Field Notes on the Amazon / Whole Foods Merger
By Alex Canepa & Dar Wolnik
Amazon’s recent acquisition of Whole Foods Market for $13.7 billion not only sent shockwaves through the grocery industry, but created a veritable cottage industry of thought pieces and jeremiads: “Would the new Whole Foods still have a soul?” “Did it ever have a soul?” “Why does Amazon suddenly care about gluten-free non-GMO tortillas?” “Would there be drones?” The breathless quality of many of these critiques obscured the fact that the Amazon/Whole Foods merger is merely the latest chapter in a nearly fifty-year trend towards consolidation and vertical integration in the grocery industry. Moreover, it is a business logic that Whole Foods has itself employed to grow from a small Austin grocer to an international brand.
Wheedling a profit margin from the sale of goods is what drives corporations to buy competitors and/or to constantly open new locations or close others. This incentive is especially strong in the grocery industry, which posts comparatively low sector-wide profit margins (one to three percent per year, on average). Beginning in the 1980s, America’s largest grocery stores began the decades-long process of gobbling up smaller regional grocers. In 1988, Walmart opened their first Supercenter, becoming the world’s largest grocer immediately; in that same year, Whole Foods Market added stores outside of Texas for the first time by purchasing New Orleans-based Whole Foods Company (1).
By 2016, only four grocery chains accounted for 36.9 percent of food and beverages sold in the U.S. While small by comparison, Whole Foods growth pattern closely mirrors that of its larger competitors. Whole Foods became a national brand by continuing to buy already established regional natural grocers: During the 1990s, Whole Foods acquired Wellspring Grocery (North Carolina), Bread & Circus (Massachusetts and Rhode Island), Mrs. Gooch’s Natural Foods Markets (Los Angeles), Bread of Life (Norther California), Fresh Fields Markets (East Coast and Midwest), Michigan’s Merchant of Vino, and Nature’s Heartland of Boston. While Whole Food’s marketing strategy was unique, it’s corporate growth strategy was not.
This brings us to that well-known phrase “economies of scale,” which refers to the per-unit cost savings gained by larger operations. According to one recent study,“ For larger chains, revenue per employee is about $150,000. For the smaller stores, it is about $130,000…In other words, the larger the store, the more gross revenue per employee.” In short, gross revenue per employee is a key metric in understanding corporate mergers. “Labor saving” technology and e-commerce have added new dimensions to consolidation by driving gross-revenue per employee even higher. Amazon for instance, has been able to achieve 30% of Walmart’s yearly revenue with only 15% of its workforce. These trends are having a profound effect the retail economy’s ability to create broad-based prosperity.
Efforts to assuage concerns that Amazon will attempt to fundamentally alter Whole Foods’ corporate values usually begin by noting that the company will remain headquartered in its hometown of Austin, Texas. This is not wholly reassuring. Like Whole Foods, during the past three decades Austin has grown from a sleepy, beard-and-sandals burgh to a self-aware, wealthy, and ambitious city. Like Whole Foods, Austin’s rise can be attributed to its deftness at marketing itself to the world as a clean, healthy, environmentally friendly, and all-around woke place, yet one that bears the lamentable distinction of being the most economically segregated and one of least affordable cities in America.
The Age of Fracture
Somewhat counterintuitively, corporate consolidation and vertical integration occurred simultaneously with a fragmentation of food shopping among consumers. Much of this fragmentation can be traced to the disruption in media that predated it. Once upon a time we watched a handful of television shows exactly at the same time, which allowed marketing firms to introduce and maintain a single corporate identity through the commercials spaced in between weekly episodes of our favorite network show, or through the corporate jingle that we knew by heart. Since the rise of the hand-held media device, however, each person’s consumption of entertainment and news has become tailored to them.
Thanks in large part to Amazon, that content is presented with personalized marketing. Additionally, the number of platforms to purchase goods has also grown exponentially. Fragmentation has led to a new world where over 40% of shoppers report visiting more than one grocery store regularly and an upwardly trending 8% of shoppers surveyed have “no primary store.” (2) Interestingly, that trend may support the expansion of direct to consumer channels like farmers markets, which allow shoppers to compare different sellers’ goods and while outside with a cup of good coffee in hand among one’s neighbors.
As food system researchers, we get a steady stream of calls from technology developers asking for data on direct-to-consumer shopping preferences. Most of the developers seem to think that the producers are the only ones who need to change. In other words, the idea is usually to capture market share by changing the behavior of local farmers and ranchers by adding more convenience for the shopper. Adding ease to local food purchasing through technology is an extremely logical idea (and we’ll keep taking those calls in the hopes someone offers some that serves farmers too), but many of these ideas miss a central point about farmers markets as they exist today: the market field was revived partly as a social movement and not just as a retail sector. From the very beginning it was about everyone changing, not just farmers. Those back-to-land farmers wanted to offer a new paradigm that would offer a path to local ownership of the resources that create real goods. Their provocative idea was to create that movement through direct purchasing relationships, and not through canvassing residents to force one-time policy changes or by funding education campaigns for their neighbors to passively “learn” about food and farming.
Still, there is no doubt using technology to expand choice and delivery of high-end food is going to be a central piece of the Amazon/Whole Foods merger. And so it seems vital for those using and advocating for direct-to-consumer (DTC) channels to continue what market founders started: to find the delicious idea that drives more people to change their habits to more direct and seasonal, but this time using technology. The difference is the idea that will work for us will need to include ways for that behavior change to continue along with a way to measure the increase in local control through those purchases.
What comes next?
Even before its acquisition by Amazon, Whole Foods and farmers markets were never really operating with the same ideas and sometimes weren’t even speaking the same language. For decades, Whole Foods eagerness to trumpet their values via their well-marketed ethical purchasing was the only real alignment with DTC channels’ own ethos. Whole Foods core values, which emphasize that food should be healthy for consumers and the planet —while admirable—never directly aligned with those whose primary motivation is to promote a type of agriculture that encourages small and mid-sized producers as leaders, and their buyers as partners in their farming decisions.
As an example, the history of Whole Foods Market is usually told in one of two ways. According to the first rendition, Whole Foods deserves credit for taking ‘good food’ mainstream. By serving as a major private sector catalyst for what most Americans now just call the “Food Movement,” Whole Foods helped Americans rediscover fresher, higher quality food. Moreover, by promoting causes and labels like Organic and non-GMO, and a host of animal welfare standards, Whole Foods encouraged its shoppers to consider the ecological implications of their food choices.
In the second narrative, Whole Foods’ critics note that it has reduced healthy food to shelves of ingredients with dizzying labels with few actual people around to help steer one through the high-priced maze. In this version, many believe it doesn’t source locally as often or remunerate farmers as generously as one would expect from the leader in “good food.” Notwithstanding the prominently placed pictures of local farmers while strolling down the aisles of Whole Foods’ flagship store in downtown Austin, one is struck by how little is grown by Texas producers. Instead, most of the perishable offerings (including USDA Certified Organic) are shipped in from large farms in Mexico and California. This is not entirely the result of Whole Foods’ indifference. Many factors—from NAFTA to skyrocketing farmland prices—have placed Texas fruit and vegetable producers at a competitive disadvantage during the past three decades. Still, Whole Foods inability to foster a vibrant regional food system in its own backyard speaks to the fact that the values the store conveys to its shoppers rest more on the qualities of the product than the producer.
The reality is that local purchasing was not a primary driver of Whole Foods growth, just as organic and non-GMO have not (yet) been a primary driver for DTC channels. Because of that, farmers markets and Whole Foods co-existed peacefully without any need to delve too deeply into the other’s share. Some farmers even happily sold to Whole Foods, especially in the old days of autonomous local purchasing at the store level. Since Whole Foods didn’t focus on local, they also did not concern themselves with what was happening with direct sales near their stores and in a few cases, directly supported DTC education. Only over the last decade the position of Local Foods Forager has been created at Whole Foods to formalize and broadcast the inclusion of local purchasing to their chain’s values. Still, that job seemed a little bit like an afterthought, and might have been even a last gasp from the hippie regional directors to attempt to join our movement.
Recent news from the merger seems to indicate that the goal of supporting local entrepreneurs is already over and certainly signals an end to any direct relationships between those offering products and Whole Foods shoppers: “Under the changes planned for April, Whole Foods’ 470 locations will no longer allow brand representatives to promote their products or check to make sure they are stocked and displayed correctly.”
“Whole Foods also is centralizing much of its decision-making regarding the assortment of products across the country,” the Wall Street Journal reported. “Instead of allowing brands to frequently pitch their products to individual stores or regions, Whole Foods executives in its Austin, Texas headquarters will choose a higher percentage of the items stores carry.”
This does seem to signal that the end of the 20th century supermarket boom has arrived with this merger, or at least warns of the ultimate disappearance of the location-based supermarket serving its surrounding population for their necessary goods. How this will affect neighborhoods and municipalities struggling to grow their commercial tax base and maintain access to food is unknown. Yet rather than dwelling on the continuing reduction in the number of supermarkets, farmers markets have the unique opportunity to plant their flag and articulate the unique features of producer-focused agriculture. In so doing we can keep expanding our values of equity, ecological balance and real wealth, even as the drones buzz overhead.
(Read a follow-up to this article by Dar Wolnik, where in the age of the Amazon/WholeFoods merger, she urges farmers markets: “Don’t hide the hard work.”)
(1) RUHLMAN, M. (2018). GROCERY: the buying and selling of food in america. S.l.: ABRAMS APPLESEED.
Dar Wolnik, FMC Senior Researcher | email@example.com
Alex Canepa, FMC Research and Education Director | firstname.lastname@example.org