Whole Foods asks vendors to pay to play

Discussion
Photo: RetailWire
Jan 10, 2018
George Anderson

Among the many criticisms leveled against grocery stores that rely on slotting allowances and other supplier fees to operate their businesses is that these charges result in higher prices to consumers and a degree of sameness — a sort of dumbing down of merchandising creativity — across locations. That’s what makes a recent Washington Post article, which suggests Whole Foods is using a similar system to operate its business, a head scratcher.

According to the report, the grocer has sent an email to suppliers informing them that the retailer will set shelf space, displays and in-store sampling based on contributions made by vendors. The switch is part of Whole Foods’ shift to more centralized operations. Last May, the Omaha World-Herald reported the company had “shifted many of its purchasing decisions to its national office, taking some power out of the hands of its regional offices.”

One of the concerns with slotting allowances is they effectively price smaller and sometimes more innovative brands off store shelves while me-too nationals pick up the real estate.

According to an email obtained by the Post, grocery vendors that sell more than $300,000 annually to the chain will need to discount their products by three percent to pay for the program. Health and beauty suppliers at the same level will be required to drop theirs by five percent. Whole Foods will also require local suppliers to pay $110 per location to have the retailer’s in-house broker, Daymon Associates, run a four-hour demo in-store, while national vendors will pay $165.

Kathleen Overman, a former employee of Whole Foods, who founded a company that hosts product demonstrations at the chain’s stores, praised the grocer for its history of “creating a community of local food producers and brands” in an interview with the paper.

“Our job has always been to advocate for those small businesses, but with these new rules, companies like mine will no longer be useful,” she said.

DISCUSSION QUESTIONS: How will Whole Foods’ new program requiring vendors to help pay for shelf space, displays and in-store sampling affect its business? What will it mean for rivals and for its vendor relationships?

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35 Comments on "Whole Foods asks vendors to pay to play"


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Anne Howe
BrainTrust

Is Whole Foods striving to be Kroger? This whole effort makes me feel sad. One of the attractions of going to Whole Foods was to discover local and small-batch food purveyors and, in the process, enjoy something usually better than average grocery store fare. I keep trying to find more reasons to go there, but this is a reason to drive two more miles to Earth Fare.

Steve Montgomery
BrainTrust

I find the term contributions ironic. A contribution is something you do voluntarily. Slotting allowances, regardless of how they are structured, are a play-to-play form of revenue generation.

True this type practice has been around in the retail world for a long time but Whole Foods has portrayed itself to be a champion of locally sourced items. This will definitely have an impact on many of their current suppliers. Will consumers notice or care if they do? Maybe or maybe not. If they do, will the impact be significant enough to have Whole Foods stop collecting contributions? My bet is no.

Art Suriano
BrainTrust

Unfortunately, paying for shelf space and other perks is nothing new and Whole Foods is joining the many grocers and retailers who have implemented this concept. Whether it’s co-op dollars, vendor contributions in a different way or flat out discounting, it’s been going on for years and typically the more prominent the chain, the costlier it is to be on the shelf.

This practice makes it harder for the little guy to compete and at Whole Foods it will be no different. How they survive as a chain once the local players are gone will be interesting because the local and smaller companies have been a substantial part of the Whole Foods culture.

Today it’s no longer about making a profit. Instead, it has become making as big a profit as possible no matter what it takes and no matter what damage it may cause others.

Phil Chang
BrainTrust

This is disappointing. For reference, I’m a Canadian that has done business with Canadian grocers. We’re famous for slotting fees or “listing fees” and it’s been prohibitive for small brands to get into distribution. The structure described above is a lot of old world, money grabbing profiteering that I’ve been so excited that we’re moving away from.

In every instance in which we’ve seen retailers adopt these programs, the “reason for being” goes away and becomes solely about profit … welcome Whole Foods to the rest of boring grocery.

Brian Kelly
Guest
10 days 10 hours ago

Centralized retail in a decentralized world. Bad.

Like politics, retail is location, location, location. Lose trading area relevance and crater brand experience. It’s stunning that the great tamer of the “long tail” should, maybe, fall into the “take cost out by centralizing shared resources” trap. It certainly didn’t work at Macy’s.

David Livingston
Guest
10 days 10 hours ago

This could mean competitors like local natural food co-ops will have a better opportunity to differentiate themselves by having smaller and innovative brands to differentiate themselves from Whole Foods. Whole Foods’ trash could be a competitor’s treasure.

Jon Polin
BrainTrust

These moves further generic-ize Whole Foods to look and feel like a commodity supermarket.

Phil Masiello
BrainTrust

This is a very disappointing step. It creates a barrier for smaller brands to enter the market.

These types of tactics will only lead to a more homogeneous product mix driven by the larger brands who can afford it. The smaller brands will need to look at online opportunities to sell directly to the consumer in a more profitable channel.

The real issue is in destroying the brand image of Whole Foods. Consumers are going to read these stories and be put off by these changes. Repercussions could blow back to Amazon itself.

The other issue that Amazon needs to think about is exerting too much influence over products and vendors both online and in brick-and-mortar. That could bring increased scrutiny to their entire business.

It is unfortunate that when retailers struggle financially they think vendors can become their bank. A better approach would be to focus on fixing the business fundamentals.

Zel Bianco
BrainTrust

This is so not what Whole Foods should stand for. It seems the Amazon takeover of Whole Foods is having a negative effect rather than positive. I think this will be very bad in the long run for consumers and just another money grab for Amazon. I agree with Anne. This provides a good reason to go elsewhere.

George Anderson
Staff

To be fair to Amazon, Whole Foods’ decision to begin centralizing its operations pre-date its acquisition by the e-tailer.

Charles Dimov
BrainTrust

Pay-to-play is standard practice with Amazon and not uncommon with many retailers/grocers as well. Though I like the aspect of “get the larger retailers to pay more proportionally, to give the smaller players a chance,” this whole notion re-expresses the importance of a vibrant, healthy and competitive retail landscape. We need a retail landscape where no single player has such a dominant market share or presence that smaller retailers and brands MUST sell through them, and end up getting extorted by the shelf space, display and allocation pricing models.

In the end, it is the consumer who suffers … and that is not good for anyone. Interesting play. It is an opportunity for Whole Foods/Amazon’s competitors.

Dave Nixon
BrainTrust

Pay-to-play will only push those regional and local suppliers to find alternative ways of selling their product, like direct-to-consumer e-commerce which will not be beneficial for retailers in the future. This next generation of shopper will not have any issue with buying somewhere else besides the traditional retailers.

I personally know some of these smaller brands that are re-investing their money in getting away from relying solely on the store shelf in an effort to survive. This trend will only hurt the diversity of product assortment and shopping experience in the end. I know some large retailers are starting to amend this approach by offering regional product assortment special merchandise vignettes, where their products are known to a smaller demographic but not expected to play across all of their stores.

This is a great way retail can maintain both the national brand presence AND cater to very valuable and relevant smaller brands that will draw this next generation of shoppers to still shop the physical store.

Brandon Rael
BrainTrust

This move by Whole Foods is concerning, as one of the more compelling attractions of shopping at the store is the local marketplace feel, and their enabling local merchants to have a forum to demonstrate their product. One of the biggest attractions of Whole Foods has been their ability to provide locally sourced products and build a sense of community.

It’s clear that the move is to push for greater profitability and maximize their shelf space similar to the larger grocery chains, which changes the dynamics of the store.

Ken Lonyai
BrainTrust

There’s Whole Foods’ mainstream persona and then there’s reality. More than ever, gone are the days of a disruptive grocery chain that adhered to quality products from varietal/unique sources. Presently, many of the brands in-store are subsidiaries of national brands that were acquired when those brands bought their way into alternative categories like organic. Coupled with the company’s (pre-acquisition) decision to centralize buying, today’s store is on a different trajectory than it was 10 years ago. Today the company is acting more like conventional grocers do, supporting fewer brands, thwarting small suppliers, and negating regional influences. Layer on their parent company’s modus operandi (volume, volume, volume) and consumers looking for product discovery and alternative experiences to run-of-the-mill supermarkets will have to look elsewhere.

Dr. Stephen Needel
BrainTrust

Mark this as the true beginning of the end for Whole Foods. They will become another (and often higher-priced) grocery store. Sprouts, Earth Fare, are you listening?

Stuart Jackson
BrainTrust

Slotting fees and distribution fees have been around since the 1970s. Payments made by suppliers to supermarkets for giving prominence to their products — or even just stocking them at all — and reward payments for when the supermarket boosts sales, are said to be worth a whopping $18 billion or more to U.S. retailers.

This means that Amazon has decided that Whole Foods will follow the lead set by others and so you can’t really blame them. Ethically though, it doesn’t send out a great signal in a store like Whole Foods dedicated to small producers, respect for the planet and healthy living! I think it might have been better if they hadn’t introduced these fees and then developed a marketing campaign around it — turning themselves in to the virtuous alternative.

Gene Detroyer
BrainTrust

The problem is that many of the suppliers are small and this could be a burden. But business is business. Whole Foods has a limited asset (the shelf) and must determine the best way to get a return on that investment. It is certainly possible as long as they don’t make it an auction.

Shep Hyken
BrainTrust

This is the way business is done. Nothing new here. Nothing surprising.

Cate Trotter
BrainTrust

This is somewhat surprising given that the customer perception of the Whole Foods brand is healthy, organic, local, small producer. It’s supposed to be a different type of supermarket, and local and small vendors are a big part of that differentiation.

This new program is likely to see a lot of those companies priced out. If that’s the case Whole Foods’ brand image may suffer as a result. It’s also a shame to hear that regional stores are losing certain controls at a time when retail really ought to be doing more to make every store different and in service of its location and the people who frequent it. There will always be customers who seek those types of products and if they can’t get them at Whole Foods they’ll get them elsewhere. In that respect, there may be opportunities that come out of this.

Roy White
BrainTrust

Many of us were hoping that Amazon’s acquisition of Whole Foods would be the first step in a new era of store design, operations and merchandising and that the digital world would meet brick-and-mortar retailing in a positive way. Sadly, however, that Daymon is managing the remake appears to mean that Whole Foods is being recreated as a standard — and confrontational — supermarket chain generating some of its earnings from “contributions” from suppliers.

Kai Clarke
BrainTrust

This pay-to-play position is nothing new in retail, especially in grocery. It allows the big to get bigger and the smaller competitors usually shrink away. Unfortunately, this model is being disrupted by Lidl and Aldi as they enter the U.S. market and demonstrate that a price-based, quality assured, select offering is a more successful and operationally superior result. Beating up suppliers for higher prices only results in higher costs to the retailer, until a competitor who doesn’t require this steps in and disrupts the market.

Omnichannel and online marketing will easily disrupt this process as our e-commerce base grows and these antiquated requirements (and their retailers) either adapt or perish.

Tom Dougherty
BrainTrust

As brands gain greater marketshare they forget what made them important in the first place. They become the very thing they positioned their brand against. Whole Foods is losing its way and its differentiation.

As Whole Foods becomes more vanilla a competitor will arise and steal some of its market share and preference. Or will Whole Foods adapt and start eating its own young? The jury is still out.

But the next chapter is already written.

Bob Hilarides
Guest
10 days 8 hours ago

While I share the sentiments of most commenters and will miss the shopping (and professional interest) experience of Whole Foods of the last couple decades, this really can’t be much of a surprise to anyone. Why would Amazon be interested in Whole Foods’ mission of offering a unique assortment of natural/organic/local products to a now leveling-off consumer segment? Does Amazon care about being an arbiter of organic and healthy? Is that really a big growth play in Amazon terms?

The value of Whole Foods to Amazon is more about the footprint and the 365 private label. That’s where Whole Foods can help Amazon grow. Squeezing some margin out of the ongoing operations to fuel deeper penetration into grocery e-commerce actually makes sense for the broader Amazon/Whole Foods enterprise. Just not for the John Mackey/Walter Robb vision.

Mike Mostransky
Guest
10 days 8 hours ago

Disappointing … I too felt the differentiation Whole Foods provided was because of the efforts that were made to bring in a more unique selection of local products. Charging for a spot on the shelf and “renting” out space is nothing new as many people have said. Is this because of the Amazon aspect? Is it an inventory thing? Are there logistical reasons or is this merely a turn towards assimilation?

Cyrus Tookes
Guest

Unfortunately, fixed fees often become the fuel for flat businesses, especially that of grocery.

Adrian Weidmann
BrainTrust

Another one bites the dust…. It seems like the MBA number crunchers encroach all the exceptional opportunities and squeeze the vitality out of them just to drive the bottom line.

Harley Feldman
BrainTrust

What happened to the Whole Foods that displayed and sold local vendor products? They have been Amazonized! A lesson for all acquisitions is to leave the acquired company alone for some time to better understand what made them successful and why the acquisition was done. Amazon is ignoring this lesson and changing the character of Whole Foods with this decision. This strategy is from an online company moving into retail stores, and it is unlikely to be successful. Some vendors will stop selling their products at Whole Foods and will look for other outlets. This is a losing strategy for Whole Foods.

Liz Crawford
BrainTrust

Sad. Homogenous. Product. Good bye Whole Foods. You were a lot of fun. Fortunately, you have opened the door to new upstarts who will now take your place, offering innovative, healthy, whole foods.

Brian Kelly
Guest
10 days 7 hours ago

I wonder if the new bosses, after living with the biz for a while, are shocked at the margins. Reducing prices cuts into topline. Cost structure drives the bottom line. How will it be before robots are on the selling floor?
Welcome to retail, Mr. Bezos!

Dan Raftery
BrainTrust

This had to happen after Amazon took the reigns ad immediately started whacking retails. Remember when “Whole Paycheck” was a common description of their margin strategy? This is just a claw-back tactic.

For some suppliers, this could be a welcome change from the regional authorizations of new items. Cost-shifting continues.

Richard J. George, Ph.D.
BrainTrust

I have never been a fan of slotting allowances (called “hello” money in Ireland) for the reasons noted, particularly the possible restriction of non-power brands. However, I am reminded that retailers enjoy a local shelf monopoly and as such can exercise control over these spaces. Regarding displays and in-store sampling programs, I come down on the side of Whole Foods. Any retailer is basically selling/leasing its store space, making them effectively real estate owners, with a license to charge whatever rent appropriate for the usage of the space.

Craig Sundstrom
Guest

I’m not sure I follow the logic that slotting fees lead to higher (consumer) prices. If anything, I would think they allow for LOWER ones. But since that’s peripheral to our discussion, let’s continue: what will the reaction be?

Vendors will hate it; the media and old-time Whole Food’s shoppers, to the extent that any are left, will be appalled and everyone else will continue to stare down at their smart phones in indifference … the march of WF toward becoming “just another grocer” goes on.

Ed Rosenbaum
BrainTrust

What does this say to other companies, vendors, looking at getting in this marketplace? It is reminiscent of the stories of Walmart “beating up” on their vendors for lower prices.

Doug Garnett
BrainTrust
This is consistent with what Amazon is doing online. Vendors are being pushed for, essentially, bigger Amazon margins, advertising expenditure (just to maintain existing sales levels), and other forms of pay-to-play. Amazon is savvy in calling them other things than slotting allowances or co-op. They are also attempting to force Prime shipping risks back onto vendors and taking solid companies and demoting them to drop ship. The fundamental result I hear about is the same as this post suggests: it’s most damaging to those small, inventive, agile companies who relied on Amazon to build their businesses and whom Amazon relied on to build their business. To keep sounding like a broken record, we shouldn’t be surprised. Amazon will have to show investors it can make money on its core business before long (since it’s losing money on retail-equivalent business right now). Amazon is a business and will have to make money sometime. Manufacturers shouldn’t give them a free ride because they’re “hot” and “innovative.” Every sales channel opportunity needs to be approached with realistic sense… Read more »
James Nichols
Guest

It’ll be very interesting to see how this affects their willingness to try and test new items in small numbers of stores. That, historically, has been an important way for small natural foods companies to get their starts. This nationalization of their decisions might significantly reduce the sort of experimentation that has helped small retailers get their starts.

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