Why Whole Foods Matters (or Why Safeway Hurts Innovation )

I’m sorry, did I miss the memo saying that we need to dog pile on Whole Foods? First we had Julie Powell’s article equating shopping at Whole Foods with classism, then we had a post at Chicagoist equating Whole Foods with Wal Mart (full disclosure, I write for Chicagoist’s sister blog Seattlest).

Let me explain, in clear language, why Whole Foods is revolutionary (and i DON’T use that word lightly).

In short, your old-school, massive grocery store chains are addicts. What they are addicted to is something called “Slotting fees”. “slotting fees” are money, specifically money paid to grocery store chains from the largest food producers in the nation. The results of this addiction include a lack of innovation in a majority of food products being sold in our country, and a near monopoly on our food supply by companies such as Conagra, Coca-Cola, Kraft, Pepsi, and other mega-corporations.

Here’s how slotting fees work: There is only a finite amount of shelf space available in any given supermarket. Each supermarket only allots a specific amount of space for any given food item. For example, with soda, any given supermarket will have 5-10% of it’s shelf space dedicated to soda.

Coke and Pepsi both understand how valuable that shelf space is. To their way of thinking, it’s essentially real estate. So Coke will go to the Supermarket chain and say “I will pay you x amount of dollars for 35% of your available soda space.” Pepsi will then say “I too, will pay you x amount of dollars for 35% of your shelf space”. Dr. Pepper/7up will then say “Since I don’t have the resources of Coke or Pepsi, I will pay you a little less than x for a smaller percentage of soda shelf space”.

What this means is that for a new soda company, there is somewhere between 0 and 15% of shelf space for which they can put up a new product. Since these are often new companies, they can afford little or no money for these slotting fees. This puts them at a tremendous disadvatage within the supposedly free market.

And if a new brand gets a little too popular? Well Coke, Pepsi and/or Dr. Pepper can increase their slotting fees in return for more space, leaving less space for the newly competing brand.

This activity doesn’t just happen with soda. It happens with chips, candy, cereal, frozen foods, pickles, you name it.

So where does Whole Foods come into this picture? They’ve essentially told the major food corporations “We don’t want your money. We’d rather give you space only if you adhere to our food standards.” To which the food corporations said “Screw you”. This is why you rarely see the major food corporations represented at Whole Foods.

What Whole Foods has done is changed they way food is supplied to their customers. Instead of the major food corporations dictating which products get put on the shelves, Whole Foods does. The choices that Whole Foods makes are based not only which product gives the best profit, but what the demand for each product is, and if the food product is adhering to their food philosophies.

That’s not to say that Whole Foods is perfect…they’ve got issues with unions than make me uncomfortable. They also may be putting foods on their shelves that may not deserve to be there. But at least there’s a Supermarket company that is not putting profits as it’s sole purpose for existance. Few (if any) other supermarket chains can make the same claim.

This is why I don’t get the recent slams against Whole Foods. Are they being targeted simply for doing something different? Or is it because there’s a level of paranoia against companies that get fairly successful in a fairly short period of time? I can’t answer these questions. What I do know that it’s best to fully understand a company before you start criticizing them.

Oh, and just so we’re clear. Slotting fees are BAD! Learn it and repeat it to all who care to hear it.

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