What's Rotten at Whole Foods

John Mackey's anonymous online critiques and self-congratulations have damaged the brand identity on which the high-end grocer depends

There's something rotting at Whole Foods Market (WFMI) and it isn't in the produce department. It's in the company's management team: John Mackey, the chief executive who spent years anonymously posting on the Web about his company and its rivals, appears to share a cynical arrogance with other corporate self-promoters who believe they don't have to personally uphold the values they publicly proclaim. The Whole Foods mission statement boasts: "We lead by example." But Mackey's unapologetic example is hardly the model for the Whole Foods brand.

Any such hypocrisy is not incidental to this particular company following its rapid, acquisition-filled growth. The third most critical challenge the company faces—after market saturation for such expensive foods and the straining logistic infrastructure—is the credibility of its equally straining culture.

Groucho Marx once said, "The secret of life is honesty and fair dealing. If you can fake that, you've got it made." Groucho's sarcastic advice seems to have been Mackey's leadership mantra. In fact, one major accounting firm leader told me, "I am going back to buying foods with additives and artificial preservatives." He was joking, but his distaste for the mess at Whole Foods was real.

Talking Head

Mackey's anonymous efforts to undermine competitors and enhance his own company's image are as disturbing as they are entertaining. This conduct was not at a scandalized competitor like grocer Royal Ahold (AHO). Rather, it was at a company—like Starbucks (SBUX), Ben & Jerry's, The Body Shop, or Patagonia—where a total brand campaign was created and marketed to enhance trust and integrity in both product and business conduct.

In endless magazine profiles, public pronouncements, and personal TV appearances, Mackey made honest dealing and fair open conduct part of the Whole Foods brand image. In a CNBC (GE) interview last year, when Mackey explained how he can be both socially responsible and commercially triumphant, he stated: "A lot of people think corporations are the bad guys. There is sort of a disbelief that they can have high integrity, do well, and be successful." He made a similar point on his blog, complaining about a journalist who wrote a 2004 New York Times (NYT) profile on Whole Foods: "It seems hard for him to believe that a business can be both profit seeking and socially responsible at the same time."

Sowing Wild Oats

Many observers, from financial analysts to late-night comedians, were riveted by Mackey's seeming self-adulation. Posting anonymously on the Web under the name &quotRahodeb," he proclaimed his own management brilliance and complimented himself on how "cute" he looked after a haircut on Apr. 28, 2000. Others have debated whether he actually damaged competitor and desired acquisition target Wild Oats Markets (OATS) in any legal sense through his concealed attacks. But the real issue is how his unsavory conduct has diminished the brand he helped forge, as well as its treasured culture, and undermined the momentum for acquisitions.

His effort to persuade other investors that Wild Oats wasn't worth $8 a share, but instead less than $5 a share, was certainly disingenuous. Not long thereafter, Mackey's company bid the equivalent of $18.50 a share for the rival retailer. Regardless of the legality of his comments, they hardly enhance the likelihood of closing the acquisition, which has already drawn opposition from federal authorities.

He Said, He Said

There is no dispute that he selectively revealed his identity when several fellow bloggers suspected Mackey's true identity. For example, on Apr. 12, 2006, he confessed, "Surgeon General and Boston Cowboy—you were both right about my true identity all along. Congratulations on your cleverness." Perhaps his defense of the firm's leadership or knowledge of detailed performance trend data betrayed his disguise.

On top of this, he appears to have shared information in his Web posts that was not available to the general public. Last year, at the annual shareholder meeting, he publicly announced the company would reach $12 billion in sales by 2010, doubling its sales over five years. Then a week later on the Web, writing under his pen name, Mackey said that: "The upgraded prediction of $12 billion is most likely conservative," and "won't surprise me if the number ends up close to $14 billion in 5 years." In fact, that same month Mackey pseudonymously predicted that "operating cash flow for 2006 will be up at least another 20% just as it is every year."

Finally, his best defense is that some of his confidential musings were not truthful. "The views articulated by Rahodeb sometimes represented what I actually believe and sometimes didn't…."

Standards Issue

It's hardly surprising that the anonymous posts of this granola-eating street fighter have triggered an informal investigation by the Securities & Exchange Commission. What is surprising is that the board of Whole Foods has so far said that it has no intention of meeting to discuss Mackey's conduct. The board should investigate the situation, even if just to protect itself against legal action by shareholders. The revelations of Mackey's Web posts come after the value of Whole Foods' stock has been cut in half from its peak 18 months ago. (Editor's note: On July 17, after this story was published, Whole Foods' directors put out a public statement that they would in fact investigate the postings by their CEO.)

Fair is fair, whether the issue is trade or corporate management. Shouldn't Mackey be held to the same standards as any other Whole Foods employee? Would another employee be able to avoid reprimand or perhaps even termination for such violations of the company's culture and values? So much for leading by example.

Before it's here, it's on the Bloomberg Terminal.