. Long-time privately-owned friends Wegman’s of Rochester and Publix from Florida clash for the first time, in Richmond, Virginia. Hot convenience store operators like Wawa and Sheetz, both from Pennsylvania, march further and further afield. Television’s smart Jim Cramer foresees a virtual bloodbath, urging his viewers to avoid the supermarket stocks at all cost. Has there ever been an industry in this much turmoil?
While the number of players and forces may have reached a new high, the food retailing industry has for over a century been one of change and innovation.
A Quick Stroll Through History
By 1912, America’s first great retail chain, the Great Atlantic and Pacific Tea Company (“The A&P”) had 480 stores spread across many states. The founder’s son John Augustine Hartford thought the highly successful company could do better if they lowered prices, but his father and conservative brother would not hear of it. Finally, he wore them down and they said, “Ok, you can open one of your cheap store ideas a few blocks from an A&P. But you cannot call it A&P and you can only have $3,000 with which to open the store.” They figured this would prove the stupidity of his “Economy Store” concept. Within months, the regular A&P around the corner had to close as customers loved the new concept. By 1927, only fifteen years later, A&P had opened 15,671 of these little stores, sometimes just a block apart in major urban centers. By 1929, the A&P had become one of America’s first companies to achieve $1 billion in annual revenue. The largest retailer in the land, these revenues were greater than those of #2 Sears, Roebuck and #3 FW Woolworth combined.
Despite this huge success, the A&P was not without competition. In 1929, Kroger of Cincinnati, Safeway of San Francisco, American Stores of Philadelphia, National Tea of Chicago, and First National of Boston operated an additional 14,188 stores. Grocery chains represented 4 of the 10 largest retail companies in America.
Then, on August 4, 1930, Michael J. Cullen opened his King Kullen store in Jamaica, Queens, New York, generally accepted as the first true supermarket. Cullen, a veteran of A&P and Kroger, had tried to convince the leaders of Kroger to try his new idea, described as “a new type of food store with a focus on low prices, cash sales, and without delivery service, in larger stores (at low rents) with ample parking.” These were to be “monstrous” stores, about forty feet wide and hundred and thirty to a hundred and sixty feet deep, located one to three blocks off the high rent district with plenty of parking space, to be operated as a semi-self-service store – twenty percent service and eighty percent self-service. Cullen suggested that this new type of store could achieve 10 times the volume and profits of the average Kroger or A&P. But his letter never even made it to the head of Kroger, as the chief’s lieutenants knew the idea was crazy.
But it wasn’t crazy. King Kullen and others around the nation added meat and produce to the standard mix of “dry groceries,” added parking, but most of all deep discounts. Others followed Cullen: two years later, Big Bear opened in New Jersey in the former Durant auto factory, its single store doing the revenue of 100 A&P’s.
Within a few years, the industry leaders woke up to the new concept. In 1937 A&P, ever ready to evolve under the same brilliant John Hartford, began closing its tiny stores and replacing them with the new “giant” supermarkets. In just thirteen years, by 1950 A&P had dropped from more than 14,000 stores to just over 4,000, but their revenues rose from $800 million to $3 billion. In 1955, 11 of the 25 largest American retailers were grocery store chains.
During the 1960s, the new concept of the discount store – general merchandise but no food – spread across America. Over time, many retailers attempted to integrate general merchandise with food: Walgreen’s and St. Louis’s Schnuck’s grocery chain, Skaggs/Albertson’s from the western US, Kmart and Detroit’s Allied Supermarkets, and others tried to make it work, with mixed success at best. Weekly “convenience goods” shopping for low margin groceries did not fit with the less frequent and more leisurely “shopping goods” trips for clothing, home furnishings, hardware, and other categories. The industry mentalities and restocking processes were radically different. A few regional firms made it work – Schwegmann’s in New Orleans, Meijer’s Thrifty Acres in Michigan, and Fred Meyer in Oregon. But none of the industry giants could figure it out.
Fast forward to 1987. Booming discount chain Walmart – still smaller than Sears or Kmart – opened an experimental store combining the general merchandise (non-food) that it knew well with groceries, a new category in an already fiercely competitive field. The store was called Hypermart USA, modeled on the “hypermarches” which were sweeping through Europe, led by France’s Carrefour. The store did not work and was soon closed.
Nevertheless, ever-experimenting Walmart opened its first “Supercenter” the next year (1988) in Washington, Missouri. This time it worked. For the next several years, the company gradually replaced most of its discount stores with the new food and general merchandise combination stores. As of January 31, 2017, there were 3,522 Walmart Supercenters in 49 of the 50 U.S. states, the District of Columbia, and Puerto Rico. Everywhere but Hawaii. Walmart is by far the largest food retailer in the world, with revenues almost twice those of runner-ups France’s Carrefour and Britain’s Tesco combined. Kroger remains the largest pure food chain in the US, and the only company to finish among America’s top ten retailers ever since 1929, a remarkable record in itself.
Yet another breakout of the 1970s and 1980s was the invention of the warehouse club with Sol Price’s Price Club in San Diego. Costco and Walmart’s Sam’s Club came along soon after. Costco later acquired the original Price Club organization. No retailer in American history has lived with such low profit margins as these stores, relying on membership fees for profitability (not unlike Amazon). Between 2000 and 2016, Amazon grew its North American revenue by $76 Billion, while Costco added $63 Billion.
Step ahead another 30 years to today. Convenience stores are getting a rising share of the food dollar, led by Sheetz, Wawa, 7-Eleven, and many smaller firms. Walgreen’s, in the 1970s a sleeping giant, and CVS, back then a small division of shoe giant Melville Corporation, are now adding more food on virtually every good street corner in America, often facing each other. Family Dollar, Dollar General, and DollarTree are adding stores and expanding in food. Aldi and Lidl are invading in spades. Those in the traditional supermarket industry in the “know” consider privately owned Publix, HEB, and Wegman’s as among the best in class – conclusions supported by surveys of customer loyalty and satisfaction.
According to Statista, in 2016 Walmart sold 17.3% of the food sold in America (excluding restaurants), followed by Kroger at 8.9%, Albertson’s/Safeway at 5.6%, Costco at 5.1%, Ahold Delhaize at 4.2%, Sam’s Club and Publix tied at 3.4%, HEB at 1.9%, Whole Foods and ShopRite at 1.7%, Target at 1.5%, Meijer at 1.4%, and Aldi at 1.3%. Further down the list were Trader Joe’s at 1.1%, and Wegman’s and Amazon tied at 0.8%. That is a LOT of upside for Amazon and the other tiny players, just as Whole Foods’ leaders realized 35 years ago.
Perhaps the most important change – under-reported among all these trends – is the continuing long-term shift from “food at home” to “food away from home,” the rise of the restaurant industry. Over the forty years from 1967 to 2007, food and beverage stores declined from about 69% of the total “meal and food market” to 37%; general merchandise stores, including supercenters and warehouse clubs, went from under 2% to 12%; while “eating and drinking places” rose from 28% to 45%. And as more grocery stores add onsite foodservices and ready-to-eat meals, restaurants add drive-thrus, order ahead, and home delivery. Everybody gets into everyone else’s market as old boundaries and definitions are obliterated.
And you thought your industry was competitive!
According to the Census Bureau, in 2016 Food and Beverage Stores generated revenue of $701.6 Billion. Food Services and Drinking Places did $660.1 Billion. Add in all the other places that sell food and other “convenience goods,” from gas stations to drug stores to Costco, and the total market is at least $1.5 trillion.
What can we learn from this history?
- The retailing of food has always been intensely competitive.
- Leading retailers have always been forced to innovate or die (the last A&P closed in 2016).
- Nobody stays on top forever.
- New technologies, efficiencies, and types of stores (real and virtual) have always driven change.
- The consumer has always come out ahead.
These waves of change seem to occur in a twenty to thirty year cycle. Check back in 2040 and see if we have yet another big shift underway. In the interim, the enormous trillion-dollar industry of feeding ourselves may have more innovation and more shifts in market share than we have ever seen.
But the spoils will not likely go to just one or two competitors. Each concept has its own advantage: the shiny new drug stores draw an aging population to their healthcare products; the convenience and dollar stores offer quick in-and-out visits; Whole Foods, Wegman’s, and Trader Joe’s present unique and engaging experiences; the traditional operators like Publix and HEB show no signs of losing their spunk; Costco and Sam’s prosper with the lowest profit margins in retail history; and Amazon has the best list of loyal customers in the world.
In my book The Art of Enterprise I claimed that the best industry in America was food distribution. From Walmart, 7-Eleven, and McDonald’s to food trucks and the latest trendy independent restaurants, the availability, variety, prices, and safety of food is nothing short of incredible. The industry is hard to survive, but many have prospered, from the tiniest café or convenience store to the giant companies enumerated here. Few things are more fundamentally entrepreneurial (and global) than selling food to your neighbors.
35 years ago, Whole Foods, with one store in Austin, realized that it did not need to take much share of market in order to be profitable and to be big. They’ve built a company with $15 billion in revenue, yet still have less than 2% of the market; under 1% if you include restaurants. Amazon understands this, and sees the same giant prize that so many others have pursued in the past.
I would love to see your thoughts and comments here.
Gary Hoover is a lifelong student of food retailing. His father was a wholesale and retail grocer in the 1930s, 1940s, and 1950s. Gary served on the Board of Directors of Whole Foods Market from 1988 to 1992. His first startup, BOOKSTOP, was 20% owned by HEB, and the President of HEB served on his Board. He has spoken at conferences of the Grocery Manufacturers Association and the Food Marketing Institute, the primary supermarket trade organization, as well as at the Texas Restaurant Association. He blogs extensively on retail trends and history at Hooversworld.com and other sites. His book on retail principles, trends, and key players, including long-term projections of ECommerce, is available here