This article by Andrew Martin appears on Bloomberg Businessweek and was originally published on November 6, 2014.
Buoyed by the improving economy and Americans’ belief that they can eat themselves healthy, sales of organic food are booming again. The growth in sales of organic products in the U.S., food and nonfood, had slowed to 4.6 percent in 2009 but has since rebounded. Sales rose 11.5 percent in 2013, to $35 billion, according to the Organic Trade Association.
Once sold primarily in musty natural foods shops, organics went wide after Whole Foods Market (WFM) took over the high end of the market, earning the nickname “Whole Paycheck” in the process. In recent years the mainstream has discovered more natural foods, and big chains, including Kroger (KR) and Safeway (SWY) have piled in. Sales of organic products at Costco (COST) have doubled in two years to about $3 billion a year.
Now the organics industry is bracing for its next big shakeup. Wal-Mart Stores(WMT), the nation’s largest grocer, is expanding its selection of organic foods. And it’s promising to sell the stuff at the same prices it sells nonorganic food.
Most organic food costs at least 25 percent more than regular fare. Wal-Mart says it will keep prices low by using Wild Oats, a well-known name in organics, as its supplier. The deal came together in 2011 after two organics industry veterans bought the Wild Oats name from Whole Foods, then recruited billionaire Ron Burkle’s Yucaipa Cos. as the majority owner and operator of the company. Anthony Zolezzi, who with Tim Luberski bought the name, said he visited Wal-Mart’s Bentonville (Ark.) headquarters 13 times to sell the company on rebooting Wild Oats as a way to sell affordable organic foods. The idea was “to democratize organic to the masses,” says Zolezzi. Wal-Mart now accounts for more than 90 percent of Wild Oats’ business.
“Our new, specific effort with Wild Oats, launched earlier this year, is a natural progression as we meet customer demand,” says John Forrest Ales, a Wal-Mart spokesman. “We are working to lower the price of organic pantry staples to be at parity with national brand nonorganic products.”
Retail’s romance with organics has squeezed Whole Foods, which transformed the industry in the ’90s by lavishly displaying organic food and repositioning it as delicious and upscale. “I think for a long time Whole Foods had the field to ourselves pretty much,” said John Mackey, Whole Foods’ co-chief executive officer, in a May earnings call. “That was nice. But we don’t any longer.” The chain has responded to rivals by reducing prices and running its first national ad campaign.
Whole Foods bought Wild Oats, then a chain of 109 natural foods stores, in 2007. Soon after the deal was announced, the Federal Trade Commission challenged the acquisition as anticompetitive. As part of a settlement in 2009, Whole Foods agreed to sell 32 stores, as well as the rights to the name Wild Oats. (Some of the stores ultimately were sold; others were closed or converted into Whole Foods stores.)
Studies differ on whether organic food, produced without synthetic pesticides, antibiotics, or chemical fertilizer, is any more healthful than conventionally grown produce, but that hasn’t slowed its appeal. “There’s a growing belief among a lot of educated people, and it’s filtering into the mainstream, that organic is a better way to eat,” says Jim Hertel, managing partner for Willard Bishop, a retail consulting company in suburban Chicago. “It’s kind of like the democratization of organics.” Food accounts for 92 percent of overall organic sales. The other 8 percent includes organic clothing, personal care products, and pet food.
The biggest obstacle to continued growth—and cheaper prices—is lack of supply. Farmers can’t convert to organic production overnight, and in recent years there hasn’t been much incentive to do so because of the high prices they’re getting for conventional products. The drought in California, where 21 percent of the 14,326 organic farms in the U.S. are located, is further limiting supplies.
“The entire organic dairy industry cannot keep up with the demand,” says Eric Newman, vice president for sales for Organic Valley, a cooperative of organic dairy farmers based in Wisconsin. He says organic milk suppliers are rationing supplies, filling about 80 percent of what customers order.
In Idaho, bidding wars are breaking out for organic raw milk, caused by demand for organic cheese and such products as macaroni and cheese. In Michigan, Jim Sattelberg, a farmer and supplier, says he can’t find enough organic black beans to meet demand and turns away at least one customer a week. Organic peanut butter is so scarce that Wild Oats offers minimally processed natural peanut butter instead.