My column in this week’s Time is about John Mackey, the CEO and co-founder of Whole Foods Market, and Kip Tindell, the CEO and co-founder of the Container Store, and their shared belief that corporations perform a lot better over time if their executives focus more on employees and customers than on shareholders.
Mackey and Tindell go way back–they shared a house in Austin with three friends one year in the mid-1970s as they worked their way through the University of Texas on the eight-year plan. They’ve recently begun hanging out together a bit, and when I met Tindell at a National Retail Federation event in New York late last year, he invited me to come down to Texas to talk to the two of them. So I did. We met at Whole Foods’ headquarters in Austin, which is perched atop the chain’s flagship store, and we talked, and talked. Tindell is stereotypical laid-back, slow-talking Texan. Mackey is a not so stereotypical hyper, fast-talking Texan. But they seemed to get along pretty well. As for me, I mostly just stayed out of the way.
What follows is an edited transcript of the conversation. I cut some stuff out, moved a few passages around, and removed a lot of “uhs” and “you knows” (mine as well as theirs). Beyond that it’s a pretty faithful representation of what was said. It’s pretty long, too. But most educational.
Justin Fox: So it’s University of Texas, what year, when did you guys meet?
Kip Tindell (to Mackey): Are you good at that, like which year something happens?
John Mackey: Well, was that your senior year or junior year?
Tindell: Well, you know, I was just like you. I crammed a four-year program into about eight years. So …
Mackey: But you finished.
Tindell: No, no, I didn’t finish.
Mackey: You’re a drop-out, too?
Mackey: Well, that’s another thing we have in common.
Tindell: And I’m actually kind of proud of it. And I’m kind of proud that John’s proud of it. But I think it was 1975. Is that right?
Mackey: Yeah, that’s probably right. 1974 or ’75, in that time frame. We were sharing a house with two friends. I did not know Kip. I knew the other three guys that were in the house; I went to high school with them.
Tindell: It was a great house over there close to campus, a duplex, actually. I met my wife in the backyard. It was a pretty neat place to be. I was so glad to see it still standing.
Mackey: I’ll tell you what I remember about Kip. Kip was the best darn poker player that I had known …
Tindell: You bet.
Mackey: … up to that time. I couldn’t figure it out because he kept consistently beating me in poker. And it was like, God, you know, is this guy smarter than me or does he cheat or what’s the deal here? I couldn’t ever figure that out.
Tindell: Well, it’s nice to be remembered for that.
Fox: What year did you graduate from high school?
Tindell: We both graduated in ’71. My father kept reducing the amount of money that he was sending me each year, and by the seventh or eighth year, it was pretty well gone. I remember at one point I was living on $5 a week, and I just couldn’t make it anymore, so I had to go to work. A friend of mine, Garrett Boone, and I had always talked about starting a retail business. And so I went directly from that existence to starting this thing. And we spent about two years without pay developing the concept.
Mackey: I was looking for the meaning of life when I was in college. And my deal with my dad was as long as I was taking a full course load, then he would pay. And the times that I wasn’t taking a full course load, then I was off the dole and I was working.
Fox (to Mackey): What did your dad do?
Mackey: My dad for a long time was an accounting professor at Rice University. And then he went out on his own, and he got hired by a client. He ended up being CEO of a hospital management company before he retired, called Lifemark.
Fox: And your dad?
Tindell: It’s hysterical now. My dad worked for Halliburton for 30 years, but nobody had ever heard of Halliburton in those days.
Fox: So when did you finally decide, okay, I’m not in college anymore?
Mackey: I dropped out of college for the last time in 1977. I moved into this — I moved into this vegetarian co-op. I wasn’t a vegetarian at the time. The honest truth was I really thought I’d meet some interesting women living in a vegetarian co-op and I did. It was mostly women living there, and they were really cool.
And the girlfriend that I started the business with, Renee, I met in that co-op. I didn’t know anything about food at that time, but I became a food buyer. You might say my food consciousness got awakened then. I learned how to cook, began reading books on food. I began to understand about nutrition. It never had occurred to me that what you ate could affect how you felt. It could affect your health. It seems obvious now, but at age 23 or 22 or whatever I was, it wasn’t obvious at all.
And then I went to work for a natural foods store called the Good Food Company. It had about five little stores here in Austin, and I worked there for six months. It was the first time I’d ever worked in a retail store, and I really liked it. I remember coming home one day from work, talking to my girlfriend, and I said, “You know, this retail food store stuff is not that hard. You order stuff from this catalog. It comes in the back door. You stick it on the shelves. You’re nice to people. People come back in to buy stuff, and you flourish.” I thought, you know, that was within my realm of competence.
And I floated the idea out to Renee, and she was very excited about it. I oftentimes wonder if she hadn’t been excited, how my life might be different. But she was very enthusiastic about it. And so …
Tindell: You didn’t have to work for Halliburton.
Mackey: Yeah, I’d probably be in an attic somewhere scribbling off insane philosophies that nobody reads. Anyway, I don’t know how Kip raised his initial capital stake, but I would say that entrepreneurs are only a step up from panhandlers because you’ve got to go out and hustle money, and you’re mostly selling dreams and enthusiasm. So friends and family are who made the initial investment in our company. We capitaled up to $45,000 back in 1978.
Tindell: We were $35,000.
Mackey: There you go. I was thinking you’d started with $50,000. Anyhow, that was from friends and family, and we did that for a couple years. And it was a little store, and I realized, man, if we’re going to be a real grocery store, we need to get a big location. There was a burned-out nightclub at 10th Street and Lamar, and I thought, man, this would be great if we could get this location. The landlord was an old-time guy named Ben Powell–a rich lawyer, lived in Houston, owned a bunch of real estate here from his family, and this is one of the locations he owned.
I remember pitching him on the store idea, and right in the middle of my pitch, he starts laughing. He says, “You are so full of idealism. This health food supermarket, that is a dumb idea. I mean, there are not enough hippies in the whole world, let alone Austin, Texas, that you could sell groceries to and make a successful business.” But he says, “You remind me so much of me when I was your own age. You’re just so full of enthusiasm, think you can take on the world. What the hell, son. Let’s go for it.”
We had our location, and he was very cooperative. He agreed to build out the store for us, which was good because we didn’t have enough money. And then we merged with another store that was a competitor to do the first Whole Foods Market.
Safer Way, which we did for two years before we relocated to Whole Foods Market, had been an old house, and it was three levels. On the first floor, we put the store. The second floor, we put the café, a little vegetarian café. The third floor was an office with a futon that Renee and I lived in, and we weren’t supposed to live there. There was no showers or anything. So the joke was is that we either went swimming down here at Barton Springs to shower or they had a Hobart dishwasher with one of those hoses that hung down and we’d sit up there, shampoo our hair in the dishwasher.
Fox (to Tindell): So starting your business, then. You just sort of had this idea that, oh, here’s this cool market that nobody’s ever really thought about?
Tindell: At first it was going to be a handmade furniture store, and it evolved out of that. You know, a year and half or two of working without pay, developing the resources, developing the concept, a lot of people saying, “You’re going to sell empty boxes?” It was very embarrassing. I was very anxious to get the store open because I thought people would understand it once they saw the product collection. We got very, very, very passionate about the functionality of these products. Nobody had ever done this before.
And we opened a little 1,600-square-foot store in Dallas in 1978. I think people thought it was the oddest collection of merchandise they’d ever seen. We had wire leaf burners to collect toys in the yard. We had pool toys and that type of thing. Everything was pretty much commercial and industrial in nature.
Fox: Is any of that inventory still there?
Tindell: Actually, about half of the original inventory. Interestingly, this whole genre of product–the storage and organization thing–is a little bit like technology. The products keep getting better and less expensive. So those products that we still have that we started with actually retail for less today than they did then. That’s because more and more people are willing to put risk capital into storage and organization products. It was unheard of then. There was Grayline and Rubbermaid and nothing else.
Fox: Were you guys keeping in touch during this?
Tindell: Not so much.
Mackey: I couldn’t afford to stay in touch with him. He’d stripped me of all my money systematically in poker. So I needed to keep my money together for my business. No, I lost touch with Kip.
Fox: Where did you know Garrett [Container Store co-founder Garrett Boone] from?
Tindell: Garrett and I have actually worked together for 35 years. I was a high school kid, and I got a part-time job at Montgomery Ward’s in the paint department. He was a bit confused–Rice Master’s degree in history, he didn’t want to teach, and so there he is in the paint department at Montgomery Ward’s. But we had the coolest paint department. We won all these Montgomery Ward’s awards and everything, you know, and always talked about opening stores and wound up doing this.
And about a year after we opened it, my wife joined the company. Sharon does all the merchandising and buying for the store. She was actually a landscape architect by profession. Garrett and I thought we were going to have the best merchandising sense of anybody, and my own wife could run circles around us.
Lots of companies have mission statements, but Whole Foods and the Container Store both make a really big deal about theirs. The Whole Foods list of “core values” is pretty straightforward: “Selling the Highest Quality Natural and Organic Products Available,” “Satisfying and Delighting Our Customers,” “Supporting Team Member Excellence and Happiness.” The Container Store’s “foundation principles” are far more cryptic and quirky. The best known is “man in the desert,” which basically means treat every customer like a famished, thirsty traveler who has just arrived at your oasis.
Fox: I would assume that when you’re first running one store, you don’t think in terms of, okay, here are our core principles. When did that start becoming an issue?
Mackey: The core principles that Whole Foods is run on were there from the very beginning, but they weren’t necessarily articulated. As long as you only have one store, you don’t need to articulate them because you can be there.
But as you start creating multiple stores, you begin to realize that the people here don’t really get it. They don’t really understand it. You’re forced to have to articulate what your core values or core principles or foundation principles are.
We did that in a formalized basis back in 1985 when we had five stores. One of the co-founders of the company and I were at open war with each other. He didn’t want to ever go past the first store because we were so successful. It’s like, “We’re making plenty of money. Why would we want to do anything else?”
Fox: What was his name?
Mackey: His name was Mark Skiles. A good retailer. I was the CEO, and Mark thought I was crazy. And he’s probably right, but I still had some good retailing instincts.
After Mark left, the company had divided into these camps. So I brought a friend in to do what he called a values clarification process to try to reunify our company. We brought in 50 or 60 of the leaders from the five stores together, and we together articulated what our mission statement was and what our core values were. And they were the core values that we’d always had, but they had not been written down before. Once they were written down, they became a much more powerful training tool for new people to come in. You now have a history. You have a legacy. You can begin to teach people, and it becomes a lot easier to get people all pulling together.
Tindell: You can just write that down for both companies. It is growth related. We certainly, I think, exemplified all these principles and values from the very beginning. But it wasn’t until we opened a store in Houston and that store did three or four times what we anticipated it would do, and it was frightening. We were just hiring anybody off the street. You know, we just could not keep up with the business, literally.
Prior to that, you know, if you had an employee that didn’t understand something, you could just go eat Mexican food with him that night and explain it to him. I mean, you know, we were all right there together.
Fox: Before that, were all the stores in the Dallas area?
Tindell: We had an Austin store, but that’s where we went to college. Houston, and the volume that store did, really changed things. We went to the store manager’s house that night, and I was trying to figure out what to do to draw us all together and be inspirational. And that’s when I dipped into this philosophy epistle file.
I wanted to major in philosophy. My dad wouldn’t let me. He told me that I’d have to pay my own way if I majored in philosophy. So I majored in English, which is, of course, exactly the same thing. I had come out of a Jesuit high school, and I was just a very existential, overly idealistic-minded English major. And I had this–I called it a philosophy epistle file. I was very Catholic. And then as I got older and went through college, it became more of a business philosophy. The main thing –and I think the big parallel between the two businesses–is that I was very adamant that you don’t have one set of values or principles or behavior that’s acceptable in your personal life and a second, looser set that’s acceptable in business life. They have to be one and the same.
All of those principles and all of those philosophies were very, very evident from
the the beginning. They just weren’t written down. It scared me a lot to try to share these. These are my most deeply held philosophies of life and business. And most of these people that are now working at the Houston store were people I knew very little about. Some of them I found to be kind of scary, in fact.
Mackey: You’re talking about back in 1988?
Tindell: Yeah. And I thought that they maybe they wouldn’t really accept these principles. You know, it’s pretty personal stuff. But they kind of went crazy over them. They just loved them and went nuts about it. And thereafter, we spent a great deal of time talking about these and then writing them down, discussing them, making sure everybody understood them.
They say a lot of jokes get written in prison because those people have a lot of time on their hands, and when they get together at lunch, apparently, they don’t bother to tell the whole joke. They just say number 47, and everybody laughs. That’s what you can do with these things here. You say, why do we do it that way? And it’s like, well, you know, the “man in the desert.”
The important thing to me is if you go into any store in the country now and ask people what the Container Store’s culture’s all about, they’ll all tell you the foundation principles, and I think that means something.
What’s interesting is the concept that you can get a group of people to behave as a unit. We’ve got 5,500 employees. And how do you liberate them to all exercise their individual creative genius while not being 5,500 jobs just going in 5,500 different directions? Well, we put together a group of ends. Let everybody choose the means to those ends, but at least we’re harmonic in our approach to those ends.
Mackey: I think perhaps accidentally we hit almost simultaneously upon the philosophy that I think will be the dominant philosophy in business in the 21st century. And it’s this principle of the stakeholder–that the purpose of business is not primarily to maximize shareholder value, that that’s a myth.
Tindell: Milton Friedman said it was the only reason for the enterprise to go ahead.
Mackey: But I’ve met very few entrepreneurs who created their businesses for that purpose. What Kip and I both realized is that if you manage the business on behalf of all of these interconnected stakeholders–the customers, the team members/employees, the suppliers, the investors, the greater community, the environment–that if you create value for all of them, they’re all interdependent. And that that will create the most successful business.
Tindell: And the most sustainable.
Mackey: It’s so obvious to me that I can’t believe anybody else thinks differently. But, in fact, almost no one thinks that way. Kip thinks that way.
Fox: You had that great exchange with Milton Friedman a few years ago in Reason where he basically said, “Well, it’s only a rhetorical difference. What we’re still both about is maximizing shareholder value.” You didn’t agree.
Mackey: First of all, Milton Friedman is one of my personal heroes, so I don’t want to trash Milton Friedman. But he had a mechanistic view of business–it’s like a factory that you bring inputs in, capital and labor, and you mix them together and out spits profits, and that’s the reason business is created. That’s how he would think about it.
It’s true that what Kip and I do also does create the best or maximum long-term shareholder value, but that’s not the reason we do it. If that was the reason we did it, we probably wouldn’t be as successful at it. The whole idea is to create an organization where all of the stakeholders are flourishing at the same time. Or in a very simple, simplistic model, which I teach our team members, the purpose of management is to make sure that the team members are well-trained and they’re happy in their work. If they’re happy in their work, then that’s going to result in good customer service and happy customers. If the customers are happy, then the business is going to flourish and the investors will be happy.
So you get this virtuous circle, and you can add the suppliers in because they have to be flourishing as well. It’s this idea that everyone is creating with the business voluntarily, and they all need to simultaneously flourish. And if they do, the business will prosper. And that will maximize long-term shareholder value.
It’s not a strategy to maximize shareholder value. It’s not the reason we’re doing it. The reason we’re doing it is because we want all of the stakeholders to flourish. Where I differed with him was what was the purpose of the business and why it really existed. He couldn’t conceive that it would exist for any other reason than to maximize shareholder value. And once he understood that this does maximize shareholder value, he said, “Oh, we agree.” I said, “No, we don’t agree because that’s not the purpose of the business.” And that’s where we never could quite sync up.
Tindell: We actually say that we put the employee first and then the customer. If you put the employee first, they’ll take care of the customer better than anybody else in the marketplace. If both of them are ecstatic, then the shareholders are going to do better
than if you just myopically pay attention to the shareholder. You get a harmonic synergy that takes place that lifts the results.
I think if you’re fortunate enough to be somebody’s employer, you have a huge moral obligation really to make sure that that person really looks forward to coming to work in the morning. And, you know, Fortune magazine thinks that his company and our company is one of the best companies to work for in America year after year after year. It’s a never-ending process to try to make sure that that person loves coming to work in the morning and loves taking care of the customer. We talk about astonishing the customer. They talk about …
Mackey: Satisfying and delighting.
Tindell: Not just satisfying but satisfying and delighting, astonishing the customer. You work in the community. You work in the vendors. They agree with the brand so much; they feel somehow a part of it. The customers agree with the brand so much; they feel somehow a part of it. You have sort of a conspiracy that takes place in this concentric circle of stakeholders that want to see the company succeed.
I mean, we were joking at a gathering that we had this past summer that even the lawyers and bankers kind of get into the act. They’re so philosophically proud of the way your organization is governed that they kind of get into the conspiracy and feel somehow a part of it and do things that wouldn’t ordinarily take place.
I’m not quite nailing that description, but there’s a harmonic effort that takes place, like a chorus is so much more beautiful than a single voice. These people are all interconnected. And it not only provides a higher return to each of them–compensation for the employees, return for the shareholders, this creative crafting of a mutually beneficial relationship from the vendors–but it enriches the lives of those people, too, as crazy as that sounds.
So that’s when business starts transcending into sort of an emotional response. It’s fun. It’s passionate. People love Whole Foods. They love the Container Store. And it’s very satisfying to not just us but everybody that works there and everybody that shops there.
Mackey: Imagine if all the businesses begin in the 21st century to become these stakeholder-interdependent-model-type businesses. People’s attitude towards business is going to change. Business is not perceived in favorable terms. It’s perceived as greedy, selfish, a bunch of crooks. All they care about is lining their own pockets. That’s how corporations are portrayed largely in the media.
I could show you a ton of letters that — well, I’m not going to show you a ton of letters because I don’t want the media to have these letters. But we do get letters from people talking about, “We used to love you, but now that you’re a big corporation, I see that all you care about is profit.” It’s weird that people’s perceptions begin to change just on the basis of scale because America has a love affair with small business but mistrusts corporations tremendously.
Kip talked about the harmony of interest. I really want to underscore that because there’s a tendency to view these stakeholders as adversaries–that, well, if I paid the employees more, then that’s money that the shareholders aren’t getting.
Tindell: It’s not a zero-sum game.
Mackey: It’s not a zero-sum game. I won’t deny that there can be, in certain circumstances, conflicts of interest between the stakeholders. What I think Kip and I are both aware of is that there’s a harmony of interest as well. If these stakeholders are interdependent on one another, you can harmonize them and you can create synergies through that harmonization that create more value for everyone, and that’s kind of the common philosophy that our two organizations share.
Fox (to Tindell): I think it’s fair to say the Container Store’s been more conservative about growth than Whole Foods.
Tindell: Well, we haven’t gone through acquisitions. We’ve only recently taken private equity money in. We’ve grown at almost 20 percent a year for 30 years in a row, which is pretty good in itself, but it’s kind of boring–just bump, bump, bump. I don’t think that we’re smart enough to grow any faster than that and really keep everything that got us there in the first place. I don’t think we’ll hit 20 this year, but I think we’ll hit 10.
I was talking to the founders of Bed Bath & Beyond the other day, and I said, surely you’ll grow more than 20 percent a year for more than 20 years. And they said, no, you’ll never find anybody who’s done that. And so everybody thinks that we grow slowly, but actually, we’re one of the fastest growing retailers out there. I think you might be faster with the help of some of these …
Mackey: We’re going to grow 30 percent this year on a very big base because of the Wild Oats merger that we did.
Fox: You’ve had some pretty high profile run-ins with competitors–your whole internet message board thing. Clearly you’re a very competitive person. You want to win. How does that square with these seemingly altruistic …
Mackey: You’re making an assumption that I wouldn’t concede, that altruism and competition are somehow or another opposites. I think you’d be hard pressed to defend that position.
Competitors are another stakeholder, and one way to view your competitors is, is that they help make your organization better. And that doesn’t mean that Whole Foods doesn’t want to outcompete its competitors, but we’re not doing any dirty tricks. We’re not running anybody out of business. Our competitors, when they innovate and if they do things better than we do, then that’s an opportunity for us to learn. And our competitors have made us better. Trader Joe’s, for example, helped Whole Foods innovate our private label, 365, in order to get a value line of products that could compete in price with Trader Joe’s. HEB opened up their Central Markets here in Austin, which were bigger perishable stores that were very difficult to compete with, and they did them in Dallas and they did them in Houston. That’s forced us to open larger stores.
Central Market helped make us a better company. Wegmans in the greater New York area and Mid-Atlantic, they’re a very strong competitor. They’ve helped improve us. So I view competitors as a stakeholder. They’re not a core stakeholder the way customers or team members are, but they’re also a stakeholder in the sense that you’re allies in order to improve each other. There’s a tendency for any organization to become complacent and self-satisfied with its success. And a competitor won’t allow you to do that because they’re copying you and they’re trying to one-up you. There’s no force out there that helps you improve more than your competitors do. That doesn’t mean I love my competitors. I want to beat them. I’m a competitive guy. But I also have a philosophical view that if we didn’t have competitors, we wouldn’t be as good a company as we are.
Fox: I’m just remembering that I didn’t ask about this idea of not just treating your employees well but telling them how things are going in an extreme level of detail. Has that been there all along? Is that something you had to make a conscious decision on after you got bigger?
Mackey: You know, nothing has been there all along. When I talk to journalists I always joke and say, you know, I didn’t go up on the Mount Sinai and come down with the Ten Commandments and God spoke to me. We’ve been creating the company as we’ve gone along.
You’re trying to create a relationship based on trust, and one of the things that you have in a stakeholder model, a relationship model, is high trust. You can’t create those high synergies without high trust. And so when you don’t disclose information to somebody, you’re basically saying, I don’t trust you. So the more transparent you are, the more you are communicating trust. And furthermore, if these are your partners, then they need the information that you have in order to do the job as well as they can.
In many organizations, people withhold information because information is power. I control the information. You don’t. I’m more powerful than you. Once you reconceptualize your business, that we’re partners working together to create value for our customers and our other stakeholders, then transparency is important.
There is a risk in doing that because somebody will run off with your information and give it to competitors, and I assume that’s happened to Whole Foods many times. But that risk does not outweigh the gains, in my opinion. And furthermore, any information that they steal goes stale pretty quickly, because you’re continually evolving.
Tindell: You know, we said that communication and leadership are the same thing. So we literally do communicate absolutely everything. Our goal is to communicate everything to every employee at all times, and I know that we’ll never reach that. But we run around with our tongues hanging out trying to do that every day, all day long. Everything that takes place in a board meeting is communicated to the employees. The only thing we don’t communicate to employees is individual salaries, and Mackey does that.
It definitely winds up in the hands of competitors. But it’s much more important to give all of the information to the employees than it is to worry about it winding up in the hands of competitors. And I don’t think it’s hurt either business at all that that information’s out there. Our marketing plans are out there a year in advance, our real estate expansion plans. Nobody lets everyone know what their real estate expansion plans are. Ours are out there.
So there’s two things that you can do to create a wonderful place to work, and number one is communication. The second one is to hire only great people. I always say one great person can do the business productivity of three good people. If we were going to start a golf team, let’s get Tiger Woods on the golf team. You know, life’s kind of short and then you die, so let’s do what we got to do with great excellence.
You were talking about competitiveness. I don’t see John as unduly competitive. I see him as really determined to be excellent and creative. You know, I think his stores are works of art. I get to shop at one twice a week. It’s a damn work of art, and it’s just wonderful. And the employees are happy to be there, and the customers are happy to be there.
Mackey: One of the things that I’m trying to philosophically just destroy is this bifurcation that human beings are either greedy, selfish, only in it for themselves–or they’re saints. It’s pretty obvious to me that human nature is we’re partly self-interested but we’re not solely self-interested. We’re capable of love and caring for other people, and I think it’s true in building your organizations.
You have to design your system so self-interest is being met. At the same time, people are not only self-interested. They care about other people, and they want to do good in the world. So if you design your structure and your system so that people can individually flourish but that they can also be helpful to other people, you’ve got the combination that is very much in sync with, I think, the true human nature.
So, yes, Whole Foods is altruistic and it’s self-interested. We do care about other people, and we want to win because that’s what human beings are like. And I’m like that. I want to win, but I also want other people to flourish. It’s not just about John Mackey, but I’m not Gandhi out there. It’s not that I don’t care anything about myself. I do care about myself, and I care about all the stakeholders, the team members, the customers.
Tindell: John flourishing is not bringing somebody else down. People are raised that way, that in order to get ahead, you have to somehow screw around the other guy. That’s why one of our foundation principles is fill the other guy’s basket to the brim. Making money then becomes an easy proposition.
Mackey: I think it’s because of sports, where there’s a winner and there’s a loser. But in this stakeholder model that Kip and I are talking about, there’s not necessarily a loser. Even competitors can win because Whole Foods has made our competitors better. They are better retailers as a result of competing against us, and we’re better retailers as well. So who’s losing there? Everybody’s winning.
Tindell: What I’m proud of and what I think both companies point to is that this thing actually does work. I mean, the track records kind of speak for themselves. I mean, you know, the capitalization that he has is astounding, and JP Morgan tells us we sold for the highest multiple EBITDA ever in the retail industry last summer. It not only enriches your life and the people around that you do business with, it actually works. That harmony that I’m talking about is real and tangible and you can sense it and feel it.
Our top executives talk about the universe conspiring to assist us all the time. We hear that comment constantly. I just came back from the International Housewares Show in Chicago, and all the vendors are like our big brothers–positive big brother, you know–helpful, looking out for you, telling you, Kip, this, that.
Fox: That’s not really like the relationship that the American auto industry has with its vendors.
Tindell: Or the mass merchants. You know, Wal-Mart’s infamously the opposite.
Mackey: It has that adversarial relationship with vendors because they’re seen as not a stakeholder, but as someone that you’re in opposition to. And I think the Container Store has gone even beyond Whole Foods in this regard. They really want the suppliers, their vendors to flourish.
And that’s very rare in business, because usually it’s like, well, if my supplier is flourishing, that means I’m not getting all that I can get from them. And so instead of seeing your supplier as a partner, you begin to envy their success and you try to negotiate harder with them.
Tindell: Creatively crafting that mutually beneficial relationship is the most creative and joyful aspect of business. But you really have to communicate with your vendors. You really have to learn a lot about their business and your business, and then you can do things that are truly wonderful for one business or the other or–more often than people would like to think–for both businesses simultaneously.
Fox: When you’re out visiting business schools or talking to people who run other big businesses, do you feel like it’s catching on? Do people think you’re crazy?
Mackey: I believe it’s going to sweep the world in the 21st century because it works better. Business is highly competitive, and whatever works better reproduces itself and gets copied. What the Container Store and Whole Foods Market have hit upon is a business model that works better, and it’s going to be imitated.
A great book came out in 2007 called Firms of Endearment. It identifies 30 companies that adopted this similar model to what the Container Store and Whole Foods adopted. They’re all really successful companies, so the word is out. It’s hasn’t really cracked the mainstream consciousness yet but when I got started, sometimes I felt like I was out in the jungle with a machete, hacking the jungle, trying to clear a path. The path’s largely clear now, and I see lots of other people coming up behind me in air-conditioned SUVs saying, “Is this as far as you’ve gotten on the road?”
Tindell: What’s promising is that millennial kids all want to be–this is a generalization, but there’s a heightened interest on their part to being entrepreneurs. They don’t want to be considered capitalists. And I love John’s expression, “conscious capitalism.” It makes it okay, you know. Our man in the desert story makes it okay to sell somebody something.
I mean, communism didn’t work. Two hundred million people died, and they said whoops, that’s no good. Capitalism actually done correctly fixes an awful lot of problems and is a very valiant thing that can help do things like eliminate starvation and poverty. It’s a very, very powerful force that is more powerful even than charity.
Mackey: The stereotype that’s out there is that, “Well, yeah, I wanted to do something really good. I sold out. I went to law school. I went into business.” And they’re seen as somehow they’re opposites.
What he’s tapping into with these millennial kids coming up–Whole Foods has got a pack load of them working for us–is they don’t have that same thought limitation. It never occurred to them that they couldn’t work in business and do good. Their idealism is being united now with self-interest, and they don’t have that kind of split in their minds that, frankly, older people in our society have. I’m very hopeful about that because they’re pushing Whole Foods to evolve a lot faster right now because their idealism has just found a home.
They’re pushing us to green up a lot quicker than I think we would have ordinarily have done. Although Whole Foods has always recognized the environment as a stakeholder, these younger millennials are so creative and so pushing for it, that Whole Foods is evolving its environmental stakeholder at an increasingly rapid rate. My experience with this younger generation coming up is almost completely positive. I’m very excited about them.
Tindell: It’s identical in Europe and Japan, everything he just said, and it’s thrilling. Another great thing about them is that they’ll pay for design that nobody sees but them–which is interesting if you care about closets.
Fox: Do you think big, hundred-year-old companies can evolve?
Mackey: They can. I don’t know if they will, but they could. Once you get your legacy and your culture gets established, it begins to become more difficult to change it. You can do it, but it’s harder to change it.
Sometimes you can change it if your survival’s at stake, and it’s like people — I remember reading about Intel. I’ll never forget it. Andy Grove and the two founders, Gordon Moore and Robert Noyce, were sitting around, and they’d run into this competition with Japan. The Japanese were beating them in their core business of memory chips. And so Andy Grove asked this question, which is such a brilliant question: “If we don’t pull out of this, the board’s going to fire us. They’re going to bring in somebody else. And if they do that, what would they do?” Meaning, if we’re not trapped by our legacy and we’re starting fresh, what would we do? Why don’t we be those guys who think like that? So they did, and they completely reinvented their business. And Intel’s obviously one of the greatest success stories in the history of business.
Most businesses, though, aren’t capable of that type of innovative thinking. So in general, it’s the entrepreneurial companies that come along that don’t have a legacy to overcome that transform society. Just like Whole Foods. Hey, what was my food background? I was a food buyer in a vegetarian co-op, okay? I’d never worked in a supermarket. I didn’t know how I was supposed to do it, neither did my co-founders, and so we were free to reinvent it.
You can see that again and again and again. The Container Store’s a great example. They invented a whole new category, but it’s also true for organizations like Home Depot or Starbucks or Southwest Airlines. And someday somebody’s going to come along in the food business, a retailer that isn’t stuck in Whole Foods Market’s legacy and will be able to innovate in ways we are not able to do. That’s just the nature of continual change and evolution and creative destruction of capitalism.
So I do think most of the change will occur through entrepreneurial companies, but I do think some of the businesses–I’ll give you a great example. I had a fascinating lunch with the CEO of PepsiCo about six months ago in New York City, Indra Nooyi, quite remarkable woman. I started asking her about what the purpose of Pepsi is.
Tindell: She’s new, right?
Mackey: She’s been with Pepsi for a while, but she’s only been CEO for a couple of years. And she started talking about, “At Pepsi we have determined that we’re going to become a good company.” And she started laying out her philosophy about what a good company was, which is remarkably similar to what we’ve already articulated here today. And I started talking about, “Well, Indra, what about the legacy of Pepsi? Is that in your way?”
And she says, “You know, I thought it would be. It turns out everybody at Pepsi wants to be a good company.”
Pepsi’s always had a drive towards excellence, but this idea of being an ethical company and really trying to sell foods that are good for people–she’s put forth this vision, and she’s getting less resistance to it than she anticipated she would. That’s a Fortune 100 company that’s in the process of evolving into a stakeholder model similar to Container Store and Whole Foods Market. So it is possible. Pepsi’s a good example because it’s happening right now.
Tindell: I’ve met almost no one that disagrees with this. How can you disagree with foundation principles? How can you not be excited by this?
Mackey: The people who disagree with us are those that really don’t think it will work financially, that we’re suckers, that when we finally run up against a competitor who’s totally dedicated to shareholder value and is ruthless, they’ll crush us. I’ve been hearing that for 30 years now, and we’ve yet to meet that company we couldn’t compete against. But that’s the myth out there, and that’s the people that don’t really believe in what we’re talking about, right?
I was a little more cavalier in taking external capital, and they’ve been a little more cautious. And that’s enabled Whole Foods to grow faster. But I’ve had to deal with the public investors in a way Kip hasn’t had to deal with it and frankly, there’s no more skeptical audience for this message than Wall Street. Because they really do believe it’s all about money. I mean, that’s what they do there. Every time the stock goes down or we miss a quarter, I’ve got Wall Street telling me that our philosophy’s wrong and when are we going to wise up and be more like Wal-Mart?
I’ve been hearing it for 16 years off and on. And I say, be patient. You know, six months or a year from now, we’ll be back on top again, and you guys will be singing our praises. My joke about it is that in the eyes of Wall Street, I alternate between being a visionary genius and the village idiot. And when the stock is down, I’m the village idiot. The stock’s down from where our all-time high was, so I’m getting more criticism about you know, this philosophy’s fine when you’re at 1 billion in sales, but at 7 billion in sales, this clearly doesn’t work any longer.
So that skepticism has never gone away on Wall Street. I think Kip and Garrett and their team were smart in a lot of ways. They were more skeptical about it than I was. And you might say I was more naïve and if I could do it all over again, I would have proceeded, I think, a little bit differently than we did.
Fox: Wall Street right now is going through its own crisis for lack of treating anybody like stakeholders. I mean, you could sort of describe the whole subprime mortgage thing as not thinking of anything but what’s …
Mackey: Of course, but you’ll never persuade them of that.
Tindell: You know, we just sold the majority of the company last year. My big thing was to find one culturally compatible strategic buyer or private equity or otherwise. You know, the timing was great. We had more serious bidders in that auction than JP Morgan had ever seen.
We just wanted to see if someone out there could think like this, and this private equity firm, Leonard Green, that we chose, did. And so you wind up with the multiple in the mid teens that people say is maybe the highest ever in retail. Everybody gets something. Total operational control on the part of the management team. And finally, one of my dreams, a really, really significant amount of equity ownership on the part of the employees, including every store manager.
Now it’s been a year, and they are still behaving that way. And it’s wonderful. But generally, John’s right. Wall Street has not behaved that way.
Fox: They’re going to want to realize a return on their investment at some point.
Tindell: Yeah, I’m sure.
Mackey: This is always the private equity risk that you take. At some time, five years, seven years, nine years, when the Container Store’s grown and they think the timing’s right, undoubtedly, they’re either going to want to sell it to another retail company, a strategic buyer, or they’ll take it public because they’ll want to cash out. It’s just a question of how long that will be.
In the interim, if he’s got the right partner, they’ll probably leave Kip and his team alone to build that value, which is great. The real question is looking out five, ten years from now. I know Kip will be the first to tell you he doesn’t really know for sure, but he trusts these guys and likes them and he feels like it’ll still be the best thing for their organization in the long run.
Tindell: We talked about being called delusional. That’s the area where in the 30 years I’ve been doing this, I was called most delusional. So far, so good. So far, actually, much more than so good. We can do an IPO in a few years.
I’m a very, very big advocate of paying great people very, very well, and I’m a huge advocate of employee ownership. I can’t seem to get stock in the hands of every single employee, but, you know, the more the merrier. Ownership in the hands of employees is a pretty magical thing. It’s not readily done. The whole system is stacked against it. The taxation system is stacked against it.
Mackey: I think one of the challenges that the Container Store and Whole Foods will both face sometime in the next decade or so is, we’ve been doing our businesses for 30 years, okay? We’re not young any longer. And so then there becomes the succession challenge. No one will love Whole Foods as much as I’ve loved it, and no one will love Container Store as much as Kip loves it because we created it. It’s our children we’ve launched into the world, and we want those children to flourish. The children are grown up, for one thing. We want them to flourish and …
Tindell: Do you have kids at all?
Mackey: I do not.
Tindell: You do not? What do you say we just have a bunch of stores and no kids?
Mackey: The point is, is that the philosophies that we’ve helped nurture, when we leave, one of the challenges will be in succession to maintain that philosophy when we’re not there to protect it. That’ll be a challenge that both organizations will go through in the next, if not decade, it has to happen eventually. So I think that’s probably a point worth mentioning.
Tindell: I’m watching that closely with other retailers that I love and admire, most notably [Crate and Barrel founder] Gordon Segal, who’s going through that right now.
Mackey: How old is Gordon?
Tindell: 69 and a half. But John’s right. Who’s going to take over? You know, how indoctrinated in all these beliefs and capabilities are those people? I’ve watched some people that created some of the best brands in America just not be able to sleep at all in their later years because they didn’t have that covered. So I’ve worked very hard to try to cover that. I know you have, too, because you obviously understand the importance of it. Are you feeling pretty good about it?
Mackey: Yeah, I’ve got a great team.
Tindell: We still have a long time to go.
Mackey: We hope.