ICELAND MAKES THE SWITCH TO ORGANIC

JAMES FALLON

LONDON -- Iceland plc, Deeside, England, has raised the stakes in organic foods by announcing plans to switch some of its private-label lines to totally organic at prices that are the same as conventional items.

The program will start with Iceland's private-label frozen vegetables when it switches all of them to organic produce by October. The move will cost $12 million in the first year, which Iceland hopes to recoup from increased sales. A spokesman said the price gap between organic and regular produce at the source will narrow over time as a result of higher sales volumes.

Iceland then will consider converting other lines to only organic products, said Malcolm Walker, Iceland's chairman. Iceland is committed to the program for at least the next three years.

Organic foods have become a major growth area for many U.K. retailers, with J. Sainsbury plc dominating the market with a 30% share. Iceland at this stage accounts for only about 1% of the market. Prices of organic foods generally are 25% to 60% higher than those of conventional ones, which retailers claim stems from the increased costs associated with organic merchandise.

Sainsbury said it has no plans to follow the Iceland move, claiming the profit margins on organic foods aren't greater than those on conventional ones. It is seeking to lower the price of organic foods by working with farmers to raise production volumes, the retailer said.

But Iceland said it will take lower profit margins on organics to keep its prices the same as conventional produce. Iceland said the organic market is forecast to grow by 40% a year over the next five years. Retail sales of organic foods are expected to be about $1.2 billion by the end of next year, according to the U.K. Soil Association, which promotes organic farming.

"Our research found that three out of four consumers would buy organic if the price were the same," the spokesman said.

The retailer is discontinuing its regular line of frozen vegetables in favor of the organic version. The packaging will indicate that the vegetables are organic, however. "We want to show our customers that it's quality, healthy produce at the same price as regular produce."

The retailer expects to source about 80% of its frozen vegetables from outside the United Kingdom, mainly from the United States, continental Europe, Canada and Guatemala, the spokesman said. It also is investing $1.5 million in a program with the National Trust to encourage British farmers to switch more acreage to organic farming. It said its $1.5 million investment is expected to generate additional grants of $7.5 million to $10.5 million from the European Union and the British National Lottery.

Iceland operates more than 750 stores throughout the United Kingdom, mainly in city centers and mainly focused on frozen foods. The company announced plans in late May for a $1.4 billion all-share merger with the cash-and-carry chain Booker plc, which would result in a combined group with sales of about $8.3 billion a year.

The retailer is one of the most innovative in the United Kingdom and despite its small size has had a major effect on the market over the last two years. It was one of the first to introduce home shopping and has attracted a major new customer base with its Internet-based shopping and home-delivery service. It also was the first British food retailer to eliminate genetically modified ingredients from its private-label foods, a move that later was copied by all other U.K. food retailers.