Getting Your Product on Shelves at Whole Foods Just Got Harder

02/08/18 05:44 AM EST
By Heather Haddon and Sarah Nassauer 

Whole Foods, which cut prices last year to make it cheaper to shop there, now is making it more expensive for suppliers to get their products onto shelves.

The supermarket chain owned by Amazon.com Inc. is asking suppliers of all sizes to pay new rates for prime shelf space as it tries to boost profits and better organize the exploding number of natural and organic products hitting the market.

Many suppliers will see an increase from the average $25,000 fee companies were paying to be featured in the stores' most-visible, high-traffic areas. Additionally, Whole Foods is pitching its biggest suppliers on a promotion costing up to $300,000 for several weeks of prime shelf space along with souped-up marketing, executives say.

The chain also is asking suppliers to offer bigger discounts on their products to earn the space. A high-visibility nationwide promotion at Whole Foods now often requires companies to cut product prices by at least 25%. Previously, large suppliers could more often do regional promotions that didn't require prices to be cut so sharply.

Whole Foods officials had been plotting the changes and set the early stages in motion before the chain's acquisition by Amazon in August, but technology is helping to drive them. Whole Foods last updated its rates for prime space nine years ago, officials at the retailer say, and its promotional fees were a bargain compared with competitors'. Whole Foods now gets guidance on prices and sales trends from Nielsen data, which competitors have mined for years.

The natural-food chain developed its cachet by carrying the newest, niche brands without being able to pinpoint whether they drove sales. During special promotions, though, sometimes stores in an entire geographic region wouldn't stock special displays or discount promoted items, Whole Foods executives and many manufacturers said.

"That's what suppliers used to be very frustrated with, and rightly so," said Jamie Brent, senior director of sales for Whole Foods at the Hains Celestial Group, whose brands -- including Arrowhead Mills and Terra Chips -- face new competition from natural and organic upstarts..

Now, Whole Foods executives say, they are adopting a suite of retailing tactics meant to enhance profitability, including centralized purchasing decisions, tighter control over inventory and working with a national contractor to do in-store sampling and demonstrations.

According to a letter Whole Foods sent to some suppliers in December, vendors selling an annual $300,000 in products in stores will be required to pay a fee each time their products are reorganized on shelves or added to new stores, starting in April. Grocery suppliers will pay a fee of 3% of the cost of goods delivered, and beauty suppliers will pay 5%.

Whole Foods has hired an outside company to stock shelves "to provide a much more effective result," the letter said. "To successfully run this program, we need your financial support."

Whole Foods began the various efforts two years ago after its sales slumped and has accelerated them in the face of activist investors last year. The grocer also faces growing competition. Conventional supermarkets' sales of natural and organic products have outpaced growth at natural-food stores for more than two years, according to specialty retail data firm SPINS Inc.

Amazon, which bought Whole Foods last summer, expects the operational changes to continue, according to Whole Foods executives. An Amazon spokeswoman didn't reply to a request for comment.

Some suppliers say the changes were rushed and confusing and have made it harder for upstart brands to get space. "Our dreams of going national are going to be far more difficult," said Alberta Pate, manager of Kitchen28 LLC, a Holden, La. producer of glazed pecans. She said the company at present isn't able to expand to additional Whole Foods stores because of tighter management of shelf-space.

Ms. Pate, whose daughter, Melody Pate, is a chef and co-founder of the company, said they love selling at Whole Foods but have started pitching their pecans to other gourmet retailers. "We made a mistake in putting all of our eggs in one basket," Ms. Pate said.

Rivals are seeking to capitalize on the adjustment period.

Robert Clark, senior vice president of merchandising for Kroger Co., said: "We definitely don't have a fee menu that would be a barrier to entry." Kroger, the largest U.S. supermarket chain, has been courting niche brands over the past year with a new portal for local suppliers and a natural-foods trade fair next week. The company doesn't charge shelving fees for small suppliers, Mr. Clark said.

Robert Mock, co-founder of Ocean's Halo seaweed snacks, said the brand is launching an exclusive new line with Walmart Inc. this spring after the retailer took pains to work with him on production and pricing. "Walmart has treated us like a partner," he said.

Whole Foods executives say they haven't seen suppliers defect because of the higher fees and stricter requirements. "We knew full-well that there would be discontent," said Don Clark, Whole Foods' global vice president of nonperishable procurement and a former Target Corp. executive.

Some suppliers say the changes at Whole Foods are overdue. Hain's Mr. Brent said product displays recently have been handled with more uniformity and Hain intends to pay for the enhanced promotions at the stores.

Eric Newman, vice president of sales for Organic Valley, the largest U.S. organic farmer cooperative, said: "Are they having challenges? Sure. Will it result in a more competitive Whole Foods? Yes."

Write to Heather Haddon at heather.haddon@wsj.com and Sarah Nassauer at sarah.nassauer@wsj.com

 

(END) Dow Jones Newswires

February 08, 2018 05:44 ET (10:44 GMT)

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