Whole Foods/LivingSocial Deal May Make Money, But Misses The Mark

The Whole Foods/LivingSocial deal, under which one million consumers purchased $20 grocery coupons for $10, is already a win for Whole Foods. The high-end supermarket chain has received a wealth of media mentions as a result of the deal, a phenomenon which isn't likely to be repeated for the next major marketers who sign up with LivingSocial.

So chalk the coverage up as a unique win for Whole Foods, and not necessarily a universal benefit of using LivingSocial. The bigger question is whether the actual deal itself will bring in valuable customers.

The grocery chain has already proven the value of incentivized shopping: Its "The Whole Deal" campaign, which mixes coupons, recipes, in-store value tours and other deals, generated average basket sizes of $66 during its fiscal year 2010. In contrast, its overall average basket in the same stores was $34.

"The Whole Deal" campaign, however, serves consumers who have stronger affinity for Whole Foods' "food-as-indulgence" spin. The vast majority of LivingSocial members who will take advantage of the deal likely fall into one of three categories. First are existing Whole Foods enthusiasts, who are essentially being given free money for purchases they would otherwise make. These folks could be better reached through The Whole Deal.

Then there are cherry pickers, who will buy $20 worth of discounted food for $10 once and run back to their preferred — and probably cheaper — market.

Finally are the true prospects — people who haven't been exposed to Whole Foods' admittedly diverse and intriguing variety of offerings.

Customers in last category are probably the minority, numbers-wise: Unlike specialty merchants that use group-buying offers to introduce their wares to new audiences, supermarket patronage is a locally driven phenomenon. Chances are consumers who live within a given store's retail footprint have already considered Whole Foods as a potential grocery source.

A discount may expand a location's footprint (an extra ten dollars in groceries may be worth going a few blocks out of one's way), but it's going to take follow-up discounts to maintain that relationship.

From a database-building point of view, the LivingSocial exercise isn't a winner for Whole Foods. While merchants get lists of names of people who have purchased deals, they don't get contact information. If frontline employees have been trained to recognize LivingSocial-generated customers, and are quick to promote The Whole Deal, this effort could pay off. But that assumes Whole Foods has had the foresight to integrate its LivingSocial program with frontline operations.

A better play for Whole Foods might have been offering a similar deal across a network of epicurean sites, which cater to people already predisposed to the idea of high-end food and ingredients as either a hobby or a lifestyle choice. While the chain might not have gotten the media play this deal generated, or the sheer quantity of customers, those consumers it did pull in would be more likely to be higher-ticket repeaters.

Sure, the deal would go viral pretty quickly. But at least the initial offer would be targeted to foodies more likely to be turned on by Whole Food's offerings — and more likely to convert into repeat, non-incentivized visitors.