THE GREEN MACHINE

Annual meetings can be a dangerous place for chief executives. You never know when a Michael Moore-style protester will grab the microphone and start heckling. If that happens, the standard procedure is for the boss to listen respectfully, avoid engaging and hope the protester runs out of hot air quickly. But John Mackey doesn't believe in the traditional rules of business. At the 2003 shareholders' meeting of Whole Foods Market, of which Mackey is cofounder and CEO, animal-welfare activist Lauren Ornelas lambasted Mackey for selling meat from ducks that were raised in what she considers cruel conditions. Instead of giving her the textbook brushoff, Mackey offered his e-mail address. They corresponded for a few weeks, but stopped when the debate failed to sway either of them. Six months later Ornelas opened her in box to find a new e-mail from Mackey. After talking with her, he'd read a dozen books on animal welfare, he wrote, and eventually decided Ornelas was right. He'd become a vegan himself. And he wanted her help in rewriting Whole Foods' policies on farm-animal treatment. "It made me fall out of my chair," Ornelas says. After she spent years boycotting Whole Foods, "now we're working together."

Inviting e-mail from protesters is just one example of how Mackey sometimes displays behavior unfit for a CEO. But rather than hurting his company, his unconventional management ideas have helped turn Whole Foods Market into one of the hottest companies in retailing. It's an unlikely success story: for decades the grocery industry has been synonymous with slim margins. Those pressures are only intensifying, as Wal-Mart's expansion into groceries boosts pressure on a host of established supermarkets. Just last month Florida-based Winn-Dixie filed for bankruptcy. But amid these tough times, Mackey's natural-food retailer is growing like the hormone-enhanced livestock it refuses to sell. Comparable-store sales--a key retail metric--grew 14.9 percent last year; few other grocers top 5 percent. Since going public in 1992, its stock is up nearly 25-fold. The company's newly opened 80,000-square-foot store in Austin, Texas--one third bigger than its existing flagship in Manhattan's Columbus Circle--will function as a lab for new food concepts. Looking ahead, Mackey predicts that the number of stores (now 168) will double by 2010, and revenue (now $3.9 billion) should quadruple by 2012. That would make Whole Foods almost as big as Xerox or the Gap is today.

That's big talk, and Mackey's ability to deliver is far from certain. To achieve that growth, Whole Foods will need to open dozens of new stores in markets that may not be clamoring for spicy Thai tofu. It will need to overcome some consumers' vocal resistance to its high prices, a phenomenon that's led critics to label the chain "Whole Paycheck." Meanwhile, conventional supermarkets are doing a better job of stocking healthier foods, creating new competition. Whole Foods' increasing size could also become a drag: the company's same-store-sales growth dipped last quarter, and Mackey predicts it will slow even further.

But even if Whole Foods never becomes as ubiquitous as the Gap, it's come a long way. The company's roots lie in a grocery store Mackey and a girlfriend opened in Austin in 1978. Like most natural-food shops, the place was run by and for hippies. VWs filled the parking lot, and most customers' preferred herb probably wasn't cilantro. The operation grew slowly, adding only six new stores during the 1980s.

The real growth spurt came after the company's 1992 IPO, when Whole Foods began buying natural-food retailers around the country. The buyouts gave Whole Foods a national presence and supply lines for expansion. Unlike most acquirers, which forcibly graft their culture onto acquirees, Whole Foods adopted many of the successful practices of the companies it bought--especially those of Boston-based Bread & Circus, renowned for its fresh produce, meat and seafood. "Whole Foods has been very smart about their expansion program, taking time to digest acquisitions before moving on to the next one," says Darrell Rigby, a retail consultant at Bain & Co.

Although growth-by-acquisition is a key feature in Whole Foods' success, 70 percent of its current stores were opened from scratch. In locating new stores, the company has focused on markets with a high density of college graduates. Executives also assess nearby businesses, hoping to find outdoorsy retailers like REI, lots of bookstores or a vibrant restaurant scene. Inventive bistros are good signs; too many Applebee's aren't.

With a pricey product line that includes chlorine-free diapers, exotic organic veggies and free-range poultry, Whole Foods might seem destined to remain an affluent, Blue State brand. Indeed, sales are still heavily concentrated on the coasts, but the company is now convinced its brand will play broadly. "If you told me 10 years ago we'd be opening stores in Charleston, S.C., or Birmingham, Ala., I'd have thought you were crazy," says Jim Sud, executive VP for business development. Today the company has 58 new stores in the works, including one in Omaha, Neb., and is scouting sites in Utah and Idaho. "When Whole Foods had just come out, the take was that they'd be able to open 20 stores and that would be it--they'd run out of places," says David Bell, a marketing professor at Harvard Business School. "Then they modified their philosophy to appeal to upscale people."

To Whole Foods' CEO, that last statement could spark an argument. There's no denying the company's customer base has changed: instead of just Doc Martens-wearing vegans, today SUV-driving soccer moms, many of whom have a cultish affinity for the brand, fill Whole Foods stores. But Mackey denies that shift was driven by clever marketing or de-emphasizing healthy food in favor of gourmet treats. Rather, consumers are realizing that natural foods are better. "If the world hadn't moved in our direction, we would have failed," Mackey says. "We didn't change to conform--the world came in our direction... [driven by] the quality and authenticity of what we do." He says that like Starbucks, which once catered mostly to coffee snobs, Whole Foods is evolving beyond niche status. "We're tipping into the mainstream consciousness," he says.

Bell, the Harvard professor, compares Whole Foods' success to that of Staples, which was fortunate to open around the time that PCs began selling briskly, creating a boom in demand for office supplies. Similarly, Whole Foods is being propelled by the recent upsurge in gourmet cooking and the glut of conflicting health news. "What everyone is really looking for is a mother," says grocery consultant Bill Bishop of Barrington, Ill. "Whole Foods assumes the responsibility of taking care of you in a somewhat maternalistic way--everything in their store has been edited."

That editing doesn't come cheap. For years Whole Foods has been mocked for its high prices. To address that issue, the company has launched a lower-priced brand called 365 Everyday Value. But Mackey dismisses the price criticism as apples and oranges. "If Hyundai comes out with a new low-priced car, you don't see people coming into Lexus or Volvo dealers saying, 'Boy, Hyundai has got you beat'," he says. He maintains that Americans spend far less of their income on food than other nations do, and that's why most of it tastes so bad. "If Americans want to eat higher quality, they can pay for it."

For folks willing to pay up, Whole Foods' repertoire is expanding. Its new Austin store contains all the elements that have made the chain famous--and then some. There are mountains of fresh produce with signage citing its provenance. The meat displays use special lights that lend them an otherworldly glow. There are copious salad bars. But there are also some new attractions. Instead of tables near the cash registers where customers can eat takeout, this outlet has a series of sushi-counter-like spaces offering custom-cooked pasta or seafood. As always, nothing in the store has preservatives or trans fats. Want a Coke with your stir fry? Sorry, get it somewhere else.

Walking the aisles, the staff is constantly high-fiving and cheering. Can they really be this enthusiastic about stocking shelves? In fact, outsiders have credited Whole Foods' unique culture--it's routinely lauded as a great place to work--as another contributor to its growth. To boost employee morale, executive salaries are capped at 14 times the average worker's pay (leaving Mackey, whose stock holdings have made him a multimillionaire, with a salary of $342,000). Employees can look up each other's earnings, and 93 percent of stock options awarded last year went to nonexecutives. Wages remain a hot-button issue in the grocery industry, as unions fight to maintain their pay rates while non-unionized Wal-Mart eats everyone's lunch. Yet Whole Foods "has found a way to turn higher compensation into a competitive advantage rather than a liability, in the same way that Costco has," says Rigby, the Bain consultant, by proving that happy workers provide better service.

Above-average wages are just another of Mackey's peculiar management theories. For instance, ask him about his plans to expand the Whole Foods brand. "We don't think about growing the brand--that's M.B.A. talk," he says in a near sneer. "We're about fulfilling our mission." So what's his strategy to maximize profits? There isn't one: according to Mackey's philosophy, shareholders' interests take a back seat to customers' and workers', and profits are a byproduct of treating people well, not the top priority. "If you don't like that, you shouldn't invest in Whole Foods," he says, launching into a tutorial on how Adam Smith's theories have been misunderstood.

It will be interesting to watch how these ideals collide with Wall Street's expectations if the chain stops delivering such healthy profit growth. But for now, Mackey sees no rivals capable of impeding his company's trajectory. "It's a growing category, and Whole Foods dominates it," he says. There's a world to conquer, one tub of organic Turkish apricots at a time.