Is organic food still a cash crop?
Some time ago, organic food made the shift from farmers’ markets to mainstream supermarkets, where its “natural” image tapped into converging consumer trends around sustainability, health and wellness and authenticity.
Spurred on by consumer demand, sales of organic packaged food in Australia reached $634.4 million in 2014, with a year-on-year growth rate of 21.4 per cent, according to market research firm Euromonitor International.
But while the total value of sales continues to grow, amounting to $784 million so far this year, the annual growth rate has slowed significantly. Euromonitor predicts the growth rate in organic packaged food and beverages will dwindle to 4.5 per cent by 2020.
As Australia’s supermarket duopoly continues to engage in a race to the bottom on price, it’s increasingly important to understand the potential of specialty categories like organic food.
One reason for the current slowdown in sales is the stringent three-year-long process required to gain accreditation as an organic food producer in Australia, which has resulted in insufficient supply to meet demand. Another reason is simply the nature of organic farming.
“It is likely that the supply of organic products will remain conservative, especially as yield is often much lower compared to regular production,” Euromonitor research analyst Alice Yu told Inside Retail Weekly.
These external factors have kept the price of organic products comparatively high, which is also hurting sales. “Unless there is a significant reduction in the price differential between non-organic and organic packaged food products, mainstream consumer acceptance will continue to elude the latter,” Yu wrote in a recent report on the category.
Supermarkets have already identified one solution to the price problem, as demonstrated by the addition of organic products to private label portfolios in recent years. Woolworths led the pack in this space in 2015, with its Macro Organic private label holding an overall market share of 15 per cent, and 79 per cent of the organic nuts category alone.
According to Yu, it was Aldi that first showed retailers how to offer organic products at a lower price point. “Like brands, if retailers want to make sales through their private label products, they must also be in tune with consumer trends and demands,” she said.
“This has become increasingly clear as Aldi stores continue to expand and take market share from the major supermarkets. In particular, Aldi has illustrated that private label products can be of reasonable quality for a lower price point, especially in their organic product offerings as well.”
Research from Roy Morgan backs this up. In its 2016 survey of grocery shoppers, 30 per cent of Australians who mainly shop at Aldi said they try to buy organic products wherever possible, compared to 24.6 per cent who said the same in 2012.
Comparing those same years, Woolworths shoppers showed a slight increase in concern about buying organic, while Coles shoppers have barely changed, and fewer IGA shoppers care about organic now than they did in 2012.
“The lower price point offered by private label organic products, such as from Woolworths, will appeal to price conscious consumers. However, the increasing affordability is also likely to encourage consumers that may not necessarily have considered organic before to give it a go,” Yu said.
Not everyone agrees that price is the motivating factor for consumers buying organic. “I think there is a big difference in the credibility of businesses that offer [organic] because they see it is a market opportunity [and] businesses that live and breathe the ethos of natural products,” Jodie Stewart, founder of the Sydney-based organic grocery chain About Life, told Inside Retail Weekly.
“For us, of course, it is more than about just the farming method. It is about ensuring producers have been paid a fair price, that the product is as nutritionally dense as possible. Many other criteria are considered such as animal welfare and food miles.”
Starting out as a juice bar and café in Sydney’s inner-west in 1996, About Life opened its eighth grocery store in February this year, its first in Melbourne. (The store’s Port Melbourne location was previously home to a Thomas Dux, Woolies’ struggling premium grocery offering.) It’s a sign of the growing appeal of organic food, according to Stewart, who doesn’t agree that high prices are slowing sales.
“We have to say that is not our experience. As the demand has grown, prices have come down. Sure, [organic costs] a little bit more than mass-produced, processed food, but one damages your body and the environment, and one is better for both,” she said.
And yet, international examples indicate that supermarkets and even organic grocery stores have yet to fully figure out the market. In April, The Wall Street Journal reported that Walmart was phasing out its private label line of organic products, which the world’s biggest retailer had introduced just two years ago. The offering didn’t gain traction with customers quickly enough, although Walmart executives announced a renewed push to increase organic food sales this year.
Meanwhile, Whole Foods Market, one of the largest organic retailers in the US, reported a 22 per cent decline in profits in July compared to a year ago. While overall sales rose two per cent, to US$3.7 billion, its same store sales were worse than projected. This comes one year after New York City’s Department of Consumer Affairs accused the supermarket chain of “systematic overcharging for pre-packaged goods..”
Whole Foods has long struggled to justify its high prices. In May, the retailer opened its first “365” store, an attempt to offer the same quality products at more affordable prices. So, should Aussie retailers view these as cautionary tales of a market that is all but tapped out?
“The demand for organic is likely to still be there, just because some consumers still perceive it to be ‘better for you’ or healthier. I think a better question may be, how big is it going to get? In that respect, not very, just because organic products are that much harder to grow,” Yu said.
“Also, health concerns are currently more focused on ‘free from’ products, such as gluten free or dairy free alternatives. In particular, gluten free products are something the major supermarkets are investing in with ‘Woolworths free from’ private label range and ‘Coles Simply Gluten Free’ private label range.”
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