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Tuesday, July 28, 2015

A Failure in the Market for Altruism

Earlier this month it came out that Whole Foods had been systematically overcharging for pre-packaged food, at least in New York. And that wasn’t the first time. Back in 2012, an investigation led by city attorneys in California also uncovered overcharging and Whole Foods ended up paying $800,000 in penalties in addition to starting a new internal compliance program to ensure it didn’t happen again. The company’s recent issues also rekindled criticism (originally raised back in 2014) that some of its fancy cheeses are the product of prison labor, though that fact is not disclosed to consumers.

At least in response to the pricing issue, the CEOs issued a video “apology,” stating that “straight up they made some mistakes” but those mistakes were unintentional, evinced by the fact that, “the mistakes are both in the customers’ favor and sometimes not in the customer’s favor.” And they were going to fix it first and foremost by giving workers more training and hiring a third-party auditor to make sure their practices are improving.

At first I found all this frustrating. The New York Department of Consumer Affairs did not find just pricing mistakes, where about half were under-charged and the other over. No, it found, as best as I can tell, systematic overcharging. So the CEOs reasoning for why customers should believe it wasn’t intentional is, at least without some actual evidence, misleading. And moreover, given that, the chances that the pricing issue was a result of employees lacking proper training strikes me as improbable. The stores seem to have had a policy of not weighing their pre-packaged products. That’s not a training issue at all. So in short, the whole thing smelled bad.

But there’s another question here. Whole Foods isn’t just any company. Its CEO, John Mackey, literally wrote the book “Conscious Capitalism.” (For those with shorter attention spans, he also wrote a HBR article on the same). The whole idea is that Whole Foods and others like it are “galvanized by higher purposes that serve, align and integrate the interests of all their major stakeholders … They endeavor to create financial, intellectual, social, cultural, emotional, spiritual, physical and ecological wealth for all their stakeholders” where the ultimate goal is to “create lasting value as the world evolves to even greater levels of prosperity, helping billions of people flourish and lead lives infused with passion, purpose, love and creativity – a world of freedom, harmony, prosperity, and compassion.”

Given all these moral platitudes (platitudes, to be clear, at least some customers buy into), shouldn’t Whole Foods be held to a higher standard? And if they are not – if between the prison labor and pricing issues not a single customer changed their purchasing habits, what are we to think about the possibility of consumer activism (seen through buying things that are fair trade or union made or sustainably sourced or green or from a “clean” supply chain, etc.) as a means to making the world better in any real sense?

In short: what are people who are trying to buy not just a product but a product made in conformity with other moral commitments doing? Are they paying more money simply so they feel the warm glow of being a do-gooder, irrespective of whether they actually are doing good? Or are they attempting to manifest in their purchasing decisions a commitment to substantive moral ends?

Consumer activism has unquestionably been a part of American history for quite some time. Quaker abolitionists promoted the buying of slavery-free cotton. I’m reading a great book right now about consumer organizing during the Seattle labor movement of 1919. This stuff can be real. But is it today? And if it’s not, how might we correct that market failure? Should we?  

Posted by Heather Whitney on July 28, 2015 at 01:12 PM in Corporate | Permalink


It sounds like McKay wants to talk up 'the mission' and ethics and such when it suits him, and then excuse violations by claiming that it didn't make any difference.

Posted by: Barry | Jul 30, 2015 1:24:10 PM

Orin, great question, and I agree that this is an important premise. Are consumers aware of these do-good companies' do-good commitments and do they actually rely on them? Perhaps in the case of WF it's unclear -- though I am skeptical that WF could keep charging high prices for its high end vibe if consumers were aware that their cheese came from prison labor just as I doubt customers would keep paying the high prices if the organic labels turned out to be fraudulent.

I deal with this issue in more depth and show the various ways in which both workers and consumers rely on these corporate commitments to be good in a forthcoming paper, which should be on SSRN eventually and which I’d be happy to share in the meantime.

Posted by: Heather Whitney | Jul 28, 2015 3:44:08 PM

Whole Foods is most definitely NOT the local food coop. And John Mackey (and the company) aren't do-gooders, any more than Toyota for developing the Prius, or Elon Musk for starting Tesla. And I say that as somebody who loves shopping at Whole Wallet, I mean, Foods.

Many people were shocked, shocked back in 2006-2007, during Whole Foods' acquisition of Wild Oats, to find out that Mackey was a lot like other very competitive CEOs. I wasn't. People do these things to make money. The chat board behavior was bizarre, but the competitiveness wasn't. See: http://www.thenation.com/article/whole-foods-ceo-sows-wild-oats/.

In a similar vein, the founders of Honest Tea were a Yale School of Management student, Seth Goldman, and his professor, Barry Nalebuff. They chronicled their journey in a graphic novel style book called "Mission in a Bottle." Which, as I recall, also recounts their ultimate sale of the business to Coca-Cola.

My point is that one ought to be careful about drinking the marketing Kool-Aid. I don't have any problem with making money, so maybe that's why I wasn't shocked.

Posted by: Jeff Lipshaw | Jul 28, 2015 2:46:35 PM

Interesting post, but I would guess that very few Whole Foods consumers are aware of the ideological premise that the CEO claims for the company. I would guess that most Whole Foods customers just see it as a “high end” supermarket, with the emphasis on natural and organic goods as just part of the general “high end” nature of its offerings.

Posted by: Orin Kerr | Jul 28, 2015 1:49:47 PM

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