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Natural Foods Merchandiser

Naturals in recession: the inside story

Veterans of the naturals industry have weathered recessions before—in the 1980s, the '90s and 2001. But none quite like this one. Commodities and transportation prices were already high when disaster struck last fall. Since then, financial markets have collapsed, unemployment is the highest in decades and businesses are failing at an alarming rate.

"In all the past recessions, we've just whistled right through," says Mike Gilliland, who opened his first natural foods store in 1984, co-founded Wild Oats Markets three years later and currently heads Sunflower Farmers Markets, launched in 2002. "But I've never seen one like this. This one is different."

This time around, nobody's whistling. This time around, the recession—the worst since the Great Depression in the 1930s—is hitting everybody along the naturals industry food chain—from retailers to brokers to distributors to suppliers. But if they're not whistling, they're not exactly playing dirges either.

"The high cost of commodities, and the pressure on consumers brought about by a complex series of financial woes, has affected all segments of the food industry, but natural products have fared better than most," says market research firm Mintel International Group in a December 2008 report titled "Natural Products Marketplace Review—The Evolving Natural Lifestyle."

Retail sales of natural products, which saw double-digit growth just a couple years ago, slowed in 2008 and are likely to slow further in 2009. Natural product sales at all retail outlets—natural as well as conventional—grew 11 percent to $18.5 billion in 2007, according to London-based Mintel, with U.S. headquarters in Chicago. Just one year later, sales grew only 6.6 percent to $20.4 billion.

"Natural products have shown steady growth … and their future was all but guaranteed to continue to grow until the economic downturn of 2008. As the price for basic commodities rose, consumers began to rethink many of their daily rituals, and some industries showed definite stress," says Mintel in its report. "The natural products industry will likely see slower growth ahead—but … the market will continue to grow. This is because consumers will continue to be very careful in choosing products that they consider to be safe and healthful. Price will be an issue—and value-conscious consumers will add price to their value equations when shopping—but safety and healthfulness will continue to be strong attributes they take into account when choosing products."

Those health-, safety- and price-conscious consumers are the key to the successes or failures of segments all up and down the naturals industry line. Strategies for retailers, brokers, distributors, manufacturers, growers, producers and suppliers vary—from extending looser credit terms and discounts to stocking shelves with fewer brand names—but the focus is the same.

And at least, as an optimistic Gilliland puts it, "We're not selling cars or TVs."

Taking stock: retailers
To stay in the game, naturals retailers are scrutinizing everything from soup to nuts—literally. What products to stock, who to buy them from and how to price and promote them have never been more important. Stores accustomed to double-digit growth are seeing more single digits.

"Retailers are going to focus on brands and products that are doing well for them—maybe no longer stock products that have a lesser interest (from consumers)," says Daniel Fabricant, vice president of scientific and regulatory affairs at the Washington, D.C.-based Natural Products Association.

While organics are suffering a bit, retailers on the supplements and personal care side are "very positive," Fabricant says. "Especially with the economy and people losing their jobs, losing their health care, they can't afford to get sick. They want to do something positive for their well-being."

But price-conscious consumers might be shunning stores they see as more swank in favor of those they think offer better deals.

"The recession is hurting retailers who are perceived as more upscale," says Lawrence Batterton of San Francisco-based Batterton Brokerage, which covers Northern California and Hawaii and represents 10 health and beauty care manufacturers. "Retailers who consumers see as more value-priced are doing better."

The numbers bear him out: Despite a big push in promotions of discounts and sale items, Austin, Texas-based giant Whole Foods Markets posted a 17 percent decline in first-quarter earnings: $32.3 million, or 20 cents a share, down from $39.1 million, or 28 cents, a year earlier. Sales of $2.5 billion were flat.

But at PCC Natural Markets, a nine-store chain in Washington that focuses on "neighborhood charm" rather than Whole Foods' gourmet image, "shoppers haven't left us," says spokeswoman Diana Crane. "They're buying different things."

More bulk items such as pasta, grains and rice. More products that are on sale. Less frozen and prepared food. Instead of high-end healthcare products, customers are buying shampoo and soap in bulk. Meat and fish are holding steady.

Retailers on the supplements and personal care side are "very positive."

"When the economy first shifted down, we saw people buying more deli and prepared food items. They were going out to eat less," Crane says. "But now they're just saying they're going to make the stuff themselves. They're cooking from scratch more." As a result, PCC's cooking classes are generating a lot of interest. "What we haven't seen is people turning their backs on organic. They still care about their health," Crane says.

The company is seeing a slowdown in growth this year, but it hasn't had to lay off workers.

"What we haven't seen is people turning their backs on organic."

At Sunflower Markets, which specializes in discounted natural and organic products, "we have nothing to complain about," says Mike Gilliland. Growth has slowed to single digits. The company, which has 20 stores in Texas, Utah, New Mexico, Colorado, Nevada and Arizona, is not hiring new employees, and it expects to open seven or eight stores this year instead of the 12 to 15 it originally planned, he says.

"Our customer count is up. There are probably some Whole Foods customers who are migrating to us," Gilliland says. "Our average basket is down. Instead of buying steak, they're buying ground beef. No impulse items." Produce sales are up "huge," he adds. "Meat is up, surprisingly. People are dining out less. Other categories are kind of muddling along."

Gilliland's advice for brokers, distributors and merchandisers: Discounts. Discounts. Discounts.

Manufacturers also are insisting that discounts get passed on to consumers.

"We're very promotion-driven," says Gilliland. "We live and die by our weekly fliers. We're all about sales. We're interested in working with [manufacturers and distributors] who are being aggressive. Some people are trying to keep their sales up by doing aggressive discounting. Others are more stingy. If they can't offer discounts, we're going to look elsewhere."

Getting caught in the middle: brokers and distributors
Broker Lawrence Batterton got the message. "We're beefing up all our promotions, making sure stuff is on sale consistently." The manufacturers he works with are focusing on more value-sized packaging. "Where we might have had an 8-ounce shower gel, now it's a 12-ounce for just a slight bit more money."

Manufacturers also are insisting that discounts get passed on to consumers. "In the past they didn't pay as much attention," Batterton says. "But now they're saying, ‘If we're going to offer this for sale, let's really make sure it's reflected through the retailer.'"

Wholesale natural products distribution giant UNFI, based in Dayville, Conn., is seeing a similar emphasis on discounts and aggressive promotions, says Mary Jo Marks, natural and organic category specialist at UNFI. The company is working with manufacturers on new product placement discounts, for example. It's offering retailers educational tools such as free webinars on specific topics and planograms—which focus on maximizing sales per square foot of natural and organic products.

"We have to do a better job of selling our value proposition."

"UNFI is evaluating both new items and previously stocked items and evaluating movement to make sure we are putting our inventory dollars into the right items," Marks says. Retailers the company works with are decreasing variety and featuring only promotional brands at a lower price. Manufacturers are discontinuing items that generate less return.

Among the hardest-hit categories are organic produce, personal care and supplements, according to UNFI. But the company is seeing growth in niche items such as gluten-free, raw, Greek yogurt and functional beverages. UNFI and Batterton are also seeing a big push for private label products.

Making it work: manufacturers, producers and growers
Manufacturers and growers are adjusting to the demands of the retailers. While some branded products are seeing flat sales, private label or store brands are growing. Batterton says "growth is great" at private label health and beauty care manufacturers he represents such as Reliance Vitamin Co.

Bridgewater, N.J.-based Applegate Farms, which produces lines of organic and natural meats, cheeses, frozen foods and snacks, continues to see double-digit growth, says President Linda Boardman. "Things are a little bit more volatile and unpredictable. We're continuing to monitor the situation." But that hasn't stopped the company from launching new gluten-free chicken nuggets, which it just started shipping. "We've gotten very good response to it," she says.

Applegate Farms is working closely with retailers and buyers to make sure it's offering product lines "that make sense to them," Boardman says. When retailers learn, for example, that Applegate's natural line goes beyond federal guidelines—products without nitrites, antibiotics or chemical preservatives, and by employing humane animal husbandry practices—they may decide to carry those products rather than organic lines, which can be more expensive, she says.

On the other end of the spectrum, the company's purchasing team has met with all its suppliers over the past few months. "We're looking at every opportunity to streamline costs"—even down to the size of its bags, Boardman says. The company realized its chicken nuggets were "bigger than needed—both from a cost and an environmental standpoint." One surprise has been Applegate Farms' organic line of deli meats and hot dogs. The company was concerned it would see shrinking sales in its organic line, but "we've seen growth," Boardman says.

Organics also remain strong for Earthbound Farm Organics, based in San Juan Bautista, Calif., which produces salads, vegetables, fruits and snacks.

"The current economic situation certainly presents some challenges, but we are encouraged by what appears to be some loyalty to organic produce," Earthbound said in a statement. "In the retail side, as people are preparing more meals at home, demand is remaining steady year-over-year. And what we're not seeing is people moving away from organic packaged salads because the value is strong for the small price premium relative to conventional salads." The company said it has seen some weakening on the foodservice side of its business as consumers cut back on eating out.

At the source: suppliers
The price of commodities is high. The organic grain market remains tight. But the natural food and supplements channel is "pretty stable, maybe down just a little," says Paul Flowerman, president of PL Thomas, the Morristown, N.J., supplier of food and nutraceutical ingredients.

The company's growth has gone from double digits to flat. "We're scouring the balance sheet and business activities to see that any fat is eliminated. But we haven't really had to go to our contingency plan," Flowerman says. The company is focusing on "the liquidity of our customers and suppliers—whether our suppliers can continue to offer products and whether our customers are able to pay."

Cost cutting isn't on the agenda. "We focus on quality premium products where our suppliers have a significant investment," Flowerman says. "It's always going to be higher in price. We have to do a better job of selling our value proposition."

Jane Hoback is a Denver-based freelance writer.

Natural Value

Consumer purchasing decisions are based not simply on price but on perception of value, according to a new study by advertising magazine Brandweek. The survey, based on 26,000 customer responses, showed a 20 percent increase in shoppers searching for good value as opposed to simply low price.

What does "value" mean? It can include perceptions of quality and flavor, according to the survey. For naturals retailers, education and customer service may also play a key role. Here, three industry insiders share their thoughts on how retailers can tout value to retain customers.

Al Urpsis, president of Breakout Sales & Marketing, Chandler, Ariz. "Discounting may attract customers and in some cases keep them. But if a retailer truly wants to keep their margins and their customers, they must sell on quality. Many of the quality manufacturers of supplements and health and beauty have educators that can do consumer lectures. It's imperative that retailers utilize this resource."

Mary Jo Marks, natural and organic category specialist at UNFI, Dayville, Conn. "As consumers become more committed to sustainability, they are not only looking for economic value in a product, they are searching for social and environmental values as well. Consumers are evaluating manufacturers on social and ethical behavior more than ever now, and this is a great way to tout environmental values and gain consumer support."

Laura Sheehan, owner of Full Circle Market, Winchester, Ky. "We create value by offering a money-back guarantee on our personal care and supplements purchases. I think this guarantee, combined with the quality of products we sell and the customer service and education provided by our staff, makes customers more confident in their purchases."

—Mitchell Clute

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