Whole Foods’ Relationship With Small Purveyors Is Not Going Well

Amazon’s mid-2017 acquisition of Whole Foods sent shockwaves through the food and grocery industry. The merging of a pioneering e-commerce giant and a grocery store with a cult following has made other retailers nervous (and many are scrambling to catch up by discussing mergers and launching delivery initiatives of their own). But it’s not just big business that’s being affected: The Amazon-Whole Foods deal is having dizzying effects on small food producers — which were at one time the national grocer’s main attraction.

While Whole Foods’ sales have risen since the buyout, it hasn’t all been smooth sailing: Customers in various cities have complained of empty shelves at their local Whole Foods as the company grapples with a new inventory system. But there’s a bigger issue at hand.

Whole Foods has historically operated its individual locations more like independent grocers, allowing each store to have a significant amount of autonomy when it came to stocking its shelves. Staff members referred to as “foragers” were responsible for tracking down local products, like homemade jams or artisan hot sauces, and buying them for the stores. The makers themselves were responsible for keeping store shelves stocked with their products and were also given time and space to demo their products in-store, which allowed them to forge relationships with new customers face-to-face.

But the grocer has been gradually shifting the way it does business with local makers, despite Whole Foods CEO John Mackey’s post-acquisition promise to “to support and promote local products and suppliers.” Last September, it started charging local producers to demo and sample their products in stores, and it has also shifted to a more centralized buying system like that used by conventional grocery stores.

Instead of relying on local staffers to find the best local products, it now largely relies on executives at the Austin, Texas, home office to pick out store inventory. (Though the new buying system was actually implemented before the acquisition, some have speculated that the switch may have been made with the merger in mind.)

After an open forum held with some key producers (including Califa Farms, an independent California-based almond milk purveyor), Whole Foods spokesperson Robin Rehfield Kelly told CNBC that the changes reflected the partners’ concerns “about the challenges of our decentralized purchasing structure and inconsistent practices across regions and stores.”

Whole Foods’ moves toward operating more like a regular grocery store may have already spelled disaster for one business. AtlantaFresh Artisan Creamery was founded in 2009 and the Georgia-based company’s fresh mozzarella and yogurt quickly drew the interest of Whole Foods. The grocer began stocking its products throughout its stores in the South, working with the dairy company in a way that “was typical of the nurturing, hands-on approach it famously took with small food businesses,” as the New Food Economy wrote.

Over the years the relationship between the two companies grew: Whole Foods became its biggest customer, even giving AtlantaFresh a loan to expand its production. AtlantaFresh says that in 2015, Whole Foods asked the company to supply 110 of its stores with grass-fed, non-GMO milk, signing a seven-year contract committing to buying 30,000 gallons of milk per week and loaning the business half a million dollars in order to expand. To accommodate the demand, AtlantaFresh took on an additional $2 million in debt for facility expansion.

But in September 2017, shortly after Amazon announced it was buying Whole Foods for more than $13 billion, Whole Foods canceled its contract with AtlantaFresh.

According to the Wall Street Journal, there has been significant turnover of Whole Foods executives and upper management since the merger, and that may have helped put the nail in the coffin for AtlantaFresh. The New Food Economy reports that in September, the company’s vice-president of purchasing for the South region, Stephen Corradini, parted ways with the company; Corradini had helped broker the original partnership with AtlantaFresh, and after he left, its products were removed from store shelves entirely.

Even for small companies who have been able to continue working with Whole Foods post-merger, it’s now more expensive for them to do so. Instead of allowing producers to give out samples of its products in stores for free, the grocer is now forcing suppliers to come out of pocket to fund in-store demos by a third-party company — the same one used by Walmart stores. The company is also now charging makers who sell over a certain amount to pay a percentage fee to the store, further cutting into small producers’ bottom lines.

But Whole Foods is trying to reassure customers and suppliers that, despite all the recent changes to how it does business, it will continue to stock local products. President and COO A.C. Gallo acknowledged this week that the new buying system has been a concern for local suppliers, telling Fortune that it is not getting rid of its regional buyers and that its new system should actually give its buyers more time to find local products.

Of course, none of this provides any comfort for AtlantaFresh, which says it has been forced to lay off 32 employees after losing Whole Foods’ business. It’s ceasing operations altogether this month.

Correction, March 26, 2018: This story has been corrected to show that meat purveyor Niman Ranch was not among the attendees at Whole Foods’ open forum.

Whitney Filloon is Eater’s senior associate editor.

• Amazon’s Changes to Whole Foods Mean Empty Shelves, Fewer Local Products [E]