EXPO EAST 2005

Robert Vosburgh

WASHINGTON -- The natural foods industry -- much of it centered on fresh items -- is poised to grow even more quickly in the coming years, as health care costs increase and Americans are compelled to seek out alternatives to traditional medical care.

Speaking at Natural Products Expo East here, Lawrence Chimerine, managing director and chief economist of the Economic Strategy Institute, pointed out that short-term threats to the economy include the costs associated with the Iraq war, the Hurricane Katrina relief effort -- and health care.

All of these are adding massive amounts of debt to the nation's coffers. The industry must seize the challenges and use them as an opportunity, Chimerine said.

"In my opinion, a big part of the solution for health care costs in the United States over time will be prevention, pharmaceuticals and supplements, rather than extensive surgeries and hospital stays," he added.

"As we start addressing health care costs in this country, your industry in particular will be the beneficiary," he said.

The general economy over the past 15 years has been a boon to the food industry. Chimerine said that the economic engine that chugged through the 1990s was so strong it broke a historic cycle of expansion and recession under which the U.S. economy has long operated.

"Since the mid-1800s, we had 31 periods of expansion and 31 periods of recession," he said. "The average cycle is five years for each. We went 10 consecutive years of growth in the 1990s, an absolutely extraordinary accomplishment."

During this time, inflation was low, mortgage rates dropped, employment increased and so did wages. Each component gave consumers buying power -- and people applied it.

"Not just upper-income groups, not only the most wealthy; people at the bottom half of income distribution [benefited] as well," Chimerine noted. For the food industry, it created among consumers a tremendous willingness to try new products and investigate new styles of living.

Consumers continue to invest in health and wellness. Packaged produce remained the top-grossing category in natural food store fresh departments last year. Likewise, it remained a winner in mainstream supermarkets, capturing 77% of total sales, according to the annual market overview compiled by the Nutrition Business Journal. Packaged produce earned $1.08 billion in 2004, up 20% from the prior year, when sales hit $897 million.

While organic meat also increased in sales and volume, most movement still occurs in natural food stores. In 2004, sales of refrigerated and frozen organic meats, poultry and seafood reached $15.6 million, up a whopping 120% from the prior year, when sales were minuscule.

According to the report, natural food stores captured 96% of these sales, compared to only 4% for conventional retailers. However, as these items become more available, and more popular among consumers, a greater shift to conventional retail outlets is expected.

The total natural/organic industry grew 13.2% in 2004, reaching $18.5 billion. The study predicts the natural and organic categories will grow 8% to 10% annually through 2007, fueled in part by emerging strategies that step beyond the pure health aspects of the categories to include their gourmet natures as well. It will potentially attract a whole new group of consumers.

Gary Hirshberg, president and chief executive officer of Stonyfield Farm, the Londonderry, N.H.-based organic yogurt processor, agreed, saying that organic and gourmet are almost interchangeable terms today -- and that's good, he added.

"Early on, 'organic' meant 'chew extra,"' he said. "Then, about 10 years ago, we all realized that it's food, and it has to be delicious. Today, restaurants around the country proudly proclaim they serve organic baby greens."

Hirshberg said the industry must grow fivefold before it has any noticeable impact -- not only on consumption, but also on environmental issues, social issues and other areas of concern.

"Organics has a 1.9% penetration in the food industry," he said. "We're a rounding error. We are just approaching the starting line of our effectiveness. What that means is that to be effective, we must increase our supply to get to a 10% penetration."

Hirshberg, who sold the company to France's Group Danone in October 2001, but retains control of the board in a power-sharing agreement, said his problem is no longer one of demand, but of supply.

The CEO said that as time goes on, the effectiveness of good organic farming and production practices is becoming apparent to the entire industry. For example, he noted that Stonyfield's Brazilian organic sugar producers have not been affected by an ongoing drought because the soil on the farms has been managed in such a way that the cane is able to retain what little water it gets. As a result, yields are up, and organic sugar prices are at parity with conventional product.

"All of humanity ate organic foods until the early 1940s. We think it's something new," he said. "It's not. We're just trying to get back to a saner way of life. It works, but we need land."

Hirshberg also noted that Stonyfield's many conservation programs have been a reliable supply of venture capital. Sales at Stonyfield are up 45% this year, while the larger yogurt category is growing at 8%. Pursuing efforts that support a transition to sustainable agricultural systems is a proven way to save money and acts as a source of cash.

There are what Chimerine described as "long-term structural changes" altering the economic landscape as well, independent of other forces. One such component, deregulation, has affected the retail industry, in the sense that consumers have more venues to choose from in deciding where to purchase particular items. It's not just the airlines, telephone carriers or power companies that are entering an ultra-competitive free market, Chimerine said.