Natural Foods Merchandiser

Organic Produce Sees Strong Growth

Organic produce sales have been increasing steadily for decades. The category's dollar sales rose almost 50 percent compared with a year ago. And in 2001, organic produce sales totaled $2.2 billion, or 40 percent of the entire organic foods market.

The produce departments that stock those fruits and vegetables have grown in size, profitability and significance for retailers during the last decade as well. Few stores, including conventional grocery stores, remodel without adding square footage to the produce department. The growth is often disproportionately larger than that of other areas. And each time consumers learn more about the health benefits of fresh fruits and vegetables, decide to experiment with exotic varieties they've been served in restaurants, enjoy expanding seasonal availability or grab a bag of salad mix, the produce department's viability soars.

Produce departments are expanding all across the country. "Anybody who's done an expansion over the last five years adds more produce space," says Mark Mulcahy, produce consultant and president of Organic Options based in Glen Ellen, Calif. "And it's not just adding, but doubling, tripling, even quadrupling their produce space."

Mustard Seed Market remodeled during the mid-'90s and dramatically increased produce department square footage. Bruce Grimm, lead produce buyer for both northern Ohio locations, started with the company in 1994 when the department was only 36 feet of rack space plus a few detached dry bins. With the most recent remodel, the owners decided to triple the department's size.

The Newark, Del.-based Produce Marketing Association reports on the growth of all produce departments, natural foods as well as conventional, in its Freshtrack 2001, Supply Chain Management in the Produce Industry study. Isolating reported department increases from 1996 to 2001, produce department square footage as a percent of the store total grew from 10 percent to 12.9 percent.

At the same time, the number of SKUs in the produce department, also an indication of size, increased as well. The average retail firm in the Freshtrack study reported 634 SKUs in 2001, 186 more than were reported in 1996. The number of SKUs is expected to increase to 760 in just five years. Thus, during a 10-year period, produce executives responding to the study forecast a 70 percent increase in the number of stocked items.

Produce departments have become a more significant part of the retail foods world, says Cathy Means, vice president of PMA. By the late 70s and early 80s, many store remodels that increased produce department size also shifted the section to the front of the store, making it a signature or destination department.

"People know that produce can pay its bills and be a profitable department," Mulcahy says, "So you see it in the front of the store. It used to be in the back."

The distribution of sales at the retail level also illustrates the produce department's growing importance. According to PMA's Freshtrack study, in 1967 packaged grocery constituted 34.5 percent of stores sales and meat and dairy were another 35.2 percent. By 1999, packaged grocery items fell to 23 percent, meat sales decreased to 13 percent and dairy dropped to 7.1 percent. During that period, produce sales nearly doubled from less than 6.6 percent to 11.9 percent.

Several factors are driving this growth, but for retail businesses the most important is that produce does a much better job of contributing to profit. "Twenty years ago, produce departments didn't make money," Mulcahy says. "They were loss leaders."

Both demand- and supply-oriented factors contribute to increasing organic produce sales. For example, the number of acres under organic production is increasing; therefore, the supply of organic fresh fruits and vegetables is better now than at any other time. In 1997, farmers in 49 states dedicated 1.35 million acres of farmland to organic production, according to the Department of Agriculture and its Economic Research Service. That number represented a 32 percent increase from 1995, when only 918,000 acres were certified organic.

By 2001, the number of acres being cultivated organically in the United States increased to 2.23 million, a remarkable 140 percent increase from six years prior, according to the SOEL (Foundation of Ecology and Agriculture, Germany) survey, Organic Agriculture Worldwide 2002—Statistics and Future Prospects.

More organic acreage means more variety and quantity available. Wholesalers don't have to say "no" to retail client requests. Most every item conventional grocers carry is now available organic, says Simcha Weinstein, marketing director for Albert's Organics, a producer-wholesaler with facilities in Los Angeles, Bridgeport, N.J., and Denver. This wasn't always the case. "I remember when an organic red leaf lettuce was considered a specialty item," Weinstein says.

Mustard Seed's Grimm credits the availability of local organic produce in northern Ohio with helping the store develop a signature produce department. He went to the Ohio Ecological Food and Farming Association and offered Mustard Seed as a venue for selling locally produced organic foods; the abundant variety and presence of produce grown by local farmers generated consumer interest.

"Grower profiles are a big driver for us," Grimm says. "With the [tight] labor [market], it's tough to have staff that is knowledgeable." The store supplies signs indicating the proximity of farms and point-of-purchase materials from local growers. Both encourage repeat purchases from loyal consumers.

In addition to expanding domestic acreage and supply, more farmland around the world is being certified organic. In fact, according to the SOEL survey, North America lags behind Oceania, Europe and Latin America in percent of the world's total organic land. Worldwide, more than 41 million acres are under organic cultivation—the United States only constitutes 0.05 percent of that.

The supply generated by these organic farms is increasing out-of-season availability of many fruits and vegetables, which is another reason for increased sales. Many conventional consumers are accustomed to year-round produce, and for those switching to organic, seasonality is a new concept. "The winter used to be a complete dry spell," Weinstein says. "But the huge increase in acreage farmed here and abroad has changed that."

Consumers' changing attitudes about healthy eating and fruits' and vegetables' contributions to health are other factors spurring demand for organic produce. "People's perceptions and ideas about their diets are changing," Mulcahy says.

Research on the phytochemical content of fresh fruits and vegetables has and will continue to increase consumer awareness about the health benefits of eating produce. As researchers learn how fresh fruits and whole vegetables keep people healthy, consumers will want more of them, says PMA's Means.

Produce departments have expanded along with America's palate as well. Increased demand for ethnic restaurants and cuisines affects produce department SKUs and sales. From Thai ingredients such as lemon grass to yucca root and pepper varieties used in Latin and South American cuisine, Means says more items are now available in produce departments because consumers demanded them. "Very often, it's the produce and herbs that make one cuisine different from another," she says. Chicken and vegetables are universal, but the particulars of the produce make the difference between fajitas and stir-fry, says Means.

Another factor driving produce sales growth is the recent introduction of convenience items. Consumers are eager for products that can eliminate steps from mealtime preparation, so the produce industry responded in the '90s with bagged salads and precut vegetables.

Many retailers also launched successful in-store preparation programs that make fresh produce more consumer friendly. "If you can cop some of your loss on something going south by upgrading it, by putting a little bit of labor into it, that's a beautiful thing," Grimm says.

Convenience items will continue to drive growth in the world of fresh fruits and vegetables, as will the growing appetite for (demand) and availability (supply) of those items. And if federal standards and a government-endorsed National Organic Program have the expected impact, sales from the produce department may make up even more than 40 percent of the organic foods market in 2002.

Natural Foods Merchandiser volume XXIII/number 6/p. 26-27

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