[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.
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.
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.
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.
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 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.com. Save 20% with coupon code “springbreak20” through March 28, 2018.