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COVER STORY: Organics: Stay the course

A small supermarket operator in New York City recently quit stocking Stonyfield Farm Organic Yogurt after several years of carrying the line. The reason? "We had all this expired product," explains the frustrated dairy manager.

What wasn't making matters any easier for the organic line was that a low-cost brand of yogurt was regularly being featured at four containers for $2.

This scenario is playing itself out over and over in markets across the country, as consumers find themselves faced with the choice of either paying extra for organic, or buying the conventional version of the same product at a much lower price. The dilemma is that plenty of shoppers still don't quite know what that gap in price is all about -- why organic products cost more, and what "organic" really means for them in terms of perceived personal health benefits, as well as benefits to the environment.

Many core players in the organic food industry are convinced that grocers themselves can bridge that gap in understanding and thus unleash greater sales potential for organic foods, even at a time when economic pressures are bearing down both on the industry and the consuming public.

If only more grocers themselves bought into the organic value proposition, that is.

Like those befuddled or suspicious consumers, many grocers are likewise not acknowledging the importance of organic products to their businesses, because they're either undereducated themselves, or think it just takes too much time and effort to make organics successful on a consistent basis. What's more, they might be skeptical about whether the segment will have legs in an uncertain economy.

Without a doubt, there are believers in the grocery community. "Some retailers have bought into organics, and consider it more than just a trend," observes Susan Sexton, a former natural food retailer who also handled marketing for the category at a grocery chain, before taking her present role as v.p. and partner in Trajectory Partners, a Richmond, Va.-based firm dedicated to helping small manufacturers break into the retail channel.

"I think Safeway, for example, is doing it right," says Sexton. "Their 'O' private label program is great -- what they're doing with it, and how they're merchandising it."

Demonstrating further its long-term commitment to, and also faith in, the global profitability of organics, Safeway has also begun selling O products to retailers in Asia and Latin America.

Yet there are other retailers that just "don't believe in" the category, says Sexton, that "aren't behind it as far as education or looking at it in the future. It's challenging for some [grocers] to buy into it because they don't quite get it themselves. They don't understand why people would want to eat that way, and pay a higher price for it."

While Sexton and other observers accept that there will be some lag time in retailers' adoption of organics, they're sounding a warning call: They maintain that retailers who don't pay more attention to organics are missing out on an area of the business that's poised for continued success in the future.

Indeed, organic has remained a red-hot category, with a 20 percent annual growth rate for the past several years -- and despite the shaky economy, experts say that consumers who are loyal to organics are unlikely to make sacrifices when it comes how their food is sourced and produced.

Meanwhile other major trends are driving the anticipated longevity of organics, suggesting that more new users will be drawn to the segment.

Weathering the storm

As for the economy, several suppliers in the industry are quick to note that organic sales didn't slump during the economic downturn after 9/11.

"No matter what industry you're in, you're likely worried about fuel prices, supply, etc.," admits Matt McLean, founder and c.e.o. of Claremont, Fla.-based supplier Uncle Matt's Organics. "We haven't seen a slowdown yet, but food is usually one of the last things people are affected by. Going back to 9/11, we were as close to being in recession as we could have been, yet the organic industry continued to chug along at almost 20 percent."

Likewise, John Foraker, c.e.o. of Annie's, Inc., based in Napa, Calif., calls on past experience to predict how current economic conditions are likely to affect organic food sales. "My experience from the last few recessions is that organics have weathered very well," he contends. "If you logically think about why, many people tend to eat out less and cut back on discretionary purchases. But when you get down to basics, considering those conscientious moms who want to do better for their kids, this is one of the last areas a mom is willing to sacrifice."

Even the c.e.o. of Whole Foods is optimistic about the category's ability to ride out the months ahead. "We realize there are a lot of questions out there about how a slowing economy might impact our sales," noted John Mackey, chairman, c.e.o., and co-founder of Whole Foods, when the Austin, Texas-based supernatural chain reported its first-quarter earnings last month. "Historically, our sales have been highly resilient during economic downturns." Among the reasons for this he offered is core customers' dedication to a natural and organic lifestyle.

Not everyone in the industry is convinced that organics won't take some kind of hit during an economic downturn, however.

Tom Pirovano, director of industry insights at The Nielsen Company in Schaumburg, Ill., sees a pattern in what Starbucks is doing to defend its turf as other competitors turn to lower prices. "With tough economic times, I would expect that there will be people who won't be willing to spend extra on organics, just as they won't be willing to spend extra for Starbucks," he suggests.

But then there are the results of a recent survey conducted by Mambo Sprouts Marketing, a firm based in Collingswood, N.J., that found consumer interest in healthy, organic, and sustainable products is on the rise, despite an expected decline in consumer spending overall during the course of this year.

In the survey, most "natural" consumers said they would pay more for environmentally friendly products, with seven in 10 consumers willing to pay up to 20 percent more. Only one in 10 respondents said they were unwilling to pay extra for green products and services.

Economic climate notwithstanding, the timing has never been better for organic when you consider its connection to the huge green trend cutting dramatically across government, industry, and consumer lines.

"The organic movement is right in the center of the green revolution," observes McLean from Uncle Matt's. "We're like a me-too product." Yet the power of green isn't the only factor that makes organics a sure bet for the future, say McLean and others.

Many organic experts point to the preference of organics among generation Y and younger consumers, for instance. At the same time, plenty of studies have linked baby boomers, with their concerns over health and wellness, to the organic segment. And there's no sign that one of the primary gateway consumers for organics -- new mothers -- will be changing their shopping patterns.

Pro-organic research

Steve Harrold, director of whole health and organics at Indianapolis-based Caito Foods Service, a leading supplier of fresh fruit and vegetables to retailers throughout the Midwest, says a lot of good science is emerging that proves organic foods have definite health benefits. "Retailers need to understand this; [then] they'll get fired up because they have accurate information," he says. It's a positive development for the category that could have major implications for its future success.

Among this recent research on organics is a four-year study released last fall by the European Union, indicating that some organic foods are more nutritious than their nonorganic counterparts. Preliminary results showed organic fruit and vegetables, for example, have up to 40 percent more antioxidants than nonorganically grown produce. Organic milk contains up to 60 percent to 80 percent more antioxidants than conventionally produced milk in the summer, and 50 percent to 60 percent higher levels in the winter. It also found organic milk to contain higher levels of vitamin E.

Yet another source of pro-organics ammunition is a research study published last August by The Organic Center, an independent nonprofit firm based in Boulder, Colo. The study claims that the average child in America is exposed to five pesticides daily in food and drinking water. "Our research found that switching to an organic diet for just five days virtually eliminates any sign of exposure to organophosphate insecticides among school-aged children," says Steven Hoffman, managing director of The Organic Center.

Just as such promising new research is making headlines, however, the media is also playing up other trends that have stolen some of organics' thunder -- primarily the trends of eating local foods, and counting "food miles" to gauge a specific food's full impact on the environment, notes Caito's Harrold.

"I'm convinced that organic food is going to grow more popular," maintains Harrold, "but we've seen a little cooling off in people's excitement and enthusiasm. Part of the problem is that, based on all the stuff consumers are seeing in the media, there's some confusion about organic. When you see statements like 'locally grown is the new organic,' that's very confusing to a population of consumers who are just starting to learn about organics."

Indeed, a study conducted last year by Mambo Sprouts found that consumers seem to be torn between buying local and organic food. Thirty-six percent of natural product consumers surveyed said they would choose local produce over organic items, while another 33.3 percent indicated the opposite. The remaining respondents said they were unsure which to choose.

Retailers have an especially important role to play in helping to educate their customers about what local and organic mean when it comes to the food they offer in their stores.

Another big consumer education challenge awaits, thanks to animal cloning of food sources. Soon after the U.S. Food and Drug Administration's pronouncement that it deems foods sourced from cloned animals and their offspring safe, the Organic Trade Association, based in Greenfield, Mass., took pains to reiterate that meat, milk, and other food products produced from cloned animals will not be sold as organic in the United States.

"OTA only supports the use of traditional processes for breeding and raising animals in the organic system," says executive director Caren Wilcox. "In the future, consumers who seek to avoid cloned meat, dairy, or other animal products should look for the organic label on products."

The suppliers' side

Just as many organic suppliers sound confident about the category's future, many are also convinced that retailers have to make a greater commitment to organics to make the segment successful.

"The retailer has to be sold, just like the consumer," says Uncle Matt's McLean. "If the retailer isn't committed, you won't get shelf space."

And shelf space is just the start. "Once retailers commit to a program," he continues, "they have to be able to ask themselves, 'What are we doing to educate customers? Do we have enough signage in the store to let them know we have organics? Do we have information in the stores to educate them about organics?'"

Annie's Foraker notes that the growth in organics so far has prompted more retailers to engage in partnerships with manufacturers.

"Also, having big conventional food companies like Kraft and Kellogg offer organics in their own brand lines has helped us," says Foraker, "legitimizing that the category is real and that the consumer is real. We then go in to retailers and say, 'We agree with those guys. By the way, we're the most authentic, long-term leading brand with dominant share, so you should put us in.'"

Foraker says that managing expectations is a key to greater retailer acceptance. "Lots of times, retailers that don't have a lot of experience with organics may have misconceptions about how the category should perform. Sometimes the products are put on the shelf priced way too high. Or the retailer looks at them the same way they look at superpremium chocolates or oils. There's certainly a premium consumers are willing to pay, but you can cross over that line and find disappointing results."

Many retailers have tended to stay in a more guarded, reactionary mode, notes McLean -- worrying first about whether Whole Foods is entering their market before contemplating the category, for instance, instead of taking the initiative to be a leader in their market.

Perhaps they should be watching Wal-Mart for clues instead. The king of discounters has stepped out on a limb to test organics in some rural markets. "In some places [Wal-Mart is] having better success than in others, but they're selling organics in some parts of the country where there are no Whole Foods," notes Foraker.

Another possible inducement for grocers could be the fact that Whole Foods, Wal-Mart, Safeway, and many other operators have already proved private label organic product lines are an effective way to introduce shoppers to the category.

Sourcing concerns

Suppliers have concerns beyond whether retailers are committed, however; they are also worried about the challenge of long-term sourcing given the potential impact of current economic trends on agricultural practices.

"The price of conventional commodities has risen to the point that farmers can make more money with conventional agriculture," points out Eric Newman, v.p. of sales at LaFarge, Wis.-based Organic Valley Family of Farms. "Many farmers are not converting to organic because of this. The ethanol boom is continuing to drive up conventional commodity prices, which has created an incentive for farmers to plant more acreage into corn. This has also meant less interest in growing organic; thus, organic feed costs are out of control and limiting supplies of eggs, meat, and dairy products."

"What we're seeing is that credible supply is becoming a huge issue, in terms of greater demand and more manufacturers wanting to produce certified organic products," says Robynn Shrader, c.e.o. of the National Cooperative Grocers Association, based in Iowa City, Iowa. "As the demand grows, it makes it harder and harder for agriculture to keep up."

Nielsen's Pirovano cautions that one major scandal involving how organics are sourced could deliver a huge blow to the industry. "An organics supplier caught taking illegal shortcuts could be devastating to the supplier, the brand, and the entire organics segment," he says.

There have already been some rumblings, as watchdog organizations have been combing the markets looking for potential violators of organic standards. The Cornucopia Institute policy group of Wisconsin, for one, sparked an investigation by the U.S. Department of Agriculture into the operations at Aurora Organic Dairy, following Cornucopia's allegations that Aurora was keeping cows in feedlots rather than grazing on pasture as required by law, and had brought conventional animals into its organic milking operation in an illegal manner. While Aurora has maintained that its milk "is and always has been organic," the USDA ended up ordering the company to reduce its herd -- and a handful of organic consumers launched a nationwide lawsuit against the dairy.

In any event, it's becoming increasingly challenging for companies both large and small to find enough supply.

"We work with a supplier of certified organic Indian sauce called Devya," says Sexton at Trajectory Partners, "and the owner is having problems getting tomatoes. She's had to go internationally to get products. With smaller manufacturers, this is even more of a concern, since they're lower on the totem pole."

Of course, a lack of supply leads to higher prices at the shelf -- something that many manufacturers that have been dealing in the category for years don't want to see.

Newman of Organic Valley predicts that prices will increase as much as 10 percent across the board by the end of the year.

Annie's Foraker acknowledges that "organics aren't going to be insulated from the broad trends affecting all food categories. There will be higher pricing ahead, but not necessarily at a faster rate than pricing among conventional products."

Uncle Matt's McLean at least is slightly optimistic about where produce is headed, noting that organic produce currently has a 5 percent penetration in the market. "Looking long-term, in 10 years, if fertilizer technology catches up and organic farming [productivity] becomes better, therefore resulting in higher yields per acre, you're looking at prices coming down. So maybe produce will then account for 10 percent or 20 percent of the market."

To counter any potential backlash from sticker shock in the coming years, some suppliers will be beefing up their marketing plans and promotions.

Milton, Ont.-based Devya, the Indian sauce supplier, for instance, is going to "demo like crazy" this year, says Sexton. "It's not always about price -- it's also about getting your product in the consumers' mouths," she notes.

And retailers -- if you're still not convinced that some of your shoppers might be interested in purchasing organics, consider the view from inside the nation's cooperative grocers.

"We're seeing a much wider range of people shopping in co-ops, as their education increases, and more people become aware of the benefits of organics and begin paying more attention to what they eat," notes Shrader. "You can still eat [organics] on a budget if you're willing to spend the time to cook," she adds. "Consumers end up paying more for higher-processed foods and prepared meals."

And that's one thing that consumers perhaps will come to understand about organics, if the economy continues to teeter on unstable ground.
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