22 July 2014
Organic food sales are expected to reach $35 billion in 2014, according to Nutrition Business Journal and the USDA. While that’s only a small fraction of the $565 billion grocery industry, organics are the market segment logging the highest growth rate at 11.5 percent. It’s also a segment that has proven highly profitable.

But the organic food industry, which began in the 1960s with local health food stores and cooperatives and grew to have national supermarket chains such as Whole Foods Market selling its wares, may undergo some price disruption thanks to Wal-Mart’s recent announcement that it will sell a line of low-cost organic products.

Wal-Mart is not alone, nor even early among mainstream retailers to serve organic-oriented consumers. In 2009, The Wall Street Journal published a piece on private-label organic foods, stating that such sales accounted for almost a quarter of the segment’s sales at the time. Supervalu and Safeway were at the forefront of the effort. And now, as more retailers produce lines of private label organics, the distinctions between brands and private labels is quickly fading. Some early organic brands have even expanded their marketing beyond organics to reinvent themselves, notes Organic Monitor.

More Grocery Shopping Options

Grocery sales are continuing to expand beyond traditional supermarkets, with 77 percent of consumers choosing that route, according to the Institute of Food Technologists. But the margins aren’t improving. The grocery business is well known for operating on low margins, so it was only a matter of time before organic sales experienced the same pressure as other products. With their increasing food market power, other major retailers, such as Costco and Target, are also putting pricing pressure on organic producers, either through private label products or direct negotiation.

Earlier this year, Target announced its own collection of organic products, called Made to Matter. While the collection features items from a range of well-known brands, and not private label options, it’s a way for Target to appeal to its consumer base—97 percent of which buy organic products regularly according to the retailer, notes Forbes.

And Wal-Mart, the world’s biggest retailer, is now teaming up with Wild Oats as its supplier to offer organic food at prices 25 percent lower than national organic brands already on its shelves, reported The Wall Street Journal’s Market Watch blog in early April.

That’s significant because the premiums consumers currently pay on more-expensive-to-produce organic products tend to be in the 20-30 percent range. And the price drop Wal-Mart is putting into place will bring the price of its organic products to parity with conventional products.

Many have hailed the news as an overall positive, with the potential to draw new consumers into buying healthful organics. But there are clearly warning signs here for organic farmers and food and beverage manufacturers, who know that lower prices are likely to put the squeeze on the supply chain somewhere.

Potential Supply Chain Changes

Wal-Mart and Wild Oats say these lower prices will come from efficiencies realized when producers have a large and dedicated market, as reported by NPR. One efficiency example cited by the companies lies in production: Instead of sharing processing space with conventional products, necessitating an extensive changeover process, organic food manufacturers will be able to justify dedicated facilities. And the promise of a guaranteed market will almost certainly entice some conventional farmers to take the three-year time commitment plunge and convert conventional farms and pastures to organic.

That reality has some food and farming advocates worried that a corporate takeover of organics will strip the term of its meaning by eliminating small scale farms, local distribution and intangibles like more humane treatment of animals for which consumers have been thus far willing to pay a substantial premium, as detailed in sustainable investment firm Trillium Asset Management’s blog post “Battle for the Soul of Organic.”

Ironically, it was the success organics have had in the U.S. market that caught corporate America’s attention and brought more companies to the table. Among the numerous corporate-owned, organic food lines—many acquired through buyouts in recent years—are Odwalla/Coca-Cola, Boca Foods/Kraft, Cascadian Farms/General Mills and Kashi/Kellogg. That means competition is only going to grow going forward, meaning that brands and retail brands must continue to innovate and drive efficiencies to remain competitive.

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