Why Organic Supermarkets are Thriving

Published: June 02, 2004 in Knowledge@Emory
The supermarket business is a notoriously high volume and low margin affair. Competition is staggering, as stores face increased pressure from well-established industry giants as well as from the likes of price-slasher Wal-Mart. Yet, many of the newer entrants into the game—supermarkets featuring organic and natural food items—are managing to win over shoppers while selling products at generally higher margins than the non-organic equivalent. With Americans becoming increasingly health-conscious and environmentally concerned, organic food items are fast becoming mainstream fare. Considering the recent food scare over Mad Cow disease, as well as concerns over growth hormones (rBGH) in milk and mercury in fish, it is easy to understand why the U.S. public has increased their purchases of organic products.

 

According to Datamonitor, a business research and information company, U.S. retail sales of organic foods and beverages totaled $1 billion in 1990. That figure jumped to $9.35 billion in 2001, and projections for 2003 set the number at just over $13 billion. (These figures include sales of organic products through natural foods markets and traditional supermarket channels.) With interest in organic items increasing, Datamonitor projects that the U.S. organic food market will reach a value of $30.7 billion by 2007. Now, going green may be as much about the cash as it is about going natural.

 

Reshma H. Shah, a professor in the practice of marketing at Emory University’s Goizueta Business School, acknowledges that health-conscious consumers are driving an interest in natural and organic foods. She adds that the United States Department of Agriculture’s voluntary organic labeling guidelines, which went into effect in 2002, also helped to bring the matter into the mainstream. But creative marketing practices have also helped to boost the burgeoning industry. In the past, notes Shah, “those interested in organic foods traversed dusty and dark old coop shelves or small area farmer’s markets.” Today, there are a number of upscale and sophisticated supermarkets centered on these products, including such names as Whole Foods Market, Wild Oats and Trader Joe’s.

But while industry stalwarts like Kroger’s, Albertsons and Publix duke it out for the top spot in the mainstream supermarket arena, they and others like them are also bowing to consumer pressure to stock organic products produced by area farmers or by outside manufacturers such as Stonyfield Farm or White Wave. Though the specialty organic markets such as Wild Oats and Whole Foods do stock their own line of store brand organics in addition to those of outside makers, many of the traditional supermarkets, including Albertsons and Kroger’s, are also adding organic lines of their own. Tanya Seaton, lead analyst in the consumer markets practice of Datamonitor, adds, “Private label offerings generally offer the retailer margins that are even higher than branded products. Therefore, from a bottom line perspective, it is not surprising that retailers are bringing out private label organic lines.”

Publix supermarkets has not only increased its organic and natural food offerings, the mainstream supermarket has moved to integrate many of their private label GreenWise and brand name natural food and organic offerings throughout their stores. Generally, traditional supermarkets have devoted a separate section to shelf-stable organic merchandise, and integrated only the organic milk and produce into the traditional sections of the store.


She notes that the loyal organic shopper will choose the variety of offerings at Whole Foods over the limited supply of organic items to be found at the traditional supermarkets. The 25-year-old chain now has 156 stores across the country, with 40 stores in development. Goizueta’s Shah adds that the specialty markets do capture the organic enthusiast, as the prices on organic items are generally cheaper at places like Whole Foods and Wild Oats than at a traditional supermarket.

 

Lowery also acknowledges Shah’s contention that innovative marketing is essential to their success. While Whole Foods does not generally advertise, the market has stepped up efforts to make their stores serve as a gathering place for consumers, with a prepared food section, sushi bar, well-laid out eating areas, food demonstrations, and featured community events. Stores feature 5% giveback days to help out community initiatives. Says Lowery, “It’s about attracting the health-conscious consumer, as well as the ‘foodie.’ Americans love to shop and Americans love to eat, but they don’t like to shop for food. You have to create a pleasing environment, and also establish a real sense of community around the store.”

 

Susan Hogan, a marketing professor at Goizueta, notes, “The players currently in the market, as well as those considering entering the market, need to think about the related needs of the consumer that they can meet in this supermarket space, beyond groceries. For instance, if the target market is a market that values a healthy lifestyle, grocery store marketers need to consider what other components of that lifestyle they can incorporate into their offerings besides healthy foods.”

 

Shah adds that the proliferation of stores in prime locations will ultimately drive the growth of these specialty markets. Americans are convenience driven, so the old adage “location, location, location” remains important to the boon of stores like Wild Oats and Whole Foods Market. Seaton of Datamonitor concurs, noting, “Availability will be key in growing the consumer base.” Certainly, while organic markets have their loyal customers, Shah believes that consumers will often go to a variety of markets to get their shopping completed. They may go to the specialty market for organic fare, and then to the traditional supermarket for their trusted paper brands. But, as the number of locations expand and the price differential continues to drop on organic versus non-organic, a portion of consumers, more so than just the dedicated “foodie” or the die-hard organic shopper, may become more accustomed to making these specialty markets their one-stop shop.

 

Another hot button health issue — the safety of bioengineered crops—may also drive further movement over to organic foods, and in turn, the specialty food markets. While bug resistance and increased nutrient quality may come with some genetically modified organisms (GMOs), such as certain crop seed, others cite the potential health risks of tampering with the unknown. The news that bioengineered StarLink™ corn made it into the U.S. food supply back in 2000 sparked outrage from many. In much of Europe, public sentiment appears firmly against the use of genetically modified food products. Last month, the EU moved to require labels on foods containing genetically modified organisms or seed. Now, the U.S. public is beginning to voice increasing concern over the matter. For instance, in March, area voters in Mendocino, California passed Measure H, banning area farmers from growing genetically altered crops. It appears to be the first time this matter has come before a local voting body, and the result sends a clear message.

Seaton says, “As traceability becomes a bigger consumer issue, evidenced by the recent mad cow disease scare, and as we hear continued concerns over genetic modification, the importance of products that provide consumers with a sense of comfort--with respect to what is in the food they are eating--will grow.”  Goizueta’s Hogan adds, “ The trick will be for these organic and specialty markets to keep consumers convinced that their food truly is a safer option than what they will get at a more traditional supermarket.”

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