Friday, June 15, 2018

What is the elasticity of demand for Whole Foods?

After Amazon bought Whole Foods, there was increase in foot traffic (a proxy for sales):
Whole Foods’ foot traffic has increased roughly 3% year over year in each of the quarters since Amazon bought the chain, according to an analysis by Thasos Group, which uses mobile-phone location data to determine trends. That came after two straight years of stagnating sales at the chain before the deal. Higher foot traffic improves a retailer’s likelihood of sales, and the figure can be a used as a proxy for a chain’s health. Of 11 supermarkets analyzed by Thasos, Trader Joe’s and Sprouts customers were most eager to try out Whole Foods after the acquisition to potentially check out subsequent price cuts, with 8% of their regular shoppers visiting the rival chain.

Presumably caused by a decrease in price: Inc. AMZN -0.61% on Monday put itself in the unusual position of being a first-mover on price cuts when it slashed the sticker price on more than 100 items at Whole Foods Market Inc.,many by more than 30%. 

To calculate the implied price elasticity of demand for Whole Foods, divide the quantity increase by the price decrease:

 elasticity = (%change in Q)/(%change in P)=(+3%)/(-30%) = -0.1

Demand seems very inelastic.  If Amazon were trying to maximize profit on its Whole Food sales, it should have raised price, because revenue would have gone up, and quantity, and costs would have gone down.  In fact, the stock price reactions seem to underscore the unprofitability of the move:

Investor concern that Amazon’s price cuts at Whole Foods will trigger a price war led to a stock selloff among traditional grocers Monday, continuing last week’s slide. Sprouts Farmers Market Inc.’s stock tumbled 10%, while Natural Grocers by Vitamin Cottage Inc. was down by more than 2%. Kroger, the largest U.S. grocery chain by stores and revenue, slipped 1.4% before largely recovering, while Wal-Mart Stores Inc.’s shares slid slightly.

What seems more plausible is that Amazon is applying its traditional pricing algorithms to the acquired Whole Foods stores.
Amazon typically relies on algorithms that scrape competitors’ prices before automatically matching or narrowly undercutting them on its website. It focuses on items that are most popular on the site and that drive traffic, according to former executives in Amazon’s retail divisions. That gives the retail giant a reputation for having the lowest prices, part of its strategy of driving more shopper traffic.