Whole Foods Sold Their Recipes & Formulas to Amazon

At some point, in the not too distant future, Amazon wants to ensure that you’re buying everything from either Amazon.com or Amazon stores.  Books.  Music. Diapers. Tech.  Food.  Shampoo.  Organic body care and organic foods. All interestingly now available for purchase at lower prices when you choose their “store brand”. The latter newly so thanks to a freshly minted purchase of Whole Foods.

Amazon announced the acquisition of Whole Foods for $13.7B on Friday, June 16, 2017.  The purchase has been heavily analyzed with more commentary sure to come, but most analysts are looking at top level layers of this acquisition and have missed some key factors that may affect independent retailers, brands, and retail consumers of the products sold by Whole Foods. This post addresses some ways Amazon might leverage the stores,  the distribution network, and key intellectual property changing the way that some retailers do business and the competitive landscape for brands operating in the natural and organic space.

Strategic positioning of future physical Amazon stores is significant to local and national retailers. 

The acquisition of Whole Foods gives Amazon all of the Whole Foods leases. Those leases cover various build-outs, but include both free-standing and strip-mall stores.  Each store includes employee break areas, warehousing, cold-food storage, a sales floor, pre-existing high income foot traffic, parking spaces, signage, and the standard high end Whole Foods look & feel.  This transaction could pre-position Amazon-branded stores in Whole Foods locations while leveraging existing consumer shopping habits for future behavior.

The simplistic connection drawn by the media is to grocery.  Many believe Amazon is opening co-branded organic grocery stores. Maybe they will. For a while. But most cities have plenty of grocery stores.  Whole Foods wasn’t growing or making money.  Why would Amazon keep that model?  Step back and imagine that space morphed into a higher end version of Target, a book store, an organic grocery store, a technology store, a music store, or even a baby store.  Apple, Buy Buy Baby, Babies R Us, Walmart and Target should all be thinking carefully about their next steps.  Amazon has not yet indicated that those stores will remain grocery.

Amazon’s recent history with Diapers.com might indicate it’s future with Whole Foods.  Quidsi was excised of it’s customer list, fulfillment centers, vendor relationships, and technology.  Amazon yielded Amazon Baby and the Amazon Mom strategies.  Diapers.com is now gone.  If history repeats itself, Whole Food stores may not look much like Whole Foods stores for long.

“Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does, said Dennis Berman, the Wall Street Journal’s financial editor.

Regardless of where they take the physical space, Amazon now owns a PHYSICAL PRESENCE in nearly every high income market in the United States.  As we watch how this space is utilized, retailers from every market category will need to be prepared to move quickly in response. It will be interesting to see which categories are affected.

Amazon’s ownership of Whole Foods may now impact UNFI, the distribution network used by thousands of independent natural product retailers.

Behind the scenes, Whole Foods has a powerful agreement with United Natural Foods (UNFI), a public organic food distribution company. This company purchases product from many natural and organic brands and then wholesales and distributes those product lines to many retail stores including all Whole Foods stores.  The agreement UNFI holds with Whole Foods doesn’t expire until 2025.  According to their 2016 annual report, UNFI believes themselves to be the primary distributor of natural and organic products to the majority of the natural products customer base. An evaluation of the same report shows Whole Foods is the primary source of revenue for UNFI.

The Whole Foods purchase gives Amazon negotiating leverage with UNFI.  As the primary source of product to natural grocery stores nationally, UNFI is also responsible for setting pricing to your local natural grocery stores. This new relationship with Amazon may change both product availability and pricing to your local store. The implications are far reaching, both to stores and to brands.

Currently, brands may rely entirely on UNFI for their store communications, pricing and promotion management. Brands may not even know which stores are stocking their products.  Identifying their customer list and developing a direct sales model would mitigate the risk associated with the heavy dependence on UNFI. Alternatively, brands may want to look at a secondary distribution source to ensure relationship management, inventory availability, and timely delivery to stores.

UNFI stock fell 21.8% on 6/17/2017, the day of the announcement.

Amazon now also owns the formulas for organic generic body care and food products.

For several years, economists have watched Whole Foods struggle to grow revenue and profitability. As  sales floundered, so did the sales of many of the independent brands reliant on UNFI for distribution and Whole Foods for revenue.  Today, many independent brands sold in Whole Foods (like Tom’s of Maine and California Baby) are now also available in the Amazon Pantry.

In an effort to increase revenue and restore a competitive edge in response to Trader Joes, Whole Foods rolled out their new “365” stores.  Behind the scenes, the 365 project created a catalog of private label recipes and formulas for food products and body care similar to the best-selling products sold on shelves in Whole Foods stores.  This project could have provided some much needed margin to Whole Foods.

Now, ownership of these new recipes and formulas under the 365 brand will instead give Amazon an distinct “natural and organic” marketing advantage over the rest of the off-brand food and body care industry, including Walmart’s “Equate” and Target’s “Up & Up” products.

The broad availability of these generic formulas on Amazon.com instead of just in the 365 stores may also have an affect on competition in the overall natural and organic body care space.  It may cause consolidation or changes in pricing. It may change how brands like Tom’s of Maine and California Baby acquire new customers.  Eventually, it may also change the products available and even how manufacturers distribute product to customers.

The big picture economics are certainly interesting, but now what?

Economists and stock analysts are so busy circling around how Walmart and Target are going to respond to this development that they’ve forgotten to pay attention to the derivative effects of big acquisitions on small businesses.  UNFI impacts thousands of businesses as a distributor, yet they were barely a passing mention in one report on falling grocer stock prices.

Eventually, a true economist will analyze how these new changes will affect the business landscape and what they might mean for smaller businesses.  By the time economists get around to that analysis, they will be discussing a graveyard full of companies who didn’t change their strategies in time. Individually, small businesses aren’t as exciting as Walmart acquiring Bonobos, but collectively they employ more than half of the employable United States.

John O’Leary recently published a book called “On Fire: The 7 Choices To Ignite A Radically Inspired Life.  In his book, O’Leary writes, “We may not control everything that happens to us, but we always control how we respond.”  That’s healthy advice for the smaller businesses and brands trying to find their way in a new world with new rules.  This is a new world with new rules.  It is time to get busy.