Natural Foods Merchandiser

NFM Market Overview 2012: Natural stays on perennial path to growth

 We look at what’s driving the success of natural products retailers today and offer tips for tomorrow. 

When it comes to natural products hotbeds, Louisville, Ky., doesn’t make the top 10—or maybe even the top 40. But last year, the five Rainbow Blossom Natural Food Markets in the Louisville area posted 9 percent sales growth. Even more impressively, the stores—which range from 3,500 to 7,500 square feet—did this while competing with a Whole Foods Market, a new Trader Joe’s and a Vitamin Shoppe for the city’s natural products audience.

The fact that eight naturals stores—soon to be joined by two more: Earth Fare and another Vitamin Shoppe—could thrive in an area that Rainbow Blossom Chief Operating Officer Summer Auerbach diplomatically calls “not the most progressive” illustrates the post-recession strength of the natural and organic industry. Indeed, Natural Foods Merchandiser’s 2012 Market Overview Natural Retailers Survey shows that nationwide, sales of all natural and organic products (including dietary supplements) within all channels jumped 10 percent to nearly $91 billion last year. 

The natural channel (which includes independent and chain natural products retailers) continued to generate the lion’s share of sales in 2011, growing 9 percent to $37 billion. Although growth in the natural channel was better last year than in 2010 (when sales expanded just 7 percent), mass market retailers—particularly club stores—remain hot on the heels of the naturals stores and, in fact, grew their sales of natural and organic products by 11.2 percent, to $36 billion, in 2011, according to NFM’s Market Overview survey.

Conducted in collaboration with Nutrition Business Journal, a sister publication, NFM’s research shows that growth of natural and organic products sales in all channels is being fueled by a variety of factors: consumers who are becoming more educated about health and environmental issues; foods that taste as good or better than their conventional counterparts; consistent, favorable media attention about the merits of natural and organic products; the growing foodie and farm-to-table movements; and even the rising popularity of yoga.   

“The number of natural products shoppers has increased so much that stores like Whole Foods are now opening in secondary markets like Basalt, Colo. [located near Aspen],” says Steven Hoffman, managing partner of Boulder, Colo.-based consulting firm Compass Naturals. Hungry and well capitalized for expansion, Whole Foods is on track to open between 24 and 27 new stores during its fiscal year 2012 and another 28 to 32 in fiscal year 2013, the company’s co-CEO Walter Robb told analysts in February.

Although it is growing like a weed, Whole Foods does not own the natural products market—not by a long shot. In fact, natural products are increasingly popping up in convenience stores and vending machines, and are becoming more available through health care practitioners and online retailers.

“You go into a SuperAmerica [convenience store] and the endcap is Clif Bars,” says Corinne Shindelar, CEO of Minneapolis-based Independent Natural Food Retailers Association. “Where the growth happens in the future is going to be very interesting to watch.”

Analyzing the data

NFM’s 2012 Market Overview compiled responses from 370 retailers to create a snapshot of the industry. Among the highlights:

• Average net store sales increased 7.4 percent last year, to $1.6 million per store.

• Almost 70 percent of retailers reported an increase in natural and organic product sales from 2010. 

• Gross profit margins for natural channel retailers were down slightly: 30.5 percent compared with 31 percent in 2010.

• Not suprisingly, the Pacific region led all other parts of the country in total store sales and growth last year. But surprisingly, the South Atlantic region had the largest growth. This region encompasses Florida, Georgia, North Carolina, South Carolina, Virginia, West Virginia, Maryland, Delaware and Washington, D.C. Mary Jo Marks, senior project manager in retail space development at Providence, R.I.-based natural products distributor UNFI, says the combination of aging baby boomers in the South and highly knowledgeable consumers around the U.S. capital is likely driving this growth. “Michelle Obama has done a great job in the D.C. area educating on organic,” Marks says.

• Sales growth for food products in the natural retail channel (nearly 10 percent) was below the 13 percent growth experienced in the mass channel. However, supplement sales growth was stronger in the natural channel—7 percent vs. 6 percent.

Analysts say four key factors are influencing the growth in naturals retailing: the millennial generation, value-driven consumers and investors, changes in conventional markets, and increased online retailing.

Rise of the millennials

Last September, Whole Foods CEO John Mackey made an intriguing comment to analysts. Although the chain’s 2011 revenues increased by 12 percent and  same-store sales growth was the highest in five years, Mackey admitted that his company has trouble reaching a large group of consumers: Generation X, or those born between 1965 and 1983.

Why? As it turns out, Gen Xers are not as impressionable or as open to the idealistic message of the natural and organic industry as baby boomers, making them less likely to value shopping at natural retailers, says Jay Jacobowitz, president of Brattleboro, Vt.-based natural products consulting firm Retail Insights. Although this difficulty in converting Gen Xers into loyal shoppers may have been bad news over the last decade, a new crop of consumers is rising into prominence—the millennials—and these shoppers are likely to drive natural and organic product sales well into the future.

“[Millennials] view natural and organic as important components of a holistic, sustainable and healthy lifestyle,” Jacobowitz says. Roughly defined as people born between 1980 and 2000, millennials are now raising their own families—which is opening them up to many important natural products categories. “They are creating a rising tide for all natural boats, from conventional grocery stores to rapidly expanding supernaturals to independent retailers,” Jacobowitz says.

Noting that the millennial generation is even bigger than the baby boomers who drove the initial growth of many natural foods retailers, Jacobowitz predicts these shoppers will give the industry its next surge. “I believe we are on the cusp of what will prove to be a decades-long growth trend,” he says. “Based on our model predictions, we predict natural and organic will make up half of total U.S. food sales within the next generation.”

But for that to happen, the industry needs to do a better job of marketing to this new generation, says Jeff Hilton, cofounder of Integrated Marketing Group in Salt Lake City. “I don’t think natural retailers and manufacturers have come to grips with how to appeal to a millennial audience.” For instance, he says, unlike baby boomers, millennials grew up inundated with advertising and thus are not as influenced by brand names. Instead, they read labels, and if they see quality ingredients in a store brand, they’ll buy it.

“Millennials are driving private label,” Hilton says. “My prediction is that private labels will go through the roof in the next 10 years. If I had a store, I would have a strong private label line.” 

It’s a mistake, however, to think that millennials won’t buy higher-priced natural and organic brands—particularly supplements—because they can’t afford them, Hilton says. Shoppers in their 20s will frequent your supplements aisle, just not with the same agenda as baby boomers. “They don’t see any big deal in combining over-the-counter drugs, prescriptions and supplements,” Hilton says. “They are OK mixing products in order to facilitate their lifestyle.”

To support their fast-paced life, millennials gravitate toward products that improve energy and mental focus. “I could see millennials going for lifestyle products that are bundled together, like an energy supplement with a cognition supplement,” Hilton says. Vision-support supplements also are important for a generation that’s frequently hunched over computer and smartphone screens, he adds. (For other supplements trends, see “Supplement sales drivers.”)

Value pricing and investment capital

Although millennials will open their pocketbooks, they and other grocery shoppers seek to save, too. “I think the food industry has a little bit of a hangover from ’08 and ’09,” says Scott Van Winkle, managing director of equity research at Canaccord Genuity, a global investment bank. “Unlike, say, shopping for a TV, there are more options when grocery shopping, and consumers make more frequent trips to buy food. As a result, they’re conditioned to save money in their shopping baskets—even on the lowest-priced items.”

Despite its “whole paycheck” reputation, Whole Foods has had “tremendous success” with its value-pricing initiatives over the last several years, says Van Winkle, who specializes in the healthy living investment sector. This helped the retailer to grow its sales 13 percent during the first quarter of is its fiscal year 2012. “The price-value scale may have a lot to do with why independents are not growing at the same rate as Whole Foods,” Van Winkle says.

This is expected to become an even bigger factor as Whole Foods and other chains move into the smaller markets that have traditionally been reserved for independent natural retailers. “A lot of these independents haven’t really looked at their pricing because they have a captive audience,” Hoffman says. Co-ops have an advantage here, Van Winkle adds, because they already have a value image.

The good news is that value pricing is likely to be easier in the future because of growing public and private investor interest in the industry. “Naturals stocks are on fire on Wall Street,” Van Winkle says. “Naturals and organics are one of the very few consumer staple, nondiscretionary categories that are posting real growth. That strength is giving investors something they can invest in.”

Although Wall Street growth is unlikely to have a direct influence on a local retailer’s bottom line, it can affect manufacturers and distributors, which in turn trickle down to individual stores, Van Winkle says. For instance, investment capital infusions into packaged food companies result in bigger economies of scale, which can produce lower price premiums.

“There’s very inexpensive capital out there that healthy corporations have access to, so we will continue to see investments in the industry,” Van Winkle says. That capital is even spreading to retailers, as evidenced by the recent $300 million acquisition of the 25-store natural foods chain Earth Fare by venture capital firm Oak Hill Capital Partners.

Conventional challenges

As noted, the mass-market channel outperformed the natural channel in 2011—but not all conventional retailers are experiencing the “house-on-fire” growth the mass channel as a whole has seen over the last 10 years, says Jim Hertel, managing partner of Willard Bishop, a Barrington, Ill.-based consulting firm that works with conventional retailers. In fact, a combination of food inflation and post-recessionary worries has taken a toll on sales of natural and organic products within many conventional supermarkets.

“The middle has sagged out of the food retail marketplace in the last five years,” leaving more high-end and discount consumers in its wake, Hertel says. Mass merchandisers that counted on middle-class shoppers to bolster sales in their natural aisles are now going after the coupon-clipping set instead. As a result, “conventional stores may not be dropping natural products, but as their performance deteriorates, they’re not promoting them,” Hertel says. “They no longer think natural is how they’ll thrive in the marketplace. Instead, they’re looking more at private label or low-cost items.”

Carla Ooyen, director of market intelligence for New Hope Natural Media, says the Market Overview survey echoes Hertel’s findings. “Sales are slowing at grocery stores,” she notes, “but expanded natural product offerings and stronger growth is occurring at outlets such as drugstores and warehouse clubs.”

Internet power

Although NFM data show that online store sales accounted for just 4 percent of the total natural and organic marketplace last year, sales within the Internet channel are rising fast—nearly 15 percent to $3.3 billion in 2011.

Abe’s Market, a natural and organic online store that launched in late 2009, posted 500 percent sales growth last year and anticipates 400 percent growth this year, according to company cofounder Jon Polin. Abe’s inventory, which includes nonperishable food, personal care, supplements, children’s items and home goods, has grown from 50 brands and 250 products in 2009 to 900 brands and 12,000 products today.

“We’re riding the wave of two growing trends: the growth in e-commerce and the interest in natural products,” Polin says. Abe’s core audience is mothers ages 21 to 39, “but it’s really interesting to me that 40 percent of our audience is over age 40,” he adds.

Polin attributes Abe’s success to three factors: the Internet’s inherent shopping convenience, breadth of supply—Abe’s has about 6,000 more nonperishable SKUs than an average Whole Foods store, and a “just-in-time” inventory management system that allows the company to take a chance on new or unknown brands with minimal financial risk. “The element of discovering new products is exciting for customers,” Polin says.

Abe’s also has another huge factor going for it: Because the retailer shares a shipping and inventory facility with other vendors, the company’s overall expenses are “way less than half” of those of a brick-and-mortar store, Polin says.

If this news makes you depressed, take heart in the fact that there’s room for everyone on the worldwide web—including natural product stores, which haven’t harnessed the power of the Internet enough, says Hilton. “The historic reason why natural retailers have the edge is relationships, so they should be on the cutting edge of social media, but they’re not.”

NFM data show that less than 60 percent of natural retailers use an e-newsletter or other online resource to boost sales, promote events or educate consumers. And only 17 percent of retailers’ sales are online.

The reality is that such lackluster engagement will not drive natural products retailers successfully into the future. A strong Internet presence is “the price of entry in retailing today,” Hilton says. “If you don’t have one, you’ll regret it in a few years.” Why? Because millennials, Gen Xers and younger boomers are increasingly building relationships in online social networks—not store aisles. 

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