'It rips my heart out': Dairy company CEO says Whole Foods killed off his business by abruptly cancelling a 7-year contract

Facebook/AtlantaFresh

AtlantaFresh Artisan Creamery is shutting down after Whole Foods cancelled a seven-year contract with the company just 14 months into the agreement.

• AtlantaFresh Artisan Creamery, a grass-fed dairy brand, is shutting down after Whole Foods canceled its seven-year contract with the company just 14 months into the agreement.
• "It rips my heart out," Ron Marks, the founder of AtlantaFresh, told Business Insider. "There's a lot of pain left here."
• Marks thinks his experience is emblematic of a changing culture at Whole Foods that squeezes out smaller brands in favor of larger suppliers. The company is meeting with suppliers on Tuesday to address their complaints.
• Not all suppliers have a problem with Whole Foods' new approach - with one telling Business Insider it is more efficient and an improvement.
• Whole Foods says it cut AtlantaFresh from its stores because of weak sales, despite "significant efforts" to improve business.

For Ron Marks, landing a 7-year deal to supply milk to Whole Foods stores was a life-changing, watershed moment.

Less than three years later he's going out of business. Whole Foods cancelled the contract with Marks's company - called AtlantaFresh Artisan Creamery - just 14 months into the deal. He's now shutting down his dairy plant, leaving his 32 employees without work, after nearly a decade in business.

"It rips my heart out," Marks told Business Insider. "There's a lot of pain left here."

Marks blames Whole Foods for the soured deal, pointing to the retailer's inability to get his fresh milk on shelves quickly as the cause of weak sales. He also believes his experience is emblematic of a changing culture at Whole Foods that squeezes out smaller brands in favor of larger suppliers. Other small suppliers have said they are unhappy with recent changes that Whole Foods has made to cut costs and streamline its buying processes. Whole Foods met with up to 200 of its suppliers on Tuesday to try and ease some of those tensions.

But Marks's story is also a a cautionary tale for any small-scale producer that ramps up its business on the promise of a single client, which is something he acknowledges. He borrowed heavily to expand his business on the promise of a non-binding contract. The grocer was his largest buyer, and when the deal was yanked he couldn't find another buyer quickly enough to keep the company in operation

Whole Foods says it cut AtlantaFresh from its stores because of weak sales, despite "significant efforts" to improve business.

"Local products are fundamental to Whole Foods Market, and we work closely with each of our suppliers to try to create successful relationships," a Whole Foods representative said. "We are always excited to bring new local products to our stores and customers, but, unfortunately, not all products meet sales expectations. When that occurs, we have ongoing conversations with the supplier to try to improve sales.

"In this case, we also made significant efforts across the business to increase sales, including in-store marketing, paid advertising, special promotions and expanded distribution," the representative added. "Despite our efforts, we are not always able to raise demand and we must occasionally make the difficult decision to discontinue products."

Whole Foods abruptly cancels 7-year contract

Facebook/AtlantaFresh

Marks said AtlantaFresh had been supplying Whole Foods with Greek yogurt for more than five years when the company approached him at a conference in June of 2015, and asked if he could supply grass-fed milk and cream to one third of its stores.

Marks didn't have the operational capacity to fulfill Whole Foods' needs at the time. So he took out a $500,000 loan with Whole Foods and took on another $2 million in debt to expand his operations from a 2,000-square-foot facility processing 300 gallons of product a week to a 12,000-square-foot facility processing up to 40,000 gallons a week.

He also got his dairy partner, Heart Agriculture, to transition a herd of 700 cows from conventional standards to grass-fed standards. By July of 2016, AtlantaFresh made its first delivery of grass-fed milk to Whole Foods stores.

It was only a couple months later that Marks said he began to worry that his contract with Whole Foods was doomed.

Whole Foods had agreed to purchase 30,000 gallons of product weekly from AtlantaFresh, but routinely only purchased one third of that amount, Marks said.

There were also chronic logistical issues with a major Whole Foods distributor that resulted in milk arriving at stores within 5-7 days of their expiration date, he said. As a result, the milk that Whole Foods purchased would often end up going to waste.

"That's the kiss of death for a fresh milk program," he said.

Marks said he "raised holy hell" about the logistical issues to Whole Foods' regional and corporate management, but claims his concerns were not addressed.

Ultimately, "Their answer to this issue was: 'We're cancelling and there is no discussion or negotiation,'" he said.

Marks said he felt duped. He trusted Whole Foods. He had been doing business with the company for years, and he knew it to be a champion of small brands. He sensed that something had changed.

'The level of frustration is high'

AP

Whole Foods has been implementing new policies affecting its relationships with suppliers and making widespread changes to its inventory management system to cut costs and address weak sales.

The changes, many of which pre-date Amazon's acquisition of the grocery chain in August, have in some cases led to issues with food shortages at stores and stoked tensions with some of Whole Foods' suppliers - hence the meeting on Tuesday.

Some vendors are pessimistic that the chain will be able to resolve their concerns, according to Jefferies analyst Chris Mandeville, who met with several Whole Foods suppliers earlier this month at the annual trade show Expo West.

"The level of frustration is high, particularly within the smaller vendor community," Mandeville told Business Insider in a phone interview.

Not everyone is against the changes, however.

The founder of a new beverage brand, who spoke to Business Insider on the condition of anonymity, said he requested to meet with one of Whole Foods' regional buyers in the fall to showcase his product and was able to schedule an appointment just two days later. His product was accepted into the system and will soon roll out in Whole Foods stores.

"This would never have happened under old system," this person, who had previous experience with Whole Foods, said. Regional buyers now have more time to review new brands because some of their responsibilities have shifted to Whole Foods' global office in Austin, he said.

AtlantaFresh shuts down

Facebook/AtlantaFresh

Marks shut down his dairy plant this month and laid off all his employees and said he is now trying to find a way to avoid filing for bankruptcy.

"In hindsight it was a bad decision to have all of our eggs in one basket," Marks said, referring to the fact that Whole Foods was by far his biggest buyer.

He said he also should have made sure his contract with Whole Foods was binding, so the company couldn't cancel it without a penalty.

He has considered trying to sue Whole Foods, but decided against it because it's owned by Amazon.

"Who am I suing: Whole Foods or Amazon or both? I don't have the temperament or the stomach or the pockets for that," he said.