How Amazon’s Whole Food plans may undermine innovation

Amazon's disruptive model has always evoked strong feelings, good and bad. So who wins and loses as Amazon bursts into the grocery business with the acquisition of Whole Foods? Beginning this week, WF shoppers will enjoy lower prices on "high-volume staples." It’s a short-term win for consumers.

But if Amazon’s discounting strategy extends into most WF SKUs, the small, innovative brands that have led a food manufacturing revival in California, Colorado, Oregon, and other progressive states may see margins erode, a potentially devastating development for companies that have benefitted from WF's model.

Specialized retailers have been a catalyst of the artisanal, craft manufacturing boom. By providing early-stage brands encouragement and key shelf space, grocers like Whole Foods have fostered growth and innovation. The higher margins that shoppers pay have also worked to protect small producers: locally made, organically-sourced products are often more expensive to make, especially early on, when companies aren’t big enough to co-pack or able to invest in larger more efficient product facilities. Notes Steven Hoffman, managing director of Compass Natural Marketing, “An authentic brand will never win on price, but it can win customers who share its mission and values.”

And here’s the rub. Is Whole Foods' values connection with customers and brands consistent with Amazon's algorithms "that scrape competitors' prices before automatically matching or narrowly undercutting them on its website?" What happens if Whole Foods evolves, if not to a discount brand, but a store that squeezes margins across the board? Margins that sustain early-stage companies and fuel the steady stream of new ideas pouring from food ecosystems in California, Colorado, and elsewhere.

Bill Capsalis, former president of Naturally Boulder, the go-to trade association for Colorado's natural and organic product sector, isn't concerned -- yet.

"Let's be clear, we’re talking about one retailer here," Capsalis says. "Yes, they are important, but my own experiences show me that due to Whole Foods' own policies and processes they have been getting a 10 percent to 30 percent premium on the same products you can buy at other retailers."

Capsalis was bullish on Amazon's acquisition of Whole Foods initially. "It’s good because brands can now preserve margin by selling direct. If you combined the expertise of Whole Foods and the way they curate brands and products -- with the tech savvy and direct to consumer model of Amazon - the consumer really wins big time in this equation."

Hoffman also takes a long view. "This is a continuum of what's already been happening with brick and mortar retailers having to compete with e-commerce sellers," he says. "Distributors that had been serving Whole Foods, too, are having to deal with this quantum shift, as Amazon comes with its own myriad warehouses, and margins are sure to be squeezed along all channels of distribution."

Today, he adds, the impetus is on brands to evolve, and the game's on. "Before, I would recommend companies explore online strategies in addition to trying to get into Whole Foods and other retail markets. Now, online strategies will become an essential part of every brand's business model. My guess is that, if you do well on Amazon.com, you may very well end up on the shelves at Whole Foods Market.”

That said, Capsalis and others are wary. "The fears of what's to come with this merger are real and palpable," he says. The fears, no doubt, are related to Amazon’s track record of transforming America’s retail landscape -- and the resulting unintended consequences.

Here's what we know: Small food brands that are transforming the industry need sufficiently long runways to innovate and operate. Eroding margins can be a slippery slope in the wrong direction. In the outdoor industry, Patagonia founder Hap Klopp calls this eventuality "the race to the bottom" -- a focus on cheaply-made products from discount brands that works to undermine product differentiation and, in the end, American manufacturing.

Industry advocates in California, Colorado, and across the West will do well to ensure that innovation and entrepreneurship remain the calling card of food manufacturing ecosystems, and remain key outcomes of Amazon practices, not just lower prices.

Bart Taylor is publisher of CompanyWeek. Contact him at btaylor@companyweek.com.