SUPERVALU's Healthy Opportunity

In a decidedly "me too" move, supermarket chain SUPERVALU (NYSE: SVU) is adding a line of organic foods to better compete in that growing segment of the grocery market. It's hard to imagine the new goods will add anything more than an incremental boost to revenue, but the third-largest food retailer can hardly afford to ignore this increasingly popular slice of the business.

According to the market researchers at AC Nielsen, consumer demand for organic and natural foods has grown 10% to 15% annually over the past 15 years, across all retail channels. Not only must SUPERVALU compete with Wal-Mart (NYSE: WMT) and Kroger (NYSE: KR) for grocery customers -- both of which have introduced organics to their aisles -- but also all-natural stores like organic specialist Whole Foods (Nasdaq: WFMI).

In fact, the spread of organics to traditional grocers underscores the conceit of the Federal Trade Commission, which sought to prevent Whole Foods from acquiring rival Wild Oats last year, on the basis that it might have been cobbling together an evil empire. Obviously, consumers have choices about where they're going to buy their groceries, and if they can just as easily get them at SUPERVALU, Kroger, or Safeway (NYSE: SWY), then there's little threat of monopoly.

SUPERVALU's move into organics is a calculated effort to keep customers in its stores, instead of having them cross-shop at Whole Foods or Trader Joe's. By having a house brand of organic foods that will cost less than similarly situated products, SUPERVALU hopes to increase the value of the basket of goods a customer buys, while also boosting profits, since private-label goods carry higher margins.

SUPERVALU currently lags its grocery rivals both in organic-foods offerings and the amount of store-brand products it sells. According to Nielsen, private-label groceries represent 19% of all sales of food and nonalcoholic beverages in U.S. food, drug, and mass-merchandise outlets. Some of SUPERVALU's rivals generate as much as 25% of sales from such products. Yet SUPERVALU's own private-label sales account for just 15% of the total, a figure the company would like to bring up to 19% this year.

In these ever-greener days, it also doesn't hurt to sound like you're promoting something as wholesome as organic produce and other foods. Although most consumers probably associate organic foods with an image of family farmers selling vine-ripened tomatoes at a roadside stand, few realize that some of the largest corporations are behind their crunchy goodness.

Kellogg (NYSE: K), for instance, owns Kashi and Gardenburgers; Dean Foods owns The Organic Cow of Vermont; and Kraft (NYSE: KFT) owns Boca Foods and Back to Nature. SUPERVALU hasn't said who it will contract with to provide its Wild Harvest brand, but I would be willing to wager it won't be the folks in Grant Wood's "American Gothic."

Munch on these related Foolish articles:

• Kroger's Organic Growth
• Safeway's Organic Growth
• Is Whole Foods Building an Evil Empire?