Yesterday, Whole Foods Market Inc. announced that the firm is replacing five of its board members, likely in response to pressure from it’s second largest shareholder, Jana Partners LLC. Whole Foods stock has been underperforming, having lost roughly half its value since it’s 2013 peak of $65 per share. On the earnings call, Whole Foods co-founder and CEO John Mackey acknowledged that competitors are making changes that will encroach into what has long been considered Whole Foods’ territory. According to the Wall Street Journal, “major grocery stores like Kroger Co. and Albertsons Cos. have seen annual sales increases of more than 10% in recent years for natural and organic foods, eating into Whole Foods’ core business,” and other chains such as Trader Joe’s and Sprouts are providing competition as well.
It’s enough to make one wonder that maybe this whole corporate social responsibility thing isn’t all it’s cracked up to be. Was former Cypress Semiconductor CEO T.J. Rodgers right when he likened Mackey’s business sense to that of Ralph Nader and Karl Marx?
I can see three really important things to take away from this news.
When everybody copies you, you’re not different anymore
Whole Foods began trading on NASDAQ in 1992. The graph below shows the stock market performance of a handful of grocery stores since that time. Whole Foods is blue, Wal-Mart is green, Safeway is red, and Kroger is yellow. Even with the recent drop in share price, Whole Foods is outperforming everybody else over the long term with a total return of about 2,300%. Moving the starting point up, Whole Foods is behind Kroger over the last ten years, and behind both Wal-Mart and Kroger over the last five. (Interestingly, they’re on top again if you just consider the last twelve months. Here's an interactive version, if you want to play.)
That’s mostly consistent with the expectation that unique products (organic foods) addressed to price-insensitive buyers (Whole Foods shoppers) will become less unique over time as competitors close the gap. In other words, every supermarket now carries organic and natural foods, generally at a lower price than can be found at Whole Foods. That’s what Mackey meant on the earnings call when he said, “our competitors are not standing still.” And they haven’t been standing still for the last ten years, either, apparently.
It’s not just competitors that aren’t standing still
This is actually leads us directly into the second, slightly scary point. Whole Foods’ competitors didn’t change just to copy Whole Foods. They started adding organic and natural foods as a response to customer demand. In other words, over time, consumers as a whole began to expect supermarkets to carry these products. Without them, customers would begin to shop at different stores.
Why is that scary? Because there will always be pressure forcing companies to adopt products and activities that are currently considered discretionary CSR. For example, in 1904, the National Child Labor Committee began documenting and publicizing the working conditions and stories of children working in factories and mills across the U.S. Between 1904 and the passage of the Fair Labor Standards Act in 1938, not employing persons under the age of 16 would have been considered discretionary CSR. In the internet age, the period of time between discretionary CSR and required corporate behavior is rapidly shrinking. For example, in 2011, 20% of the companies in the S&P 500 produced sustainability reports, while that number grew to 81% just four years later.
In other words, if you're not actively pursuing CSR activities, you're going to get left behind.
On shareholder pressure
The published script of the Whole Foods earnings call contains the phrase “maximize value for all of our shareholders.” Including the word “all” in that phrase is clearly acknowledging the different motivations of some shareholder groups. A Jana Partners spokesperson told the Wall Street Journal ,“We will now be watching carefully to… ensure that the board is seriously pursuing all avenues to maximizing shareholder value,” Presumably, Jana Partners thinks that Whole Foods is spending too much time on non-revenue generating activities. Whether or not those non-revenue generating activities include discretionary CSR remains to be seen.
That is a solvable problem. Whole Foods is incorporated in Texas, which has not passed benefit corporation legislation. Re-incorporating in one of the 31 states that offer benefit corporation status, however, would allow Whole Foods to resist pressure from shareholders to stop considering the needs of other stakeholders, such as local food suppliers. That could, in turn, prevent Whole Foods from falling behind other companies as customer norms continue to push the CSR train down the track.