The country may be in a recession, but standing in the middle of the Whole Foods (WFMI) flagship store in Austin, Texas, you d hardly know it. From the small stream that runs through the patio at the entrance to the half-dozen kinds of grind-your-own nut butter in the bulk foods section to the chocolate fountain at the candy counter, the store is an 80,000-square-foot monument to abundance. As a nod to tightening belts, small signs promote Whole Deals in other words, cheaper items yet there s still plenty to bust the budget.

But three stories up, in Whole Foods corporate offices, CEO and founder John Mackey can t ignore the economic crisis. For the first time in the chain s history, same-store sales are dropping and the stock has lost about 75 percent of its value last year. In the middle of 2008 the company suspended its dividend and announced it would still open new stores, though not as many as originally planned. And in early November, the company sold a $425 million stake to Leonard Green Partners, shoring up the balance sheet yet diluting the holdings of existing shareholders.

When the CEO is also the company s founder, he s not going be the guy who says, let s take a breather, said Scott Van Winkle, an analyst who covers the stock at Canaccord Adams. It s too bad, he adds: They should have made the decision to slow growth sooner than they did.

For his part, Mackey makes no apologies for the company s growth it plans to open 15 new stores in 2009 nor for the decadence of the stores, which have a reputation as the kind of place where Barack Obama would be appalled by the cost of arugula. Our mission isn t to sell the cheapest food, it s to sell the highest quality food that s what sets Whole Foods apart, he says.

Pushing expensive food in lean times is a bold move, but Mackey has never been bland. Members of Austin s die-hard food co-ops tagged their tough new competitor Darth Vader when he opened his first store in 1978. More recently, he triggered an informal Securities and Exchange Commission investigation since closed by posting anonymous comments about Whole Foods and Wild Oats on an Internet message board, and he s still wrestling with the Federal Trade Commission over the 2007 acquisition of Wild Oats.

Even so, Ronald Burkle found the company s prospects convincing. Last week, Yucaipa, the investment firm controlled by the supermarket billionaire, announced that it acquired 7 percent of Whole Foods shares. There are substantial opportunities for the company to improve operations and its pricing image while maintaining its high-quality product offering, Yucaipa said in its SEC filing.

In jeans and a Whole Foods polo shirt, Mackey looked more like a checkout clerk than a chief executive officer when he sat down with SmartMoney recently for a conversation about the slowing economy, the problem with the company s Whole Paycheck reputation and keeping employees on board when their stock options are underwater.

SmartMoney: I was floored by the store downstairs.

John Mackey: It s a monument to food itself. For most people, food shopping is sterile, it s a chore. And yet Americans enjoy eating, they enjoy shopping. Food is this incredible, sensual, pleasurable thing, and our idea is to create stores that enhance that experience.

Q: Some of it seemed over the top. Does anyone really need seven different kinds of peppercorns?

A: Did you see how many people were in that store? We only need one in 100 to buy those peppercorns. And if they don t sell, we ll get rid of it.

Q: And yet you argue that Whole Foods isn t an upscale place to shop.

A: It isn t. Our first core value is to sell the highest quality, natural, organic food available. Sometimes that s more expensive, and sometimes it isn t. We have a value selection in our stores we sell Monterey Jack and cheddar, we have inexpensive wines, but we ll also have a $30 Brie and a $200 bottle of wine.

Q: But compared to Trader Joe s, for example, you re known for the expensive stuff.

A: Everything you can get at Trader Joe s you can get in our private-label line at the same price. But everything at Trader Joe s is inexpensive, so when you get to the checkout, your bill won t be that high. And at Whole Foods, if you shop with a list and look for the least expensive items, your bill will be reasonable too. The problem is, while you were shopping, you didn t buy all the least expensive stuff. You gave in to temptation. We get blamed when people choose the expensive stuff.

Q: That s the argument McDonald s makes: You don t like the food, you don t have to buy it.

A: I totally agree. People are responsible for what they buy and what they put in their stomachs.

Q: But you do actively tempt people. I didn t want a cupcake until I had a sample downstairs.

A: One cupcake won t kill you. Look, you have to develop your business around what customers actually eat. People want cupcakes. If we don t sell em, they re going to get them from our competitors. We ve had this debate in the company, and we ve said, We re not Holy Foods market.

Q: So you ve started promoting the cheaper items in the store; you re giving value tours. Is there a contradiction here? It can t be good for the bottom line if everyone shows the kind of self-restraint you re advocating.

A: If our customer count didn t go up, then obviously, our sales would go down. But if people only bought our less expensive items, they would come to realize that Whole Foods is very competitively priced, and they would tell their friends. The average ticket might go down, but the number of customers might go up.

Q: This is a tough time, and a lot of your employees have stock options. How do you keep people motivated?

A: It s challenging. Almost every stock option in the company is worthless. Whole Foods has a philosophy of shared fate. We cut about 7 percent of the workforce last summer, which was regrettable but necessary. We tried to explain the situation. I think people will forgive you one reduction in force, but a second one will totally undermine their trust. So we cut deeply, so we wouldn t have to cut again.

Q: How do you gauge morale?

A: You talk to people. When we were forced into that reduction in force, it was like a morgue in the offices. And I think morale is maybe 75 to 85 percent back to where it was. Still, people are afraid. These are weird times.

Q: Two years ago you dropped your salary to a dollar.

A: At the time I thought I had enough money. Now my net worth has declined about 85 percent in the last three years, so the joke is, perhaps I was a little rash. On the other hand, it s been good for morale. At too many companies, the executives don t bear any pain in hard times. That s not the case at Whole Foods.

Q: In November, Leonard Green Partners took a 17 percent stake in the company for $425 million. The deal seemed to come together in a hurry. Did you panic?

A: It came together very quickly, but panic would be too strong of a word. We were concerned. If we really are heading into the worst economic downturn since the 30s, we want enough capital to see us through. Yes, we diluted our existing shareholders, and it wasn t the best time to sell stock we know that but the institution s first goal is to survive.

Q: Wall Street was calling for you to slow growth and cut the dividend six months ago. What took so long?

A: That s ridiculous. Our first quarter was a 9 percent comp; our second quarter was 6.7 percent. This economy has deteriorated tremendously. You can say we should have done it sooner, but there weren t good economic indicators out there for us to see that. Nobody was predicting this financial crisis.

Q: You weren t concerned about the ripple effects of subprime?

A: It looked like they were taking adequate measures to contain it. When was the last time something like this happened?

Q: You re back to blogging. Why do you do it?

A: It s fun. I really do believe that the 21st century CEO is going to be more accessible and transparent. I can t just live in an ivory tower and expect to understand what s going on.