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Natural Industry Primes for Amazon

Celadrin

By Janet Poveromo

On June 16, Amazon announced its plan to acquire Whole Foods for $42 a share, in a deal valued at $13.7 billion. Whole Foods’ John Mackey will remain CEO of the grocery store chain and the deal is expected to close in the second half of the year.

The news sent shock waves across industries and there has been plenty of analysis done on the deal. What it means for health food stores and the natural industry as a whole is yet to be determined.

“This is one of the first major combination of two completely different sales channels for natural products: direct to consumer internet sales and a large brick and mortar retail chain,” said Jim Emme, CEO of Illinois-based NOW. “The Amazon model is fast service at a low price, while the Whole Foods model had been a culture of trust with the consumer, with products at a premium price. How the dichotomy of these pricing models will sync up is going to be interesting to observe.”

One big difference in the two models is how branded products are purchased by the retailers, Emme added. “Whole Foods relies heavily on the support of a third-party distributor to supply its stores, with some brands being carried by brokers.  This adds two layers of expense to the retail supply chain.  Amazon currently does not follow this model, and it is not yet clear whether Whole Foods Market will continue to operate in this manner.”

NOW, Emme said, currently sells to both Whole Foods Market and to Amazon, “so we believe that there will not be much effect on our brand in the beginning of the consolidation. Our brand is at a value price point, with top quality at a fair price. This could position our products to do well in either channel. No matter what happens in this situation, we will continue to be staunch supporters of independent retailers and natural chains.”

Naomi Whittel, CEO of Twinlab in Florida, noted that the acquisition “will open up the world of health to a much larger group in an extremely convenient way, positively changing the whole retail shopping experience and make natural foods more accessible for the consumer.”

In the meantime, Twinlab’s focus will also remain on providing the highest quality and most innovative products that address consumer and market needs and support our retailer partners, according to Whittel.

Retail Tech
Amazon has been experimenting with retailing technology with its Amazon Go stores, for example, and that will likely expand.

“Amazon is about the efficient and innovative way to deliver consumer needs and we have already begun to see new technology entering retail stores from self-checkout options to talk of drone delivery,” Whittel said. “I’ve spent a lot of time in Asia and the have already adopted smart lockers in neighborhood fulfillment centers and in residential blocks to allow for rapid and secure delivery and pick-up of consumer orders.”

“Amazon is a leader in supply chain innovation and superior customer service,” Emme agreed. “They have competitive advantage in these areas, so it makes sense that they could leverage this innovation to change the way technology is used to deliver products to consumers. The ability of Amazon to use consumer metrics to recommend additional products is legendary, and this too is another area in which they might change the way we shop for natural products.”

How the possibility of new retail technology will affect the community-centric model of Whole Foods remains to be seen, Whittel added. “But what this acquisition tells me is that Amazon is interested in deepening its consumer relationships. They have an appreciation for what Whole Foods has built and what it brings to the table, which may mean the best of both worlds is coming to the consumer.”

Emme also speculated on Amazon’s strategy and how it will play out with Whole Foods’. “One should look at the business model Amazon uses to serve consumers versus the business model used by Whole Foods Market.  Amazon strives to be the lowest price provider of products in multiple segments and categories.  It remains to be seen as to whether or not they will expect the same of Whole Foods Market.”

“How will Amazon hold out Whole Foods as a natural brand—that’s where the rubber meets the road and nobody knows that yet,” said Daniel Fabricant, PhD, CEO and executive director of the Natural Products Association (NPA). He also pointed out the significance “natural” plays in the acquisition. “People have referred to the [natural] industry as a ‘cottage industry.’ Well, that’s gone.”

Natural Product Retailers’ View
“I can’t fully predict the short and long-term effects,” said retailer Michael Kanter, owner of Cambridge Naturals in Massachusetts. “In the short term I see little to no change. In a few months to a year we will start to see further challenges in pricing and I’m more concerned about inventory and availability. We will be challenged margin wise,” he said. “The long term is a lot murkier.”

Observing and evaluating the on-going evolutions of Whole Foods as well as online ecommerce companies is something that Retailer Mo George-Payette CEO of Mother’s Market & Kitchen in California said is something they have been watching closely for some time. She also pointed out the significance of the industry’s halo history.

“As independent natural foods retailers, we need to continue strengthening/enhancing our practices, because that is how we have remained competitive: by providing excellent customer service with a unique depth of selection—we are values based, which is the platform by which our industry was founded—customers trust us to remain consistent, with transparency, and also remain receptive to their requests and concerns, as advocates for their local communities and leaders of sustainability—this ability to be responsive to the needs of our customers is a very important aspect of our culture and success.”

Retailer Ramona Billingslea of Betsy’s Health Foods in Texas said the acquisition proves what smaller retailers have been saying all along—the natural products industry thrives because of the relationships that are built in brick and mortar stores. “Will Amazon, which has mastered mechanization in sales online, be able to make the changes required to thrive in brick and mortar, where relationship is king? That will be the key issue that determines if Amazon’s takeover of Whole Foods makes a big impact on our industry as a whole or just a little ripple.”

The store has also been creating strategies to compete with Amazon’s online sales, Billingslea said. “We are largely a supplement store, which probably makes our perspective on this issue slightly different than natural foods retailers. We plan to keep building relationships with our customers and seeking vendors who support small retailers by working with us to keep us as competitive as possible on price.”

As to technology, retailers might add the Amazon Go technology for easier checkout, said Bob Phibbs, CEO of the Retail Doctor, a New York based retail consultancy. “But I wouldn’t let that worry [independent retailers]. “I doubt ApplePay, GooglePay or Paypal are much of a factor for them.”

George-Payette said retail technology is constantly evolving already, relative to providing digital applications, resources, efficiency and easy-to-access options for shopping. “This is where we need to stay current and be nimble and dynamic, yet also remember there are many customers who like a good ol’ local basic shopping experience.”

As for payment methods, she said, back-of-house receiving processes and ordering procedures is an ever-changing environment that distributors are also adapting to. “It’s a race toward who can get the most product in the hands of the consumer most rapidly. We do not currently know to what degree the Amazon/Whole Foods worlds will integrate and shift but they will have all of our attention as they mesh online fulfillment with options for an even wider variety of offerings with the ability to connect the best practices from both of their realms.”

Digitally, “it’s one thing to be tracked online, so that ads for products you’ve looked at on Amazon pop up wherever else you go on the internet,” noted Billingslea. “It might be quite another thing to be ‘stalked’ this way in the brick and mortar environment. Will Amazon’s retail solutions foster innovation in technology across retail channels? If it does, perhaps all retailers may potentially benefit.”

Cambridge Natural’s Kanter noted that his store is not selling online at this point. “I won’t say never, and I won’t say that it doesn’t worry me that we don’t, but we are about the experience and the experience is about people shopping in our brick and mortar store. While I can’t argue about the growth of delivery, we can’t compete in that place. It’s a slippery slope if we try—we’re not going to try to be a significant player.

Terry Lemerond, founder and president of EuroPharma, Inc. in Wisconsin, stressed that 74 percent of shoppers still want to touch smell and feel what they are buying. “Amazon does not provide that and they know they are missing a high percentage of people,” he said. “Plus they will funnel other non-food items through Whole Foods. It will in my opinion give the independent stores better and more attention.”

However, Fabricant stressed the need for independent retailers to focus on their web presence. “Here’s what we want to see and we want to help retailers out. If you’re a mom and pop health food store, can you compete with Amazon? Well, not in the sense of the vastness. But look, if you’re a mom and pop health food store and have a website and offer local delivery, there may be some options there. If you’re worried about customers coming into your store once, getting good information and then purchasing on Amazon, there are ways to combat that.”

Still, the pending partnership with Whole Foods and Amazon obviously creates a bit of anxiety for all in the industry, said George-Payette. “It is also exciting to imagine how it will unfold. It leads to wondering how it will have an impact on the overall industry and which retailers will be further impacted, from the growing demand for organics and non-GMO (genetically modified organism) products to farmers/growers incorporating other resources to support supply, to pricing structure competition, to of course fulfillment methods,” she said. “We are seeing many regional brokers join forces with others to stay afloat, more independent brands signing on with larger companies across all categories, and frankly, it is a sign of our fast-paced changing times.”