When Amazon bought Whole Foods last year, many wondered what changes it would make to the specialty grocer, whose unique identity includes a reputation for high costs.
One draw for shoppers is access to smaller and local brands they can’t get elsewhere. That’s of course a draw for suppliers too, as Whole Foods has been proactive about including brands that don’t always have the funding or scale to compete nationally.
The Texas-based grocery chain recently emailed suppliers with changes, according to the Washington Post. It’s bringing in retail strategy firm Daymon, and Daymon’s subsidiary SAS Retail Services, to check shelf inventory, schedule (and sometimes run) in-store sampling, and create merchandising displays.
Retailers selling more than $300,000 in grocery items through Whole Foods will pay for the services by giving Whole Foods a 3% discount, 5% for beauty/health retailers.
Whole Foods will charge suppliers $110 to run a four-hour sampling session, according to the Washington Post; vendors with a DIY table will pay a scheduling fee. For suppliers, “that could be a trivial cost or a huge amount of money, depending on the vendor’s revenue,” said Min Choi, PhD, assistant professor in the management department at California State University, Fullerton, who studies grocery supply chains. “I’m not sure how viable that option is for the local brand vendors.”
Before, retailers handled their own inventory, merchandising and sampling, with no imposed fees.
Whole Foods aims for high-quality supplier and customer experiences
This comes on the heels of September news, when Whole Foods announced it was centralizing buying operations and saving on costs.
As for the company’s strategy, Whole Foods told Supply Chain Dive that it’s been streamlining its processes for the past two years, and changes to its in-store execution and demo programs will create consistent and high-quality experiences for suppliers and customers.
Given a lack of public details, though, experts can only speculate about the company’s direction. The chain’s value comes from its unique offerings and friendliness to small retailers and producers, not from its pricing. But from a business perspective, “inefficiency is cost, and not sustainable. There’s got to be a good rationale for all their changes,” Choi said.
Bringing in a third party will help streamline its operations, reducing the complexity of multiple suppliers restocking shelves and setting up tables to demo products. “If every vendor comes in and does their own inventory replenishment and sampling, that’s not efficient,” Choi said. “Efficiency is key for supply chain operations.”
National and local brands compete for shelf space
Another issue is Amazon bringing in more national brands and cutting back on local suppliers. The Washington Post quoted one small pasta sauce maker whose shelf space decreased from 108 bottles to 36 bottles, as the store transitioned to bringing in better known brands.
Before this, Whole Foods was probably not optimizing shelf space, which is a science, Choi said. “There are a lot of brands in the grocery store with different levels of revenue generation. If Amazon is reducing certain vendors’ shelf space, I’m sure it’s the result of shelf space optimization,” she said.
“The question of inventory is important, but it’s also important to have a sense of the experience I get being in the Whole Foods store.”
Ananth V Iyer
Operations management professor and department head of management at Purdue University
Shelf space reallocation isn't necessarily done by a third party like Daymon, but reallocation efforts, plus a third party centralizing in-store execution, can improve profits by maximizing revenue and lowering the operating costs.
National brands should have their place in some aisles, but not all, said Ananth V Iyer, PhD, an operations management professor and department head of management at Purdue University, who studies grocery promotions.
“You find all these interesting organics and new things in healthy foods, but you go to their section for paper towels, and you don't see national brands. It's a little frustrating because you get what you want in one aisle, but are completely frustrated in other aisles,” he said. For example, when he looked for shaving cream, he didn't recognize any of the brands.
A third party to optimize product variety
Bringing in a third party can help prune and refine the product mix and brands carried. A third party can help analyze the categories needing more variety, to maximize the pruning impact. A third party can also make it easier to drop products. Buyers who sourced specific products may have difficulty dropping them, whereas a third party is dispassionate, Iyer said.
To remain unique, Whole Foods needs to maintain a mix of national brands and lesser known ones. “Some things are done well by national brands,” he said, like cereal. “There are so many health brands, like Kashi, that were purchased by the national brands. It's difficult to tell the difference” between what’s national and what’s not, given brand acquisitions.
Bringing national brands into categories including paper towels and diapers would make sense to Iyer, in terms of pricing and one stop shopping. Amazon’s model is that customers can buy everything from them, while Whole Foods customers often make another stop after Whole Foods for staples such as paper goods.
With the merger, Iyer expected that Amazon would leverage their low prices on national brands while also staying competitive in the fresh produce aisles and with their other unique offerings.
Why Daymon?
One of Whole Foods’ strengths is its 365 Everyday store brand. While none of the news stories mentioned whether Daymon is or will be involved in the 365 Everyday production, the firm is a strong player in private label products.
“They have a long history of doing it and doing it well,” Iyer said. He said he’s confused why Whole Foods is bringing in Daymon, as Whole Foods’ challenge isn't to improve its private label, but to become more relevant in the grocery area and to cut prices.
“If every vendor comes in and does their own inventory replenishment and sampling, that’s not efficient. Efficiency is key for supply chain operations.”
Min Choi
Assistant professor in the management department at California State University, Fullerton
“If they don’t do something on the national brand side, they’ll lose out.” He doesn't think of Daymon as the company to go to for bringing in national brands, but rather for shoring up private brands.
That said, Daymon’s subsidiary, SAS Retail Services, was brought on for the inventory management, merchandising and sampling programs. Both Whole Foods and Daymon declined to comment on Daymon’s role.
Efficiency leads to a changed identity
A big question is how much Amazon is willing to change Whole Foods’ identity in order to bring in national brands and change their supplier relationships. “If their plan is to give up the identity as a marketplace for local and organic foods and use Whole Foods stores as a front for their Prime or Amazon Fresh, everything they’re doing makes perfect sense,” said Choi.
Bringing in a company to do merchandising and sampling will change their identity, though. “The question of inventory is important, but it’s also important to have a sense of the experience I get being in the Whole Foods store,” versus looking like other grocery chains, Iyer said.
