This Time, Are Organics Really Going Mainstream?
By Tom Ryan, RetailWire
After slowing down during the recession, the organics business is booming again with Americans gravitating toward healthier foods. With Walmart, Kroger and others expanding organic assortments, and McDonald's entering the fray, the category appears set to reach another gear.
According to Bloomberg News, Walmart is not only expanding its selection of organic foods with the launch of the Wild Oats label, but seeking to sell it at the same prices as non-organics. Market estimates currently place most organic products about 20 percent higher than non-organic options.
On its second-quarter conference call, Kroger officials raved that its Simple True organics and naturals label will reach $1 billion in sales only two years after its launch and expected to double over the next few years. CEO Rodney McMullen said, "When you think about a brand reaching that level in its second full year, not many companies can say that."
Meanwhile, McDonald's, suffering its fourth straight quarter of declining same-store sales, said last month it was looking to sell more organic food as part of an upgrade to its offerings.
According to the Organic Trade Association, organic food and nonfood in the U.S. sales jumped 11.5 percent in 2013 after slowing to a 4.6 percent gain in 2009 amid the recession.
Wall Street continues to fixate on how organic's broadening popularity affects Whole Foods, which faces heightened competition from mainstream retailers and niche chains like Sprouts and Fresh Market.
Claiming its efforts to lower prices and emphasize value are paying off, Whole Foods last month reported a better-than-expected fiscal fourth-quarter, leading to its strongest one-day share gain since July 2012. On its conference call, Whole Foods officials stated they believe the company is uniquely positioned.
"It's true that natural and organic products are increasingly available in stores and online, yet no one does what we do," said John Mackey, co-CEO. "We hold the idea of food to a higher standard, banning more than 75 ingredients commonly found in other stores, and we believe our unparalleled quality standards and selection are a large part of why we maintain a broad base of loyal customers and attract new customers aspiring to a natural and organic lifestyle."
Is the organic pie growing fast enough for the many competitors going after the market? What factors will likely drive the next phase of growth for the organics category??
Comments from the RetailWire BrainTrust:
People are concerned about what's in their food, and as a result the organic sector is growing. I like Walmart's approach: Try to sell organics at or slightly above the cost of the same non-organics. The primary hurdle for consumers is the higher price of organics. If the prices can be brought down, the sales will go up.
Max Goldberg, President, Max Goldberg & Associates
This is purely anecdotal (I'd love to see data if anyone has it) but it seems to me that the combination of increased distribution in lower price retailers (i.e., Walmart) and actual price reductions (i.e., Whole Foods) has lowered the price premium for "organic" considerably in the last year. Since volume for "better for you" is typically a function of price premium demanded and shopper enthusiasm for a particular benefit, it makes sense that we should be seeing increasing organic sales. If this is a) a correct hypothesis and b) continues, then growth should be robust.
Ben Ball, Senior Vice President, Dechert-Hampe
It's important to note, I think, that given the extent to which overall sales slowed down during the recession, organics sales continued to rise, just at a slower pace. There's plenty of room for organics. The question is, what will traditional food sellers do to hold on?
What will Monsanto do, since its GMO products are falling out of favor? That's the interesting question. People really DO prefer non-GMO produce. What kind of study will Monsanto come up with?
Paula Rosenblum, Managing Partner, RSR Research
Organic products have been gaining ground in the consumers' basket both at the specialty retailers and now the mass vendors (Walmart, Kroger). The prices of organic have also dropped, making it within reach of more consumers. In the approaching years, I think the trend will be that the organics take up more and more of the produce shelf space and encroach on canned and prepared foods as well.
Just to stir the pot a bit, research doesn't show that organic foods are any healthier (and there are a lot of definitions of "healthier") than conventionally-grown foods. Organics may contain slightly more antioxidants and fewer pesticides (neither contain much). However, some studies have shown organics have the potential to carry more pathogens (we all need antibiotics once in a while).
To my point, if conclusive evidence, or even better marketing, can convince consumers that organics = slower aging, etc., then I would expect that organic foods would be the standard, and enhanced/modified/conventionally-produced foods will be seen as the lower-priced alternative and will be given less space on the shelf and in the customer's grocery basket.
Larry Negrich, Vice President, Marketing, nGage Labs
Organics will continue to grow in the areas with good economies, and will not in struggling rural areas like mine. I have tried many different times to promote select items of produce and could not generate enough sales to make a profit, as they simply won't pay a premium in our area. Organic half-gallons of milk do OK and local eggs sell well. It comes down to money, and risking capital on perishable foods for me is too risky, as price is a huge factor. Honey and some healthier-type dry goods sell a little, and that is
I have had many requests for organic chicken breasts and some beef items, but have not sold any to the people who are asking prices on these items, so it is a steep uphill battle around here to push any organic products. However, as I said, the higher-income areas are growing this business, which is a good thing for their bottom lines.
Tony Orlando, Owner, Tony O's Supermarket & Catering
Ironically, ORGANIC GROWTH is defined as the growth rate that a company can achieve by increasing output and enhancing sales. That's precisely what the organics category is experiencing.
My belief is that the country is becoming more and more conscious of what is in the food consumed and where that food comes from. Yes, the organics category will continue to grow (I believe outpacing many traditional categories). Hopefully prices will not become a barrier to better eating habits.
Dave Wendland, Vice President, Hamacher Resource Group
The organic/natural market is again growing after the Great Recession. At the same time product availability has increased. As with all product categories, they have high growth in the beginning and then reduced growth as the market needs are satisfied. Just like clubs did not replace supermarkets, they only cannibalized some volume, organic/natural will not replace all competing products. As the organic/natural market grows, the price premium will decrease. This will increase sales and share. As mainstream retailers expand organic/natural products, the pure-play retailers' growth rate will decline.
W. Frank Dell II, CMC, President, Dellmart & Company
Although organics have been around for decades, as the demand/supply curve eases a bit hopefully more and more organic products will become affordable on a regular, not once in a while, basis for more consumers. I think shoppers would typically rather buy a product that is viewed as a healthier alternative, as long as it doesn't break the bank.
So, yes, I see growth in organics in the U.S. market, however that growth is not universally strong around the world.
I think health awareness efforts by government organizations, NGOs, private companies, celebrities, etc., will continue to drive the demand for organic products. The average grocery shopper simply doesn't even think about organics in the traditional supermarket.
Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM
Millennials are educated about food and additives, and crave authenticity in everything. They're one reason that organic sales are up.
Cathy Hotka, Principal, Cathy Hotka & Associates
The biggest change right now is that grocery retailers are using organic to help differentiate their store brands (private label) while achieving higher prices (based on competitive set) and increased profit.
The prices for organic private label are higher than traditional private label but still below competitive offerings. By offering organic products, grocery retailers also receive the benefit of making their brand positioning more contemporary and somewhat upscale.
The next phase of organic will show further price declines as volume and quality continues to improve.
Mark Price, Managing Partner, LiftPoint Consulting, Inc.
I think the next factor to drive growth in the organics category is mass appeal and Walmart just did that. Not only the mass appeal but offering at a value to consumers. Consumers buy with their heart as much as their head and if they think organic is better for their children, that is what they will buy.
Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group