CHAINS DEEPEN COMMITMENT TO NATURAL/ORGANIC PRODUCTS

Mark Hamstra

CINCINNATI -- Some of the nation's largest traditional supermarket companies, including Kroger Co. here and Albertsons, Boise, Idaho, are making natural and organic merchandising more mainstream.

In a recent conference call with analysts, Kroger executives described the company's Nature's Market store-within-a-store departments, which are now located in about 1,200 stores, as becoming a standard part of its offering. Kroger also is rolling out a natural private-label brand, the 140-item Naturally Preferred line, which analysts said is an indication of the company's long-term commitment to offering natural and organic products.

Albertsons, meanwhile, has begun integrating its natural-food offerings within the mainstream sections, as opposed to keeping them segregated, a move also seen as a signal of the company's commitment to natural/organic offerings.

The company has already integrated natural/organic products within traditional-product sets in about 166 stores, and its near-term goal is to convert about 368 supermarkets that currently offer segregated natural/organic departments, according to Karianne Cole, a spokeswoman for the company.

"We feel the mainstream consumer is more apt to try these products if they are integrated with the mainstream products," she said.

Robert Norris, corporate category manager for natural/organic foods at Albertsons, described the company's natural/organic program as "an integral part of Albertsons' overall neighborhood-marketing strategy."

"Today, Albertsons is implementing an integrated merchandising blueprint that exposes our consumers to the wide variety of natural/organic products throughout the store," he told SN in a prepared statement. "This merchandising program, aligned with our national natural/organic advertising program, will position Albertsons to be the consumer's choice for their healthy lifestyle purchases in the years to come."

Cole said the company is primarily focusing on stocking the natural and organic items that have the highest demand.

Traditional supermarkets like Kroger, Albertsons and Safeway stock about 1,000 to 2,500 stockkeeping units of natural and organic products. At Kroger, the sections occupy about 1,000 to 1,400 square feet, analysts said.

Many smaller chains and independents also have been increasing their natural/organic offerings, including Price Chopper, Schenectady, N.Y., and Wegmans Food Markets, Rochester, N.Y., both of which recently introduced their own organic private labels.

"We feel there's a huge opportunity for mainstream supermarkets to offer these types of products," said Laurie Demeritt, president and chief executive officer, The Hartman Group, a Bellevue, Wash.-based research firm. "It's something that mainstream consumers are just getting into. Maybe right now they are just buying produce or dairy, but they are going to continue to evolve in those lifestyles, and so as time goes on they may start experimenting with those other natural and organic goods over a period of time."

She said Albertsons' strategy of integrating natural/organic products with mainstream offerings makes sense for an environment in which the retailer is encouraging trial.

"We find for the consumers who are just starting to experiment with organics and natural, the segregated sections can come off as very ostracizing," she said. "To them it kind of looks like the expensive section.

"For a lot of consumers, their first introduction to natural products is going to be in kind of a side-by-side set, where they can compare the prices and the products, and make the choice that way in an area where they feel comfortable."

Equity analysts said the moves by Kroger and Albertsons are further indications that the companies are committed to reaping some of the gains being achieved by the organic/natural category.

Sales of natural and organic products are growing at a rate of 8% to 10% annually, totaling about $36 billion last year, according to analysts.

And although traditional supermarkets are gaining more and more of those sales, the analysts said the category is growing so rapidly that these traditional operators are not putting any pressure at all on the big natural-foods specialists, Whole Foods Markets, Austin, Texas, and Wild Oats, Boulder, Colo.

"The traditional grocery companies have been trying to get into the space for some time," said Monica Aggarwal, analyst, Merrill Lynch, New York. "But given that their customer base is quite different, they are never going to have more than a certain percentage of their sales come from natural food. At the end of the day, they are just providing a conventional grocery."

Aggarwal estimates that natural and organic products account for less than 5% of sales at traditional supermarket chains. Like the installation of fuel centers and pharmacies, the addition of natural-foods departments gives traditional supermarkets a same-store sales boost, she said. And because natural items -- especially dietary supplements -- carry higher margins, the products also can offer a boost to the bottom lines of companies like Kroger, she pointed out.

Scott Van Winkle, analyst, Adams, Harkness & Hill, Boston, said the growth of natural and organic products in traditional retailers might actually be helping Whole Foods and Wild Oats.

"If a conventional shopper walks into a Stop & Shop and they pick up soy milk and granola, and if they really take to natural foods, they begin to seek out a broader selection, and that is found in a Whole Foods or a Wild Oats, or a specialty retailer," he said.

Even though the growth of natural-foods sets in traditional supermarkets might be attracting some on-the-fence vegetarians and natural foodies away from the specialist retailers, "I don't think there's been any significant loss of the hard-core natural-foods customer towards grocery," Van Winkle said.

Albertsons' move to migrate natural-and-organic products into mingled sets with other products is a step in the right direction for retailers seeking to increase sales of these items, he said, although he said the traditional chains still lack the breadth of product offerings that will attract the heavy users of natural and organic products.

New products and increasing consumer awareness are driving the growth in the natural-foods categories, Van Winkle said.

"One of the fastest-growing categories [of natural foods] is frozen, not because frozen is more important than it was five years ago, but because five years ago there was no frozen section in natural-foods stores," he said.

He also noted that the popularity of natural and organic products varies widely by market and even by individual neighborhoods within each market.

Demeritt pointed out that consumers also seem to be tailoring their purchases to specific occasions.

"A lot of the consumers that we look at are going to places like Whole Foods on certain occasions, Safeway on others, and they might go to the farmer's market sometimes," she said. "They are kind of picking and choosing organic products sometimes, but by no means are they buying all organic and natural."