Whole Foods and Starbucks: Two Peas in a Pod
What do Whole Foods and Starbucks have in common? They both earned well-deserved reputations as overpriced food & beverage establishments. Not coincidentally, they both experienced massive growth in recent years while the yuppies were bringing home the (organic, free trade) bacon. And now they have both been slammed by the latest economic swoon.
Whole Foods was the latest in a string of companies that target the premium segment to disappoint Wall Street. The company posted quarterly earnings that were down 31% from last year at this time, and announced that they will cut back on store openings and also suspend dividends to their shareholders. Paired with recent store closures by Starbucks, these two companies make for an interesting case study in how once-healthy, innovative companies can become overzealous on the way to their achievements.
Shared characteristics that led to both companies’ rise and fall include:
1. Premium Pricing – Premium pricing is great when you’re the only show in town. Unfortunately for both Starbucks and Whole Foods, this no longer rings true. In the case of Starbucks, even McDonalds offers premium roast coffee (which by the way scored better in taste than Starbucks according to Consumer Reports). And Whole Foods has experience pressure from everyday supermarkets that now dedicate entire sections of their stores specifically to organic goods.
2. Overexpansion – This is truer in the case of Starbucks than Whole Foods. Starbucks expanded their number of stores to the point of cannibalization. The company was no longer broadening the market, but rather sharing the same pool of customers across a larger base of stores.
3. High-Brow Reputation – An off-shoot of premium pricing, a high-brow reputation is hard to shake. Even if these stores start to lower prices or offer coupons, it will be tough for them to rebrand and become known for more than just catering to society’s elite.
In all fairness, I have made more than my fair share of purchases from both establishments, so I am certainly not here to criticize their products or services. Nor can I deny that much of their growth over the past few years has been intelligent growth, capturing and in some instances creating a market that did not previously exist. However, the age old debate of when to curb growth lives on. Both companies felt invincible and in turn became greedy.
Now they are the ones paying the premium price.
Tags: Innovation, organic, overexpansion, starbucks, whole foods
