The 4Ps drive organics, as Whole Foods is learning the hard way

blogmay15

This week saw bad earning news for Whole Foods, which lost 19% (over $3B) in market value and for the first time admitted it needs to lower prices to compete as it moved from niche to mainstream. Both Target and Walmart have substantially increased their organic assortment, and price it a lot lower. As one consumer put it: “I used to buy 75-85% of all of my groceries at Whole Foods, and now buy only 10 percent there, they are pricing themselves out of the market. I’m glad to see my local supermarkets get into selling organic produce” (http://www.ibtimes.com/whole-foods-disappointing-q2-performance-reflects-shifting-grocery-industry-landscape-1582589)

Can we blame Whole Foods management? Decades of market research showed that organics were somehow a special case, in the sense that organic consumers did not care about price, even preferred a higher price gap with conventional products to signal purity and quality. Now it appears even organic-devoted consumers care about the 4Ps of product assortment (now offered at the local supermarket), price, place (the convenience of the local supermarket) and promotion (coupons and deals on organics). Who knew? Bezawada and Pauwels did. In their 2013 Journal of Marketing article (http://journals.ama.org/doi/abs/10.1509/jm.10.0229), they study scanner data in 56 categories to uncover long-term consumer response to temporary and permanent changes in organic price, product assortment and promotions at mass-market retailers. They find that permanent changes, such as the organic assortment and regular price improvements by Target and Walmart, bring retailers much more organic sales. In contrast with common wisdom, even “core” organic consumers are sensitive to these actions. Their category comparison yields specific advice as to where larger assortment, lower prices versus more and deeper promotions are most effective.

What have we learned? It may benefit managers to scan so-called ‘academic’ journals for relevant and important research on their industry. Also, most of common wisdom was based on surveys (what consumers say they will do) not on actual market data, i.e. what consumers actually do with their money at the point of purchase.

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