How Whole Foods Transformed Its Relationship With United Natural Foods

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Two weeks ago, I interviewed Whole Foods Market (NASDAQ: WFM  ) co-founder and co-CEO John Mackey in front of a live studio audience at Motley Fool headquarters. Mackey had just published Conscious Capitalism: Liberating the Heroic Spirit of Business with co-author Raj Sisodia and stopped by our Alexandria, Va., offices on his book tour.

I recommend Conscious Capitalism. It's part philosophy, part memoir, and part management theory, and it includes Mackey's own anecdotes of turning Whole Foods into a $16 billion business with more than 70,000 employees (called "team members" at Whole Foods).

The aim of business, argue Mackey and Sisodia, is not merely to profit; it is to serve all key stakeholders, including customers, employees, suppliers, local communities, the world, and, yes, shareholders.

One candid section (pp. 116-117) in the book comes when Mackey recounts his experience with one of Whole Foods' key suppliers, United Natural Foods (NASDAQ: UNFI  ) . In the following video clip, someone from our live studio audience asks Mackey about the evolution of the Whole Foods-United Natural relationship. (Run time: 3:49; there's also a lightly edited transcript following the video.)

Audience question: I know you talk in your book about United Natural Foods and your relationship -- it seems to have progressively gotten better as time goes on, which is interesting to me because they hold such a market-leading position in the distribution of most of what you sell. So I wondered, first, could you talk a little bit about that relationship, maybe shed some light into managing your relationship with management there? And then from a long-term perspective, where do you see your relationship with United Natural Foods going in the long term?

John Mackey: Well, I'll talk a little bit about it but I'm not completely comfortable talking about it too much, for lots of reasons. ...

UNFI, for a long time we had a typical relationship with them which is not unusual, which is somewhat of a mistrustful, adversarial relationship, which -- think about, say, the Wal-Mart model, which is, let's grind our suppliers down and get, extract every last possible dollar we can out of them and then that'll help lower our prices and we'll be more competitive again in the marketplace. And so you had that kind of adversarial relationship with the suppliers; you're trying to do exact same thing.

We criticize that in the book -- we don't pick on Wal-Mart per se, I think we use General Motors as an example in the book, about how they've they grinded down all their suppliers when they got into financial trouble, and some of those suppliers failed and most of them -- and it worked for them in the short term, because in the short term the suppliers are captive. They don't have alternatives. But in the long term, they begin to move their business away from you to the alternative customers. They may still do business with you, but you may not be getting their highest quality, their best service, their best prices -- because they're not so vulnerable anymore.

And with UNFI, we always had a certain power over them in the relationship, which I'm ashamed to say but will admit that we took advantage of that in the earlier days because we were such a big part of their business. We were a third of their business, and as a public company, if there was any rumor that Whole Foods Market might be self-distributing, then that would be devastating to their company and their stock price. So we never actually threatened them, but it was always in the air. So we realized, we don't have a healthy relationship here, this is our most important supplier, and they're scared that we're going to harm them. So we basically just transformed the relationship.

We asked the question: How do we create a win-win? How do both of the organizations prosper? Whole Foods seems to get really good prices, but they need the security of not [having the] risk of losing the relationship and that we'll work with them when we have problems instead of trying to bully them in some way. So what we did was, besides changing our attitude, we always enter into a 10-year contract. So there's a 10-year agreement, but every five years, we go back into negotiations. So there's always going to be a minimum of a five-year lag time, and if we decided that we couldn't do business for any longer, that we couldn't work out our problems, it would be basically like a five-year notice. It would give them plenty of time to adapt. It would also give us plenty of time to find alternatives as distribution or do it ourselves.

So that's been a really smart thing. We've had a great partnership with them. I think they're a really good company. And, in terms of the future, Whole Foods has no particular expertise in distribution, at least for dry grocery. We do our own distribution for produce, meat, seafood. Those are kind of our bread and butter, and we don't think UNFI has any special expertise in that area. So we're real happy with the relationship, and I hope they work out their stuff with the Teamsters and it doesn't spill over any further into Whole Foods.

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