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Industry veterans do deep dive into status of organics

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Longtime produce retailer Frank Padilla and industry data expert Steve Lutz agree that organic produce sales, which are continuing to register double-digit gains, still have room to grow and can garner a greater percentage of produce department sales.

Padilla, vice president and general merchandising manager for Costco Wholesale, and Lutz, senior vice president of insight and innovation for Category Partners LLC, were featured in an Organic Produce Network webinar on Wednesday, Aug. 19, with OPN Co-Founder and Executive Vice President Tonya Antle serving as interviewer. Both industry veterans gave unwavering endorsements for the organic sector, with Lutz saying lack of availability of organic produce is the biggest barrier to growth and Padilla indicating that all things organic resonate with his member-shoppers.

Lutz kicked off the webinar revealing that during the first two quarters of 2020 organic produce sales organic sales continued to do well, and the first month of the third quarter, July, proved to be even better for the category with organic dollar sales representing close to 12 percent of total produce department sales. He said organic produce has outperformed conventional produce during these pandemic times, with both categories registering good gains as supermarket sales have skyrocketed.

Though the numbers are strong for organic produce, Antle asked why there appears to be a ceiling of near 10 percent for organic produce sales share of market. Lutz cited availability and used July as a benchmark. He said dollar sales were strong in July because organic volume sales rose from the typical 5 percent in produce to 6 percent. That represents a 20 percent increase in volume, which accounts for the increase percentage in dollar sales. More organic products need to be on the shelf and sales will increase, he said.

Lutz said increased availability in any specific commodity also tends to narrows the price gap between organic and conventional produce. A smaller gap also leads to greater sales. He pointed to some of the larger volume items -- bananas, carrots and apples -- to illustrate his point. On average, he said retail pricing for organics is about double that of a similar conventional SKU. In those three items, the price gap is much narrower and volume sales of organics are much higher.

Lutz also noted that the supermarket retailers that have the most success selling organic produce are those that make it easier for their customers to compare the two choices side by side. The more display space between the options results in fewer sales of organic produce. He believes this is a strong argument that the consumer will pick the organic option more often when the choice is easily comparable.

Lutz added that while organic sales outperform conventional produce sales, a survey of distribution points shows that conventional produce is outgaining organics. This is a disconnect and Lutz said it indicates that retail merchandising is not in balance with consumer demand.

Padilla took that same position, stating that organic sales are increasing throughout the entire store and the category “resonates with our members.” Organic produce sales are doing great, but he said shoppers are also choosing organic milk, cheese, poultry cookies, salsas and even socks and laundry detergent. All things organic appears to be the battle cry of the Costco shopper.

Costco announced a major commitment to organic producers several years ago and Padilla said the 800-store chain has not wavered from that commitment. It has been handling organic produce for close to 30 years and Padilla recalled that Tonya Antle was one of the first to call him long ago pushing her products in that category. He said in those early days Costco was only selling a few items, such as packaged spring mix and spinach, which he said were referred to as “yuppie salads” at the time.

Today, he said organics mean a lot to the chain, simply because its member-shoppers want them.

Speaking about the past five months and the challenging pandemic, Padilla said organic sales have done very well. Initially, he said the chain had to cut down on its SKUs and scramble a bit to figure out what consumers wanted. Costco buyers had to convey these desires to their suppliers, as buying habits had shifted a bit. He said value-added items aren’t quite as popular, theorizing that with consumers at home all the time they are not needing the convenience of cut apples, for example.

What they are looking for is ingredients that help them be more creative with their additional home-cooked meals. He said items such items as organic ginger root, Brussels sprouts and Crimini mushrooms are doing very well. He also noted that Costco has a commitment to protected agriculture such as greenhouses. He revealed that organically grown, hot house, long-English cucumbers have also sold surprisingly well.

During these challenging times with foodservice operators at half capacity at best, Padilla said it points out that the retail sector is in the best position to partner with organic suppliers and offer their products to the consumers. He said a great deal of Costco’s organic produce success has been because it has partnered with growers that have had extensive experience with conventional produce and giving Costco what it needs with regard to packaged produce. Those same grower-shipper partners have taken that learning and applied it to their organic production as well.

Antle pointed out that bulk packaging is key to Costco’s value proposition.

She also quizzed the Costco executive on their efforts with online shopping during the pandemic. Padilla said Costco partnered with Instacart, which has resulted in increased sales as some shoppers are just not willing to shop in person. He also noted that a non-Costco member can shop its products on-line via Instacart. It is the in-store Instacart shopper’s membership that makes the purchase.

While online shopping is a necessary convenience to provide to customers, Padilla said it isn’t the club store’s most-effective business strategy. That strategy includes creating a “treasure hunt atmosphere” with the customer traveling throughout those gigantic stores “bumping in” to bargains and must-buy items.

Padilla said there was one aspect of the company’s value proposition that has changed since the pandemic and that is the cessation of sampling and demoing of product, which is a Costco mainstay. He said it is at important element of its merchandising program because Costco sells large, bulk products and it wants to give its customers the opportunity to sample the product before buying it.

“It’s been very impactful not to have that,” he said.

 

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