The demand for natural and organic products is still on the rise. So is consumer skepticism. Retailers have to be picky with their product offerings to stay ahead of the game.
Election Day 2012 was historical for many reasons, but none may be more significant to grocers than Proposition 37 on the California state ballot. One of the most talked about items to ever appear on a state ballot in regard to grocery retailing, Prop 37 called for the mandatory labeling of foods containing genetically modified organisms (GMOs).
A wide range of natural and organic food companies and trade associations supported the proposal—but the opposition was motivated too. Some of the country’s largest consumer packaged goods companies, stressing that it would harm businesses and dramatically increase costs, donated millions to the campaign against Prop 37. The proposal was defeated by voters in the Golden State by a 51.4% to 48.6% margin.
Despite the final outcome, some advocates still view the vote as a success, adhering to the phrase that there is really no such thing as bad press. “This was a huge win in terms of consumer understanding,” says Arjan Stephens, executive vice president of sales and marketing for Nature’s Path, based in Richmond, B.C., Canada. “More than six million people voted ‘yes’ to the proposition and millions more across America gained a better understanding of GMOs. People are realizing that they have a right to know what is in their food and demanding a higher level of transparency.”
The non-GMO movement is just one driver behind the drastic growth in the natural and organic segments. According to SPINS, a market research company based in Schaumburg, Ill., the natural category, including organic as a subset, saw 13% dollar growth in 2012 versus the prior year. This included all UPC-coded food and non-food products in SPINS-tracked Natural and Specialty retailers + Food/Drug/Mass. Furthermore, the organization reported 97% of households buy natural products in the U.S.
Purchasing foods classified as natural is becoming more important to consumers. Yet, at the same time, industry observers point out that consumer research shows an increasing distrust in the term “natural,” as used on packaging and sales materials.
“As a marketing term, ‘natural’ means very little to consumers,” says Amy Sousa, Ph.D., senior research analyst and consultant for The Hartman Group, based in Bellevue, Wash. “When talking about natural, consumers are referring to products that are inherently healthy, minimally processed, have a short list of ingredients and are free from preservatives and additives.”
What the industry is missing is a definition for the term. According to the U.S. Food and Drug Administration’s office of public affairs, the government agency does not object to the use of the term on food labels provided the product does not contain added colors, artificial flavors or synthetic substances. For those companies that make false claims, the FDA will issue a warning or take another form of action.
Consumers’ awareness of this lack of regulation, on top of growing health concerns, is forcing shoppers to approach the supermarket shelves with skepticism. According to FMI’s U.S. Grocery Shopper Trends 2012, 64% of shoppers read nutrition labels while in store. What it comes down to is shoppers are trying to avoid being lied to, say observers, and those that are in the know see beyond the false claims splashed across packaging.
Retailers are becoming more skeptical as well, say observers. Those who do not offer truly natural products are positioning themselves for backlash. “The buyers are the gatekeepers. Their store is at stake so the buyers have a strong invested interest into what comes into their store,” says Paul Gregg, executive vice president for Raaw Foods International, based in Miami.
This applies to grocery stores across the board. Contrary to just five years ago when shoppers had to visit natural retailers or select conventional supermarkets to find such products, they are now hard pressed to enter a store that does not carry at least some natural options.
“Retailers should make a firm commitment to bring in the best natural products and promote them to the consumer base,” says James Lacey, president and CEO for Crunchies Food Co., based in Westlake Village, Calif., “Then they should educate consumers about choosing, instead of an unhealthy snack, a more expensive natural option that is good for them. We believe that consumers are looking for products that are gluten-free, non-GMO and kosher, among other things, to purchase on a regular basis.”
The advice from the industry is to look for transparent brands. They will feature more than the phrase “all-natural” on their packaging. For example, Holy Crap cereal, owned by HapiFoods Group, based in Gibson, B.C., Canada, lists the health benefits—gluten-free, lactose-free, vegan, kosher and 100% organic ingredients—on a simple package design. It captures consumers’ attention, says Lyle Hartley, director for the company.
“We have to give consumers credit: In the natural/organic sector people are educated and reading labels. They are willing to pay more but they are also doing their due diligence on which companies are offering legit products, and which retailers are offering them,” he adds.
Elden’s Fresh Foods, based in Alexandria, Minn., saw the benefits first hand when the company renovated the store and added a complete line of natural, organic and gluten-free offerings, across food, vitamin and health and beauty care departments.
To keep shoppers happy, Elliot Christensen, the company’s president, says Elden’s changes its offerings on a weekly basis according to its consumers’ demands. “Suppliers are constantly introducing new products. We keep it fresh and make sure the items we select are a true value to consumers and not just a line extension or a ‘me too’ item.”
The remodel attracted an entirely new shopper—a younger, high-end consumer interested in feeding their family a healthy product—but the store receives requests for specific products from all demographics. “Our senior community has even embraced these new departments,” says Christensen. “People in our area often winter in the south—California, Florida, Texas—and come back with requests for something they discovered while out of town at a Whole Foods or another natural store. We always work with them to fill their needs.”
Elden’s is not the only one seeing this shift in the target market. The consumer for natural—and organic—products no longer fits the traditional mold. The target customer used to be described as a younger shopper, someone educated with an above average income, say observers, but it is now closer associated with behavioral traits than economic status.
Gregg, at Raaw Foods, says the all-natural beverage company had been targeting 24 to 55 year olds, but has yet to see a demographic that does not like its fruit and vegetable drinks. “We have done senior citizen consumer events where we see a frenzy, and I have done family-fun activities with five- and six-year-olds that love it.”
According to Mary Ellen Lynch, director of consumer insights and strategic partnerships at SPINS, purchasing decisions for each demographic are driven by different factors. “Some are driven by a health concern, some an allergy and some alter their habits when they have children,” she says. “Many younger shoppers are more educated about food and health, and there is a hipster crowd that has carried their healthy habits with them as they have families.”
The organic sector, specifically, has seen the largest shift. “The industry started off with a lot of reformed hippies who had this idealism of leaving the earth better than they found it and wanted to make a difference in food,” Lynch adds. “It started with a deep environmental message but is now driven by taste, health and the sustainability message. So as organic and natural has expanded the tent, the core crowd still really believes in that environmental-ness but goes beyond to taste and health, as well.”
Where does organic fit in?
The organic sector has received its own scrutiny over the years, most recently regarding the misconception that organic means more nutritional value. It does not; and organic manufacturers agree.
What organic does stand for is an “absence of things,” say observers. According to The Hartman Group’s 2012 report, when asked what properties are suggested or implied by organic, 60% and 64% of survey participants said the absence of herbicides and pesticides respectively. “The meaning of organic has become diluted,” says Sousa of The Hartman Group, attributing this opinion to the rise in organic processed foods.
Still, the industry saw 12% dollar growth in 2012 versus the prior year, according to SPINS. Shoppers are looking for the safety factor implied by the USDA Certified Organic logo, say observers.
Companies have to follow strict stipulations to receive the USDA’s stamp of approval. It is a combination of required practices and avoiding those that are prohibited, says Barbara Haumann, spokesperson for the Organic Trade Association, based in Brattleboro, Vt. Some examples, she says, “are the prohibition of pesticides, herbicides and fungicides; forbiddance of the use of synthetic fertilizers so there is no nitrogen run off; no sewage sludge on land; and animals need to be fed 100% organic feed and have access to pasture.” It is a three-year minimum process to convert farmland into organic use before potentially qualifying for USDA approval, making it a costly, risky investment for farmers, add observers.
Haumann emphasizes the importance of differentiating organic from natural: “Many products labeled natural are very far away from organic. We want consumers and retailers to realize the difference and recognize that it is worth the sometimes-higher price point, if not more. It is an investment in our planet,” she says.
The sector is clearly not going away. According to research done by The NPD Group, based in Port Washington, N.Y., 24% of consumers report buying at least one organic product in a two-week period, a number that has doubled in the last seven years, says Harry Balzer, chief industry analyst and senior vice president for the group.
Naturally, conventional companies are jumping on the bandwagon. While this has helped penetrate the market in traditionally less “organic-friendly” stores and regions of the country, it has also created a new concern at the retail level, say observers.
“There is talk of corporate mistrust,” says Sousa. “Consumers feel many large companies who traditionally produce conventional products are entering the organic market to make money, not provide a superior product, and they are not concerned with the wider implications of organic, such as environmental sustainability or health.”
While this may be true, not all are in it for the money; they want to diversify their product offering to meet consumers’ needs, just like any other brand, say observers. Take Kellogg’s, for instance, parent company of Kashi Co., which has upheld its commitment to providing a high-quality natural product.
“It is our vision to enrich and delight the world through foods and brands that matter,” says Doug VanDeVelde, senior vice president of marketing and innovation, U.S. Morning Foods, at The Kellogg Co., based in Battle Creek, Mich. “To achieve that vision, we are committed to making foods that appeal to our consumers’ individual taste and lifestyle preferences. Our Kashi brand, for example, offers a variety of options for consumers who prefer natural and organic products.”
Some of the pioneers of the industry, the smaller companies that have been dedicated to the cause since the beginning, are not happy about conventional companies joining the game—while others are laying down the red carpet.
It is transparency and authenticity that sets natural and organic foods apart from mainstream conventional brands trying to enter this segment, says Doug Radi, senior vice president of marketing and conventional sales for Rudi’s Organic Bakery, based in Boulder, Colo. “It is difficult for a conventional brand to promote a non-GMO product when the rest of its portfolio says it does not matter. Demonstrating transparency in a number of ways, from the principles that drive ingredient choices to product development efforts to the causes the company supports, are all critical for natural brands.”
On the other side of the equation, Peter Meehan, CEO for Newman’s Own Organic, the organic division of Newman’s Own, welcomes expansion of the segment no matter where it comes from. The Aptos, Calif.-based company is in favor of converting more acres of land in this country to organic. “If that means some large companies are getting into it in order to increase that conversation rate, we are all for it. It is not just for some people, it should be for as many people as possible. Anytime a new organic product comes out, and does well, it helps organic farmers,” he says.
Whichever side consumers fall on, observers predict the category will continue to grow both in dollar sales, volume and variety—as long as companies show they are doing the right things.
In sickness and in health
That extends to the non-food sector as well. When it comes to non-food health and wellness products, retailers know they have some tough competition from drug stores, both on price and product offering, observers say.
Conventional manufacturers are competing with Whole Foods and the natural food stores, says David Gerhardt, vice president of sales for King Bio, a homeopathic company based in Asheville, N.C. “They do not want customers leaving their doors and taking their money with them; they want to capture that.”
According to SPINS, vitamins and minerals were the leading natural dollar sales category in 2012, ranked on cross-channel dollar volume. Consumers are looking for healthier options, but accessibility and education stand in the way at grocery retail outlets.
“The self dominance of conventional products and the narrow focus of some retailers to open up their shelves to innovative organic products means consumers may have limited access,” says Theresa White, senior executive officer for Natracare, a natural female hygienic care company based in Greeley, Colo. “With almost half of all organic products now being sold in conventional supermarkets, expanding organic and natural offerings not only drives this trend, but increases conventional supermarkets sustainability points in the process.”
Manufacturers advise retailers to look at the drug store chains for direction. Companies such as King Bio offer products unavailable from conventional manufacturers, says Gerhardt. Conventional brands are the natural company’s biggest competition, after all.
“By educating consumers and buyers, the organic and natural category has huge potential to gain market share, says White. “The shopper comes from all communities crossing a broad range of age groups and has concerns about their bodies and their skin coming into contact with toxic chemicals and synthetics, which may cause them intolerance or impact their long-term well-being.
“They are checking labels and campaign websites for safer options, and seek to establish the ethical status of the companies they buy from which doesn’t stop at a CSR statement or website,” she adds.
Meating the standards
If there is any sort of exception for natural labeling, it is meat and poultry. Meat and poultry producers are the only ones that must meet requirements to be marketed as “natural.” According to the USDA’s Food Safety and Inspection Service’s (FSIS) Food Labeling requirements, a natural product is one “containing no artificial ingredient or added color and is only minimally processed. Minimal processing means that the product was processed in a manner that does not fundamentally alter the product.” Then, the label must include a statement explaining the term natural, such as “no artificial ingredients” or “minimally processed,” the FSIS outlines.
While this provides reassurance to consumers, there is a flaw in this definition, says Barbara Haumann, spokesperson for the Organic Trade Association, based in Brattleboro, Vt. “It only says how the meat was processed; it does not say anything about how the animal was raised. A lot of consumers think natural means what is required for organic, but it is far from it. For example, natural can use antibiotics, organic you cannot.”
The USDA’s definition is almost deserving of criticism, says Kent Harrison, vice president of marketing and value creation for Tyson Meats, Open Prairie Natural Angus Beef. The term retailers and consumers should be looking for instead of natural is “never,” he says.
Both Open Prairie Natural Angus Beef and D’Artagnan, a purveyor of foie gras, pates, sausages, smoked delicacies and organic game and poultry dedicated to natural, sustainable and humane production, market their meats as having never received antibiotics or hormones. Using such terms on their packaging and marketing differentiates their brands from those that use withdrawal programs and advertise as natural.
“What you end up with is a discrepancy between ‘true natural’ and calling it natural through the watered down nature of the USDA definition,” says Harrison. Open Prairie adds a level of transparency to its business by enlisting third-party verification services, such as IMI Global, to corroborate its processes. This is done through audits that extend as far as the calf/cow operator and the feed level. In addition, the Dakota Dunes, S.D.-based producer’s suppliers are source verified, and the Global Animal Partnership (GAP), a nonprofit organization with the goal of improving animal welfare, audits 60% to 70% of the suppliers, says Harrison.
“Between all these elements we have audit levels that cover about 80% of the cow/calf operators, the guys that produce the animals,” he says. “It is unique in the industry. It plays a huge role in authenticating the credibility of our programs with our customers’ decision makers. It lets them know there is no a short cut to giving you what we are saying we are giving you.”
A winning loss
Advocates of the defeated Proposition 37 may have won after all. The California state initiative that required the mandatory labeling of genetically engineered food, but was narrowly defeated in the 2012 election, has caught some momentum.
Versions of Prop 37 have been considered or voted on by the government in more than a dozen states, such as Hawaii, Washington and Connecticut, to name a few. The jury is still out on the success of some states’ initiatives, but supporters have captured the attention of the federal government, and even more importantly, the opposition.
The opposition donated more than $45 million to the “No on 37” campaign last year, and all it received in return was a larger battle, say industry observers. The result has been talk among some of the large food manufacturers, which the industry is speculating could lead to a compromise at the federal level with a national labeling program.
Although the corporations that opposed Prop 37 were accused of lacking concern for peoples’ rights to know what is in their food, their reasons are not entirely cold-hearted, say observers. The costs to small businesses and farmers to restructure their production processes could bankrupt them and have a huge impact on the state’s economy, say observers.
Supporters are not expected to back down any time soon. “I think consumers are going to be much more vigilant,” says Arjan Stephens, executive vice president of sales and marketing for Nature’s Path, based in Richmond, B.C., Canada. “Consumers are going to continue to take an activist approach and hold brands accountable for making sure they are as transparent as possible, especially surrounding GMOs, the use of synthetic herbicides and pesticides and the addition of artificial colors and flavors.”