OUT OF EXCUSES: TELLING THE OOS STORY

LIZ PARKS

Shoppers blame the retailer when they come in to buy a basic product like milk and the store is out of stock. But retailers don't have that luxury when sourcing certain hot commodities. They have to come up with a solution - fast.

Situations where out-of-stocks can't be helped because demand is rapidly outstripping supply is a headache, to be sure. But faced with the facts, some resourceful retailers are using the situation and turning the problem into a marketing and educational event.

"We have salespeople on the floor and they explain that because demand for organic milk is so high, supply temporarily can't catch up," said Bruce Parker, director of business development for Lombard, Ill.-based Fruitful Yield, a 10-unit chain of natural food stores. "That gives us the opportunity to recommend different products such as soy milk. We get to cross-sell and upsell."

Such scenarios are becoming more common across the country as the organic industry struggles to accommodate an insatiable demand for popular food products like milk, produce, yogurt, honey, eggs and nuts. On any given day, they are not always on the shelf when the consumer comes in looking for them.

The principal stumbling block is the three-year transition period required by the National Organic Program before any food can be certified organic under the U.S. Department of Agriculture's guidelines.

Until more farms and production facilities are approved, supermarkets are going to have to cope as best they can. The question becomes, what to tell everyone in the meantime?

"Obviously, we lose some sales but it also creates an opportunity to sell other things and to have conversations that strengthen our relations with our customers," Parker said.

The organic milk category in particular is growing so fast that many suppliers have been forced to drop smaller clients, or implement rotating delivery schedules among retailers. For the past 12-18 months, there also have been intermittent shortages of milk-related products like yogurt and butter. Then there's organic produce, which can be in short supply due to weather conditions.

Ann Yates, owner and president of Nature's Pantry, a one-store operator in Knoxville, Tenn., currently has a shortage of goat milk-based products including goat milk yogurt, a popular item among customers.

"Late winter/early spring is the time of the year when there is much less goat milk available because the goats are nursing, and the milk is being used for the babies," she said. "That's a big deal for us because we sell a lot of goat yogurt."

Yates, like Parker, puts up signs in her store that explain why there is a shortage, and she and her sales associates talk to their customers to further explain the shortage. At the same time, they suggest alternative products whenever possible. Yates noted that some shortages have a positive side.

"I tell my customers that I want to deal with companies that follow environmentally sound practices and do things correctly," she said. "I think the key here is to keep the consumers educated about why there are shortages."

Phillip Nabors, co-owner with his wife, Margaret, of two Mustard Seed Market stores in Solon and Akron, Ohio, sees shortages as proof of the growing consumer acceptance of organic and natural products.

"I celebrate these growing pains as evidence of a shift in consumers' attitudes as to what's important to them, which is quality and purity in the foods and beverages they consume," he said.

Nabors typically raises the price of products that are in short supply, but stores also carry a complementary selection of non-organic products, such as conventional milk or conventional asparagus when prices of the organic items rise dramatically.

"That gives shoppers who might not be able to pay the higher prices for the organic items a price alternative," he explained.

Mike Witt, vice president of merchandising for Stillwater, Minn.-based Cub Foods, a division of Eden Prairie, Minn.-based Supervalu, said that they have so far been able to keep up with demand for organic milk and most other products, but when there is a shortage, as there was recently for organic grapes, Cub Foods handles it by posting signs and distributing talking points to associates.

"Customers aren't afraid to ask why we are short of products and we're able to have employees on the floor who can take care of that customer, explain why there is a shortage and offer alternatives," he said.

Several sources note that the supply situation for organic milk has gotten worse partly because, as demand grows, more and more conventional supermarkets, wholesale clubs and mass merchandise stores are adding organic milk to their product mix. Wal-Mart Stores, for example, now stocks organic milk in some stores.

"Supermarkets watch to see which items are selling well for natural food stores, and then they add the best-selling products to their mix," Parker said. "When significant players in the big-box world jump into a rapidly expanding category like organic milk in a big way, as some have, that puts pressure on supply and it makes the category very competitive."

Greg Leonard, a spokesman for Tree of Life, the St. Augustine, Fla.-based natural and organic food distributor, said the organic milk category has received so much visibility, it is now "full of possibility for retailers of all types. Demand is snowballing because of consumer interest and the retail industry's reaction to that interest."

Michael Funk, chief executive officer and president of United Natural Foods, Dayville, Conn., noted that consumer demand for organic milk is growing, in some regions, at rates in excess of 80%.

"As the industry continues to grow we are going to continually see periodic shortages, particularly when crops fail or when weather intercedes, as it did last year with so much fierce hurricane activity," he said.

Faced with shortages, buyers typically try to work with multiple suppliers, hoping that when one source runs low, another can fill in.

Fruitful Yield splits its orders between two vendors, "shifting orders to the one that's giving us the best fill rates. It's challenging," Parker said.

Milwaukee-based Roundy's Supermarkets, has organic food departments in most of its 135 stores; Cub Foods has organic food departments in all of its 76 stores; and Nature's Pantry and Mustard Seed Markets do the same.

"There are always periods of shortages, but we've always been able to cover our needs by having multiple suppliers and by cutting back on promotional activities," Nabors said.

Roundy's spokeswoman Vivian King said they don't often suffer shortages because "we use multiple vendors and we stay in close touch with them to manage supply."

Retailers and suppliers who have consistently dealt with shortages of organic milk note that it has been going on for about a year now.

"Sometimes it gets better as more farms come on line and the industry begins producing more," said Tree of Life's Rick Moller, category director for natural and organic foods. "But then demand keeps going up and we have a supply problem again."

The distributor copes with the shortages "by sharing inventory levels and all the needed information with both our suppliers and retailers," he said. "But because milk is such a short-dated product with people ordering every week, there is really not much you can do."

United Natural Foods encourages retailers to buy from large distributors who have access to hundreds of suppliers internationally as well as nationally, and to develop relationships with local and regional suppliers who can often fill in when shortages hit nationally. All the pieces of the supply chain need to be in place to solve this ongoing puzzle, he said.

Funk also urges retailers to carefully watch the timing and scope of their promotional programs to "ensure that promotions are planned with supply needs in mind. You don't want to get caught promoting items that are in short supply."

Pour it On Gallons of organic milk sold

2002:

29.2 million gallons, 0.8% of market share

2003:

35.2 million gallons, 20% growth from previous year, 1.0% of market share

2004:

43.1 million gallons, 22% growth from previous year, 1.3% of market share

2005:

54.6 million gallons, 27% growth from previous year, 1.7% of market share

Source: National Dairy Council

Good Advice

Make sure buyers maintain strong communications with suppliers of high-demand organic items.

Plan promotions well in advance to prevent last-minute shortages.

Distribute talking points on shortage issues to floor associates.

Don't be afraid to use shortages to upsell customers on similar, high-margin substitutes.