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Wall Street: Organic Food is Going Mainstream

In a bid to capture a slice of the fast-growing organic-foods market, mainstream supermarket chains are rushing out their own store-brand lines that can cost significantly less than comparable specialty brands often found at health-food and gourmet stores. The pricing could remove a big barrier for many Americans who have wanted to try organic rice, cookies or cans of soup but have been put off by the prices. Though the store brands are less expensive, the chains say they adhere to the same federal standards for what constitutes organic as other brands.

SuperValu Inc., poised to become the nation's second-largest supermarket chain after it acquires Albertson's Inc., this month is introducing a line of 50 organic products called Nature's Best, including cereal, juice, apple sauce and pasta. By the end of June, the company will add 100 more private-label organic products, and plans to offer about 300 by mid-2007.

Nature's Best, priced to be 10 percent to 15 percent below comparable national-brand organic products, is the latest in a surge of lower-cost alternatives. Safeway Inc. recently introduced 150 organic products under the O, Organics name. The company plans to have as many as 300 "O" products by the end of 2007.

Stop & Shop, owned by Dutch company Ahold NV, also has a new organic-food line called Nature's Promise. And Sam's Club, owned by Wal-Mart Stores Inc., began selling organic food under the Member's Mark line in January 2006, and is now adding salad dressings and coffees.

Driving these moves is a desire to capture some of the growing consumer interest in organic foods -- which are often perceived as more healthful and environmentally friendly because their ingredients must be grown without pesticides. Chains are also looking to push back against specialty-food retailers like Whole Foods Market Inc., which have siphoned away customers in recent years. The U.S. organic-food market generated about $13.8 billion in sales last year, up from $11.9 billion in 2004 and $3.6 billion in 1997, according to market-research firm Nutrition Business Journal. The firm estimates organics will reach $15.5 billion this year.

The major chains hope to bring organics more into the mainstream by competing on price, partly because store brands -- referred to as private labels in the industry -- don't require as much advertising as national brands. Organic foods are notoriously costly, which has put off many potential consumers.

Michael Kelly, a Merrillville, Ind., hair stylist, says he would consider trying organic foods, but "it's just expensive, that's why I don't buy it."

On average, prices on private-label goods of all sorts, are about 27 percent below branded products, according to Information Resources Inc., a market-research firm. Already, the price difference in the organic category is significant, and industry observers say they expect prices to fall on all organic products as organic becomes more mainstream. SuperValu plans to sell a large bag of Nature's Best blue-corn tortillas for $1.79. A national organic-chip brand, Garden of Eatin Blue Corn Tortilla Chips, runs about $2.99. A bottle of Nature's Best Organic Maple Syrup will run $4.99, compared with a national organic brand, Spring Tree Maple Syrup, which retails for $5.69.

Under a 2002 federal law, foods must meet certain standards set by the U.S. Agriculture Department in order to be labeled organic. Stop & Shop, in describing the Nature's Promise brand on its Web site, notes that federal organic standards indicate, among other things, that crops must be grown free of synthetic pesticides and herbicides and that animals are given room to roam and no antibiotics or growth hormones. "We follow strict quality standards for every item and organic certification requirements for organics," the site says.

Setting Standards

SuperValu says that its manufacturers and suppliers must be in compliance with the USDA in order to label its products certified organic. Company executives say they placed prospective Nature's Best products through rigorous tests to make sure the look, tastes and smell matched up to the quality of national-branded products.

The sourcing of organic products can be more difficult than for conventional items, because of the relatively small number of certified organic producers. Early on, SuperValu executives say they considered numerous items like cookies, salty snacks and microwaveable popcorn. The company whittled the size of the first wave of Nature's Best products to about 150 from the 600 initially under consideration. The new Nature's Best products will be sold at SuperValu-branded stores, as well as the chain's other outlets, including Cub Foods, Bigg's and Shopper's Food & Pharmacy.

As demand for private-label organic foods grows, organic farming is beginning to happen on a larger scale. "There's potential for supply issues, if the trend continues at the pace it's going," says Mike Minasi, senior vice president for marketing at Safeway. "But the suppliers and growers are understanding the opportunity, and capacity is growing."

Organic Roots

These efforts aren't the first time organic foods have hit major grocery stores' shelves. Kroger Co., currently the nation's largest supermarket chain by sales, began selling organic foods, primarily produce, in the early 1980s, and then slowly added other products. Demand for organic food surged in the late-1990s, especially on the West Coast. In early 2000, Kroger executives began developing a private-label organic food line that eventually became known as Naturally Preferred. Introduced in 2002, that line has grown to more than 275 items.

"The fact that a lot of conventional supermarket chains are getting into this business is an indication of the market size and demand for these kinds of products," says Lynn Boardman, director of private labels, at Whole Foods. Her chain's private-label brand, called 365, offers a range of foods and expanded into organics in 2002.

SuperValu's effort began about three years ago, when the company began developing a line of "premium" private-label products, just as the company started building a new organic and natural-food line, called Sunflower, as a less-expensive alternative to Whole Foods. The first Sunflower store opened near downtown Indianapolis in January, and others are set to open in Chicago and Columbus, Ohio, later this year.

Pricing Issues

Last fall, as the company finished plans for Sunflower, it rushed plans for the premium private-label line, which became Nature's Best. "Seeing the mainstream trend that was going on, we wanted to take Nature's Best beyond Sunflower, and take it to our corporate stores," says Michael Jackson, SuperValu's chief operating officer. "If mainstream consumers said price has been an issue in buying organics, we've addressed the pricing issue."