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No one does it better than Whole Foods. Its co-founder, Mackey, 48, is a six-time college dropout who grew up on TV dinners, got bitten by the health-foods bug in his 20s and built his business by combining the concepts of health-foods store and gourmet market. Mackey is the son of an accounting professor, and despite his left-leaning roots, he is a carnivorous capitalist. Starting with a single Whole Foods store in Austin in 1980, he took 12 years to expand to five outlets. But after taking his firm public in 1992, he steadily opened new stores and used his equity to swallow competitors, buying 15 regional chains, including New England's Bread & Circus and California's Mrs. Gooch's Natural Foods Market.
The firm has stumbled occasionally. In 1997 it paid $146 million for a Colorado vitamin business that proved a bust, and it made a costly foray into Internet retailing. But those missteps have helped Whole Foods executives hone their strategy: to create a "supernatural" giant that can withstand the challenge from both conventional chains and the 500-pound gorilla called Wal-Mart, which is selling ever more low-priced organic fare.
A key step toward Whole Foods' goal was its acquisition of Harry's Farmers Market, an ailing Atlanta-area chain that Mackey scooped up last year for $35 million. Harry's was losing money, and is dragging down Whole Foods' earnings. But the chain provides access to the Southeast, where Whole Foods is weak. And Harry's three megastores fit the prototype for Whole Foods' expansion plans; they are massive, fun (with cookouts on weekends) and strong in perishables and prepared foods--high-margin segments that account for 60% of Whole Foods' sales.
If Whole Foods has a weakness, it's that occasional shoppers find the stores a bit confusing. Most national brands aren't available, and regional purchasing managers have so much leeway in how they stock shelves that Heinz ketchup, for example, is sold in some stores but not in others. The problem for some shoppers--and the charm for others--is that hundreds of the products Whole Foods sells are made by mom-and-pop producers. Few shoppers outside Austin, for instance, know of Boggy Creek Farm, a family-run business whose sun-dried tomatoes and pasta sauces are sold at local Whole Foods stores.
Nearly every item is screened for artificial ingredients, but what's blessed as "natural" can seem arbitrary. The chain is phasing out all goods with hydrogenated fats, meaning no more Pepperidge Farm Goldfish and Carr's crackers. But it sells its own chocolates and cheese puffs. Rationale: the chocolates contain organic cocoa and raw cane sugar, and the cheddar puffs contain real cheese and no artificial colors.