Whole Foods Hands Mackey Sole Control of Fixing His Creation

(Bloomberg) -- Whole Foods Market Inc. co-founder John Mackey, who opened his first store in 1980 with a staff of just 19 people and built the chain into an organic powerhouse, is now taking full responsibility for restoring the company to glory.

The retailer named Mackey as its sole chief executive officer on Wednesday, ending a dual-CEO role that he shared with Walter Robb for the past six years. In taking the step, the board is trusting that the eccentric Mackey can figure out how to make Whole Foods fresh again after its worst sales slump in at least a decade.

Mackey, 63, is a libertarian who has railed against Obamacare and minimum-wage laws, putting him at odds with some Whole Foods customers and employees. But he's also a vegan who pioneered the organic-food movement and briefly turned Whole Foods into the second-most-valuable food retailer in the U.S. -- behind Wal-Mart Stores Inc. -- in the fall of 2013.

Though Robb helped provide a check on Mackey's outspoken tendencies, the current struggles have probably made it increasingly difficult for the pair to reach consensus, said Brian Yarbrough, an analyst at Edward Jones.

“When things were going well, it was probably much easier to agree on things,” he said.

Mainstream supermarkets, including Kroger Co. and Wal-Mart, continue to make inroads into Whole Foods' organic turf, weighing on sales. The Austin, Texas-based company has been trying to fight back by offering more discounts and even starting a new chain focused on younger shoppers, but the payoff isn't yet clear.

Cost Cutting

Though sales slid last quarter, cost cuts allowed the company to post better-than-expected earnings. That helped send the shares up as much as 5.4 percent to $30.06 Thursday in New York. The stock had been down 15 percent this year.

Profit was 28 cents in the fourth quarter, topping the 24-cent estimate of analysts. But same-store sales dropped 2.6 percent in the period -- worse than the 2.1 percent decline predicted by analysts. Total revenue of $3.5 billion was in line with estimates.

Comparable sales are expected to range between flat to a 2 percent decline in fiscal 2017, the company said.

“In a year that presented many headwinds for food retailers, we made measurable progress on positioning our company for continued success,” Mackey said.

Early Days

In 1980, when the first Whole Foods opened in Austin, there were fewer than a half-dozen natural-food supermarkets in the U.S. Now every major chain touts its selection of organic groceries.

As it tries to bounce back, Whole Foods is pursuing $300 million in cost cuts and working to lower prices at its more than 460 locations. The company also is building out a lower-priced store concept called 365.

The first location of that chain opened about five months ago in Los Angeles, followed by two more on the West Coast. The stores, cheaper to build and staff than a standard Whole Foods, are designed to pull in budget-minded shoppers. A fourth location will open in Austin this spring, the company said on Wednesday.

Results for the first three stores have been mixed, but the company said it now has time to assess what is working and what isn't. The fourth location will be “365 2.0,” Mackey said.

The company has said the new chain's locations will come on top of the 1,200 conventional stores it already plans to build. But that forecast was issued in 2013, shortly after the company's stock hit an all-time closing high of $65.24. Analysts have questioned whether there's room for so many high-end organic stores in the U.S.

Rivals Catch Up

When Whole Foods was thriving in the '90s and '00s, the burgeoning popularity of foodie culture was a reliable growth engine. The company offered items like grass-fed beef and organic produce that had been difficult to find elsewhere.

But the industry has caught up. Organic products are now widely available at U.S. grocery stores, often at lower prices. And food deflation has made matters worse. With costs dropping for items like beef and eggs, some retailers have slashed prices in a bid to boost store traffic. That's put even more pressure on Whole Foods to stay competitive.

Robb, 62, will step down from the company on Dec. 31, but he'll remain on the board and serve as an adviser to Whole Foods. The company expects to record an expense of $13 million this quarter tied to his departure, including $10 million for a 30-month noncompete agreement. Robb, who has been at the company for 25 years, also will get a 30 percent lifetime discount at Whole Foods' stores.

The board decided it was time for a more “streamlined structure,” Robb said on a conference call.

To contact the reporter on this story: Craig Giammona in New York at cgiammona@bloomberg.net. To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Kevin Orland, Mark Schoifet