Three Questions: Prof. Soheil Ghili on Why Amazon Shoppers Aren’t Embracing Whole Foods
Since Amazon bought Whole Foods in 2017 for nearly $14 billion, the company has sought to convert its Prime members into regular shoppers at the high-end grocery store. So far, though, most Prime members aren’t biting, and in recent weeks Amazon has begun cutting prices at Whole Foods and offering special discounts to Prime members. We asked Yale SOM’s Soheil Ghili, an expert in quantitative marketing and empirical industrial organization, to explain the company’s strategy.
What do you see as the challenges in convincing Prime members to shop more at Whole Foods? Is it more than prices?
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 customers and 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.
What factors would you look at in deciding whether to cut prices at Whole Foods? Are there likely to be unintended consequences?
What I would ask in making that decision would be who the customers are that Whole Foods is trying to acquire and where they shop currently. 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.
One big potential consequence arises from the tradeoff between margin and volume. For a price cut to be considered successful, it will not be enough to bring a few more customers to Whole Foods stores. The increase in sales volume due to price cuts needs to be large enough to pay for the fact that those who, in spite of higher prices, were already Whole Foods customers, are now buying the same products for less. The money left on the table there is an important consequence to watch out for. Competitors’ responses to price cuts, as well as the likely inevitable compromise on quality, are other risks.
Is this move part of a larger trend putting pressure on traditional grocery retailers?
I agree that there seems to be some pressure on grocery stores’ prices in the U.S. due to competition. But that, at least at this stage, is more on the low end than the high end. I see the recent expansion plans by Aldi in the U.S. as part of this trend. I see Amazon’s considering establishing lower-end grocery stores in the same light. But at least in the short run, price cuts on some Whole Foods items seem less relevant to that direction.