ORGANIC GROWTH 2001

BARBARA MURRAY

The supermarket industry has embraced natural and organic foods, experimented with how to merchandise them and has done a pretty good job of making it work, say some retailers, who note that as recently as three or four years ago natural and organic foods were perceived as something one would buy at a natural food store.

Supermarkets either keep these items segregated from conventional products, integrate them or use a store-within-a-store set. The Big Five food retailers tend to have fewer stockkeeping units and focus on high-velocity items, according to Greg Badishkanian, natural products analyst for Salomon Smith Barney, New York. This is one category that Wal-Mart has not yet addressed, he and others told SN, although the giant Bentonville, Ark., retailer did send a produce buyer to the Organic Trade Association's show last May in Austin, Texas.

The explosive growth of natural products in mainstream supermarkets shows that supermarkets are enthusiastically picking up more of these products, whether they use a distributor or go the extra mile in dealing with multiple suppliers.

One thing is certain: Retailers are getting more sophisticated and more open to capitalizing on this market, which is driven by health-conscious consumers.

Snack foods, cereal, nondairy milks and energy bars are the leading categories in natural grocery, according to SPINS, a San Francisco market research firm, and retailers. The natural products segment in supermarkets generated $6.5 billion in sales for the 52 weeks ended June 30, 2001, representing a 25% increase from the prior year, according to SPINS.

Bea James, whole health manager for Lund Food Holdings, oversees the natural and organic foods program for the 20 Lunds and Byerly's stores in the Minneapolis area.

Those stores merchandise 20 SKUs of nondairy beverages "right in line," she told SN, usually in the cereal aisle, in 4-foot sections. The hottest sellers are products by EdenSoy and Imagine Foods' Rice Dream and Soy Dream. "Those fly off the shelves," she said. "We merchandise it by the case, on the very bottom."

This category has really boomed, she said, because of consumers' desire to lower cholesterol, promote women's health and find a good alternative for the lactose intolerant.

And, James noted, "Once people get into it for one health reason, it opens the door for them to explore other natural foods. It all dovetails off each other; you get an increase in sales due to people taking care of their health."

Another big category is snack food, which carries a high ring, James said. She also sees a surge in the purchase of natural cereal by families with children, which she assumes is because they are not as high in sugar as the mainstream cereals.

Lunds and Byerly's merchandise natural products in-line but segregated, so that in the cereal aisle, for example, natural products are in a 16-foot section among the mainstream cereals, but highlighted by wings at either end with the "Living Wise" logo on it, stating that these products are natural or organic. Shelf strips also denote the natural and organic section.

Chains that are said to do a good job with natural products have had to learn to deal with many suppliers, since the manufacturers are typically smaller, often too small to work with a distributor.

To have the variety that makes a store competitive, a chain needs to look at having many different direct buyers, a couple of retailers said.

"We probably have about 70 different direct suppliers," James said. Because educating the consumer is such a key part of natural grocery sales, each vendor must support the stores' demonstration program with product samples and demos at least once or twice a year.

Working with several vendors can be difficult unless the manager is organized, she added.

Having knowledgeable associates is another key part of a successful natural products program.

Lunds has a training program implemented by all department managers so employees can answer basic questions about natural and organic products.

"For things that are a little more involved, we have our Living Wise specialists," James said. These are people who have used and supported a healthy lifestyle using natural therapies for a long time. "The program has been running almost two years. It's been very successful for our company, and it helps us compete," James said, noting that there are a couple of Whole Foods Markets and many natural products co-ops in the Twin Cities.

J.B. Pratt, owner of a group of eight Pratt Foods markets, has developed them into a category killer for central Oklahoma.

The newest store, in Edmond, is a 32,000-square-foot natural foods supermarket in an area where the demographics support it, Pratt told SN. "It's similar to a Whole Foods, except we have a registered dietitian, a pharmacy and a medical doctor in the store. So we depart from Whole Foods' approach and offer customers even more choices in this particular store," he said.

Overall, he said, more than 20% of sales are from natural and organic products, which customers find integrated in the conventional Pratt Foods stores.

In the new store, which opened June 24, Pratt describes the decor as "real upbeat," informal and entertaining, with caricatures of fruits and vegetables in a whimsical effort to keep the atmosphere from being too clinical. It contains many personal touches, such as the specially imprinted tiles on the walls, showing fruits, vegetables and grains.

"We don't want to look too serious even though our underlying purpose -- the benefits of real food, great-tasting food, starting with enjoyment of food -- is serious," Pratt said.

He describes Pratt's offerings and mission as very different from a chain like Albertson's, for example, which is right across the street from the new Pratt's. The new Pratt's stocks over 30,000 Center Store items, not including the supplements.

Nondairy beverage sales are increasing all the time, even in Pratts' conventional stores. "It's become a really big part of our business," Pratt said. "We keep one on sale for 99 cents. In a competitive marketplace, we find a way to bridge a deal on one all the time." According to SPINS, nondairy beverage sales have increased by 61% in the year ended June 30.

Energy bars, a category that SPINS says has increased by 35.6% in the same time period, has also been one of the bigger categories for Pratt. "In one of our conventional stores we have reset the section and enlarged it," he said.

Pratt Foods' WellMarket has a 12-foot-high waterfall in the entrance, and uses wind chimes in several departments. The waterfall, with a tree next to it, sets the tone right away, Pratt said, tying the environment into natural foods merchandising.

Hy-Vee Food Stores, West Des Moines, Iowa, uses its HealthMarket model, a store-within-a-store where customers find all of the natural foods, organics, special diet foods, supplements, accessories and books on cooking and diet. The store-within-a-store stocks fresh and grocery Center Store items in the same section, and a lot of bulk foods. "We just did our first real big prototype in Columbia, Mo. We have various other arrangements that we have put into existing stores," explained Ruth Mitchell, assistant vice president of communications for Hy-Vee. In the Columbia store, which has a total of 73,000 square feet, the section is about 4,000 square feet and is the first HealthMarket designed from the ground up.

"In others, it would depend on the store. But we think this is a good size and most of the new stores we are building are in the 70,000 [square-foot] range. In a large university town, this seems to be a natural fit. You do find more people who are interested in natural foods due to the education level, plus with the younger generations X and Y, natural foods have become a lot more popular," Mitchell said.

In the future, if Hy-Vee follows this model, as Mitchell says it probably will, the shelving will have a wood look. Lighting will be lowered down into the department, and there will be different wood flooring in that section, in warm tones, earth colors and natural wood. The concept is two years old, and it has been refined along the way, she said.

Soy milk, rice milk and energy bars are big components of the HealthMarkets, Mitchell said, with a lot of shelf space. Bulk foods, too, have a lot of shelf space for nuts, flours, dried fruits, oat flour, rice flour, soy flour and a flour grinder so customers can load the grain in and grind, like coffee. Organic coffee is sold there, too.

"We have taken the approach that we think health and health products are going to be growth areas for the supermarket," Mitchell said. "Our pharmacy departments have grown, our pharmacies are bigger and are doing more business. This ties in with people managing their own health. Our approach is based on what we see going on in society, rather than what any other retailers are doing."

Mitchell said Hy-Vee has received a lot of customer comments already. "The different look really draws a lot of attention to the products, more than if they were scattered through the store in various departments," Mitchell said. "We have done that, too, and a lot of the products are located elsewhere, too. But from the testing we've done, that was one of the conclusions -- the store-within-a-store does best to attract the customer."