Retailers have their game faces on as they battle to gain market share of the organic and natural segment.
However, try telling that to Whole Foods executives. They are in the midst of a battle to maintain their market share of the natural and organic consumer segment. The international grocery chain is generally credited with pioneering the natural and organic retail market, bringing shoppers an indisputably unique product mix and shopping experience.
Organics have since taken on a life of their own. According to the Organic Trade Association (OTA), organic product sales (92% of which are foods and beverages) in the U.S. grew 11% to $35.1 billion in 2013; the strongest growth in five years, say officials for the Brattleboro, Vt.-based organization. Along with that growth has come the expansion of natural and organic-oriented grocery banners, such as The Fresh Market, Mrs. Green’s Natural Market and Sprouts Farmers Markets—all of which are ready, willing and able to tap into Whole Foods’ consumer base.
While “organics” were basking in a record 2013, Whole Foods Market was making headlines for another reason. The chain reported its Q2 earnings, and investors were not happy. Revenue reached a record $3.3 billion, reported Whole Foods; yet, earnings were at 38-cents a share, 3-cents a share below the consensus estimates.
“Whole Foods is still generating store sales that are superior to any major supermarket in the U.S., they were just overrated; now they are being rated realistically,” says Bill Bishop, founder of Willard Bishop and chief architect at Brick Meets Click, based in Barrington, Ill. “What has happened is that their growth has slowed and the value of their stock has stopped growing. The store still owns a very important segment of the grocery business and they are not showing any signs of relinquishing that ownership.”
As the industry stopped to debate Whole Foods “failures”—and sell their stock—they were blind to what everyone else is doing right. If Whole Foods’ growth is slowing, even if ever so slightly, where have the chain’s health-oriented consumers been shopping?
Turns out, everywhere else.
The expansion of natural and organic-oriented grocery banners, some featuring lower price points, have been able to tempt organic shoppers away from Whole Foods’ mecca. Simultaneously, traditional grocery stores have been inching their way into the better-for-you segment, product-by-product, for years now, and have recently really jumped in full force, creating a tremendous rivalry for middle-of-the-road shoppers who want a bit of both—organic and conventional.
“The shift is on for retailers as ‘wellness advocates,’” says Sandy Skrovan, U.S. research director at Chicago-based Planet Retail. “Access to convenient, affordable healthcare and good-for-me solutions is a growing concern. Today we see drugstores transforming into healthcare hubs and grocers going after holistic health experience. The door is open for a lot of innovative and distinctive products, services and solutions to find their way to stores shelves.”
Traditional retailers are in a strong position to reach the masses. Industry observers estimate about 15-20% of shoppers are “diehard” organic shoppers. “A relatively small share of shoppers, or households, go completely organic, they mix and match so they do not require a store that has organic products across all categories. Most people are just going to buy ‘more organic,’” says Bishop.
So while farmers markets and organic-oriented stores continue to thrive off the business of heavy organic users, conventional stores are thriving off the mainstream market, building their product mix off consumer demands.
Company officials for Bi-Lo Holdings allow consumer demand to dictate the evolution of their organic offerings. “In our stores, we notice that as we add organic products in one department, produce for example, customers interested in these items shop with us and increase the demand for natural products in other departments,” says Nicole Hatfield, senior manager, local business for the Jacksonville, Fla.-based retailer.
“This pattern helps us to expand our assortment, and as the trend continues to increase for organic and natural products, many supermarkets will most likely continue to make adjustments in stores to meet the demand,” she adds.
There is an evolution to natural and organic product success in traditional stores, explain observers. It begins through introducing a selection of national brands in a designated section, transitions into an organic and conventional mixture in department shelves and eventually ends with a full offering—and in many cases a natural or organic private label brand.
This is the model Publix followed. However, the retailer took it a step further and built a “health/natural/organic” banner, called Publix GreenWise Market, with three locations in its home state of Florida.
Publix officials studied the consumers shopping patterns in the GreenWise banners, and learned that many still stopped at Publix for their traditional items. Employing those findings, the Lakeland, Fla.-based retailer was able to better stock their traditional format stores with health/natural/organic products. “In our customer base, few are solely looking for health/natural/organic; there is usually a mix looking for both worlds,” says Maria Brous, spokesperson for the retailer.
“We have seen a great response from our traditional store customers buying more health/natural/organic products. We also see them going for more convenience products in our fresh departments—items that are pre-cut, pre-washed, pre-sorted, for instance—all of which are really time savers. It is really respecting the time of the customer and understanding that they want one trip and they want to get everything they need in that one trip,” she adds.
The retailer tailors its GreenWise label offerings in its traditional Publix supermarkets by merchandising them alongside their conventional counterparts, as well as in a designated section, depending on the store footprint and consumer base.
As consumers continue to grow trust in store brands, more retailers are developing natural and organic brands to gain that consumer loyalty, similar to GreenWise.
Kroger is another large-scale chain that has hit the ground running with its own line of better-for-you. The Cincinnati-based retailer’s Simple Truth and Simple Truth Organic product lines have grown at what officials are calling “an astonishing pace.” Launched in September 2012, officials expect it to reach billion-dollar brand status by the end of fiscal year 2014.
This overall success of private label brands in the market, and especially in the natural and organic arena, has opened the door for the next phase.
The next phase
Before the industry began over-analyzing the future of Whole Foods, another national name was making news for planting organic roots.
The discount retailer is jumping head first into the organic segment via a partnership with Wild Oats Marketplace. The addition of the Wild Oats brand to Walmart Supercenter store shelves will level the playing field, say observers.
Many call it the “next phase in the organic industry” by bringing organic products to consumers on limited budgets. In support of that, an Acosta Sales & Marketing study recently identified “expense” as the biggest barrier to healthy eating.
Affordability was the main driver behind the partnership between the two companies, says Tom Casey, CEO of Addison, Texas-based Wild Oats. “Roughly 75% of consumers say they buy some organics, and roughly 80% would buy more if they could afford it. We believe in the mission of affordability and availability; those are the pillars of the Wild Oats brand,” he says.
The lower price point does trigger some questions about the legitimacy of the product. Casey explains that organics, like other sectors, are subjected to economies of scale. “Something like 15% or less of the cost of production is the organic ingredients, and the rest of the costs are in manufacturing, distribution, marketing and retail mark-up; those are areas where scale matters in a big way.
“We are excited about this because we can start with pantry items and achieve cost savings of at least 25% and make the price comparable to conventional brands,” he adds.
Walmart will offer Wild Oats Marketplace Organics; Wild Oats Marketplace products, made with ‘simple and real ingredients;’ and Wild Oats Marketplace Originals.
Almost simultaneous to Walmart’s big news, Target announced the launch of an initiative to merchandise 17 popular natural, organic and sustainable brands across multiple categories: Made to Matter—Handpicked by Target.
Then, add to that Aldi’s latest brand debut, SimplyNature. Like Walmart’s Wild Oats venture, SimplyNature is aimed at making better-for-you options more affordable. Observers note that the conglomeration of these efforts predicts a shift in the organic shoppers demographic.
Aldi officials say that demand has been strong since the early 2014 launch. “We take a simple cost-effective approach to grocery shopping that fundamentally saves shoppers on their grocery bills at checkout, which our customers have come to love, especially on organic items that are traditionally known to be more expensive,” says Liz Ruggles, director of public relations for the Batavia, Ill.-based retailer.
Jim Hertel, managing partner for Willard Bishop, food retail consultants, based in Barrington, Ill., says Aldi is seeing growth every bit as hot as Whole Foods back in the day.
“The chain is seeing same store sales trends in the high single-, low double-digits; they are opening stores at about 10% a year; put A and B together and the chain is growing at almost 20% a year,” says Hertel. “That is almost unheard of in this business.”
Budget organic brands like SimplyNature and Wild Oats may be changing the category, but the jury is still out regarding Walmart or Aldi’s potential to become a major player in the organic market.
“If you think about the profile of typical organic consumers, it doesn’t match up that well with the shopper base Walmart tries to appeal to,” says Jeff Born, professor of finance at Northeastern University D’Amore-McKim School of Business, and faculty director of the executive MBA program. “Having said that, Walmart is famous for capitalizing on growth opportunities, so I expect that we will see the chain not just experiment, but figure out the combination that what works for their clientele.”
They face the same challenges as every other traditional chain playing in the better-for-you sector, say observers. The difference is that until now mainstream traditional retailers have typically followed the consumer’s lead when determining the extent of their organic and natural offerings; Walmart is changing the way the game is played by bringing in a new shopper base.
Now the question on industry officials’ minds is: with everyone offering organic, what are retailers going to do to be different? “If being a natural/organic retailer was your main differentiating point, you are going to have to come up with something new,” says Hertel.
For a retailer like Sprouts Farmers Markets, which competes in the natural/organic arena by going after a broader consumer base than that of a traditional health food or specialty store, that means offering a competitive price point along with an indoor farmer’s market shopping environment.
“We are taking share from the conventional stores, as opposed to the high-end natural and organic models, because we’re showing people that eating healthy doesn’t have to be expensive,” says Donna Egan, spokesperson for Sprouts Farmers Market, based in Phoenix. The shopping experience is unique with wooden crates stacked with fresh produce and bins and barrels of bulk food.
“We also help educate shoppers on product attributes, from gluten-free to raw to vegan. Our level of service simply can’t be matched by a 100,000-square-foot supermarket,” she adds.
Retailers that offer high-quality prepared foods section have been able to use that as a differentiator. Those that committed to prepared foods during the recession fared well, say observers. They gained, and continue to gain, consumers that may have previously eaten out five nights a week. “Retailers like Mariano’s are blurring the line between traditional grocery shopping with food to bring home—like fresh grilled meat—to prepared foods to eat-in options,” adds Hertel.
Consumers, especially younger generations like Millennials, are seeking a positive shopping experience as much as they are a specific product segment. The fresh and prepared foods section is the section most retailers target to build-up the experience.
Many retailers are pulling out all the stops when it comes to differentiating themselves: “Some offer cooking classes, dieticians, newsletters, extensive website information and on-shelf labeling to help educate shoppers, things like that,” says Colin Stewart, senior vice president at Acosta Mosaic Group Strategic Advisors (AMGSA), the strategy and insights consulting division of Acosta Sales & Marketing, based in Jacksonville, Fla.
In the end, the winners will be the retailers whose competitive advantage appeals to the masses—whatever that is at the time.
Leading the way, organically
When it comes to differentiating factors, Trader Joe’s has demonstrated to the industry that it does not have to be just one. For a second consecutive year, the quirky, private-label driven chain was rated consumer’s favorite grocery store in North America, according to a March 2014 Market Force study. Receiving a Composite Loyalty Score of 82%, determined by consumers’ shopping satisfaction and their likelihood to refer the store, Trader Joe’s beat out Publix, which came in a close second with 80%.
“It is only getting more difficult to attract and keep customers, and being adequate is no longer good enough,” said Janet Eden-Harris, chief marketing officer for Market Force, based in Louisville, Colo. “We have found that delighted customers are three times more likely to recommend a grocery store than those who had just an OK experience. This tells us that chains that truly wow their customers on their first visit can establish brand advocates who go on to recommend the grocer to friends and family.”
The study ranked a number of different product and customer service attributes and Trader Joe’s received one of the top rankings in the study for its natural/organic product offerings (83%). Other areas it topped the list were private label brands (67%), nutrition/health information (48%) and sustainable practices (46%). On the service side the numbers change a bit with Publix taking the number one spot for courteous service (74%), fast checkouts (47%) and inviting atmosphere (53%).
Atmosphere and experience play a big role, says Colin Stewart, senior vice president at Acosta Mosaic Group Strategic Advisors (AMGSA), the strategy and insights consulting division of Acosta Sales & Marketing, based in Jacksonville, Fla. “This is especially the case with younger generation shoppers. In our survey we ask them about what is important about where they shop and it is often a lot of experiential factors. They are looking for information and a more interesting environment.”