HAPPIER RETURNS

MATTHEW ENIS

"It's a new industry all over again."

More than any other comment in SN Whole Health's second annual online survey, this participant's remark best summed up the enthusiasm, curiosity and frustration that food retailers have been feeling as they contend with the ever-rising demand for health and wellness products and services.

Respondents were once again overwhelmingly bullish on the prospects of the category, though many expressed concern about the difficulty in recruiting knowledgeable employees to help grow this business in their stores. They also conveyed apprehension about Wal-Mart Stores' plans to increase its selection of organic items. But overall, a sense of excitement and optimism pervades.

The Big Picture

Almost 95% of survey participants said that they expected to see an increase in sales of health and wellness products during the coming year. Only 5% answered that sales would remain the same, and no one expected to see sales decline.

As one respondent put it, "Healthy food is in; priced right, it sells."

Most also felt that those gains would be robust, with 44% expecting growth of more than 10%, and more than half of respondents saying that they expected growth of 4%-9%. Many respondents pointed out that they were simply basing their estimates on the category's past performance.

"Health and wellness upswings are well documented in established data and projections," noted one poll taker.

Another explained that "the segment has increased 20% each year for 10 years"; that growth may eventually slow down, but anticipating 10%-15% increases per year is not much of a stretch.

When asked to pick a single standout trend that demonstrated the most promise for the coming year, organic foods dominated, picked by almost half of all respondents, and by 62% of all retailer respondents. Natural and organic private-label brands were also a popular response, garnering 17% of the vote. Whole grains followed closely at 16%, while functional foods and antioxidant-enhanced products rounded out the top five at 7% and 5%, respectively.

Opinions on what has spurred the growing popularity of these categories were varied, but one point was clear - no one seems to believe that these changes are temporary.

"The health and wellness trend is not based on a single fad like the low-carb diet," explained one respondent. "It is a combination of the growing organics niche, the national realization of obesity in children and the baby boomers' attempt to stop the clock and retain their youth and health."

Those themes were echoed in other written replies as well. "The negative effects of being overweight are being discovered daily, and the issue is hot in the news," one respondent said. "As the population grows older, more people on an absolute basis will be dealing with health-related issues and getting advice from their health care professionals to cut down on fat, sugar, sodium, etc."

According to respondents, media coverage of other issues - such as the antibiotics, hormones and pesticides used in conventional agriculture - were getting more people to try organic foods, especially when purchasing for their children or families.

Similarly, recent, positive stories on the benefits of whole grains and omega-3 fatty acids have been driving functional food innovation, as well as renewed interest in categories ranging from cereal to seafood. One respondent anticipated that this trend would soon continue to expand with probiotics, as well as new functional foods tailored to benefit eye, heart, bone and joint health, "as long as they taste as good or better than any counterparts currently on the market."

Labor Pains

The excitement over health and wellness categories is still tempered with frustration. Mirroring the results of WH's 2005 survey, 62% of respondents this year said they believed that supermarkets would benefit most from the growth of these categories in the next 12 months. Only 22% said that natural food stores would benefit the most, and 13% said mass merchandisers would.

Yet, 91% of respondents also said that supermarkets have not done enough to take advantage of these opportunities. A whopping 97% of retailer respondents shared that view. And most tended to blame internal roadblocks for the sluggish response.

"It's a lack of targeted focus - [supermarkets are] trying to be all things to all shoppers," one respondent said.

Only 6% of respondents said that a local competitor already dominated the health and wellness market. Rather, when given the opportunity to select the most significant challenges whole health categories were facing in their stores, most blamed management reluctance (59%) and space limitations (41%).

Write-in responses ran the gamut. Some complained broadly about the continued dependence on slotting allowances and an ingrained resistance to change in the food retailing industry; others said that factors such as high prices, spotty supplies and lack of advertising support for many natural and organic products created major risks that forced caution, despite the category's promise.

Organics, in particular, have faced their own considerable growing pains on the supply side. The demand for many products and commodities has continued to outstrip supply, and Wal-Mart's impending entry into the category will soon place new strains on the industry in the near term (see "The Wal-Mart Effect," Page 36).

Almost 60% of respondents said that shortages of organic raw materials had created a barrier to category growth. These shortages were most acutely felt in dairy (46%), meat and poultry (41%), produce (36%), and even organic grocery products (29%). More than half also said that sourcing raw ingredients was a significant challenge.

Clearly, some guidance is needed to profitably navigate these categories, but almost 80% of respondents said that recruiting adequate health and wellness expertise into their companies had also posed a considerable challenge.

"Many decision makers are not knowledgeable about natural and organic products," one respondent said. "They don't look at the success [these products] have had in the natural food industry, they only look at the initial profit margin."

Asked to select any areas they felt were lacking in expertise, 55% of survey participants agreed that retail executives needed to deepen their knowledge of these categories, while 66% said that store-level staffing was a larger challenge.

"Most retail help is not even aware of the full private-label offerings within their stores, let alone assisting in a wellness program," another respondent noted. "It takes training, trying the product, promoting it and being knowledgeable to help consumers make a right choice."

Retailer respondents said they were using a variety of strategies to cope with these challenges, from hiring nutritionists or partnering with local doctors to advise on nutrition issues, to providing more training to existing buyers and merchandisers.

In fact, 62% of all respondents said they had made an effort to offer additional employee training or education in this area, while almost a quarter had plugged these knowledge gaps with new hires. Some 22% had reorganized existing staff in an effort to better manage these categories.

The need for a clear, top-down commitment from senior management was a theme that surfaced repeatedly in the written comments.

One respondent relayed an anecdote regarding a recent trade show. "I heard several executives who actually traveled down into the [All Things Organic area at the Food Marketing Institute's 2006 trade show] for the first time this year, and were amazed at what was available. If this is the top of the organization, I am certain the managers at the lower levels are further in the dark, especially in more rural areas."

Another survey participant noted that "once a management commitment to health/wellness exists, I think an adequate job has been done obtaining skilled assistance."

Merchandising Woes

Among other issues, the challenge of finding experienced employees who are well versed in natural and organic products and supplements has led many retailers to focus their health and wellness efforts into store-within-a-store concepts.

"There is still some confusion among consumers about natural and organic products," one respondent noted. "By separating that section out, you can educate and inform there - helping customers make intelligent, informed purchasing decisions."

However, these concepts seemed to be falling out of favor among participants in this year's survey.

All told, 47% of respondents (including 48% of retailer respondents) felt that full product integration was the best way to merchandise health and wellness products. By contrast, store-within-a-store sets appealed to 19% of all participants.

Write-in feedback was varied, convincing and often completely at odds, although most comments boiled down to key questions regarding what type of exposure is best for this fledgling category in a conventional retailing format.

"Having options next to each other on the shelf is important; separating out certain brands doesn't give the customer true options," one respondent said.

Another countered that: "People who desire to buy natural/organic or healthy products will shop a separate section. When incorporated into normal sets, the price of the natural/organic products will inhibit purchase."

Several others agreed about pricing, noting that side-by-side comparisons with conventional brands exposed a significant weakness of the category. One retailer, however, noted that the category "is becoming mainstream. Independent sections denote higher pricing."

Respondents also found themselves on opposite poles when arguing whether full integration would increase the visibility of a store's natural and organic selection.

"I believe this category is still being explored by customers - seeing if there is a new product that better fits their needs," one respondent said. "A segregation strategy makes this an exploration destination for the consumer, especially if the retailer manages it accordingly."

Another respondent disagreed, arguing that if a conventional supermarket is trying to get their existing shoppers interested in a new breed of product, segregation is the wrong way to go.

"People who do not usually purchase these things may not even go into a segregated area," the respondent said. "If integrated, customers will get more exposure."

For now, many are viewing "segregated integration" strategies, such as aisle bump-outs, to be a good compromise, grouping similar natural and organic products together to offer increased visibility within an aisle.

"Bump-outs provide an opportunity for an impulse trial of [these] slightly higher-ring products," one respondent noted.

Another elaborated that "a consumer purchasing tomato sauce will go to the tomato sauce section. With segregated integration, we can tempt the consumer with the additional advantages of the whole health product."

Regardless, as mainstream shoppers continue to embrace natural and organic foods, as well as other health and wellness categories, supermarkets will need to find new ways to adapt - often quickly. Different merchandising strategies often appeal to different types of consumers and may be more or less effective in different locations. What works best?

"That," said one respondent, "is the $64 million question."

Which Trends Look Most Promising for the Coming Year?

Other 3%

Natural/Organic Private Label 17%

Whole Grains 16%

Organics 49%

Functional Foods 7%

Low Fat/Low Sugar/Low Sodium 3%

Antioxidant Enhanced 5%

Identify Your Type of Company. (Choose All That Apply)

Food Retailer19%

Food Wholesaler8%

Manufacturer43%

Sales Agency14%

Other24%

About this survey

WH's survey was conducted via email newsletter and from the website of parent publication Supermarket News,www.supermarketnews.com, for three weeks in May. Respondents included retailers, wholesalers, sales and marketing agencies, manufacturers and allied entities. More than 150 responses were received.

How Do You Expect Health and Wellness Categories to Perform in the Coming Year?

Increase95%

Decrease0%

Remain the Same5%

Increase by How Much?

10% or More 44%

7% to 9% 31%

4% to 6% 22%

1% to 3% 3%

Which Merchandising Strategy Is Most Effective For Health and Wellness?

Other 3%

Segregated Integration (i.e. aisle bump-outs) 31%

Segregation/Store in Store 19%

Integration 47%

Have Retailers and Product Manufacturers Recruited Adequate Health and Wellness Expertise into Their Companies?

Yes21%

No79%

If "No," Which Areas Are Lacking? (Choose All That Apply)

Retail/Store Level66%

Retail/Executive Level 55%

Manufacturer/Sales 26%

Manufacturer/Research & Development 37%

Other6%

What Is Your Company Doing to Secure This Expertise? (Choose All That Apply)

New Hires24%

Additional Training/Education62%

Staff Reorganization22%

Other 25%

The Wal-Mart Effect

When Wal-Mart Chief Executive Officer Lee Scott announced this spring that the company would aggressively expand its selection of organic foods, retailers were abuzz with questions about how this would impact the category and their company's own approach to it. The speculation does not appear to have died down. Participants in Whole Health's second annual online survey mentioned Wal-Mart frequently in their written responses, even though the poll contained only one specific question about the Bentonville, Ark.-based retailing giant.

Asked to select the single biggest effect that Wal-Mart's entry into the world of organics would have on food retailing, responses were mixed. However, most seemed to think that the net effect would be positive, with 39% expecting total consumer awareness of organics to improve, and almost 30% suggesting that the move would ultimately bring down the price of organic items. Only 7% felt that the chief impact would be a siphoning of shoppers from other formats.

"They don't get it," one respondent argued. "The best thing their competition could do to prevent [a loss of customers]? Understand the marketplace first."

In fact, many respondents said that Wal-Mart's growth in the category would simply speed the mainstreaming process, forcing executives at other chains to make concrete plans of their own to expand their selection of organic products and find new ways to compete.

One concern emerging among competitors and suppliers, however, is how Wal-Mart plans to source all of this food. Domestic supplies of several organic commodities - particularly organic dairy - are already stretched exceedingly thin, and 20% of respondents said that Wal-Mart's leap into organics would make an already difficult situation even worse.

"Again, Wal-Mart is about to turn the grocery [business] model upside down for organic perishables and organic private label," one respondent noted.

How Will Wal-Mart's Entry Into Organics Impact the Market?

No Effect 3%

Other effects 3%

Bring Down The Price of Organic Items 29%

Improve Total Customer Awareness 39%

Create Additional Supply Shortages 20%

Siphon Organic Customers From Other Formats 7%

Are Supermarkets Taking Full Advantage of Health & Wellness Trends?

No91%

Yes9%

If No, Then Why Not? (Choose all that apply)

Competitor Dominates Market 6%

Management Reluctance59%

Space Limitations41%

Lack of Consumer Interest9%

Other19%