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Retailers and organic producers weather economic storm

by Lora Abcarian | June 15, 2009
The bad news is that everyone is nervous about the national economy. The good news is that organic shoppers are generally remaining loyal to their pocketbooks, principles and products.

A survey conducted by the Lieberman Research Group for the Organic Trade Association concluded that sales of oganic products were up 15.8 percent in 2008 compared to 2007. In a previous interview, OTA's senior writer-editor Barbara Haumann told The Produce News, "Consumers have definitely been a driving force for retail operations." Data, she said, show that organic sales at retail continue to grow at a rate of about 14-20 percent annually.

The survey also indicated that organic food accounted for 3.5 percent of total 2008 food sales, and organic sales were three times stronger than conventional food sales. Fresh fruit and vegetable sales currently garner 37 percent of organic product sales, preserving its status as the largest sector within the organic category.

Ms. Haumann said that consumers are concerned about pesticide residues, irradiation, overuse of antibiotics in livestock, as well as soil health and water contamination. And an online survey conducted last year by The Hartman Group for Whole Foods Market found that "despite rising food prices, 79 percent of consumers do not want to compromise on food quality and 70 percent continue to buy at the same amount of natural and organic foods. Two in three adults prefer to buy natural or organic products if prices are comparable to those of non-organic products."

"People are trying to make choices that fit with that new value system," Ms. Haumann said. "Green is the new black."

A triad of forces is currently driving the organic sector. Retailers, growers and consumers are supporting organic production and consumption as agricultural sustainability is addressed. The question remains: How successfully can this be accomplished in a flagging American economy?

Natural Grocers by Vitamin Cottage, headquartered in Lakewood, CO, has staked its 50-year reputation on providing organic produce to its customers. Produce Coordinator Steve Carlton said that the company has set itself apart from other retailers because organic commodities are the only ones stocked in the produce department. Fifty years ago, organic was anything but mainstream.

"The mighty dollar is not the driving force in this company," he told The Produce News. Natural Grocers has 31 stores in Colorado, New Mexico, Texas and Utah, and the company continues to see annual growth. Ten percent of overall floor space is devoted to organic produce. "Our customers seem to be very loyal to us and understand where we're going," he said.

Splashy headlines about a dire economic picture took a toll on retailers this past February. "Everybody was so freaked out," Mr. Carlton noted. "They didn't know if they'd have jobs." Since then, the picture has moderated. "Money is tough," he continued. "People are spending on items that are a necessity to them. Shoppers are a little freer with their money. Consumption is down from a year ago but is going up."

The panic factor affected shopping habits during the first quarter of 2009. "When people panic, they buyer cheaper stuff," Mr. Carlton said. "These people have come back. Staples are still rocking."

Price points are closing between conventional and organic product in general. According to Mr. Carlton, the price for organic commodities at Natural Grocers is sometimes lower than the price for conventional commodities at large retailer outlets. "I am usually very competitively priced," he said. "We give customers the best price and best quality. We pass savings along to customers."

On the grower side, the narrowing of price points is not necessarily a bad thing. "Price is based on supply and demand," said Gene Loudon, director of marketing for Dovex Marketing Co., the sales arm for Dovex Fruit Co. in Wenatchee, WA. Dovex began its big push into the organic arena a decade ago. "We're the largest in the state as far as organics is concerned" and the nation's largest producer of organic apples and pears, he said.

"This year, we knew we'd see a doubling of the organic crop. Three-and-a- half million to 4 million boxes feeds organic-only coops and loyal organic shoppers," Mr. Loudon stated. "Larger packer-shippers are putting more organics in the ground and need to deal in volume. We knew we would have to make inroads with retailers to move organic."

He went on to say that consumers will look at organic product if the price gap between organic and conventional is 30 percent or less. As it turns out, the price for organic apples for the current season declined an average of 30 percent, making the apples more affordable to consumers.

Because organic apples generally size 1.5 sizes smaller than their conventional counterparts but cost 50 percent more to grow, Mr. Loudon expects grower shakeout will take place soon, with some smaller producers opting out of organic production. But he said that companies like Dovex will continue to expand their organic holdings.

Looking at the company's overall manifest, Mr. Loudon said that 80 percent of apple volume is organic. Pear volume is currently 75 percent organic, and stone fruit is 100 percent organic. He anticipates that organic commodities will account for 10 percent of Washington's overall crop volumes in the next five years. "There will be some plateaus," he said of production dynamics, noting that organics are seeing double-digit growth in the marketplace vs. single-digit growth for conventional items. "Demand for organics is still there," he noted.

Organic consumers and producers are equally driven by concerns about agricultural sustainability and environmental responsibility. "Everyone wants to know where their food comes from. People are definitely feeling the impact of how pesticides are affecting water systems," Mr. Loudon stated. Over-fertilizing has negatively affected the Mississippi River, he said by way of example, "sucking oxygen out and resulting in algae blooms." As incidents of groundwater contamination increase, he added, "There has to be some credit to people going organic."

Mr. Loudon said that there are three prime reasons consumers make the switch to organic product. "It's good for me, it's good for the earth and it tastes better," he said about consumer interest.

Another major producer of organic produce is Stemilt Growers Inc., also headquartered in Wenatchee. Director of Marketing Roger Pepperl characterized the company as "ahead of its time" when it comes to organics. "Our late founder, Tom Mathison, transitioned a very large ranch [in 1989]," he told The Produce News. Today, 15 percent of the company's overall apple volume is organic. Organic pears comprise 8 percent of volume, and cherries account for 10 percent. This year, 100 percent of Stemilt's peaches and nectarines are organic, and 50 percent of its apricot acreage is in transition. All Pluots marketed by Stemilt are organic.

According to Mr. Pepperl, the marketplace has been historically undersupplied with organic fruit. The situation is changing, however, because growers are stepping in to meet consumer demand. "Sourcing from South America isn't the solution," he said.

Mr. Pepperl said that improvements in production techniques have had a positive effect on supply. "Conventional farming is already close to organic. Therefore, the transition is easier. We're already farming in organic ways," he said.

One of the supply-chain improvements, he noted, is the ability to store organic commodities for longer periods of time. New protocols for crop storage include the replacement of oxygen by nitrogen in "Harvest Watch" storage rooms. Such improvements, he went on to say, are necessary to keep larger-volume organic commodities fresh. "Conventional fruit is going longer and longer," Mr. Pepperl stated. "You'll see organics chasing after that."

With bigger organic crops and longer marketing seasons, Mr. Pepperl said that the price gap between conventional and organic products will narrow. While it costs organic producers more to bring their crops in -- and at greater risk -- Mr. Pepperl said that the narrowing makes organic product more consumer friendly.

He cited cherries as an example of this phenomenon. This season, he expects the premium for organic cherries to be $2 to $4 per 18-pound box. "That's pretty narrow," he said. But by narrowing the premium, he went on to say that sales at retail could be boosted as much as 50 percent. "We have done consumer studies. A 20- to 50-percent difference is what consumes will bear," he said. "We share our knowledge base on organic marketing and product marketing in general. We try to bring extra detail into them."

Mr. Pepperl said that retailers have more choices and availability when it comes to organic commodities. "Consumer demand continues to go up and up and up," he said. "All grocers have organic sections integrated into their individual departments. Organic shoppers want to be wowed just like conventional shoppers. The biggest thing we can do as a supplier is give [retailers] advanced notice." By helping retailers plan for the transition of one organic commodity to another and creating promotional plans, retailers can generate marketplace excitement.

Today, tomorrow and in the coming years, Mr. Pepperl concluded, "The marketplace really has a slot for organics."

(For more on organic produce, see the June 15 issue of The Produce News.)