Nearly four years post-acquisition, the chain leads the way in online shopping. But the in-store experience leaves something to be desired.
The minute Amazon acquired Whole Foods more than three and a half years ago, the hand-wringing started. The fear was that in its quest for retail domination, the Big Tech behemoth would strip away everything that made the Austin, Texas-based natural foods pioneer so special, turning its 500 or so stores into little more than mini fulfillment centers for Amazon grocery purchases. Thankfully, many of the industry’s worst fears didn’t come to pass. But that doesn’t mean there haven’t been changes — and not all for the better.
For example, although the online shopping experience is “second to none,” according to Craig Rosenblum, VP of industry transformation at Winston-Salem, N.C.-based Inmar Intelligence, “shopping in stores has become a nightmare due to the overwhelming number of workers picking online orders. It’s hard to get up and down the aisles. You get stuck waiting in line behind them at the deli, meat and seafood counters. And while some stores have great customer service… at others, you just feel like you’re in the way.”
Rosenblum adds tha while home delivery is timely and affordable — for both Prime members and non-members — Whole Foods was very late to the party on curbside pickup, which only rolled out chainwide in October. Recent sales figures bear out the shift. Although the company doesn’t break out Whole Foods results, during the third quarter, it reported a 10% drop in sales via its brick-and-mortar stores, which are mostly Whole Foods Markets. Meanwhile, Amazon’s total revenue during the period was up 37% year over year, suggesting huge gains in online sales, presumably at Whole Foods as well.
The irony is that Amazon has invested in creating more modern, spacious stores with restaurants and additional fresh food areas, says Neil Saunders, managing director of retail at New York-based GlobalData. “But because shops are also being used to fulfill online orders, they seem more crowded and cluttered.” (Even on a good day, though, he would describe most Whole Foods Markets as “pleasant,” not cutting edge.)
One way the company could reduce the number of order pickers in brick-and-mortar stores is to create more permanent, online-only “dark stores” dedicated exclusively to fulfilling delivery orders. The first such location opened in Brooklyn Sept. 1, but the company hasn’t yet announced plans to expand the concept to other areas. “I think dark stores will need to be part of the fulfillment mix,” says Saunders, though maintaining them in high-rent districts like New York City and San Francisco could be costly. “I think the best solution might be hybrid stores open to the public but with some behind-the-scenes automated fulfillment to manage online orders,” he says.
QUALITY HIGH AT WHOLE FOODS, INNOVATION LAGS
Another common fear about Amazon’s acquisition was that it might “sell out” by loosening some of the rules Whole Foods has established for its assortment. Happily that has not come to pass, and the chain remains committed to its very high standards around unacceptable ingredients, sustainability, traceability, etc. What has been sacrificed, however, is Whole Foods’ leadership position as far as discovering new items and bringing them to market.
“Whole Foods should be in the vanguard of innovation,” says Saunders. “Sadly, it isn’t. In fact, it’s something of a laggard. Regional chains like Wegmans and Publix do a better job. Even Target has stepped up its innovation game.”
“Whole Foods has become a lot less nimble in terms of bringing on new products nationally,” confirms one manufacturer partner, who says the chain’s focus on private label appears to be consuming much of its global energy. However, he does see a lot of activity in plant-based. “That appears to be where the retailer is staking its claim — though some might say to an extreme degree.”
Another vendor told a similar story. “It feels like they are closed off [to innovation in] many areas and just don’t seem to care,” he says, lamenting the difficul even getting an audience with a buyer to present new items (more on that later).
As a result, says another supplier partner, “Whole Foods used to be a place for foodies and foodie brands. Now it feels like just an investment for Amazon.”
Not everyone sees it that way, of course, but even those who disagree acknowledge that Whole Foods doesn’t dominate new innovation the way it used to. “While Whole Foods still leads,” says Rosenblum, “e-commerce, B2C and larger retailers like Walmart and Kroger that are much quicker to market with national brands continue to nip at the chain’s heels.”
Where there is innovation, manufacturers say much of it is happening at the regional level where local brands are still plentiful — though perhaps not quite as much as before — and prominently featured (but frozen endcaps remain few and far between).
Even before its acquisition by Amazon, Whole Foods had announced a shift to more efficient, centralized buying, which created some trepidation among smaller, local and regional manufacturers who feared they’d never get an audience with the powers-that-be in Austin. They weren’t wrong. “Central buying left little space for local and regional brands, with a lot of manufacturers fighting for those slots,” says one supplier that’s still seeking an in with retailer. But after changing directions a few times, the chain seems to have finally found a better, if not perfect, balance between centralized and regional decision-making.
“Last year was pivotal,” explains one vendor partner. “Whole Foods came to us last year with an impressive new strategy for our category that concentrates different brands where their customer base is strongest.” So instead of just one to three items in freezers everywhere, “We’re seeing strong increases in our assortment in key regions,” she reports. While the brand may ultimately have to exit other regions, “In the end, our assortment and regional volume will be stronger, so it will be beneficial for everyone.”
ONLY HALF A PAYCHECK NOW?
Some observers hoped that Amazon’s acquisition of Whole Foods would lower prices, helping the chain shed its Whole Paycheck reputation once and for all. Through a combination of reduced prices on key items, more promotions and discounts for Prime members, Whole Foods shoppers’ weekly grocery bills probably did go down — a bit. “But prices were so high to start with that it’s still one of the most expensive chains out there,” even on national brand items also sold by competitors, reports Saunders. “That’s why so few consumers do full shops at Whole Foods.” The other issue is “value for the money,” he continues. “Customer service is often better at Target and Walmart than at Whole Foods, where too many staffers are surly, which undermines justification for premium pricing.”
That could be a problem as organic becomes more mainstream at other grocers, says Rachel Dalton, director of e-commerce and omnichannel at New York-based Kantar. But the chain shows no signs of backing off. In fact, she says, Amazon’s recent launch of Fresh Market gives it the flexibility to maintain Whole Foods’ positioning as a premium natural foods grocer whose core customer is still willing to pay those higher prices.
To get to those prices, “Whole Foods takes some of the highest margins of any other retailers we work with,” reports one vendor partner. That’s all well and good, “But they always try to get the manufacturer to cover the gap in price.”
And then there’s the universally panned 3% merchandising fee (for brands that do at least $300,000 in sales) — “way too high for the service provided,” according to one manufacturer, who puts the industry average at around 1%. “We’ve seen none of the reporting or accountability Whole Foods promised when the new fee structure took effect,” he explains.
On top of the margin requirements and merchandising fee, Whole Foods expects a lot of promotional support, according to vendors. “And some programs, such as Prime Day for frozen products, are not optional,” reports one, citing a particularly onerous categorywide BOGO program that he describes as a “fill-your-freezer-at-the-manufacturer’s-expense kind of deal.”
Honestly, says another, “It seems like it’s all about squeezing the most promotional dollars out of vendors.” Between that and the merchandising fee, he adds, “It’s getting increasingly hard to make money selling products to Whole Foods.”
But for many vendors, especially those in the natural and organic space, the volume they generate at Whole Foods makes up for the slim profit margins. “They’re a top-five customer, and our sales in the chain were up 13% last year,” says one. “So the positives outweigh the negatives.”
In addition, says another, “Whole Foods gets to know its suppliers and actually supports them as they grow. Others say they do, but they don’t really follow through. We’ve enjoyed having a real relationship with a buyer.” But getting to that point is not easy, and manufacturers on the outside looking in face an uphill battle.
“Whether an in-person audience or a zoom call, opportunities to actually interact with a buyer are severely limited,” says one supplier. “But it’s very challenging to fully explain your brand in a limited number of slides sent via e-mail and samples that you’re not even sure they actually opened or tried. Whole Foods has always kept manufacturers at arm’s length,” he adds, “but it’s accelerated since the move to centralization.” It’s no coincidence, though, that that’s when consumers started to notice a decline in innovation. (Manufacturers says poorly timed review schedules in some categories haven’t helped either.)
PANDEMIC TAKES A TOLL ON FOODSERVICE
Although industry observers say Whole Foods did a good job keeping shelves stocked early in the pandemic and Ipsos rated its health and safety practices tops among food retailers, the past 10 months have certainly presented challenges. For example, the self-serve hot and cold food bars for which the chain is known either closed or switched to staff-serve, which reduced sales. The company responded by adding more packaged prepared foods and ready meals, which have traditionally been the weaker part of its offer, according to Saunders. “But many products are not all that compelling, and they’re often expensive.” He adds, “The chain should be doing more in meal kits. Amazon has them and they’re actually better than some of Whole Foods’ offerings, but they’re not stocked in all stores.” Perhaps because prepared meals aren’t as available, at least one supplier says sales of his company’s frozen items are up higher at Whole Foods than at other retailers. Expanded assortments better tailored to specific regions, including a smattering of “exclusive” products and flavors, are also probably lifting the entire frozen department.
The department is also likely getting a boost from Whole Foods’ 365 private label program, which is not only expanding but was recently redesigned to offer a more modern and cohesive look. The line is also sold on Amazon.com and at Amazon Fresh, so it’s clearly a big priority, says Dalton. But in Whole Foods Markets, at least, the own-brand doesn’t appear to be grabbing a disproportionate amount of space.
“We continue to see Whole Foods pioneer different formats and product types in frozen, which is exciting for our brand as we continue to innovate,” says one manufacturer partner.
“Despite the change in ownership,” says another, “Whole Foods continues to drive health trends like keto, Whole30 and regenerative agriculture, to name just a few.” Perhaps it’s not as dominant, “But even after 50 years, it’s still the go-to for natural and organic brands.”