The $19 Smoothie That Is Actually a Loss Leader

There is a grocery store in Los Angeles where a strawberry-and-hibiscus smoothie costs nineteen dollars and is, by reasonable accounting, a loss leader. The store is Erewhon. The smoothie is one of approximately eighty smoothies on the menu, the smoothie is named after a celebrity who is paid a percentage of sales for the use of her name, and the actual ingredient cost of the smoothie is somewhere in the four-to-six-dollar range. The remaining markup is the experience.

Erewhon operates roughly ten stores, all in Southern California. Average revenue per square foot is the highest in American grocery — multiples of what Whole Foods generates, which is itself multiples of what Kroger generates. Annual revenue is in the low hundreds of millions, vanishingly small relative to a public grocer; profitability is unpublished but reportedly substantial. The customer base is concentrated among entertainment, fashion, and venture-capital professionals in the seven-figure household-income band, plus a longer tail of younger customers who visit Erewhon as an experiential destination — to be photographed buying the smoothie, drinking the smoothie, posting the smoothie. The smoothie has, in this sense, become its own kind of media.

The Loss Leader Logic. A nineteen-dollar smoothie generates, after ingredient and labor costs, perhaps eight dollars of gross margin. The same customer, drawn in by the smoothie, will then buy a basket of supplements, organic vegetables, prepared foods, and household goods that yields gross margins of forty to sixty percent on items priced two to four times what an equivalent product would cost at a conventional grocer. Mushroom extracts marked up substantially. Twelve-ounce jars of unrefined sea salt at forty dollars. A single avocado at four dollars. The average Erewhon basket is reportedly between sixty and one hundred and twenty dollars per transaction — three to five times the national grocery average. The smoothie is bait. The basket is the catch.

The Sociology. What Erewhon has built, more carefully than any other American grocer, is a piece of identity infrastructure. The store is not really selling food. It is selling membership in a small, durable cultural club whose entry requirements include the willingness to spend twice the market rate on groceries and the willingness to be seen doing it. The branded canvas tote — printed with the store's logo and given away with purchases over a certain threshold — has become the most photographed grocery accessory in American retail, appearing in tabloid photographs of celebrities walking from their cars to their homes, in social-media posts of teenagers in suburbs nowhere near Los Angeles, in irony-laden merchandise reselling on secondary markets. The bag, like the smoothie, performs a sociological function. It signals.

The Margin Of Aspiration. The premium that Erewhon's customers pay, relative to comparable products at lower-positioned grocers, is the price of belonging to a tribe whose central article of faith is that what you put in your body is the most important investment you make. The faith is sincere; the customers are not, by and large, being cynical when they spend forty dollars on a powdered adaptogen blend that has, in clinical literature, approximately no demonstrated effect. The economic phenomenon is not deception. It is the willing transfer of substantial sums in exchange for an identity that the customer wants to inhabit — wellness, attention, scarcity, status, a particular relationship to ingredients — and that the store has packaged with unusual completeness.

This is also why the model has been difficult to copy. Whole Foods tried, partially, and was bought by Amazon. Sprouts tried, partially, and stayed in the conventional grocery margin. The thing Erewhon has — the dense club feeling, the celebrity-collaboration smoothie, the photographable interior, the tote-as-status-good — is built on a combination of geographic concentration, customer self-selection, and brand mystique that cannot easily be extruded to the suburban Midwest. The mistake competitors make is to think Erewhon sells expensive groceries. Erewhon sells expensive groceries as a side effect. What it actually sells is the chance to be seen carrying expensive groceries. The smoothie is the most efficient advertisement for that proposition. The smoothie is also, often, very good.