Organic grocers dig in to survive Amazon–Whole Foods battlefield

In the organic-foods market, Whole Foods was already a Goliath. When Amazon bought Whole Foods in August 2017 for $13.7 billion, that Goliath ballooned into a gargantuan threat to other grocers. The combined company had nearly 560,000 employees at the end of 2017 and revenue of almost $180 billion.

Whole Foods Market has about 10 stores throughout the North Bay.

On Feb. 8, Amazon announced two-hour free delivery from Whole Foods stores to Prime Now members in Dallas, Austin, Cincinnati and Virginia Beach. Items from the Whole Foods 365 brand can now be ordered on Amazon's website.

Prime members enjoyed pruned rose prices for Valentine's Day — $19.99 for two dozen at Whole Foods. Regular customers paid $5 more.

Since the acquisition, Whole Foods aims to broaden its customer base by trimming prices, competing with Trader Joe's, Safeway and Raley's. Conventional produce has become more prominent at Whole Foods, though organic fruits and veggies remain. Prices eased for Fage yogurt, avocados and prepared food.

In larger North Bay Whole Foods stores — San Rafael and Napa — Amazon placed lockers so online shoppers can order merchandise of all kinds then pick it up at Whole Foods. Pop-up Amazon deals sprouted at Whole Foods stores over the holidays.

Amazon-muscled Whole Foods may hurt organic-food grocers in the North Bay. But some see the bulked-up behemoth ceding market space in which Whole Foods had formerly been a tough competitor. Amazon-Whole Foods may pull more customers away from food-store chains than from dedicated organic grocers such as Good Earth in Mill Valley and Fairfax, and Community Market in Santa Rosa and Sebastopol.

North Bay Business Journal reached out to Whole Foods for comment. 'We aren't participating in interview requests,' said Erika Dimmler, public-relations representative for Whole Foods in Northern California.

In a Feb. 1 earnings call about Amazon's fourth quarter, Amazon CFO Brian Olsavsky said, 'We're ... very excited about opportunities we have to innovate with the Whole Foods and Amazon teams together.' Store revenue in the fourth quarter, mostly from Whole Foods, was about $4.5 billion.

'Our focus has been on continuing to lower prices even beyond the initial ones we discussed at the close of the deal,' Olsavsky said. 'We've also added lockers, and have much more to come.'

'Amazon is actually decreasing pressure on a store like ours,' said Stephen Mitchell, managing partner and general manager at Good Earth Natural Foods, which in 2016 opened a new store in Mill Valley, with population of about 15,000. Mitchell, one of three owners, joined in 2011.

Good Earth, founded in 1969 as a small Fairfax store, refurbished an Albertson's in Fairfax and expanded in 2012. That store draws some 3,400 customers a day with nearly $40 million in annual sales, Mitchell said, already 'pushing capacity.' Whole Foods has no store in Fairfax, which has population of about 9,000 and about twice that with surrounding communities.

There are two Whole Foods stores in Mill Valley. The first on Miller Avenue was doing about $20 million a year in business when Good Earth opened, Mitchell estimated. 'They dropped down to about half of that,' he said, with traffic going to his store, projected to hit $28 million in 2018 sales. Limited parking will curtail the store's further growth to about $36 million, he said.

The Whole Foods on East Blithedale Avenue in Mill Valley opened in 2010 and has huge annual volume of about $65 million, Mitchell estimated. Whole Foods in San Rafael is in that range, exceeding $1 million a week, he said.

'It is becoming more transparent what they're doing' under Amazon ownership, Mitchell said of Whole Foods. 'The majority of their products were not organic' even before the Amazon buyout. 'Our produce, café, bakery and bulk are 100 percent organic,' he said. He sees customers shifting from Whole Foods to shop instead at Good Earth or other independents.

Before Amazon's buyout, there was already a 'trend for higher expectation around quality standards and transparency,' Mitchell said. 'Whole Foods runs about half the organics we do. People are looking for a more intimate touch' after the 'corporatization of our industry, changes over there and apprehension it has generated. It's not the reason we're growing, but it certainly didn't hurt. We are crushing them on organic produce.'

Good Earth products are not entirely organic, Mitchell acknowledged, especially in the gluten-free realm where organic almond flour prices are triple those of non-organic flour. He may produce ingredients to create certified-organic gluten-free baked goods.

In Sonoma County, Santa Rosa Community Market declined about 8 percent when Whole Foods opened a store about a mile away in 2014 in a former Lucky supermarket in Coddingtown. Regaining lost revenue has been challenging, said Melissa Minton, general manager. 'We have been trying to recover ever since,' she said. 'We had to compete and get bigger.'

Community Market pushed back in Sebastopol, opening a new store in 2013 four blocks from Whole Foods. 'West County is a very big supporter. They appreciate what we do,' Minton said.

'It was tough for about a year,' she said. 'Then we started coming out of it.' That store includes a deli, which garners 20 percent of sales.

'When we first opened, that was the main draw,' said Derek Finn, grocery manager. 'They came in to grab sandwiches. It took a year before we had people walking around with full shopping carts.' The store tailors inventory to local customers.

Community Market, run by mutual-benefit nonprofit Red Clover Workers Brigade, has 100 member workers and total sales of about $10 million. The source of that revenue is heavily tilted toward Sebastopol, a town of just 8,000 that brings Community Market $7 million a year. Community Market in Santa Rosa, a town of 175,000, brings only $3 million in sales even though the company started in Santa Rosa and its store there is located a block from Santa Rosa Junior College.

A larger portion of Sebastopol's residents choose organic over conventional food. Santa Rosa is more mainstream and its residents are more price-sensitive, according to Finn.

Since Amazon bought Whole Foods, Community Market gained traction against Whole Foods in Sebastopol. Residents there may be shopping local and reducing patronage of Whole Foods. 'Even here we're picking up some' business, Minton said of the Santa Rosa store. 'The more corporate they get, the less people are enamored of them,' she said.

Amazon's food delivery was expected. 'I don't think of it as the threat from Amazon,' Minton said. 'They have to streamline everything. That's our advantage.' She noted that Whole Foods is pushing into small-format stores in some areas.

'Our No. 1 competitive advantage,' Minton said, 'is that Derek is amazing at finding new products, new trends, and working with little companies. He is able to bring in products Whole Foods may not get for a year. It's going to get worse with Amazon. If a small producer can't get into UNFI (United Natural Foods, national distributor), Whole Foods isn't going to buy it. That leaves us with all these awesome products.'

'People like the experience of picking out food,' Finn said, 'the human interaction. It gives us an opening,' as well as selling only top-quality food. 'That will set us apart,' he said. All produce sold by Community Market comes from local sources.

Community Market sought to compete better on price as Whole Foods expanded its 365 brand and cut prices. 'It's hard to sell a 99-cent can of organic beans,' Finn said. 'We can't get one. We try to be strategic. Dairy, yogurt, eggs, flour — people really pay attention to pricing.'

Community Market belongs to Independent Natural Food Retailers Association, founded in 2004. The nationwide group bargains with big vendors as a way to rival Whole Foods. 'That has helped a lot,' Minton said. 'They cut us a deal so we can compete. They do for us what Whole Foods does.' A typical reduction obtained by INFRA is 5 percent.

Finn negotiates directly with some vendors. 'In grocery, two-thirds of our sales are negotiated by INFRA,' he said. 'Instead of 10 or 15 percent off, it's 20 or 25 (percent),' a discount that prompts customers to stock up on sale items.

Whole Foods charges fees to vendors to hand out free samples in stores, Minton said. She doesn't. Community Market buys through distributor UNFI. 'I wonder if they (Amazon) will be their own distributor,' bypassing UNFI, she said. 'That's what they do. We get new products on the shelf much faster. About 36 percent of our vendors are (in) Sonoma County. We are locally focused, all organic produce.'

Whole Foods on Guerneville Road in Santa Rosa 'is big — Costco-ish,' Minton said, a fit for Santa Rosa residents. 'People can get a bunch of things there,' she said. On Feb. 8, the Coddingtown Whole Foods had pallets of La Croix sparkling water at its entrance — berry, lime and lemon at $5.99 for 12 cans. Coddingtown Whole Foods has a better location than Community Market.

'We're not interested in growing to a national chain,' Mitchell said of Good Earth, which has 500 employees. One additional store would boost efficiency. 'We could expand in the North Bay,' especially small stores of about 10,000 square feet, 'cater to specific communities.' He notes Petaluma, Sebastopol and Healdsburg as possible sites.

The Amazon takeover of Whole Foods has 'helped fuel our acceleration,' Mitchell said. 'It plays to our strengths — transparency, education, activism.'

Community Market has similar spirit. 'We are personable,' Minton said. 'Relationships happen with customers. We bring people together.'

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257.