Whole Foods CEO’s poor excuse for poor performance – Jose Alvarez and Zeynep Ton

Harvard Business School Senior Lecturer Jose Alvarez

At a town hall meeting announcing Amazon’s purchase of Whole Foods, a Whole Foods employee had this question for CEO John Mackey:

“I have a question about Whole Foods’s commitment to those win-win-win-win partnerships with our suppliers, with our team members— and how that’s going to live on once this merger is complete.”

Mackey’s response was curious, to say the least:

MIT Sloan Adjunct Associate Professor Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

“I think, sometimes, our company’s gone a little bit too much team-member focus at the expense of our customers. And that’s one definite evolution that’s gonna happen. I love the passion these guys [Amazon] have around the customer. They put the customer first in everything they do and think backwards. And— we— we’re gonna be the same way.”

If Mackey thinks that investing in people is part of the reason for Whole Foods’s poor performance, he’s wrong. From what we see, the real problem is a lack of operational excellence. Whole Foods may be paying its employees more than competitors do, but it has not created an operating system that leverages that investment. You can’t put premium gas in a clogged-up engine and expect to win a race.

Whole Foods strikes us as an organization that doesn’t standardize where it needs to and doesn’t empower where it needs to. Five stores within a city may have five different people purchasing from the same local farm in five different ways. Their information systems are mediocre at best.  John Mackey’s own words about Whole Foods technology are useful here: “So I think that we can expect that we’ll go to the front of the class, eventually, in the grocery business, from … the class dunce to… the class valedictorian.”

Poor systems and lack of appropriate standardization mean lower labor productivity and higher costs. At the same time, frontline team members appear to have little empowerment to satisfy customers. One of us recently wanted to return a $3 Whole Foods reusable shopping bag that had broken the first time it was used.  You would expect the cashier to just exchange the bag for a new one.  Instead, she called for her manager to resolve the problem.  It was a waste of time for all, including the other customers waiting in line. Paying team members more than competitors do won’t pay off if you don’t empower them to make a $3 decision! Lack of empowerment reduces not only motivation but also customer service.

We both shop at Whole Foods and we’ve noticed a great deal of specialization. A nine-year employee we interviewed told us all he does is shelve produce and help customers find the produce they’re looking for. He doesn’t order products. He doesn’t check inventory accuracy. He can’t open a cash register if there is a long line. Lack of cross-training reduces the company’s ability to manage traffic variability. It reduces motivation. And it reduces productivity. We asked cashiers at two Whole Foods stores what they do when there are no customers. They told us they just wait.  At Trader Joe’s, those same cashiers would be cleaning or shelving or doing some other productive task if traffic were slow.

Most importantly, unless continuous improvement is something that all your employees know how to do and know that they’re expected to do, your company will have a tough time reacting to changes in the market. A lot of competitors now sell natural and organic products.  Whole Foods is no longer even the industry leader—Costco, WalMart, and Kroger all have higher sales of organic food.

So the problem isn’t that Whole Foods is focused too much on employees at the expense of customers.  The problem is that frontline employees have been living with an operating model and information systems that prevent them from creating great value and great service for their customers. The result for Whole Foods seems to be lose-lose-lose.

First, team members lose because their jobs are not motivating. Despite the higher wages, Whole Foods’s Glassdoor score from over 4,900 current or former employees is 3.4 on a scale of 1 to 5. That’s less like Costco (3.9), QuikTrip (3.9), and Trader Joe’s (4.0) than it is like WalMart (3.1)—and nobody ever accused WalMart of coddling its employees at the expense of its customers.

Second, customers lose because inefficiencies mean higher prices and more out-of-stocks. Indeed, Whole Foods’s reputation as “Whole Paycheck” seems to be well deserved:  surveys have shown it to be 15-20% more expensive on comparable items than other grocers.  (Worse yet, these surveys were taken before the price war that is raging as Lidl has entered the U.S. market and Aldi has sped up its expansion plans.)

Third, investors lose because of lower sales, lower productivity, and higher shrink.

Brick-and-mortar retailers that are customer-centric invest in operational excellence.  That means they have great processes and motivated people who deliver on the brand promise.  Costco focuses much more on employees than Whole Foods does.  Costco also pays employees significantly more than Whole Foods.  Yet, you will never hear Costco’s founder, Jim Sinegal, say that his company focuses too much on employees. Costco’s investment in employees pays off because of its investment in operational excellence—which, in fact, is just another investment in employees.

If we were in Mackey’s shoes, we would be thankful indeed that we’d been able to pay our employees well for this long and we’d get to work making that investment pay itself back through operational excellence.

Jose B. Alvarez is Senior Lecturer of Business Administration, Harvard Business School.

Zeynep Ton is an Adjunct Associate Professor of Operations Management at the MIT Sloan School of Management.

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