Coffee is the Sad Face of Whole Foods’ New Loss Leader Strategy

Image by Whole Foods Market promoting the Allegro Coffee brand. Not associated with the “Love Fest” marketing campaign.

Last week, the publicly traded Whole Foods Market announced that as part of its new “Love Fest” customer appreciation campaign, all locations will be giving away unlimited 25-cent cups of coffee through Sept. 30.

As with any corporate customer appreciation campaign, Whole Foods’ plan is naturally to boost total sales and increase profits, and coffee in this case is part of a “loss leader” strategy — plainly defined as the selling of one product below market cost in order to lure customers in for increased sales of other items.

With its relatively low market cost, coffee is often the sad face of loss leader campaigns, from fast food restaurants to gas stations and even to coffee chains themselves — anywhere money can be made through purchases of other items at full market cost. Companies can afford to sell coffee at or below their own production cost when they’re also selling high volumes of gasoline, beef jerkey, packs of smokes or pre-made breakfast sandwiches.

Coffee-as-loss-leader campaigns have been proven winners for companies like McDonalds, Dunkin’ or 7-Eleven for decades, to the point that we don’t bat an eye at them. But with Whole Foods — a company that has built a grocery empire convincing customers to pay premiums for virtually all its inventory based on concepts such as quality differentiation, ethical sourcing, locality, and social and environmental sustainability — it’s hard not to feel like coffee is being thrown under the bus here.

Say what you will about Whole Foods being a publicly-traded, bottom-line-focused corporate behemoth, the company has also managed to evolve into one of the specialty coffee segment’s great champions through its coffee buying efforts. To be clear, we’re not talking about the green coffee sourcing efforts of Whole Foods’ house brand, Allegro Coffee; we’re talking about its wholesale buying of packaged, roasted coffee.

For many micro roasteries, especially those that are relatively new to what might be considered emerging specialty coffee markets, a place on the shelves of Whole Foods is a really big deal in terms of brand exposure to a giant new pool of buyers interested in the specialty food segment at large. Not only that, for many smaller roasters, a Whole Foods deal can inspire the feeling that a business is “making it,” even though margins from grocery sales may not exactly stuff the coffers.

Whole Foods has also been pushing its own in-store coffee program through the recent collaboration with Allegro Coffee Roasters, a separate entity from Whole Foods’ Allegro Coffee, that boasts more quality-focused sourcing efforts for in-house roasteries and upscale cafes in Berkeley, Calif., and Brooklyn, N.Y. Allegro Coffee is soon to open a standalone location in Denver.

In short, Whole Foods has been an influential ambassador of specialty coffee — and, importantly, to the concept that the most conscientious of consumers ought to be willing to pay a little more for products that reflect their values. That’s why coffee as Whole Foods’ “loss leader,” just kind of, like, hurts. You know?

(editor’s note: A previous version of this story incorrectly stated that the forthcoming Allegro Coffee location was planned for inside a Whole Foods store.)