Corporate Culture: Does It Matter?

A director at Deloitte Services and coauthor of The Three Rules: How Exceptional Companies Think, Michael Raynor joins the Fool to share his findings about what makes a company successful for the long haul.

In this video segment, Michael explains why Whole Foods Market (NASDAQ: WFM  ) is only an "average Joe" among the exceptional companies identified by the study, despite its recent success and the strength of its corporate culture.

A full transcript follows the video.

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Brendan Byrnes: Right. Whole Foods is another company that you point out as an exceptional company. They recently had --

Michael Raynor: Actually, they're the average Joe of the trio.

Byrnes: Average Joe, are they? I'm sorry.

Raynor: Yes.

Byrnes: They had their stock split, though, and I think you said that might be a positive for Whole Foods. Why?

Raynor: Again, there's a difference between a great company and a great investment. What I would say about Whole Foods, I guess, is if we look at their performance over their whole lifespan, their profitability has been unexceptional.

But of late -- and "of late" in our world means the last three, four, five years, not the last two or three quarters -- they've really been on a tear.

Their absolute and relative performance has been increasing dramatically and without, I should point out, abandoning the rules. They've always been a highly differentiated player, focused on "Better Before Cheaper," driving up profitability through pricing premiums, typically, to their nearest competitors.

I think what you see in their improvements of late is a fine tuning and finding the right balance among those different variables. I think that the increases that you've seen -- if you'll forgive me -- are entirely consistent with what we would have expected.

Byrnes: Right. I think one of the biggest things with Whole Foods, you could argue, is their strong culture. They pay their employees more, as their recent success -- I think they're up something like 800% since early 2009.

We talked about this earlier, but how do you incorporate culture into this? Obviously you don't have a data point in it. Do you just assume that that's incorporated in some of the data points that you do have?

Raynor: Well, we looked at things like culture, insofar as it's possible to operationalize that or measure it. Really, again, that's why the third rule is "There Are No Other Rules," because culture is critically important, and a lot of people would agree with you, I think, that culture is critically important in a place like Whole Foods.

I've got examples where culture didn't seem to matter much at all, so hard to draw any rules, any trends, any systematic pattern in terms of why culture is important or the ways in which it is important.

That's why we've really only got those first two. That's as far as the data would let us go.

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9/23/2016 4:00 PM
WFM $28.52 Down -0.15 -0.52%
Whole Foods Market CAPS Rating: ****