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December 20, 2006

Whole Foods: Bringing Venture Capital to Your Local Organic Family Owned Farms

posted by MR WAVETHEORY at 12/20/2006 10:15:00 PM
I've been a long time fan of Whole Foods Market, Inc. (Nasdaq WFMI), the largest distributor of organic food products in America. What I like best about the company is that it provides organic products that are certified organic, meaning the fruits and vegetables they sell are grown under stricter guidelines than your average farmer's market. Of course, it comes at a price and Whole Foods is facing an identity crisis.

Many of the entrepreneurial farmers who initially worked with Whole Foods were small family owned farms, plowed by your local farmer. They were startups - sans venture capital. The original organic farmers were hippies from Santa Cruz and dropouts from Berkeley who wanted to go back to the land, kind of like your average disillioned tech geek today who dreams of launching a multibillion social networking company. Many of them moved to the Salinas Valley to drop acid while others moved to plow the land. However, over the last 30 years, organic has gone from hippie to yuppie to mainstream. I've always liked organics, but companies like Whole Foods now face a big challenge: How to convince its customers that its not selling out of its original roots as a single store in AustinNew Orleans (thanks for flaglerwrangler's reader comment) featuring wholesome food that works with entrepreneurial growers to bring great unique foods to your kitchen table.

Whole Foods faces several crises in its brand identity:

  • As the company has grown, Whole Foods has made 15 acquisitions and has had to tap into larger "industrial farms." It's grown at an extraordinary pace and faces a huge hurdle because Wall Street analysts value it at a huge premium to the average supermarket. I won't go into details, because you can look the details up, but the valuation of Whole Foods builds in some huge grow assumptions. Whole Foods has a target of 300 stores and $12 billion in sales by 2010, up from $4.5 billion last year. It's no longer a startup.
  • Another issue facing Whole Foods is how it will convince consumers that it's not just another Safeway - I recently strolled through Costco (Nasdaq COST) and I could find about 50% of the items I buy at Whole Foods for 33-50% less, things like dried dates, Silk Organic Soy Milk, Organic Honey Farm Yogurt, and Tangerines. The produce and vegetables are sourced from large organic farms like Grimmway Farms and Cal-Organic. That is killing the smaller farmers who can't compete on price. It's becoming mainstream.

I took a look at Whole Foods site to better understand its business it looks like they are aware of this identity crisis and are doing several things to differentiate itself. What struck me was how much of that strategy draws upon the venture capital model. CEO John Mackey wrote about this crisis in his blog where he talks about "Conscious Capitalism: Creating a New Paradigm for Business" John wants to make Whole Foods more conscious of its responsibilities and he plans to do what a VC would do:

-- Give $10 million a year in low-interest loans to help small, local farmers and producers of grass-fed and humanely raised meat, poultry and dairy animals.

-- Raise its standards of humane care for the animals who supply meat, eggs and dairy to the stores. Whole Foods has hired an "animal compassionate field buyer" to work with producers to ensure that they meet the standards.

-- Set up Sunday farmers' markets in the parking lots of some Whole Foods stores, including about 10 in Northern California.

I hope Whole Foods is able to build a bigger business and continue to bring down prices - I love cheap food and I love the variety that Whole Foods brings to my table. I also hope they will continue to continue promoting entrepreneurial farming activity. We could use more innovation in the grocery industry.

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