Whole Foods Calls the Shots for Startups

Companies tweak ingredients, labels to win the retailer’s blessing

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John Simmons, founder and CEO of bottled-tea maker Third Street, says, ‘When Whole Foods gives you an opportunity, you take it.’ PHOTO:BENJAMIN RASMUSSEN FOR THE WALL STREET JOURNAL

By

ANNIE GASPARRO and

LESLIE JOSEPHS

May 6, 2015 5:33 a.m. ET

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When a Whole Foods Market Inc. representative contacted Heidi Lovig about carrying her tiny line of vegan cheese substitutes, she felt like she had hit the jackpot.

“I was crying. I called my parents,” recalls the 34-year-old entrepreneur.

The meeting four years ago launched her then five-month-old company from its Portland, Ore., base onto the shelves of Whole Foods across the country. But it also brought lots of work: She has had to change ingredients, pay to achieve organic certification, and change her brand’s name twice.

Whole Foods may not dominate specialty-foods retailing the way it once did, but for startups targeting Americans’ growing hunger for natural and organic fare, it remains the ultimate gatekeeper. Its imprimatur can open the way not only to Whole Foods’ more than 400 stores, but to bigger retailers who covet the cachet of brands carried at Whole Foods, entrepreneurs say.

As a result, small companies are willing to do a lot to get into Whole Foods and stay there—from changing recipes and tweaking packaging to selling certain products exclusively through the chain.

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“When Whole Foods gives you an opportunity, you take it,” said John Simmons, founder of Third Street Inc. He began selling bottled chai tea concentrate to Whole Foods in Colorado in 1998 after one of its buyers sampled it in a local coffee shop. Today, the Louisville, Colo., company has multiple products in Whole Foods nationwide, including a bottled iced tea it developed exclusively for the chain. Its original concentrate sells at Kroger Co. and other retailers.

Meeting Whole Foods’ druthers can be expensive. Kate McAleer, founder of Bixby & Co., which supplies candy bars to Whole Foods, says certifications cost at least $10,000 a year—a hefty sum for her company, which she expects to break even this year. And Whole Foods lists roughly 80 “unacceptable” ingredients including vanillin, bleached flour, and aspartame that must be removed from products seeking to appear on its shelves.

Ms. Lovig, whose vegan cheese substitutes swap out dairy ingredients for plant-based ingredients, said she sifted through the sourcing of all her ingredients with Whole Foods’ buyers. She had to use a pricier version of the preservative citric acid that was less chemically processed.

Whole Foods also advised her to rename her company, then called Heidi Ho Organics, because while its vegetables, nuts and other ingredients were organic, its products weren’t certified organic by the U.S. Department of Agriculture, Ms. Lovig said.

She and her partner chose “Heidi Ho Veganics” while they worked through an elaborate certification process—only to have hard-line vegans complain the name was misleading because animals may be present on some farms. They shifted the brand to simply Heidi Ho around the time they won the certification, a process that cost close to $3,000, Ms. Lovig said.

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Ms. Lovig says the effort was worth it for the 12-employee company. She said she expects sales to reach $1.2 million this year, up from $340,000 last year.

“And as I create new products, I would happily give them first go at those,” Ms. Lovig said. “The level of clout in saying you’ve launched with Whole Foods nationally is pretty paramount for a natural brand.”

Cultivating new brands and exclusive products has become even more important to Whole Foods as mainstream retailers have expanded natural-food offerings. Kroger, the biggest traditional supermarket operator in the U.S., with 2,600 stores, last year sold more than $1 billion of Simple Truth, a line of natural-and-organic foods it launched in 2012.

Such competition has helped slow Whole Foods’ growth. On Wednesday, Whole Foods said that for the 12 weeks ended April 12, sales at stores open at least 13 months rose 3.6%, adjusted for currency fluctuations. Profit rose 11%, but Whole Foods’ stock sank more than 10% in after-hours trading, to $42.48 on disappointment in sales growth and margins.

Whole Foods buyer Errol Schweizer said that over the past 12 to 18 months the retailer has offered 250 products that were exclusive for at least some time. When suppliers branch out, it challenges them to create new flavors or other unique options for its shoppers.

ENLARGE

Among Third Street’s iced teas, the Half & Half Green Lemonade and Lemongrass Green Tea drinks are exclusive to Whole Foods. A Whole Foods in Boulder, Colo. PHOTO: BENJAMIN RASMUSSEN FOR THE WALL STREET JOURNAL

Mr. Simmons, for example, started selling a spicy pumpkin-flavor tea only at Whole Foods last year after the exclusive period for Third Street’s original Festivus Chai drink expired.

Sometimes, suppliers that have signed on with Whole Foods must pass up other opportunities. A couple of years ago, Third Street’s Mr. Simmons recalls, he met with a buyer for a big retailer who had photos of his company’s tea at Whole Foods, and demanded those products. Since they were still exclusive to Whole Foods, Mr. Simmons refused. That may have cost Third Street some revenue, he says, “but it was a good long-term decision.”

Whole Foods isn’t afraid to throw its weight around when it wants a supplier to create a new product, get a certification or make a design change. “We tell them ‘this is the way the market is going, and if you don’t want to, we have other options,’” says Mr. Schweizer.

Whole Foods flagged the cursive script on High Road Craft Ice Cream’s packaging when the Marietta, Ga., company was working on a new ice cream for the grocer, BLVD Tasty Ice Cream, a company executive said. “Millennials can’t read cursive,” Shaun Chavis, High Road’s director of sales and marketing, recalled a Whole Foods buyer saying.

High Road switched to block lettering. “That was a good bit of advice,” she said.

To keep its pipeline full, Whole Foods has provided low-interest loans totaling $15 million to small food makers over the past nine years. It also helps with sales forecasting, ingredient purchases, and marketing.

Brands that grow too big can become vulnerable. In late 2013, Whole Foods said it would stop carryingChobani Inc.’s Greek yogurt, saying it wanted to make more room for niche brands and especially those that were organic or made without genetically modified organisms and not sold at mainstream grocery stores.

Chobani said it doesn’t think Greek yogurt should be exclusive and that it is proud of its broad reach.

Hain Celestial Group Inc., which had $2.15 billion in revenue last fiscal year, sells more than 800 products under various brands in Whole Foods, its biggest customer. But some brands it focuses on selling to mass-market retailers, said Chief Executive Irwin Simon.

“Whole Foods doesn’t like it when our products grow up,” he said—adding later that he understands its concerns and meets with its executives regularly to ensure they are working together.

“We still want to support these guys after they grow up a little,” said Mr. Schweizer. “But we also look at growing up the next generation.”