Doing Business the Whole Foods Way

by Andreas Petropoulos

In 1978, a twenty-five year old college dropout and his 20 year-old girlfriend borrowed $45,000 dollars from family and friends.  This they used to fund the opening of a small natural food market in Austin, Texas.  They called their store SaferWay - SaferWay being a pun on the name of the large grocery chain, SafeWay.    At first, the going was rough.  Their landlord kicked them out of their apartment for storing food there, so they decide to live, illegally, in their grocery.  Since it had no shower, they bathed using the attachment hose of the store's dishwasher.  After two years, they merged their business with another local health food store, changed their name to Whole Foods (another pun, this time on the Whole Earth catalog), and opened a far larger market with a staff of 19 people.  Months after this new store opened, Austin was hit by a devastating flood.  The store was destroyed; they had no insurance.  But customers loved the market.  Employees loved working at the market.  So the two groups pitched-in and helped to - literally - rebuild it.  Creditors gave them breathing room to get back on their feet and employees lived for a while without a paycheck.
Today Whole Foods is the leading retailer of natural and organic foods, with more than 270 stores in North America and the United Kingdom and over 54,000 employees.  The college dropout, John Mackey, is still the CEO.  The fact that he turned a mom and pop shop into a global corporation is a testament to his vision; to his ability to create a new type of company based on a truly radical business model. 

Building a business

Today, if you are clever, ambitious, and living in America, and you want to start your own company, you have two options.  The first is to invent a new product or service which, because it is new, has no competition.  If the product or service is good enough, and cannot be protected by patent, some company bigger or richer than you might steal your idea and do it themselves.  This means your company must be able to grow at an absurdly fast pace, which in turn requires that you have huge sums of cash at your disposal.  In fact, you need to have so much cash that you can survive several years without being profitable. 
Doing something new these days generally means building an Internet-based business. The biggest problem with building an Internet-based business is developing a revenue model.  Remember the so-called New Economy of the Clinton years?  When venture capital firms fell over themselves to pass ungodly sums of money to Web start-ups with no revenue model except for a vague promise of potential advertisements? Money that could have been better spent, say, on developing alternative fuels or feeding pigeons in Madagascar? Them days are over.
One man that had a new idea with a viable revenue source and then employed this throw-money-at-the-problem model was Jeff Bezos, founder of Amazon.  Bezos raised huge amounts of cash and then created a company that had virtually no competition.  He moved hard and he moved fast, and though it took years for the company to turn a profit, he managed to develop a strong network effect with a strong customer lock-in, which, in turn, made the barrier for entry for would-be competitors prohibitively high.

Network Effects and Customer Lock-In

A network effect is a business situation whereby the more customers you have, the more customers you will get.  It is a phenomenon based on Metcalf's Law, which states that the value of a network is proportional to the square of the number of the users of the system.  So if you have, for example, 100 customers in your network, the total number of potential customers you have would be 10,000.
A good example of a network effect in action is eBay.  If you want to sell your grandmother's silver, you are going to get a better price on eBay because there are more buyers there.  And if you want to buy someone else's grandmother's silver, you will check eBay first, because there are so many sellers there.  Buyers beget sellers, who beget buyers and so on. 
Customer lock-in is when there is something about the business that makes customers want (or have) to stick with a company.  An extreme example of this is your internet service provider.  You may hate your ISP, but if changing it necessitates changing your e-mail address - a huge hassle - you will think twice before doing so.  A more benign example is instant messaging (IM).  Odds are that if you use an IM program, it is one that most of your friends use; the more users, the more potential users.
Unfortunately (or, perhaps, fortunately), there are few people who can raise huge sums for a venture such as Amazon, and even fewer who can translate those sums into a viable business.  So the rest of the clever, ambitious folk who want to start their own companies today must do it the organic way, the way that John Mackey of Whole Foods employed.

The Organic Business Model, a la Whole Foods

In the organic model, an entrepreneur makes a relatively minor, personal investment, to start a company.  Maybe he finances the company with a credit card.  Maybe he borrows money from family.  If the company is successful, great; if it fails, the losses will be minimal.  Many other famous American companies started this way.  In recent years, these include Microsoft, Dell Computer, Ben and Jerry's Ice Cream and Starbucks. 
Two factors determine whether a business which is organically grown (and which has peaked consumer interest enough to be profitable fairly quickly) will grow wings or just muddle by: re-investment and values.  Re-investment is obvious.  The business uses its profitability to fuel growth.  Values are more tricky.  The business leader must have a vision and a mechanism that ensures that all his employees share this vision.  The better the employee buy-in to this vision - these values - the more successful the business is likely to be.  To achieve this unity, employees must be carefully selected, trained and mentored.  Because of this, rapid growth, at least at first, is impossible.
There are many kinds of companies with many kinds of value systems, from the cutthroat values espoused by, say, some investment banks, to the customer-first ethos of Wal-Mart.  In recent years, a new kind of business has emerged, driven by an anti-establishment, "socially conscious" set of values. 

Hippie Companies

In such a business, profits are theoretically less important than happy employees, delighted customers, kindness to the environment and charitable endeavors.    Companies which proclaim these values include Ben and Jerry's and Starbucks.  Their employees are partners, not drones!  They care about the environment! They are saving whole villages in Africa!  I won't argue that these companies do no good - take it up with St. Peter - but I will say that these sentiments sell product, especially when the company's demographic is college-educated, left-leaning urbanites with decent salaries.  So what, thinks this demographic, if the ice cream and the coffee is (way) overpriced?  These companies are helping people!
They were helping more people before they became profitable enough to arouse the amorous interest of venture capital.  That's when management gets taken over, shareholders come first and whatever is left of the do-good philosophy is directly tied to its marketing benefit.  Even the sort-of-good guys sell out eventually.

Whole Foods Philosophy

One company that has not sold out, or at least not as much, is Whole Foods. This is partially due to the fact that their stated mission - what they call their Declaration of Interdependence (Mackay can't seem to help himself when it comes to puns) - is an integral part of their overall business philosophy, a philosophy which fuels an immensely profitable business model. The motto of the Whole Food philosophy is "Whole Food, Whole People, Whole Planet." This philosophy proclaims that all the stakeholders in their business, from employees and customers to vendors (both small and large) and investors, to the environmental health of the world at large are all dependant on each other.  One unhappy stakeholder can affect the bottom line.
With this in mind, Whole Foods supports various initiatives, like providing loans to small, artisan vendors, buying local whenever they can, promoting sustainable agriculture, and supporting producers of specialty items from far away, like Costa Rican coffee growers.  They have strict policies on food quality and safety, as well as guidelines for cruelty-free food.  They take this last one so seriously that no store is allowed to sell live lobsters.

Radical Teams

If the Whole Food philosophy defines the mission; the base unit that carries it out is the self-managed team. After all, nothing is more interdependant than a team.  It is this base unit that makes the Whole Foods business model so amazingly radical and incredibly effective.
There is little managerial hierarchy.  Instead, each store is an autonomous profit center composed of several teams - one for produce, one for grocery, one for prepared foods, etc. These teams have designated leaders and clear performance targets.  The team leaders of a store also form a store team.  The store's team leader belongs to a regional team and the regional leaders, called presidents, belong to yet another team.
Everything that can be measured at Whole Foods is measured: sales, profits, growth rate, employee morale, customer service.  Everything that is measured is shared with all employees.  That means that the guy behind the coffee counter knows, week by week, what his station's sales are, what his store's sales are, what all the other store's sales are, which store has the best customer service record and so on.  The employees, in fact, know so much that all are considered insiders by the Security Exchange Commission (SEC).
The base team competes with other teams within the store and with similar teams from other stores.  Achievement is measured in dollars and other promotions.  Members of teams that do well, get paid more - not by a raise in salary, but in incremental bonuses. Employees can, if they wish, invest extra earning is the companies retirement plan or stock purchase plan. These offer a much needed measure of worker security.
In the States, the government takes a portion (7.65%) of salaries up to a certain amount ($97,500) to finance the Social Security program.  Employers pay a matching amount.  Theoretically, this money gets placed in a fund which will provide workers with a pension when they retire, as well as other benefits.  In reality, it's a tax.  It is more likely than Americans under 40 will witness the Abominable Snowman conducting the New York Philharmonic than that they will see a reasonable portion of their "Social Security" money returned to them.  (By contrast, in Greece it is more likely that workers of a certain age will see the Abominable Snowman conducting the New York Philharmonic while juggling a set of 12 kitchen knives and balancing on a ball than that they will receive all the benefits their government has promised them.  This bothers no one because everyone believes that, even if the Greek government does cut or eliminate some benefits, it certainly won't be theirs.  But I digress.) 
More about teams.  Teams get to decide on new hires - after all, a new team member that doesn't pull their weight is going to affect the rest of the team members' pocketbooks.  It takes a 2/3 vote among team members to allow a new member to join their team.  Another vote is taken after 30 days to decide if the new member can stay on the team.  Oh, and every single employee knows exactly what all other employees are earning. 
As Mackey says "Whole Foods is a social system. It's not a hierarchy. We don't have lots of rules handed down from headquarters in Austin. We have lots of self-examination going on. Peer pressure substitutes for bureaucracy. Peer pressure enlists loyalty in ways that bureaucracy doesn't."
Peer pressure also drives competition and innovation.  Teams have leeway to select which products to place on their shelves.  Teams may contract with local producers for cheese, produce, meat, etc.  Teams can try different marketing techniques.  Teams, in short, can innovate in order to increase sales.
Of course, Whole Food's offerings are expensive - they geared to the same liberal elite that frequents Starbucks.  They are also ruthless, using aggressive tactics to buyout emerging competition, even if doing so produces a short to mid-term loss.  In other words, they are a serious business. What makes them interesting is not their feel-good save-the-world mission, but their extremely effective - and radical - corporate structure.

Greek-Grown Whole Foods?

Could such a structure be built in Greece? Well, yes - though not easily.  Greek tax laws and worker rights rules (and a judicial system that rarely sides with employers on any issue whatsoever) makes creating a merit-based corporation here nearly impossible. If an employer hands out performance bonuses, say, on a monthly basis, they risk being sued by an employee who received a big bonus one month and no bonus the next.  The employee can argue that that bonus wasn't a bonus at all, but a raise.  If the employee takes the issue to court, they'll probably win. The lack of a legal mechanism to compensate an overperforming employee is only half the problem; the flip side is how hard it is to deal with an underperforming one.  Firing is expensive.
Yet, there is a way.  Greek law allows for the creation of an SA-type company based on worker partnership.  Law firms often use this model.  This model can be used to create a new, merit-based company.  Here is how it would work: every employee would be given a small (in the case of this hypothetical company, as small as possible, like .000001 percent) part of the company.  They are also given a small salary, the minimum required under IKA rules.  Periodically (weekly, monthly quarterly, whatever), the company can make payouts to its partners in any amount the company's management desires.  Different "partners" can receive different payout amounts regardless of the size of their stake in the company.  These payout amounts can be tied to performance.  It's legal; law firms in Greece are already doing so to reward those that, for example, bring in more client work.  The best part is, because the taxes are paid at the corporate level, there is no personal tax on partnership payouts.  In other words, employees get cash tax free and both employees and employers pay only the most minimum amount to IKA.  A company could make a case for eliminating salaries, and therefore IKA payments, all together, but a minimum salary offers workers the prospect, however illusory, of security, as well as IKA healthcare benefits.
The biggest downside to this scheme is the fact that all the employees would be permanent shareholders in the company.  The company could not compel them to sell their share if they decide to leave or are fired.  The best the company could do, legally, would be to demand first right of refusal on the sale of any shares.  However, because the employees would control such a minimal part of the company, this downside is not too risky. Plus the shares are only a mechanism to legally enable merit-based pay, meaning that they are relatively worthless on their own, unless the company is hugely successful and goes public.  Even then, with the rules governing the Greek stock market as they stand now, the risk is small.

Good Luck

The problem is, where in Greece could you find a worker willing to be employed by such a company? Employer/Employee relations in Greece can be described as strained at best, what with each group convinced that the other is out to get them.  Plus a company that compensates based on merit is one in which employees compete with each other.  It is not unusual to see Whole Foods employees laboring very long hours indeed to better compete effectively, a work ethic at odds with the Greek psyche. 
Further, years of a malfunctioning semi-welfare state have left the average Greek firmly believing in entitlements.  Greeks are entitled to their healthcare, entitled to their retirement benefits, entitled to their vacations (there are only 5 official government holidays a year; the unofficial ones seem to be constantly increasing), entitled to park their cars where they like, entitled to get a group of like-minded people together, no matter how small, and form a demonstration that closes Central Athens, etc., - whether or not the economy can support such largesse or society as a whole can bear the burden of this me-first attitude.  Try telling, then, the average Greek worker, that a company that is truly based, like Whole Foods, on a mission-driven merit-based philosophy has the potential to offer them more money and more security than the companies that exist today.  You'd have a better chance convincing that knife-wielding, ball balancing Abominable Snowman to conduct his orchestra on the moon.  On the other hand, stranger things have happened