Friday, January 13, 2006

Always Low Prices on Natural Foods?

by Tom Bozzo

Kim Weeden, quasi-guest-blogging, sends along this item from CNN on food trends for 2006. Organic foods, one of the few big growth opportunities for the food industry, will continue to grow rapidly...
"As a result, more companies will enter the organic space," he said. Sales at the number one natural foods retailer Whole Foods (Research) have been on a tear, but the chain will soon be in for some stiff competition, most notably from Wal-Mart (Research), the biggest grocer in the U.S.

That retailer already sells a limited range of organic products like brown flour, packaged salad, carrots, tomatoes and milk, and indicated its intention to become a premier retailer of natural foods at its October, 2005 analysts meeting. "That's why we are expanding our organic food offerings," John Menzer, who heads the retailer's U.S. stores.
Kim's comment:

Whole Foods facing stiff competition from Wal-Mart? This statement strikes
me as remarkably naive about the social dynamics of consumption. People who
shop at Whole Foods don't do so because Wal-Mart lacks a good organic
produce aisle: they shop at Whole Foods in part because it's an event, it's
a place to network and be seen by like-minded friends, and it's an
expression of a particular lifestyle. I'd guess that most Whole Foods
shoppers avoid Wal-Mart like the plague, because shopping at Wal-Mart would
be a social faux pas on the order of admitting that you love Budweiser,
watch NASCAR, and have all episodes of Average Joe saved on your DVR. And,
I imagine the people who shop at Wal-Mart hold similarly disparaging
stereotypes about Whole Foods shoppers. The main points of overlap in the
consumer base are thus those that want organic products but can't afford
Whole Foods' prices; and realistically, there aren't enough graduate
students in the US to have much an impact on retail numbers at either company.

I wish Wal-Mart all the best in its efforts to make organic products widely
available and affordable to more Americans. In fact, if they are able to
increase consumer demand for organic products by increasing the supply of
such products, and to encourage more farmers to "go organic," more power to
them. But barring a major shift in either company's corporate image,
Wal-Mart is far more likely to create new consumers for organic products
among existing Wal-Mart customers than they are to steal Whole Foods'

I agree with Kim that there shouldn't be much fear in Austin over Wal-Mart's move into organic foods. Among other things, I doubt the Whole Foods practice of buying produce from local artisanal producers — which gives them not insignificant credibility to get actual foodies in the door — translates into Wal-Mart's purchasing model. A few other comments from the economist's side.

1. I'd like to believe that demand curves slope downwards, so if Wal-Mart can price organic foods cheaper than other grocery retailers, they ought to pick up some business from (other) competitors while encouraging some substitution of organic produce among their existing grocery customers.

2. Offering premium products like organics would, in principle, give Wal-Mart an opportunity to profit from less price-sensitive customers, assuming organics have a higher mark-up than conventional produce. Does Wal-Mart have any less price-sensitive customers (e.g., in areas where slightly more stylish competitors such as Target have less presence)?

3. One thing I've wondered, as more pre-packaged and processed organic foods have made their way into conventional grocery stores, is how easy it would be to commit organic certification fraud. The incentive is obviously there, given the price premium commanded by organics, and since in many cases proving a product is organic is tantamount to proving holy water has been blessed. Might Wal-Mart's famous cost pressure on its suppliers encourage fraud in earlier stages of the production process?
IMO, the more people who have access to organics, the better. Given the high rates of childhood obesity, if we can get some better food out there for people who are unlikely to shop at Whole Paycheck Foods, it's going to be better for society in the long run.

Will I be running to Wal-Mart to buy these items from them? No. But will Wal-Mart put places like Whole Paycheck/Magic Mill/Insert Your Local Co-Op Here out of business? No.

I would rather pull out my own fingernails (sorry, just saw Syriana) than step inside that store. I'm clearly not their target consumer.

I would gladly buy from a store with ethics that I can support even if it means paying a little more. My support of organic agriculture isn't just a health decision...but for other consumers it will be, and they'll get it shopping at Wal-Mart.

So be it.
The person you quote makes a mistake in social analysis: the person to think about isn't the average person (shopping at Whole Foods) but the marginal person. And the marginal person who Wal Mart is aiming at certainly is deeply influenced by price.
Isaac: I think Kim's 'not enough graduate students' crack actually addresses your criticism; I think her point that there aren't a lot of Whole Foods shoppers whose next alternative is Wal-Mart holds up.

My point #1 about demand curves sloping downwards is more along your lines -- what Wal-Mart can expect is to bring in price-sensitive non-Whole Foods shoppers to get organic stuff at the Supercenters.

I think conventional grocers have more to fear from a Wal-Mart foray into organic foods, in no small part because their natural foods offerings are often at a premium to Whole Foods prices. While Wal-Mart can't match Whole Foods as social event, it can match a Cub Foods on assortment.
I am sure Wal Mart knows more about their demand curves than you do. You should be happy - greater demand for organics will raise the prices for organic farmers. And if going to Whole Foods is a social event for you, then you don't get out enough.
Anon: Neither Kim nor I contend that Wal-Mart can't make money off natural foods, so I'm not sure what the purpose of your 'deman curve' comment is. Likewise, Kim suggested that it would be a good thing if Wal-Mart helped expand the reach of organics, and I don't disagree. We just don't think they'll make much of their money at the expense of Whole Foods (or substitutes such as well-established co-ops).

It may be true that people who go to Whole Foods for the scene need to get out more, but that doesn't mean that there isn't a scene.

Also, while I permit anonymous comments, I request that commenters use an identifying handle. Anonymous comments that are not much less civil than yours are subject to deletion without warning.
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