Moovin' on over

Blame it on the eco­nomy or just plain maturing of the category, but natural and organic dairy sales are beginning to wane, leaving experts to wonder if the momentum and days of double-digit growth may be over for nationally branded organic dairy products.

Officials at many of the leading organic dairy companies note that with consumers cutting back on spending overall, some shoppers are buying fewer organic and natural dairy products, while others are forgoing national brands for store labels in the hopes of staying in the category for less money.

While suppliers admit the economy is playing a role in influencing consumers’ purchasing habits, they are quick to add that the reasons behind the current sales trend is much more complex than first meets the eye. “There’s no doubt the economy has placed challenges on business across many food categories,” says Blaine McPeak, president of Broomfield, Colo.-based Horizon Organic. “Companies operating in premium categories—and I include organic dairy in that— have probably felt the pressure the greatest. Our core customers are still buying organic dairy products, but the lighter users who dabble with organics are likely among those who are pulling back right now.”

Similarly, officials at Organic Valley Farms report their sales have dipped a bit this year as well. However, given the tremendous spending constraints on consumers, they see the fact that sales haven’t worsened as a positive sign. “We’re seeing flat sales right now in the fluid milk segment, but in today’s climate flat is OK,” says Theresa Marquez, chief marketing executive for La Farge, Wis.-based Organic Valley Farms. “Interestingly, while milk may be flat we’re still seeing healthy growth in our organic cheese, butter, cream and half-and-half of about 12% annually.”

But why is organic milk not faring as well as the other segments? Marquez says to understand this, one has to look at the conventional dairy industry for answers. She notes that while the recession is hurting everyone, the conventional dairy industry, which had been in turmoil for some time, is now feeling the brunt of the impact. “In the past, the price differential between organic and conventional fluid milk had gotten close, but today the spread between the two is huge and in some cases three and a half times as much. That’s a pretty hard pill to swallow for many peripheral consumers.”

On the other hand, Marquez says some mid-level and most of the core consumers are somewhat less price sensitive, noting that oftentimes they are young moms or women who are pregnant who are not willing to make concessions. “These people tell us they will buy organic milk no matter what,” she says. Marquez believes that as research connecting cancer, fertility, thyroid, intelligence and pesticide use continues to be published it is only a matter of time before more consumers make the switch.

Jay Totman, sales manager with West Grove, Pa.-based Natural Dairy Products, says that while overall sales have been flat, he believes there is still growth potential, providing the industry continues to educate consumers and retailers on the value of organic. “This may be one of the hardest aspects of our business for mainstream retailers to grasp, but people are going to buy products from companies they like,” he says. “They make buying decisions based on their relationship with a company and whether they offer quality products. My job is to educate the consumer, retailer, distributor and everyone in between on what differentiates our products from other companies.”

Albert Straus, owner and president of Marshall, Calif.-based Straus Family Creamery, reports that 2009 has been a good year for organic dairy sales. He says sales are up across all channels and sectors where its full line of organic dairy products are sold. Fluid milk, yogurt and butter sales, he adds, are performing well, while sales of their organic ice cream have been a bit slower. He attributes much of the growth to their loyal customer base. “Despite the fact that we are considered higher end even in the organic segment, our brand is experiencing strong growth and sales have remained steady, particularly in the West, where our brand is best known,” he says.  “Our consumers are very committed to the organic lifestyle and tend to be higher-educated, higher-income shoppers who are concerned about their health and not willing to cut corners. They don’t price shop and are very brand loyal.”

Straus says his company continues to see strong interest from a wide range of retailers, ranging from natural food stores and grocers to non-traditional food outlets. “Despite the economy we’re still getting meetings with potential accounts as well as additional placements in existing ones such as Costco.” Straus says its European-style yogurt, which is pourable due to the exclusion of stabilizers, has a large following and is currently the No. 1 selling natural yogurt in the West.

Officials at Organic Valley Family of Farms note that even though the company’s milk sales are down 10%, private label organic milk sales are up. Marquez adds that 50% of conventional fluid milk is private label today, but only 15% to 18% of organic milk sales are private label. “Given the penetration possibilities, I predict we’ll see private label organic milk sales continue to grow while the brand sales stagnate at least for the remainder of this year,” she says.

Marquez says while private label is clearly buoying sales across the organic dairy category, long term it will take a well-balanced strategy to grow sales. With this in mind, Organic Valley is stepping up promotions, emphasizing the brand’s value and uniqueness and doing everything possible to change the commodity mindset. “What we must do as brand managers to compete with private label during this recession is to work hard to differentiate our brand,” she says. “We need to remind retailers of the values that bring consumers to the category in the first place. Consumers on all levels these days want authenticity and in dairy that means connecting to the farms and farmers.”

Horizon also has a strong connection to local farmers, which it highlights when communicating with consumers. In the early ‘90s, the company began as a cooperative of organic dairy farms in Wisconsin and is now one of the leading organic dairy companies in the U.S. Today, the company works with 400-plus family farmers across the country. “Consumers want to buy more than just a list of product attributes and are attracted to products that offer additional benefits that go beyond natural or organic,” says McPeak.

He notes that the landscape of the wellness category is changing and many companies have jumped into the mix in recent years, but while a larger selection can be a good thing, McPeak warns retailers to focus on value-added products from reputable companies. “There are a number of natural products for consumers to choose from, but what you don’t see as much are brands that have longevity and that invest in innovation,” he says. “Consumers are buying a bundle of benefits—retailers who cater to this will expand their consumer base.”

PRESSURE ON TURNS
According to suppliers, today’s buyers are more educated about the value of organic dairy than in years past. That isn’t stopping retailers, however, from feeling pressure to make every square foot perform as well as it did before the economic downturn. “We understand how the economy has changed the way retailers operate their business, but optimistically we’d like to think they would continue supporting and believing in organic dairy products,” says Totman. “However, in our experience many retailers are quick to pull the trigger and pull products off the shelf if they are not seeing notable growth. The pressure on them to bring in returns seen in pre-recession times is causing many to lose patience with inherently slower-turning products, organic dairy among them.”

That’s not to say some relationships haven’t flourished during this time. Totman says there are still a number of retailers who are willing to give the category its due, but not without a cost, noting that companies such as his are being asked to do more with promotions than they had been in the past.

So how can retailers build category sales? Totman advises they focus on carrying unique, innovative assortments and products that stand out. “Even though we have a full line of organic dairy products, most people don’t realize our best selling product is our organic whipped cream,” he says. “No one else offers a whipped cream with organic ingredients in an aerosol can. We’ve been doing it for years and have just rolled out a brown sugar organic whipped cream.”

Pressure is also on to justify positioning, according to McPeak. He says that retailers are extremely focused on the sales-to-space ratio and velocity per square foot the category produces. “That is all well and good, but they need to balance this against an item’s ability to build incremental sales and create a point of differentiation,” he says.

balancing act
Looking ahead, McPeak expects to see retailers offering fewer national wellness brands and being more selective about who they do business with. “I think retailers will put a greater emphasis on seeking out companies with great reputations, that uphold a set of values, are truly committed to focusing on consumers’ needs and investing in the category through promotion and advertising. It will take nothing less than this type of effort to grow our industry at the same rates we’ve seen over the past few years.”

There may be a number of retailers willing to entertain products from both small and large companies, but Straus notes there is still a large contingent who are not willing to suspend certain business metrics and make allowances for the fact that smaller companies often cannot afford pay-to-play arrangements. “Rather than the retailer recognizing the opportunity, often times our products are brought into the store as a result of consumer’s asking for them,” he says. “It would benefit the entire category and their consumers if retailers were more open to fostering and supporting smaller companies.”

Organic Valley’s Marquez says she is routinely asked about the best place to merchandise organic dairy products, but notes the answer is far from cut and dry. “There is always this question as to whether these products should have their own section in the store or be integrated into the regular grocery set with a call out such as a channel strip,” she says. “Stores that are just developing their wellness strategy should probably have all their wellness products together for a more powerful call out. Those stores that have been selling wellness products for a long time find that integrating their higher volume wellness products into their standard mix increases the sales of these products and increases recognition that they carry these products and are committed to providing options.”

Marquez feels this approach makes a retailer’s wellness commitment more visible and effective. “For organic milk, consumers want to find it in the milk section, not elsewhere. This is practical and convenient for the consumer, which certainly is what the retailer’s job is—to help consumers easily find what they are looking for.”
Looking forward, Marquez says we can expect to see more value-added offerings in the category. “My feeling is that omega-3 and 6 is the next wave of organic milk opportunity. Not only will this be beneficial to people, studies show that when flax is added to a cow’s feed, the methane gas emission from the cow decreases nearly 50%,” she says.

McPeak suggests if retailers want to grow these categories they need to put the offering where the non-core organic shoppers are making their shopping choices—right in front of them. “Of course, following this strategy depends on the category and how much it is developed. What we are seeing more frequently are wellness products placed in proximity to similar conventional ones.”

Despite the challenging year, McPeak’s outlook for the category’s future remains positive overall, noting that with only a 10% penetration in the category there is clearly room for more growth. “We are competing in what I call value-added dairy,” he says. “Organic is one of those value components, products like our DHA milk is another. Adding benefits above and beyond the current offerings and leading with consumer-relevant innovation is something we intend to continue doing.”

Others express concern retailers might not be making the best long-term decision when it comes to placement, favoring their own products and displacing national brands. Straus says its organic dairy products are sold in the natural set in Raley’s, which he feels can be puzzling to consumers who are also finding organic dairy in the conventional set. “Raley’s places its own private label dairy in the conventional dairy case, which is where we think it makes the most sense to have organic dairy. Where we are now requires people to make a conscious effort to head down the aisle.”

Some suppliers, however, believe the answer for where to best place natural and organic dairy products must be framed around the current economic downturn. While placement strategies have been all over the map in the past, given the present environment the store-within-a-store concept is where Totman believes organic dairy sells best. “Today in mainstream the largest consumer segment buying organic dairy is the core shopper and, as such, they expect to find organic and natural dairy among other like products,” he says.