Organics Among Marketing’s Sweet Spots

By Jim Prevor, Editor-in-Chief, Produce Business

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 a 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 an organic product may make up for a decrease in dollar sales for conventional, yet still, result in a decline in the 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.