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Amazon’s offer for Whole Foods will shake up Sonoma County’s grocery industry

Hip Chick Farms co-owners, from left: chef Jen Johnson and Serafina Palandech at the Hip Chick Farms research kitchen in Sebastopol, California, on Thursday, June 29, 2017. (Alvin Jornada / The Press Democrat)

ROBERT DIGITALE,

Rich Norgrove, the brewmaster and chief operating officer at Healdsburg’s Bear Republic Brewing Co., can’t help but think about internet giant Amazon when he considers the weekly basket of produce delivered to his home under a community supported agriculture, or CSA, program.

The local produce arrives consistently fresh, shows up conveniently at his door and Norgrove can order extras like a jar of honey with the fruits and vegetables. Interest in the food deliveries could spread, he said, and Amazon’s plan to purchase Whole Foods grocery stores might lead to a new era in how Americans acquire groceries and prepared foods.

“That’s what Amazon has the potential of doing, introducing a whole new group of people to it who never have done it,” Norgrove said.

Sonoma County food producers and grocers expect Amazon’s $13.7 billion offer for Whole Foods to shake up their industry. The changes could include new food pickup and home delivery options for consumers, smaller profits for producers and more challenges for food startups seeking shelf space in the grocery aisle. Not to mention the potential need for local upscale markets to adjust the way they do business.

“What’s going to happen to the little guys?” asked Serafina Palandech, who with partner and chef Jen Johnson owns Hip Chick Farms, a Sebastopol maker of frozen organic and natural chicken entrées.

Business analysts generally remain optimistic about the future of the local food segment, a significant and growing part of the county’s economy.

Local producers enjoy more options today than ever for selling the premium wine, beer, cheese and other food items for which the county increasingly has become known. More conventional chain grocers now stock their shelves with natural and organic products, a shift many local producers attribute largely to the success of Whole Foods.

And while the prospect of competition from e-commerce and home food deliveries looms ever larger as a result of the deal, local grocers say consumers here likely won’t see quick changes.

“I don’t think immediately it will have much effect on us,” said Steve Maass, the founder and owner of Oliver’s Markets, a Santa Rosa-based chain of four upscale supermarkets.

Nonetheless, Maass acknowledged the leaders at Amazon are “geniuses at logistics” and already have “changed whole industries,” including those that sell books, apparel and a variety of goods.

“Jeff Bezos has generally changed whatever he’s gotten into,” he said, referring to Amazon’s CEO.

Amazon’s announcement last month to purchase Whole Foods is expected to bring together two companies viewed as master retail innovators. And while outsiders can only guess at exactly what the outcomes of the deal will be, most expect big developments.

“I do get the deep sense that it will fundamentally change the retail landscape as we know it,” said Marcus Benedetti, president and CEO of Clover Sonoma, the Bay Area’s largest dairy processor.

For Benedetti, the fact that Whole Foods will be part of that transformation is especially noteworthy. He maintained that a large number of county producers, including Clover and frozen vegetarian food maker Amy’s Kitchen, “would not be where they are today without that relationship with Whole Foods.”

“They really provided the springboard for the authentic food movement,” he said.

It wasn’t just giving locals shelf space, he said. Whole Foods’ success came from leaders with the foresight to anticipate what consumers wanted and from executives who treated food makers as partners, working with them to develop new products.

“Walter Robb (a former Whole Foods co-CEO) was the instrumental force to get Clover into organics,” Benedetti said.

However, facing sluggish same-store sales, the publicly traded Whole Foods has begun centralizing decisions on what products its stores carry, a move that may make it more difficult for new food makers to get shelf space.

For example, the 4-year-old Hip Chick Farms used to have its organic and natural frozen chicken foods in Whole Foods stores in all five of the chain’s regions, with approval obtained from the buyers in each region. But this year, after taking part in a review piloting a new national buying system, Hip Chick has initially been cut back to three regions.

Palandech and others noted the shift toward more centralized decision-making at Whole Foods preceded the Amazon deal. Moreover, for food makers the grocery chain remains a powerful player in the building of brands.

“The folks that shop at Whole Foods influence the rest of us,” Palandech said.

Neal Gottlieb, founder of Petaluma’s Three Twins Ice Cream, agreed with Palandech and Benedetti that startups may need to find other avenues — especially independent grocers who have long welcomed local food items — to get their products on store shelves.

“I do think it will make it harder for smaller brands to get a toehold in Whole Foods,” he said.

For him, the results of Amazon’s latest acquisition are mixed. To the positive, he said, the deal “saved Whole Foods” as a natural foods grocer and spared it from being gobbled up by another large grocery chain that could have fundamentally changed its nature.

However, Amazon now may use its clout to force producers to accept lower prices for their goods.

“That is I think the biggest concern that most people have,” Gottlieb said, “that it is going to lower margins.”

The demands for lower prices concurrently could lessen the criticism of Whole Foods as “Whole Paycheck,” as it is called by some who find the store too pricey.

“I think the consumer may benefit, but I think the suppliers could suffer a little bit,” said Mike Maher, CEO of Presenture, a Houston company serving producers for the food service industry. Maher, whose experience includes retail foods, said food makers, grocers and others in the business are “going to have to up their game.”

John Lloyd, an owner with his wife, Kim, of Big John’s Market in Healdsburg, said it was a “brilliant” strategy for Amazon to acquire Whole Foods. The chain’s collection of 460 retail stores will allow Amazon to greatly expand its fledgling e-commerce food business.

“It makes perfect sense,” said Lloyd of the acquisition. “They’re going to use it for local food distribution centers.”

Real estate experts have put forth the same idea, namely that Amazon needs a way to get refrigerated and frozen items safely “the last mile” to customers’ homes. The smartest approach, they said, isn’t to build more Amazon warehouses but to buy existing supermarkets with the means to properly store food.

Amazon also will benefit by acquiring stores in some of the more upscale parts of the U.S., Lloyd said.

“They’re situated in the right places for what they want to do,” he said. He suggested many of the nearby residents already have or would consider paying $99 a year for Amazon Prime, the subscription service that not only provides free two-day shipping for a variety of items but also entitles members to enroll in the Amazon Fresh grocery delivery service.

Grocery deliveries comprise a mere 2 percent of the $715 billion in retail food sales last year, the Wall Street Journal reported last week, citing data from food research firm Technomic Inc. But the service, provided by companies like Instacart, Peapod and FreshDirect, constitutes one of the faster-growing parts of the grocery business.

Amazon has deep pockets and eye-popping tech skills; it already has a test store in Seattle where Amazon employees pay for food items using smart phones and need never go near a checkout register. Many expect the company now to shake up not only the grocery delivery business but also similar companies bringing customers prepared meals.

Last week, meal delivery service Blue Apron slashed the value of its initial public offering by a third, a move some attributed partly to the threat of Amazon’s competition but also to the startup’s lack of profitability.

Gary Edwards, owner of Sage Marketing, a Sonoma marketing business that works with food companies, said he foresees the day when a consumer will order from Whole Foods a prepared dinner, plus a gallon of milk and a dozen eggs — “and it’s going to show up on your doorstep in 45 minutes.”

Urban grocers that haven’t already adopted delivery programs “might have a problem ahead,” Garrick Brown, vice president of retail research for real estate company Cushman & Wakefield, wrote in a report last week. Some investors apparently agree, because the stocks of several major grocery chains took a beating after Amazon announced its plans for Whole Foods. Amazon stock, meanwhile, increased in market value by more than $15 billion in the day after the announcement, an amount that exceeded the planned purchase offer for Whole Foods.

Nonetheless, local grocery experts said the independent grocers in suburban Sonoma County likely will be slower to adopt e-commerce delivery programs.

“Right now we’ll just kind of hold on and do what we do best,” said Ken Silveira, a longtime grocer and a former owner of Pacific Market stores in Sebastopol and Santa Rosa. For the independent stores, their strengths lie in being based in the county and not being part of a huge chain.

“The ‘local’ card is the best card that we have,” Silveira said.

Meanwhile, some producers hope that as one door closes, another may open. Small food makers may find it more difficult to get products on store shelves, but Amazon may provide new ways to get food items directly into the hands of consumers.

“I think it’s going to open up more local opportunities,” said Edwards of Sage Marketing. The combination of e-commerce and retail stores will “take Sonoma County products even further.”

That is the hope of Michael Volpatt, an owner with Kate Larkin of the 6-year-old Big Bottom Market, a Guerneville company whose packaged biscuit mix was cited on Oprah Winfrey’s Favorite Things List in November.

Volpatt would like to get on the shelves of Whole Foods and says for artisan food makers it’s “deemed like the gold ring.” But he noted that Amazon already has agreed to carry his products, so perhaps one day consumers will be able to somehow buy them through Whole Foods, too.

“My hope is it’s an easy transfer,” he said.

Norgrove of Bear Republic said Whole Foods was among the first large grocers to allow craft brewers shelf space and “has done a great job of exposing people to great craft beer.” Now he maintains that Amazon has the means and savvy to take things a step further, perhaps one day even getting federal law changed in ways that would allow brewers direct access to more consumers.

He foresees a day when a fellow in Tennessee could order a bottle of Bear Republic Beer online and get it shipped directly to his home, something now prohibited by law. The craft brewers lack the political muscle to change the law, he said. But when it comes to Amazon, “they’re big enough.”

You can reach Staff Writer Robert Digitale at 707-521-5285 or robert.digitale@pressdemocrat.com. On Twitter @rdigit