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.

Retail Memo: Customer-Owned Retail Food Cooperative Stores Gaining New Popularity in Reccessionary America

Seattle, Washington USA-based PCC Natural Markets operates 10 modern cooperative natural foods supermarkets in the Seattle Metropolitan region. The photo collage above shows the exterior and interior of one of those stores, [Photo credit: PCC Natural Markets.]

Food retailing and consumers in trying economic times

The retail food cooperative movement in the United States was brought across the Atlantic, like many other things, from Europe, where beginning after the second World War the cooperative, customer-owned food stores started to blossom in the United Kingdom, France, Germany and other parts of Europe.

In the U.S. retail food cooperative stores began to blossom in the 1960's and early 1970's as part of the counter-cultural movement, when mostly younger consumers began forming cooperatives as a means to both save money and have greater political control over their food purchases, as well as an attempt to create a greater sense of community for themselves

The retail cooperatives sprung up rapidly from California, the Pacific Northwest and Colorado in the west, to the Midwest and eastern USA.

There were some retail food coops prior to the 1960's in the U.S., but they were mostly informal operations.

The 1960's versions were in many ways the first U.S. natural foods markets, and unlike the American retail food cooperatives before them put an emphasis on healthy and natural food products, as well as collective customer-worker relationships. These coops thrived in the 1970's and into the early 1980's

Beginning in about the mid-1980's, retail food cooperatives began to lose business in the U.S. (along with closings like the once very popular multi-store Berkeley, California food coop), to a large degree because new, modern for-profit natural foods markets were springing up throughout the land. These stores included Whole Foods Market, Wild Oats, Alfalfa's and many modern, independent natural foods stores. Additionally, numerous independent grocery stores throughout the U.S. started selling a decent selection of natural, organic and healthy foods in the 1980's, which also led to the decline of the cooperatives.

Many retail coop stores continued to thrive in the 1980's and beyond though, including the popular Davis Food Co-Op in Davis, California near Sacramento and the Sacramento Natural Foods Co-Op in Sacramento, which is building a second store; the four-store Bloomingfoods market coop in Indiana; and the 10-store PCC Natural Markets coop chain in Washington state, for example, along with many others in the west, Midwest, south, Mid-Atlantic and eastern U.S. The movement was much smaller however -- and the retail cooperatives that tended to survive and thrive were those that adopted a more modern natural foods store retailing model, such as the Pacific Northwest's PCC and others like it.

If you set foot in many of these thriving retail food cooperative stores today, you would have no idea they aren't for-profit natural and organic food stores. The look is modern and even upscale in many cases. The departments are the same, and the brands no different than those found in Whole Foods Market stores. Of course, few are as upscale or elaborate as Whole Foods, which is a positive for the coops today.

The big difference is that the retail coops are owned by members who buy shares in the cooperative as well as work in the stores for no pay in return for being able to purchase food and groceries at a substantial discount, often at the wholesale cost or slightly above.

It is this model, savings and value, that retail cooperatives were created to serve primarily after all. Pay a small annual fee of say a couple hundred dollars and/or volunteer a few hours a week working in the store, and in return receive a substantial discount on all the food and groceries you buy at the store -- with all the profits going back into the operations. The coops also are run by the owner-employees-customers, and generally feature a board of directors that makes policy, with the "owners" voting on major initiatives and policy changes.

The retail cooperative model is ripe for bad economic times such as the U.S. and most of the world finds itself in. And it's no surprise that as a result the retail food coop movement is gaining fast in a new popularity. After all, for people aged 18 -to- 40 retail food cooperatives are really a completely new thing in many ways. They were either small children or not yet born in the 1960's and 1970's. And for those older than say 50 who remember retail cooperative stores, or belonged to one while attending college for example (college towns were popular coop towns), its can be for them a perfect money-saving solution to the current recession, as well as a way to increase their sense of community in these difficult times.

One of the regions in the U.S. where coops are gaining popularity and members, as well as expanding, is in New York.

A story in yesterday's New York Daily News, "Shoppers work for food as co-ops surge," describes the growing popularity of a number of retail food cooperative stores in the New York region.

"There's been a steady growth in co-ops, with a spurt in the past few years,"Barry Smith, manager of the Flatbush (New York City) Food Co-Op, which opened in 1976 and requires its members to invest $200 - no labor involved, says in the New York Daily News story. "We're definitely in an upswing," Smith says.

Like we said, retail food cooperatives have never went away -- but they are on an upswing throughout the U.S.

For example, the National Cooperative Grocers Association, which operates 109 co-ops in 32 states in the U.S., recently reported annual sales of more than $945 million. That would be strong annual sales for a for-profit natural foods store chain of 109 stores. Rather impressive. The association is setting a goal to achieve sales of $3 billion annually in its stores by 2020.

In New York City's South Bronx, five New Yorkers started the South Bronx Food Co-Op last year. Now there are 120 members and the store recently expanded its hours to five days a week from just one, according to the Daily News' story.

"I'm shocked to see how people have gotten into it,"says South Bronx Food Co-Op Director Zena Nelson. "People want to be part of something. And we're saving money."

That wanting to be a part of something is what we mean by the political and community-based motivation, along with the economic, that's always been a central part of the retail food coop movement in the U.S., as well as in Europe.

We believe in addition to the current recession, the surge in the food coop movement in the U.S. is tied to the recent activism evidenced in the Barack Obama Presidential campaign in which literally millions of Americans of all ages, and particularly young people, got out in their communities and organized in a grass roots way for President-elect Obama's victory. The Obama campaign and the retail food cooperative movement both have the grass roots or "bottom up" organizational concepts very much in common.

Participating in a retail food cooperative store, particularly if one volunteers as well as just pays a membership fee, is a form of community. And saving money is part of that benefit. In fact, sometimes bad economic conditions serve as a catalyst for such change. Motivated by saving money consumers try something new, in this case joining retail food cooperatives. Once a member, they find additional benefits such as a greater sense of community and greater involvement with the food they consume in the process.

For example, read what Jamie Principe, an architect for a Manhattan design firm says about her "second job" as a shift manager at the Park Slope retail food coop store in the city neighborhood of the same name as the store in the Daily News' story: "I think it's terrific,"says the 38-year-old mother of two, who says she saves her family about 30% on groceries. 'The co-op even provides child care while she works.'

One can tell in her quote that she loves the economic benefit (the savings of 30% on her groceries) of being involved with the Park Slope retail coop store. But you can also tell she loves the sense of community it brings her. Otherwise why would a hard working, well paid architect work a "second job" as a shift manager at the store?

Here's the second part of Jamie Principe's quote from the story: "It's being part of a community," she said. "It's kind of a back to basics."

Architect Principe isn't alone in her views: 'The Park Slope Food Co-Op, which opened in 1973, said its membership has grown to 14,7000 - including a 10% spike in the last year alone - from 5,700 in 2001, according to the story in the Daily News'. Most for-profit supermarkets and natural foods stores would be very pleased with a 10% spike in a one year period of time.

Read the full story, "Shoppers work for food as co-ops surge," by New York Daily News staff writer Stephanie Gaskell here.

The growing retail food cooperative movement is giving that sign, "Will Work For Food," a whole new meaning in these trying economic times in the U.S.

We believe the movement will continue to grow. Not just because of the savings on food and groceries it offers consumers but also because of the sense of community it brings, as described by Jamie Principe.

There are changes brewing in America around the sense of and definition of community. As we mentioned, bad economic times usually serve as a catalyst for change. These can be good or bad changes.

But often they are positive ones because generally the things that brought about the bad economic times were negative, such as greed and excess. A greater sense of community, along with the financial need to save money, often has been the response to periods of bad economic times in America. And often these behavioral changes last long after the bad economy goes away.

Green Memo: 'His Royal Greenness' Britain's Prince Charles Reveals His Prized 38-Year Old Austin Martin Now Runs on Fuel Made From Wine and Cheese

Britain's Prince Charles, who in addition to conducting his regular duties as the male head of the Royal Family also is the founder of the fast-growing United Kingdom-based Duchy Originals premium, organic foods company, revealed yesterday he has converted his prized 1970 Austin Martin DB5 motor car (pictured above) to run on biofuel, produced from surplus white wine and cheese.

The Austin Martin was a 21rst birthday present to the UK's leading environmentalist from the Queen Mum.

The fuel for Prince Charles 38-year old Austin Martin DB5 comes from Greenfuels in Gloucestershire, and is made from surplus white wine from a vineyard in Wiltshire, and whey obtained from local cheesemakers.

Some time ago the Prince was telling friends he desired to run his pristine Austin Martin DB5 on biofuel, but said he wondered if doing so was possible since the car is 38 years old.

Austin Martin, the producers of the car, heard "His Royal Greenness" wanted to be able to run the car on biofuels, so they contacted Greenfuels for help. The alternative fuel company hatched a scheme in which it obtained 8,000 litres of surplus UK-produced white wine from a vineyard in Wiltshire, which they purchased for only ~1-p (British pound) per-litre.

Greenfuels then ran the surplus white wine through their distillery. By boiling off the wine's 11% alcohol content, the green fuel firm said it ended up with hundreds of gallons of 99.8% pure ethanol. They then topped the near 100% pure ethanol off with fermented whey, a by-product of cheese making, which they obtained from local cheesemakers.

Once the wine and cheese-based fuel was produced, auto company Austin Martin says it merely gave the carburetors on the Prince's Austin Martin DB5 a special tune up, which allowed more fuel to get into the engine, and "His Royal Greenness" was good to go in his wine and cheese biofuel-powered car. The biofuel is a mix of 85% ethanol and 15% petrol.

By converting his prized Austin Martin, which the Prince says he only drives on special occasions, to biofuels, the Prince, organic gentleman farmer, and organic foods industry pioneer, continues to burnish his green credentials as not only the UK's top environmentalist, but most likely the greenest royal in the world.

Prince Charles operates his Duchy Originals premium organic food company, 100% of the profits of which he gives to various charities, on the Duchy of Cornwell Estate. The estate's business includes organic farming, the premium, organic foods company and a "green" garden tools business (which is part of Duchy Originals.)

The company is doing very well indeed. The profits from the Duchy of Cornwell Estate, the majority which comes from the Duchy Originals premium organic food company product sales, increased by 7% in the last fiscal year, to ~16.3 million-p (British pounds).

Duchy Originals continues to grow, both in distribution and by the regular addition of new products, including one of the latest new lines, ready-to-eat gourmet sandwiches made using all organic ingredients. The Prince recently hired a new CEO, who comes from the UK-based food and beverage giant Cadbury PLC, who plans to eliminate some of the less popular of the now 300 items in the Duchy Originals line and grow the company by focusing on top performers, newer niche products, and increased international distribution.

Numerous Duchy Originals food and grocery products are gaining increased distribution in upscale supermarkets, specialty stores and natural foods markets in the U.S., as well as throughout Europe, India and elsewhere in the world.

The Prince uses all UK-produced organic ingredients in the Duchy Original brand food products, which range from packaged biscuits, snacks, fresh breads and organic fresh milk, to fresh meats, condiments, preserves, fresh soups, deserts and more. Click here for a complete list of the Duchy Originals products, including the body care and garden tools lines.

The Prince, who is a major advocate of sustainable and organic farming in the UK and globally, also is a major supporters of Britain's farmers, along with being a chief spokesperson for buying locally-produced foods in the nation.

Since the surplus wine and whey used to make the biofuel are both produced in the UK, as well as the fuel being distilled locally, "His Royal Greenness" not only is upping his already solid green credentials by converting the Austin Martin, which was once British Secret Service Agent James Bond's (Agent 007), car of choice, to run on the biofuel, the Prince also is further burnishing his "local" credentials at the same time. It's hard to get much "greener" than that.

Supply-Side Memo: Food Industry Giant Campbell's is Making a Big 'Locally-Grown' Push as Part of a Tomato Processing Plant Expansion in California

Natural~Specialty Foods Memo learned at the recently concluded FMI (Food Marketing Institute) annual convention in Las Vegas, Nevada, that food industry giant Campbell Co., marketers of both conventional and organic food brands like Campbell's Soup, Prego pasta sauce (both conventional and organic), V-8 vegetable juice and V-8 juice drinks (conventional and organic), Pace Salsa (also conventional and organic) and numerous other brands, plans to increase its use of locally-grown California produce as part of a $23 million expansion and upgrading to its tomato processing plant in Dixon, California USA, near Sacramento.

The company's Dixon, California tomato processing plant is located in an agricultural and tomato processing-rich valley about 15 miles from Sacramento and about 50 miles from the San Francisco Bay Area.

The plant processes tomatoes and vegetables for Campbell's flagship soups, its sauces, salsa varieties and V-8 vegetable juice, V-8 V-Fusion and V-8 Splash vegetable drinks.

The $23 million expansion and remodeling of the plant will increase its size, add new, state of the art equipment, and boost overall plant production by about 15%.

The Dixon plant in Solano County in California's Sacramento Valley agricultural region is Campbell's largest tomato processing plant in the U.S. The plant was built in 1975, according to the company, and currently employees close to 200 people.

Campbell's has become an increasingly bigger player in the organic foods sector, with introductions of its organic versions of its Campbell's tomato juice, V-8 vegetable juice, Prego pasta sauce and Pace salsa, along with a few other brands and products.

As part of the plant's expansion, Campbell's Anthony Sanzio says the company will be buying more organic vegetables to process at the facility for these organic food and beverage product brands and lines.

Campbell's has plans to line-extend its current organic product offerings and to create new products, according to Sanzio.

The locally-grown angle

Because the Dixon plant is located in a tomato and vegetable-growing region, as well as being very close to the heartland of California agriculture in the San Joaquin Valley, along with near the central coastal region where numerous vegetables also are grown, Campbell's sees an opportunity to add the "local" angle in a big way to both the conventional and organic produce it buys to process at the facility for its soup, juice, beverage, pasta sauce and salsa brands and products.

The food company correctly sees numerous similarities between the organic foods and local foods consumer, and wants to play that fact up at least in California by increasing the capacity of the Dixon plant so that it can process, and thus allow Campbell's to buy, more locally-grown conventional and organic produce. IT also says it wants to further support local farmers.

As part of its plant expansion plan and locally-grown foods procurement emphasis, Campbell's Sazio says the company will increase agricultural production with farmers it contracts with in Solano County, as well as in neighboring Yolo and Sacramento counties, along with those in nearby Colusa, San Joaquin, Contra Costa, Sutter and Monterey counties.

This expansion of vegetable production includes organic as well as conventionally-grown produce.

Local agricultural industry officials and observers say the Campbell's Dixon plant expansion will be good for both local conventional and organic farmers.

For example, even though Solano County has urbanized considerably over the last two decades, agriculture, including tomato growing and processing, remains a significant industry in the area. Last year's tomato crop value in the county for example was about $23 million. Other double digit (in millions) crops in the county include walnuts and almonds and alfalfa, along with a few others. Numerous other fruit and vegetable crops are grown throughout the region as well, including an increasing amount and variety of organic crops.

Michael Amman, who heads up the Solano County Economic Development Corp., a nonprofit entity, says Campbell's Dixon plant expansion will be a big boost for local agricultural, locally-grown foods and local farmers, many of whom are smaller family farmers.

He says a major benefit will be that the local farmers will be able to get longer-term contracts with Campbell's because of the plant's increased capacity and emphasis on organic and locally-produced produce. In other words, Campbell's will put its emphasis on vegetables grown by local farmers even if they can buy produce for less money from farther away. As a result, the food company will need to sign longer contracts with the local farmers so it can ensure enough supply of the local produce to meet its needs. This is particularly true in the case of organic produce.

Campbell's says it may flag (on the labels) some of its conventional and organic food products produced at the Dixon plant with all locally-grown produce as "local" or "Made with California Produce," or something similar. However, the food giant isn't sure of that since what's local in California isn't local in Chicago or New York. In order to flag the products as local on the labels, the plant would have to produce certain runs just for California, after all.

However, Campbell's marketing and sales teams will be able to conduct "local foods" promotions with supermarkets in the region, including the Bay Area, with those products produced at the Dixon plant. (Shelf talkers identifying the "locally-grown" aspect of the products would be a simple and cheap way to promote the local angle of the products in-store.)

The important local foods aspect of Campbell's Dixon, California plant expansion and emphasis on using produce produced by local farmers though is the huge boost it could give to the region specifically and to local foods procurement in general. After all, many food processing plants, even in California, truck-in produce from a long way away rather than use that produced locally because they can obtain it for a cheaper cost.

As we've suggested numerous times on Natural~Specialty Foods Memo, we see the "local foods" movement growing in size and popularity to equal that of the organic foods movement.

Local is a bit harder to define than organic? Is it the strict locavore definition of food from no farther than 100 miles from where a person lives.? If so, why not 200 miles? That's still local to many, and it makes a bit difference in terms of increasing the variety and amount of "local foods." "Local" does have some wiggle room, in other words.

But, when it comes to locally-produced, most of us basically know it when we see it. If you live in Los Angeles, even though the city is about 400 miles from Sacramento, produce or food products bought in LA and produced completely in Sacramento are pretty "local," even though it doesn't meet the 100-mile locavore definition.

In the case of produce used for processing like at the Campbell's plant in Dixon, the important fact is that local farmers, ranging from those just down the street from the facility, to others as far as 150 -to- 200 miles away (Monterey County), are providing the vegetables.

This practice will be using locally-produced crops, which supports local communities, and offers those consumers who live nearby an opportunity to buy packaged food and beverage products at the supermarket which in turn will benefit their local economies if they do so.

Doing so, in a widespread way, is essentially a major aspect of the local foods' movement philosophy, it just pertains to processed food products rather than fresh ones. We think Campbell's is on to something in Dixon.

Supply-Side Memo: A 'Bare-Naked' Success Story

Bryndon Synnott and Kelly Flately outside Stew Leonards' in Norwalk, Connecticut. (Photo: courtesy Bare Naked, Inc.)

Early one morning about five years ago, famed independent grocer Stew Leonard Jr., founder and president of the Stew Leonard's chain of superstores, came upon two young people--Brendan Synnott and Kelly Flately--waiting for him in the lobby of his Stew Leonard's Dairy store in Norwalk, Connecticut. The pair were holding a serving tray, which contained their Bare Naked brand granola, milk and a banana. They were waiting in the lobby to catch Leonard and pitch him on their homemade granola.

Leonard tasted the granola and loved it, talked briefly to the two young entrepreneurs, and ordered 20 cases of the hand-baked granola created by Kelly Flately for his store.

As mentioned, that was just five years ago. Late last year, Synnott and Flately sold their company, Bare Naked, to the Kashi division of food industry giant Kellogg Company in a $122 million dollar deal that also included Kellogg's purchase of natural foods company Gardenburger, which shared an investor with Bare Naked. Bare Naked is the number 1 selling granola brand in natural foods stores, and the number 2 selling brand in supermarkets.

In an article in today's New York Times, Stew Leonard says when he heard the two granola empire builders had sold Bare Naked to Kellogg's, and made bank on the deal, he was thrilled.

Just five years ago when the pair of struggling entrepreneurs got that 20 case order from Mr. Leonard, they had to spend the entire night baking enough granola just to fill the order. Just five years later, when they sold Bare Naked to Kellogg's last year, the company had sales of $65 million, and was growing by double-digits annually.

As the Times' piece explains, the company became a local success story in Fairfield County, Connecticut. This is do in large part to the way the pair marketed their granola products: lots of personal product sampling in local grocery stores, word of mouth advertising, community-event support, and using humor to create their brand, first among the locals and then nationally.

That humorous, fun approach has been key to the company's success. For example, there's a huge sign outside their corporate headquarters building in Norwalk, that reads: "Do You Get Bear Naked?" Additionally, their website is packed with puns on the "Bare Naked" name, such as "Get Bear Naked" and "Live Bear Naked." They also sell "Bare Naked Gear" like 100% percent organic cotton "Live Bear Naked" Tee-Shirts and similar themed items like hats and sweatshirts.

By using local and community marketing techniques, as well as having a quality product, Bare Naked has built up much support in the towns where they make their granola and have their headquarters.

Of course, with the sale to Kellogg's there's a bittersweet taste in the mouth's of many locals (and it isn't from eating Bare Naked Granola), who've followed the pair's story and route to success. However, any bittersweet feelings about losing the company headquarters and the 90 jobs that go with it (Kellogg's plans to close the production facility), pale compared to the abundance of good will expressed locally for the two and their success.

For Kelley Flately, who created the granola, and Brendan Synnott, the marketing and sales chief who gained its distribution, there's some uncertainty as to what the future will hold for both of them as well. Both are under contract with Kellogg's until February 1 as part of the buyout deal, according to the Times' story. After that, they're on their own.

We aren't worried about them though. They should have enough Kellogg's money to put a roof over their heads for a bit while they figure out their next venture. There are second acts for entrepreneurs, especially for those who aren't afraid to work hard and get "Bare Naked" in the process.

Read the New York Times story by Jan Ellen Spiegel here.

Food & Society Memo: The Poor Get Diabetes, the Rich Get Local and Organic

In an excerpt from his new book, Closing the Food Gap: Resetting the Table in the Land of Plenty, Mark Winne, a writer and the longtime director of the Hartford Food System in Hartford, Connecticut, analyzes and writes about what he says is a dangerous dietary split between those who have substantial economic means in the U.S. and those who don't.

Winne says the residents he worked with for 25 years in the low-income neighborhoods of Hartford knew all about organic and local fresh foods--and desired to have them--but were in the main unable to obtain the foods, not only for economic reasons, but because of logistical ones as well. Chief among these logistical or distribution reasons, is the lack of quality food stores in the inner-cities that offer healthy, fresh, organic and local foods at a reasonable price.

In his piece, Winne argues there are a variety of market-based and government-oriented public policy programs that could bring more fresh and healthy foods to poor people, especially those in the inner-city.

Further, he offers examples and potential solutions from his years running the Hartford Food System, and describes other innovative solutions to this serious problem being successfully implemented in places like Oakland, California, Massachusetts, and other places in the U.S.

Winnie's piece is thought-provoking, and offers some good solutions to this serious dietary problem faced by people living in America's inner cities (and rural regions as well).

The healthy "food gap" between America's haves and have-nots, as Winnie puts it, does continue to grow. Smart, creative and innovative solutions are needed to bridge this economic and social divide. These solutions also need to be provided in a partnership consisting of government, the private sector, non-profit groups, retailers and citizens.

We would also like to see America's food industry, especially retailers, work in partnership with food manufacturers, community groups and others to launch real, healthy food and shopping education programs in communities throughout the U.S., especially in the inner-cities and poor rural regions.

It's amazing how much money a person can save, and how much healthier they can eat, when they have knowledge. That knowledge needs to include a primer on how to shop economically: shopping weekly sales, the fact that "real" foods are cheaper than highly-processed ones, and other facts.

Home food preparation also needs to be a part of the classes. Scientific research has demonstrated that those people who cook and eat at home most often are far healthier than those who eat foods away from home most often. Cooking at home also is at least 50% cheaper overall than eating out regularly, even at fast food places.

Lastly--but far from least--there needs to be a nutritional element in these community-based classes. A primer on the basic food groups, differences between proteins, carbs and fats, and the importance of eating a balanced diet all need to be included.

These three elements--shopping economics, cooking at home, and diet and health--can be tied together easily in a series of community-based classes, and brought to community centers and churches throughout America's inner-cities and rural areas.

If done in a real, comprehensive way, and backed by both the private and public sectors, such classes--along with other private and public initiatives--will go a long way towards helping many people eat better, stay healthier, and live longer.

Read Winnie's piece, The Poor Get Diabetes, the Rich Get Local and Organic, here.

Prepared Foods Memo: A 'Prince' of an Organic Sandwich

Duchy Originals Does Organic Sandwiches

We're all familiar with Britain's Earl of Sandwich, that member of the Royal Family who the modern day sandwich is named after. Obviously, becoming the "father" of such an everyday foodstuff like the sandwich is quite an honor for a man, even among royals.

However, after all these centuries of having the honor of being the "sandwich king" of the royal lineage, the Earl is now being "out-royaled" on the sandwich front: None other than Prince Charles, heir to the current royal dynasty, has introduced a line of organic, premium, ready-to-eat sandwiches to his fast-growing Duchy Originals food empire.

The Prince of Wales' line of ready-to-eat, upscale and organic sandwiches will be introduced later this month at Waitrose Supermarkets, Britain's favorite upscale grocer. Waitrose, which currently has about 190 stores, will be the first retailer to sell the line, with other UK grocers and shops coming on a bit later.

the organic sandwiches, which with prices starting at $2.99 are priced for the common man and women, are handmade and contain all organic ingredients.

The organic sandwich varieties include: Cornish Brie (cheese) with vine-ripened tomatoes, cheddar cheese with a special relish, rare roast beef with various garnishes, and smoked mackerel with gooseberry. The mackerel is line-caught (and approved by the UK Marine Stewardship Council), cured in sea salt, smoked over oak and beechwood, and then roasted. A fresh gooseberry dressing serves as its primary garnish. (The mackerel is the only ingredient in the sandwiche line that's not organic. It can't be as it's wild and comes from the sea.)

The Duchy Originals' organic sandwiches contain no preservatives or artificial ingredients, in addition to using all organic ingredients, with the exception of the sea-caught mackerel. Additionally, the bread (called Bloomer loaves) for the sandwiches was created especially for the line. Premium organic condiments and garnishes are used in all the sandwiches.

Duchy Originals is in fast-growth and diversification modes

The launch of the organic sandwich line is part of Duchy Originals', and Prince Charles', plans to grow the natural, organic and sustainable food company significantly.

In July of last year the company introduced a line of organic fruit yogurts in the UK. Currently, there are three varieties of organic yogurt under the Duchy Originals brand: rhubarb and ginger, lemon curd (which has already won a number of awards for quality) and blackcurrant. The yogurt varieties contain 100% organic whole milk and organic fruits.

The increasingly diversified company currently has product lines in the following food or grocery categories: biscuits, bread and bakery, preserves, condiments, dressings, confections and chocolates, crisps, pastries/pies/flans, desserts, and soups/gravies.

Additionally, there's a dairy products line, which includes fresh milks and cheeses, in addition to the yogurts mentioned above. Duchy Originals also has a line of meats and poultry. The line features fresh hams, sausages, bacon and chicken. There's also a line of pate and smoked salmon.

The royal food firm also has an extensive line of beverages. These include mineral water, ciders, ales, herbal teas, refreshers and cordials, and sparkling wine.

Duchy Originals has also diversified into non-food products. Currently, the company markets an extensive line of health, beauty and body care items, and a garden tool line.

(You can view a listening of all the food and non-food products the company currently markets here. Just click on the "products" link when you get to the page.)

Prince Charles says the philosophy of the company embodies his commitment to what he refers to as "a virtuous circle of providing natural, high-quality organic and premium products, while helping to protect and sustain the countryside and wildlife." All of the company's profits go to charities.

In a week or so, British consumers will be able to support the Prince of Wales' environmental and charitable commitments an organic sandwich at a time. We think the Earl would be proud of the lad.

Friday Fishwrap

End-of-the week news, ideas, analysis and opinion

Food and beverage trends 2008: A Natural~Specialty year is on the way
Natural, organic, specialty, gourmet, premium, fresh, healthy, green and sustainable top the list

If the various market and consumer researchers, prognosticators and analysts (including us) are right, 2008 will be a natural~specialty year in terms of the top hot trends in food and beverage marketing and consumption in the U.S. and Western Europe.

For example, a just released report by market research firm Datamonitor predicts the following top ten food and beverage trends for 2008.

>Probiotics, healthy foods
>Natural and organic foods and beverages, especially for kids
>Fresh foods, especially premium quality prepared foods
>High-nutrient Superfruits
>Exotic foods, especially foods from Africa
>Specialty foods that promote sleep and stress relief
>Healthy and natural foods with "crunchy" and "crispy" taste profiles
>Bold, hot and spicy foods
>Increased use of caffeine in beverages and foods
>Green, "eco-friendly" foods, beverages and grocery products

You can read a detailed summary describing these top 10 food and beverage trends for 2008 here, along with examples of numerous food and beverage products in these categories introduced this year that Datamonitor has tracked, and which point to strong growth for next year. You also can read a short piece summarizing Datamonitor's top ten food and beverage trends for 2008 published yesterday in Beverage Daily here.

As the Datamonitor report shows, the top ten food and beverage trends for next year all center around the natural/organic, specialty/premium, healthy/environmental sector. As we suggest here often, these categories (an consumer movements) are related and have strong synergies between them They're also increasingly converging together.

For example, natural and organic foods consumers tend to also be "greener" consumers. They also focus more on healthy eating and are most likely to be early adapters to foods and beverages like probiotics and superfruits, for example. Additionally, there's a growing convergence between specialty and premium foods and natural/organic foods consumers--and marketing. These consumers share a concern for quality. More and more, quality in terms of food and beverage products is meaning all-natural or organic as well, in addition to the elimination of food additives, preservatives and artificial coloring.

This "healthy" convergence is demonstrated by an emphasis on the part of specialty foods manufacturers and retailers (store brands) to introduce more and more new products that have natural or organic attributes as well as being premium quality. By the same token, natural foods manufacturers and retailers are increasingly going premium with their new natural and organic food and beverage products.

In fact, a new study from market researcher Mintel says the top food and beverage trend for 2008 will be "getting the junk out of food and beverage products." In other words it's the elimination of preservatives, additives, artificial flavorings and colorings and other such ingredients in their existing products, as well as not putting them in new products introduced in the majority of cases that will be a key event in the food industry beginning next year. This isn't to say food and beverages with these artificial ingredients are going away anytime soon. Rather, Mintel says there will be a rapid decline in their use beginning in 2008.

This junk-free food and beverage movement has been picking up steam in the U.S. and Western Europe, and dovetails with the natural, organic, green and sustainable consumer movements. The definition of healthy is being expanded we believe to include not only what is in food but how and where it's grown, packaged and tastes. In other words, healthy not only means a healthy person, but a healthy environment as well. It's becoming an external as well as internal definition. You can read about the Mintel 2008 food and beverage trend study in more detail here.

As we mentioned above, taste is a key factor--and premium taste is one of the hottest trends for 2008, according to a new study from Packaged Facts and Trendwatching.com.

A new study from market research firm packaged facts says sales of specialty and gourmet foods are predicted to grow by a whopping 63% over the next five years. This consumer flight to premium quality foods is being driven by a number of factors, according to the researcher. These factors include consumers' becoming more sophisticated via travel and multiculturalism, retailers carrying expanded selections of specialty, gourmet and ethnic foods, and a convergence between specialty, natural and organic foods.

This growing consumer sophistication and the availabilty of a wide variety of specialty, gourmet and ethnic foods, not only in specialty stores and supermarkets, but in natural foods stores, mass merchandisers like Wal-Mart and Target, online, and even in drug stores, is growing the premium foods market to the point that Packaged Facts predicts it will grow to $96 billion annually in five years, compared to the categories current sales of $59 billion. (You can read more about the Packaged Facts' specialty and gourmet food and beverage report here.)

Packaged Facts isn't the only consumer research firm to predict this huge growth in the specialty, gourmet and premium food and beverage categories. (We use all three of these terms because each has certain distinctions. However, from a sales standpoint, they are one category.) Trendwatching.com, a consumer products trend analysis firm and website, is predicting 2008 will be the year for the "premiumization" of nearly everything and anything, including food, grocery and beverage products. By this, the firm means virtually no product category will escape having some sort of premium version.

"Premiumization" is one of the consumer research firm's top 8 trends for 2008, along with what it calls status spheres, snack culture, online oxygen, brand butlers, crowd mining, MIY (make it yourself) and eco-iconic. (you can read more about these seven other trends here.)

In terms of the food and beverage industries, "premiumization" means an increasing trading up by consumers to more premium-quality products. It also means food and beverage manufacturers, marketers and retailers will not only continue their current rapid pace of premium specialty and gourmet foods new product introductions, but will excellerate it even more.

Trendwatching.com also says we'll see niche "premiumization" in the food and beverage sectors. For example, limited addition super-premium food and beverage products like deserts and bottled waters, will be introduced in very upscale packaging and for a limited period of time.

As examples, they sight Evian's new, limited release Palace bottled water. Set to be introduced either at the end of this year or early in 2008, the water will only be available for sale at high-end bars and restaurants. The sleek bottle features a specially designed pouring top and comes with a stainless steel coaster. It will sell for between $15-$20 (USA) per bottle.

Other super-premium bottled waters include Bling H20. Bling water comes in a frosted glass-bottle with a cork that's embellished with crystals. The water is a much a personal accessory as it is a beverage. It's big with the Hollywood crowd, and was featured backstage at the MTV awards and the Emmy's this year.

If the first two bottled waters aren't premium enough for you, there's Tasmanian Rain. This utra-premium water comes from the pristine north coast of the Australian island of Tasmania. According to the bottlers, the water comes from a spot where the World Meteorological Organization records the world's purest air.

Beer also is getting "premiumization" treatment. This summer, Carlsburg launched its Carlsburg 900 in a limited number of bars in Stockholm, Sweden. The brew is made with refined virgin hops, selected crystal malt, and is triple filtered in a special process that ensures a pure, delicate taste, the brewer says. Carlsberg 900 also is priced at the premium end of the price range. A bottle costs about the same as a class of quality champagne.

Trendwatching.com also sights some premium foods as an example of niche categories that are undergoing the "premiumization" process. Chief among these are marshmallows. Dean & Delucca's gourmet Boule' Marshmallows come in such flavors as passion fruit, lemon chiffon, pure vanilla and rose petal. They retail for $28 a bag--and it's not a very big bag. Another gourmet foods maker, Pete's Gourmet, sells premium flavored and dipped marshmallows for $1 each. Dean & Delucca recently reported that in its stores and on its website the pricey gourmet marshmallows are selling out.

Honey's and chocolates are two other categories the consumer research firm says also are getting "premiumized" in a big way. Foods and beverages lead this "premiumization" trend, according to Trendwatching.com. Of course, we see this daily in nearly every food category in the supermarket. Retailers are aiding this trend by creating store brand specialty, gourmet and premium foods and pricing them more reasonably than manufacturer brands, thus expanding the market for these goods into the moderate income sector.

Fresh foods also are getting the "premiumization" treatment. Whether it's in-store fresh prepared foods at grocers like Whole Foods, Wegman's, Safeway Stores and others, or manufacturer-produced fresh and frozen entrees, the trend is towards premium quality. Tesco's entry into the U.S. market with it's Fresh & Easy Neighborhood Markets also is fueling the growth of fresh, prepared foods marketing and sales. The retailer is offering scores of fresh, prepared foods at its Fresh & Easy stores in California and Nevada (13 open so far). The grocer plans to have at least 200 stores open in the next two years, and all will offer extensive selections of premium prepared foods.

As we end 2007 and move into 2008, our analysis tells us the hot button trends and consumer movements will be: natural and organics. The categories will continue their rapid growth. However, we see retail prices on organics coming down at least 5% as retailers like Safeway, Kroger and others continue to expand and grow their store brand organic grocery lines.

Specialty, gourmet and ethnic foods. As the research discussed in this piece demonstrates, category growth will be huge. We also see an increasing number of large, multi-national packaged goods companies getting deeper into specialty foods marketing. Major companies like Kraft, Heinz, General Mills and others will move upscale with line extensions and even new brands.

Ethical consumers and marketing is a growing trend, and it will continue to grow in the years ahead. Consumers increasingly want to know how and where their foods are produced. They also want to know the corporate behavior of the companies that produce their foods. It's a small movement at present, but will grow bigger in the next five years.

Local food sourcing also will continue to grow. However, consumers love imported foods too much to give them up. Therefore, in the main, locavores (those who only eat foods produced within a 100 miles of where they live) will remain a small, minority movement. However, more and more consumers will buy local foods whenever they can, making it an important movement and marketing concept for food marketers, retailers, consumers and small farmers.

Green issues will begin to move into the mainstream in a big way in 2008. More and more consumers will demand sustainability from food producers, marketers and retailers. The industry will respond, led by key players like Wal-Mart, Whole Foods, Safeway, Tesco and others on the retail end. On the supply side, companies like Proctor & Gamble, Clorox, Hain-Celestial and others will move further with their green initiatives, setting an example for others in their industry to follow.

Healthy foods, especially foods containing new natural ingredient innovations, will continue to be a major hot button. We are beginning to see healthier foods positioning throughout the supermarket, from the dairy case to the snack aisle. This will intensify, and grocers will get more involved in their customers health issues by putting health and wellness clinics in-store, increasing the quality and quantity of health labeling information, and even demanding their suppliers produce healthier products.

As we said at the beginning of this piece, there's a synergy between these top trends for 2008. That synergy is the growing convergence between the natural and specialty foods industries, and the growing consumer movement towards eating healthier and defining healthy as not only something internal but external (the environment). Within this mix, taste is key. Consumers won't trade off healthy and "green" for quality anymore. In fact, they want premium quality taste along with the natural, organic, healthy and green attributes in their foods---and from their food producers and retailers.

Wednesday Marketing Memo: Organic Foods

Analysis: New study suggests organic food and beverage products moving into the mainstream in U.S.

For the past three months we've been discussing our analysis here that the organic foods market is in the process of moving from what has been a small niche to the beginnings of widespread, mainstream status in the U.S.

By this, we aren't suggesting organic foods will replace conventional products anytime soon and become the norm for the majority of consumers. Rather, what we mean is we see a clear trend in the organic category from what has thus far been a specialty niche, purchased by a few select groups of consumers, to what is becoming a category sampled and purchased regularly by a wider sector of U.S. shoppers, and offered more and more for sale by mainstream food and other format retailers.

A new study by market research firm Mintel suggests we've been on the right track in our analysis. The just-released Mintel study reports that organic food sales have grown a whopping 132% since 2002. In this same five year period the study says organic beverage sales have grown nearly as much, at 92%. Combined, the organic food and beverage categories today make up a nearly $6 billion a year market in the U.S., according to Mintel.

The organic food and beverage growth trend is clear according to the study. Over half (52%) of American consumers purchased organic foods in the past year, while over a quarter (26%) bought organic beverages. This is a significant increase (and hence the clear trend) over 2002, when just 34% of U.S. consumers purchased organic foods, according to a 2002 Mintel study. Of even greater significance in terms of a clear trend line--and the movement towards mainstream status as we've defined it above--is that 32% of U.S. adults reported they purchase organic foods on a regular basis or as often as possible. That leaves plenty who haven't yet done so, but the growth is very significant.

As we suggested above, organic food and beverage products are being sold by more and more food retailers and even by other retail format operators, including mass merchandisers, drug stores and others. This is do to three primary reasons. First, is the growing demand by consumers for organic products. Second, food and other format retailers have found selling organic products can be good for profits as they have much higher gross margins than conventional grocery items, for example. Lastly, combined with both factors above, food and beverage manufacturers are developing and introducing organic products at the most rapid pace in the history of the category.

For example, the Mintel study says 2006 saw nearly 1,600 new organic food and beverage products launched in the U.S. In contrast, less than half that many (722) were launched in 2002. Additionally, food retailers (Whole Foods, Safeway, Kroger, Publix, Wegmans and many others) have launched multi-item private label organic foods lines and continue to add items to these lines at a rapid rate.

As the organic food and beverage market begins to mature, as it is, the rate of growth will decrease. This is logical, and the Mintel projections for the next five years bare out that fact. Mintel says the organic category will have strong, consistent growth over the next five years. The market researcher estimates organic foods sales to grow by 59%, while the organic beverage market will grow by about 65%, between now and 2012. That's huge growth despite the leveling-off from the current growth rate numbers mentioned above.

"This (the organic market) isn't a niche market full of environmental health nuts and affluent hippies anymore," says Marcia Mogelonsky, a senior research analyst at Mintel. "Organic is now part of the picture for everyone from the Hispanic immigrant mother to the hip suburban teen next door. With health issues and food contamination issues in the news, many people have begun looking for more safer, more natural food and drink," Mogelonsky says in explaining the growing "mainstreaming" of organics.

As we've mentioned often here, price remains a major barrier to even faster adoption or "mainstreaming" of the organics category we believe. The overall retails still remain too high for many people to purchase organics on a regular basis. And often these "too high" retails act as a barrier to entry for consumers who want to try organics but are scared off by the price premium over conventional food and beverage items.

This pricing factor is changing a bit--but not enough we believe. With retailers like Wal-Mart, Target, Costco, Safeway, Kroger and others getting into organics merchandising in a big way, overall retail prices have been driven-down a bit. The market is working in this regard. However, these retailers, along with Whole Foods and others, are still using organics as "margin enhancers" all to often. This isn't wrong. We just believe they should lower the retails a little bit and obtain just slightly less margin enhancement.

Gross margins of 45-60% aren't unheard of by retailers such as Safeway and Whole foods on organic grocery products. Supermarkets like Safeway make less than half that amount in terms of the gross margins on conventional grocery items. We suggest some margin reduction is in order. A 10% retail margin reduction in the category would go a long way towards making organic food and beverage prices more competitive with conventional goods. This, we believe, would speed the adoption of organics by even more customers--leading to a larger market, which is good for all. And even with a 10% margin reduction, retailers like Safeway, Kroger and others would still be doing very well indeed in the category.

We also argue there remain lots of inefficiencies in the organic foods supply chain. Manufacturers can decrease their cost of goods and production expenses by adopting some of the practices of larger consumer packaged goods companies. There's also savings out there in transportation and warehousing. And much can be done to improve marketing--and thus increase sales volume.

Additionally, most food retailers--large and small--still obtain most of their organic food, grocery and beverage products from third-party distributors. While this practice can actually save money in some cases, it generally doesn't as it's practiced today. For example, many large supermarket chains are on "full service" programs with natural foods distributors. In other words the distributor handles all aspects of the process--from ordering to stocking the products on store shelves.

This semi "hands off" approach by retailers leads to margin creep. Many distributors work on 25-35% gross margins on these full-service programs. They need to in order to make any money. Often the retailer doesn't even know what the distributor's overall margin in the category is. The extra distributor margin goes into the retail price of the organic goods since the retailer isn't about to take it from its margin. This practice, along with other distributor inefficiencies like logistics, buying practices, poor marketing and more, contributes to higher than needed retails on organic food and beverage products.

We believe there's easily another 5-10% margin savings between increasing organic foods' manufacturer efficiencies and improving and streamlining the third-party distribution system. In fact, Safeway, for example, now distributes the majority of the organic grocery products it sells in its stores directly, through its natural and specialty foods buying and distributing division. The retailer only uses a third-party distributor for slower moving items. The problem, however, from a consumer pricing (and category mainstreaming) standpoint is that Safeway hasn't put much if any of this savings into lower organic category retails. Rather, it's gone to margin. The grocer is offering some significantly lower retails on its private label brand O' Organics however, which is Safeway's line of organic, premium quality grocery items.

Perhaps this is where the organic food and beverage market is going? Large, mass market food retailers like Safeway, Kroger, Wal-Mart, Costco and others will continue to lower the retails on their private label organic brands, while holding the line retail pricing-wise on the national and regional branded organic items produced by manufacturing companies. This would allow the retailers to maintain their margins on the private label (with a slight reduction perhaps) while also keeping the higher margins on the manufacturer brands. Private label brands generally have lower costs of goods for these retailers, so they can continue to reduce the retails, while at the same time getting better deals from their vendors, and still ring-up high gross margins on the products.

Mintel's study agrees with our analysis that organic food and beverage product retails remain too high overall. Two thirds of the respondents reported they would buy more organic items if the products cost less. These consumers said current retail prices tend to turn them off on the organic category. This data, according to Mintel, tends to support our argument above that there could very well be a move by consumers to more store label organic products since it seems the trend is for these retailers to offer the brands at lower retail prices than manufacturer branded organic food and beverage items.

A key decision within the industry will be how fast the various players want to see organics become more mainstream. We believe pricing is key to the rapidity of this phenomenon, despite the significant growth projected by Mintel (59% organic foods, 65% organic beverages) for the next five years.

It's clear to us that in the main retailers are now taking charge of the category with there successful and expanding private label organics lines. As such, they'll be the primary players in this growth and mainstreaming process. That's not to say organic food and beverage manufacturers and distributors don't still have a significant role to play--they do. However, like they are in the conventional grocery products category, food retailers are rapidly becoming the key players (along with consumers) in the organic category.

And of course, lets not forget Whole Foods Market, Inc. With the supernatural grocer's acquisition of Wild Oats and its aggressive new store building program, Whole Foods remains in perhaps the number one position in the industry in terms of influencing the speed of organic category mainstreaming by its retail pricing policies.

Does Whole Foods want more consumers to be primary shoppers at its stores? The answer is yes. That's where the new growth comes from. Perhaps lowering its retails on organic food and grocery products say by 10% across all categories would convert numerous secondary shoppers to primary shoppers and lower the price barrier to entry for consumers wanting to try Whole Foods but being put off by the reality or perception that its prices are just too high?