The organic health food industry has benefited from increased consumer awareness of healthier foods as people take more responsibility for the role of diet in their health. In the recent “2015 Global Health and Wellness Survey”, Nielsen’s poll of more than 30,000 people online, found some 88% of respondents across all demographics expressed their willingness to pay more for healthy foods.
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In today’s market consumers are better able to understand food nutritional value on packaging and the prevalence of documentaries and written material on healthy eating have aided consumer sentiment towards natural and organic products with better nutritional outcomes.
The tides are turning
The organic health food industry in the U.S. has been thriving with American consumers spending more than US$43 billion on organic products in 2015 according to the U.S. Organic Trade Association. The wider consumer health industry (food, supplements and personal care items) totaled US$97 billion in 2014 and has been growing at about 9% year on year. Both sectors remain a small but faster growing segment of the US$1 trillion a year food retailing market in the U.S. according to JPMorgan.
As traditional food growth stagnates, many U.S. food giants are responding to the shift in U.S. consumer preferences, scrambling to become relevant in the organic and natural food space.
Campbell’s have launched a number of organic soups using USDA certified organic ingredients and Mondelez International’s (with such brands as Cadbury, Milka and Oreo) acquisition of Enjoy Life Foods have recognized the importance of allergen-free, gluten-free and non-GMO products. General Mills have even launched gluten-free varieties of Cheerios as they seek to capture a part of the growing gluten-free market, and they continue to expand their healthy food product base after the US$820 million acquisition of Annie’s.
Last month French dairy company Danone agreed to acquire Whitewave Foods for US$12.5 billion, the largest natural and organic foods deal ever announced. Whitewave is a producer and wholesale distributor of organic and natural food and beverages products with the leading market share in 4 of its 5 main food product categories, Danone noting in its presentation that “organic foods everywhere grows three times faster than conventional food growth”.
Organic and natural food sales through specialty grocers
In the U.S. organic foods can be bought across a number of retailer categories including specialty grocers such as Whole Foods Market and Sprouts Farmers Market, conventional supermarkets including Krogerand Publix, and warehouse/ discount stores such as Costco.
The U.S. specialty grocers account for about 3% of food retail sales and they have benefited from the growing demand for organic and natural perishables. In fact, about 13% of all fruit and vegetable sales were organic according to the 2016 Organic Industry Survey conducted by the Organic Trade Association.
Sprouts Farmers Market stores focus on natural groceries and carry an array of USDA certified organic and natural products with its 2.2% market share. The company has managed to flourish in markets with below average affluence (contrary to other specialty grocers) due to their attractive pricing and has the majority of its locations in California, Colorado, Texas and Arizona (and thus plenty of scope to expand). Sprouts maintains a competitive edge in the fresh produce department which accounts for about 25% of their sales, yet at a price 20% cheaper than conventional supermarkets such as Publix.
Whole Foods Market has been the leader in the organic food retailing segment with its over 420 stores and 4.4% market share. In May this year, Whole Foods Market unveiled its innovative 365 grocery chain, offering lower prices in a smaller store format and more technological interaction. These stores compliment the flagship Whole Foods Stores which carry a greater variety of products.
Nearly 65% of the specialty grocers market in the U.S. is dominated by Sprouts Farmers Market and Whole Foods Market as well as their two small competitors, The Fresh Market and Natural Grocers. However, they have seen their combined sales growth slow to 5.3% in 2015 after an average 13.6% per annum over the prior 5 years in the face of the expanding organic health food presence and competition from conventional supermarkets.
The threat of conventional supermarkets and discount stores
With faster growth and better margins, it is not surprising that conventional supermarkets are keen to move further into the healthy organic and natural foods market (Whole Foods Market’s gross margin is 15% better than Kroger’s). They recognize the strength of the organic and natural food market with growing choices in products, particularly in fresh produce and the consumers’ willingness to pay for it.
With increasing competition, margins in the industry are likely to face downward pressure. Whilst Sprouts Farmers Market is a price leader in produce when compared to other specialty grocers, their prices on non-perishables are less attractive than Kroger’s and Whole Foods Market’s 265 store concept is its attempt to continue grow market share but offer a more price competitive product to its customers.
The Wall Street Journal noted in an interview with a leading Rabobank food and consumer trends analyst that “we are now living in a world where Costco outsells Whole Foods in organics, Wal-Mart is exceeding its own goals for buying local, and McDonald’s is contemplating adding kale to its menu.” As the demand for organic and natural foods continues to grow, there will be increased competition from traditional and larger retailers seeking to expand their product ranges and provide complementary organic products to their existing ranges.
AtlasTrend expects to see further consolidation in the natural foods sector, with larger food companies seeking to expand their market share. As the appetite for healthy foods continues to grow, it will be interesting to see how specialty grocers can adapt to competition from larger conventional retailers after years of significant sales growth.
Why Atlas Trend?
AtlasTrend’s Healthy Lifestyle Fund invests in global leading companies benefitting from our increasing awareness to live healthier lifestyles. For full disclosure, the fund invests in Whole Foods Market, Sprouts Farmers Market and Whitewave Foods. Sign up for free membership to learn more about investing in the healthy lifestyle trend and the full list of companies AtlasTrend’s Healthy Lifestyle Fund invests in.
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