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What Whole Foods Can Learn From Starbucks' Turnaround

By Jeremy Bowman – Feb 20, 2016 at 8:12AM

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Starbucks once found itself in a similar predicament to Whole Foods. Here's how the coffee chain fought back.

It's clear by now that Whole Foods Market (WFM) is in the midst of an identity crisis. The stock has crumbled as the company faces declining sales at established stores and experiments with ideas such as a new budget-priced chain targeted at millennials.

Whole Foods once had the organic space to itself, but competition has crept in from all corners of the grocery industry. As a result, consumers can find lower-priced options elsewhere, and have left Whole Foods for the likes of KrogerWal-Mart, Trader Joe's, and others.

Whole Foods is not the first company to experience such a crisis. The nature of business is that conditions are always changing, bringing competitive threats that force shifts in strategy.

Plenty of companies have recovered from such downturns, but one company more than any other offers the best parallel for Whole Foods' current predicament -- Starbucks Corporation (SBUX 0.76%)

From 2006-2008, Starbucks stock fell more than 75% as profits tanked and same-store sales fell by as much as 10%. Competitive threats had arisen from Dunkin Donuts and McDonalds, which had added their own espresso-based menus in an attempt to grab some of Starbucks' growth, and the recession hit discretionary spending across the board. The company's founder, Howard Schultz, who had vacated the CEO chair in 2000, returned to the helm in 2008, but blamed the company's troubles on self-inflicted wounds. He believed Starbucks had moved away from its core values and that it needed to return the company's focus to the customer. In order to do so, Schultz made a number of aggressive changes:

  • The company closed hundreds of stores, shutting down unprofitable, newly opened establishments, many of which were near existing Starbucks locations.
  • Starbucks shut all of its stores for a three-hour period to retrain its baristas on how to make the perfect espresso. The move sent the message that the company was taking its product quality seriously, and was recommitting to making the best coffee possible for its customer.
  • Starbucks introduced its rewards program. Now a major source of growth for the company, My Starbucks Rewards was developed incrementally, but the decision to offer it came out of the need to strengthen its relationship with the customer. 

Starbucks made a number of smaller changes as well, launching its biggest national ad campaign ever, focusing on the quality and freshness of its coffee. Reinforcing that, It told baristas to dump coffee after 30 minutes, and even introduced Via, a brand of instant coffee. Starbucks also invested in technology, appointing a Chief Technology officer and revamping its point-of-sales systems. Today, Starbucks is considered the retail leader in mobile payments, and recently rolled out a popular mobile order system.

Where Whole Foods stands today
No two businesses are the same, but Whole Foods and Starbucks have at least a few important things in common. Both cater to a similarly high-end, discerning customer who is willing to pay extra for quality. Both have similar philosophies toward their employees, and are ranked among the best retail companies to work for.  Both value experience as well as product, and both compete in the food industry, though in different segments.

Whole Foods has already made some major changes, including the launch of the 365 chain targeted at millennials. It named a new big-name chef to improve its prepared foods department and launched an ad campaign around communicating the value of its higher-quality products with slogans like "Buy goods, not bads."

However, there are still some areas for improvement. Whole Foods launched its first rewards program in 2014, and just released digital coupons on its mobile app. Those are steps in the right direction, but it seems like technology is an opportunity for the company to stand out from the competition. Like Starbucks, its customers are tech-savvy and often deprived of time. Harnessing technology to improve and expedite the customer experience should be a top priority.

Likewise, Whole Foods needs to do a better job of communicating its core values and its focus on the customer. Unlike Starbucks, which competes primarily in one category, there may not be an easy way to do this, but the company must reassure its customers that its prices are competitive. After last year's news that its New York stores had wrongly priced some items, it's especially important for the company to overcome the "Whole Paycheck" image.

Starbucks has also been derided for its high prices, at one time being called "Five Bucks," but the coffee chain's future is as bright as ever today and it's not because it simply lowered prices. Instead, it offered convenience and value in exchange for loyalty with its rewards and mobile programs.

Turnarounds take time, and Whole Foods management has proven itself more than capable in the past. It won't be easy, but given enough time and room to experiment, the company should find the right formula to return to organic growth.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$84.81 (0.76%) $0.64
Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
WFM
Walmart Stock Quote
Walmart
WMT
$131.31 (0.96%) $1.25
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$243.76 (-0.89%) $-2.19
The Kroger Co. Stock Quote
The Kroger Co.
KR
$45.00 (0.31%) $0.14

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