Tuesday, December 16, 2008

Fear of Falling? Organics, Slow Growth, and Making Too Much of Market Data

This week Mintel’s research on organic foods is all over the press, especially with the catchy headline “organics are not recession proof.” This strikes me as another one of those no-thinking-involved stories: let’s start at the beginning. First, is ANYTHING recession proof? Because if it is, you should let us all in on the secret now.

Second, we run into the same problems with definitions that we had prior to the economic fear factor. “Organics” means a whole lot of things – and often, not enough to define entire segments of the consumer population. People may be hesitating about buying organic shampoo, but they’re not ready to give up on organic meat or eggs. Or, more likely, they’re cutting back on meat (organic or not!) until the prices are more in line with their current budgets. Still, it looks like they’re still buying their essential pantry items from the organic side of the fence (not much downturn in sales of Annie’s Mac and Cheese, for example…).

It’s absolutely true that, despite its current legal battle and identity switch from "Whole Paycheck" to "Whole Deal," Whole Foods is not going to show the same profits and growth it has in its pre-recession history. CEO Mackey claims it’s not as bad as we think:

“We have worked hard to increase the value choices within our grocery and Whole Body departments without sacrificing our standards," he said. "We believe our efforts have been successful since these departments are continuing to produce positive comps. While we saw a decline in average transactions in grocery, our average basket size was up, which we believe is a reflection that customers are making fewer trips but stocking up with more on each trip."
Here's three things to consider when evaluating the organic market:
  • One, it’s still expensive, especially in the produce aisle (here’s a hint to all you green consumers: shop local produce markets and shop sustainable rather than organic).
  • Second, a good chunk of WF’s big sales have been in regions that have experienced big population and economic growth, but are now at the forefront of the real estate crash (Arizona, Florida, and California, for example). These areas are hard hit by the recession and all businesses will be struggling a bit here.
  • And third, it depends on what you look at that people are buying. What's green is more often mixed in at mainstream stores now (ironic that WF is being accused of having a monopoly when some of their biggest competitors are now supermarket organic brands and the real candidate for global market control, Wal-Mart).
Although the Organic Trade Association has charted a greater price convergence between organics and conventional food (especially with the development of in-house organic brands), it’s important to note that certain items are going to remain high. Organic produce that’s not in season and difficult to transport is still selling at premium prices in supermarkets. Comparatively, organic vegetables and fruits that are locally sourced and sold in local markets generally sell for the same if not less than their supermarket counterparts. Certainly, consumers have gotten used to buying strawberries even when there’s snow on the ground, so the shift away from those products may be a general trend, not limited to oganics. On the other hand, some of these items may return to their original status as luxury goods, which would mean producing less, but selling for more.

Non-perishable organics like cosmetics and household cleaners are a more complicated question. If the price differences remain high, expect sales of the organics to drop, except in the very high end. But OTA editor Barbara Haumann points out that big companies like P&G are striving to keep their green goods in the same ballpark as their regular line. To me, the Natural Specialty Foods Organization sums up the whole situation:
Organic category sales - not including store brands or bulk sales - were forecast to grow by 14 percent in 2008, compared with increases of 16 percent in 2007, 22 percent in 2006 and 21 percent in 2005, according to market research firm Mintel International. We think the 2008 forecast is probably off by about 4-5%, meaning overall organic category growth is more likely in the 10% range for 2008.
Mintel’s study is more subtle than the headlines would have you believe. Senior analyst Marcia Mogelonsky claims, "Economic struggles will undoubtedly change the way organic food and drink is sold. But we don't expect people to completely stop buying organics… We anticipate more subtle changes, such as the formerly all-organic shopper who returns to traditional cookie brands while sticking with organic produce. These small changes will slow market growth."

Pantry staples remain solid sellers. We still load up the cart with Annie’s Mac and Cheese, some Arrowhead Mills mixes (Hains Celestial is the parent company), and Stonyfield Yogurt, all of which are slightly more expensive but brands with loyal followings, as their steady sales indicate. Stonyfield’s CEO Gary Hirshberg says it all: things may be slowing down, but "Anybody else would be envying our growth" given current economic conditions.”

Maybe not recession-proof, but certainly still kicking.

1 comment:

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