Marginal Utility

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'
consumers.

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?