Whole Foods Market revolutionized business in a traditionally low-growth sector: grocery retail. Visionary management, strong purpose, and passion have built up a strong competitive advantage -- and have led this company to report amazing growth over the years.
Whole Foods Market's vision is about much more than selling food. It's about healthiness, environmentally sustainable practices, community support, and fair trade products. Whole Foods' message is that not all bottom lines are strictly financial -- and this highly successful and growing company hits on all cylinders.
The case for Whole Foods
Unlike many companies, rank-and-file employees (called Team Members) receive most stock options. Full-time employees are eligible for affordable health benefits . Management salaries are capped at 19 times the average worker's wages, and the company has an open-book policy on salary.
Whole Foods Market is one of those companies that very rarely advertises, though it strongly uses social media to communicate with its engaged customers. Word of mouth carries its message. Whole Foods ranked number 38 out of 50 in Interbrands' list of Best Retail Brands for 2012.
Although Whole Foods has often battled the impression that its products are expensive (the tired "Whole Paycheck" joke), awareness is growing that there are some legitimate reasons why some of this retailer's products are priced higher than peers. At the same time, Whole Foods has been able to adjust pricing to the point where some of its goods are cost-competitive with conventional grocers.
Investors can't complain about Whole Foods' long-term growth. Over the past five years, sales have grown at an average annual rate of 13%. Its median return on capital has been nearly 10% -- much stronger than you'd expect to see from a traditional grocer. Shares have doubled.
Although the timing of its massive 2007 acquisition of Wild Oats wasn't ideal, Whole Foods has paid down debt associated with the transaction and has thrived since. The company generates plenty of free cash flow and has $1.22 billion in cash on its balance sheet.
Whole Foods Market is one of those companies that aims to serve a higher purpose. Take its numerous environmental initiatives, supplier-friendly initiatives, local sourcing of many products, loans to farmers and other suppliers, and efforts to alleviate poverty. Each store has a separate budget for community philanthropic activities, and Whole Foods dedicates at least 5% of after-tax profits to non-profits every year; in the last three fiscal years, its donations (including in-kind food donations) amounted to more than 10% of after-tax profits.
Environmentally, Whole Foods has always been ahead of the curve. It was the first retailer to offset 100% of its energy use with wind credits. Last year, the company released its first Green Mission report, which illustrates how so many of its initiatives and programs make green sense. Providing fresh foods from sustainable farms, Eco-Scale labels, and its many initiatives from waste reduction built into its processes to green building and design make this retailer ahead of the curve to help result in a less polluted, greener planet. Environmental friendliness is in this retailer's DNA.
Risks to consider
Whole Foods still faces the threat that many consumers may not be able to be able or willing to buy its higher-priced products.
It's also possible that consumer interest in organic, natural, and eco-friendly products could wane despite all its growth over recent years. Economic factors could drive budget-constrained consumers back to dirt cheap, processed grub.
Although Whole Foods is a truly forward-looking company, it could be too far ahead of the curve for many mainstream consumers with initiatives like animal welfare ratings and its enthusiasm for plant-based diets.
Finally, visionary co-CEO and founder John Mackey is a brilliant, outspoken leader, but every once in a while, his statements rub some of his company's target demographic the wrong way, leading to vocal outrage and public relations issues (which, granted, do tend to die down and fail to make a dent in the company's sales and profits).
The Foolish bottom line
Whole Foods Market has set its sights on being a legitimate and leading part of the future of retailing and consumption, where quality and sustainability are more important factors than just achieving the lowest possible price.
The article What Makes Whole Foods One of America's Best Companies originally appeared on Fool.com.
Alyce Lomax owns shares of Whole Foods Market. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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