Whole Foods Goes Prime

Whole Foods Goes Prime

Handle of Whole Foods shopping cards stacked up

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Whole Foods Market was once considered a paragon of socially responsible business practices. It was instrumental in bringing organic food into the mainstream and had a reputation for positive employee and community relations (though its founder and CEO, John Mackey, was virulently anti-union and a devout libertarian). For more than two decades, the stock was a staple of social investment portfolios, including Clean Yield’s.

In recent years, Whole Foods’ reputation has been tarnished by a pricing scandal in New York City, its stance on GMO labeling, and Mackey’s anti-Obamacare rhetoric. Now it has agreed to become part of the Amazon empire, known for business tactics that threaten independent retailers and for its ruthless workplace conditions. It is worth noting that Amazon intends to keep Mackey on as CEO of Whole Foods after the merger is consummated.

When the news broke in June that Amazon had reached an agreement to acquire Whole Foods, the stock market reacted with gusto. Whole Foods stock jumped 29%, rising above the takeover offer price. Supermarket stocks tanked, with Kroger down 19% and Ahold (Stop & Shop) off 8%. Mega-retailers blinked too, with both Wal-Mart and Target dropping 5%. Natural foods companies, likewise, were under pressure. United Natural Foods tumbled 11%, and Hain sagged 4%. Notably, food giant Kraft Heinz fell only 2.5%, General Mills gave up 3%, and Conagra sank 3%.

What was immediately apparent was the widespread perception that this corporate merger was bound to have far-flung impacts on the food and retailing marketplaces. The announcement raised many questions about the scope and depth of those impacts.

The behavior of the stocks of major grocers and food companies after the merger announcement would suggest that the grocers face the gravest risk from the deal. The thinking goes that Amazon will bring its technology expertise and deep pockets to food retailing, increasing competition and driving profit margins lower. Bloomberg did some fine reporting on Amazon’s approach to food retailing back in March, providing helpful context for understanding the acquisition. Whole Foods has just 456 stores, accounting for a little over 1% of U.S. grocery market share, and is growing its base slowly. Amazon’s ownership won’t change the battle over consumers’ grocery dollars in brick-and-mortar stores. But will Americans’ grocery shopping habits shift dramatically toward online buying as they have with apparel and other categories?

Amazon’s ownership won’t change the battle over consumers’ grocery dollars in brick-and-mortar stores.

Amazon has been attempting to push into groceries with its Amazon Fresh service, which is now available in 20 U.S. cities. Yes, you can have organic produce delivered to your door if you live in Boston, New York, Los Angeles, San Francisco, Chicago, and other major cities. Two pounds of organic carrots cost $1.79, and a bunch of five bananas (not three, not six) is $1.98. But good luck if you want to know where any of the produce comes from. That bunch of organic broccoli ($2.49) is sourced from “United States, Canada, or Mexico.” So far, this approach has met with limited success. According to TABS Analytics, just 4.5 percent of shoppers made frequent online grocery purchases in 2016, barely above the level four years earlier. Apparently, people still find value in going to the market to buy their food. Whole Foods’ long-term success derived from offering a more pleasant shopping experience than competitors, with attractive fresh produce as one of the big draws, and helpful, knowledgeable staff another key plus.

If you’ve watched the viral utopian/dystopian Amazon Go YouTube video, you know that Amazon imagines a future of retail that eliminates the checkout process in a vision that is chillingly free of human interaction. The store in the video looks strikingly similar to a Whole Foods store, sans employees. If Amazon intends to bring this approach to existing Whole Foods stores, you should certainly expect blowback from customers. More likely, Amazon will attempt to integrate this approach into Whole Foods’ new 365 stores if its pilot store in Seattle (still in beta testing) is a success.

Regardless of its success in physical stores, we expect that Amazon plans to leverage Whole Foods’ existing relationships with organic and natural food suppliers and its own massive online retail platform to create even more buying power to squeeze its suppliers for price concessions. That is bad news for shelf-stable packaged food suppliers, who are already facing pricing pressure from Wal-Mart, Costco, and other major grocers. Since packaged food can make the shift to online retail much more easily than fresh produce, natural food companies such as Hain (Celestial Seasonings, Westbrae, and Terra) and General Mills (Cascadian Farm, Annie’s, and Muir Glen) are in for continued profit margin pressure.

This consolidation will make it even more challenging for upstart organic and natural foods companies to make the leap from local to national distribution. We have seen countless small food companies focus on getting their products on the shelves of a single Whole Foods region as a stepping stone for broader distribution. Since 2006, Whole Foods has lent $14 million to small farmers and food manufacturers to help them expand via its Local Producer Loan Program. Two Vermont businesses (and Clean Yield investees), Ayers Brook Goat Dairy and High Mowing Organic Seeds, have received funding through the program. There’s no word yet on whether this program will be affected by the merger.

Nor has Whole Foods or Amazon disclosed how the merger will change their purchasing process, but Whole Foods had already started moving toward more-centralized purchasing from what had been a process that allowed significant local and regional autonomy. It seems that it won’t get any easier for the local cricket protein bar maker to get on Whole Foods’ shelves. As for your local farmer who has been selling to Whole Foods, we don’t see how this helps them, but we’re not sure that it will have much of an impact.

It seems that it won’t get any easier for the local cricket protein bar maker to get on Whole Foods’ shelves.

Interestingly, Amazon convened a meeting in early August with grass-fed beef producers. The attendee list and the agenda were hush-hush, but the fact that such a meeting was being held at all indicates that Amazon is spending resources on developing its fresh foods supply chain. While overcoming thorny issues about small-scale meat processing is something most can agree to, we have concerns about the compatibility of Amazon’s approach to scale and price with the nature of regenerative agriculture and soil stewardship.

Whole Foods had long ago transitioned from a small, alternative grocer to the 600-pound pumpkin of the natural foods industry. This merger simply seals its identity as Big Organic. While the company made significant positive contributions in its early days and even its middle age, the true champions of sustainable local and regional food systems remain our local food co-ops, farmers’ markets, and CSA farms.

Thankfully, investors who want to support sustainable food systems have an ever-increasing number of options for putting their money where their mouths are. Clean Yield clients have deployed capital into a wide range of vehicles, from Vermont Community Loan Fund to the Flexible Capital Fund to Fresh Source Capital to Iroquois Valley Farms. Meanwhile, Slow Money networks continue to emerge and grow to help individual investors find local food enterprises in need of capital. The Whole Foods-Amazon marriage only adds urgency to the development of local and regional food systems.

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