June 13, 2017 at 8:03 am #1447Sean IddingsKeymaster
You might have heard the term “Conscious Capitalism” which describes the philosophy of working in harmony with all stakeholders (win-win relationships). Focus on treating them all well and the financial results will take care of themselves. John Mackey the co-founder of Whole Foods Markets coined the term and literally wrote the book on the philosophy, yet, his company’s performance is dwindling and he still is CEO. Articles like this one purport that conscious capitalism is faulty because Whole Foods Market’s poor recent results.
I’d disagree. To sustain high performance results over decades, even after their visionary founder has left, organizations need to relentlessly follow win-win relationships with all stakeholders. Southwest Airlines, Costco, Les Schwab Tire Centers are three great successful examples.
I do not believe that Mackey’s Whole Foods Market could be defined as a conscious capital business anymore. Let’s look at the past and the present of Whole Foods Market and see where they have lost their touch.
The Past Model
Whole Foods Markets started in California with a $45,000 investment in 1978. Whole Foods achieved $250,000 in revenue in that first year. In 2016, the company achieved $15.7 billion in revenue and $500 million in profits. There have been few years when the company has not had a profit, and I believe that the company, for the most part, was consistently following their stakeholder model, shown below. Otherwise, it’s unlikely that Whole Foods would have achieved their success in the highly competitive retail space for more than 3 decades.
In 2006, John Mackey wrote a wonderful analogy that encapsulated the company’s true past ideology on generating long-term profits:
The analogy is “happiness” because, based on my life experience, happiness is best experienced by not aiming for it directly. A person who focuses their life energies on striving for their own self-interest and personal happiness is often someone who is also a narcissist, or someone who is self-involved and obsessed with their own ego gratification. Ironically, chances are high that they won’t actually achieve their goal of happiness pursuing happiness along this path. In my experience, happiness is a by-product of other things; happiness comes from having a strong sense of purpose, meaningful work, great friends, good health, learning and growing, loving relationships with many people, and helping other people to flourish in their lives. If we have a strong sense of all of the above, it’s very likely that we will also experience happiness in our lives on a frequent basis.
Yet, happiness is a by-product of pursuing those other goals and I think that analogy applies to business as well. In my business experience, profits are best achieved by not making them the primary goal of the business. Rather, long-term profits are the result of having a deeper business purpose, great products, customer satisfaction, employee happiness, excellent suppliers, community and environmental responsibility – these are the keys to maximizing long-term profits. The paradox of profits is that, like happiness, they are best achieved by not aiming directly for them.
Long-term profits are maximized by not making them the primary goal. A business is best not thought of as a machine with various factors of production working in tandem to maximize profits. A business model more in touch with our complex, post-modern, information-rich world is that of a complex self-adaptive system of interdependent constituencies. Management’s role is to optimize the health and value of the entire complex, evolving, and self-adaptive system. All of the various constituencies connect together and affect one another. If business managers optimize the health and value of the entire interdependent system and the well-being of all the major constituencies, the end result will also be the highest long-term profits for the investors as well.
The Current Reality
Actions speak louder than words.
The start of Whole Foods’s poor results can stem from one recurring pattern of not being fully “conscious”. In June 2015, the news reported that New York City’s Consumer Affairs Commissioner Julie Menin had found that Whole Foods Market had been routinely overcharging customers by overstating the weight of prepackaged meat, dairy and baked goods.
Specifically, the NYC regulator found that 100% of the pre-packaged foods they checked were mislabeled:
The price on a package of coconut shrimp at the upscale market was too high by $14.84, said Department of Consumer Affairs Commissioner Julie Menin. A package of chicken tenders was overpriced by $4.85, and a vegetable platter by $6.15, the department said.
Not only has Whole Foods lived up to its nickname “Whole Paycheck”, they had recently been deceiving customers. Such an action is a win-lose proposition, not found in conscious capitalism. It is only commonsense that when you deceive your customers and they find out, a great deal of customers will leave. Brand loyalty and trust is decimated.
So far since the Whole Foods’s practice of overcharging was uncovered, millions of customers have not returned. Top-line results have slowed and the company’s net income has been falling consistently each quarter. The last two quarters declined year-over-year at 30% and 36%.
Whole Foods Markets was breaking their own model by cheating consumers.
As Bill Hewlitt and Dave Packard said, “The biggest competitive advantage is to do the right thing at the worst time.” In response to the allegations Whole Foods did not do the right thing at the worst time. They disagreed with the DCA’s overreaching allegations instead of honestly admitting its mistake. The company has lost its reputation.
While a company might have been founded on the ideal business principles espoused by conscious capitalism, or found with the best intelligent fanatic-led organizations, consistently following those values is tough. Leaders need to get the air just right in their organization to prevent win-lose propositions from forming.
Somewhere along the way, Whole Foods Martket’s leadership allowed their people to dilute the culture. Was it their internal incentives? Who knows? But it will take a significant amount of time for the company to re-establish that trust with consumers.
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