Here’s What Tim Cook Can Learn From Starbucks and Whole Foods

Tim Cook, chief executive of Apple, is up against his company’s own phenomenal history of success. The iPhone’s ubiquity and dominance have combined to deliver Apple a soaring share price and an astoundingly high percentage of the total mobile phone profit pool. Competitors are either losing boatloads of cash, or delivering marginal profits. Apple has a market cap of $555 billion—with roughly 90% of its value delivered in phones.

But now a number of other promising players are out to eat Apple’s AAPL 2.08% lunch—and the U.S. government is after Cook to unlock the iPhone. The FBI wants encrypted data on the phone to help build its case against a murderous extremist in San Bernardino. Cook is resisting, arguing that encryption is the right thing to do to protect customer privacy. Certainly, a protracted fight with the federal government is a recurrent nightmare for any manager.

Five years ago, Cook was appointed CEO of a company with a market cap of $360 billion and $108 billion in sales; its revenue has continued to grow, to $234 billion, and its recently volatile market cap has increased by nearly $200 billion. During Steve Jobs’ last five years, revenue had soared more than fivefold, to $108 billion, while market cap ballooned six-fold, from $61 billion.

Cook’s tenure has seen a remarkable growth in iPhone share and global usage. Jobs would certainly have been proud of the trajectory. But Jobs’ most famous quote was: “Being the richest man in the cemetery doesn’t matter to me. Going to bed at night saying we’ve done something wonderful, that’s what matters to me”

The new “wonderful” is what Apple needs most now.

Other notable chief executives have faced similarly overwhelming challenges, and have fought to stay true to core company values and deliver ongoing value. Cook, of course, when he isn’t fighting the federal government, is trying to reinvigorate Apple’s growth.

Last week, Italian luxury sweater king Brunello Cucinelli told me that shortly after his IPO, his newfound investors told him, “Give us 30% growth.” Cucinelli BCUCF 8.95% created his company to deliver more than sales and profits. His orientation has been to treat his network of local suppliers fairly, pay his employees substantially above market, and ensure that the “human” side of relationships be cherished and reinforced. Cucinelli, who calls himself the company’s custodian and not just CEO, stared down the new investors. He told them 10% is a sustainable growth rate and that anything higher would hype the company. He has delivered on his promise. He believes he is setting the direction for his company for the next 50 years or more.

When Howard Schultz returned to Starbucks SBUX 0.49% after temporarily “retiring” in 2000 as chief executive, he shut every store down for a day. During Schultz’s retirement, there was intense pressure to deliver 20% growth in sales and profits. In 2008, when he returned, Schultz decided that the company needed to stress speed, service, and quality product.

In a memo to Starbucks employees, he lamented the “watering-down of the Starbucks experience” and “commoditization of our brand.” Insisting on a return to quality and experience control was a bold act at a time when same-store sales had slipped and consumer ranking had dropped. It was a clear statement about values and value, a push for reinvention, programmed expansion, and an emotional connection between employee and customer.

Since Schultz’s return, Starbucks market cap has soared 600%, to $88 billion today. Big bets around expansion, global flag planting, investment ahead of everyone else in electronic loyalty cards, new day parts and the core business have delivered beyond anyone’s expectations.

In what’s close to a bet-the-company move, Co-CEO John Mackey has a new plan to reinvent Whole Foods WFM -0.66% with a limited product assortment, more limited customer service, and a lower-price second brand called “365 by Whole Foods Market.” Mackey is also launching a book to convince Americans to eat minimal processed food diet and instead focus on a diet rich in plant-based protein, whole grains, beans, fruits, and vegetables. This is another counterintuitive move: processed foods are traditionally the profit core for typical grocers. If 365 by Whole Foods Market is successful, it will be a move serve the 60 million middle income households in the country, not just the top 20 million. It will define a next wave of growth.

Mackey is attempting to reinvent Whole Foods to take it to the next level. Sales have plateaued at $14 billion. In some markets, same-store sales are flat or declining slightly. To maintain a high P/E and upward trajectory, Whole Foods needs to deliver at least 5% real growth. An alternative to a second brand would have been a price rollback, which would have certainly destroyed value: Whole Foods’ above-average profits are derived from high-margin prepared food, very pricey health supplements, higher sales per square foot and net higher prices on fresh produce, fish, and meats. Whole Foods’ operating margins are three times that of average grocery chains, with up to three times the sales per square foot.

All the leaders above take great satisfaction in leading their organizations and providing a moral compass for employees. They live by a belief that brands are not stable–they are either rising or declining, and that trajectory is a function of invention and innovation.

Steve Jobs famously said, “If today were the last day of my life, would I want to do whatever I am about to do today?” He added . . . “Avoid the trap of thinking you have something to lose . . . There is no reason not to follow your heart.”

Samsung, LG, Huawei, HTC all want what Apple has. Relying on predictable, incremental improvements is no longer good enough.

For companies like Apple facing the legacy of outsized success—as well as hungry competitors—the following are some tough rules for delivering sustainable growth:

  1. Understand your customers’ latent and unspoken needs, their usage and dissatisfactions. Get underneath to the whispers and emotional turmoil. Provide them a startling solution. Know you have their attention when you are unique and differentiated.
  2. Concentrate on understanding the top 2% of your consumers. They love you. They advocate for you. Know them like the back of your hand. Celebrate their loyalty and reward them. Provide them a reason to sing your praises and bring their friends into your camp.
  3. Deliver visually stunning merchandising. Consumers shop with their eyes. They make decisions in milliseconds. You cannot look old, ordinary or uninteresting. Know that the game is constantly being re-upped. A glorious store today becomes dated and trite inside five years. A product that is the same as it was a decade ago is stale and losing position every day.
  4. Understand schismogenesis. This is an anthropological term. A consumer has no obligation to remain loyal to you. She is constantly ranking and re-ranking. You need to earn your place in her heart with stunning products that offer unique benefits.
  5. Your shareholders want predictable and consistent earnings, but honestly that’s an unrealistic expectation in an increasingly volatile market. Great companies that deliver long-term value are built on investment, risk, and new truth. Stunning performance comes from making big leaps, not by taking baby steps or grinding it out.

You have many fans and supporters, Mr. Cook. This fall, it’s time to bring that faithful core a next-generation phone that is a rocket, a must-have, a can’t-do-without.

Leave a Reply