Dive Brief:

• Whole Foods’ new sourcing policies are creating an opportunity for competing retailers to snap up promising niche products, according to Boulder, Colorado’s Daily Camera.
• Alfalfa’s Market, a local grocer, has begun mentoring small producers and plans to stock more than one thousand additional local products in its stores. Meanwhile, Lucky’s Market, which is based in Boulder and operates close to 30 stores nationwide, has stepped up efforts to work with niche suppliers and get their products on store shelves faster.
• Whole Foods began centralizing it’s purchasing processes before it was acquired by Amazon, and has since instituted merchandising fees of between 3% and 5% of manufacturers’ total sales to pay for the program. The grocer has also begun charging for in-store demos, and has barred suppliers’ brokers from stores.

Dive Insight:

For years, Whole Foods was known as a national grocer that operated like a local one — and one that gave small suppliers their crucial first shot. Stories abound of entrepreneurs who took samples of their lovingly crafted product into a nearby Whole Foods’ store, scored a contract and kick-started their business.  

But that sort of retailing is expensive. And while it may have paid off for Whole Foods during its boom years, it became a drag on the company once competing grocers began to flex their own local and organic muscles. Before Amazon swooped in last summer, Whole Foods was in turmoil, with traffic and profits declining, and activist investors delivering ultimatums.

As Whole Foods tries to become more profitable and efficient, small natural grocers see an opportunity to step out from the company’s shadow. Boulder’s Alfalfa’s Market currently stocks around 3,800 locally sourced products, and hopes to bump that number up to around 5,000 in the near future, marketing director Chris Epp told the Daily Camera.

Similar stories are unfolding at independent grocers across the country as demand for local goods continues to move mainstream. Local product sales were $12 billion in 2014 and are expected to hit $20 billion next year, according to the U.S. Department of Agriculture.

Gunnar Lovelace, founder and chief strategy officer at online grocer Thrive Market, said he sees a clear opportunity to differentiate from Whole Foods on assortment and authenticity. As an e-grocer with nationwide distribution, Thrive’s smallholder suppliers aren’t “local,” per se. But they do offer the transparency and unique attributes that shoppers are seeking out these days.

In a recent interview with Food Dive, Lovelace said Thrive’s sales have boomed since Amazon bought Whole Foods. He also said more and more small suppliers are flocking to his buyers after being turned away by the specialty retailer.

“We’re seeing a rush of innovative small brands that want to do exclusive launches with us,” he said.

Large supermarkets see an opportunity to differentiate, as well. Kroger has stepped up its local sourcing efforts and recently began holding supplier summits for emerging natural brands, while Albertsons announced it’s building an online marketplace for manufacturers that couldn’t make it onto store shelves, but are still promising.

Nick Desai, CEO of Snack It Forward, recently signed deals with both grocers to distribute its latest product — a natural alternative to Cheetos called Peatos — after deciding to bypass Whole Foods. He said his company, which sells some items in Whole Foods, along with others are getting squeezed by the natural grocers’ distributors and by its new fees. He predicts the company will lose sales as strong emerging brands continue to turn away from it.

“Whole Foods is becoming so much more bureaucratic,” he told Food Dive. “It’s combining the worst elements of the natural channel with the worst elements of the conventional channel.”

As Amazon puts a shiny new gloss on Whole Foods with Prime integrations, discounts and online innovations, it stands to draw more mainstream shoppers. But drastic changes to its assortment could risk undercutting the company’s carefully crafted brand. There’s no doubt Whole Foods needed to become a more efficient seller. But if it scales back its assortment of unique local and niche products too much, it risks becoming just another conventional grocer.