Is Whole Foods Destruction Assured or Will Cannabis Save Them? (Part 3)

Is Whole Foods Destruction Assured or Will Cannabis Save Them? (Part 3)

Whole Foods is a major part of the organics industry and growth of small brands.  If you have been following our insider’s look into the food industry, especially how it is impacted by Amazon purchasing Whole Foods, welcome back. If you missed Part 1 and Part 2, feel free to read those first!

Amazon’s founder Jeff Bezos is one of the greatest entrepreneurs in modern history. Surely, he would not have bought Whole Foods Market with a strong “Plan B” and “Plan C.”

Let’s assume Plan A is reviving Whole Foods. In the first two parts of this blog series, I laid out a few facts about changes in organics and in Amazon’s management of Whole Foods that call into question whether that will happen. It seems pretty obvious that Plan B would be to change Whole Foods into local Amazon distribution stores. What is the most fun to talk about (and I admit a bit of a stretch) is that Plan C could be converting the Amazon and Whole Foods gift card industry into a cannabis banking system? And, these three plans don’t have to be alternatives, Bezos could do all of them, and in a relatively short period of time.

Bezos’s Alter Ego Is Unlikely Mr. Green Jeans

Bezos’s plan was never just Plan A. That’s too boring for him. Whole Foods was ripe for a buyout because of declining profits. But, turning around a grocery from declining to rising profits has been done many times before — cutting costs and squeezing vendors is nothing Bezos invented (see Part 2 of this blog series). It’s hardly exciting for someone looking to take people into space (Blue Origin).

whole food owner space program

I’m sure his team did enough research to know about the changes in the organic industry (see Part 1 of this blog series) and the challenges of growing a company that sources much of its goods from a very small amount of organic farmland production (under 1% of US farmland is organic in the US). He must know there are a finite number of stores a high-priced grocery like Whole Foods can operate. Wealth is concentrated in pockets of the United States, just check a map of the Starbucks locations to find out where.

Based on the changes he’s implemented already at Whole Foods, I am guessing Bezos may not appreciate how important the Whole Foods experience is to shoppers – finding and supporting small local brands, the inviting, warm in-store experience. In fact, since I wrote my last blog highlighting these two issues, Amazon fired its entire marketing team that does those cute hand-drawn (looking) signs on chalkboards that are part of what makes the store feel more like a farmers’ market. From the perspective of the shopper and small vendors, it looks like Plan A of “making Whole Foods great again” is not likely to happen. So, let’s move on to Plan B.

Plan B Comes to the Rescue When “Making Whole Foods Great Again” Fails

Amazon’s biggest challenge it’s last mile. The company is great at getting goods from one warehouse to another but getting it to your door is expensive and challenging. That’s why you see the US Post Office at your door on Sunday afternoons delivering your Amazon goods. Clearly, Bezos likely can make a lot more money operating Whole Foods’ 450 locations as local pickup spots for Amazon purchases and having the grocery side morph into the “Amazon Fresh” program for food delivery. But, there is plenty of reason to keep the grocery stores open to shoppers.

Amazon Could Redefine In-Store Shopping

Amazon has been experimenting with “checkout free shopping,” and it has real appeal to it. Standing in a checkout line is so 2015.

Given that, why even go to an Amazon store at all? After all, you don’t need to try on earphones, and they can be delivered to your door.

Fresh food. Fresh food is what brings you to the store most often, produce and refrigerated items. Most people prefer to pick out their own produce to make sure their apples aren’t spotted and peaches aren’t bruised.

Amazon would be smart to use high quality, low-price fresh grocery items as bait to get you into the store. While there, your impulse-buy of a new pair of headphones and tiny Bluetooth speakers for your cat (because cats can’t wear headphones) become the store’s profit center. If we could get all that in one place, we might not mind so much that the cute chalk board signs are gone and the organic apples are from Chile.

shopping whole foods

I have a friend who owns a very successful chain of sporting goods stores. His bait is athletic shoes but I dare you to walk into his stores and not come out with 3x the cost of those shoes in other non-essential, higher profit margin items from yoga mats to tents to Frisbees. The problem with Plan B is that stores like Target and Walmart already offer everything from produce to furniture, and City Targets serve some of the same high population areas. Amazon Whole Foods will need to offer a superior experience to get an edge on these retailers, but as I wrote in Part 2, it’s already losing that “customer experience” edge. And, once Bezos perfects “checkout free shopping,” companies like Target and Walmart are likely to copy it.

Will Bezos Be Bold Enough to Revolutionize Banking?

I’m not really predicting Plan B because Bezos and his team are already making moves in that direction with Amazon locker pickups at Whole Foods locations. What’s more interesting is to explore the idea of Plan C in which Bezos could become the premier banker for the cannabis industry virtually overnight.

Let’s me preface this by saying that I am NOT a banking expert. This discussion is more a topic for lively cocktail party conversation, not one on which you should base an investment decision. But surely the rise of Bitcoin has shown that banking is ripe for a revolution. Bitcoin also isn’t helpful if you deal in cash though; the whole point of the crypto-currency is that it is cashless.

Remember cash? You used to carry it in your wallet all the time, even in your shoe. Cash is an important conversation topic now because various aspects of growing and selling cannabis is now legal in several states, and cannabis is largely a cash-based business.

Cannabis Banking Background (for those interested in some detail)

Let’s quickly cover some background. In a nutshell, eight states have legalized cannabis and a handful more are considering doing the same in 2018. The trick is that under federal law, cannabis is simply illegal drug money, despite these state legalizations. And, though the Obama White House was willing to look the other way on the matter, the Trump Administration has threatened otherwise. Jeff Sessions called marijuana, “slightly less awful than heroin.” Cannabis bankers can be charged with racketeering, which is a criminal offense. They also can’t get FDIC insurance for the accounts, but if you are in jail for racketeering, I think the insurance issue is probably not what you are regretting.

Congress has considered, but not passed, a bill to protect the cannabis industry in states where it is legal. Despite this, the number of banks accepting cannabis customers has increased nearly 20% in the last year, but that only brings the total to 400. And, the prevalence of banks depends on the state. This is because, in 2013, deputy US attorney James Cole issued what is known as the “Cole memo,” which outlined the eight biggest concerns the federal government has with the industry, like selling to children. The Treasury Department followed up with guidelines for banking based on those eight priorities. This guidance does not change the fact that cannabis is still illegal under federal law, but it gives banks a little more security if they dare to enter the business. States are required to issue regulations based on the guidance. It’s a bit like being in a flimsy legal hammock hanging high up between illegally planted trees–with Jeff Sessions down below pondering over a chain saw.

So far, only the state of Colorado has issued state regulations based on the Treasury guidance. California should be next. In fact, California and the city of San Francisco are considering setting up banks that would accept cannabis accounts. This may make it seem like banking reform is already happening, but remember the federal guidance could be revoked any time.

Under federal law, cannabis remains illegal. Even with the Cole memo and state regulations, bankers willing to take the risk are technically racketeering. Legalization is rolling out fairly quickly state-by-state. So, even if the federal guidance stays in place, there will be a lag time before state legislatures and banks can catch up. With six more states likely to legalize cannabis in 2018, the problem will continue far into the 2020’s.

cannabis

Bezos Could Instantly Double the Number of Cannabis “Banks”

As a result, people in the cannabis industry carry around a LOT of cash, and they will be for quite some time. Employees are paid in cash; warehouse leases are paid in cash; taxes are paid with money orders; you get the picture. Robberies plague the industry but they are downplayed so the public does not get concerned. With that background, let’s circle back to Bezos and look at how this could emerge as his Plan C.

There are about 450 Whole Foods stores in communities across the country concentrated exactly where you would think they would be, in densely populated areas with higher incomes.

Amazon already offers one of the most useful gift cards in commerce. For this model, think of them as electronic cards — basically a number you receive that used to be embedded in a card but would become your electronic Amazon cash account (just download the Amazon money laundering app to access it). People with cash can convert it to Amazon money by dropping off their cash at any of Whole Foods 450 locations around the country (please spray with a non-toxic deodorizer before arriving).

Suddenly, the entire industry has a place to deposit their cash, and it’s located in the same place they can spend it! I would imagine the green entrepreneurs would happily pay a fee for this service, which Bezos would need for lawyers and self-insurance. Inevitably, a secondary market will come to bear to help people convert this Amazon money into actual money that could be used to pay tuition, buy a car or be put into savings in a traditional bank. Assuming no one goes to jail, which is a big assumption, this could develop into a brilliant new banking system.

About jail. Amazon Whole Foods would be expose itself to racketeering charges and possibly others I’m not aware of? Yes, of course.  But in the meantime, Bezos could rapidly make piles of money and zip past legislators and regulators who scramble to try to figure out what to do. How long could he keep that up before someone puts on the brakes? If Uber can be used as a comparison, indefinitely.

Plan C is a stretch for sure, but Bezos has stretched the commonplace in commerce since he first started his online bookstore decades ago. And, an industry with a cash problem expected to grow from $9B in 2017 to $21B by 2021 is just asking for entrepreneurial disruption.

What Will the Future Hold?

If Bezos keeps going down the path he’s headed on with Whole Foods under Plan A, and the company will likely lose its competitive edge in grocery. The next evolution under Plan B, to create “Amazon stores,” could fail if they prove to be nothing more than an overpriced City Target. Wouldn’t it be incredible if, as fantastical as it sounds, Plan C’s cannabis banking ends up being Amazon Whole Foods’s new bread and butter, without the . . . bread and butter.

I sincerely believe a man with tens of billions in dollars in personal wealth who is rapidly building a company to go into space will not be satisfied with turning around a grocery store or building a better Target. I can’t wait to revisit this in two years and see what happened.

What do you think? Would you like to shop for produce, books and computer game systems at your local Whole Foods, or would you just go to Target? If you don’t support cannabis legalization, would you choose not to shop at Amazon Whole Foods if the company became entwined with that industry? Would you feel comfortable shopping at a grocery that was accepting large cash deposits or would you be concerned about robbery? Have fun with this at your next cocktail party!

Part 2: Is Whole Foods Destruction Assured?

Part 2: Is Whole Foods Destruction Assured?

[Part 2 of a 3 Part Series – read Part 1 here]

Let’s get a little further into what will either bring about the end, or a complete revolution of Whole Foods. In my last blog, I talked about how changes in the organic industry and the expansion of Whole Foods lead to too little differentiation in the quality of organic produce offered at Whole Foods versus stores like Wal-Mart and Costco, because these stores now offer similar quality at lower prices. Amazon could save the company by providing the “better than organic” many of their customers crave (not just organic certified but a small farm, regionally grown and biodiverse). However, it seems to be moving in the opposite direction in an effort to provide lower prices. The problem is, a premium brand will never win a price war. 

In this blog, I want to cover something near and dear to my heart, the future of small brands at Amazon Whole Foods. I have so much to say here that I decided to cover my next topic–how Amazon Whole Foods could become the largest cannabis banker in the country virtually overnight—in the third blog of this series. It’s worth the wait. Not only would it be an incredible evolution of the company, as you will know by the end of the third blog, it could be easy for them to do.

The Whole Foods Experience: Getting to Know Small Brands

Part of the value-added proposition of Whole Foods has always been a better shopping experience. Their stores are beautiful in comparison to most supermarkets. And, you could always count on meeting the founders (or people who knew so much about the brand you mistook them for founders) of small, new brands from your area. They would be doing demos and chatting with you about how the company started and what makes their products special. The personalization of it made the sampling experience much better than the lunchtime rush at Costco.

Small brands and Whole Foods

Colleen demoing our new mix-ins with one of our favorite customers 🙂

Whole Foods Started Changing Small Brand Rules Before Buy-Out

Whole Foods had already set into play some new rules that were squeezing small brands before the Amazon buyout. Consider this shipping change in 2016. If a small brand located in California is asked to ship one, small box of product to a store in NYC, the brand is required to do that and to pay the shipping cost. In the past, the brand could set a minimum amount a store had to order, which allows brands to spread the shipping costs over a minimum number of items. The new “no minimums” rule might be okay for a very high cost, lightweight item, but if your coconut hand cream sells to Whole Foods for $10 (your profit is $5) and the shipping is $12, you’ve just gone in the hole big time. However, if you could set a minimum order of 12 units, the shipping might average to closer to $1 a unit, even with the extra weight, which still leaves you with some decent profit.

Impact of Amazon and Whole Food on food industry

Amazon Has New Discount Requirements That Will Cost Small Brands Big Bucks

Fast-forward to the post-buyout era. Amazon needs small brands at Whole Foods so it keeps its promise of a premium shopping experience, otherwise, it becomes a smaller version of a traditional supermarket. And yet, it is talking about and testing new rules that will threaten the financial health of small brands and interfere with their ability to market to their customers. On the cost side, let’s first consider discounts. All brands are required to discount their products four times a year at Whole Foods. That discount is tricky because if you have a long shelf life, customers will sometimes “forward buy”, which means they only buy at a discount. This takes much of your margin. But that’s not new, I just wanted to complain for a minute.

What’s different now is Amazon is looking to assess a fee of $7,500 to set up that sale (also called a “temporary price reduction” or TPR) for all “national” brands. It defines a “national” brand as selling in 4 or more Whole Foods regions. That may be okay if you are a large company selling a staple such as sugar or ketchup, or even organic cheddar bunnies. But if your product is lower volume, say walnut butter or fennel olive oil (okay, I made that up but doesn’t it sound good!), or you are new and building brand recognition, that TPR fee could be many multiples higher than you anticipate your revenue would be from the product sold, even more so after the discount.

Financial Analysis Whole Foods and Small Food Brands

Another hit from Amazon is that companies with $300,000 in sales to Whole Foods per year (translate that into maybe $80,000 in gross profit after taking out the cost of making the product and discounts) are now required to cut their prices 3% so Whole Foods can permanently discount products. Three percent may not sound like a lot but that could equate to 10% of the gross profit on $300,000 in sales. That is money they would use to pay employees, utilities and the sales team.

In-Store Demos May Become Even Less Common

Demos have always been a very expensive and inefficient marketing method when you look at the cost per person reached. And, the value of in-store demos declined significantly with the rapid growth of shopping and delivery services like Instacart.

To make demos worth the cost, the person doing the demo has to be extremely well-versed in your brand and all its nuances. It’s best to use your own employees, but that isn’t workable for most companies (most small brands have very few employees and they are all located in one city). So instead, they use a 3rd party company that ideally is specialized in natural foods and understands the link between health and food, and how your brand fits into that picture. Otherwise, your $125 demo turns into nothing more than a manned snack station for hungry shoppers.

But now Amazon is rolling out a new rule where brands, with some exceptions, have to use one demo company under contract with Amazon for in-store demos. Here we have a conflict of who is boss and who is paying because their goals are clearly different. The brand pays for the demo, and its goal is to have people buy its product. But the demo company wants its boss, Amazon, to be happy. Amazon generally wants shoppers to be happy, which means they may be less committed to seeing your brand do well, and more interested in shoppers generally having a good in-store experience. We will see how this unfolds in the coming months as the first couple of regions get started on this new system. I was recently part of a webinar where a broker reported that many smaller brands have stopped doing in-store any demos at Whole Foods because of this change.

ZEGO focuses on whole food for children and families

What Are Small Brands Going to Do?

As I said, not all of these changes have been rolled out yet, but some smaller brands are pulling out of Whole Foods already. They are quickly being replaced by well-known, national brands more often associated with a supermarket. In fact, some brands are pulling out of retail altogether and putting all their efforts on online sales. A broker told me last week that several of her brands that did just that in 2017. The problem is, margins are so low for food companies in retail stores due to the cost of making the sale (sales team, brokers, required discounts and extra fees distributor fees) that some companies are deciding the extra hassle just isn’t worth the small profit the yield.

What impact will Amazon and Jeff Bezos have on Whole Foods and small brands

What Would Get You to Start, or Continue Shopping at Whole Foods?

I’d love to hear from you. If you’ve been a Whole Foods shopper, why do you or don’t you still shop there? Would you be more or less likely to shop there if they decreased the number of small brands in favor of large ones but also dropped their prices? Please share your comments!

Colleen Kavanagh is the founder and CEO of ZEGO, a superfood-based company making “free from” snacks that fit most every special diet need–from severe allergies to gut disorders to diabetes–with superior food safety and transparency. You can find our products at www.zegofoods.comSave 20% with coupon code “springbreak20” through March 28, 2018.

 

ZEGO is a B Corporation – Why This Matters!

ZEGO is a B Corporation – Why This Matters!

We have big news to announce – ZEGO is now a B Corporation! I love talking about our company because ZEGO is so much more than delicious, Free From snacks. But it’s hard to convey all we hold dear in a Tweet or Instagram post. If you had the time, I would want to tell you we are a family-based business that grew out of a desire to provide delicious and nutritious snacks that are safe for nearly everyone to eat–no matter your dietary restriction, that we are passionate about providing food safety data through dynamic labeling, and how we use our labels to communicate food safety information to you. I would tell you we believe you have a right to know what is in your food and encourage you to demand it from all the companies you buy from – especially when it comes to toxins like glyphosate or cross contact with allergens. 

I would want you to know that we are about more than transparency, nutrition and taste. I would want you to know that we work hard to support U.S. farmers by buying locally and regionally grown food for our products. We use our packaging to inform consumers how they can advocate for a cleaner food supply, and that we donate 2% of our revenue to improve nutrition for low-income kids. As you see, it takes us awhile to tell people about all we do, which is why we are so happy to be officially certified as a B Corporation!

What is a B Corporation anyway?

B Corp for business is similar to Fair Trade or USDA Organic for food, but much broader. It covers how you treat your employees, your corporate governance, and your commitment to protecting the environment and giving back to your community. Because not every question on the assessment is relevant to every type of company, to get certified you must score 80 points out of 200. ZEGO scored a full 113!

Being B Corp certified allows us to use one symbol, the B badge, to show that we care about a lot more than profit. It means that we strive to make our business a force for good in our community and in our world.

B Corporation

Why Did We Get B Corporation Certified?

We didn’t get certified as a marketing tool. We got certified as a B Corporation because it’s not enough for ZEGO to be an independent “good guy” company. To be a force for good, we need to join forces with other B Corp food companies to define new, higher standards both in food labeling and food / social responsibility. By working together, we can encourage other food companies to follow the same path. The benefits will be felt for generations. 

It is part of our bigger commitment to always improving and setting the standard for transparency for food companies!

What Does Our Being a B Corporation Mean to You?

We have been doing the things that B Corp certified us for since we started ZEGO back in 2013, but it does make a difference to be certified. The certification actually holds legal weight as it is woven into your corporate legal structure. Most importantly, because re-certification is required every two years, you can be confident that as we grow, we will hold true to our values. 

B Corpoartion ZEGO Snacks

How You Can Help

So, here is our call to action for you — It truly matters if you support companies that are making a difference by how they do business. It’s simple, we can’t be a force for good if we don’t have enough sales! So when you are choosing which product to buy, look for the B Corp logo, help us spread the word about ZEGO and other B Corp companies, and ask other companies that you love to consider getting certified! Most of all, thank you for your support.