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Does Whole Foods Need The Middle Aisle? What The Shift Toward Fresh Means For Retail

(Photo by Drew Anthony Smith/Getty Images)

The Keebler Elves are going to need a smaller tree.

Kellogg, the maker of Keebler cookies, Frosted Flakes, Pop-Tarts and Pringles, recently posted a 2.5% decline in second-quarter sales due in part to a consumer shift toward fresher, healthier foods. Kellogg wasn’t the only big-food brand to see its sales slip: Kraft Heinz, General Mills and Pinnacle Foods (Duncan Hines, Birds Eye) did as well.

While their losses are in part due to a consumer preference for more natural foods, they are more directly caused by supermarkets. Many are dedicating more space to healthier options, including wholesome prepared meals, private labels and in-store dining, all of which indicates a crowding out of the middle aisle. Few events may accelerate this change as dramatically as Amazon’s pending acquisition of Whole Foods.

Through Amazon and its Prime two-day delivery program, Whole Foods could sell more of its shelf-stable goods, including its 365 Everyday Value brand, online. This could free up more in-store space for restaurants, fresh prepared meals and natural foods. Other supermarkets are paying attention, and many will likely follow its lead.

Wall Street agrees. Shares of stock in packaged food companies in the S&P 500 fell more than 11% in the last year, while the rest of the index rose nearly 14%, according to a report by CNBC.

The Keebler elves will either have to renovate — or rightsize.

Dining In, Processed Out 

For major food manufacturers, renovation may mean adding a new kitchen — in the supermarket.

More grocery chains, including Whole Foods, are upping their investments in takeout and dine-in experiences:

  • H-E-B is opening its first restaurant drive-thru, a BBQ place, on Aug. 11.
  • The natural-foods chain Sprouts Farmers Market offers a variety of to-order spreads including fresh fruit trays, vegetable trays and sushi trays.
  • And Kroger plans to open a store in 2019 that will include a second-floor bar, a food hall, a variety of restaurants operated by third parties and ready-to-eat items by vendors.

As more square footage is dedicated to dine-in and carryout foods, the shopper dollar will be similarly allocated. Chains that focus on healthier fare are already at an advantage — sales at stores that sell more fresh foods rose by 4% in 2016, compared with 1% for other stores, according to the CNBC report, citing Nielsen.

These figures resonate with food manufacturers, many of which are reformulating their recipes to include cleaner ingredients, either for the kitchen or the shelf.

Private Labels Cleaning Up

However, even with cleaner ingredients, big food manufacturers face their toughest competition on the same shelves where they are fighting for attention. Private-label foods, which are becoming a staple for more major retailers, are penetrating the packaged-food aisle in greater numbers and with more natural ingredients, threatening to shoulder out big-food brands.

In-store brands account for 14% of all grocery sales, according to a UBS analyst interviewed in a separate report by CNBC. Kroger’s private-label portfolio, which includes its growing Simple Truth and Simple Truth Organics lines, represents more than 14,000 items at a store, according to its annual report. Whole Foods’ exclusive brands, led by 365 Everyday Value, accounted for 15% of its sales in fiscal 2016, it reports.

Most grocers — 72% — see healthier foods as a gateway to private-label expansion, according to the Food Marketing Institute’s 2017 Report on Retailer Contributions to Health and Wellness. So it’s not surprising that retail observers expect Amazon to extend its private-label offerings through the Whole Foods 365 brand. If so, more of these items would be available online, with two-day free shipping for Prime members.

Should sales of 365 goods shift significantly to Amazon, there could be reason to reduce the number of them on Whole Foods’ shelves, and ship directly from the warehouse.

Fresh-Blend Solutions

Packaged food makers are scrambling to adjust by getting in on the game. Recently, Kraft Heinz partnered with Oprah Winfrey on a line of comfort foods, called O, That’s Good, all of which are free of artificial flavors and coloring.

Similarly, many big-food companies are creating or buying up healthy labels. General Mills bought Annie’s Homegrown, Pinnacle Foods owns Evol and Earth Balance; Unilever, owner of  Ben & Jerry’s, is investing more in natural ingredients. Meanwhile, Tyson and Perdue are now producing chicken and meats in line with Whole Foods’ clean-label standards. Tyson’s meats sell under the Open Prairie Natural Angus label and Perdue under the Harvestland brand.

Still, with so many supermarkets controlling their own healthy-eating options, packaged foods makers are at a disadvantage. They need to catch up faster. But to go where? If the middle aisle is shrinking, where will these healthier options be stocked?

I think the solution may be a new merchandising categorization that blends all healthy foods — packaged and fresh — to reflect the shopper’s path. Think of the refrigerated salad dressings in the produce aisle. All-natural cereals can be displayed near organic milk and berries; sugar-free condiments near the fresh meat case; and canned soups near whole-grain, fresh breads. Those labels that make the cut will simply meet the shopper’s desire for honest nutrition at a fair price.

It would require a complete shakeup of the food store format, and such change might not be well met, but small-format stores can serve as tests. After all, smaller food footprints will likely become by-products of the transition to fresh. Ask the Keebler Elves.

This article originally appeared in Forbes. Follow me on Facebook and Twitter for more on retail, loyalty and the customer experience.

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