It?s a good time to be a natural foods retailer. New categories of organics are developing every day—and are selling furiously, helping naturals stores take back some organic sales from mainstream grocers.
In last year?s Market Overview, we noted that with exceptions in three categories, more organic foods were purchased in mainstream stores, with an overall split of 56.6 percent of the organic dollar going to conventionals and 43.4 percent to naturals. This year, the reverse has happened. Naturals stores have dominance in all but two of the top 10 organics categories, according to data provided by SPINS, the San Francisco-based natural products market research firm. The difference, though, lies in which categories made the top 10.
?Once a category goes into mass, the category gets much, much larger and it is therefore harder to post the same growth rate,? said Scott Van Winkle, a financial analyst and managing director at Boston-based investment firm Adams Harkness. ?Intuitively, the fastest growth categories should be categories that are just beginning to gain distribution into the mass channel ? and thus aren?t well-penetrated yet.?
That seems to hold true for the top three fastest-growing organic items in naturals supermarkets?frozen and refrigerated meats, poultry and seafood; coffee, coffee substitutes and cocoa; and cookies and snack bars.
But the story of the year may be No. 4: packaged fresh produce, with skyrocketing growth in both channels.
Consumers veg out
The best-selling categories in naturals stores include some old favorites. Packaged fresh produce was a top performer for naturals, both in terms of sales and year-over-year performance. With 35.4 percent growth, it rang up $171.9 million for naturals retailers. Despite its stellar performance in naturals, mainstream stores still dominate sales in this category, with $1.08 billion last year.
?Organic produce is one of the most developed organic categories,? said Bob Burke, principal at Natural Products Consulting Institute in Andover, Mass. Burke noted conventional stores sell a lot of organic produce because it goes through the same distributors as conventional produce and doesn?t rely on smaller natural food distributors.
Peter Meehan, co-founder and chief executive of Newman?s Own Organics, which recently began selling a line of organic bagged produce, noted, ?Many independent natural foods stores don?t sell a lot of branded produce. They work with local growers to bring in fresh, unbranded mixed greens.? Vitamins and minerals continued to be steady performers, bringing in $304.4 million last year but representing only 2 percent growth from 2003.
And, perhaps as a testament to the decline of the low-carb diet, bread and baked goods were the No. 2 sellers in naturals stores, experiencing 9.1 percent growth with sales of $177.7 million.
Food supplements—a category that includes aloe products, bee products, green food supplements, soy supplements, yeast products, supplement oils, and miscellaneous fruit, vegetable and grain-based supplements—performed well for naturals retailers, with a brisk 11 percent growth rate, bringing in sales of $161.2 million.
A much smaller segment, but still showing explosive growth, is personal care items, which posted sales of $16.3 million, a nearly 30 percent increase over the previous year. Meat, poultry and seafood are neck-and-neck with coffee, coffee substitutes and cocoa for fast-track growth, falling in the 25 percent range. Crackers and crispbreads round out the top five.
A meaty contender
In the organic sector, the cold case is even hotter. Organic frozen and refrigerated meats, poultry and seafood showed an astounding 120 percent growth in natural products stores, with the market now totaling more than $15.6 million. It started from a small base, but the category?s growth remains impressive. ?It?s likely that the driver behind this is consumer concern for [food] safety,? said LeAnn Ledebuhr, a natural products expert at SPINS. In previous years, she said, the low-carb craze fueled demand for natural and organic meat products. ?Though the low-carb trend has declined significantly, sales should not be impacted by this decline because of the rapid increase in overall consumer awareness over the last few years about issues like food-borne illness, chemical contamination, environmental sustainability and treatment of animals.?
So far, the natural channel has nearly complete dominance over this category; 96 percent of all organic meat purchased in 2004 was at a natural foods store.
That may change in the near future, however. In late April, Coleman Natural Meats announced it was introducing a line of all-natural beef, poultry, lamb, pork and sausage to the conventional grocery channel. ?Greater numbers [of today?s consumers] are increasingly concerned about the use of antibiotics and hormones,? said Jeff Tripician, vice president and chief marketing officer at Coleman. While most of the line is merely ?natural? and not organic, this may be the first step in introducing conventional consumers to the concept of organic meats.
A jolt in caffeine sales
Coffee and cocoa followed at a distant but still impressive second-best among top-selling organics categories in naturals stores, with 64 percent growth and more than $29 million in sales. ?I believe that the fair trade issue has had an impact,? said Warren Jones, also of SPINS. Jones noted that many of the fair trade products also tend to be organic. Sixty percent of this category, however, is purchased in mainstream stores. Burke of Natural Products Consulting speculated that ?some mainstream brands with fair trade and organic SKUs, such as Green Mountain and Starbucks, [that] have a lot of distribution in supermarkets—as well as natural brands in mainstream stores—are contributing to growth in the mainstream channel.?
According to the SPINS charts, the organics craze has found its way to junk food, too. Cookies and snack bars showed 63 percent growth—the third-fastest rate among organic products in naturals stores. Most of the other items in the top 10 growth categories—crackers, candy, puddings, dips—are also snack items or desserts.
Meehan said he isn?t aware of any consumer-driven factor that would explain such statistics. ?The only thing I?ve noticed ? [was] how our cookie sales didn?t go down during the low-carb craze. The only thing we can tell is that the people who eat our cookies weren?t obese ? and weren?t eating a pound and a half of Newman-O?s a week.?
Also, take note that organic cookies are being sold predominantly in the healthy food havens known as naturals stores, not in conventional stores where they might be positioned as ?almost good for you.?
?In a supermarket it?s unlikely that the average organic cookie set is as large as the organic cookie set in a natural foods store,? said Meehan.
Meehan also noted that dollar sales don?t tell the whole story. ?Look at what?s hot,? he suggested, ?and the [retail] cost of those products.? If, say, pretzels are hot this month, a bag that formerly sold for $2.99 may now retail for $3.99, he said. ?The dollar ring is going to go way up [but] the volume is still the same.?
Looking forward, Burke said he expects the growth of natural and organic meat and seafood to continue. He also sees great promise for whole grains and foods that address food allergies.
Natural Foods Merchandiser volume XXVI/number 6/p. 40, 42