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Industry Report: Whole Foods-Amazon Fallout

by Eric Peterson on November 20, 2019, 08:13 am MST
Location: North America / United Kingdom
 
Publicly traded (NASDAQ: AMZN)
 
Industry: Food & Beverage

Two and a half years later, how has the Amazon-Whole Foods matrimony played out for locally-focused food brands?

Once upon a time, Whole Foods provided the perfect launchpad for natural foods entrepreneurs. They could deal directly with their local store and sell it through it just like it was a mom-and-pop.

The fairy tale might just have ended in 2017, when Amazon announced plans to acquire Whole Foods. Many small food manufacturers expected the worst, and not all of them enjoyed a smooth transition to the new structure. But observers have also noted that Whole Foods was in a state of flux three years ago and the deal brought stability.

The consensus: Things might have changed, but it's too early to write an unhappy ending.

What the press is reporting

By buying Whole Foods, Amazon has benefited most of all perhaps from "endless free PR," not to mention a national brick-and-mortar footprint and a boost to its leading position in online grocery sales -- which clocked in around 30 percent market share in 2018, or more than all other grocery chains combined.

CNBC explored how the deal led to Whole Foods "going from regional to national" in a 2018 story that noted, "Many small brands point to Whole Foods as the birth ground for their new products. For Whole Foods though, devoting shelf space to small brands, especially those that aren't driving traffic, was not always good for the bottom line."

As Whole Foods centralizes purchasing, "many small brands need to go through WFM headquarters in Austin, Texas, to get placed in a store, not through their regional Whole Foods representative,"  wrote CNBC's Lauren Hirsch "That approach simplifies operations and makes it easier for a brand to scale without traveling region by region. The drawback is small brands with little plans to grow at such a scale might feel squeezed out."

(However, it's no picnic on the other side of the spectrum, as the article also noted, "Big Food is getting crushed.")

A June 2019 Forbes piece reported that Whole Foods support of small brands remained strong -- and that centralization preceded Amazon's involvement. "While Whole Foods has moved to centralized procurement, this has not meant cutting ties with small regional suppliers in favor of national suppliers and larger contracts. Whole Foods Market added over 7,500 new local items from 1,900 new and existing suppliers in 2018. Actually, efforts to centralize purchasing were underway prior to the acquisition. Regional buyers and purchasing teams are still part of the mix; they focus on local and regional suppliers. The global procurement teams handle larger, national brands."

 

However, some of the fine print probably had a bigger impact on small brands; the story pointed to merchandising fees and reimbursements for Amazon Prime discounts.

A 2018 Eater story, "Whole Foods' Relationship With Small Purveyors Is Not Going Well," painted a grimmer picture. The article tells the story of AtlantaFresh, a Georgia creamery that invested $2 million in its capacity to keep up with Whole Foods' contract, only to get pulled from the shelves and cease operations after the Amazon buyout.

Other reported results of the deal tended to hit small brands the hardest, as the fabled "autonomy" of each location dissipated. "Staff members referred to as 'foragers' were responsible for tracking down local products, like homemade jams or artisan hot sauces, and buying them for the stores," wrote Eater's Whitney Filloon. "But the grocer has been gradually shifting the way it does business with local makers, despite Whole Foods CEO John Mackey's post-acquisition promise to 'to support and promote local products and suppliers.'"

Whole Foods "started charging local producers to demo and sample their products in stores, and it has also shifted to a more centralized buying system like that used by conventional grocery stores," noted Filloon. "Instead of relying on local staffers to find the best local products, it now largely relies on executives at the Austin, Texas, home office to pick out store inventory. (Though the new buying system was actually implemented before the acquisition, some have speculated that the switch may have been made with the merger in mind.)"

The brands' perspective

CompanyWeek spoke to the leaders of several food brands across the West, some of whom requested anonymity. (Whole Foods did not respond to a request for an interview for this story.)

The takeaway: There is no single headline. Some feel Amazon has righted a rudderless ship, while others see the deal as another step in grocery's inevitable race to the bottom.

Armed with a proprietary process that  converts spent grain from breweries into a protein-rich ingredient, San Francisco-based ReGrained got into Whole Foods with its bars in April 2019 and is now in its Northern California, Southern Pacific, and Rocky Mountain regions. The company is applying for two more regions in 2020, with hopes for a national rollout by the end of the year, as it launches a new puff product in 2020 with a similar retail strategy. 

Daniel Kurzrock, ReGrained co-founder and chief grain officer, is quick to point out that a lot of recent changes at Whole Foods were in the works long before the deal was a twinkle in Jeff Bezos' eye. "A lot of the changes that happened at Whole Foods predate Amazon," says Kurzrock. "Whole Foods used to be the place to incubate and launch a natural products brand."

Individual locations once had a good deal of autonomy, but Amazon centralized marketing operations and some of the unique in-store features have disappeared. "Now they've got a very rigid review schedule and you can't go national until you're in a certain number of regions," he says.

Overall, he adds, "They are a little easier to work with than other retailers," and notes that some other outlets won't share any data. "They [Whole Foods] has this great portal where you can get daily insights."

"I definitely expected the worst," says Maura Gramzinski, founder of RedCamper, a Denver-based manufacturer of jams and paper products. "I expected it to be changing, but it hasn't been changing."

RedCamper's Deliciousness line of preserves has been available at Whole Foods for about five years and is now in about 45 locations in Colorado and the Rocky Mountain region. While some independent stores sell more Deliciousness on a per-store basis, Whole Foods is RedCamper's single largest account. "We don't have any other grocery chains," says Gramzinski. "We've been lucky. We got in pretty early in the whole lifespan of Deliciousness."

Gramzinski says the Amazon acquisition has been good from her standpoint. "We had some troubles before they were bought by Amazon," she notes. "It was definitely tumultuous and scary before they were bought by Amazon. Since Amazon came in, it's been a lot more stabilized."

"I'm super blessed and fortunate for the relationship I've had with them and the placement I have with them," she adds. "I know a lot of small brands are struggling to find their place with them and keep their place with them."

Kelly Strong, founder of Blue Moon Goodness, a maker of premium soups in Woodland Park, Colorado, also sees reason for optimism stemming from Amazon's stewardship of Whole Foods. "They've given us more tools to succeed," she says. "I'll say this: They are making an effort."

Strong's soups are now available in about 1,000 stores nationwide, including 18 Whole Foods locations in the Rocky Mountain region. "We've grown slowly and methodically with Whole Foods," she says, noting that an upcoming reorganization should benefit Blue Moon Goodness. "They're going to rearrange the soup aisle. They're going to do a whole set of soups in glass jars."

But it's not just the particulars of placement that inform her forecast for a bright future at Whole Foods. "They've reached more to us than before," she notes. "Two years ago, they had a summit for local, emerging brands. It was after the announcement. It was a whole day. I found it very useful."

She says staffers from other divisions at Amazon were "telling us how we could work with different Amazon brands that sell food."

With cashierless Amazon Go locations now open in New York, Chicago, San Francisco, and Seattle and other grocery concepts in the works, Amazon's grocery play does not begin and end with Whole Foods.

Strong says Whole Foods' online portal is helpful and have allowed her to rely less on in-person visits to verify inventory at a given store. "That's an initiative to help the vendors succeed," she says. "Access to information is really important."

Whole Foods still allows small brands like Blue Moon to be direct vendors. Strong often goes to the distribution center east of Denver in Aurora in the wee hours of the morning to put her products on pallets to Boise, El Paso, and points in between. "It's becoming harder for me to do that," she adds. "I'm in the process of transitioning to a new way of distribution to the stores."

She says she's also hopeful that a new distributor in Whole Foods' system will benefit small brands like Blue Moon Goodness. "Another third-party distributor is being set up," she says. "I'm very hopeful about it. It appears they're setting up a system that will be more suitable for emerging brands."

Distributors "just tear us up with fees and expenses," adds Strong. "It's death by 1,000 cuts."

While Blue Moon Goodness is benefiting from Amazon's buyout of Whole Foods, Strong says timing has worked in her favor since she first approached a store about five years ago. "We went right to our local Whole Foods store and got in. That is no longer an option," she says. 

Regional category managers now play the gatekeeper role, but "[t]hat regional category manager might only put you in one store," says Strong.

Part of it is persistence. "I've seen a lot of changes. I've seen a lot of small brands give up," says Strong. "I would have like to have grown quicker in the Whole Foods system -- 18 stores is not a lot. But if I had grown quickly, it might have killed me. [Slow growth] might be a blessing in disguise."

Amazon or not, Whole Foods still brings in the steadiest stream of pre-qualified customers for Blue Moon Goodness of any outlet, she adds. "When they walk through the door, they've already made the decision: They're going to look for a quality product and they're willing to spend a little more."

One food manufacturer who asked to remain anonymous says they placed product at their local Whole Foods about a decade ago and expanded throughout their region in the West. After Amazon entered the picture, "Our shelf space became less," he says. "National brands and store brands took center stage. . . . We were spoiled, but we worked hard to get that shelf space."

He notes that some of the best-selling products lost their spots entirely. "I don't know how strategic it was, based off sales," he says. "They just kind of winged it." The brand's sales at Whole Foods have dropped by 20 to 30 percent in the Amazon era.

The company has long done five promotions a year with 20 percent off sales, and Prime customers now get an additional 10 percent discount that's reimbursed by the manufacturer. "It's a necessary evil," says the manufacturer. "You either play the game or you go away."

He says the Amazon acquisition reminded him of dealings with Walmart -- "the big, giant corporation game." Whole Foods "eventually succumbed to centralized headquarters and cut costs," he adds. "It's the Walmart way."

As big retail chains adopted Whole Foods local ethos, Whole Foods moved to the big chains' business model. What about the pro-local messaging? "I think that's just a front."

Another entrepreneur who requested anonymity has a complaint about the free case of products manufacturers needs to give to new stores. "You can do the math. It's going to take three reorders to break even," says the food manufacturer CEO. "That's the elephant in the room. I have to give away a lot of product away. For Kellogg's, they don't have a problem -- they have the money. And that's not just a Whole Foods thing."

Nancy Rosales of Pepito's Paletas in San Francisco is similarly critical of what she sees as an increasingly difficult system for small brands.

Pepito's sold ice cream through Whole Foods before partnering with a co-packer focusing on Mexican-style popsicles for events. After a lot of hard work to get into the freezer aisles in 15 stores, Rosales says she wasn't able to expand capacity at a high enough rate to fill Whole Foods' benchmarks. 

"Because there weren't enough sales for my product, they took me out of the system," she says of the exit from Whole Foods in the wake of the acquisition.  "We needed bigger numbers. It wasn't for small companies anymore."

And the model wasn't paying off for Pepito's: A single unit cost about $2 to make, the distributor took $1 of each $3.99 sale to Whole Foods, leaving Pepito's with 99 cents profit.

She says it was much different than her initial experience with Whole Foods at the outset of the decade. In 2010, "They let me take baby steps," says Rosales. "I don't think they'd let me do that anymore." 

She adds, "That was Whole Foods' business model: 'Small brands can be next to Ben & Jerry's.'" In Rosales' mind, that's changed: "It's going to be about the pennies at the end of the day."

Eric Peterson is editor of CompanyWeek. Reach him at rambleusa@gmail.com.

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