Cornucopia’s Take: Economy of scale is a practice perfected by the online behemoth Amazon, a company known for driving prices down. While some are hopeful that organic food would become less expensive under Amazon’s Whole Foods, many farmers, activists, and organic industry analysts, including Cornucopia, are concerned that small to mid-sized farmers may be shunned for cheap, industrial “organic” producers.
The big consequence of the Amazon-Whole Foods deal no one’s talking about
The Washington Post Wonkblog
by Caitlin Dewey
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Amazon has proved its power to disrupt markets. Now its proposed purchase of Whole Foods has some small farmers and food producers worried that they could be next in line.
So say organic activists, farmers’ advocates and economists who are just beginning to process the potential ramifications of Amazon’s bid to buy Whole Foods, the country’s largest organic retailer.
The news, announced June 16, has already jolted grocery store stocks and prompted rampant speculation about the future of food delivery and bricks-and-mortar stores. But some small farmers and manufacturers are also starting to look at Amazon’s record in other fields — and worry that the retail giant will use its market power to further centralize and corporatize theirs. (Amazon.com chief executive Jeffrey P. Bezos owns The Washington Post.)
Such a move stands to boost large, industrialized organic operations, to the detriment of small and midsize players. But the real harm may come to the organic brand if Amazon pushes for price concessions that lead producers to compromise on environmental and formulation standards.
Those price pressures have already driven major changes in Whole Foods’ supply chain and within the organic industry as a whole, which has consolidated in the face of increased competition. But at Whole Foods, sourcing from small producers has remained a priority — and some worry that Amazon will not be so protective of them.
“Whole Foods has been willing to work with [midsize farmers and producers] to take on added costs, and it’s made a huge difference in their ability to make a living,” said Scott Marlow, executive director of Rural Advancement Foundation International, a farmer advocacy group. “There is real concern about what will happen after it gets acquired.”
A representative from Whole Foods said the company “remains committed” to its small and midsize producers. In a statement Friday morning, Amazon spokesperson Ty Rogers said Amazon supported Whole Foods’ commitment. “As the representative from Whole Foods said, Whole Foods ‘remains committed’ to its small and midsize producers and we will want Whole Foods to do exactly that – to keep doing what it does best, including working with small farms and producers to bring the best natural and organic foods to customers,” Rogers said.
Both companies have pointed out that the acquisition has not been approved. When/if it is, it’s far too early to determine what Amazon has in store for Whole Foods. The retailer controls 1.21 percent of the U.S. grocery market, according to GlobalData Retail. Amazon has even less, at .19 percent.
But that hasn’t calmed the jitters of some Whole Foods suppliers, who saw the store — as food entrepreneur Zach DeAngelo, who launched several brands through Whole Foods, put it — as the “Holy Grail in distribution.”
Unlike most other national chains, Whole Foods has placed a strong emphasis on sourcing products from local players, including sustainable farmers and small-scale food start-ups. The chain has a reputation for partnering with small farms that other large stores would ignore, Marlow said. It currently sources local produce from 1,400 farms across the United States.
Over 10 years, Whole Foods also disbursed $21 million in low-interest loans to help local farmers and producers scale up their operations.
And it has launched aggressive branding and labeling programs to persuade consumers that it is worth paying more for food from specialty and organic operations, many of which boast impressive environmental and sustainability goals.
But this model has been costly for Whole Foods, as the company admitted in recent earnings calls and shareholder reports.
Whole Foods announced last year that, to cut costs, it would begin buying more of its nonperishable goods through a central office in Austin, as opposed to regional hubs. It made a similar switch with produce long ago.
At the same time, some observers have accused the store of diluting environmental standards for some of its products. Phil Howard, a professor at Michigan State University who studies consolidation in the food system, notes that price pressure has already forced Whole Foods to begin offering a range of foods that aren’t organic but “natural.” Unlike organics, which are regulated by the Agriculture Department, the term “natural” comes with no requirements.
Still, Whole Foods has remained highly committed to a class of midsize producers that don’t have many other markets, Marlow said. He and others fear that under Amazon — a company that has built its empire by exploiting economies of scale — that sort of commitment could disappear.
There is worry that the company may move to further centralize Whole Foods’ buying operations, which would be cheaper and more efficient for the company — but which would disqualify producers too small to supply a large number of Whole Foods’ stores.
According to Bloomberg News, Amazon homed in on Whole Foods’ food distribution practices during negotiations. The company is known for the large-scale efficiency of its logistics system.
“Whole Foods has a reputation of putting effort into regional sourcing, and of trying to work with smaller folks to get them into the regional market,” said Patty Lovera, assistant director of Food & Water Watch, a D.C.-based environmental and consumer group. “But Amazon is laser-focused on efficiency. Is it going to continue that?”
The larger threat, however, is that Amazon might seek to lower the costs of Whole Foods’ products by demanding concessions from small farmers and vendors. Because their margins are already low, such price cuts could endanger producers.
That’s particularly true in organic farming, which is typically more expensive than conventional. Yields are lower, and the inputs — including seed and pest control — cost more.
Some observers say that that price pressure could force out small organic farms. It could also encourage organic food manufacturers to source more ingredients from overseas — a practice that has diluted organic standards, according to advocates and a series of Washington Post reports in May.
“The overriding thought I have about this is the likelihood of an expansion of the prevalence of fake organic foods,” Michael J. Potter, chief executive of Michigan-based Eden Foods, an independent organic company, told The Post by email. “Skyrocketing amounts of ‘cheap imitation organic food’ from overseas has driven prices down, creating an environment that does not serve the development of our domestic organic agricultural resources.”
There are advantages here, as well. Food would probably be cheaper, for a start. And it could boost the visibility and availability of organic foods in places many miles from a Whole Foods if Amazon uses the acquisition to expand its grocery delivery arm, as many analysts have predicted.
Some Whole Foods suppliers have even cheered the news, arguing that the acquisition will shake up a store much in need of it.
“Whole Foods came in as an innovator, and others changed to catch up, carrying natural and organic foods,” Sylvia Wyant, chief executive of specialty-food company Zest Brands, recently told NPR. “I see Jeff Bezos and Amazon as innovators, and I see the grocery business needing innovation.”
Then again, critics say, that’s what the publishing industry initially said of Amazon when it first forayed into its field in the 1990s. They soon grew wary of the site’s enormous market control: between 40 and 100 percent, depending on genre, said Barry Lynn, director of the Open Markets program at New America.
Amazon later used that power to demand advantageous shipping arrangements, fees for better search rankings and steep price concessions — which has reportedly cut into the funds publishers use to buy new manuscripts.
“Publishers have to ride Amazon’s rails to get to market, so they do whatever Amazon wants,” Lynn said. “That makes it much harder for producers to do well. When producers can’t sell at the price of their choosing, they have less money to invest in quality or in future development.”
Added Lovera, of Food & Water Watch: “The publishing model should be a red flag for folks in the food industry — especially suppliers.”
As the initial shock of the acquisition news wears off, more suppliers do indeed appear to be asking tough questions about what the deal could mean for them. Marlow, of Rural Advancement Foundation International, said he’s started to hear from small farmers who supply Whole Foods and who are worried that the company’s priorities may shift.
On Wednesday, the North Carolina Natural Hog Growers Association — a cooperative of midsize hog farmers that supplies Whole Foods — published an open letter to Whole Foods chief executive John Mackey, thanking the company for its support of their farms and urging it to continue that work after the acquisition.
Among other things, the letter said, Whole Foods committed to buying whole hogs, which is more profitable for farmers, and to pay them a living wage. Whole Foods staff members have made regular visits to NCNHGA member farms. The stores also use the farmers’ images in marketing.
“Together, we have collaborated and proved how vital the Whole Foods Market role is in continuing our farm legacies,” the letter reads.
The unwritten question is whether Amazon will also invest in that legacy.
