TAKING THE ADVANTAGE 2004-03-01 (2)

CHRISTINA VEIDERS

An exclusive SN survey indicates that supermarkets have an opportunity to increase their share of the burgeoning demand for natural/organic food.

Yet, some industry observers warn that supermarkets may be missing out by not recognizing the needs of natural/organic shoppers and making their stores a true destination for these consumers.

The survey also found that many consumers want and often expect retailers to do a good job in showing off their natural/organic selections through well-designated departments that contain information and products that are clearly labeled.

The survey was conducted by Harris Interactive, Rochester, N.Y., to assess consumer attitudes and perceptions regarding natural and/or organic foods. It polled just over 2,000 adults aged 18 and over through its QuickQuery online omnibus service. Specifically, consumers were asked why and where they purchase natural/organic food and what retailers can do to further stimulate sales.

It was about four years ago that reports began to surface that supermarkets were gaining a sales edge in selling organic products over other retail channels, particularly the natural health food stores -- long the traditional outlets for natural/organic products.

When SN asked consumers where they purchase their natural and organic foods, 61% said they bought them in a supermarket. When asked where they purchase these foods the "most," 39% named the supermarket.

Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., said 61% isn't good enough when one considers that 90% of the people, including organic food shoppers, go into supermarkets over the course of two weeks. "That's not really impressive. Supermarkets are only pulling in two-thirds of the shoppers, which means there is a big, unexploited opportunity for supermarkets," he said.

Don Montuori, who authored the latest Packaged Facts report on the organic food sector for MarketResearch.com, said supermarkets can do a better job in merchandising the category, "particularly in organic produce and meats, where organic products are often hard to find in supermarkets, as opposed to Whole Foods, where obviously natural and organic food is their mission and it's clear what they are offering. If shoppers are made to realize there are more organic choices available through the positioning of the product in supermarkets, then they may be inclined to buy more," he said. However, price still remains a barrier for many consumers, he noted.

Not surprisingly, natural/health food stores, which include Whole Foods and Wild Oats, were the second most popularly shopped outlet by those who purchase natural/organic food, with 43% saying they purchase products from these natural food retailers, and 21% saying they purchase "most" products from these retailers.

Holly Givens, a spokeswoman for the Organic Trade Association, Greenfield, Mass., cautioned that the survey figures may not truly translate into real market share. "I know consumers say they prefer to buy these products where they do their shopping, and they don't want to have to go to many places," she said. "But I think part of what is happening is the pie [for natural/organic] is growing. If you look at dollar figures, probably more is purchased at natural food stores. If you look at consumer figures, probably more people go to supermarkets."

A healthy percentage of consumers also shop other channels for natural/organic products, the survey indicated. The local grower/fruit stand attracted 35% of respondents; 29% went to smaller independent grocers; and 20% shopped at alternative channels, such as Wal-Mart Supercenters or Costco.

Quantifying the Segment

There appears to be no definitive numeric data regarding the market size and distribution of the natural/organic segment. The U.S. Department of Agriculture's Economic Research Service cites statistics from various outside sources, including the Food Marketing Institute, the Hartman Group and Packaged Facts.

What is clear is that demand for these foods is no longer coming from only those who are strictly health-conscious and environmentally concerned. Consumer demand has grown rapidly over the last several decades and is drawing mainstream shoppers, many of whom have a desire to pursue a healthy lifestyle.

In addition, these people are aware and concerned about the use of chemicals and synthetic growth hormones in conventional food production. Of the 2,000 consumers SN surveyed, half said they purchase natural/organic food. New York-based Packaged Facts, a publishing division of MarketResearch.com, estimated that approximately 40% of adult consumers regularly use organic products.

Consumer penetration is even greater for natural food, reaching 63% of households last year, according to the Natural Marketing Institute.

In its latest 2003 study, "The U.S. Market for Wellness Foods and Beverages: Volume 1 -- Organic Foods and Beverages," Package Facts reported that sales of organic food and beverages fell just under $11 billion in 2002. In 1990, sales volume was at $1 billion. Natural and organic are two distinct segments. Natural food is broadly defined as minimally processed and free of artificial colors, flavors, preservatives and additives. Organic food is federally regulated and certified under the National Organic Program, which took effect in 2002. These foods must be grown and processed using organic farming methods that recycle resources and promote biodiversity.

"There are shoppers out there that don't understand the difference between natural and organic. All organic products are natural, but not all natural products are organic. The OTA wants people to know when a product has organic ingredients in it," noted Givens.

In its just-released 2004 Health and Wellness Trends Report, the Natural Marketing Institute, Harleysville, Pa., said 2003 sales of organic food and beverages was $9.4 billion, and natural food and beverages was $11.1 billion.

The report projects that the organic segment will grow bigger than the natural food segment within the next five years. However, the rate of growth in both segments will slow within that period. Organic food sales will reach just over $15 billion by 2007, according to NMI, with a growth rate going from 16% to 10%. Natural food sales are expected to be $13.7 billion by 2007, with a growth rate falling from 7% to 5%.

Maryellen Molyneaux, president of NMI, expects long-term growth for the organic segment, even though household penetration is expected to hover at the 40% level.

"What we see within the data is -- as one of the reasons that household penetration is not growing -- that there is a lot of misunderstanding about what organic means and what the benefits of usage are. That is something the Organic Trade Association is addressing in their consumer education programs," Molyneaux said.

Driving Growth

SN found the "better for you" message is helping to drive growth of this segment. Over one-third of respondents (37%) said they agreed strongly or somewhat strongly that natural/organic foods are more nutritious than other foods. Nearly one in three respondents (30%) agreed that eating natural/organic foods helps prevent or control serious diseases like cancer, and 34% said natural/organic foods are simply safer than other foods.

"The combination of better for you, worth the price, and safer is a strong consumer proposition," said Bishop, who wonders whether supermarkets are really taking advantage of this proposition.

When it comes to safety, the discovery of mad cow disease in the United States last year did not incite enough concern among consumers to drive them to their natural health food stores to buy organic meats.

After the discovery, Wild Oats urged consumers to buy all-natural and organic beef, boneless beef, or alternatives. It also advised consumers to know and trust the source of the beef they buy, and to request that the meat be freshly ground at the time of purchase.

SN asked consumers about their concern of the spread of mad cow disease and whether or not this discovery changed their meat purchases to natural/organic meats. Nearly half said they were concerned. However, few who were not already natural/organic purchasers said they were moved to actually buy natural/organic meats instead of "regular" beef.

Contrary to what some analysts had predicted, there was no significant uptake in natural/organic beef sales. In its latest Healthy Living Monthly report, Boston-based Adams, Harkness & Hill said concerns regarding mad cow "have been relatively tempered to date." However, the investment firm warned that any decline in consumer confidence should lead to growth of natural and organic beef.

Bea James, whole health manager for Living Wise who is in charge of the organic/natural food program at Lunds/Byerly's, Minneapolis, said she is surprised over the response from surveyed consumers. "Sales of Coleman all-natural beef and organic Smart chicken have gone up significantly since the mad cow discovery. Part of the reason is that we drove education in those departments through signage, demos and newspaper ads. We are now looking at other organic meat suppliers to help grow the category," she said.

Regardless of the mad cow scare, New Leaf Community Markets, Santa Cruz, Calif., has seen sales of its organic and natural meats skyrocket in the last couple of years [see "Strong Roots" on Page 35].

Consumers also were asked how retailers can improve how they market and sell natural/organic food by gauging the importance of labeling; information on specific foods and food ingredients that could prevent serious diseases; location and merchandising; and trained and knowledgeable employees.

Nearly two-fifths of respondents (38%) said it is extremely/very important that a retailer provide information on the country of origin for all foods sold, and provide products bearing the USDA Organic Seal. An additional one-third considered both of these options to be important (34% and 33%, respectively).

The survey found that current organic/natural food purchasers accord all the actions listed a higher degree of importance than do their non-purchasing counterparts and, for them, the above are also the two most important things a retailer could do:

Fifty percent said it is extremely/very important to them that their retailer provides products bearing the USDA Organic Seal.

Forty-seven percent said they feel the same way about the retailer providing information on the country of origin for all foods.

Such labeling is really recognized by natural/organic consumers in produce where co-mingling of products is a concern, said James. "You have to be an educated consumer to understand what the USDA ruling is all about. The impact for the mainstream consumer is not strong unless the retailer has a program to help bring awareness," she added.

Givens said, "Over a decade of work went into developing the federal regulations and having that completed gave business confidence to move forward with developing new organic lines and products."

Providing information on what specific foods and food ingredients could help prevent/control diseases is of extremely or very high importance to 29% of all respondents, and 40% more view it as important. For one-quarter of respondents, training/hiring employees to be knowledgeable about natural/organic foods (25%) and providing a separate department or area for natural/organic foods (24%) are considered extremely/very important; both issued are judged important by an additional 35% of respondents.

"Education is a key component in driving organic sales," said James. First you've got to get consumers to become label readers and then you teach them the relationship between diet and health, she said.

Cost Factor

The cost differential remains a factor for a great many of those surveyed. Over half of all respondents (55%) strongly or somewhat agreed that natural foods cost more than they are able or willing to pay.

Even many of those who purchase natural/organic food, 46%, agreed the segment is costly and more than they are able or willing to pay.

While these foods cost more than others, 35% of respondents said they are worth the investment.

For over half of the consumers (56%) who buy natural/organic foods, natural/organic purchases make up only 10% or less of their total food purchases.

For 19% of the shoppers, natural/organic foods constitute between 11% and 20% of their food purchases and for another 13% the total is 21% to 30%. Only 12% report that these types of food constitute more than 30% of their total food purchases.

"Price and availability are factors we've seen as to why consumers aren't choosing more organics," said Givens. Consumers need to realize, said Givens, that "organic products are more closely reflecting the cost of producing something in a sustainable manner, like the cost of cleaning up polluted water resources that might be tainted with fertilizers or pesticide residues."

Some consumers expressed doubts about natural/organic claims and safety risks. Thirty percent agreed that most claims made for natural/organic foods are unproven, and 20% said they believe that natural/organic foods carry a higher risk of containing bacteria or parasites.

The big risk overall, according to Bishop, is that "retailers don't help their customers see that natural/organic food is available in their stores and help them by pointing out why it's better. If this becomes just another 500 items that are no more differentiated on the shelf than the last 500 items by the retailer's lack of effort, then supermarkets will lag behind the continued growth of this segment."