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Store Brands Save the Day

September 25, 2009
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After posting double-digit gains during each of the past five years, the organic segment appears to have run out of steam, thanks to an economic downturn that left even eco-conscious consumers short on cash. According to figures provided by The Nielsen Co., New York, unit sales of prepackaged UPC-coded organic foods and beverages in U.S. food, drug and mass merchandise outlets, excluding Walmart, edged up less than 1 percent over the 52 weeks ending July 11, while dollar sales expanded just 5.1 percent (dollar sales of non-organic foods and beverages grew only 2.5 percent).

But the modest gains didn’t come on the national brand side, where organic food and beverage dollar sales actually decreased almost a whole percent. Instead, the increases came courtesy of store brands. Although private label gains were only about half what they were a year ago, according to Nielsen, dollar sales of store brand organics jumped a whopping 32.6 percent over the past 52 weeks, pushing private label’s dollar share of the $4.4 billion organic marketplace (prepackaged only) to 22.6 percent - up from 17.9 percent a year ago and 13.0 percent the year before.

While private label’s growth during the recession has been well documented, such strong gains among what are often the highest-priced store brand options have come as a bit of a shock to some. But not “Chef Drew” Starkweather, CEO of Chester, Vt.-based Drew’s All Natural.

“For people who’ve eaten organic for the past five or 10 years, it’s a way of life, and not something they’re willing to give up,” regardless of a financial setback, he explains.

Sure, the “dabblers” might return to conventional non-organic products, he continues, but core organic consumers will find a way to keep eating organic. And for many, that means less-expensive store brand alternatives.

According to a recent survey by the Organic Trade Association (OTA), Greenfield, Mass., approximately 40 percent of organic consumers reported they are choosing more store brand organics today than they were even six months ago, a trend many retailers and manufacturers have witnessed first-hand.

“The availability of private label alternatives has really helped core organic consumers get through a hard time,” Starkweather says.

He believes shoppers will stay with store brands even after the economy improves, now that they’ve discovered for themselves just how well they compare to national brands.

Gotta Have It

Of course, increased availability is one of the keys to private label’s growth over the past year. Although the OTA estimates that only about 3.5 percent of all food sold in the United States today is organic, the majority of large conventional retailers offer a natural and/or organic private label program.

“There’s been a perception in the industry that you’re not a ‘full-service’ retailer if you don’t have an organic private label offering,” especially over the last year or so, says Doug Baker, vice president of sales at Arlington Heights, Ill.-based Federated Group. This perception is prompting even unlikely sellers such as Houston-based wholesaler Grocers Supply Co., which caters mostly to Hispanics, to add Safeway’s O Organics program to its lineup. (Safeway recently began offering the collection to retailers outside its own family of stores.)

It’s all about casting the widest net, continues Mike Hackbarth, director of private label at The Fremont Co., Fremont, Ohio.

“In some markets,” he explains, “offering natural and organic store brands is a matter of survival. You have to offer those kinds of products - and not just in a little specialty set either - in order to keep certain consumers from abandoning your store in favor of specialty retailers” (such as Whole Foods and Trader Joe’s, which sell a wide range of well-priced private label natural and organic options).

“Organic may not have hit ‘critical mass’ just yet,” adds Nima Fotovat, general manager at Markham, Ontario-based Shandiz Natural Foods, “but, clearly, it’s not a fad; it’s here to stay. … And retailers know it.”

But, Fotovat adds, retailers that make the move to private label sooner rather than later have a unique opportunity to begin building brand equity with a group of consumers less interested in national brand cachet than so-called “higher-level” product attributes.

“National brands like Kraft, General Mills and Quaker have struggled to break into organic because true organic shoppers don’t buy such products only because they’re better for them, but because they’re better for the earth as well,” Baker explains, adding that it’s hard for many organic consumers to believe that “big business” is willing to sacrifice profits to do what’s right for the environment. “It’s a bit of an oxymoron,” he remarks.

As a result, says Pat Nicolino, vice president of marketing at Carneys Point, N.J.-based Clement Pappas & Co., the organic industry traditionally has been populated mostly by small, local or regional “mom and pop-type” operations more committed to Mother Earth than the almighty dollar. Yes, things are starting to change, she admits, citing recent inroads by well-known national brands in the natural cleaning supplies category, for example. But, for the most part, the organic segment remains relatively fragmented, creating an opportunity for store brands to play a leading role - especially among “newbies,” who are much more likely to know and trust the Safeway or Kroger brand than, say, Annie’s or Muir Glen.

As long as it gives organic consumers what they want, Nicolino continues, “A retailer’s brand can absolutely become the powerhouse brand in their store because there really isn’t a big national brand to contend with in many organic categories.”

According to Hackbarth, that’s exactly what happened in the organic ketchup category, where private label owns a staggering 69 percent of total dollar sales, outselling Heinz’s organic offering by almost three to one.

“Clearly,” he says, “consumers have demonstrated that they’re willing to pick up store brand organics.”

Other categories in which store brands have grabbed better-than-average shares of the organic marketplace (prepackaged only) include butter and margarine (31.1 percent), carbonated beverages (76.8 percent), frozen desserts/fruit/toppings (49.4 percent), desserts/gels/syrups (48.6 percent), fresh eggs (38.9 percent), fresh produce (40.6 percent), canned fruit (42.2 percent), dried fruit (41.6 percent), jams/jellies/spreads (55.7 percent), nuts (74.2 percent), packaged meat (38.1 percent), salad dressings/mayo/toppings (28.3 percent), frozen unprepared meat/seafood (51.2 percent) and canned vegetables (48.7 percent), according to Nielsen.

Where To Begin...

Although categories in which store brand shares are high - as well as those with high volumes overall (milk, bread, cereal, juice, etc.) - form the basis of most companies’ private label organic programs, industry insiders suggest retailers consider other criteria, too.

For example, Starkweather says, many consumers enter the organic marketplace because they’re concerned about the effects of pesticides, hormones and antibiotics. So retailers should focus on offering organic alternatives to what are considered “higher-risk” items rather than those that are relatively “clean” to start with. But don’t forget about products at the value-added end of the spectrum.

“Natural and organic consumers are just like everyone else,” Baker says. “They’ve got busy lives, two jobs, kids - and they often need help getting dinner on the table, too.”

Retailers should also make sure they’ve got a broad enough assortment of private label products aimed at children and toddlers - even babies - Fotovat says.

“Customers may not be at the point yet where they’re ready to purchase organic for the entire household,” Fotovat adds, “but the first place they’ll make the change is food for their children” - a belief confirmed by OTA’s latest research.

Particularly in this economy, Starkweather adds, retailers also might want to consider shifting their private label product development efforts from organic to natural, which, in the salad dressing category at least, results in savings of 10 to 15 percent.

“Some of our retail customers have gotten rid of their private label organic programs and relaunched as natural, mainly because it’s more price-conscious,” he explains, noting that some consumers who can no longer afford organic are choosing all-natural alternatives instead.

“I actually think there’s a bigger market for natural than organic because of price,” Baker says. “Consumers want a cleaner product, but a product they can still afford,” he continues, pointing to the success of chains such as Sprouts Farmers Market, a Phoenix-based retailer that emphasizes natural over organic.

According to grocery buyer and category manager Susan Welsh, Sprouts increased its private label offerings by 50 percent over the past year, boosting store brand share from about 6 percent a year ago to between 12 and 15 percent today.

“We strive to offer the best-quality product at the very best value,” she explains. Oftentimes, however, that means natural, not organic, though the chain does offer organic store brands “if the value is still there.” But not everyone is so bullish on all-natural.

“Consumer understanding of the term is very mixed,” Nicolino says, adding that its overuse - and, in some cases, misuse - has diluted its effectiveness somewhat.

“The definition of organic is very clear,” she adds. But until the government finally decides to get involved, “the range of meanings for ‘natural’ is a lot broader.”

Integrate or Segregate

Beyond the issue of organic vs. natural, retailers and manufacturers also continue to disagree over how best to merchandise such products: alongside conventional products (integrated) or in a separate natural and organic “section” (segregated). Even organic consumers themselves can’t agree on the best approach. Except for a small group the OTA calls “Organic Influencers,” which prefers to shop in a separate section, the majority of organic consumers are evenly split between integrated and segregated.

“By segregating natural and organic products in a separate section, you’re providing core natural and organic consumers with a convenience, eliminating the need for them to walk the aisles,” Baker explains. “But even for the transitional or new consumer, you’re creating an area where they can go to find educational materials or maybe even a nutritionist - a single spot where they can find all the answers. If you spread natural and organic out all over the store,” he adds, “there’s no opportunity to really engage the consumer, to educate them,” which retailers and manufacturers agree is the key to continued growth in this segment.

But Hackbarth says the majority of mainstream consumers just do not shop the organic and natural section, eliminating even the possibility of a purchase. If retailers put the organic alternative right next to the conventional item, and put it on sale, consumers might pick it up, he adds. But even if retailers do maintain a separate natural and organic section, they should put a private label alternative in the regular set as well.

That’s also the approach favored by Clement Pappas, says Aaron Mace, the company's organic product manager.

“If there’s enough space in the store,” he explains, “we suggest merchandising the ‘core’ natural and organic private label juices - top sellers like apple and grape - in the same area as conventional juices so you can continue to build business among non-users and those new to the category. But use the natural and organic store-within-a-store to offer increased variety to committed organic consumers. A lot of retailers have enjoyed success by combining those two strategies.

“Natural and organic represents a great opportunity for private label, especially now with the poor economy,” he concludes. “Even loyal brand customers are trading across to private label. So now’s the time to act.” PLB

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