Who owns the natural pie?

Walmart sells about 25% of the nation’s food. The company sent shock waves through the natural products industry in January when it announced a major five-year plan to convert thousands of its private label food items to healthier recipes. Less salt, trans-fats and sugars. A second part of the plan lowers prices on fresh fruits and vegetables, which will make healthy foods more affordable for shoppers on tight budgets. First Lady Michelle Obama raised awareness of the initiative when she threw her support behind Walmart as part of her campaign against childhood obesity. Should you be worried that Walmart will capture more natural products market share?

Better than Walmart?
Before we answer this question, take a quick look around your store. Do the products you carry contain sugar and other “bad” ingredients that Walmart plans to reduce? The answer is likely yes. So what, really, makes your store better than Walmart or any other food retailer? If we are honest with ourselves, we’ll admit that the natural products industry has moved fairly far from its founding ideals. Sugar used to be bad. We sweetened with malt syrup. Chocolate used to be bad. We substituted carob. Refined flour used to be bad; we only ate whole grains.

It was not unusual in the 1970s to see natural foods retailers grinding their own wheat berries in the back of the store on a stone mill. No more. We got tired of all the work. Our customers got tired of the ground-up-Birkenstock taste of some of these “healthy” ingredients. And, we all craved our chocolate, sugar and unbleached white flour. In response to this demand, those ingredients began to creep into more and more of the products on our shelves. And our “industry” grew.

The industry has always had its “transition” products; foods that didn’t have ideal ingredients, but fewer bad ingredients than the traditional choices. Remember “honey-dipped” bulk dried pineapple? A lab test we conducted at my old distribution company, Stow Mills, found the product was 62% sucrose by weight. We, meaning the wholesale and retail natural products industry, carried these items hoping to bring new customers through the door and, over time, educate and convert them to more healthful ingredients.

Now, I love my (dark!) chocolate just as much as the next person. And, I am not standing in judgment of diluting the ingredient standard for the industry. Let’s face it; if we’d insisted on not deviating from our ideals, we’d be selling a lot less malt-sweetened carob candy than we do sugar-sweetened chocolate. We’d have far fewer customers, employ fewer people and have much less chance to help people in our communities get and stay well. I think most in the industry would agree that broadening our ingredient standards to attract more customers has been a worthwhile tradeoff.

Which Products Make You Different?
But when we made that deal, as part of the bargain, we gave up our ability to say that our products are incomparably different and better than all traditional foods. They’re not. And as conventional grocers and food manufacturers add more “better-for-you” ingredients, it becomes more and more difficult to draw a clear distinction between the quality of “our” products and the quality of “their” products. Walmart is just one example.

In addition to cleaning up its own brands, Walmart has said it will encourage its major suppliers such as Kraft Foods, Pepsi, Coca-Cola, Unilever, Nestle, and Procter and Gamble to follow suit. Even though these companies were already reformulating toward healthier ingredients, the pressure from Walmart will accelerate this trend. At Retail Insights, we estimate that the reformulations to better-for-you ingredients across all these brands will account for well over half of all food-store sales within the next 10 to 15 years. Every small, medium and large supermarket in the country, big-box mass merchants like Target, discount club stores like Costco, dollar stores, and don’t forget drug stores, will carry these more-natural items. So, which products will you be able to say make your store truly different?

Natural: A “Young” Category
For those of us who eat, sleep and breathe natural products, it’s easy to feel we are a dominant force in the food industry. And while it is true we are driving change in the food business (see above), our market share is still a small sliver of the $600 billion-plus total retail food pie. Consider that all of the major wholesale natural products distributors in the country sell less than $10 billion combined. Compare this to the $400 billion-plus conventional wholesale food distribution business.

Even marking up wholesale to retail, that’s still less than 3% of the total retail food dollar. Add another couple of percentage points for direct vitamins and supplements not sold through distributors, and maybe another percentage point for small local and regional distributors, and natural/organic still clocks in at less than 7% of all retail food store sales.

What this means is that most of our dedicated natural brands—that is, not Frito Lay, Dannon or Starbucks, for example—are too small to register on most shoppers’ radar screens. Most mainstream households are not aware of, and therefore not emotionally attached to, the relatively new natural brands we’ve come to know and love over the last 40 years. The typical mainstream grocery shopper who is trying to eat better doesn’t know and doesn’t care about niche brands he or she has never heard of, and would sooner pick up a bag of Baked! Lays potato chips.

Private Label Fills the Vacuum
Sharp food retailers have recognized that 1) consumers want to eat healthier and that 2) no major national food brand has yet fully captured the “natural” identity in consumers’ minds. In the absence of a dominant national “natural” brand, these first-mover retailers have seized the opportunity to “own” the natural category, and have begun to shift the balance of power away from manufacturers and toward retail stores.

Exhibit A is Austin, TX-based Whole Foods Markets. The company’s 365 Everyday Value Products and other private label items account for 2,200 stock-keeping-units (SKUs) and 19% of total grocery and whole body sales, or pushing $2 billion. Exhibit B is Trader Joe’s, the Monrovia, CA-based natural/gourmet-on-the-cheap retailer, which racks up 85% of its sales from its private label, or about $7 billion.

Major conventional supermarket chains are also taking notice. In January, Safeway, the Pleasanton, CA-based 1,700-store chain, which controls an estimated 5% market share of total food-store sales, announced its Open Nature line of 100% natural foods. Open Nature adds to Safeway’s O Organics and Eating Right house brands, which already deliver an estimated $500 million in annual sales.

Open Nature will feature fresh proteins; all-natural beef, pork, chicken, chicken sausages, bacon and beef hot dogs, with meat and poultry products from animals fed an all-natural vegetarian diet without antibiotics, hormones or artificial preservatives. Safeway has positioned Open Nature to “address nutrition and dietary needs at very affordable prices” with products that are “as close to nature as possible.” The line will expand to include categories such as bread, yogurt, ice cream, salad dressing and frozen foods, among others.

Private label manufacturers, the co-packers that help the Whole Foods, Trader Joe’s, and Safeways of the world develop their private label lines, are also being proactive. These manufacturers are promoting private label line extensions that include the latest trends, such as gluten-free foods and leading-edge dietary supplement formulations based on the latest science.

Our Vitamins Are Different, Right?
I recently ran across an ad insert in my local newspaper. There was a picture of a 40-something woman with the headline, “Kathy Knows 75% of All Americans Don’t Get Enough Vitamin D,” followed by copy that read, “This Maximum Strength formula supports bone, breast, colon, pancreas and immune system health.” The dosage on the bottle of vitamin D pictured in the ad was…5,000 IU. Was this ad from my innovative local independent natural products retailer? No. The brand was Spring Valley vitamins, Walmart’s private label.

Reading vitamin labels the other day, I was impressed to see on a bottle of CoQ10 the information that statin drugs Lipitor and Zocor may lower CoQ10 levels in the body. On a bottle of multivitamins was the message that heartburn drugs such as Nexium and Prevacid can deplete iron, folic acid, calcium, chromium and vitamin B12. And on a vitamin B12 label was the warning that diabetes drug metformin may reduce B12 absorption; on another label, the warning that asthma corticosteroid drugs may deplete vitamin D, calcium, magnesium and vitamin C. How useful! What was this highly educational brand? Nature Made, on the shelves at Walgreens drugstore.

While independent natural products retailers may still be able to claim superior quality in some cases, savvy mass marketers will continue to squeeze shopping trips away from independents as they add more timely, relevant, state-of-the-art supplement formulas. How are you going to convince new shoppers you have better quality if they don’t set foot in your store in the first place?

“Eat More Trans-Fats”
Can you imagine this headline in a supermarket ad? Large food corporations, be they manufacturers or retailers, can no longer afford to ignore the impact their products have on American’s health. The epidemic of obesity, the spread of chronic disease, the in-your-face immediacy of digital communication, plus pressure from the highest offices of government are forcing the largest food marketers to step up and be part of a health solution.

Independent natural retailers may have enjoyed an exclusive “health halo” for their products while the conventional food industry slept. But today, the giant is awake. In order to survive, you’ll need to do more than just set products on your shelves and hope customers come in.

The Way Forward
Because products alone can no longer differentiate you from your competitors, you’ll need to bump up the value elsewhere in the shopping experience; your place and your people. For your place, make visiting your store a soothing, uplifting experience. Freshen it up. Paint and decorate. Add plants, a cascading waterfall sculpture. Diffuse some lavender aromatherapy. Clear a space for a couple of comfortable chairs.

For your people, you are already more knowledgeable than your competitors. The key is to empower your people to authentically and sincerely engage with every customer. At times, you may be frustrated by the customer who doesn’t appreciate your efforts. But retreat is defeat. With so much sickness in our society today, the odds are you’ll reach many more people who do appreciate your services. Make every visit to your store about inspiring hope. WF

Jay Jacobowitz is president and founder of Retail Insights®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a comprehensive marketing service designed especially for independent natural products retailers. With 34 years of wholesale and retail industry experience, Jay has assisted in developing over 900 successful natural products retail stores in the U.S. and abroad. Jay is a popular author, educator, and speaker, and is the merchandising editor of Whole- Foods Magazine, for which he writes Merchandising Insights and Tip of the Month. Jay also serves the Natural Products Association in several capacities. Jay is next scheduled at National Products Association Southwest Healthfest in Arlington, TX. Jay will speak during the afternoon program on Saturday, April 9, 2011. He can be reached at (800)328-0855 or via e-mail at jay@retailinsights.com.

Published in WholeFoods Magazine, March 2011