March 16, 2016

Natural Products Expo West Trade Show - Highlights from Anaheim

By Anna Rubino

At Expo West, natural foods suppliers learned details about Whole Foods’ plans to overhaul its operations and UNFI’s steps to restructure, as they continued to focus on launching more products outside the natural channel, particularly with Kroger and Target.

In four days of discussions with natural products suppliers at the Natural Products Expo West 2016 trade show in Anaheim, OTR Global learned details about a range of natural and mainstream retailers and distributors:

Whole Foods
Centralized purchasing under development: Whole Foods Market Inc.
 is working with leading natural suppliers to allow centralized global purchasing of a core group of products for all stores. Currently, most purchasing and promotion decisions are made by each region. Initially, the retailer will be testing these core sets in two regions -- Rocky Mountains and Northern California -- but how large the core sets will be is still uncertain, several suppliers said. “This is a big deal,” one said. “It looks like they’re finally going from talk to action. The question is how ugly is it going to get before they can get through this transition?”

Vendors said Whole Foods will now evaluate all products for these core sets based on “buckets”: “win” products, those best-in-class items that draw shoppers specifically to Whole Foods; staples such as paper towels, which it will curtail with a more limited selection; and “parity” items, including high-volume products set at price parity with the competition. “We’re waiting to hear which products will fall into which bucket,” one source said. “We may see a list soon.”

However, many sources said uncertainty over the development of these centralization plans in recent months, compounded by layoffs last fall, has seriously undermined morale, as in OTR’s March 2 Snapshot. “At the store level, [staff] people are overwhelmed and don’t feel the company has their back anymore,” one said.  

Digital, centralized promotions: In meetings at the trade show, Whole Foods told vendors it plans to launch a digital national flier as well as relaunch its “affinity” (loyalty) program soon in new markets. One said Dallas would be the next market for the program, followed quickly by others. Several suppliers said the retailer was retooling the program to get away from a point-based system.

Sources also said Whole Foods is expected to launch a new media campaign in 12 metro areas, with more than one billion impressions in those markets, and expand with Instacart Inc. into an additional 12 markets (currently in 16). “They told us 17% of all Instacart orders are in the New York region,” one said.

Possible cut in vendor support: Two sources said Whole Foods’ plans to emphasize private-label products in promotions this year may prompt more vendors -- frustrated by the retailer’s indecision on new products and poor track record on implementing promotions -- to cut their trade spending. “Vendors are already pushing back, cutting back to just doing shelf TPRs [temporary price reductions],” one said. “More may do that. It looks like Whole Foods is getting hit from all sides.”  Another source at OTR Global’s March 11 Viewpoint Breakfast said, "Whole Foods is really good at taking [suppliers'] money and not very good at lowering prices."

New details on 365 stores: Whole Foods unveiled artists’ renderings of the sleek, modern design of the new-format 365 by Whole Foods Market stores to some vendors. “They will have only about 7,000 SKUs, including the full line of 365 products, but it’s unclear what proportion that will be,” one source said. Another estimated private label would be about 35%-45% of the selection. (Currently, about 15% of Whole Foods’ sales are private label.)

The first three 365 stores, due to open this spring and summer on the West Coast, “are just experiments,” a vendor said. The one slated for Bellevue, Wash., is directly across from a legacy store. “Whole Foods thinks these stores will complement each other,” another supplier said. “You’ll go to the 365 store on a Tuesday to pick up some quick dinner solutions and then you’ll go to the legacy store on a Friday to have a glass of wine and hang out.”

Most said they remained skeptical or negative about the format because they believe it undermines or “cheapens” the brand. But one said, “Whole Foods didn’t have much choice. They had to develop an alternative so they’d attract a new shopper -- younger ones who feel they can’t afford the legacy stores.”

Several sources said Whole Foods also told vendors the 365 stores would be less expensive than Trader Joe’s Co.Sprouts Farmers Market Inc. and The Kroger Co., but another supplier said, “I don’t see how they can do that, not with branded products.”

Reorganization in the works:
 Several suppliers said United Natural Foods Inc. is reorganizing its sales teams to bring all its divisions under centralized management within three regions -- Atlantic, Central and Pacific. A regional president will now manage all sales, across all channels, for UNFI’s core business as well as for divisions that have previously been run separately. In addition, UNFI plans to start shipping from its new distribution center in Gilroy, Calif., on March 27, after an eight-month delay caused by the unexpected loss of the Albertson's LLC’s Safeway account last summer.


Sprouts’ rapid expansion: Several suppliers said Sprouts has signaled plans to continue to expand quickly during the next few years. News of Apollo Global Management LLC’s successful bid for The Fresh Market Inc. prompted several to say they would not be surprised if the two retailers merged eventually.

Renegotiation with Kehe: One supplier said Sprouts was already in contract re-negotiations with its leading distributor, Kehe Distributors Inc., even though its contract does not expire until 2018. “It’s typical for these deals to be re-negotiated early,” he said. “They both need each other, but Sprouts has the upper hand.”

Natural/Organic in Kroger and Target
Launching more in mainstream:
 Many suppliers, even midsized and smaller ones, said they are finding mainstream retailers increasingly eager to place their products or even launch new items, particularly in Kroger and Target Corp. “Target is really boosting small natural brands,” one supplier said. “They started about 18 months ago, but they’ve really scaled up in the past six months.” Even small natural products vendors are giving Target exclusives for six to eight months. “Not all do well but many do,” another said. “Target’s great to work with.”

Other suppliers echoed the same for Kroger. “We’ve been in Kroger for a couple years now, and they’re great to work with,” a small dry grocery supplier said. “They don’t charge slotting fees or free fills.”

Easier, more profitable terms: Many suppliers said they were willing to try Target and Kroger in part because of increased frustration with the natural channel, particularly Whole Foods and UNFI. Vendors widely criticized Whole Foods for poor execution on promotions, particularly for not passing on discounts in their entirety, and UNFI for continuing to hike its fees and deductions. “Vendors are getting hammered by UNFI. There’s a lot of anger toward them and Whole Foods. They’re trying to make vendors their profit center. But what it’s doing is killing innovation,” one said. 

Kroger’s Main & Vine: Vendors familiar with Kroger’s launch of its first new upscale Main & Vine store near Seattle gave it high marks and expect more to open soon. One said, “Kroger has been keeping it under wraps, but they plan to open 15 Main & Vines within 12-18 months in a cluster in the Pacific Northwest, mostly Portland and Seattle.” Two West Coast vendors said they believe that region could handle that kind of expansion, even with Endeavour Capital’s New Seasons Markets expected to open up another five stores this year.

Many vendors noted the growing importance of ecommerce, particularly at Inc.’s, perishables division, AmazonFresh, and Thrive Market Inc., which has surprised some vendors with better-than-expected results. “Thrive says they’ll hit 500,000 subscribers by the end of 2016,” one supplier said. “They’re just doing dry grocery but will soon start a test in the Los Angeles market for deliveries of some perishables.” Another supplier got a big lift from a promotion she did with Ibotta Inc.’s app, adding, “Ecommerce is really starting to change the food industry.”

Several suppliers said working with Amazon was frustrating because it was “high maintenance” but could not be ignored. “Amazon’s a pain to deal with, but you have to accommodate them because you never know when you may need them,” one said. However, another said, “We do more with Fresh Direct [LLC] in New York and Philly than we do with AmazonFresh in the entire country.”

Additional Quotes
On Whole Foods

“Recently things have been at a standstill. Regionally, they haven’t known what to do, so they’ve been in a holding pattern.”

“The [365] interior looks modern with produce in the center and freezer and refrigerator doors around the periphery. It makes me think of Sprouts.”

“The 365 stores will have hot bars and grab-and-go meal solutions, but no deli counter or sushi bar or prepared foods counter – all self-serve. It’ll be a big reduction in labor.”

“At the vendor meeting, Whole Foods [executives] gave the sense they’re really looking at the 365 stores as an experiment, saying 'let’s see how they work out.'”

“Whole Foods is mired in bureaucracy. I can get an answer from Trader Joe’s in minutes, from [conventional retailer] in two weeks, but Whole Foods – it takes three months.”

“Whole Foods says the new centralization will lift some pressure off of regional coordinators who will deal with implementing core sets and only buying for much smaller regional and local sets.”

"Whole Foods has a huge markup. I don't think they are trying to lower prices."

“Whole Foods is going in a completely different direction than what they’ve been doing – all the way down into the guts of their business. They can no longer afford to support a lot of the programs that have helped innovative products. They just don’t have the resources anymore.”

“Whole Foods has been way behind the curve on digital coupons.”

“It’s an exaggeration to say that morale is shot [at Whole Foods]. Yes, their people are worried, but they’re working really hard to turn things around. You can’t turn a big ship around that fast. [New procurement executive] Don Clark has a good plan.”

On Sprouts
“Sprouts recently asked me if we could handle supplying an additional 150-plus stores on short notice.”

“Vendors I’ve been talking with are quite happy with their sales at Sprouts.”

“UNFI is going through another reorganization. The IT platform has been consolidated, but now they need to get their arms around all the different segments.”

“Retailers and distributors have banded together to make vendors their profit center. Whole Foods’ deal with UNFI is much lower than they’ll admit. It’s the elephant in the room. The best estimate we’ve got is they’re only paying cost plus 4.6%.”

“At the end of the year, UNFI slams the vendors with so many deductions that it wipes out profits. It’s unconscionable.”

On Kroger and Target
“[New Kroger format] Main & Vine is upscale. It was very busy when I went in it. It’s more of a Dean & DeLuca [Inc.] than a Fresh Market.”

“Main & Vine is so interesting. Most folks aren’t going to know it’s a Kroger store, just like they don’t know Fred Meyer is.”

“Kroger has not lowered its margin on our products, but we haven’t been in there that long. They make about a 40% margin because they take it direct. At Kroger, we’re at $4.49, compared with $4.99 at Whole Foods and Sprouts.”

“Kroger and Target are likely to be real winners in food retail in the next five years because they’re so much more open to natural now.”

“So many smaller innovative vendors are now going to Target to break in. That’s a big change.”

On Other Retailers
“Costco’s Southern California region has gotten so great with natural and organic that it is taking a real bite out of Trader Joe’s and Whole Foods. And that’s Trader Joe’s home base.”

"Wal-Mart [Stores Inc.] is optimizing price ... so we are giving up [some margin]. It is the new cost of doing business at Walmart."

"With Apollo's history with Sprouts, [the acquisition] should be good for Fresh Market."

Fresh Thyme [Farmers Market] is trying to flood the market with stores as fast as possible so they can get Sprouts or even Kroger to buy them. They want to build presence [in the upper Midwest], but they’re not very profitable. You could turn those stores into a Sprouts almost overnight.”