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Organics One Year Later —
Wal-Mart, Whole Foods & Wild Oats

A year ago the news in the food industry was consumed by word that Wal-Mart and other mass merchants were pushing their big packaged goods suppliers to supply organic versions of products. Now there is a news report out that quotes executives attending the Reuters Food Summit in Chicago this week as saying that the sales of most of these products have been modest:

“It was a big push a year ago,” Alan Jope, Global Food Group Vice President at Unilever Plc, said at the Reuters Food Summit in Chicago this week. “Wal-Mart asked everyone for organic (food). At the end of the day consumers buy benefits and it’s not exactly clear what the benefits are from organic. They might end up being niche propositions.”….

Cadbury Schweppes Plc expanded the distribution of Mott’s organic apple juice when Wal-Mart allocated more shelf space to organic products, and sells organic apple sauce.

“You’ve seen the growth in organics,” said Cindy Hennessy, senior vice president of innovation at Cadbury Americas beverages. “Consumers are definitely walking the talk across all health, but including organics. It’s not as rapid as Wal-Mart might have liked or as any of us might have liked, but it is definitely growing.”

The report goes on to explain that food industry executives are increasingly sensing that growth may come with a different focus such as natural or local:

Kenneth Harris, managing director at Cannondale Associates, said that consumers are really looking for “authenticity,” whether the product be organic or locally procured, a niche that is gaining in popularity, with stores touting that produce and dairy products come from local farms….

Hormel CEO Jeffrey Ettinger said that while there are consumers who want organic products, that segment of the market may be too expensive to make it worthwhile for a company like his to pursue.

“We feel natural is a better arena for us to play in,” he said. “We believe the natural market is the larger opportunity.”

But what exactly does natural mean?:

“One of the things that is somewhat confusing I think today is the term natural,” said Tyson Foods Inc. CEO Richard Bond. “In our consumer research that we did, the consumer is very confused about what natural means … and I think it’s important for our government to end up with some sort of a standardized process of what natural means across food and I think we’ll get there.”

A government comment period about the definition of natural just closed on Monday, Bond said.

One chain is thinking it should get into buying organic fruit:

“We don’t use any today and I believe … that we should offer either products or ingredients using organics and we’re looking into that,” said Jamba Inc. CEO Paul Clayton.

We like Paul Clayton. When other companies such as Yum Brands had food safety issues, their head honchos cowered in the corner hoping no one would notice them. Paul stood up like an adult and dealt with the problem as we noted here.

You can read the whole article here.

This article is best read as an explanation for why Whole Foods stock was almost 80 just 15 months ago and now is almost 45. Organic products, the distinctive calling card of operators such as Whole Foods, are becoming ubiquitous. Predictably, organic products represent a tiny percentage of a mass marketer’s sales — which means they can price aggressively against Whole Foods without much impact on their gross margins but with big impact on the gross margins of Whole Foods if Whole Foods feels a need to be competitive.

If Whole Foods tries to retreat from its organic positioning into its epicurean side, it runs smack into Safeway and its Lifestyle stores as well as most other mainstream grocers who are all moving upscale to escape deep discounters such as Aldi and Save-a-Lot as well as to avoid Wal-Mart.

The stock market has not reacted well to Whole Foods’ announced deal to buy Wild Oats; perhaps it is because Whole Foods is doing nothing to resolve this strategic dilemma.

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