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Whole Foods’ “Slump” Is Not a Failure of Conscious Capitalism

Whole Foods current “fix” is a massive strategic misstep. But the company’s impact on business has been a huge win for society.

Last week I came across an interesting article by The Guardian suggesting that Whole Foods’ crisis represents the failure of the larger movement the company represents: Conscious Capitalism. Yes, Whole Foods is not doing well, by Wall St. standards, and is taking measures to curry the Street’s favor. In case you don’t have the details, here’s a quick summary The Guardian’s article put together:

1. Same-store sales have declined for six straight quarters. Apparently some 14 million customers have walked away during the same period.
2. A hedge fund just bought 8.3% of the company, demanding a major revamp in its business operation.
3. The revamp includes, among other measures, hiring big-shot executives from the traditional grocery retail world, and promoting Gabrielle Sulzberger (whose background is in private equity) as Whole Foods’ new chairwoman.
4. Additionally, the company initiated a $1.25 billion share buyback program and has promised to cut costs by $300m, both measures Wall St. loves (because it drives shareholder gains).

Next, the article tries to make an argument for why Whole Food’s downfall should be seen as the failure of the whole Conscious Capitalism (CC) movement. Before we dive into this argument, let’s take a quick look at the four tenets that make up CC:

• Higher Purpose: Businesses should aim at creating larger impact in their communities and the world, and not solely pursue profit and shareholder returns. A key way to assess this is to ask “What is the impact your business wants to make in the world?” or “If your business didn’t exist, would it be missed — and why?”
• Stakeholder Integration: No business survives on its own, they depend on stakeholders to exist. That means besides shareholders, businesses should consider customers, employees, suppliers, vendors, and the government as part of their value chain. And that includes, of course, society and the planet, which are also stakeholders.
• Conscious Leadership: This is about leadership which prioritizes people over of profit. How? By focusing on building a culture of fairness and egalitarianism, trust and transparency, integrity and loyalty, love, care and personal growth.
• Conscious Management: Conscious leaders focus on decentralization, empowering others below them to take on higher accountability, and work collaboratively and with more autonomy.

In a nutshell, conscious businesses aren’t just about being productive and providing shareholder returns, but about creating a values-led culture that puts people (and the planet) ahead of profit. When this happens, what you ultimately find is a happier workplace, where employees are engaged at work because they feel what they do is a part of something bigger. By adding more meaning to work, engaged employees end up working more productively, which in turn makes it good for the business, while being good for society and the also for the planet.

Of course, the Conscious Capitalism movement isn’t alone. Very similar approaches include the B-Corporation certification and Michael Porter’s seminal Shared Value proposition, which argues that businesses that create value for society (and the world) end up being more profitable. As Peter Diamandis, c0-founder of Singularity University and author of the bestselling Abundance beautifully frames it, “the world’s greatest challenges are the world’s greatest markets.” Together, these three major movements are supported by hundreds of global corporations and smaller businesses, including the likes of Patagonia, Starbucks, Google, The Container Store, TATA, Costco, Southwest Airlines, Etsy, Warby Parker, Chipotle, Twitter, TOMS, Bright Horizons, REI, Ben & Jerry’s, among several others.

Great. But let’s get back to The Guardian’s story about Whole Foods…

In essence, the Guardian piece argues that Whole Foods’ approach failed, because it prioritized all its stakeholders, instead of focusing on efficiency and generating profit. Whole Food prioritized building a “network of autonomous regional production hubs of small farmers and mom-and-pop food startups” at the expense of having a centralized bulk-buying operation (such as Walmart’s), eventually leading to the loss of efficiency and sales declines. In sum, the article claims that selling organics and taking care of people sounds great, but simply doesn’t create a sustainable business. Hence, Conscious Capitalism is a failed proposition.

But is it?

We know that Whole Foods’ prices have always been above market average. After all, when you pioneer mass sales of organics and locally grown products, barriers to entry are costly — you certainly can’t count on economies of scale. Another example of this is Patagonia’s famous ditching of synthetic materials for organic cotton in the 1990s, which shot prices far above its competition. Both companies reasoned that if they wanted to make a difference in the world, they would have to (initially, at least) charge higher prices, but bet on a growing customer base that would justify that pivot. In short, Whole Foods positioned itself at a higher price point for more privileged customers. That was always the plan.

However, the point of Conscious Capitalism isn’t to beat your competition. When your focus is to create a more just and sustainable world, you don’t really mind sharing some of your secret sauce with what traditional business mindset defines as “competitors.” That’s why, in his book by the same name (Conscious Capitalism,) Whole Foods founder John Mackey (along with co-author Raj Sisodia) talks about many other companies who are doing great work, including one of his biggest competitors, Trader Joe’s.

In the Portuguese language, “competitors” are widely referred to as “concurrents.” Despite having the actual translation “competidores,” Brazilians adopt a nuanced term that inherently frames competitors as entities in pursuit of a same goal.

(In geometry, “concurrent” means two or more lines toward one point)

Understanding this characteristic of conscious companies is key to reframing the traditional mindset definition of competition — and in turn, analyzing Whole Foods’ trajectory so far from a higher level perspective. In pioneering organics and local produce, Whole Foods ultimately led the way to a vast, systemic change, making organic products and practices commonplace. The company educated masses of customers, educating consumers that there are healthier and more sustainable alternatives. The company did a phenomenal job of crossing the innovation chasm, moving from selling early adopters, to the early majority, and then crossing into the mass market. Whole Foods set the pathway for all other “competitors” to follow — including the Walmarts, Targets, Safeways and Krogers of the world.

For Whole Foods’ traditional compeitors, there’s only one thing to do: copy or die. And that’s they did. As the Guardian pointed out, they began selling the same type of products, but relied on their size and centralized bulk-buying to squeeze margins and offer far lower prices. So far, nothing new here.

But it’s in its conclusion where I strongly disagree with The Guardian. The fact that Whole Foods is transitioning to a more “Walmart-like” model is the actual failure — and not, by any means, is this is a failure of Conscious Capitalism.

Whole Foods took a giant leap decades ago when it opted to pioneer selling organics and local produce. In a fascinating breakthrough after the massive flood that destroyed its only store in 1981, John Mackey realized the importance of stakeholders in the success of a business. This turnaround was a major innovation at the time, and set the tone for Whole Foods’ rampant growth. When far larger players become aware of the strategy that is outperforming them, they tend to fast follow, and win by economies of scale. Whole Foods must once again innovate and shift the dynamics of the market — while protecting its margins and customer base. But the company isn’t doing that. Instead, in a what it seems like a desperate move, it’s going backwards and copying the very models it once threatened. Whole Foods is becoming Walmart — a strategic error of Whole Foods, and actually, a win for Conscious Capitalism.

Here’s why:

Gallup’s State of the American Workplace (2017) warns that only 30% of American workers are engaged at work. The other two thirds are either disengaged (simply not caring) or actively disengaged (emulating behavior that threatens the organization performance). Additionally, in a 2015 study, Gallup found that only 21% of Americans trust big businesses. In sum, “There’s an American leadership philosophy that simply doesn’t work anymore. Employees are pushing companies to break down the long-established structures and policies that traditionally influenced their workdays,” said Gallup’s CEO Jim Clifton. Add to this climate change, natural resources depletion, waste and growing social inequality, and it’s easy to know where we’re headed.

Sadly, this is not really news. It’s a major wake up call for traditional businesses that insist in viewing their role through the famous lens of economist Milton Friedman, who in 1970 stated that the sole purpose of a corporation is to generate maximize shareholder value. Worse, more recent approaches insist on the fallacy of what the current “connected generation” has come to worship as exponential growth. According to another (but more attuned) economist, Kenneth Boulding, “Anyone who believes exponential growth in a finite world is either a madman or an economist.”

Global enterprises have largely contributed to a system that long neglected the byproducts of insane pursuit of growth. Generalizing Whole Foods current slump as a failure of Conscious Capitalism misses the point: When all major grocery retail players begin to sell organics and local produce, that’s a major win for Conscious Capitalism altogether. Whole Foods did its job in setting the bar high — and others did their jobs following. The next step for Whole Foods is not to normalize itself against the Walmarts, but take another leap and (re)set the bar even higher — for the health of its business, the prosperity of conscious companies, and for our society and the planet.

PS: for another point of view on responsible businesses, take a look at this recent article by The New Yorker.