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‘Take-Aways’ From United’s Short Course On Organics

Jim Prevor’s Perishable Pundit, May 9, 2007

As part of its annual convention, United Fresh Produce Association offered a series of “short courses” on the Saturday before the trade show started. This year they offered different segments for retail, foodservice and food safety.

A particularly intriguing workshop focused on organics and was organized by the Perishables Group. The presentation was sponsored by Eurofresh, Paul Marshall Produce, Torrey Farms and Pundit sister publication, PRODUCE BUSINESS.

The Perishables Group had organized a research project on organics and received funding from Dovex Fruit Company, Driscoll Berry Associates, Paramount Citrus and Sunripe Produce Company to conduct the research.

Representatives from those companies and two retailers, Marvin Lyons from Biggs/Supervalu and Rick Steigerwald from Lunds/Byerly’s, participated in a panel discussion moderated by Steve Lutz of the Perishables Group

The session was entitled Tapping the Organic Opportunity in Conventional Supermarkets and was particularly valuable because, in assessing the potential for organics, it excluded the Whole Foods and Wild Oats segment of the industry, which meant that both the data and the thinking could be clearer for those whose opportunities are with conventional retailing. Kudos to the Perishable Group for focusing on this segment of the industry.

To some extent, all discussions of organics are surrealistic. In the retail short course, one out of three sessions offered were on organics and a significant portion of the other two sessions involved discussions of organics… yet, the Perishable Group estimate is that only 3% of produce sales through conventional supermarkets are organics.

And this number is by dollars. If you consider the higher prices for organics and the fact that right now a very high percentage of organic sales in conventional supermarkets are fresh-cut salad mixes and baby carrots, the actual poundage of organic produce sold in conventional supermarkets is certainly less than 2% and, probably less than 1%.

So why all the fuss? Well, on the retail end this is an excellent tool for differentiating store from store, and on the production end, organics are, by their nature, an answer to the prayers of growers.

Not because they are easy to grow — they are not. As Brian McElroy of Driscoll Strawberry Associates, who worked many years for California Certified Organic Farmers, pointed out, in contrast to the crunchy granola association, growing organically is actually a high-tech endeavor.

But during a time of rising demand, organic agriculture offers the crucial break that prevents overproduction: It takes three years to transition land from conventional to organic production.

Typically in produce, especially if you are dealing with a row crop, having a great season on, say, honeydew melon, is the kiss of death for the following season. High prices lead growers to over plant and, if weather is normal, prices collapse next season under the weight of increased volume.

With organics, however, it is simply impossible to ramp up production so quickly. Remember, of all the farm and ranch land used to raise food in America, not even 1% has been certified as organic.

So all across the produce industry, companies are finding that wildly disproportionate shares of their profitability come from their organic business and this, of course, is a powerful motivator to grow in this space.

Some points from the Perishable Group research that struck a chord:

  • Although consumers are confused about the meaning of organics in general and its applicability to areas such as meat, 70% of consumers “get it” when it comes to fresh produce. Specifically, they understood that organics does not mean grown without chemicals, just that they could not be synthetic.
  • A big chunk of the initial trial of organics was by accident. Consumers found an item or product that looked appealing, bought it, and only later realized it was an organic product.
  • The market for organic consumption can be seen as bifurcated, with heavy users motivated by different factors than light users.
  • Fresh produce is often the portal through which consumers move on to try organics in other departments. Produce is often the point of first trial.
  • The organic “lifestyle” that is so heavily emphasized at specialized natural/organic outlets is not an important part of the appeal of organics to most shoppers in conventional stores.
  • The research also indicated that the northeast is the strongest market for organics and identified that it is also the region with the smallest price difference between conventional and organic.
  • The thing about organic is that there is almost no consumer opposition. The study found that most shoppers in conventional stores were accepting of a 20% price premium over conventional, although the study didn’t actually test that finding in real shopping situations.

Certainly, however, there is no reason to think consumers won’t buy organic — so the further one gets from the source of production — meaning the more the transportation component comprises of the final price — the more likely it is that organics will be competitive. This indicates, incidentally, that if we can get the shelf life and coordinate our organic standards with those of Europe and other countries, there will probably be a substantial export market for organics. Put another way, if transportation, duty, inspection, etc., outweighs the FOB, consumers in other countries will probably gladly pay 4% extra to have organic product.

We still have to be careful. There was some talk at the workshop that the fact that organic sales have grown in a slow-and-steady rate for years “proves” that organics are not a fad as opposed to the Atkins diet where affiliation with the diet and sales of related products spiked at a certain moment, only to collapse soon after.

Yet because of the need to transition acreage for three years before product grown there can be declared organic, it is virtually impossible to get an Atkins-like “spike” — yet that doesn’t mean the trend is forever.

And, as organic grows, issues of little consequence now may become issues of major consequence. Scott Owens of Paramount Citrus pointed out that his horticultural people tell him that the instant they move to organic production, yields drop 30%. The obvious issue is whether consumers will be willing to pay enough to compensate for that drop, and the Perishable Group study doesn’t give a firm yes.

A larger issue, however, is whether the implications of all this won’t sully the reputation of organics. A 30% drop in yield, if sustained, means you need to increase the acreage under cultivation by over 40% to maintain production.

Will organics sustain a reputation as “good for the world” if they require so much land, water and other natural resources to produce?

Billy Heller of Sunripe, who is quickly becoming an indispensable industry resource with his frank speaking and focused thinking (we last mentioned Billy as a result of a discussion he had with a Wal-Mart representative at the Southeast Produce Council meeting, which resulted in discussions here and here), continued his valuable contribution to industry thinking by pointing out both the increased likelihood of crop failures with organic production and the logistics issues involved with shipping smaller quantities.

Once again, how well will organics be thought of if product is either unavailable due to crop failures or has to be overproduced as insurance against crop failure? Plus, in an age of consciousness on things such as the “carbon footprint” and “food miles” — moving things around in small quantities is likely to burn up petroleum much more inefficiently than shipping full trailers. How will this issue play as organics get more scrutiny?

Some of the issues surrounding organics are almost self-contradictory. Immediately following the organics seminar, Steve Lutz from the Perishables Group moderated a session with produce managers who have been given an award, sponsored by Ready Pac, as produce managers of the year.

These managers, among other things, were speaking about their challenges in making sure that organics get rung up as such and not at less expensive conventional prices.

These were exceptional produce managers who talked about spending a lot of time instructing cashiers, etc. On an industry-wide basis, however, the solution has been things such as stickering each piece of organic produce or putting it on trays or in clamshells. Of course, though this study as presented didn’t deal with consumer perception of these devices, it seems reasonable to surmise that to the degree consumers care about organics, they don’t like packaging and stickers.

The hottest battle in the “sustainability” movement is the issue of local vs. organics. Not all places are perfect for growing organics. Washington State seems very well suited, and Tracy King from Dovex represented a successful organic program. East coast apple growers struggle with organics.

Consumers are not necessarily cognizant of this issue but, in the end, consumers at Acme or Genuardi’s may have to choose between organic apples from Washington or locally grown with an Integrated Pest Management plan from Pennsylvania. This study didn’t reveal such strong preference for organics that we are certain consumers would vote for organics with their dollars.

And, in the background is food safety. Organic produce production is still very much a cottage industry, and it is unclear that these growers will be able to implement and sustain the kind of rigorous food safety and traceability systems that government and buyers will soon demand. We constantly hear from small growers who aren’t even certified as organic because it is just more paperwork than they can handle.

One very specific focus of opportunity that came out of the workshop series was that many retailers are now carrying only an organic version of certain low volume items such as leeks and specialty items such as golden beets.

Basically, the volume on all these items is so low that it just doesn’t pay to maintain two SKUs. Since consumers are happy to buy organic anyway and the price on many of these small volume items are not easily comparable, why not just sell the organic version?

This substitution of organic for conventional could cause organic sales numbers to boom but it will also serve to distort the connection between organic sales trends and the popularity of organic produce.

In this sense organic may become like kosher. If you look at the sales of kosher products you would surmise a large portion of the population is a fan of kosher food. What you are really seeing is that producers of product such as Coca-Cola decide to make their product kosher since nobody objects and some people look for it.

Equally, if we can get costs to the point where substitution is widespread, consumption may boom but many consumers will care no more for whether their leeks are organic-certified than do if their Coke is kosher-certified.

Many thanks to United for hosting this workshop, the Perishables Group for adding to our industry knowledge and the sponsors and panelists for making it all possible.

The Perishables Group was kind enough to share with the industry their slide presentation, which you can view or download right here.

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