Tuesday, December 9, 2008

Organics Category Memo: Wither Organics? Organic Food & Grocery Category Sales Down; But Double-Digit Growth Still Possible With Mass Market Lift

Category Sales Analysis: United States

Natural~Specialty Foods Memo has been arguing since late last year (we now officially know the U.S. went into economic recession in December 2007) that sales or organic food and grocery products in the U.S. has been decreasing overall for about one year, due primarily to the bad economy. The U.S. economy has been going downhill for far longer than September of this year, when the financial crisis suddenly appeared in the headlines, after all.

Now, new research data from market research firm NPD Group is demonstrating we've been correct all along, including most recently.

In a recent research report, NPD Group, which tracks sales in the organic food and grocery sector closely, said the number of U.S. consumers who reported buying organic products fell 4% in August of this year, compared with a year earlier. While more than one in five consumers surveyed in the latest figures available from NPD purchased organic products, the August 2008 data represented the first customer losses for the sector since February 2006 - a decline that we expect to accelerate in the months ahead, the research form says.

Since we agree with nearly every independent economist, the U.S. Federal Government Economic Research Service and President-elect Barack Obama, all who say the current recession is going to get worse before it gets better, and that the recession will likely linger throughout 2009, we predict sales of organic food and grocery items will decline even further throughout 2009 because cash-strapped consumers will be forced to trade down and buy less expensive conventionally-produced products, as well as buying fewer quantities of organic products overall. We are far from alone in this analysis. Many in the industry agree.

Organic category sales - not including store brands or bulk sales - were forecast to grow by 14 percent in 2008, compared with increases of 16 percent in 2007, 22 percent in 2006 and 21 percent in 2005, according to market research firm Mintel International. We think the 2008 forecast is probably off by about 4-5%, meaning overall organic category growth is more likely in the 10% range for 2008.

A July 2008 survey by Mintel International, based in Chicago, Illinois, found that among customers who reported buying organic products, 56 percent had household incomes of more than $100,000, according to Marcia Mogelonsky, a senior research analyst for the firm. Thirty-six percent had incomes of less than $25,000.

It's this 36%, those making under $25,000 annually, that in our analysis have dramatically cut back and are even eliminating purchases of organic food and grocery products completely, unless the items are super-discount priced.

However, our analysis also is that those in the higher income segment, the 56% of consumers making $100,000 or more, also are cutting back on the amount of organic category items they are purchasing in these bad economic times.

After all, for a family of say four, $100,000 a year doesn't constitute wealthy, especially when family's are seeing the price of all food rise, their housing values sink like a dead weight, and their 401-K retirement plans drop in value by high double-digit percentages.

We've also written -- both in relation to changing consumer shopping behavior in general and specifically in relation to why we believe the U.S. Federal Trade Commission's (FTC) argument that Whole Foods Market, Inc. holds a monopoly in the organic products retailing segment in numerous U.S. markets is folly -- that where U.S. consumers are buying organic category products is shifting in part.

We've observed a shift from shoppers buying the majority of organic food and grocery products at natural foods retailers like Whole Foods Market, Inc. to seeing a greater "cherry picking" of category items, ranging from shopping dollar stores and discounters like Wal-Mart, Costco and Target, to supermarket chains like Kroger and Safeway Stores, Inc., among other retail outlets and classes of trade, in addition to still shopping Whole Foods and other natural foods class of trade retailers, but buying less at those stores.

This shift is most pronounced in our analysis in the packaged goods segment, where a package of organic Annie's Macaroni and Cheese or a can of Health Valley Organic Chicken Broth is the same product at Whole Foods or Wal-Mart, but might be lower priced at Wal-Mart or the supermarket.

Consumers also are buying more supermarket and discount format (Wal-mart, Target, Costco)store branded organic packaged goods items, such as Safeway's O' Organics brand and the store brand organics offered by supermarket chains like Supervalu and Kroger, as well as the many store brands offered for discount prices by regional supermarket chains throughout the U.S.

We've received numerous e-mails from consumers who read the Blog telling us just this. We've also talked to scores of consumers throughout the U.S. who tell us they are shopping around much more for organic products rather than buying the items at Whole Foods and other natural foods stores exclusively or even primarily.

Wal-Mart, Target and Costco have all reported increased sales of store brand and manufacturer brand organic food and grocery products this year. Even online mega-retailer Amazon.com has reported seeing increased sales of the organic products it sells online.

Supermarket chain buyers also report significant sales increases in the organics segment across the board.

The good news is this means consumers are still buying organics, albeit not as much as in the past. But it also is bad news for retailers like Whole Foods, which is why the natural foods grocer has been discounting organic products across all categories in its stores.

Ironically, the U.S. Federal Trade Commission (FTC) is attempting to overturn the Whole Foods-Wild Oats merger at the very same time Whole Foods is losing organic category share to discounters like Wal-Mart, Target and Costco, as well as to supermarkets, particularly to their store brand organic items.

We believe the core organic food and grocery consumer will continue to buy organic (but less of it) in this severe economic recession. However, we argue even the core organic consumer is and will continue to do two things: (1) cut back on his or her volume of organic category purchases and (2) switch or trade-down within the organics category more frequently, for example buying more budget-oriented organic products such as organic chicken instead of organic steak and organic mac & cheese instead of more expensive organic packaged goods and the like.

Some evidence of this phenomenon is that Napa, California-based Annie's, which makes budget-oriented organic packaged goods like its popular macaroni & cheese and pasta lines, are doing well despite the economic recession, for example.

Annie's 2008 profits are up about 30% from last year, and CEO John Foraker recently commented: "Our business has been getting stronger as the economy is getting weaker," attributing it to the more budget-oriented of the organic brands it markets. He added a cautious note though, saying: "It doesn't mean we're immune if things continue to get worse."

Hain-Celestial Foods, which has organic brands across a wide spectrum of categories, also is doing well despite the recession. The company, which owns the Health Valley, Hain, Celestial Seasonings and Arrowhead Mills brands, along with dozens more, reported a $7 million profit on sales growth of 22% for the quarter ended September 22, 2008.

Hain-Celestial said part of its growth was attributed to the fact it holds a very diverse portfolio of brands, including many in the budget segment of the organics category. This fact has helped it in the current economic downturn. The retailer also said it has been seeing somewhat of a consumer flight away from more premium-type organic food and grocery products to more reasonably priced goods.

Hain-Celestial CEO Irwin Simon told cable business news channel CNBC ta couple days before the Thanksgiving holiday that increased distribution of the company's brands into supermarkets and discount stores like Wal-Mart over the last year was part of the reason for its increased sales growth and profits. Simon told CNBC news anchor Erin Burnett, who hosts the program "Street Signs," that the company has seen increased sales in these channels of retail distribution since early this year, attributing the increase to a shift by many consumers way from Whole Foods and other natural foods class of trade retailers in part to the discounters and supermarkets.

Simon's comments also tend to prove our analysis that such a class of trade shift is happening in part among U.S. organic food and grocery category shoppers. We aren't quantifying the shift, that is either small or huge. But it is happening.

We see continued growth in the organics category. But we see less growth in 2009 than is predicted. We also see a continued trading down by consumers within the category and an increase in the shopping for organic food and grocery products in alternative retail channels.

The Organic Trade Association (OTC) forecasts sales of organic foods will rise by 18 percent a year, on average, through 2010. The association expects its customer base to grow on the assumption that prices will drop and mainstream retailers will stock a wider variety of products.

We agree in part with the OTC's forecast, particularly that prices on organic products will drop and that distribution will increase in the supermarket and discount store retail channels.

We do however think the 18% growth forecast is too optimistic. Out projection, at least for 2009-2010 is more like a 12-14% growth rate, which still is strong, especially considering the rotten economy.

In addition to increased distribution in the mass market channels and the decreased consumer demand forcing both suppliers and retailers to lower prices like Whole Foods market is doing, we also are observing an increased promotional emphasis on the part of organic category manufacturers and marketers.

In order to stem the organic category and brand sales decline, numerous company's, including Hain-Celestial, Annie's, Stonyfield Farms, Earthbound Farms and others, are increasing their promotional and advertising activity. The companies are offering deeper discounts to retailers, issuing more coupons and launching advertising campaigns.

For example, Annie's recently launched a magazine advertising campaign for its brands, and Hain-Celestial has been partnering with retailers much more, offering store-specific promotions and other activities.

Stonyfield Farms recently offered FSI's (and if offering regular coupons online) for its organic dairy products in numerous U.S. markets, and Earthbound Farms has stepped up its use of coupons, as well as increasing the "cents off" value of the coupons it distributes via FSI's.

Meanwhile, part of the shift in shoppers buying more organic category products at mass merchandisers and supermarkets has to do with the aggressive store brand organics programs many of these retailers are conducting.

For example, Safeway Stores, Inc. continues to expand its O' Organics store brand. It's currently estimated sales of the brand in the U.S. are now about $500 million annually. Safeway is in the process of marketing the O' Organics brand to other retailers in the U.S. and globally, taking it from a store brand to a national and international organic food and grocery brand.

Wal-Mart also continues to expand its own private label organics brands and to carry more manufacturers' brands in its stores. In both its Supercenters and Sam's Club stores, Wal-Mart is offering and selling more organic food and grocery products. And because in the current recession Wal-Mart stores are experiencing increased customers counts, including among higher income consumer segments, many more shoppers are discovering and buying organics at Wal-Mart.

Kroger Co., Target and Costco have all increased the number of private label organic products they produce and sell in their stores as well, as have other supermarket chains throughout the U.S. Earlier this year Kroger lowered the everyday prices on its organic food and grocery store brands by 10-20% across all categories. It's CEO says the giant supermarket chain wants to be the organics' retailer "to the masses."

In large part its this increased mass market channel distribution, both of store brands and manufacturer's brands, that will keep the organic category sales growth growing over the next few years.

However, with organics as with conventional food and grocery products, there is only so much share of consumer stomach. That means this mass market growth has to come at the expense of sales, at least for many organics categories, in the natural foods class of trade retail channel. This includes at Whole Foods Market stores, in our analysis.

This is why Whole Foods will continue to lower prices in its stores and continue its "Whole Deals" promotional program. It has to or it will lose share in the organics segment, which is the natural grocery chain's bread and butter.

It's also why Whole Foods Market, Inc., despite the FTC's argument, isn't monopolistic post the Wild Oats' acquisition. There's just too much alternative channel, and in channel as well (Sunflower Farmers Market, Sprouts, Trader Joe's), competition in the multi-format U.S. food and grocery retailing world to make it true.


Anonymous said...

In the Guardian UK,

"Supermarkets? No, thanks
Local food-buying cooperatives, which cut out the middlemen between producers and consumers, are taking the country by storm. But how do they work, and how do you set one up? Tom Moggach reports"


-Anonymous Seattle

Anonymous said...

"Store Brands Lift Grocers in Troubled Times"

The NYTimes weighs in on merchandising and brand in these interesting days.