Sour Deal: AtlantaFresh Artisan Creamery Shuts Down

When Ron Marks, founder and CEO of dairy processor AtlantaFresh Artisan Creamery, agreed to become a long-term partner with Whole Foods Market in June 2015, he understood it carried some risk.

The deal, a seven-year contract which called for AtlantaFresh to supply 30,000 gallons of grass-fed, non-GMO dairy milk and cream to 110 stores in three regions, would not be simple to fulfill. It would require Marks to more than double the size of the company’s existing processing facility, as well as to help its supplier farm to transition from conventional to 100 percent grass-fed and certified non-GMO dairy production.

Still, after enjoying nine years of consistent business with Whole Foods, selling Greek yogurt to 180 stores across 20 states, Marks believed that going all in with the natural retailer was a gamble worth taking.

“We knew it was not a healthy business practice, but for eight out of the nine years I was in business [Whole Foods] was my largest customer,” Marks said in a call with BevNET. “On the one hand I was aware of that, on the other hand there’s not another brand out there I’d rather be associated with.”

Naturally, things look different in hindsight. Just 14 months after AtlantaFresh delivered its first shipment of product, in July 2016, Whole Foods suddenly cancelled the contract last September, citing poor sales. The unexpected termination crippled Marks’ dairy operation, ultimately leading to the announcement earlier this month that AtlantaFresh was laying off all 32 employees and closing down.

“One of the frustrating things for us is, in the Southeast region, we had been on Whole Foods shelves for eight years and had developed a strong consumer following,” he said. “I’m really not sure where we are going to go from here.”

While Marks acknowledged that Whole Foods did nothing illegal or illicit in cancelling the deal, the case of AtlantaFresh reveals a glimpse into the changing nature of the retailer’s relationship with its suppliers on a local level — and how Amazon’s $13.4 billion acquisition of the natural retail chain last summer may ultimately shape those partnerships in the months and years ahead.

Setting the Terms

According to Marks, production capacity was a critical component of early contract discussions with Whole Foods. To service the 30,000 gallons of milk and cream, spread over 12 SKUs, required by the retailer every week, AtlantaFresh took on $2 million in debt to finance upgrades to its 12,000 sq. ft. production facility which, when completed, increased its output to a maximum of 40,000 gallons of milk per week. In addition, as part of the contract, the company received a $500,000 low-interest loan through Whole Foods’ Local Producer Loan Program to defray a portion of those costs.

A complete operational overhaul at AtlantaFresh’s partner, Waynesboro, Ga.-based Newberry Farm, would also be required. The conversion from conventional to 100 percent grass-fed, certified non-GMO dairy also took time and money. But the promise of a consistent, long-term purchase commitment from Whole Foods, valued by Marks at $100 million, was too good an opportunity to overlook.

“Prior to the milk arrangement, we exclusively produced Greek yogurt and for the previous three years we had been a $2.5 million company in sales,” Marks said. “The day the milk contract began, we became a $8 million a year company, though we projected to be between $15-20 million a year, anticipating them fulfilling their volume agreements.”

Yet, according to Marks, Whole Foods never even came close to hitting its forecasted numbers.

As he explained, the peak production time for dairy is January through June, otherwise known as “spring flush.” When the contract took effect in July 2016, Newberry Farm’s output was only 17,000 gallons per week; Whole Foods agreed, Marks said, to start with that volume and ramp up to the agreed 30,000 gallons per week starting in January 2017. By October, Marks said Whole Foods was already walking back its promise, asking instead for 20,000 gallons.

“Rather than trying to build up to what their commitment level was, they kept trying to whittle the amount down, which really kept putting the dairy farmer as well as AtlantaFresh under increasing financial stress,” Marks said. “During the course of the contract, they actually only purchased 10,000 gallons per week on average.”

Adding to his frustration, Marks said roughly half of that volume never even made it onto the shelf.

“Because they were ordering twice the amount of milk into United Natural Foods, Inc. (UNFI) that they were selling, we were breaking our backs to get them the very freshest product into their distribution centers,” he said. “We would pack it off at 28 days shelf life, it would arrive at the distributor with 25 days [shelf life], and then it would sit at the distributor for three weeks. It would show up at the store with 5-7 days shelf life, which is the kiss of death for a fresh milk program.”

To make matters worse, Marks said Whole Foods failed to back the products with significant marketing or promotional support, which made its later claims that AtlantaFresh products were underperforming on-shelf particularly tough to swallow.

“We really felt that, in terms of the follow through and execution of selling the products, they really did not do any level of appropriate due diligence in putting a plan in place to move the amount they guaranteed to move,” he said. “From the promotion and distribution side, it was just totally botched.”

An Unexpected Exit

As these various issues began to pile up, Marks received a call in August from Whole Foods CFO Keith Manbeck. Citing less-than-expected sales that cost the company a reported $1.5 million, Manbeck said the retailer was cancelling the contract.

“The thing that was frustrating to us was that there was no doubt in my mind that an organization of that size had the wherewithal and the means to find a place to move that milk, whether that was to put it under their 365 label or use it for shelf-stable milk or spec it out for some of their vendors to use on private label ice cream or soup or sauces,” Marks said. “They really didn’t seem to feel any sense of responsibility for the impact on me and the dairy farmers, relatively much smaller businesses where we put our whole companies on the line in order to fulfill the contract that they asked us to provide.”

The struggles of AtlantaFresh fit with the larger negative trends in the U.S. dairy market. According to market research group Mintel, U.S. dairy milk sales have dropped 15 percent since 2012, falling to $16.12 billion in 2017. Though non-dairy milk sales are still modest in comparison at $2.11 billion in 2017, that category has enjoyed a 61 percent increase in sales over the past five years.

Those declines are beginning to shape the corporate strategies of some of the dairy industry’s biggest players. Earlier this month, Dean Foods, a major processor of private label milk to Walmart, announced the termination of contracts with 100 of its contracted dairy suppliers in eight states, effective at the end of May, citing a “surplus of raw milk at a time when the public already is consuming less fluid milk….” That surplus, which also extends to organic milk, has prompted companies like Organic Valley and Danone to impose production restrictions or use the milk to make other dairy products.

Grass-fed dairy milk would seem to be an exception to the trend. According to data from research group SPINS, sales of refrigerated grass-fed milk are up by around 23.4 percent, growing from $47.4 million last year to almost $62 million this year. Sales of grass-fed egg nog and buttermilk have also increased, from $726,000 to over $878,000. But AtlantaFresh wasn’t able to capture the momentum.

“If you look at sales of specialty milks, specifically grass fed non-GMO, they are up anywhere from 30-60 percent last year,” Marks said. “The company that ran away with all that volume was Organic Valley. I don’t know if [Whole Foods] were tied into promoting or supporting them more, but it was certainly a better known brand name. We really were not successfully competing against them and they were doing nothing to help us.”

In the following months, despite receiving encouraging signs from retailers like Kroger and Publix, AtlantaFresh was unable to recover from the setback, as the additional placements were not enough to offset its monthly losses. Meanwhile, at the request of a Whole Foods regional broker, the company drafted a plan that would allow it to continue supplying the chain; it was ultimately rejected, as was a request by AtlantaFresh for compensation after cancelling the deal.

In the end, the fact that Whole Foods agreed to forgive the $500,000 loan issued through the Local Producer Loan Program was little more than a token gesture.

“It was really of no consequence or consolation to us in that fact that it’s not in any liquid state right now,” Marks said, adding that he is still hoping to engage in some form of mediation with Whole Foods. “It’s sitting in a dark room filled with idle milk processing equipment that I bought to sell them milk.”

Marks, who was looking ahead towards retirement at the time the Whole Foods deal was signed, now faces an uncertain future as he explores potential ways to recoup his losses. He is working with the property landlord and his bank to sell the plant, which has capabilities for milk separation, fermentation, continuous pasteurization, blending and bottling, as a turnkey operation. If that is unsuccessful, assets will be sold individually at auction. Also as a result of the Whole Foods deal’s collapse, Newberry Farm was shut down by its ownership group, Hart Agriculture.

Whole Foods did not respond to a request for comment on this story.

Looking Ahead

The termination of AtlantaFresh’s deal with Whole Foods came roughly a year after the retailer’s acquisition by Amazon, a move to which brands in the natural food and beverage industry are still adjusting.

Since its acquisition, Whole Foods has taken several steps aimed at reducing costs and centralizing operations, including implementing a new national category management structure that will be administered from its corporate headquarters in Austin. Tensions between suppliers and the grocery chain have flared over the controversial elements of the new policy, which will limit the former’s ability to work with third-party brokers for in-store merchandising and sampling activations, as well as charge them a 3 to 5 percent fee to fund the new program. Last week, Whole Foods invited about 200 key vendors to a summit at its corporate headquarters in Austin to discuss the issue.

Looking beyond his own circumstances, Marks said he fears that Whole Foods’ shift to a more centralized, metric-driven corporate strategy will undo its years of work in supporting and incubating small regional food and beverage brands.

“I think [the closure of AtlantaFresh] is a broader statement across all small regional, local or artisan food producers, regardless whether you make granola or you are a dairy processor, he said. “They are moving to a very tightly controlled category management system that doesn’t allow any wiggle room for slower moving or lower margin products. I think it’s a loss for the industry that it’s going to stunt the growth of that segment for quite a while until other people come in to pick up that slack.”

Marks, however, said he didn’t view Amazon as being directly responsible for the decision to terminate the contract.

“The only way I think Amazon had an impact was that it probably accelerated the senior management team to try and put this issue to bed before Amazon’s people came in and they had to try to explain or justify how this contract came to be and how they committed to that volume without having a plan or a method to use the product,” he said. “I think they just wanted to put it to bed prior to Amazon doing heavy due diligence on a lot of their existing purchasing contacts.”

Whether or not Marks, a former chef now in his mid-60s, will continue to work in the food industry is uncertain at this time.

“I thought this would be my retirement and really good funding for my management team and employees’ stock option plan, that it would just be taking our company to a whole new level of sales and profitability,” he said.

Adding a bittersweet laugh, he concluded: “It ended up being a very different program.”