COVER STORY: Mass appeal

Supermarket operators by now needn't be reminded of the impact Wal-Mart can have on any industry. But back in 1988, when Wal-Mart opened its first Supercenter, few would have predicted that the Bentonville, Ark.-based discounter would be the country's leading food retailer by 2003.

Now supermarkets must brace for the next big rumble from the 800-pound gorilla as Wal-Mart begins its mission to become the low-price leader in organics. Is history about to repeat itself?

Don't say you weren't warned. "Anyone who underestimates Wal-Mart's commitment to organics will make a big mistake," cautions Richard Hastings, v.p. and senior retail sector analyst at New York-based Bernard Sands, LLC. Hastings, who has followed Wal-Mart closely since 1990, predicts that the retailer will hit competitive pricing hard by wielding its supply chain prowess, and likely make "humongous" strides specifically in organic private label.

The implications for the organics industry at large are unprecedented. "If Wal-Mart remains committed, it could signal an 'inflection point' for the natural/organic market," suggests analyst Neil Stern, a partner at McMillan/Doolittle in Chicago. "Wal-Mart's buying power will have a tremendous impact on supply capabilities. It will also undoubtedly lead to downward pressure on pricing, and narrow the gap between organic and traditional product."

Perhaps it's no surprise then, that Wal-Mart's latest foray is causing concern among some organic suppliers fearing that mass production on such a large scale could begin to water down precious organic standards. Indeed, it's mind-boggling to imagine the impact Wal-Mart could have on the supplier community, considering that even without the retailer's full participation, demand already outweighs the available supply.

Nonetheless, as the world's largest merchant, Wal-Mart has an appeal to suppliers -- even members of the highly specialized, hardcore organics community -- that's hard to ignore. Plenty of organic vendors are already lining up in Bentonville in hopes of helping the retailer bring organics to the masses, and growing their businesses in the process.

Of course, a number of conventional grocers have already recognized the power of organics and have begun securing a niche in this segment, either because they saw the category's potential early on, or were prompted by the success of mega health food chain Whole Foods.

Lakeland, Fla.-based Publix Super Markets, for one, has developed its GreenWise brand as a natural/organic destination in its stores, a private label line, a magazine, and an information source on its Web site. The retailer will further evolve the brand with its standalone GreenWise Market concept, set to debut in Florida sometime next year.

Minneapolis-based Supervalu, meanwhile, is making ripples in the Midwest with its new low-price natural/organic format, Sunflower Market, which sources indicate is doing extremely well.

Yet despite such progressive moves, some observers expect that many supermarkets might have already missed the boat when it comes to merchandising organics. They warn that Wal-Mart could be preparing to take advantage once again of weaker links in the food supply chain.

"Some retailers still haven't fully realized the potential of organics," says David Neuman, e.v.p. of global sales and marketing at Richmond, B.C.-based Nature's Path Foods. "All these retailers have had years of notice about this, whether from trade shows or manufacturers stomping up and down about the value of additional margins, consumer appeal, and global sustainability benefits. It may be too little, too late."

Granted, while major chains and independents alike jumped on board with segregated natural/organic sections in their stores, some of these departments were placed in hard-to-find locations and did little to attract shoppers who weren't already into organics. The negative nicknames that have been applied to these sections speak for themselves: "health food ghetto," "aisle of death," and "natural products museum."

Now a number of retailers are warming up to the idea of either having both integrated and segregated sections, or possibly moving solely to sectional segregation with clear signage. The best strategy depends on the consumers who shop the store, experts say.

Either way, the days of saying, "Our shoppers don't buy organics" should be considered over, if the latest research is any indication of just how mainstream organics are becoming. While organics currently account for a modest 2.5 percent of all retail food sales, research from the Food Marketing Institute and the Hartman Group, among other sources, confirms that the number of shoppers who have tried organics is growing -- 73 percent by some estimates -- and that the interest isn't limited to major coastal markets.

There are myriad reasons that consumers are experimenting with organics, one of the most important being the health benefits consumers align with the term "organic."

So the question isn't whether to get into organics; it's more about how to do organics right, to serve your customers. Analysts say that traditional operators could still have an advantage over Wal-Mart if they up the ante in service, and finesse their product selection and presentation.

Several suppliers emphasize that they're ready, willing, and able to counsel other retailers on how to better capture organic sales. But there's no one-size-fits-all strategy, observers note. The key is to know your shoppers' preferences and react accordingly.

Bentonville's strategy

Wal-Mart is apparently still developing its organics strategy. While the retailer has been selling organics in its stores for at least five years -- in fact, today it's considered to be the largest retailer of organic milk -- the company has begun to take a much more serious look at the segment and how it might help win new shoppers. Wal-Mart is now testing 300 so-called "organic trait stores," units that contain a heavy concentration of organics, across the country, observers tell Progressive Grocer.

The retailer is also in the process of rolling out 400-plus organic items across all departments in its stores, including food and nonfoods. Its experimental Supercenter in Plano, Texas will serve as especially fertile testing ground for the initiative. Organic items in the center store there are being highlighted in much the same way as specialty items, with curved shelving and special signage.

Wal-Mart's goal, simply stated, is to be the low-price leader in organics. C.m.o. John Fleming said during a keynote speech at Advertising Age's American Consumer Conference in New York that Wal-Mart is using its buying clout and efficient supply chain to drive down the premium on organic foods to within 10 percent of regular foods.

Wal-Mart is bullish on organics mainly because it knows that the segment can support its mandate to broaden its shopper base. More than 130 million U.S. consumers already shop at Wal-Mart, but that leaves half the population out. Wal-Mart figures that bringing in organics is one way to entice nontraditional shoppers.

"Wal-Mart hasn't been able to make Target loyalists stop shopping at Target," notes Bernard Sands' Hastings. "They're looking for that vulnerable spot that will make people budge. And organics is one such spot."

He points to Wal-Mart's recent rollout of a private label natural and organic pet food line. Supplied by Natural Life, the food is made with no artificial preservatives, colors, or flavors. No doubt Wal-Mart realizes that pet products aren't only an emotionally charged buy, but also one of the most popular organic gateway categories that attract new users. Likewise Wal-Mart's new organic infant offerings, including Parent's Choice Organic Infant Formula, are sure to appeal to the sensibilities of parents who want only the best for their children.

Supplier economics

More than a few traditional leading organic suppliers are really enthusiastic about working with Wal-Mart. Beyond the obvious implications for penetration and volume, these manufacturers say they see an opportunity to promote a healthier lifestyle, along with more sustainable environmental standards, to a larger number of consumers.

"I get asked by grocers and natural food types a lot why we're selling to Wal-Mart," admits Nature's Path's Neuman. (Nature's Path provided the first organic cereals ever sold in Wal-Mart, a little over two years ago.) "I explain that 45 percent of the U.S. population shops at Wal-Mart, and they may not otherwise have access to organics. We want to make our products available to everyone, of every social and economic background. That's more than 145 million people we're not servicing, if we don't sell to Wal-Mart."

Today Nature's Path has a business unit in Bentonville. It also supplies Wal-Mart's Sam's Club division, as well as other alternative food retailers, including Costco Wholesale Corp. and Target.

Neuman notes that in some respects, it's been easier to deal with the alternative channels than it has been with traditional grocers, especially when grocers expect the same promotional fees that major CPG manufacturers are used to forking over. "I would encourage retailers to look at the costs of doing business with manufacturers. Any cost you cause them to incur is going to relate back to the retail price on the shelf," he says. "Organic food doesn't have to cost that much more."

WhiteWave Foods Co., a division of Dean Foods based in Broomfield, Colo., entered the mass channel in 2002 with brands including Silk soymilk and Horizon Organic. "Our mission is to enroll more consumers in the organic lifestyle," says Tom Arcuri, director of category management at WhiteWave. "We believe it's a positive for the organics industry, and probably the retail industry as a whole, that more consumers are moving along the organic time line from trial to committed status." He notes that organic dairy, which is another popular gateway category for organics, has at least 4 percent household penetration now, with "extreme growth coming."

Another gateway organic category that's continued to see growth in both the conventional and mass channels is produce. San Juan Bautista, Calif.-based Earthbound Farm has been growing strongly at Wal-Mart for the past five years, says Tonya Antle, v.p. of organic sales at the produce supplier. In Wal-Mart's organic trait stores, produce has been extended from 50 to 70 SKUs, she notes. "They're creating organic destinations with prominent location and great signage."

Earthbound Farm views the mainstream embrace of organics as an "extremely positive trend," according to Antle. "The widespread interest in organics indicates people are more interested in what they're eating. The fact that our products have been growing strongly in Wal-Mart for the last five years tells us that it crosses over income and education levels. This is food for everyone."

As organics become more widespread, however, manufacturers realize that their supply could be in jeopardy. "I think we're all concerned," says Neuman. "Organic farms don't just pop up."

On the contrary, the conversion process takes three years. That's why Nature's Path and other suppliers are planning ahead. Nature's Path has an agronomist on staff, whose official title is organic program manager. His job is to encourage farmers to convert to organic, as well as to help them with the related paperwork.

For its part, WhiteWave sponsors the HOPE (Horizon Organic Producer Education) program to educate farmers about what it takes to convert to organic, and to provide financial assistance as they make the switch.

"We're doing all we can to grow responsibly, without compromising our standards," says Molly Keveney, WhiteWave's director of communications. WhiteWave currently has 325 family farmers in its network, supplying about 80 percent of its milk. The other 20 percent of its supply comes from two farms it operates itself, one in Maryland and one in Idaho.

"It's quite a process that farmers have to go through to convert to organic," explains Keveney. "We're asking a lot of farmers to make that switch, but the payoff is considerable. They get a set price for their milk through a contractual agreement."

Earthbound Farm, which is the largest organic farming operation in the country, has spent years setting up an extensive supply network, but the company is still being proactive to prepare for what lies ahead. "We farm 26,000 certified organic acres, with another 3,000 currently in transition to organic," says Antle. "To meet the escalating demand for organic produce, we're working closely with our retail partners on their budgetary needs all the way back to the farm. These budgets are not only for their immediate supply, but will look as far out as 2010, whenever possible."

Another group that's planning for the growth of organics is the Organic Trade Association (OTA). Like many of its supplier members, the Greenfield, Mass.-based trade group sees the mainstreaming of organics as a positive trend.

"We're encouraged by the prospect that consumers will have more access to organic products grown under sustainable conditions," says OTA spokeswoman Barbara Haumann.

As for the question of whether Wal-Mart and other giant chains will put pressure on organic standards, Haumann gives no ground. "The OTA is here to make sure the organic standards are kept strong. If Wal-Mart is selling certified organic products, its products will have to be equal to any other certified organic products," she says.

And if the demand for organics means increasing imports from other countries? "In order for organic products to be sold in the U.S., they have to be certified by an agency that's accredited by the U.S.," says Haumann.

Reality check

For some supermarkets the concept of Wal-Mart selling organics is still a little difficult to get their arms around. Organics was one segment retailers figured they could automatically count on as a source of differentiation vis á vis the supercenter competition. But proactive operators still have opportunities to stand out and make organics their own, say observers.

"Wal-Mart could have a tough time with this, because they aren't known for educating their shoppers," notes Brendan Synnott, president of Bear Naked, an all-natural and organic granola and hot cereal supplier based in Darien, Conn. "In contrast, Whole Foods stockers know their products and are passionate about what they're selling."

While few conventional chains may aspire to replicate the Whole Foods experience, some retailers are taking a cue from the supernatural retailer when it comes to educating employees. Privately owned United Supermarkets, based in Lubbock, Texas, is working with employees in its upscale Market Street stores to improve knowledge and selling skills. In some cases vendors have come in to conduct seminars for associates.

"When we entered the Dallas market with Market Street, we got a lot of questions from customers about organics," notes Susan Lawrence, a marketing and education advisor at United. "If customers have questions, the employees need answers."

Training has benefits beyond better customer service, observes Lawrence. "We feel that training makes employees better motivated, more loyal, and really makes them feel part of the company.

"As we grow our organic selection, education will be key," she continues. "The more you get customers to sample products and see the quality and benefits of these products, the more you'll sell."

As supermarkets continue to bulk up their organic selection, they're likely to have a larger variety than Wal-Mart, notes Stern of McMillan/Doolittle. That could be seen as another point of differentiation. "I would guess that Wal-Mart will stick to basic, high-moving products. Supermarkets will still be able to differentiate on factors like variety, service, and information," he says.

Beyond having the right product mix, supermarkets should focus on in-store communications and marketing, stresses Stern. "There's a perception issue to be addressed with a fuller commitment to the program, and clear indicators to the consumer that they're there," he says.

Stern cites a few retail responses that have been positive, including naming strategies to brand organic selection in the store (a la Publix's GreenWise and Shaw's Wild Harvest); creating a prominent and permanent home for organics in marketing materials, in-store communications and callouts to signify organic presence; and featuring signage to reinforce the variety of organics available.

Integration vs. segregation

One of the ongoing industry debates about how best to merchandise organics centers on whether the products should be segregated -- in other words, placed in separate organic sections apart from their conventional, nonorganic counterparts. Proponents of segregation say it's preferred by committed organic users, and will turn them away if done differently. Critics argue that by segregating the sections, retailers are ostracizing a whole other group of shoppers that might be curious to try the products and would like to compare them side by side on the shelf.

In a nonscientific Web poll that PG conducted last month, the majority of respondents (45 percent) agreed that the best approach is to mix the two -- have a standalone section, but also include organics alongside conventional products. Twenty-nine percent said that segregated is best, while only 26 percent agreed that retailers should just leave organics in line with conventional products to attract new users.

Opinions are mixed among the consultants, analysts, and suppliers who spoke to PG.

"I like the integrated/segregated strategy, where organics are placed within the department but clearly called out and communicated," says Stern. "Most shoppers in a conventional supermarket aren't dedicated organic shoppers, so they'll switch based on price, availability, and quality."

Bear Naked's Synnott says that in-store tests done with a grocer in the Northeast found that Bear Naked's sales almost doubled when the products were put in line with conventional product, probably because it encouraged trial usage.

WhiteWave's Arcuri says his company's research suggests that the ideal strategy would be dual placement. But he admits, "It's a difficult thing to do, and all retailers can't participate based on space constraints."

Arcuri advises retailers to look closely at the consumer segmentation shopping in their stores. "If you do that, I think you can derive the proper strategy," he says. "So if a large portion of your shoppers fit the trial bucket, alignment next to conventional products makes the most sense. If the area is highly developed with organic shoppers, the store-within-a-store approach works because it gives them a larger assortment."

New research from the Hartman Group, a consultancy based in Bellevue, Wash., supports Arcuri's suggestion. "Sectional segregation seems to be winning out with the majority of shoppers, who are occasional users of organics," says Laurie Demeritt, president and c.o.o. "Shoppers want an easy way to find organics, but they also want the conventional items close by. This seems to be the way many retailers are going. We're hearing of more stores tearing down the store-within-a-store sections."

Another factor that may increase product integration is the growing number of major CPG companies offering organic versions of their brand-name products such as Kellogg's and Campbell's Soup, she notes.

Retailers are also taking a new look at how they merchandise organics in perimeter departments. As WhiteWave's director of category management, Arcuri has been working closely with retailers to help them make the most of the dairy case. "We're developing shopper, retail, and consumer insights across the total dairy case as a way to win in driving higher organic sales and helping our retail partners drive those consumers," he says.

In such areas as category management, retailers have a chance to create stronger partnerships with organic suppliers, says Neuman of Nature's Path. "Use us as resources, because we're the experts in what we do."

Retailers can do their part by employing people committed to the cause, adds Neuman. "The chains that have done very well with organics have evangelists in the buyer's seat -- people like Bea James at Byerly's/Lunds and Charlie Gardner at Wegmans. When you have one key category manager focused on integrating organics into your store, they're the people who will be the face for organics in the chain."

Indeed, more supermarkets might want to think about enlisting an ambassador for organics, since the trend is here to stay. If you ask the organic suppliers, conventional products could be overtaken by organics in the next decade.

"We're going to have five good, strong years of additional growth," predicts Neuman. "Organic and natural foods will be such a dominant part of the industry that they'll be considered mainstream. That's how vertical we're growing."

Science could play an important part in the acceptance of organics, too, adds Bear Naked's Synnott. "If the scientific community identifies a clear benefit to eating organics, it could change the way everyone eats," he notes.

While that might have sounded like pie in the sky even 10 years ago, these days it's at least fair to predict that organics could soon be changing the way everyone merchandises, too.
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