Yahoo Finance Amid the turmoil in Whole Foods, new natural food brands turn elsewhere
Francisco Pavan’s natural food startup Kumana sounds like a good fit for Whole Foods: The creamy avocado sauce is plant-based, sugar-free, gluten-free, and founded by a homesick Venezuela immigrant in 2016.
But Pavan hesitated to pitch his product to Whole Foods when he heard about changes going on inside the natural food giant. Even his broker told him to “stay away for now.” Small food brands usually work with food brokers to get their products on store shelves.
Whole Foods has branded itself as a supporter of mom-and-pop food vendors and was once the go-to testing ground for local natural food brands. But since the grocer was acquired by Amazon last year, the natural food maven has not been the same and the changes have pushed food brands to look elsewhere. Meanwhile, other conventional retail chains are seeing an opportunity with natural food brands and are aggressively courting them.
Internal changes push brands away
Amazon (AMZN) CEO Jeff Bezos touts the great perks Whole Foods has offered to customers in his annual investor letter, but vendors who work with the grocer see things differently. California Baby CEO and founder Jessica Iclisoy recently said she pulled her products from Whole Foods because of the changes. California Baby had been a partner of the grocer for 23 years.
New brands find it harder to get on the natural food giant’s shelves, as they need to deal with increasing fees, centralized buying decisions and tighter control over in-store presentations. The changes were implemented in the past couple of months and were planned before Amazon’s acquisition in August.
Whole Foods used to rely on local staffers to find the best local products, giving regional stores great autonomy. But now that decision is made by the company’s management team at its Austin headquarter. Whole Foods also requires vendors to work exclusively with one company to schedule in-store demonstrations and shelf placement.
Local vendors used to give out samples of its products in stores to build connections with consumers, but now they are required to pay a scheduling fee of between $10 and $30 for doing it themselves or $110 for each four-hour product demonstration to hire the company that Whole Foods has partnered with.
“For a small emerging brand where you really have to educate the consumer, that’s a hard pill to swallow today, because you don’t get that option like you were getting and you were not there telling your story,” said Jeff Clark, a North Carolina-based natural food consultant.
The changing fee structure has also scared new food brands away. Starting this month, vendors selling an annual $300,000 worth of products in Whole Foods stores are required to pay a fee for certain store displays or expanding to a new Whole Foods location.
“They sell high-priced food and yet their profitability is low, so they’re trying to increase margins by dipping into more fees from small brands,” said Gregory Yankelovich, co-founder of Demo Wizard, which provides in-store marketing services for food brands. Industry experts said Whole Foods’ approach could make the system more efficient and benefit the grocer in the long-term, but for now, it turns out to be a burden on smaller brands.
The uncertain fees have also generated concerns among food companies. The fees, which vary depending on the size of the vendor, may not sound like a lot at the beginning, but could add up and eat into small brands’ bottom line. “I think what is the scariest is the unknown,” said Pavan. “I don’t know what the fees at Whole Foods will be in three-, six-, nine months because it’s changing.”
Whole Foods did not reply to a request for comment. But A.C. Gallo, Whole Foods president and COO, recently told Fortune that the old decentralized system was “cumbersome” and the grocer will use a hybrid system to continue to grow local suppliers, which will “lead to better execution and more transparency.”
Food brokers are less motivated
Food brokers help new brands negotiate with stores and are paid by commissions. As Whole Foods streamlines its operations and works directly with brands, some brokers feel being “squeezed out” of the process, so they end up looking for alternative channels.
“I want to grow my share, not just be squeezed out. Then I would leverage my relationship with other stores, other than Whole Foods,” Yankelovich said.
It’s not easy for small brands to say goodbye to brokers, either. Brokers connect food brands and stores and maintain relationships with many retailers. Without them, brands don’t have the time and resources to negotiate prices and scale up. So brands trying to sell at Whole Foods have to work with the grocer directly while hiring brokers to talk to other chains, therefore having to pay more for distribution.
Conventional retailers become proactive
Without Whole Foods, Pavan still managed to get off to a great start. Albertsons, the Idaho-based grocery chain which also owns Safeway, expressed interest in his avocado sauce even before he launched it. In March, Kumana was selected as one of four new natural food brands Albertsons wants to roll out to more than 2,000 stores nationwide.
Amazon’s acquisition of Whole Foods has been a wake-up call for many grocery chains. Food brokers have seen increased interest from conventional retailers in cultivating new brands. Last September, Kroger (KR) launched a new website for local and emerging brands. While opportunities at Whole Foods are shrinking, more doors are opening for natural brands at other grocers and it could benefit small brands and customers.
“Kroger and Sprouts (SFM) are getting more interested in new brands as they see the decline of conventional brands,” said Mike Anderson, a veteran natural food broker and president of Natural Specialty Sales. “They have to look at trendy millennials who don’t identify with the conventional brands. Consumers want something new and fresh.”
Correction: Jeff Clark is based in North Carolina. His location was misstated in an earlier version of this article.
Write to Krystal Hu at krystalh@oath.com or follow her on Twitter
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