Tuesday, July 28, 2009

  • The Wall Street Journal
  • JULY 27, 2009

Organic Foods Get on Private-Label Wagon

As More Shoppers Pinch Pennies, Grocery Chains See 'Natural' Expansion of Store Brands


Organic farmers and grocery retailers are embracing the idea of lower-cost, private-label products to retain newly budget-conscious consumers.

Supervalu Inc., the fourth-largest U.S. food retailer by sales, expanded its Wild Harvest organic brand to 312 items, from 150 last spring. Safeway Inc., the third-largest U.S. food retailer , last fall began selling its organic food brands to other retailers.

Private-label organics have "broken some price barriers for shoppers, and everyone is price sensitive these days," said Mike Gilliland, chief executive of Newflower Market Inc., a natural-grocery chain based in Boulder, Colo., with 25 stores.

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Sunflower Farmers Market, a chain operated by Newflower Market Inc., offers both organic and conventional private-label foods.

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At a Newflower Market store in Tucson, Ariz., a 16 oz. jar of a name brand organic peanut butter costs $ 4.79 while the store's private label was $2.99, putting it in line with conventional peanut butter prices.

These store-brand goods accounted for 22.7% of organic food sales for the 52-weeks ended June 13, up from 13.6% for the same period in 2007, according to market tracker Nielsen Co. In all, private-label organic food sales rose 34% to $1.1 billion. In 2005, organic private-label sales totaled just $166 million, said Nielsen.

For years, the organic-foods segment logged annual sales gains of 20%-plus, but that growth has slowed. Sales of natural and organic grocery products rose 4.6%, to $18.3 billion, for the 52 weeks ended June 13 from a year earlier, according to SPINS Inc., a market researcher.

Slowing demand has pushed even reluctant name-branded organic food companies to offer private-label products. Frontier Natural Products Co-Op, which produces organic spices, teas and oils, began selling private-label products last year as retailer requests piled up.

"It's not an easy decision," said Clint Landis, chief marketing officer of the Norway, Iowa, co-operative. "We are competing with ourselves." But persistent demand by retailers such Sprouts Farmers Market LLC convinced the co-op to drop its reservations.

The lower prices afforded by private-label organics are helping grocers cater to more price-conscious shoppers. "When the economy started slowing, we noticed our (same-store) sales really picked up," said Shon Boney, CEO of Phoenix-based Sprouts Farmers Market, which has significantly expanded its store-brand offerings.

Mr. Boney said the closely held Southwest chain this year is posting high single-digit to low double-digit same-store-sales gains and plans to expand by 20 stores in the next 18 months. Private-label products now account for 12% of total sales, doubling in the past year.

While some people have cut back on organics, the growth is being fueled by shoppers such as Mari Nevar, a self-employed accountant in Boulder, Colo. Ms. Nevar and her family changed monthly cellphone plans, dropped premium cable channels and adjusted the thermostat to save money.

The lower prices afforded by private-label organics are helping grocers cater to more price-conscious shoppers.

"You can drive less, you can scale back on entertainment, lots of things," said Ms. Nevar, 42 years old, who estimates the monthly food bill for her family of four reaches $1,200. "But why would anyone, unless in absolute desperation, scale down on what you consume every day to fuel yourself?"

Deflation for conventional dairy products is undercutting retailers' efforts to reduce organic prices. Loretta Jaus, an organic dairy farmer from Gibbon, Minn., wanted to add livestock to have her son join the family farm. But with falling prices on conventional milk, she put the plan on hold.

This month, a half gallon of reduced fat 2% organic milk costs $3.78, compared to $2.96 for a gallon of conventional milk, according to the U.S. Department of Agriculture. A year ago, prices were within six cents of each other.

"Now is not a good time," said Ms. Jaus, whose 70-cow farm is a member of the Organic Valley Family of Farms co-operative. The co-op has instructed her recently to reduce her milk supply by 7%.

Whole Foods Market Inc., a pioneer in private-label organic foods, is also feeling the price heat. The Austin, Texas, grocer, whose $8 billion in annual sales represents more than a third of the organic industry, has posted consecutive quarters of declining same-store sales and flat overall sales in its latest quarter.

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