Closing the g-a-p: organic products have become more attractive to consumers as prices move closer to their conventional counterparts, but the economy is presenting new challenges for the segment.

AS THE RECESSION CONTINUES TO SHAPE THE WAY CONSUMERS SHOP, manufacturers and sellers of organic products face new challenges ahead. Industry insiders agree that when the economy was strong, convincing consumers to spend a little bit extra on a pound of organic apples or a gallon of organic milk wasn't so difficult. Today, the task is now somewhat more challenging.

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Although the price gap between conventional and organic products has narrowed, in some instances organics have become a tougher sell. The good news however, is that many consumers are still seeing the benefits of purchasing organic products.

"Organics are not exploding as much as they had been," says Ted Taft, managing director for Wilton, Conn.-based Meridian Consulting. "They are still doing well. People are still concerned about money, but they are also concerned with health, longevity and quality of life. In categories that are used all the time--fruits, vegetables, milk--consumers are more likely to pay a premium than they are for organic peanut butter or cereal."

While there is still little evidence that definitively proves organic-products are healthier than conventional products, Taft says arguing that organics are "better for you" shouldn't be hard to sell. "Part of the problem is--with pesticides and the like--they can take years to accumulate in somebody's system," he says. "There is a belief involved and there have been enough instances where those things have caused harm to the body."

According to the Greenfield, Mass.-based Organic Trade Association's 2009 Organic Industry Survey, 2008 total U.S. organic food sales accounted for $22.9 billion dollars, a growth rate of 15.8% over 2007. The leading segment within organic foods (which, for the survey, includes fruits/vegetables, dairy, non-dairy beverages, packaged/prepared foods, breads/grains, snack foods, sauces/condiments and meat/poultry) remains fruits and vegetables, accounting for more than $8.5 billion and nearly 37% of all organic foods sales. After flourishing over the past several years with double-digit increases, growth of organic fruits and vegetables slowed, yet still managed to increase 6.3%.

The segment's slowing growth can't be completely blamed on the struggling economy, observers say. Even in flush times, insiders admit that it was unrealistic to expect organic produce to continually grow at double-digit rates year after year.

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Most believe that while growth has slowed, even a slight up tick in sales is a positive sign and insiders are encouraged about the future of all organic segments.

"Despite the recent economic downturn and its affect on organic sales, we feel the long-term prospects for sales of organic products remain strong," says Simcha Weinstein, marketing director for Ashville, N.C.-based Albert's Organics. "As the economy improves and discretionary spending becomes more available, more consumers will shift their buying patterns back to organic. As more growers of raw product transition to organic, the price differential between conventional and organic will continue to decrease, giving an additional incentive for organic purchases."

PRICES FALLING IN LINE

Organic growers say that as organic prices have fallen more in line with conventional produce, particularly with commodities such apples and pears, many supermarkets have found ways to successfully broaden the customer base for these items. Gene Loudon, director of marketing for Wenatchee, Wash.-based Dovex, says some of their retailers have switched to carrying almost entirely organic apples. For other retailers, organics provide an opportunity to trade consumers up with the premise of offering value-added product.

"With the prices coming down, what that does is provide retailers with a value-added product that can compete with conventional," says Loudon. "That s how we look at organics, as value-added. So if retailers can sell organics as a value-added product it creates more of a consciousness toward organics. The good news is we are starting to get a very strong foothold in [supermarkets], which is something we haven't seen in the last 30 years of organics."

Loudon attributes the strong foothold first and foremost to a more attractive price, as well as to the improved quality of organic products. He adds that the ability to keep fresh product on retailers' shelves has also helped convince retailers to commit to organics. For example, last year Dovex was mostly out of organic product by early May.

"This year, because of the larger number of organic product available, retailers feel more comfortable with the sustainability issue," says Loudon. "They think 'I can sustain an organics category right now,' where as in the past it probably wasn't an option."

Providing year-round availability of organic products is a major part of Sedro-Woolley, Wash.-based CF Fresh's business. Matt Roberts, sales and marketing coordinator for CF Fresh, says the availability of year-round organic products has gone a long way towards growing the category as well. "Providing a year-round organic offering is more difficult than conventional, simply because we can't put anything on the products to lengthen the storage," says Roberts. He adds that CF Fresh uses different growing regions to help assuage the problem.

Most organic growers say supermarkets that have had success with the category helped increase demand by significantly expanding their organic sections or moving organics closer to the front of the store--with some doing both.

"You can tell who is really behind organics," says Roberts. "I was on the Last Coast a couple of weeks ago and one of the retailers I visited had beautiful sets. They had conventional onions on a table with a big display of well-marked organics right in the middle. They looked nice, they were right where you couldn't help but notice them and it looked like they were moving--or at least the retailer was rotating it well."

Beyond dedicating space to organics, insiders say some retailers do an excellent job of educating consumers on what organics are and why they are a better option. Weinstein says the key message retailers should be delivering to consumers is the "organic story," that is the benefits organics offer. He points out that what is most apparent about organics to many consumers is that typically organics cost more. Albert's Organics encourages its retail partners to help their shoppers understand that while at times organics may seem to be more expensive, they often provide a better value than other food choices.

One way successful retailers have made education a primary focus is by featuring prominent organic signage. Theresa Marquez, chief marketing executive for La Farge, Wis.-based Organic Valley Family of Farms, says Wegmans does a "super job" by combining organic marketing with local marketing, attracting and appealing to the customer already looking to improve their carbon footprint and providing them with further education.

"The educational component varies not only from chain to chain, but store to store," says Marquez. "Select chains do a very good job, depending on where they are and what market they are in. If you are a retailer in the Pacific Northwest and don't sell organic... wow, you are not with it."

HITTING THE TARGET

While it is difficult to pinpoint the target consumer for organic products, insiders say that it is generally an affluent consumer, a well-educated consumer and/or moms buying food for their children. Retailers that are located in areas that house a large population falling into any of those demographics have a greater ability to succeed with organics. Those retailers with a strong organic mix are poised to capitalize in other parts of the store as well. Conversely, retailers without those consumers in the area may struggle selling organics.

Organic growers aren't naive enough to think the responsibility to educate consumers falls squarely onto retailers shoulders. Most work closely with their retail partners, providing suggestions and support in an effort to grow the category. Dionysios Christou, vice president marketing, for Coral Gables, Fla.-based Del Monte Fresh Produce, says they do all they can to help retailers highlight organics and differentiate them from other products.

Sales and growth rate of organic foods

Category                 2008 sales (millions)  Growth rate*

Fruits/vegetables                $8,503             6.3%

Dairy                             3,607            12.7

Beverages (non-dairy)             3,158            31.5

Packaged/prepared foods           2,904            21.0

Breads/grains                     2,708            35.3

Snack foods                       1,110            11.0

Sauces/condiments                   491            22.8

Meat/fish/poultry                   448            12.1

Total organic food                22,929           15.8

* change since 2007
Source: Organic Trade Association's 2009 Organic Industry Survey

Share of organic food sales

Fruits/vegetables         37%

Dairy                     16

Beverages (non-dairy)     14

Packaged/prepared foods   13

Breads/grains             12

Snack foods                5

Sauces/condiments          2

Meat/fish/poultry          2

Source: Organic Trade Association's 2009 Organic Industry Survey

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2008 organic food sales versus total U.S. food sales

Category                Organic food    Total U.S. food  Penetration
                      sales (millions)  sales (millions)

Fruits/vegetables          $8,503           $86,773          9.8%

Dairy                       3,607            72,231          5.0

Beverage (non-dairy)        3,158           118,294          2.7

Packaged/prepared           2,904            68,370          4.2
foods

Breads/grains               2,708            68,994          3.9

Snack foods                 1,110            37,412          3.0

Sauces/condiments             491            21,660          2.3

Meat/fish/poultry             448           130,666          0.3

Total                      22,929           659,012 *        3.5

* includes sales in other categories Source: Organic Trade
Association's 2009 Organic Industry Survey
Distribution of organic food sales by channel

National natural grocery chain       34%

Traditional grocery store            33

Regional natural/health food store    9

Club/warehouse store                  8

Export                                5

Mass merchandiser                     3

Other                                 4

Source: Organic Trade Association's 2009 Organic Industry Survey

"Del Monte continues to grow our category management and merchandising support so that our retailers have the resources to help increase traffic and grow sales in the organics category," says Christou.

"Category management has become a vital asset in the growth of all categories in the produce department. Our retail partners should take advantage of the benefits that this kind of support can bring to their organic business and know Del Monte will always deliver premium quality organic produce.

For companies such as Del Monte and Irwindale, Calif.-based Ready Pac Produce that sell organics as well as conventional, educating consumers on the virtues of organics can be a slippery slope. On one hand it is great to point out the benefits of organics, yet they need to make sure they do so without denigrating conventional.

Ready Pac encourages mainstream consumers to try organics by making organics easily available and provides the information needed to make an informed decision. That's really the bottom line, say insiders, providing consumers with detailed, clear, legitimate information.

"What we find is that people will buy what they know," says Loudon. "When they become educated on what organic is and the benefit it provides for them and the environment, they become even more dedicated to the category."

Along with retailers' willingness to dedicate space to organics and their commitment to educating consumers, the category is also bolstered by increased external consumer awareness. Roberts says the media has played a big role in extolling the virtues of organics.

He also directs credit towards the new-administration, which seems to be pushing sustainability, food safety and organics more than did the previous administration.

"Organics has grown to a level now where people can't really ignore it anymore," says Roberts. "Organic information is all over the place. If we keep getting organics out there, in the newspapers, in the stores with demos, it can keep growing. With all that you also have retailers that are more willing to go out there and push organics, so we really have the ability to move some volume."