Whole Foods was founded in 1980 as a 10,500-foot location in Austin, TX. Thirty-seven years later, in 2017, Amazon bought it for $13.8B. Discover what made it attractive to Amazon.

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Dave Young:
Welcome to the Empire Builders podcast. I’m Dave Young, alongside Stephen Semple and today we’re going to talk about Whole Foods.

Stephen Semple:
We’re going to talk about Whole Foods. And here’s the thing that I really find interesting about Whole Foods is that Whole Foods has an impact way bigger than its footprint, right? Like it is a big company, but it’s not massive compared to other grocery stores. And really in many ways, in many, many ways, it changed the grocery industry because today there’s organic food in Walmart.

Dave Young:
Honestly, Whole Food stores, I mean, I’ve been in some that are sizeable and their flagship store in downtown Austin is pretty big, but there are grocery stores that dwarf them in square footage typically.

Stephen Semple:
Yeah. And this is really a story about following your passion.

Dave Young:
Okay.

Stephen Semple:
And that’s one of the things that really made it stand out to me, but we also got to recognize, we’re talking about building of empires here and Whole Foods was founded in 1980 by John Mackey, Rene Lawson, Craig Weller, and Mark Skiles and it started off as this 10,500 square foot location with 19 employees in Austin, Texas. And 37 years later, in 2017, Amazon buys it for $13.8 billion.

Dave Young:
With a B.

Stephen Semple:
With a B.

Dave Young:
Yeah.

Stephen Semple:
Not bad at all.

Dave Young:
Not bad at all.

Stephen Semple:
And before Whole Foods it actually started as Safer Way Natural Foods by John and Rene. It originally opened as an organic bulk bin store. No brands. And it was really appealed to that small subculture hippies and was that really at the leading edge of the food revolution? This was interesting because John Mackey grew up eating pop tarts and he even will say he did not discover real food until he was 23. When he was 23, he got involved with the hippie movement and basically got exposed to real food and he ended up working in a veggie food coop in Austin called Prada House.

He got interested in food because it was this, “Oh my God. This is what it’s really like.” But he also needed a job. So he started being a buyer for that coop. And then he became a buyer for this other company called the Good Food Company and this is really when he found his passion. And Dave, you might relate to this. He dropped out of college and at the time he dropped out of college, he was on track to get a degree in philosophy from the University of Texas. But he hit a course that was required that he didn’t like. When he dropped out he noticed he had 120 hours of electives.

Dave Young:
Yeah. I’m all about the electives.

Stephen Semple:
He was working in this small stores, a couple thousand square feet, but what he noticed was everyone was really passionate about the food and he worked there for about six months and he wanted his own store. So he went back to the coop and he told his girlfriend Rene, “Let’s plan on opening a store.” So they went out, friends and family, and they raised $45,000. He had 10 grand on top of that and they opened up a store, Safer Way. And he had never taken a business class. They opened this store in an old house and it was this super cool house where there’s a store on the ground floor, restaurant on the second floor, and they lived up on the third floor. And in a lot of ways he talked about how it was this great, grand adventure. He had no fear. There was nothing to lose. It was all really great. And they lost $23,000 in the first year.

Dave Young:
I’ve heard worse stories.

Stephen Semple:
Right. So he read a few books on business, tried a few things, experimented a little bit, and the next year they made $5,000, which is better than losing 23-

Dave Young:
Yeah.

Stephen Semple:
Right.

Dave Young:
Yeah, yeah.

Stephen Semple:
But what he realized was they needed a bigger location. They needed a real store. So they found this location that was this old nightclub on a busy street. He had to sell the board on expansion. And the board was like, “Yeah. We’re not giving you any more money.” So he had to find someone and he had to really start hustling and it turns out a guy he played basketball with turned out to be a millionaire. So Jay was a customer that he played basketball with who had a whole pile of money. And he said, “Sure. I’ll kick in 50K.” So he puts in $50,000 and now they’ve got money to go rent a location. And the guy-

Dave Young:
Nice.

Stephen Semple:
Who owned the place was this guy by the name of Min Powell. And they had to sell Min Powell on renting them the space. And Min laughed at the idea. Min said, “This idea is nuts. But John, you’re so full of enthusiasm and you remind myself of a younger me. Let’s do this thing.” So they get this started, but they also realize that they want to make it a little bit bigger and in 1980, they pitch a competitor, Clarksville Natural Grocery, to join forces. So they figure, “Let’s join together.” There was a condition because Clarksville Natural Grocery sold meat and beer and coffee and a few other things.

They had to make a compromise when they joined forces. And the compromise was, “Sure. We can still sell these things, but we still have to make sure they’re of this high quality.” And it’s at that time that they also changed the name to Whole Foods Market. The Clarksdale and Safer Foods kind of created that critical mass. It was an immediate success and there were strong words of mouth and people were really excited. Then they hit a huge roadblock.

Nine months later, one of the worst floods in the history of Austin. Place was flooded out, it was looted. They thought they were out of business. Here’s when you know you’ve got something powerful. Customers showed up to help clean up and rebuild.

Dave Young:
Customers showed up.

Stephen Semple:
Customers showed up to help them clean up and rebuild. They were reopened after 28 days. There was even a benefit held to raise money for the store. Banks saw this and stepped in and lent. The investors put in more money and right away they wanted to open up a second store and diversify. Now, when they opened up their second store, they discovered something. They opened it in the suburbs and it didn’t work because the suburbs at that time still had not caught on to this whole idea of organic food and the like. So then when they opened a third store they again made sure it was in a downtown location. Actually, it was not far from the original store in Austin. I had to have a certain type of culture in education and things along that lines. So they expanded in ’84. They finally moved out of the Austin area, went to Houston. And by this time they had 600 employees and then in ’88 they decided they needed to really get bigger again and had to do some venture capital.

And they had a real hard time hiring a banker to raise money for them because basically here’s how the bankers looked at it. They said, “Your market is too small because you’re a niche market. And if it gets big, the major brands are going to take over.” This was the challenge that they had in terms of finding venture capital.

Dave Young:
So the major brands are going to just do what you do.

Stephen Semple:
And in 1992, they gave up on the idea of the venture capital and basically what they did was they went public.

Dave Young:
Okay.

Stephen Semple:
And they raised $28 million and at that time that put them at $100 million valuation and they could now grow. And the other thing that they discovered is they could use their stock as capital to acquire. So they could go to a company like Red Circuses that they bought and they could buy it partially with cash and partially with stock.

Dave Young:
Okay. They’re just doing their own thing to grow this company, ignoring what the venture capital people thought.

Stephen Semple:
And between ’92 and ’97, so if you think about ’92, they had $100 million valuation, five years later in ’97 through expansion and buying of competitors, they surpassed a billion dollars in sales and had 70 stores in 16 states.

Dave Young:
That’s a pretty good turn of events.

Stephen Semple:
Yeah. Five years later, they come to Canada. 2002 in Canada. 2007 they opened in the UK. In 2015, 35 years after opening, Whole Foods has officially changed the food industry because Walmart started to offer organic food. Walmart is now the largest retailer of organic food, but this is the business that Whole Foods created. And when you hear John Mackey talk about this, he does not see Walmart as becoming that big as a failure of Whole Foods, but as a success of Whole Foods because what he wanted to do was change the food industry and he did it.

Dave Young:
Yeah. Oh yeah. There’s not a grocery store around that doesn’t have an organic section and doing at least some of the things that Whole Foods does.

Stephen Semple:
Yeah. The story of Whole Foods is about following a passion. It’s the dream to change an industry. It was about changing the world. It was not about becoming wealthy. That was secondary. This is like Netflix and Spanks and Bert’s Bees. Bert’s Bees is another one that was inspired from the hippie culture, right?

Dave Young:
Mm-hmm (affirmative) Yeah. Absolutely.

Stephen Semple:
It was about bringing this change, not about building all of this wealth. And it’s also interesting, how many of these businesses are started by people who don’t have business experience, but what they do do is there’s a certain point where they go, “Boy, I need to learn a little bit more about business.” He was a vegetarian, he understood the food, didn’t understand business, but went and sought that information. Got educated on it and really continued to drive towards that passion. And they also knew they had a great idea when the community rallied around them. You know you really got something.

Dave Young:
That’s just mind blowing. You think there’s not many businesses that would carry that kind of respect in their customer base.

Stephen Semple:
Yeah.

Dave Young:
Right. Especially in a big town. You could see it happening pretty easily in a small town-

Stephen Semple:
Right.

Dave Young:
Where everybody knows everybody. In a city, especially if you’re in a downtown like Austin and a flood happens and you’re just one of many businesses that got wiped out and yet your customers came to your rescue. It’s amazing. That’s loyalty.

Stephen Semple:
And it’s also like we’ve seen so many times as well, you have to kind of soldier through those early years. They lost $35,000 their first year. They made $5,000 the next year. And then 37 years later, $14 billion.

Dave Young:
Yeah.

Stephen Semple:
Is what the business is worth. It’s really interesting. You really do need to soldier through these early years and follow that passion and learn a little bit about business and keep at it.

Dave Young:
It’s $14 billion that he can finally afford to shop at the store that he founded.

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