Amazon-Whole Foods Deal Shakes Up Specialty Food
By Mark Hamstra
Amazon’s relentless focus on driving efficiency could become a two-edged sword for many companies in the specialty food industry as the e-commerce giant prepares to swallow Whole Foods Market.
While the $13.7 billion acquisition could create a more streamlined conduit for omnichannel sales for specialty food suppliers, it also has the potential to disrupt their supply network and reduce shelf space for their products at Whole Foods stores. For specialty food retailers, more aggressive pricing, along with the potential for innovations in technology and e-commerce, could transform Whole Foods into a more fearsome competitor.
On the “plus” side for specialty food manufacturers, the Amazon-Whole Foods merger could simplify suppliers’ efforts to offer their products both online and in Whole Foods’ bricks-and-mortar locations, said Jeff Grogg, founder of Battle Creek, Mich.-based consulting firm JPG Resources. That’s especially true for smaller specialty suppliers that might not have the resources to effectively manage both online and retail sales channels on their own.
“There’s an opportunity to make it easier for brands to have an omnichannel sales presence,” said Grogg. “Right now everyone has to have different contacts and different networks in order to sell in these different channels, so I think the biggest plus for brands is the potential for the integration across multiple channels.”
The acquisition also could provide Whole Foods an opportunity to address some of its internal challenges, said Melanie Melia, founder of Glen Cove, N.Y.-based Wildfire Sales, which specializes in helping manufacturers in the natural-product space get their goods to market. Whole Foods has seen its industry-leading sales growth slow and stock price tumble, which had led to the recent push by activist investor Jana Partners to acquire a stake in the retailer and push for changes.
Whole Foods has undertaken a number of initiatives as it has sought to turn its operations around, including reducing store labor, a move Melia said “has not been good for anyone.” The company has also been moving toward centralized procurement, implementing category management and experimenting with loyalty programs and home delivery, all of which could evolve significantly under Amazon’s ownership, observers said.
One negative outcome of the acquisition for specialty food suppliers could be a reduction in shelf space at Whole Foods for branded products, particularly slower-moving items, as the company seeks to drive down costs and improve its price image. Such efforts could include devoting more space to private-label products at Whole Foods, and expansion of the private-label food assortment at Amazon.
That could squeeze out some branded-product suppliers, while also ratcheting up the price competition with rival retailers.
“This would put the onus on brands to be truly meaningful, to have a connection to the consumer and a real point of difference — a real value they are bringing,” said Grogg. “Anything that is commodity-like looks like it could be heading for really choppy waters in the near term.”
Another area of particular concern is how Amazon’ low-cost, low-price mindset might impact Whole Foods’ distribution model, which relies largely on wholesaler United Natural Foods Inc. to deliver products to its stores. UNFI’s stock price plunged on the announcement, as many observers believe Amazon could eventually sever or diminish Providence, R.I.-based UNFI’s role as a supplier to Whole Foods.
However, Tim Sperry, who spent 20 years in purchasing at Whole Foods and now leads consulting firm The Tim Sperry Group, said the acquisition could provide UNFI an opportunity to broaden its relationship with Amazon, perhaps by delivering some slower-moving products or providing other e-commerce fulfillment functions.
Grogg of JPG Resources agreed. “Either UNFI has to find a way to create value for Amazon and be an essential partner in a way that goes beyond what they do now, or they get swept aside,” he said. “It’s hard for me to see them continuing in their current state.”
While converting to self-distribution might reduce Whole Foods’ operating expenses, it could lead to increased costs for specialty foods suppliers and potentially for other retailers that rely on UNFI to deliver product, said Grogg.
“There’s a lot of turmoil in the world of distribution anyway, and this just adds to it,” said Sperry.
Amazon said it expects that Whole Foods will continue to operate independently, which some have taken to indicate that UNFI will remain a supplier. UNFI currently has an agreement to remain Whole Foods’ primary supplier in the U.S. through 2025. It tallied 35 percent of its sales from Whole Foods in 2016, according to financial filings with the Securities and Exchange Commission.
UNFI could not be reached for comment.
All of that is assuming, of course, that the $13.7 billion deal is consummated. In a report this week, Karen Short, a New York-based analyst with Barclays, suggested that other retailers could bid to acquire Whole Foods just to keep it out of the hands of Amazon. Potential strategic bidders include Kroger, Walmart, and Target, “to name a few,” she said.
“Many will do anything to make this acquisition more costly for Amazon,” said Short.
In any case, Amazon’s offer “has wide-ranging ramifications,” she said.
Melia of Wildfire Sales said the announcement was the single biggest event in her 17 years as a natural-foods broker.
“This was the earthquake,” she said. “Now we are waiting for the tsunami to hit.”
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