Organic Foods Finding A Niche, But That’s All

The wave of organic packaged foods may have crested at mainstream retailers.

Organic foods and beverages are pulling back from startling growth levels in recent years and settling into a small niche space at mainstream retailers, food industry executives and analysts said while attending the recent Reuters Food Summit.

The recession put a halt to the double-digit sales growth organic foods saw earlier last decade. But even when the economy improves, organics are not likely to rebound to such lofty heights as consumers and retailers now have other priorities for spending and shelf space.

“It’s hard if you are a big company to do things that move the needle in that space,” said Greg Pear lman, managing director and head of the U. S. food and consumer group for BMO Capital Markets. While Pearlman expects 2010 to be an active year for deals in the food industry, he did not see a big play for manufacturers in the organic space.

HEALTH AND WELLNESS

Health and wellness is still expected to be a big trend in the food industry, analysts and executives said at the Reuters Food and Agriculture Summit in Chicago. But that interest will be spread across items like those with lower sodium, reduced calories and even a focus on removing allergens from food.

Some organics and their less-regulated cousins, natural foods, may be losing out in that battle for shelf space.

Organic sales are still growing, but the pace has slowed sharply.

During the 52 weeks ending Feb. 20, supermarket sales of packaged foods and non-alcoholic beverages with “organic” claims rose 1.9 per cent to $4.4 billion, according to Nielsen data. That compares with an 11.7 per cent increase the prior year, and increases of 24.5 per cent in the period ending in 2008 and 29.1 per cent in the period ending in 2007.

Organic food was a hot topic in the grocery industry in the middle of the last decade, with even Wal-Mart Stores Inc. saying in 2006 that it would double its organic offerings. Mainstream manufacturers jumped on the bandwagon, coming out with organic versions of products like pasta sauce and ketchup.

To qualify as “organic” in the United States, food must be farmed without the use of pesticides, antibiotics or genetically altered organisms, while “natural” foods refer to those that are minimally processed.

ORGANIC “LIGHT”

Mainstream consumers are finding benefits similar to those they seek in foods that fall short of U. S. government standards for the “organic” label.

“We’re seeing a lot of conventional companies fighting back with ‘organic light,’” said Michael Swanson, analyst at Wells Fargo.

He noted milk that is free of artificial hormones is one product that consumers will buy that is less expensive than organic milk, but which still gives a benefit sought by consumers.

For some mainstream food producers, the economics of organic foods, naturally raised chickens and other such products have not made sense.

“The problem with that is every grocery store sells such a very small amount of it,” said Joe Sanderson, CEO of poultry producer Sanderson Farms, referring to “naturally raised” chicken, which he called a “niche” market.

“They get a premium price for it, but … most of the people that buy that product want boneless breast. And what do you do with the rest of the chicken?” he said.

PULLING BACK

Bob Goldin, executive vice-president of food and restaurant consulting firm Technomic, said that manufacturers and retailers may have put more organic products on store shelves when the marketing buzz was highest. Now they are pulling some of it back as consumer demand did not meet those expectations.

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