As Whole Foods reshapes procedures, Austin-area suppliers rush to adapt 

Posted February 23rd, 2018

Daniel Nicholson’s ice cream company was born out of a random encounter with Whole Foods Market.

After the company’s coconut-milk ice cream was created in Austin in 2004, it was being sampled at a local store when a Whole Foods Market buyer walked in, Nicholson said. The buyer said if the ice cream could be packaged and branded, Whole Foods would find a place for it.

The company’s founders came up with a name — NadaMoo — and Whole Foods in 2005 began carrying the product at local stores.

Like many other food brands starting out, Whole Foods gave NadaMoo the shot it needed, eventually selling the product nationwide.

The grocer’s then-regional buying system helped NadaMoo scale up at a slower pace, Nicholson said, and Whole Foods, facing less competition then than now, could stand to take more chances.

“Whole Foods was the retailer that brought our brand to life,” said Nicholson, NadaMoo’s CEO. “Without them, our brand would probably not exist.”

Things aren’t that simple nowadays.

Changing procedures

Whole Foods has changed its procedures for suppliers, and some Austin-area Whole Foods vendors say it’s becoming harder to start and grow as a small brand with the chain.

The changes at Whole Foods include widely reported alterations to promotion and delivery costs, the centralization of Whole Foods operations and differences in how suppliers sample their products.

In December, Whole Foods sent a letter to its suppliers, telling them that the company was working with a new partner, Daymon Interactions, to stock shelves and run other operations.

In the letter, which was obtained by the American-Statesman, Whole Foods said suppliers selling more than $300,000 worth of products at Whole Foods stores will pay fees beginning in April to have their products reorganized on shelves or moved into new stores. Grocery vendors will pay a 3 percent fee of the cost of their products delivered, while beauty product suppliers will pay 5 percent, the letter said. Vendors say these are completely new charges.

“To successfully run this program, we need your financial support,” Whole Foods said in the letter.

Additionally, some suppliers have said their costs have risen to place their items on sale, making it harder for smaller companies to get visibility. Suppliers now often have to cut rates by at least 25 percent to be promoted nationally, though Whole Foods said that is not always required.

“There’s a lot of uncertainty around it,” Nicholson said, adding that the 3 percent of products delivered fee “is anywhere between three to six times the normal industry percentage fee. For now, it’s all thought. We haven’t seen it trickle down yet, but our team has already been putting some thought into it.”

RICARDO B. BRAZZIELL / AMERICAN-STATESMANDaniel Nicholson poses at the Nadamoo offices in North Austin on Wednesday, Feb. 21, 2018.

NadaMoo is now in about 4,000 stores, with Whole Foods representing about 10 percent of its business, Nicholson said. None of that would have been possible without Whole Foods, he said, but the recent changes there and in the overall industry are making stories like theirs less achievable for some young brands.

“It’s 100 percent more challenging for small brands to cultivate their brand with Whole Foods like they used to,” Nicholson said. “Whole Foods is beginning to think about efficiency, and as they think about that, they no longer will be able to cater toward the truly smaller companies that are not ready to scale to the national level.”

‘Have to be patient’

While the changes have ramped up at Whole Foods recently, they began prior to the grocer’s sale to Amazon in the fall.

Whole Foods has been exploring strategy shifts in recent years in response to slumping sales, increased competition and its pricey image.

Last year, Whole Foods began to centralize its product buying procedure, shifting from a program where individual regions had more control over product assortments, which some suppliers say gave startup brands a better chance at growing more at their pace.

Now, once brands are sold in four or more regions, their buying goes directly through Whole Foods’ headquarters in Austin, according to Whole Foods spokeswoman Brooke Buchanan.

Beginning in late spring, Whole Foods is also changing how vendors sample their products in stores.

Vendors will only be able to run their demonstrations through Daymon Interactions, instead of having wider choice as in the past. Demos and in-store sampling are an important way for companies to get their name known.

Still, vendors say, some of the Whole Foods changes could ultimately be positive.

Whole Foods’ de-centralized system, for example, helped startups grow incrementally as they worked through operational issues, but the system could also become a barrier once companies were ready to expand because they would have to do that region by region.

“It’s taking one step back to maybe taking many steps forward,” said Daniel Goetz, founder of Austin-based popsicle maker GoodPop, which he said is sold at more than 150 Whole Foods stores. “Any changes that are necessary to keeping Whole Foods competitive in the market and ultimately as a business — you want your main retailer to drive that partnership. We have to be patient.”

Founded in 2009, GoodPop came to market when organic and natural food was a much smaller part of the food industry.

But now, natural food companies are launching at an unprecedented rate, Goetz said, making it more difficult for Whole Foods to find room for everybody.

RICARDO B. BRAZZIELL / AMERICAN-STATESMANCEO Daniel Goetz checks his email at the GoodPops location in Austin on Thursday, Feb. 22, 2018.

“Due to consumer demands for natural foods, there are so many options now,” Goetz said. “It’s not just that Whole Foods is changing how brands flow into the market, it’s just more difficult to build a food brand in 2018 than it was in 2008.”

Buchanan, the Whole Foods spokeswoman, said while the changes might be an adjustment to suppliers, they are part of a more consistent system at the grocer and follow industry standards.

A more formal operation will help suppliers, she said. She said Whole Foods is still committed to helping the niche type of brands that were a catalyst to the grocer’s success.

“We’re adapting to consumer needs and desires,” Buchanan said. “Change can be tough, but we’re here to answer questions that folks may have. We’re continually having conversations with our suppliers to ensure working with us is a good experience.”

Additionally, Buchanan said, Whole Foods plans to grow a supplier loan program that has already given $22 million to local farmers and food artisans to help them scale their business.

Still in limbo

But at the moment, some Whole Foods vendors are in limbo, said Chris Campbell, founder of Austin-based Chameleon Cold-Brew. Since some of the changes are policies that are new or haven’t started yet, it’s difficult for brands to know exactly how they will be affected long-term.

Campbell said Whole Foods was critical to his company’s start. The coffee brand started selling to Whole Foods in 2011, the same year it launched.

It quickly grew out of Whole Foods’ southwest region into a nationally distributed brand, eventually scaling to each of Whole Foods’ 470-plus stores, Campbell said, and into Target, Costco, Safeway and other stores.

Even amid the changes, Whole Foods remains an important partner, Campbell said.

“The whole supplier community is waiting to see what it shakes out to be — there’s a lot happening at Whole Foods,” Campbell said. “We’re very much trying to be in the mindset of being patient, being a good partner and understanding what their needs are. We’re not going to be reactionary. We’re going to be partners with them and communicate our perspective.” 

Have any recent changes at Whole Foods affected you as a customer, employee or supplier? Email reporter Sebastian Herrera at sherrera@statesman.com.