What Do the Major Changes at Whole Foods Mean for Food Entrepreneurs?
The Amazon-owned grocery chain recently created a stir after it decided to streamline its decision-making process.
There's a commonality between some of the most popular food brands founded over the past decade, including Beyond Meat, Noosa Yoghurt and Nona Lim: Whole Foods. The grocery chain became their first national retail partner and helped them earn a spot in the hearts and stomachs of customers.
But now many food entrepreneurs fear that recent decisions at Whole Foods, which was acquired by Amazon for $13.7 billion in June, will threaten its place as one of the largest incubators of groundbreaking food brands. Namely, that decisions on what ends up on shelves will no longer be made by the company's regional buyers but by one central body based out of the Whole Foods headquarters in Austin, Texas.
"A lot of the novelty, value and competitiveness of Whole Foods was being a launchpad for small, local and undiscovered brands," says Erica Liu-Williams, founder of gr8nola, which currently only sells through ecommerce. Liu-Williams says she thought of Whole Foods as her ideal first retail partner. "These decisions may turn [Whole Foods] into a conventional store."
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Those decisions include the aforementioned centralization of decision-making, a fee that amounts to 3 to 5 percent of sales to cover the costs of restocking shelves and running promotions and a requirement for food companies to use a third-party service for in-store demos, a critical means of promoting a new brand.
While it's easy to blame efficiency-obsessed Amazon for these moves, all of these changes were being developed two years before Amazon's acquisition of the company, a Whole Foods spokesperson confirmed to Entrepreneur.
"All these moves are things Whole Foods needs to do," says Phil Lempert, a grocery analyst who runs SupermarketGuru. "Whole Foods was broken. Same store sales are slipping. We're seeing growing pains here."
Neil Stern, senior partner at McMillanDoolittle, a retail consultancy that doesn't work with Whole Foods, agrees that changes were needed.
"Whole Foods has been struggling with profitability over the past several years," he says. "There are a few reasons why: one is an over-proliferation of SKUs. That can be good for a customer but difficult to manage."
Meanwhile, Kroger, Safeway and Target are increasing their commitment to organic and healthy foods, which could pose a major threat to Whole Foods.
The Whole Foods spokesperson said that under the old system, food companies would have to maintain relationships with every regional buyer to keep their products on the shelves in that territory. So for example, a brand that's sold across all of Whole Foods' stores would have had to maintain contact with all 12 buyer groups under the previous system.
But now, bigger companies that sell in four or more regions are now referred to as global brands, and these businesses will only deal with the buyers in Austin. Smaller companies, which are only sold in three regions or less, will maintain their relationships with each of those regional buyers, who will still have the authority to make decisions on bringing in new products.
"This new hybrid structure allows our regional buying team to focus exclusively on smaller, local suppliers," the spokesperson said. "We remain committed to supporting local brands, and working with suppliers of all sizes to create win-win partnerships."
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Food entrepreneurs who spoke with Entrepreneur.com were mostly supportive of these changes at the grocery chain, but did express some concern about what it means for the next wave of emerging food brands.
"After the bumps are ironed it presents an opportunity for brands who have a story to tell," says Shazi Visram, founder of Happy Family.
But one entrepreneur, who runs a nationally distributed product company and who spoke on condition of anonymity, said Whole Foods' decisions have resulted in a loss of business for her brand due to confusion within the company and a lack of clarity about the new system.
"They went from being one of our biggest customers to barely doing business with them," she says. "Two years ago, the buyer sort of evaporated. We were seeing 40 percent growth year over year, but we lost placement. I don't think anyone knows what's going on."
It's this lack of clarity over the changes at Whole Foods that may be the biggest issue for the brand, as it's been hit by a slate of negative articles and even held a summit to address angry partners.
"While I think all vendors that work with Amazon Whole Foods are encouraged by what's possible, longtime partners of Whole Foods are certainly looking at it with trepidation because of what we don't know," says Michael Palmer, who runs the ice cream brand McConnell's. "Whether you're a small or big company, communication is what it's at."
It's a critical time for Whole Foods, which has to prove the merits of these changes to the companies it works with, as it not only battles other retailers but increasing competition online, even from its parent company.
"Retailers will be challenged to improve the in-store experience," says Peter Rahal, co-founder and CEO of RXBar. "You can't compete with the things going on online. You got to elevate the experience from the smell of fresh coffee to pizza being made."
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But what does this mean for food entrepreneurs trying to make it? It's not that much different than before: pursue the best opportunities for your brand, whether that's in retail or online, and focus on your story and having the best product.
"What [Whole Foods is] trying to do is become more efficient, not to become more corporate, and bring organic and natural foods to more people," Visram says. "The brands we love and trust and believe in will be the winners at the end of the day."