Wednesday, May 01, 2019

Why Has Amazon Struggled to Increase Whole Foods' Revenues?

Source: Wikimedia Commons
According to the most recent Amazon earnings reports, the company's Whole Foods Market subsidiary continues to show sluggish sales performance.   Revenues during the most recdent quarter only grew 1%.   Sales were relatively flat in prior quarters.   Why is Amazon struggling to increase Whole Foods' revenues despite repeated attempts to showcase lower prices on key products?  Why hasn't introducing discounts for Prime members been more successful in driving revenue growth?

Yale School of Management Professor Soheil Ghili recently commented on the company's struggles. He told Yale Insights

"There might be some non-price factors, but the main challenge is indeed the prices and the “Whole Paycheck” brand image of Whole Foods. It is true that Amazon Prime membership is commonplace among high-income households that are likely to be—or have the potential to become)—Whole Foods customers. However, data on the incomes of Prime customersand U.S. income distribution suggest that the majority of Prime members have household incomes below $100,000 a year. Converting those Prime members to regular Whole Foods customers would require much sharper price cuts than Whole Foods/Amazon is now offering."

Ghili goes to question who the customers are that Amazon is targeting.   The choice of target customer matters a great deal with regard to the appropriate competitive positioning and marketing strategies for Whole Foods.  He explains, 

"Whether you are competing against Trader Joe’s or against Walmart has significant implications on how you want to respond. If you want to poach TJ customers, lowering prices might help with some. (Certainly not all; I for one, don’t see myself leaving TJ for Whole Foods!) If trying to poach from Walmart, you’d better establish cheaper stores and brand them anything other than “Whole Foods.” This, by the way, is something Amazon is already thinking of doing, in parallel to slashing Whole Foods prices."

I find this discussion quite interesting, because I've always been puzzled about the Whole Foods strategy.  The company achieved remarkable success by positioning itself as a highly differentiated, premium price grocer with an exceptional customer experience.  Yes, it is true that the company's sales growth had stalled prior to the Amazon acquisition, as traditional grocers expanded their organic offerings, often at lower prices.  However, it's not clear that the appropriate response by Whole Foods is to try to walk away from the "Whole Paycheck" image.  I fear that Whole Foods runs the risk of being "stuck in the middle" strategically.  They have alienated some of their core customers by weakening the customer service experience and changing the mix of products in their stores.  They have potentially alienated some of their best employees as well.  Meanwhile, the price cuts do not appear substantial enough to bring in waves of customers who would otherwise shop at lower-priced rivals.  Whole Food has to decide who they really want to be when they grow up.  It doesn't seem that they have made a clear choice at this point.  Do they want to be Apple or Southwest?  Which is it?   My gut says that they have a much better chance of thriving as Apple than trying to transform into Southwest. 

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