October, 2011

Research Perspective and Comments & Analysis

Organic Produce Gaining Shelf Space, Sales

By Steve Lutz And Kelli Beckel, Perishables Group

Sales of organic fruits and vegetables in supermarkets have grown steadily since 2006, even through the midst of a recession. Despite higher price points than conventional counterparts, organic produce is proving its staying power within consumers’ baskets.

The Perishables Group recently examined sales trends for the top organic categories in the produce department. Between 2006 and 2010, supermarket dollar sales of organic produce increased 73.3 percent, which is even small in comparison to some individual categories. For example, organic berries increased sales by nearly 200 percent during the five-year time period, compared to the category’s overall growth (including organic and conventional) of 30 percent.    The positive trend continued in the 52 weeks ending July 30, 2011, as 13 of 19 organic vegetable categories increased sales compared to the prior year. Fruit displayed the same upward pattern, with 12 of 14 organic fruits increasing sales.

While a growing base of loyal consumers is supporting organic fruit and vegetables’ growth, the increase is also fueled by more organic items on store shelves. Even as store shelves are increasingly crowded, retailers increased the number of unique organic produce items on shelves during the latest 52 weeks. The most notable increase was in organic value-added produce, where there were 40.4 percent more unique items on shelves in the 52 weeks ending July 30, 2011, compared to the prior year.

Organics: The Success Story Of Packaged Salads

As the highest selling organic produce item, packaged salad sales are critical to understanding organic trends throughout the entire department. Since the recession hit, the packaged salad category struggled as consumers switched to lower-priced bulk lettuce and salad ingredients. However, organic packaged salad is the apparent success story in the category. The number of households that purchased packaged salad increased 1.6 percent in the 52 weeks ending June 25, 2011. During the same period, household penetration for the category overall and for every other packaged salad variety declined, with the exception of broad leaf spinach salad.

Aiding the success of organic packaged salad was the fact that its price remained steady in the past year, up just 0.6 percent, while its primary competitors, garden salads and blends, increased prices more substantially. Organic salad still carries a higher price point than its conventional counterparts, but consumers are willing to pay the premium because many consider organic as an indication of quality.

Source: Perishables Group FreshFacts® Shopper Insights powered by Spire

Based on the performance declines in garden salads and blends, it can be implied that packaged salad consumers are switching their purchases from garden and blend salads to organic salads.

Given its positive momentum, organic packaged salad can be positioned to grow sales for the category by continuing to drive innovation and keeping prices steady within organic salads.

How Can Retailers Capitalize On The Growth Of Organics?

Based on consumer surveys conducted by the Perishables Group, organic buyers in conventional supermarkets are different from buyers in natural food stores. While heavy organic food users frequent supermarkets, they clearly prefer to regularly shop the natural foods channel. Conversely, lighter organic users — driven more by convenience and price — are much less likely to deviate from established shopping patterns or seek out organic foods beyond their normal conventional supermarket shopping trip.

The high potential organic customer in a conventional supermarket is a crossover-shopper, comparing organic and conventional prices, quality and product differences. These individuals are less committed to “organic only,” so they are more sensitive to product and price comparisons between organic and conventional items. As a result, these target consumers are more likely to purchase when the organic product choices are convenient, accessible and easily comparable with the conventional items they regularly purchase.

When it comes to organic potential, all supermarkets are not created equal. Based on Spectra demographic profiles and performance, the organic opportunity for supermarkets lies with the stores located in affluent, suburban neighborhoods with older shoppers.

Once high-opportunity stores are identified, how do retailers get the shelf space to expand organic products in already crowded produce departments? Within high potential stores, replacing selected conventional items with substitute organic products (versus just adding an organic SKU) offers a stronger opportunity to maximize organic product visibility and shelf turns while minimizing shrink. This focused substitution strategy for key organic items allows the supermarket to reduce SKU count, improve shelf visibility and significantly enhance the store image as a provider of high quality organic and natural foods.

 

Organics Among Marketing’s Sweet Spots

This study by The Perishables Group is genuinely helpful to those looking to maximize produce sales. We are fortunate to have many retailers share their category numbers with us, and one of the standouts is that the numbers often look bad at first glance, with, for example, berries and packaged salads in decline. This, however, is often only true because many retailers maintain a separate organic category. If one restructures numbers, putting, say, organic berries back into the berry category, many of these categories are doing quite fine.

Steve Lutz and Kelli Beckel provide good guidance to the trade by pointing out that increased sales of organics in mainstream supermarkets may not tell us much about consumers deciding to “buy organic.” The best way to understand these purchases of organic is to see organic as a kind of “Good Housekeeping Seal of Approval,” in which consumers impute all kinds of characteristics of quality that may or may not actually correspond with organic.

They are also sharp to point to the growth of organic as being driven by two industry trends: The addition of organic product lines and the substitution of organic for conventional on certain product lines.

The imputation of qualities to organic — safety, flavor, freshness, etc. — that may not actually be there is similar to the dynamic one sees with Kosher foods where many who are not religious, or not Jewish, and thus not concerned with the religious aspects of Kosher, see the Kosher seal as a more generalized sign of quality. Smart marketers have long played on this, as when Empire Kosher poultry hired Pearl Bailey to do commercials saying that her mother taught her to only buy a Kosher chicken.

The decision to utilize only an organic SKU is often smart for a retailer as those consumers who insist upon organic will only buy organic, whereas most shoppers will buy either conventional or organic. On low volume items, movement can’t justify two SKUs, so in many stores it makes sense to carry only organic.

For the industry, though, it is worth noting that this only also serves to distort the organic numbers in the same way that the decision to make all Coke products Kosher distorts the size of the Kosher market. We are now selling lot of organics to consumers who don’t care much about organics.

A switch of product sales to organic is usually a plus all through the supply chain. Growers make a higher margin, typically, because restraints on organic growing — notably a three-year transition before a field can be sold as organic — constrain supply. Retailers typically draw margin off the price point so they make more money on this more expensive item.

There is, however, a cautionary note for the trade in this story. An increase in dollar sales of organic product may make up for a decrease in dollar sales for conventional, yet still result in a decline in volume of produce being sold.

Also astute is the point that organic is a bifurcated market. There are consumers who simply won’t buy anything that is not organic. However, these consumers are not typically shopping at mainstream supermarkets. This means there are two totally different approaches required in the decision to buy and merchandise organics. Quite obviously, if one is operating a natural foods store focused on organics, the imperative is to have a supply of organics. Price may impact volume but, in general, these consumers will pay what they must to get organically grown produce.

In a conventional supermarket, consumers make choices. In a more affluent community, they have options to pay more to buy organic. If the differential is not too great, they often decide to do so. The conventional supermarket industry bifurcates again on this issue as shopping venues serving more modest incomes don’t have the discretionary income to opt for organic.

Some find it incongruous that organic demand has grown through the recession. There are many explanations: one is that there is a backlog of unsatisfied demand on organics because of the difficulty of increasing organic production. Another is that the industry has focused on products that higher income buyers will purchase, and many of these are organic. A third thought is that during tough times, many families cancel or defer major purchases, say a big vacation or a new car or a home expansion. This means that their disposable income, defined as that available to purchase food, actually could increase in tough times. So people can splurge in small indulgences such as organic raspberries.

The big message of this study, though, is that produce marketing has gotten more challenging. This is about organics, but all these variables apply to many things in the department. This study is saying that producers need to target for the sweet spots in the market, and retailers need to target to maximize sales and profits from the consumers they serve. This really is not your father’s produce industry anymore.