Whole Foods reorganization: punctuation on a decade of change
No matter whether you are a loyal shopper or a member of the natural foods community, you have been watching the slow-moving disassembly of Whole Foods Market for two years. As they have embraced a model of centralized category management, important parts have been removed and it’s too early to tell how it will all be put back together. The pending Amazon acquisition calls into question whether this process will continue or remain partially implemented as a new vision is engaged by the online giant. In the meantime, shoppers are finding fewer of the items they want, experiencing a lower level of service, and leaving in droves to find equally interesting alternatives. One only hopes this process doesn’t take too long as competitors step up to fill the void.
Inside the industry, stakeholders of all stripes are painfully trying to assure that their brands, brokerages, and distribution companies survive the changes. From a larger perspective, food retailers have been merging, failing, growing and reforming themselves regularly for decades. My career was shaped by a series of mergers in the late nineties that formed the basis of Kroger as a national retailer and before that I experienced both from the inside and outside the first of a series of mergers and acquisitions that involved the Albertsons brand. In recent years, we have seen the near and total failure of several chains and the acquisitions of key regional players. We have seen new investment models with larger chains staking crossover formats with considerable resources. We have seen further consolidation in distribution with UNFI and KEHE gobbling up competitors and complementary partners.
So why does this retailer reorganization feel so different? Perhaps it isn’t. Time does allow a certain distance from the confusion of such things. But at least in my memory, this is the first time we have seen such a radical of change by a significant natural food retailer. The only thing close was the Whole Foods acquisition of Wild Oats. But it didn’t really shape anything; except the direction for Whole Foods and perhaps sparking the start of exponential growth for Sprouts, Vitamin Cottage and independent buying groups such as NCG and INFRA. Internally, the process was painful as usual, but externally, the industry remained relatively unchanged. In distribution, the more recent acquisition of Natures Best by KEHE was regionally dramatic, but largely left the industry intact. This time things are different. This is a major shift and will fundamentally change how the natural channel functions.
Without considering Amazon, the changes to the structure of how decisions are made at Whole Foods is already impacting the natural channel significantly. In the past, there have been eleven regional decision points and a global team with a growing powerbase. Relationships at all levels have been important, but being effective at the regional level has been the key to brand success. Under the new structure, regional contact may still be important, but it is obvious the more critical contacts are at the evolving center of power in Austin.
Regional natural channel brokers are likely to suffer the greatest impact of these changes. While certainly Whole Foods isn’t the only significant customer, for many natural brokers they have been central to the services they provide. Many brokers have reported they are already blocked from doing anything at store level except audits; and it is likely Whole Foods will centralize and outsource the fair share reset functions which have consumed brokers for the last many years. Without these points of persuasion and ability to effectuate change, how much longer will top brands pay regional brokers full commission for Whole Foods business? And what is the ripple effect when they start making other choices? Regional brokers will either need to demonstrate their continued usefulness, find other sources of revenue, or align themselves with other regional brokers or larger entities to survive.
What happens with distribution is a much tougher question. Without Amazon, it is likely Whole Foods would continue to work with UNFI and a handful of regional distributors. But Amazon is already buying from most key manufacturers for their online business. They have the pricing knowledge and logistical resources to design a more efficient buying and distribution system; stripping out distributor logistics padding, administrative costs and marketing fees. To be sure, Whole Foods’ sweetheart deal with UNFI is very attractive. Amazon might choose to continue down the path Whole Foods has set, putting pressure on UNFI to reduce costs and see how far it takes them. But in the longer term, I think it is only logical to think they will create their own distribution network, largely move away from UNFI, and rely on smaller distributors to handle the bulk of their regional products.
These are only a few of the likely changes as Whole Foods adjusts how they go to market; and what Amazon brings should revolutionize more than just our little natural channel. In some way, Whole Foods moving to a centralized model was inevitable and is the final frame of the imagined split between natural and the rest of the industry. Natural products are no longer on the fringe but have become a driving force. Major consumer goods companies have been actively buying successful natural brands for more than a decade and these acquisitions have become their primary source of innovation. The line, once very clear between natural products and the industry at large, has blurred into a sea of gray.
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