20 Nov

Note to start-ups: Whole Foods can’t be your whole plan

Becoming a Whole Foods “supplier partner” is all about cachet. But it’s not for everyone. Here’s what to expect and how to tell if you’re ready.

For food entrepreneurs, Whole Foods is a great distribution catch—a shining dreamland of taste-leader shoppers and appealing core values. It’s a stretch for a small company, but not quite over the rainbow. No wonder new brands want in. But small producers—especially those who get into Whole Foods by selling direct—should know what’s at the end of the yellow brick road: market reality, large-scale production demands, and distributor pricing obligations. If you play it wrong, you can end up losing your way when trying to grow your business beyond Whole Foods.

For starters, getting into Whole Foods is great because it lets you dip a toe in the water of big retail. It’s bad because that toe-dip can be either frightfully expensive or dangerously misleading. Here’s what you need to know.

Whole Foods is big, but not Big. It doesn’t behave like a huge corporation because it’s not one. There are nearly 40,000 grocery stores in the United States. Whole Foods runs about 400 of them: 1 percent. (The big chains, Kroger and Albertson’s/Safeway, are both in the neighborhood of 2,500 stores.) This isn’t to say securing shelf space at your local Whole Foods can’t be great for your brand; if you’re in the natural and organic category, one Whole Foods account can be worth as much as four or five regular grocery store accounts.

Doing business with a local Whole Foods store can be really easy. One of my clients had been selling his barbecue sauce at farmers’ markets and fairs for some time when he approached his local Whole Foods, went through their process, and got them to carry his product. Soon, another location picked him up, and then another few. He delivered right from the trunk of his car and generally got paid on the spot. Easy.

It works that way because Whole Foods is regionalized, and individual stores have autonomy. Suppliers need to meet some basic requirements, such as holding a certificate of liability insurance. Otherwise the buying process is flexible. The buyers in each store have the green light to purchase some locally produced items direct.

Getting your product into Whole Foods doesn’t automatically mean you’ll get it into other chains. Being in Whole Foods shelves may increase your local visibility, but it’s pretty insignificant in the greater context of the big chains, even if you land in all 400 WFM stores. That’s because when big grocery chains are considering potential suppliers, often they rely on third party data that tracks items scanned through grocery store registers nationwide. That information gives them an idea about where your item is currently placed and what kind of sales they might expect. In that context Whole Foods may not be as much of a factor.

You need to worry as much about success as you do about failure. My real concern with Whole Foods is that those easy-to-work-with practices set growing companies up for problems as they try to grow bigger. Let’s say you’re selling your product at the farmers’ market for $6. Then you get into a Whole Foods or two. You sell to the store for $5, and the store charges $10. That’s a $4 increase of your retail price, or what we call your SRP (suggested retail price.) Things go well, and you score a meeting with the divisional buyer for 50 stores, and she says you need to use their preferred distributor. (Most major grocery stores use distributors for slower moving items like natural, organic and specialty foods. Whole Foods is no exception.) The distributor adds another 30 to 40% markup to the cost—and naturally now the SRP might be as high as $14. That’s over double your original farmers’ market SRP of $6.

Your once loyal consumer might be saying “Wow, it’s $14 at Whole Foods? Never mind.” You need to build growth into your price from the start if you want to have room to succeed in big retail. It’s not reasonable to expect any retailer to help you figure that out.

The other problem with moving into more and bigger stores is that it forces you to increase production, whether you’re ready to or not. It’s another classic getting bigger catch: Unique products can be hot. But uniqueness doesn’t necessarily work in your favor when you’re trying to find a co-packer to let you rapidly move from three or four stores to 400.

That’s just what happened to another client. His specialty snack food got picked up by Whole Foods and exploded when he got into 25, 30, and then 40 stores. He outgrew his commercial kitchen almost overnight, but when he looked for alternatives, he learned that his uniqueness had a price: He couldn’t find a co-packer that could manufacture it at volume. Soon he was buying equipment and setting up a plant—a risky and expensive strategy. Like the barbecue sauce maker, success meant he had to make a jump he wasn’t prepared for.

Here’s a tip: Early on, long before you’re ready to exit the commercial kitchen, start planning for popularity. Figure out how your product would need to change for a co-packer to be able to take it on and let you scale up quickly. Talk to a number of co-packers and refigure your pricing and margins. Rethink your packaging. That’s a good place to get creative if you’ve had to adjust your formula. You want your product to be disruptive but not dysfunctional. Unique is good, but sometimes difficult to produce in large quantities.

Whole Foods is a great place to establish your brand identity. But it’s just one step in your product’s lifecycle. Keep that in mind, and you’ll enjoy a smoother ride and greater success on the other side of it.