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The appeal of organic products may have survived the U.S. recession -- the category eked out modest sales growth in 2009, and mainstream retailers such as Wal-Mart (NYSE: WMT ) and Safeway (NYSE: SWY ) continue to push such products -- but going forward, the business of selling goods that are good for you may be in for a permanent profit crunch.
A recent study conducted by the Natural Marketing Institute, which polled more than 50,000 consumers in 20 countries, found that while roughly two-thirds of consumers are concerned about the environment, their purchasing decisions are motivated primarily by price. That finding is supported by a similar (but unrelated) survey, which revealed that the percentage of U.S. consumers who plan to increase their green-product spending has declined from 2009. Furthermore, within developed economies such as the U.S., U.K., France, and Germany, surveyed consumers cited higher prices as a key barrier to green purchases.
What all this means is that companies will have to maintain a laserlike focus on price, which may eventually come at the expense of margins. Whole Foods Market (Nasdaq: WFMI ) , for instance, recently speculated that company sales growth could be attributed to its "competitive prices on known value items" and "robust promotional programs." So far, Whole Foods' value orientation hasn't dinged its profitability, but not all health-focused companies are faring so well. Natural and organic buttery spreads maker Smart Balance (Nasdaq: SMBL ) , which, incidentally, I selected as the best stock for 2010, recently dropped a bomb on shareholders, slashing its full-year forecast for cash operating income from mid-teens growth to flat with the previous year.
Meanwhile, Clorox (NYSE: CLX ) was recently forced to roll back prices on its Green Works line of cleaners and detergents by 5% to 30% to get prices in sync with competing premium-tier products.
Don't get me wrong, I'm not all doom and gloom on the profit outlook for organic and better-for-you products. Not long ago, I suggested that organics specialist Hain Celestial Group (Nasdaq: HAIN ) looked attractive, and more recently, noted investor Carl Icahn reported an 11.9% stake in the company.
Moreover, a retailing titan such as Wal-Mart likely will be able to pressure its vendors (i.e., manufacturers) to give ground on pricing, enabling Wal-Mart itself to preserve margins. As for organic and natural products that Wal-Mart sells under its Great Value brand, well, that might be a different story.
Ultimately, while the organic products market probably still has plenty of runway ahead, as an investor, I'd make sure that there's nothing synthetic about your sense of caution, nor your attention to company-specific developments.