Wal-Mart, others hope to cash in on growing market niche; critics fear standards will drop

By KAREN ROBINSON-JACOBS
The Dallas Morning News

A NATURAL QUESTION

When Wal-Mart Stores recently promised to boost the number of organic foods it stocks, the announcement sent shock waves rolling among producers and distributors of organic products.

Large corporations have been quietly snapping up organics’ marquee names for years. Many organic farms already are industrial size. And organic food has long been trucked cross-country, gobbling up gasoline along the way.

But the pronouncement by the world’s largest retailer sent a signal that big business, lured by escalating demand and fat margins, wants to claim an even greater slice of a niche long associated with the Birkenstock bunch.

“Large companies see the growth and understand consumer attitudes,” said Joe Scalzo, president and chief executive of White Wave Foods, a subsidiary of Dallas-based Dean Foods that makes Horizon and Silk organic milk. “They see an opportunity to market brands in the better-for-you space.”

Consumers are eating more fresh foods and organically grown products as awareness rises about the link between poor food choices and poor health.

Many Fortune 500 companies already have been digging for organic gold — the list includes manufacturers such as Dean Foods, Altria Group’s Kraft Foods, General Mills and Kellogg.

For organic purists, “big” means more outsize farms, increased imports and other supply-chain realities antipodal to the segment’s weeds-and-seeds roots.

For consumers, “big” means more organic products available in more places at more affordable prices.

Organic food and drinks pulled in an estimated $13.8 billion in sales last year. While that’s only 2.5 percent of U.S. grocery sales, organics is the fast-growing food segment, with annual sales increases of about 16 percent.

Experts say sales are growing fastest at mainstream supermarkets.

Earlier this year, Wal-Mart said it would nearly double the number of organic items it stocks — from 109 to 189 — at 374 stores in neighborhoods most likely to house organic shoppers. It also plans to expand offerings in stores it thinks are underserved.

But whether Wal-Mart — the 800-pound gorilla of groceries — will have a sizable impact on organics’ trajectory depends, in part, on the chain’s ability to persuade its everyday-low-price shoppers to pay a premium for organic offerings.

Wal-Mart says it can deliver organics at lower prices — in some cases at only a 10 percent premium to comparable nonorganic products.

But organic farming takes time, in large part because of government regulations that keep organics “organic.”

The need to increase supply to satisfy a customer like Wal-Mart has led some to worry about weakened organic standards and stress on a fragile supply pipeline. The mega-chain already has gone to China for some of its organic goods.

“I truly believe that Wal-Mart’s promise to deliver lower prices is based on large, industrialized food production,” said Ronnie Cummins, national director of the Organic Consumers Association in Finland, Minn.

Wal-Mart hasn’t lobbied at any government level to change organic rules or standards, said Wal-Mart spokeswoman Gail Lavielle.

“It’s very important to us to work with suppliers who follow the rules. Cheating by anyone isn’t in our interest,” she said. “The trust factor is really a big one with our customers.”

With retailers already facing shortages of organic items ranging from almonds to milk, finding ways to boost supply is essential to growth.

Many supermarkets are scrambling to stock organic goods, said Caren Wilcox, executive director of the 1,700-member Organic Trade Association. “There’s a huge demand.”

While supply is not yet huge, it is growing.

Nearly 5,000 new organic items sprouted on retail shelves in 2005 — a 60 percent increase from 2004, according to SPINS, a San Francisco-based market research and consulting firm for the natural products industry.

It was the biggest one-year jump since at least 2000 but was still a small portion of the 29,343 new items introduced last year, based on the Food Marketing Institute’s tally.

Several Wall Street heavyweights have added to the new-product mix.

Kraft owns the popular Boca and Back to Nature lines, while General Mills owns Muir Glen and Cascadian Farm.

Organic consumers might not be aware of the corporate connections because most came through acquisitions. And for the most part, the corporate name is not on the product packaging.

But that’s changing. More corporate players are launching organic lines under some of their best-known brands.

In June, Kellogg launched Keebler Toasteds Organic Harvest wheat crackers.

And this summer, Kraft unveiled Kraft Organic Macaroni and Cheese — a direct competitor to its Back to Nature Organic Shells and Cheese.

“Clearly, there is an opportunity in natural/organics for Kraft and other food companies,” said Sydney S. Lindner, a spokeswoman for Kraft. “Kraft is working with our customers to develop product line extensions to meet the growing consumer interest in natural and organic foods.”

Despite its rapid acceleration, the consumer market for organics remains small.

Less than 20 percent of adults eat organic food at least once a week, according to The NPD Group, a research firm in Port Washington, N.Y., that tracks food and diet trends.

Some marketers wonder whether companies risk putting out too much of a good thing — a fate that befell the low-carb craze.

“A flood of organic products might discourage retailers away and overwhelm consumers,” said Maryellen Molyneaux, president of the Natural Marketing Institute, a consulting and market research firm in Harleysville, Pa. “A sudden flood makes it less believable. [Consumers will] think it’s a marketing ploy.”

Among the new organic offerings are six yogurt flavors from brands owned by Dean Foods.

Few major companies are more heavily invested in organics than Dean, which became the nation’s largest supplier of organic milk following its 2004 purchase of Horizon Organic Holding Corp. Dean acquired White Wave and its Silk soy milk brand in 2002.

Horizon and Silk make up the White Wave Foods subsidiary, which owns two organic dairies. The larger operation, in Idaho, has about 4,400 cows.

Once four more farms begin supplying White Wave, the company will get milk from at least seven organic dairy farms with more than 1,000 cows each. (A White Wave spokeswoman said less than half of its milk comes from large farms.)

Critics charge that such “industrial scale” farms fool consumers, who only see the bucolic images on the milk cartons of a handful of cows lolling in grass.

And they see that as among the more troubling aspects of the “corporatization” of organics, in part because the cows have less time to graze on grass.

“We don’t know of any legitimate dairies that operate much over 1,000 cows,” said Mark Kastel, senior farm policy analyst with the Wisconsin-based Cornucopia Institute, which advocates for small family farms.

White Wave chief Mr. Scalzo argues that the cows have adequate time to graze. And he said farms like the one in Idaho are needed to meet the demands of large retailers.

“If the industry didn’t figure out a way to do some form of scale farming, the prices would always be high” and supply would always lag demand, he said.

But Mr. Scalzo was unable to convince PCC Natural Markets, a small co-op chain in the Puget Sound area, that its scale farming methods weren’t compromising organic standards. PCC told the company earlier this month that it would no longer sell Horizon Organic products, in part because of pasture concerns.

“It’s the sourcing that concerns us,” said Diane Crane, a spokeswoman for PCC. “And making sure the organic certification is being lived up to.”

Ms. Wilcox of the trade association concedes there’s a debate now over the impact of large companies – and whether big means bad.

She calls it industry “growing pains.”

“The pioneers are not always thrilled when the settlers move in,” said Ms. Wilcox, who counts small firms as well as White Wave and No. 1 organic grocery chain Whole Foods Market among the group’s members.

Ms. Wilcox, whose group has been criticized for siding with large corporations on changes in organic standards, fears that debate over large vs. small, and the attendant accusations, may undermine consumer confidence in organics.

“This is a civil discussion that needs to happen over what is organic,” she said. “We need to stop tearing each other to shreds over these things.”

Staff writer Maria Halkias contributed to this report.

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