Panic in Organics?

It's no secret that the market for organic items, in particular foods, has been growing at a rapid clip for quite some time now. Overall, the U.S. organic industry grew 17% to $14.6 billion in 2005, and the food portion of that industry grew 16.2% to $13.8 billion. Since 1998, the organic-food industry has posted annual growth rates between 15% and 20%.

The double-digit growth rates have been a sparkling bright spot in the rather staid and -- some might say -- stale food industry. So it's no wonder that many retailers and marketers have sought to get in on the action -- thus the inevitability that companies like Wal-Mart (NYSE: WMT  ) would push to get in on the organic trend.

Hold onto your organic-cotton hat, though. AdAge recently implied that the future isn't as bright as it's cracked up to be, suggesting mainstream adoption is hitting a wall (at least partially caused by premium pricing). In an article from mid-October, "Organics Fail to Yield Cash Crop for Food Giants," the following ominous statement started the ball rolling: "But after a stupendous start, organic foods are looking suspiciously like a sensation sizzling out." Here's an even more chilling excerpt: "It's all mounting evidence that the trend, like the low-carb craze before it, is hurtling toward a crash."

A crash? Hurtling, no less? Is it time to short Whole Foods Market (Nasdaq: WFMI  ) ?

Digging for dollars
It seems to me there's more than meets the eye here, and AdAge is, after all, a publication for marketers. Bless their hearts, but they're quick to develop products -- and marketing campaigns -- to capitalize off the latest hot thing. That's exactly what they did with the low-carb craze; I remember thinking at the peak of the madness, what on earth made anybody think that any quick-weight-loss-oriented diet would stay mainstream for the long haul?

On the other hand, the organic movement focuses on lifestyle and ethics. In an ironic turn that actually butts up against its growing popularity, the true organic movement is not fond of industrialized farming, so there's lots of controversy about the industrialization of organic farms as giant retailers and food conglomerates clamor for a piece of the pie.

The article cited an unnamed executive "close to" Unilever (NYSE: UL  ) who pointed to the company's Ragu organic pasta sauce as a good example of an organic product failure and intimated that Unilever is unlikely to launch too many more organic products. This mystery executive went on to say, "The mainstream-organic trend is definitely slowing down, and though it won't likely come to as drastic an end as low-carb, it definitely appeals to a much smaller demographic than originally anticipated."

The article also mentioned organic versions of classics like Kraft's (NYSE: KFT  ) Kraft Macaroni & Cheese and DiGiorno frozen pizzas; the article admitted that there was irony in offerings like these considering "the image of organic foods as fresh, natural, and healthful."

Truth in advertising
The article poses an interesting idea, but it certainly merits deeper thought. First of all, is it really so shocking that mainstream shoppers wouldn't appreciate paying more for organic versions of their old favorites? The article pointed out that it's often the organic independents that the food makers have acquired whose products do well, and that's not rocket science either.

Beyond that, certain products make far more logical sense as organic offerings than others. Although some organic foods are processed, the truth is, processing strips out nutrients and therefore, an organic label doesn't carry quite so much heft. (Years ago, I remember hearing a rule of thumb that for healthy eating, shop only the perimeter of the grocery store -- the processed, highly refined foods are in the middle.)

In fact, organic produce, dairy, and meat products do best. That's not only about better-tasting products but also about some ideals, ethics, and health concerns: sustainable and environmentally friendly farming, more humane treatment of animals, and fear of contagions or unnatural additives to our diets like pesticides, artificial hormones, antibiotics, genetically modified organisms, and food-borne maladies like mad cow disease.

Last February, Consumer Reports released a report on the organic industry, pointing out that there are certain products for which going organic makes more sense than others. For example, certain non-organic fruits and vegetables are notoriously high in pesticides even after washing -- think apples, celery, cherries, potatoes, spinach, and strawberries, to name just a few common ones. Another example is baby food; condensed fruits and vegetables grown on non-organic farms could contain high levels of pesticides. It seems there are clear-cut reasons why certain organics do better than others.

Meanwhile, apparently there's no crash in demand for organic milk -- Dean Foods (NYSE: DF  ) and Hood recently demanded that farmers in New England supply hormone-free milk for parts of that region. (Bear in mind, though, that Dean Foods has been on the hot seat for bringing industrialization to the organic dairy movement.) At any rate, there are plenty of other data points about the organic market -- take Chipotle's (NYSE: CMG  ) and Panera's (Nasdaq: PNRA  ) emphasis on organic ingredients as just another example -- that don't seem to indicate it's slowing down.

Whole lifestyle
So, should investors short Whole Foods? Heck, no. I think the trends sound good for the retailer, maybe even better than ever.

One thing Whole Foods seems to have squarely on its side is authenticity. Whole Foods operates within the framework of the convictions that come part and parcel with organic lifestyles. Consider Whole Foods' vow to more strongly support local farmers through loans to small operations, or its recent move to offset 2006 power usage in its stores through wind power credits, for example.

As CEO John Mackey has said in the past, Whole Foods aspires to "walk its talk" -- and that's where many of the larger retailers like Wal-Mart and giant food conglomerates may very well fall short. And of course, this wouldn't be the first time that marketers would try to jump somebody else's train without fully understanding the heart and soul of a trend, or what consumers really want (or believe, in this case).

Furthermore, even if some of the traditional food giants' array of organic products don't fly off the shelves, they're still exposing the idea to more and more people who may seek more information. After all, perhaps the AdAge article isn't really indicating an overall market slowdown -- certainly, some of it is apathy from some consumers, but what if some of this is, instead, more informed consumers differentiating between a lifestyle and a marketing slogan?

Whole Foods' Mackey has said in the past that the more the conventional supermarkets have tried to get into organics, the better off it has been. Call it a sort of "halo effect," if you will. In the long run, I wouldn't be surprised if Whole Foods laughs all the way to the bank.

For related Foolishness, see the following articles:

Whole Foods Market is aMotley Fool Stock Advisorrecommendation. Wal-Mart is aMotley Fool Inside Valueselection. Unilever and Kraft areMotley Fool Income Investorpicks.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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