Whole Foods’ foot traffic has increased roughly 3% year over year in each of the quarters since Amazon bought the chain, ... That came after two straight years of stagnating sales at the chain before the deal.
Presumably caused by a decrease in price:
Amazon.com 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.
Perhaps the differences in Amazon's pricing algorithms utilized for online operations and physical store locations that are utilized by Whole Foods lead to the differences in projected foot traffic growth at different price points.
ReplyDeleteGreat touch Johnathan!
DeleteThe article says that Amazon typically focuses on products that are most popular to cut prices on, in order to earn the reputation for lowest prices since these will be the items people seek out most regularly. However, if I remember correctly when back when this happened every consumer I knew reported that the cuts were on undesired products that were not what people would care about or be buying much of.
ReplyDeleteI think this article brings up a good point. Thinking from personal experience, Whole Foods was not my typical go-to grocery store due to high prices. Now that it's bundled with Prime, prices are closer to that of Publix, and there is an easy to use delivery option.. the price cuts make more sense. I'd be curious to see the impact of online sales plus foot-traffic increases before making a determination on elasticity.
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ReplyDeleteI thought this blog post was very interesting. I was drawn by the investors concern about price wars between traditional grocers. I think that the investors failed to also see the other underlying condition: people shop at Whole foods for the same reason many people buy brand name clothing. Despite whole foods cutting prices, I think their brand name will still remain and hold value over other traditional grocers.
ReplyDeleteVery good content, thank you for being a great professor.
ReplyDelete