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Analyst: Prime perk could eventually double customers at Whole Foods
It has been estimated that 20 percent of Amazon Prime members are also customers at Whole Foods. With yesterday’s announcement that Prime members will receive added discounts on sale items and other selected products at every Whole Foods in the U.S., the potential for the organic grocery chain to increase its customer count is significant. At least one analyst believes Whole Foods could as much as double the number of customers it has over the next five to 10 years as a result.
“If Amazon has 60 to 70 million Prime customers in the U.S., there are probably about 20 to 30 million that live near a Whole Foods that don’t regularly shop there,” Mark Mahaney, the lead internet analyst for RBC Capital Markets, told CNBC.
Beginning tomorrow, Prime members will receive a 10 percent discount on all sale items at Whole Foods. They will also receive added savings on select items. A press release to announce the nationwide launch said the grocer has cut the price of organic cherries and yellow peaches by $2 a pound, baby back pork ribs by $5 a pound and sockeye salmon by $6 a pound.
“Customer feedback has been overwhelmingly positive — in fact, Prime members have adopted this benefit at one of the fastest rates we’ve seen,” said Cem Sibay, vice president, Amazon Prime, in a statement. “Since starting this rollout in mid-May, Prime members have already saved millions of dollars on everything [items] from seasonal favorites to popular products.”
Prime members who are also Whole Foods customers also have access to free two-hour shipping (not including driver gratuity) via Prime Now. Members with the Amazon Prime Rewards Visa card also receive five percent cash back on purchases made at Whole Foods.
Discussion Questions
DISCUSSION QUESTIONS: Do you expect that Prime member savings at Whole Foods will lead to a substantial increase in the number of people who shop at the grocery chain over the next five years? What impediments, if any, do you see in the way of Whole Foods converting large numbers of Prime members into customers?
Poll
BrainTrust
Joan Treistman
President, The Treistman Group LLC
Byron Kerr
Head of eCommerce, Tuft & Needle
The Prime discounts at Whole Foods are good, but they are currently very limited. When taken in the context of the overall offer they do very little to move Whole Foods’ price position — which remains very expensive.
Our own data shows that both customers and non-customers still believe that Whole Foods’ proposition is bad value for the money. Until that perception shifts, Whole Foods will struggle to drive significantly more customers.
Amazon likely has the determination and the ability to drive up shopper numbers, both via investments in price and other things like brand changes and delivery. However, the current trajectory is not as impressive as this analysis sounds.
Prime member savings will bring some new customers into Whole Foods, but the company still is wrestling with its Whole Paycheck image, which runs counter to the Amazon brand image of low prices. Offering additional discounts on sale items is attractive, especially when combined with the 5 percent rebate for Prime card holders. More customers? Yes. Double in five years? Not very likely.
I think it is a pure WIN for Whole Foods. No impediments beyond a possible logistical hiccup or two.
It is a stellar example of a retailer seeing beyond its founding model and adapting to new and permanent changes in buying habits. Being willing cannibalize an existing modality to win in the future.
This ship has sailed and Whole Foods is onboard. Bravo.
Amazing what you can do with deep pockets! As a Prime member and shopper of Whole Foods, it is difficult to find a down side to this announcement.
This appears to be all good news for Whole Foods: new customers, bigger shopping cart, etc. But unless the Prime membership fees pay for all this gross margin erosion, this move is not good news for the company as a whole. “We lose a penny on every unit we sell, but we make it up in volume” is not going to cut it, unless these additional shoppers buy a substantial number of higher-margin items at Whole Foods. This is one case where the expression “cherry picking” fits perfectly.
Discounted products at Whole Foods could lead to a substantial hit to independent grocery retail industry. I’ve spoken to several grocers through the Independent Grocer Association this week that have growing concerns about how to stay relevant over the next 10 years as Internet ordering becomes more convenient. With in-store shopping, the experience is key. That’s what Costco perfected with its sampling program and what Whole Foods is going to find will be key to bringing Prime members into the stores.
If only 20 percent of Prime users are also Whole Foods customers, there is a lot more growth Amazon can get. Customers love Prime perks and this will certainly lead to a large amount of additional Whole Foods customers. Prime is Amazon’s retention tool. This gives Amazon a lot of marketing power to drive customer use at Whole Foods.
The only impediment to this strategy of using Amazon’s existing retained customers to build Whole Foods’ base is that there is not a Whole Foods everywhere. Some locations may be too inconvenient for many users.
The other benefit to this strategy is a location determiner for Amazon to build more stores. Build them around where their Prime members are underserved. Amazon has a lot of data to use to build this business and it would not surprise me to see very high double-digit year-over-year sales growth in the next five years.
Sure, Whole Foods Market will likely get a bigger share of Prime members’ wallets, and also other Prime members who don’t shop there might start.
But removing the “local” component is going to cause customer defections regardless of price (if you recall, the historical Whole Foods customer is not terribly price sensitive to start with), and I have already heard anecdotal stories of people troubled by the sheer volume of packaging associated with two-hour delivery (ice packs, etc.) Because Instacart fills orders at stores nearer to the point of demand, there really is no need for all that packaging.
Whole Foods may grow, but I’m not convinced it will be the same company, nor am I convinced it will have the same type of customer. I worry it’s going to become “just another grocer.”
Whole Foods may or may not still be seen as Whole Paycheck by most customers, but it is still higher priced than most of its competition. Being an Amazon Prime member has lowered the price point for its members but in doing so has moved Whole Foods closer to a club model than a traditional grocery store.
This announcement gives Prime members another reason to try Whole Foods for the first time or gives them another reason to go back even more frequently; for some it may even translate to an increase in their shopping basket.
What has to happen in parallel is continued work to reduce lingering “Whole Paycheck” stigma. This is well underway, but in order to maximize the benefits of this and similar future announcements it just can’t be ignored .
Quick story — I went to find a nice piece of fish for dinner last weekend. Started at King’s, a regional upscale player here in New Jersey. I could find what I wanted but noticed that Bing cherries were on sale for $5.99. I went to Whole Foods next and still couldn’t find the fish I wanted, but noticed that Bing cherries were on sale for $4.99 Ended up at ShopRite, where I did find the fish I wanted and noticed that Bing cherries were on sale for $3.99. That’s the challenge Whole Foods is facing and a 5 percent discount with Prime membership won’t cover it for a lot of shoppers.
Prime members who are potential Whole Foods customers will step into Whole Foods for a look-see. Whole Foods’ equity takes the risk factor out of one aspect of the shopping experience. If the savings, variety and quality offset price concerns those customers will come back. Whatever created the barrier to shopping at Whole Foods is what has to be overcome to win and sustain Prime members.
I think it’s too easy to brush off the possibilities by saying that the “Whole Paycheck” image will stay in place. Remember that perception is reality. If I think I’m getting a good deal, I’m getting a good deal.
With substantial savings I believe there will be more people shopping in Whole Foods soon, and as long as price value is an attribute of the grocery chain. But if Whole Foods’ savings and prices are seen as “too much to bear” the shoppers will leave for stores offering a better perceived value.
While I do think this new program will extend Whole Foods’ reach further into existing customers’ wallets, I definitely don’t see this doubling their total customer base. A few bucks saved on a few items will not significantly shift the market and attract people who heretofore have shied away from the perceived higher prices typical of most of the Whole Foods lineup.
No doubt this move will have significant synergistic effects on both Amazon and Whole Foods. The potential impact on Whole Foods has been well documented. However, the more Amazon associates itself with the “foodie” attributes of Whole Foods, the greater the positive impact and legitimacy that will rebound to Amazon’s online grocery business.
Agreed — plus, as I said above, the elimination of “local” will cause customer erosion from non price-sensitive customers.
Loyal Whole Foods and Prime members have been eagerly awaiting something new in terms of an enhanced integrated loyalty program, where real value and promotions will come forward. Amazon strategically chose Whole Foods as an entryway into the grocery industry. The vast majority of loyal Whole Foods customers are a bit more affluent and live in cosmopolitan areas, and are already taking advantage of the Amazon Prime membership benefits.
The publicity machine regarding potential Prime discounts has been churning in the year since the Whole Foods acquisition. Yet up to this point, each and every visit to the store has led to a bit of disappointment.
The time is ripe for Amazon to drive demand via some compelling cross promotions and discounts with Whole Foods. While it’s doubtful that this will lead to doubling the customer base at the organic grocery chain, it could lead to incremental visits/purchases by existing customers and an expansion of their customer base.
Neil Saunders makes some great points; Whole Foods carries a perception of high prices. Certainly every Prime member is a potential customer, but will the discounts be enough to entice them to change their grocery shopping habits?
Consumers in our focus groups generally have a favorite local grocery store. They bristle when the grocer does a necessary floor move, so whatever discounts Whole Foods offers better be good.
We shop Whole Foods about twice a week. Yeah, they offer some discounts — mostly underwhelming, and essentially no more or better than they always did or than their competitors offer. Certainly Amazon is going to put out a bunch of hype (like they did with the exaggerated price cuts when they made the acquisition) about how the universe is so thrilled with them, but I truly doubt it.
In the corporate spin, they failed to mention that case discounts are no longer available on their own brands and that rainchecks are no longer available on sale/promotional items — something most fanboy “experts” are unaware of.
Employees have been complaining when I chat with them, talking about the failure of OTS (order-to-shelf) and how their customers are disgruntled with the resultant missing inventory, something we experience continuously.
Put these two factors together and an expert logistics company (Amazon) is hiding their inventory failures, especially on sale items, with a poorly camouflaged takeover and thrust to expand Prime at the expense of common sense grocery management.
I’ll stop here (for now … ).
There are two parts to it: low price/selection and integration into the Amazon shopping experience. Whole Foods still has a perception of higher price and it will take time to adjust that. The integration of Amazon Prime for me is about driving foot traffic to the store and giving Amazon a physical presence. Whole Foods doesn’t need to be the low-price leader, just low enough for the Prime members to go there to shop and possibly interact with current and future Amazon services.
Yes, for those who view grocery shopping as a means to an end, now seductively painless with all the highly-touted “convenience and enticements” this will likely lead to increased sales for Whole Foods. Although over time the details will matter. $6 a pound off “farmed” salmon and organic cherries (overpriced, to begin with) now being $2 off for Prime members are loss leaders. They’re great for PR, but not the long haul. Time will tell. It will be interesting to watch the Whole Foods journey.
I am sure with the number of customers on Amazon Prime they are a Prime target for Whole Foods to increase their customer base. However, is offering further discount on sale items the right strategy? Surely if the offers they have on sale items are appealing enough to get people to buy more of those, items they do not need to give further discounts on these items. They would be more productive offering special discounts on none sale items that are not available to other customers to drive traffic. This would be a bigger benefit to customers, safeguard Whole Foods’s margins on sale items and provide an additional reason to visit a Whole Foods store.
The thing that the Prime discounts does is to make Whole Foods appear more affordable. Given that it falls into the high-end, high-price bit of the grocery market this will be an important aspect of attracting the more general shopper (who isn’t already going there for its health, diet, quality credentials). The fact that Amazon Prime members can get the discount without signing up to yet another programme is helpful too. I’m sure that it might entice some new customers through the door, but I’m not sure that it will be enough to overcome the fact that Whole Foods is a more expensive, premium option. I’m not sure it will ever become mass-market in the way that Amazon is unless the company has a bunch of other tricks up its sleeves (which it probably does!).
Since only 20% of Amazon Prime members are Whole Foods shoppers, the extra discount may inspire these consumers to try Whole Foods. The 10% discount on all purchases seems significant enough to help offset the perception of high prices at Whole Foods and if consumers can double dip on discounts by getting another 5% off if they pay with an Amazon Rewards Visa card, that is even more enticing.
It will be interesting to see if the added discounts are enough to get consumers to become frequent shoppers at Whole Foods or if they feel the discount isn’t enough to make the prices on par with their current primary grocery store. Maybe the Whole Foods customer is less price sensitive than the typical Prime member, we shall see.
Changing customer’s perception of Whole Food’s “whole paycheck” reputation is a difficult challenge. It doesn’t seem realistic that the Prime perk will double customers at Whole foods, but it will definitely attract many new customers. But never underestimate Amazon!
I agree with many here that this won’t significantly move the needle. The “Whole Paycheck” stigma remains and the discount remains tied to sale items & specially designated items. If Whole Foods went the Restoration Hardware route where all members of the program get a blanketed 10% off all products, this would be much more enticing.
There’s nothing remarkable, of course about the idea that (presumably) lower prices will attract more shoppers. But let’s review the other reasons why people shop where they do — and hence might not switch: convenience/location, brands, atmosphere (far more than most WF had an almost “cult” following). I don’t know that any of these things will change more than incrementally over the next few years. And in the case of the first two, they really can’t change much without fundamentally changing what WF is (or was). So my prediction is a small increase … accompanied by a huge increase in publicity.
It’s cool that Whole Foods is adding a promotional component by leveraging its Amazon Prime relationship portfolio. Sales generate some excitement and extra reasons for Prime members to visit the store.
Discounts on popular fresh proteins and seasonal produce items could be influential, but I see no news about price promotions on packaged or frozen foods. Does any one here know whether Whole Foods accepts trade promotion funds from suppliers? I haven’t seen any evidence of TPR pricing on my store visits, other than the Prime discount shelf talkers recently added.
For now, I conclude that Amazon-era Whole Foods is changing its pricing tactics gradually, but using a few high-profile sales to try to change its price image. Prime customers may visit more often for great prices on salmon or ribs, but converting them into “Prime-ary” shoppers may require more than a few promotions. More visits may not translate automatically into more share of wallet.
Limited Prime discounts do not account for the actual pricing of key grocery items. Until Whole Foods can compete with Aldi, Lidl, Walmart, etc. the doubling of customers is but wishful thinking. The grocery business is a price sensitive business and just offering a greater savings will not be enough. The entire basket of goods needs to be priced better, offer a superior shopping experience, and give consumers a better reason to switch. Anything less than this is a hollow perk that will not fulfill its potential.
Grocery shopping is really driven by price and location. While added Prime discounts will surely encourage more Prime members to try Whole Foods this may not be enough of a discount to turn a new customer visit into a recurring one. It’s also easy to forget the issue of location — most grocery shoppers pick their favorite store based on its location unless there is a strong sense of loyalty. That loyalty needs to be built on something more than discounts and it’s not clear that Amazon has created this sense of loyalty yet for new Whole Foods shoppers. Will they see more customers now with these added benefits? Yes, but double? I doubt that without some added incentive.
I do see the cross promotion between Amazon Prime and Whole foods to increase traffice to the store. Prime users are bargain hunters and a substantial discount at the grocer will encourage exploration, especially from Millennials.
I don’t see impediments, only challenges in appealing to two distinct consumer segments wtih the same brand and how to evolve without loosing the core Whole Foods consumer. Ultimately, the two consumer segments do share some characteristics, some threads that can be utilized benefit both Amazon and Whole Foods.
This is a natural extension for Amazon. While the acquisition gave Amazon a footprint of grocery distribution locations, the idea of giving benefits to members will increase traffic within the stores. Amazon continues to integrate convenience and value into its customers’ lives.
There is no doubt that integrating Amazon benefits and promotions will significantly grow the Whole Foods shopper base. It is unclear, however, which lever or levers will result in the greatest uplift of shoppers. Lowering prices immediately after Amazon acquired Whole Foods, and perks such as Prime discounts are eroding Whole Foods’s old reputation as “Whole Paycheck.” New offerings such as 2-hour home delivery and the potential of deploying Amazon Go technology will keep shoppers coming back and over time. It will be very interesting to watch.