Tuesday, September 11, 2007

Tuesday Talking Points Memo

Searching For a Post-Organic Retail Paradigm:
Since the late 1980's organic foods have been a defining niche for natural foods stores and independent supermarket retailers but that is ending. What's next?

For the last couple decades (roughly the early 1980's to present) organic foods and related products have been the defining niche for first natural foods retailers (and Co-ops) and a bit later specialty-oriented independent supermarkets. These two types of retailers were able to create a retail niche for their stores by merchandising organic products which weren't available at the vast majority of conventional supermarkets.

The natural foods retailers built their businesses first on what were called "health foods," grocery products produced to be "good for you" (eg: fat-free, low-fat,) or having certain specialty attributes such as for diabetics, those with food allergies and similar health considerations. Most supermarkets at that time devoted small (4-foot to 8-foot) segregated sections in their stores devoted to "healthy foods;" the majority of these packaged foods in the sections being sugar-free products for diabetics. Some progressive (primarily independent) supermarket operators had expanded "health foods" sections in their stores but it was the exception rather than the norm.

The organic products niche was a perfect progression for these early independent natural foods store retailers and specialty-oriented independent supermarkets. Organics fit well within the "healthy food" mandate of the natural foods stores and provided the upscale independent operators with a new niche to compete against the chain retailing giants moving into their communities.

It was about 1989 when sales of organic foods begin to gain some real momentum. Natural foods retailers were the primary retail "owners" of the organic niche (and benefited most from this momentum), followed by specialty-oriented independent supermarkets, which were located primarily on the east and west coasts of the U.S.

In most regions in the U.S. if you wanted to buy organic fresh or packaged foods you had to shop at a natural foods store in the 1980's to early 1990's. The only exception was in parts of the U.S. where upscale independent supermarket retailers and a handful of regional chains also got into the organics game as part of their retail marketing mix and as one of a number of ways to differentiate their stores from the larger national chains.

This all began to change in the mid 1990's when a number of national chain supermarket operators started increasing the organic foods offerings in their stores dramatically. Today we are seeing the seeds of that mid-1990's change blooming in 2007 as the three largest Supermarket chains in the U.S.--Kroger, Supervalu and Safeway, and the largest retailer in the world, Wal-Mart--all not only offer large selections of organics in their stores but have each made organic products merchandising a key part of their retail marketing strategies. We also see other large national chains and major regional chains doing the same. Some like Publix in Florida, Wegman's in the east, Raley's in the west, and numerous others, are operating full-fledged organic stores within their large supermarkets.

Let's not forget the one-thousand-pound organic gorilla, Whole Foods Market, Inc. When it comes to "Organic Inc." in terms of organic products retailing Whole Foods still gets to wear that particular name tag. However, since Whole Foods is a natural foods retailer (a supernatural one but still natural) it's open to the same niche-losing potential in terms of organic products as the independent natural foods stores and upscale independent supermarkets we are primarily addressing.

This gets us to the topic at hand. What we're seeing today is the end of the "ownership" of the organic foods niche for natural foods retailers (Whole Foods included) and upscale independent supermarkets. Whole Foods still has the best organics selection of all U.S. retailers in its stores but that gap is being closed by supermarket retailers like H.E.B.'s Central Market, Publix, Wegman's, Raley's and a few others.

More importantly it isn't the best selection of organic products that is of concern but rather the proliferation of retail formats--supermarkets, mass merchandisers, drug stores, dollar stores, on-line merchants and more--that are selling organic foods, many doing so in a serious way. This retail-channel proliferation and mass-marketing of organics has its biggest effect on natural foods retailers and independent specialty-oriented supermarket retailers.

We aren't suggesting natural foods and upscale independents move away from merchandising organic products. Rather, we suggest the opposite, especially when it comes to organic products in new categories and new items. These retailers have smaller organizational structures than the big chains and thus will always be able to be the "first movers" in the organics category. And they should continue to be as well as continuing to be leaders to the best degree possible in the overall organics category.

But we do suggest these retailers can no longer rely on organics as their "niche leader." That they need to become more creative in creating stores on the cutting edge of natural and specialty retailing in order to thrive--and even survive. Whole Foods gets it in its own way and is creating stores that go far beyond focusing on the organics niche. However, organics remain a huge slice of the supernatural grocer's total sales pie and as such Whole Foods in it's own way are also searching for a post-organics paradigm as the chain realizes the new realities of organics retailing.

In order to achieve this success in a "post-organic niche" era we suggest exploring the following three related concepts (which together comprise our model) as an overall "post organics paradigm" (along with continued organics retailing) to create a new "post-organics niche" for natural foods and upscale independent supermarket retailers. The concepts also make good sense for regional chains and even large national multi-banner chains looking for ways to differentiate their stores (or banners) with today's consumer.

The three concepts which comprise our "post organics niche" model we call (1) food origins, terroir and the geography of flavor, (2) local and community initiatives, (3) real green or "eco-retailing."

First, in terms of food origins, terroir and the geography of flavor, we are referring to three related concepts. Food origins refers to where foods are produced. Are they locally grown, nationally or internationally grown for example? Are they grown by large agribusiness farmers or small, family farms?

Terroir is a related concept borrowed from the French wine industry. The literal translation of terroir is terrain but it has come to mean the way foods and wine express the soil, climate, culture and tradition of a region. In other words it describes where the food comes from and how it is grown--and why it tastes like it does. This last point exemplifies the "geography of flavor" in that depending on the origin of a food product and its terroir it will have a distinctive taste profile. This also includes how the food crops are grown--organic, non-organic and the like.

Second, by local and community initiatives we are referring to two related concepts. First is whether or not the food products were locally grown. This has environmental, economic and other attributes. The second aspect is the fact that the retailer is either locally-based or supports the local community where it has its stores. In other words the retailer must be an integral part of the community in which it has its stores. By this we don't mean regular donations to local charities but rather the retailer playing a key role in the community. Lastly, the locally-grown and local-retailer concepts must be marketed and communicated on an ongoing basis by the retailer. The idea being for the retailer to become synonymous with the community.

Our last post-organic concept is "eco-retailing" or becoming a real "green grocer." This is a comprehensive concept which involves everything a company does as a retailer. The products it merchandises and sells, how it designs it stores, the store's environmental practices and behavior, how the retailer interacts with and interfaces with its community environmentally and more. In other words the true "green grocer" is the community leader in "eco-retailing," embracing all aspects of positive environmentalism. The retailer sets an example for its shoppers and the community when it comes to positive environmental behavior.

These three concepts taken together make up our "post organic niche" model for natural and independent retailers,as well as regional chains and multi-banner national chains looking for a point of difference.

Lets use an example to tie-in these three related concepts which together comprise our post organic model. We can envision a store banner called "Origins Foods," for example. "Origins" could be an independent natural foods store or supermarket or a banner of a regional chain operator or a national chain like Kroger or Safeway Stores. The "Origins Foods" store would be designed using state of the art "green" building standards and design. Water reuse, optimum energy efficiency, using recycled materials, solar and wind power and the like would be the norm. "Origins" would be the most eco-friendly retail store built to date. This isn't far-fetched by the way. Both Mark's & Spencer and Tesco in the UK are in the process of building similar "eco-friendly" stores.

All of the products merchandised in "Origins" would have electronic shelf tags which describe where each food product came from--its origins, terroir and geography of flavor. This would be the case whether the product was locally-grown, nationally-grown or imported. The tags would provide this origin/terroir information along with nutritional information and of course the product's price. Again this isn't far-fetched. The technology to do this is already here in a basic way and should be completely available in a couple years. In fact Tesco in the UK is working on just such an electronic shelf tag that would also provide a food product's "carbon profile" allowing shoppers to judge the product's relative carbon footprint right at the point-of-purchase.

Lastly, "Origins Foods" would not be just a retail store but rather a seamless part of the community. The retailer would buy all the locally-grown products it could. It would merchandise them prominently and highlight the local origins. It would also support local growers with low-interest loans and free marketing support. Local-growers would be "special friends" of "Origins Foods" if you will--and integral and important part of the of the team.

"Origins" also would be a community center of sorts. The store would have a multi-purpose room attached to the store where community groups can meet for no charge. The store would use its "eco-friendly", green store as a community showcase to help with environmental education. Local non-profit groups would always receive a significant discount on anything they purchase at the stores for their groups. "Origins Foods" team members would be encouraged to involve themselves in the community, even getting cash bonuses and extra time off perhaps for doing so.

"Origins Foods" would do these and many other community initiatives in order to be a real part of the community it serves. In return residents would begin to think about shopping local in the same way we are seeing the concept of buying locally-grown begin to take off in the U.S.

The overall retail philosophy of "post-organic" "Origins Foods" would be summed up in its mission statement: "We are your local, healthy, tasty and natural community grocer. We buy the food we sell to you like we do for our own family. We are your family store."

In other words by combining food origins, terroir and the geography of flavor with "eco-retailing" and local and community support in a real and significant way, natural foods retailers, upscale independent supermarket retailers, (even regional chains and multi-banner national chains looking for a point of differentiation and purposeful niche), can create a "post organics paradigm" that we believe can be lucrative and profitable while at the same time serving the environment and the community as a whole.

Learn more about what retailers and others are doing that make our "post-organic model" look like a potential winner by reading the articles linked below:

>UK retail chain Mark & Spencer has set a corporate goal of being a "carbon neutral" retailer. One way the chain is doing this is the development of "eco-stores," which are stores built using the strictest green building methods. The first Marks & Spencer "eco-stores" are opening in Scotland next month. You can learn more about UK-based retailer Marks & Spencer's new "eco-store" building initiatives here.

>Pharmaca Integrated Pharmacy is reinventing the drug store by combining "eco-design" with organic products, high levels of service, community outreach principals and other creative concepts. You can learn more about the small but growing chain here.

>Natural~Specialty Foods Memo's Talking Points Memo isn't the only one who believes the organics niche is coming to a close for natural foods and niche supermarket retailers. Seattle Post-Intelligencer business columnist Bill Virgin shares our opinion. You can read a recent column he wrote in the paper's business section here.

>Natural-Specialty Foods memo has written extensively about "locally grown" and "buy local" initiatives. Please check our archives. Additionally, this recent article from the Washington Post discusses how grocers and restaurant owners are partnering with local growers to buy locally grown foods and promote locally grown initiatives. Click here for the story. This recent article from the Chicago Tribune also talks about "eating local" and community with the added twist of having to negotiate the seasonal weather and growing changes of the Midwest. You can read it here.

Lastly, for an interesting view of how the global economy is making the world a "smaller" place, and how the traditional Japanese food style of Sushi has played a part in globalization, we suggest this review of the book "The Sushi Economy: Globalization and the Making of a Modern Delicacy." The book's author is Sasha Issenberg. The review is from the publication Knowledge@Wharton, a publication of the University of Pennsylvania Wharton School of Business. You can read the review here. We see the book as a tale of globalization but also of the need for community and localization. Our "post organic niche" model fits into this global yet local "Sushi Economy."

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