Food for Wonder

How Ernie and Jim Shelton gilded groceries into a cool $25 million in just ten years

by James Dunn

They made the American dream look easy, the Sheltons did. In 1990 they paid $180,000 for a tiny natural foods store in Sebastopol, built a three-store chain in a decade and sold it in 2000 to Whole Foods Market for $25 million. But this was no windfall, no serendipity, no fluke. Ernie and Jim Shelton were food industry veterans on their third round of transforming natural food store dogs into beauties.

A few weeks after the transition following the sale, the Sheltons had time to reflect on their feat. Ernie, who performs jazz music, took intensive singing workshops at Stanford. He sang on Friday nights at Equus restaurant in Santa Rosa. Jim, an athlete and former wrestler who did a half-triathlon in 1996, had time to learn the piano, paint and draw. They both craved quiet mental space.

“I am trying not to rush into something to start organizing space and time,” Jim said. “I am not bored yet.”

Ernie had to override the urge to jump into his car and drive to town. “Wait! I don't have to do that,” he said. “It's habit patterns that I am giving the opportunity to re-create and change. Neither one of us has any major burning projects. We did not make this move because we were burned out with our business and had a bigger dream.”

The brothers' dream of building natural food stores began long ago. After growing up in Willitts, Ernie helped out at a health food store in Santa Cruz when he was in his twenties.

Then both brothers joined a spiritual community called Sunburst Farms on a 3000-acre ranch near Santa Barbara. The community, based on the teachings of India-born Paramahansa Yogananda, supported itself with two natural food stores and a small distribution company. “It was a vibrant community of about 250 people,” Ernie recalls. In about 1973, Ernie lived and worked in an apple orchard for a year. The area, at 3,000 feet elevation situated between Ojai and Bakersfield, didn't have such a rosy climate for apples, though it was good for avocados. “It was better for alfalfa than apples,” Ernie recalls. “It was a great introduction to organic agriculture.” Soon he gained experience managing the community's businesses, which grew to four retail stores, a juice bar and a wholesale distributor of organic produce.

Ernie married in 1977 while still in the community. He and his ex-wife Xenia had two children, one born in Santa Barbara.

Jim Shelton worked for four years at the wholesale warehouse for Sunburst Farms, which did about $3 million a year in sales. “We sent out $11,000 in one day,” he recalled. “It was huge at that time. Now it doesn't mean anything.” Then, zucchini sold for $2 a box; by 2000, it was more than $20 a box. Jim also managed a retail market at Sunburst Farms from 1974 to 1977.

“It's a very tricky time—the whole negotiating process. Who do you talk to? Who do you not talk to? Who on your staff do you involve in the process? How do you do that without causing tremendous earthquake waves through the company?"

In the 1980s the community sold its properties and businesses then moved to a 500,000-acre high desert ranch in northeastern Nevada. The enormous ranch, worth nearly $8 million then, had a climate far more harsh than that in Santa Barbara. “We had two seasons,” Ernie said, “winter and the Fourth of July.”

“There was a major falling out with the leadership of the community,” Ernie said. The group, then called The Builders, dwindled to about 150. “I was not involved in upper levels of decision-making,” he said. “I was a member bee.” Ernie moved to Salt Lake City—the nearest urban center.

“I happened to walk into this natural foods store,” he recalled. “We bought them out for $20,000, next to nothing.” Ernie became manager of the 1,500-square-foot, struggling store. His management skills bloomed as he drove its sales to $800,000 a year. The Builders bought a second store, this time 4,000 square feet. Jim Shelton managed one of the stores, called New Frontiers. “I had the opportunity to learn the craft, learn the trade,” Ernie said. “I did so very successfully.” He took great pride in the quick growth of the businesses, and The Builders appreciated his contribution to its sustenance. By 1988 after six years, the two stores together grossed nearly $3 million.

Ernie's compensation at the time was paltry—room and board. All the stores' profits went to The Builders, a non-profit organization. Eventually the Sheltons left The Builders and moved back to California. “We left with nothing,” Ernie said.

The long years of experience under the auspices of the community developed a keen business mind in Ernie. “I can't even conceive of living beyond my means,” he said. “I've taken a risk, but it's always planned.” He observed a key difference between wealth, which implies accompanying wisdom, and riches, which can cascade into the life of a fool and soon be squandered.

Ernie moved to Sonoma County and worked as programs director for Living Foods in Marin County. The company had three stores: San Anselmo, Mill Valley and Berkeley. Later the stores were sold to Wild Oats, and the Mill Valley store closed. At Living Foods, Ernie was hired by Walter Robb, regional manager for Whole Foods Market who later helped engineer the acquisition of Food for Thought by Whole Foods.

Jim also moved to Sonoma County; he was selling organic baby foods imported from Europe by the Perlinger Naturprudke company of Austria. The company had about 53 stores in Austria, most small.

After Ernie left Living Foods in 1990, the brothers decided to launch their own company. The 2,000-square-foot Food for Thought store on Healdsburg Avenue in Sebastopol had been open for about two years. Its owners had discovered that retail was not their forté. “They were burned out,” Jim said. “It was too people-intensive for them.” Despite the owners' discontent, the store was grossing $700,000 a year with profits of about $70,000. The Sheltons paid $180,000 for the business.

By now veterans in the industry, the Sheltons quickly turned the store into a bustling hub, doubling its sales to $1.5 million. They moved in 1993 to a 5,000-square-foot store in the McKinley Center—a better location. Sales soared to $5 million a year before the brothers decided to take a giant gamble and open a store in Santa Rosa in 1994. “The business was throwing off enough money that we felt we could purchase the Molsberry store,” in Santa Rosa, Ernie recalled. A well-run store can reach double-digit profits, he notes, but many groceries make less than 10 percent.

The Sheltons got a $350,000 Small Business Administration loan to pay for the store, which was grossing about $3.5 million a year. “We remodeled on half of a shoestring,” Ernie said, spending about $150,000 on “a lot of paint and scrub-a-dub. We had no money.”

They had financial help from Mountain People's Warehouse, now United Natural Foods, Inc., in Auburn, their biggest supplier, which extended them 90-day payment terms instead of the usual two weeks. UNFI supplies bulk groceries, perishables and supplements, totaling some 60 percent of the store's gross sales. UNFI remained a major supplier for Whole Foods.

The Santa Rosa store was profitable in its second week of business. “We had so little to put into it that it could be profitable at modest sales,” Ernie said. The store hit $5 million in its first year.

Some of the fixtures he built himself, such as a 200-case display for 99-cent chips. The store was so capacious—23,000 square feet—that the brothers needed big fixtures to fill it. “It was the largest natural foods market in Northern California at its time,” Ernie said. “We had to learn how to open a big store. We had never done something of that size.” In Santa Barbara, their biggest store was 12,000 square feet.

In their original business plan, the Sheltons expected to open five stores, but smaller, each about 5,000 square feet. “We changed our thinking,” Jim said. “We knew it was too small. The industry was changing so that a medium-sized store was no longer viable. We went up to a larger store and thought about it in terms of regional instead of local. The smaller store was too vulnerable.”

Whole Foods came into the Bay Area in the late 1980s, Ernie said, first in Palo Alto then Berkeley. A San Rafael store went in during the 1990s.

For a family business to run smoothly, its members must have sharply defined roles. Otherwise, “you start stepping on each other's toes,” Ernie observed. Before the brothers opened the Santa Rosa store they made Ernie the company's president and general manage; Jim was the store manager in Sebastopol. The brothers met weekly with other managers to talk about general direction for the company.

Ernie's ex-wife Xenia did the bookkeeping in the early years. “She would get up at 5 a.m. to do the day's bookkeeping,” Ernie recalled. “She'd have that done before the kids were up and about.” The company hired a controller in 1994.

They looked for about a year before landing in the former Molsberry store, which had been a grocery site for some 45 years. The store, built by Codding Enterprises, was struggling, squeezed between Safeway, a Lucky store and the former Petrini's store. “It was a big 7-11 for the local neighborhood,” Ernie said. “It's difficult to compete against big chain stores. I would never want to go head-to-head with those guys. They're tremendously deeply funded and have the very best minds in the industry.” But natural foods outlets were scarce in the area. “We felt strongly that the time was ripe,” he said. “Our Sebastopol store had gotten bigger and bigger. We felt the potential in Santa Rosa was even greater.”

Within a few months of the Santa Rosa Food for Thought opening, the Sheltons doubled the size of their Sebastopol store from 5,000 to 10,000 square feet. At the time, the store was doing $5 million in sales then grew to $7 million.

By 1998 the Santa Rosa store was at $10 million in annual sales. Then it grew to $15 million. A large store such as this one can gross $25 million or more in annual sales. The Whole Foods store on Franklin Street in San Francisco grosses nearly $50 million a year.

One boon was the closing of the Petrini's store within two years of Food for Thought opening. “It was manna from heaven!” Ernie said. “My god!”

The Sheltons opened their Petaluma store in 1996 in the former Carl's Market. A nearby health food store, Back to Basics, was owned by Lynn Silva. She closed her business, which was grossing about $2 million a year and was modestly profitable, and went to work for the Sheltons. “It was not a deal of ours,” Ernie said. “We were happy and pleased. It made for a soft landing for us in the community. She brought a well-developed staff. It gave us a core staff.” Silva kept working in the Petaluma store.

“It's a very different position to be a hired manager rather than an owner-operator,” Ernie said. “There's lots of pressure, but it's not like the depth of contact as an owner,” whose success or failure instantly affects him financially.

To go from the little Sebastopol store to suddenly having a chain of three, including a giant store in Santa Rosa, was nearly overwhelming. “I was a pretty tired boy,” Ernie said, chuckling. At the time, he was also coaching a Little League team. “There were a couple of points where I was as exhausted as I had ever been in my whole life.”

But he knew his course was right. “I had a deep, inherent, intuitive trust that we were following the lead,” Ernie said, “not leading the charge. These were opportunities that were unfolding in front of us one after the other. We never questioned the reasonableness of the growth—it was such a natural progression. I never discount the factor of grace in our success. There are a lot of factors that go into the success or failure of a business. Grace is often the most heavily weighted.”

Though Jim still meditated regularly, Ernie had not followed a spiritual practice for many years. “I entered a different phase of my life,” he said.

Despite his exhaustion from running the business, Ernie said he wasn't burned out. Yet soon he turned his attention to re-creating the business so it could run without the Sheltons. “That was our goal, to create systems that were effective that did not need a unique personality to guarantee the business success, to not be living the business 24 hours a day if we did not want to,” he said.

While the brothers delegated extensively, Jim still did interviews with prospective new hires every Tuesday night. “We hired good people with good character,” he said. Ernie did the orientation of new employees.

In 1997, Ernie hired the George May company as consultants to do a business audit, interview staff members and analyze services and systems. “We took our business organizing to a different level,” Ernie said, with job descriptions, performance agreements, reviews, orientation, interview processes and accounting systems. They analyzed cash usage and developed more accurate reporting systems. Food for Thought paid the George May company $200,000 for three months' work—well worth the investment, Ernie said. “It put us in the position of doing more forward thinking and forecasting, looking through the front windshield instead of the rearview mirror.”

By 1999 the whole company was doing $33 million in sales. The three stores conducted some 4,000 transactions a day and had nearly 375 employees.

Twice a year for several years, Ernie received a call from Walter Robb, now a co-president of Whole Foods, who works out of the Emeryville regional office. While Robb was plainly interested in the Sonoma County marketplace, Ernie didn't fear that Whole Foods would open its own stores near Food for Thought. “They had larger fish to fry in the Bay Area,” Ernie said. “We had the opportunity to continue to grow without being on anybody's radar. The county as a whole supported three sizable natural foods stores. It's a B market with a number of A stores. It was our plan to build a strong enough presence that if Whole Foods or Wild Oats wanted to come into the county, they would have to come through us rather than around us.” The brothers expected to have the county largely to themselves through the year 2001 or 2002.

“We were large enough that we could fend off outside competitors,” Jim said.

The Sheltons had discussed opening a fourth store in Healdsburg. “We were reluctant to pull the trigger on that,” Ernie said. “We felt it would do well” but not extraordinarily well.

“It pushed the question,” Jim said. “Hold it! How successful does the store have to be for us? In Healdsburg, it would have taken many years—about seven. It was going to cost $1 million to put the store in. We expected to be in the black, but it would never be an exceptional store.” He had noticed that no big chain store in Healdsburg carried natural foods the way Raley's and Safeway did in Santa Rosa and other parts of the county. “They respond to what the demand is,” he said. “If we can open a beautiful store in Healdsburg, and in two years we turn around and sell Food for Thought, it has no value” because the Healdsburg store's expected volume was low at about $3.5 million a year. “We did not want to do it as a hobby,” Jim said. “It was an eye-opener for us. How fast can we go in smaller markets?”

By 1999 the Sheltons began to discuss selling the business; they were ready to do something else. Ernie had turned over general management to Joe Rogoff. Jim was “starting to sleepwalk” in running the Sebastopol store. “I enjoy people,” Jim said, “but the challenge was gone.”

When Robb called again in 1999, the Sheltons were ready. “The risk of going forward was greater than the present value,” Ernie said. He spent considerable time researching the market value of the business. Whole Foods offered $24 million. The Sheltons countered at $25 million. The deal closed in February 2000, a month after announcement of the sale. According to Jim, typical sales multiples in the industry are about 10 times earnings, so the stores were generating net profits of an estimated $3 million a year.

“The deal went through on a Sunday night,” Jim said. “I was mopping the floors” in Sebastopol. “This is full circle,” he thought to himself. “This is where I started out. Clean floors are important.”

At the time of the announcement, both sides had signed a letter of agreement. “The deal was going to happen,” Ernie said. “It's a very tricky time—the whole negotiating process. Who do you talk to? Who do you not talk to? Who on your staff do you involve in the process? How do you do that without causing tremendous earthquake waves through the company? It's a very difficult time.”

“Having the stores provided extraordinary training in a certain kind of consciousness. “I know how things manifest,” Jim said, “where you can put energy and have benefit, and where you can squander it.”

They hired Santa Rosa CPA Reuben Weinzveg to help with the deal and also used a Seattle-based acquisitions team of Moss Adams.

Consolidation in the health food business has accelerated in recent years. “For the first 20 years, we were an alternative business,” Jim said. “Now it's big enough that market forces are at play.”

“Our business was an acquirer's dream,” Ernie said, with well-organized business systems. Whole Foods quickly made modifications, implemented its own accounting systems and changed the stores' names a few months later. “Their operational style, and team member and leadership concept is different,” Ernie said, but not so different as to make the transition difficult. Nearly all the staff remained. “There were many many more similarities in the companies than differences,” he said.

Whole Foods Market, based in Austin, Texas, had about 112 stores in the year of the sale and has about 300 stores in 2011.

The Sheltons had a 12-month consulting contract; but after a couple of weeks, Whole Foods barely needed them. “They didn't need us for 12 minutes,” said Jim, chuckling. “At the store level as soon as I replaced myself, that was it.” Joe Rogoff, who became general manager of Food for Thought in 1998, went back to being store manager in Sebastopol; Rogoff had served as store manager in Santa Rosa for four years.

The deal was all cash with a five-year covenant not to compete. “We do have a tax problem this year,” Ernie acknowledged. He was 47; Jim was age 50. The two men suddenly had more money than they ever dreamed possible.

Ernie seemed almost baffled by his sudden wealth. “I lived on nothing for 16 years,” he said, reflecting on his austere life in the spiritual community. “I had no bank account until I was 35 years old. There was nowhere to fall to. You don't need much to live on.”

He felt as if he were on the first leg of a long vacation. “The mind is still active, but there's no place to go,” Ernie said. “What I am experiencing now is the continued ripples of life patterns, impulses I am letting move through.”

Jim had no connection with the community they both belonged to years ago, but he still meditated with a group that practices Zen. “It's not so devotional,” he said, “watching thoughts. It starts out with a breath meditation.” He did an intensive meditation retreat where he sat for several hours a day in silence, punctuated with long walking meditations. “We can do a lot of things” at the same time, multi-tasking in a frenzy, he observed, but “just to sit and try to pay attention is difficult. You can do so many things without paying attention to any.” Having the stores provided extraordinary training in a certain kind of consciousness. “I know how things manifest,” Jim said, “where you can put energy and have benefit, and where you can squander it.”

“I miss the contact with people,” Jim said. “I have a lot of friends at the store,” customers he had known for years. The store is “a door that opens out into the community,” he said. “It's so public.” He estimated that the Sebastopol store had a base of about 2,000 regular customers. Despite wistfulness, he was relieved. “I am done with retail,” he said. “I don't think I'm willing to put in the number of hours required.”

“I have shed a few tears,” Ernie said. “I like business. I enjoy the interaction, the leadership role. I am not real sure what's next. I want to put our resources to work, put our money to work. We have to get our heads around what this means for us personally. Everyone has a pipe dream of what they would do if they were suddenly in a position of financial independence. I've never really dreamt about it, but I don't take it for granted. It's a tremendous blessing. I am not thinking about going out and buying a lot of doodads or buying a second home in Maui. Our lifestyle has been pretty modest.”

“There's nobody else in the industry who started their business and sold it in such a short period of time for as much as we have gotten,” Ernie said of the gush of cash. “The timing has been nothing short of remarkable. There's this window that opened, and it has poured down on our little part of the garden. We can only take partial credit,” he said.

“Everybody reacts differently,” he observed. “I have talked to a number of people in similar positions, people in the industry. Some of them have responded very positively and comfortably. For others, it's taken them to new lows. It has led them to more unhappiness than to positive results. Some people have a tremendous amount of self-identity wrapped up in what they do and not in who they are. I remind myself every day that this too shall pass; death sits on my shoulder. My self-identity has not been so wrapped up in having my name on the business card. Five years ago, nobody knew what Food for Thought was.”

Neither Shelton is materialistic by nature. Their primary response to the $25 million sale was humble wonderment.

The covenant not to compete for five years ended in about 2005. A few years later Ernie Shelton followed through on their previous plans for a health food store in Healdsburg. With his younger brother Martin as business partner and store manager this time, Ernie opened a new store: Shelton's natural foods market. Selling natural foods is in his blood—an irrepressible talent for building community through business.

(original story published by Brainpower LLC in 2000)