For a certain kind of small business Whole Foods represents the big boy pants. Snagging shelf space in a local store is a sign that you're on your way to maturity.
So when Amazon announced a deal to buy Whole Foods for $13.7 billion, the natural products channel lit up.
"It was crazy," says David Simnick, co-founder and CEO of SoapBox Soaps, a buy-one-give-one personal products company based in Washington, D.C. "People were texting each other, posting on Facebook, email threads. 'Oh my gosh!' 'Did you see?' 'What is going to happen?'"
Small suppliers were already coping with changes at the 467-store healthy food retailer. Whole Foods, with its local forager program that reaches out to artisans and growers, its generous in-store marketing opportunities, and its willingness to make loans to small suppliers, has long been a favored launch pad for sustainable entrepreneurs. But last year the company began to shift from autonomous local and regional buyers to a more centralized purchasing model. That new hybrid approach, some worried, might weaken the local focus.
Then came word of the Amazon deal.
Some entrepreneurs, like the founders of Health Warriors, a maker of chia-seed-and-protein bars, based in Richmond, Virginia, were excited out of the gate. CEO Shane Emmett expects that with Amazon's help, Whole Foods, which launched Health Warriors nationally, will be able to reduce waste through better forecasting and improve the return on their promotional spends. "My great hope is that the combination of these superheroes of the industry will help expedite better food access for more people," says Emmett. "It is going to usher in an entirely new era of grocery retail."
But along with optimism came concern. Knowing Amazon's reputation for putting downward pressure on prices, many worried about their margins. "The buying power of Amazon--everybody expects that to eventually reduce the margin of Whole Foods' suppliers," says Mike Maher, president of Presenture, a sales agency that represents small food manufacturers. "Aggressive pricing would cause the industry to look at ways to take costs out of the system," says Maher. The ripple effect to competing grocers would eventually affect many more small businesses in the category.
A spokesperson for Whole Foods said commenting on any specific plans would be premature because the deal has not been finalized. An Amazon spokesperson was reassuring: "We will want Whole Foods to keep doing what it does best, including working with small farms and producers to bring the best natural and organic foods to customers."
Of course, many Whole Foods suppliers may fare better than they expected. "Whole Foods customers trust Whole Foods" to stock the kinds of products sustainable and health-conscious small vendors make, says Maher. Such vendors rely on ingredients and processes that can't be replicated cheaply. "They are not easily replaced," says Maher. "And Whole Foods will not do anything to jeopardize that trust."
One such supplier is Native American Natural Foods in Kyle, South Dakota, which makes snack foods from buffalo meat. Part of the company's mission is to encourage buffalo ranching on Native American lands, a goal made more difficult if it has less money from which to pay buffalo producers. "Producers are at the bottom of the value chain," says co-founder and president Mark Tilsen, who, like most Whole Foods vendors, says the acquisition inspires both hope and caution. "We are putting more and more demand on them for grass-fed, natural, and organic. We have to make sure, as they do more work, that the value we give them goes up at the same time."
Rob Adams, who teaches entrepreneurship at University of Texas, Austin, is sanguine that suppliers won't feel much pain. "A lot can come off of Whole Foods' profit margin, or it can come out of Amazon's operational efficiency before they start reducing prices to the vendor," he says. "Amazon's costs of delivery are the lowest in the industry. If they apply that to Whole Foods, they can bring down prices without necessarily lowering what the vendors get."
SoapBox's Simnick says he anticipates a mix of lower prices and tightened operations. "The vendors are going to feel the squeeze. But there is going to be a lot of efficiency built into creating an effective supply chain that Whole Foods has never experienced," he says. (Whole Foods gave SoapBox Soaps its start. But the companies parted ways in 2015 because the products SoapBox made specifically for Whole Foods were not profitable. SoapBox still does good business on Amazon and is available at such Whole Foods competitors as Target and Walmart.)
Some entrepreneurs worry that, to the extent data-driven Amazon influences product selection at Whole Foods, the deal will increase the advantage of large brands. "A bigger brand can do better at buying reviews, doing buying programs, funding all the things necessary to succeed inside of Amazon," says Daniel Doll, president at SoapBox. "I'm not sure the access that a smaller brand has to Whole Foods gets retained.
"The counterpoint would be that Amazon looks at partnering more deeply with the successful brands at Whole Foods and making them big on Amazon," says Doll. "That's the Amazon opportunity."
Tilsen worries that "Bigger companies tend to do more business with bigger companies. So we have to work harder to make sure there are places for people like us," he says.
He is less enthusiastic than others about the effect of Amazon's data-driven culture on Whole Foods. "If brands are evaluated simply on the dollars per square inch that they generate for the retailer, it will be harder for small brands like us to maintain their shelf space," says Tilsen. "Will a natural, Native American buffalo product that is based on a traditional food still have value in the new equation? We are hopeful that it will."
To the extent that Whole Foods serves as a test market for Amazon, high-performing companies may swiftly be lofted to the big time. Of course not every company can scale quickly enough to serve a global market. And some don't even want to. "The current vendor that is supplying one or two Whole Foods stores is probably going to continue to supply one or two Whole Foods stores," says Adams. "The upstart vendor that has ambitions to grow faster will have that option if they can hang on for the rocket ride."