October, 2005

Fruits of Thought

Future Of Organics

The organic industry is in a state of flux. A recent Federal Appeals Court ruling has put a stop to the USDA’s National Organic Program standards permitting the use of certain non-organic elements when organic substitutes were not readily available. Though this ruling mostly will affect processed products, some fresh produce, most notably bananas, pineapple and lettuce, may also be affected.

To maintain the existing organic product line and encourage continued growth of the organic foods industry, most major producers and the Organic Trade Association have petitioned Congress for legislative relief. But many of the most passionate consumers of organic product want the organic label to represent 100 percent organic product, and they oppose the legislative relief. Many of these consumers indeed were shocked to learn that non-organic ingredients were allowed in organic foods to begin with.

From an industry perspective, the need for continued production and an assurance of supply to justify production investment and marketing efforts requires a more flexible approach. The industry would also claim that by allowing a more flexible approach, we can grow the organic “infrastructure” and thus make “shortages” less likely.

This battle — call it between the pragmatists and fundamentalists — strikes as cutting to the heart of the question for the produce industry as we here at Produce Business begin our second generation. If you speak to consumers, especially affluent, educated consumers, and you talk about the produce industry, they frequently leap to a discussion of organics and never fail to mention Whole Foods.

After all, in an age when most retail chains are suffering, Whole Foods is a stock market darling. It would shock many of its shoppers, however, if they knew most of the produce is not organic at Whole Foods.

Whole Foods is an anomaly in the industry, not so much because it is organic or natural or anything else related to its product line. It is an anomaly because it is a national chain with stores located in widely disparate places. Conventional wisdom says this wouldn’t work because such a setup poses insurmountable distribution difficulties and can’t take advantage of efficient advertising.

Whole Foods is thus a triumph of both logistics and marketing. Its success may teach us less about the appeal of organics than about the fragmentation of the American Market — that in certain cities, there are certain people who find Whole Foods valuable. This less proves that every company should emulate Whole Foods than it proves that many companies would be wise to search out various niches in which they can succeed. (I think Wal-Mart is crazy for not coming out with a Mexican-themed store and opening in appropriate markets. It would be bigger and more successful than Whole Foods within a few years.)

Indeed what the contentions in the organic industry really portend is that Whole Foods itself is vulnerable to a further fragmentation of the market. The Whole Foods customer — or, put another way, the organic customer — is really many different people. Some of the market is composed of the true passionate believers who bother to write Congress to oppose the industry-sponsored legislation.

Some of the most passionate members of the organic community shop at Whole Foods and Wild Oats because they feel a part of the companies’ social philosophies.

Many who want to buy organic are environmentalists. They don’t so much believe it helps their personal health as believe it helps the world. Other consumers think of organic as higher quality. A lot of mothers buy organic foods because they want the best for their children.

For many consumers it is just a change in the definition of upscale. If once the hot and trendy food was imported in little bottles and jars from Europe, today upscale is more likely to mean fresh. One suspects this group is a big chunk of the business. In fact, Whole Foods’ real success is in selling fresh prepared foods. These are rarely organic and are simply upscale items presented in a fresh environment.

Fundamentally, though, the grounds for believing the organic business will inevitably dominate the produce industry are not that strong. Admittedly, substantial volume increases are certain as organic acreage put into production years ago, such as organically grown apples and pears, come on line and as other retailers, such as Publix with its Greenwise concept, drive demand by attempting to emulate the Whole Foods concept.

Many conventional supermarkets are trying to move upscale not so much to compete with Wal-Mart as to avoid competing with Wal-Mart, and that will drive demand for a few years. Plus chefs like to push things like locally grown, organic and seasonal, and chefs have become influential in our food culture.

In the end, however, without scientifically valid studies providing convincing evidence that organically grown produce tastes better or improves human health — studies that do not currently exist — the organic industry is built on shaky ground.

I’m a capitalist and thus thrilled people have the option to buy organic. I hope the option expands, and I am certain fortunes will be made in expanding those options. After all, many great successes arose out of building an organic industry virtually from scratch in the last two decades.

But the next 20 years, as with the past 20, will bring new fortunes in areas we don’t see today. If past is prologue, that is as organic a truth as the world can provide.  pb