Riding the wave of consumer interest and awareness of healthy and organic foods Whole Foods, the up-market grocery chain, rapidly spread into middle and upper class neighborhoods around the country. Consumers with plenty of discretionary income to spend flocked to its stores and it soon earned itself the sobriquet Whole Paycheck, a phrase the companies executives would like to now remove from common parlance.

With the economy in the dumpster people are now reigning in on discretionary spending and to make matters worse for Whole Foods, consumer interest in organic food appears to be leveling off after several years of double-digit growth, according to the Hartman Group, a market research firm specializing in health and wellness. [Found on NYT]

With Whole Foods stock off 70% since 2006 is this a company that has stumbled like another former leader in the discretionary spending market, Starbucks? The cost of fuel and the high rise in food prices are definitely hurting the consumers pocketbook now they are turning their backs on high-priced grocery chains like Whole Foods.

This is not to say that consumers who are heavily committed to organic foods and are happy to pay a premium for them will stop buying organic. More likely it’s those customers who were attracted to the “idea” of organic, pulled in by savvy marketing from companies who never used the term organic to describe their produce, who will steer away from high-priced organic foods and go back to regular produce at cheaper grocery chains. As everyone jumped on the organic band wagon sales soared but now it is consumers economic woes that are dictating where their groceries monies will be spent. The trend appears to be that meat, produce and dairy that is organic continues to sell but products such as breakfast bars or cereals and other similar food categories labeled organic are now less important to shoppers.

Whole Foods problems do appear to mirror those of Starbucks‘ - they were both once Wall Street darlings whose stocks soared for years, but with aggressive strategies for expansion by building more stores rapidly both chains were unable to maintain their margins and Wall Street punished them. They also relied heavily on customers paying a premium for what they saw as a premium product and that only works in times of prosperity not in an economic downturn.

There is also the hyper-local aspect of consumer habits these days. Farmers Markets and even cooperative shares in small organic farms are becoming very popular these days. These markets and farms offer consumers access to locally grown organic produce at the right price and also the feelgood aspect of supporting their local communities. Think local, eat local may be a phrase that becomes popular but it won’t help a national chain like Whole Foods. Whole Paycheck may very well haunt them and their shareholders.

Related Post: Starbucks Fires Head of Entertainment Division

The news today is that Proctor and Gamble is getting into the music business. Just as Starbucks is going in the opposite direction and exiting the CD sales business, more brands are jumping in to fill the void left by the collapse of the CD retail store business. Music sales in the UK were once again down 11% over the same period in 2007.

For the labels, attention from product companies is a good thing. I see the logic here. CD sales are plummeting and online sales are not filling the void, a company comes along that wants to license the record label’s music to promote a brand and it appears that a match has been made in heaven. Rhianna had a lot of success this way working with Totes Isotoner to help them improve sales of umbrella’s. Umbrella was the title of her hit song, I wrote about her arrangement with Totes here.

Proctor and Gamble, and other companies using music to promote their brands, are jumping in deeper though:

“At a time when online file-sharing is rampant, record stores are closing and consumers are buying singles instead of albums, getting into the music business might seem like running into a burning building. But as record labels struggle to adjust to a harsh new digital reality, other companies are stepping up their involvement in music, going far beyond standard endorsement contracts and the use of songs in commercials. These companies — like Procter & Gamble, Red Bull and Nike — are stepping outside of their core businesses to promote, finance and even distribute music themselves.”

I believe all of this extra-curricular activity by these brands may pay off for them in the long term. The music fan has shown her willingness to buy music online although only singles, not albums. Album sales are no longer the preferred format. The labels created this nightmare for themselves when they scrapped the single as a sales format. They blamed their losses on file-sharing online but they ignored their own disastrous moves in the market place. They weren’t listening to their customers. And then they began to sue them. Even Apple can’t persuade music fans to buy albums.

There is a lesson here though and it is one that Starbucks learned the hard way. Brand and product companies should not get too deep into the music sales business. The P&G deal with Def Jam may work well as it is a joint venture where presumably each side does what they do best - Def Jam runs the label side, P&G markets its product with Def Jam music and pays for everything.

I discussed the following issue in a recent post: To the music fan music becomes cheapened by being used as a commodity to sell products. The artists behind the music have their celebrity enhanced and they then go on to use their brand to sell more products. Music fans understand that music is now a commodity and refuse to pay for it. The music industry and the artists both complain that no one pays for music and to account for the decline in sales accuse us of stealing it online. The commodity is over-priced; no one is buying it.

Unless you are a brand with a product to sell.

Starbucks continues to struggle and is now looking to “examine all aspects of our business that are not directly related to our core” according to this article. This means that the first decision was to let go of Ken Lombard, the unpopular head of Starbuck’s entertainment division. That wasn’t unexpected, I covered this earlier this year. The unexpected part of the re-org is that Starbucks’ Chief Technology Officer has been chosen to run “the division which selects and markets music, books and other items sold in Starbucks coffee shops.” Mmmm, watch this space.

Here’s an excerpt from the article:
“Starbucks shook up its entertainment division on Thursday in the latest bid by the company to invigorate its sagging sales. The chief of Starbucks, Howard Schultz, center, and Ken Lombard, the entertainment unit president who has left the company. The overhaul comes a day after Starbucks said it would post weaker-than-expected earnings for the second quarter amid slumping sales and a darkening outlook for consumer spending.

In a statement, the chairman and chief executive, Howard Schultz, who has previously taken steps to bolster the chain’s coffee offerings, said the company was “committed to examining all aspects of our business that are not directly related to our core.”

As part of the changes, Starbucks said Ken Lombard, president of the entertainment unit since 2004, had departed. Chris Bruzzo, the chief technology officer, will take the reins of the division, which selects and markets music, books and other items sold in Starbucks coffee shops. Starbucks also said it would turn over management control of Hear Music, its in-house record label, to its partner in that venture, the Concord Music Group.”

Related Post: Starbucks’ Hear Music Program Messes Up.