The natural foods movement has its origins in the philosophy of Jean Jacques Rousseau. “Everything is good as it leaves the hands of the Author of things; everything degenerates in the hands of man,” wrote Rousseau. Of course, this outlook cut across the predominant view of mankind and progress, at least, in the Western World.
That philosophical bent initially encouraged advocates of vegetarianism. Rousseau’s world view took on additional meaning with the advent of modern food production and chemical food additives. Health food advocates, such as Rudolf Steiner and J.I. Rodale, who also influenced following generations, started to experiment with organic farming and natural diets to counter the growing use of chemicals in the modern food chain.
Yet, it was the “back-to-the earth” movement in the 1960s that truly laid the foundation for today’s mainstream consciousness. The 1970s saw a slew of natural food markets, or co-ops, crop up across the United States supported by young baby-boomers, who had been influenced by the vibes of the 1960s. Still, most stores were confined to progressive college towns and few forward-looking urban areas. In fact, there were fewer than a dozen natural food supermarkets in the United States in 1980 when the first Whole Foods Market opened. The natural-organic movement spread slowly across the United States in subsequent years. Nevertheless, it took the combined buying influence of baby-boomers and millennials to turn the movement into a multi-billion dollar industry in the new millennium.
Amazon company lore says that when Whole Foods was expanding in the 1990s, a young Jeff Bezos dreamed up the idea of an online retail store while driving to Seattle. Over the next 27 years, his company has become the world’s largest online retailer by reaching into almost every area of a consumer’s daily behavior. Now it wants to replicate its retailing success in the food sector. Given the overlap between Amazon’s growing Prime membership and Whole Foods’ consumer base—generally affluent, urban, and educated—the organic food segment is a natural first step for a company which may have greater aspirations in the retail food sector.
Organic explosion strains grower base
For the first time ever, over 5 percent of 2016 US food sales were organic. What’s more, organic food sales grew at 8.4 percent in 2016 compared to a measly 0.6 percent for non-organic food products. At the same time, organic food sales are increasingly occurring via conventional retail outlets. Contrary to the red-hot growth elsewhere, Whole Foods’ year-to-date comparable store sales actually declined by 2.6 percent. The company’s richer margins haven’t gone unnoticed by conventional food retailers. Yet, the rush of Walmart, Aldi, Krogers, and others into the organic sector is slowly slicing prices. Amazon will likely add to the downward pressure.
Within this landscape, US growers must surely be contemplating whether Amazon’s strategic move presents them with opportunity, doom, or something in between. On one hand, Amazon is known for relentlessly extracting efficiencies from the value chain after entering new market sectors. On the other hand, the company has enabled entrepreneurs and small producers to reach mass markets with their products.
Our view is that Amazon will experiment with Whole Foods before instituting any radical changes to the retail experience. However, industry consolidation, supply chain streamlining, and food deflation are all likely outcomes. On the face of it, these forces could result in negative outcomes for all growers, organic and conventional. It’s important to remember that Amazon will still control less than 2 percent of US grocery sales after a potential takeover of Whole Foods Markets. If Amazon is to succeed in the long-run, it would be wise to pay attention to the industry’s growers.
The amount of certified US organic farmland dedicated to crop production jumped by over 20 percent between 2014 and 2015, according to a recent USDA survey. But, a good portion of current growth is coming from legacy decisions made by growers when prices of organic food commodities provided a certain and lucrative return. Moreover, total US organic area includes a 40 percent jump in pastureland, which adds to organic food supply only indirectly through livestock, and 33 percent increase in unclassified certified land. Conventional growers who decide to make the organic transition face a break-even period of several years. They must be certain that the payoff will still be there if/when Amazon and Walmart transform value chain economics.
Given strong demand growth and attractive production margins for most organic food commodities, capital availability and opportunity costs remain the real hurdles for growers looking to go in this direction. While most of Wall Street is focused on the impact that Amazon will have on food retailing, it is just as important to ask whether growers will be able to keep up with the mainstreaming of organics. Cheap capital has enabled Amazon to get into the organic game, but many farmers aren’t as blessed. Companies that offer conversion incentives directly to US growers may be the ultimate supply chain winners.
Amazon likely also has aims entirely separate from groceries in mind. The company currently maintains “75 fulfillment centers [that] have ensured that it has an easy two-day reach virtually anywhere in the country." The company spent $11.5 billion on shipping in 2015, 10.8 percent of their sales. Whole Foods, for its part, runs 431 large facilities (currently known as “grocery stores”) strategically located in the middle of most of the major wealth concentrations in the United States. Many analysts have commented that the logistical appeal of Whole Foods real estate portfolio probably played a role in Amazon’s decision to pursue the acquisition.
It seems at least plausible that Amazon’s desire to leverage Whole Foods’ distribution power could mean that the historic “natural/organic” food sales focus of Whole Foods locations could actually decrease, to the benefit of food-marketing rivals such as Walmart, Kroger, and Weis. Of course, this outcome would shock stock market investors who sold Whole Foods’ competitors hand-over-fist when the potential deal was announced. Any move by Amazon to internalize logistical operations would also result in significant pain for UPS, Fedex, and the US Postal Service, who have become increasingly dependent on business from the internet retailing giant.
So, we should remain aware of a wide range of possibilities for the stretched-thin supply of “natural/organic” foodstuffs. It looks like there is widespread conviction or certainty that the acquisition means that production will need to expand. A deeper consideration of the motives, strengths, and weaknesses of Amazon leads us to the realization that we don’t really know what Mr. Bezos and his management team have planned for the grocery market. We do know, however, that the slightest movement in any direction by the Amazon/Whole Foods “dog” will certainly cause whiplash in the undersized “natural/organic” food market “tail.”
Despite the buzz, it’s still way too early to determine the real motives behind Amazon’s bid to acquire Whole Foods. We expect the deal to close in the second half of 2017, but clarity will only come when the knowledgeable parties choose to speak.
Rival retailers won’t spend the intervening period waiting idly on the sidelines. The market will react to moves and countermoves taking place among the various grocery players, and Bezos’ plans will morph to confront a changing landscape.
Amazon will likely be an unprecedented threat to other grocers. Based on history, the online retail giant has cut prices to the point where others can no longer compete in a race to the bottom. If Amazon continues that behavior, consumers looking for cheap food prices and convenience will win big at the expense of the broader grocery industry.
More concretely, we expect to see changes across the distribution chain. Amazon’s commitment to centralized shipping will likely spread to Whole Foods. The application of cutting-edge distribution technology to the less advanced retailer will allow for lower prices at the stores jokingly called “Whole Paycheck.”
For now, the market’s hopes appear to have run wild in the face of substantial uncertainty. Drone deliveries of cheap, organic kale won’t happen any time soon. In the case of Jeff Bezos’ acquisition of Whole Foods, complete delivery will take much longer than two days.