Amazon, Whole Foods Market, Thasos Group, Walmart, Trader Joe, Wall Street, retail sector, food costs, inflation, impact of merger

By Wolf Richter

Here are the numbers since the August 28 price cuts.

When Amazon’s deal to acquire Whole Foods Market closed on August 28, the first thing that happened was a panoply of strategic and massive price cuts on some items at Whole Foods. The second thing that happened was that the media jumped on it, creating enormous hoopla, so that every consumer in the US would know about it. No advertising needed. It was ingenious marketing. The media fell for it. And consumers flocked to Whole Foods to see for themselves.

Whole Foods used to be known as “whole paycheck” based on the prices it charged for even mundane items. So price cuts of this type were a shift in strategy – and a sign of how Amazon would be shaking things up.

Now we have some numbers, gathered by data intelligence firm Thasos Group via real-time location data from smartphones (yup, that spy device in your pocket that never stops giving). It used its technology to “quantify the competitive impact of the price reduction.”

Here are the key nuggets from its report (PDF) about how it turned out for Whole Foods:

  • Average daily foot traffic of new and regular customers (those who shop at a given Whole Foods at least twice per month) jumped 17% year-over-year during the week starting on August 28, the day of the price reduction.
  • This foot traffic of new and regular customers peaked on the first day with a 31% year-over-year increase. That was August 28, when the phenomenal media blitz exploded across the US.
  • Average daily foot traffic of just new customers jumped 33% during the first week of the price cuts, compared to the prior week before the price cuts.
  • This foot traffic of new customers peaked on Sep 2, two days after the peak of total foot traffic, with regular customers having been the first big surge.
  • Foot traffic of all customers has tapered off since the media hype ended. As of the week ending September 16, foot traffic decelerated to 4% year-over-year, but remained elevated relative to the three weeks preceding August 28.
  • But foot traffic of new customers remained at elevated levels through September 16. On that day – a Saturday – the index of foot traffic spiked to one of its highest levels since the price cuts.

So where did these new customers come from?

During the week of price cuts, Walmart’s regular customers accounted for nearly a quarter of Whole Foods’ new customers:

Walmart: 24%
Kroger: 16%
Costco: 15%
Target: 11%
Sam’s Club: 5%
Trader Joe’s: 3%
Safeway: 3%

Who suffered the most customer “defections”:

The size of each retailer’s customer base varies enormously, with Walmart being by far the largest. So in terms of “defections” in relationship to each retailer’s customer base, the picture changes.

Trader Joe’s saw the highest rate of customer defections. The number of its regular customers shopping at Whole Foods during the week after the price cuts (August 28 – September 3) jumped by nearly 10% (the “average daily Defection Rate”), compared to the week before the price cuts.

The “average daily defection rates” during the first week:

Trader Joe’s: nearly 10%
Sprouts: 8%
Target: 3%
Costco: 2%
Safeway: 2%
Aldi: 2%
Kroger: 0.7%
Walmart: 0.6%

Trader Joe’s defections were still elevated by the third week after the price cuts (September 11 – September 16), with an average daily Defection Rate at 6%. Defection rates by other competitors remained elevated as well, with the average daily Defection Rate at Walmart declining from 0.6% during the first week to 0.4% during the third week.

The low percentage of Walmart’s average daily defection rate needs to be multiplied by millions of daily customers shopping at Walmart. This is not small change for Whole Foods, as 24% of Whole Foods new customers had defected from Walmart, though for Walmart, given it size, they barely made a ripple.

Distance matters.

Whole Foods stores aren’t everywhere, and distance to the nearest store matters. Trader Joe’s is once again in the pickle:

As expected, nearly all stores had higher rates of defection the closer they were located to a Whole Foods.

However, Defection Rates for Trader Joe’s stores remained strong even when they were located up to 20 miles away from the nearest Whole Foods.

The defection rates were highest within the 0-3 mile range. By the 10-20 mile range, defection rates for most competitors dropped to nearly nothing, except for Trader Joe’s, whose defection rate was still at 5%.

Who’s defecting the most?

The analysis found that Whole Foods’ new customers after the price cuts “overwhelmingly belonged to the same upper income demographic” as Whole Food’s traditional customer base.

Defecting customers in the week of the price cuts came from the wealthiest segment of each competing store’s customer base.

The price reduction did not attract a lower income demographic or incentivize longer driving times to reach Whole Foods’ stores.

For Amazon-Whole-Foods, this was an experiment to find out what it would take to get customers to defect from competitors. All it took was enormous and free media hoopla and some strategic price cuts. All competitors suffered defections. Trader Joe’s, proportionally, lost the most. In absolute terms, Walmart lost the most.

Amazon is in a unique position where Wall Street does not demand big earnings per share. Instead, it demands that Amazon crushes its competition, even if it loses money doing so. Other retailers don’t have that privilege.

So Amazon does not have to make money with Whole Foods. It just needs to crush the competition. Thus freed from any earnings discipline, Amazon will roll out other initiatives to power its way into the grocery sector, with the ultimate goal of shifting much of it online, though this has proven to be devilishly difficult in the US, even for Amazon (hence its purchase of a brick-and-mortar grocery chain). But the biggest retailers that sell groceries have taken notice. And the price war is likely to continue – which would, over the short term, be a good thing for consumers, though not for the industry which is already embroiled in the brick and mortar meltdown.

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