A Conference Note From Donna Crothers

As consumers focus more on transparency and healthfulness in foods, attendance at Natural Products Expo East in Baltimore Sept. 17-19 was up notably from 2014. Preliminary attendance figures for Expo East showed about 1,800 exhibitors (up from 1,330 in 2014) and 22,000 attendees, which also increased from 2014, according to Expo East officials. An estimated 30% of the exhibitors were first-time attendees at Expo East.

Conventional Retailers Drive Prices Down
As consumer interest in natural/organic/gluten-free foods grows, retailers like The Kroger Co., Costco Wholesale Corp. and others are increasing such offerings, putting pressure on natural foods retailers such as Whole Foods Markets Inc., as in OTR Global’s July 17 report. Sources at Expo East said this is good news for the consumer as conventional grocers will both drive retail prices down and increase supplies. “Margins are coming down for retailers on natural foods. Kroger is forcing the issue. Sprouts [Farmers Market Inc.] is responding aggressively. Whole Foods is still wedded to high margins, and they’ve got their prepared foods to still draw in shoppers. But margins are coming down. That’s the impact of natural [products industry] going mainstream,” one source said. Another agreed that Sprouts has been aggressive in matching Kroger’s prices. “Sprouts is obsessed with beating Kroger on price. Now when you present a new item, you have to tell them what the retail price is [at Kroger]. Sprouts has to be lower [than Kroger], even if it’s only by 2 cents.” Some sources said supplies of organic ingredients -- sometimes stretched thin -- should improve with conventional grocers’ demand. "Conventional supermarkets are creating more demand, and I think that is great because it means more organic products are being grown," a top supplier said.

UNFI Faces Challenges
As in OTR Global’s July 28 snapshot, suppliers said United Natural Foods Inc.’s (UNFI) loss of Albertsons Cos. Inc. and Endeavour Capital’s New Seasons Markets accounts to KeHE Distributors LLC has left UNFI struggling and KeHE in a stronger position. One said this is good news for natural foods suppliers, “UNFI is definitely feeling under the gun [from KeHE]. It’s great for vendors to have a stronger No. 2 [national distributor].” One top supplier said UNFI is taking steps such as bringing on new leadership to prevent any further losses. “Bringing back [this senior executive] means KeHE has got UNFI really worried about holding on to the independents they have left now that they’ve lost another INFRA [Independent Natural Foods Retailers Association] group [INFRA Southwest recently switched to KeHE]. UNFI doesn’t want to lose [Natural Grocers by] Vitamin Cottage,” the supplier said.

Small Suppliers Being Gobbled Up
A plethora of start-up companies attended Expo East, and for many, the ultimate goal is to be bought out by a large corporation. The CEO of a smaller natural foods company that recently was acquired by a multinational firm said little had changed in his operations and the acquisition was a positive. Others were more divided on whether smaller natural foods companies benefit from such acquisitions. “Most [large] companies that buy natural [companies] screw them up, like Kellogg [Co.] with Kashi or Hain [Celestial Group Inc.] with all their acquisitions. But General Mills [Inc.] seems to be doing well with Annie’s. They’ve been hands off with [Annie’s], and that makes all the difference,” one supplier said. Others said smaller companies can be quicker to hop on trends. A gluten-free, non-GMO snack food supplier said, "We are catching up to and passing Hain [snack sales] in a lot of places. But, they are still a robust, growing company."

Certified Organic Trumps Non-GMO
While the gluten-free food trend remains well intact, a shift from emphasis on non-GMO certification to what some said is the more meaningful certified U.S. Department of Agriculture organic certification was noted by many sources. “Last year, everyone was talking about getting non-GMO certification -- that it was even more important than organic [certification]. But now organic [certification] is back to being recognized as the gold standard,” a supplier said. One snack supplier said he will not seek non-GMO certification because his products are USDA certified organic. He said, "One hundred percent, certified organic -- that is the trump card. It is better than non-GMO." Although Whole Foods is expected to require all products to be labeled as to whether they contain GMOs by 2018, several sources said other natural foods retailers -- including Natural Grocers by Vitamin Cottage and smaller independents -- have even more stringent standards.

Top Trends: Gluten-Free, Free-From, High Protein
Most sources said the gluten-free movement has staying power but said consumers are seeking more than the absence of gluten; they want nutritious gluten-free items. "The gluten-free trend is growing but just not at the same rate as it was. Consumers [of gluten-free products] don't just want it to be free of gluten. They want the presence of positive nutrition like protein and fiber," a top supplier said.

Another trend rapidly moving to the forefront is the “free-from” movement as consumers want all possible allergens removed from foods. A top supplier of non-GMO, gluten-free snacks noted his products do not contain the top eight allergens, including soy, dairy, wheat, tree nuts and eggs. 

Protein content was touted in many products and fresh meat vendors were at the show, but sources said millennials increasingly seek protein from other sources. “Another important trend [evident at the show] is the demand for plant-based protein. Those products are getting a lot of traction. Millennials especially want products that are not made from animal meat. Older generations may still have a hankering for a good steak or even hamburger, but younger generations are moving away from that,” a natural products distributor said.

Emphasis on Sustainability, Social Responsibility
Many new natural products companies are emphasizing their contributions to the environment to distinguish themselves from competitors. Many were certified Fair Trade, and one supplier said, “I think palm oil being certified Fair Trade and eco-certified is the next big thing.” Compostability also was another frequently mentioned attribute, with a supplier showing compostable microwave popcorn bags and another 99% compostable single-serve coffee pods. 

ADDITIONAL QUOTES

On Gluten-Free Products

"Gluten-free is not a fad, although there is a fad element on the edges. But the core is not a fad."

“We’re not seeing any interest wane in gluten-free. Demand is not letting up. It’s not like the Atkins diet craze.”

“Gluten-free is the new mold; it is taking over everything.” 

On Organic/Non-GMO Certification

"To be organic is better than non-GMO."

"The USDA organic certification umbrellas the non-GMO certification."

"The consumer is getting bombarded by all these terms, which is why certified organic needs to stay at the top."

"Organic should be for everyone. If it doesn't taste great, we are not going to launch it."

“There are some products that simply can’t be GMO-free. There’s such a limited supply of GMO-free corn and soy.”

“Transparency is key. Even with all the debate over GMOs, people just want to know what’s in their foods. The demand for labeling just keeps growing. The ‘free-from’ [certain ingredients] movement is all part of that.”

On Whole Foods

“It seems Whole Foods’ plans for their 365 stores are just something to distract Wall Street while they try to get their act together to deal with the competition from all quarters. Our growth at Whole Foods is still strong -- just as strong as it is with others in natural or in [the] grocery [channel].”

"Most people don't go to Whole Foods for their whole basket. They can’t afford to." 

"Whole Foods is where we started, so we do a lot of things for Whole Foods that we don't do for other retailers."

“We’ve not seen Whole Foods take lower margin on any of our products, but they’re clearly under increased pressure.”

“All [Whole Foods] 365 products are non-GMO so they want consumers to know that [with new labeling requirements].”

“Young people are determined to find what is healthy for them, and people trust what we are selecting for them. Whole Foods is letting in some ingredients that we would not.” 

On Sprouts

“Sprouts has been pushing BOGOs [buy one, get one free] big time. That’s new. It’s because of the price pressure from Kroger. And they expect the vendor to ante up the whole thing. Sprouts is only contributing the [cost of] advertising.”

“Whole Foods has not lowered prices, but Sprouts has gotten much more aggressive recently. We’ve agreed to do a BOGO with them, even though we don’t like to. We don’t have much choice. They demand a lot, but they know how to move product. They give you huge displays.”

“We’ll be able to tell you by mid-October how well the promo with Sprouts is going. They contributed on margin too -- under 20% -- which is amazing.”

“[Natural] vendors are in a bind with Sprouts. If you don’t do BOGOs with them, you’ll lose shelf space -- lose sales and lose profitability.”

On Fresh Market

"Fresh Market's new products presentations are becoming more like Whole Foods -- just a single sell sheet."

On UNFI

“It’s a big deal that KeHE got the Safeway-Albertsons’ account. UNFI was not expecting that. It’s clearly shaken them up. And [for KeHE] to get New Seasons and now INFRA Southwest -- that’s high-margin business that UNFI just lost.”

“The [three] INFRA groups have switched to KeHE because they got so fed up with UNFI’s priority focus on Whole Foods.”

On Hain

“Hain just takes the heart and soul out of every company they buy. Their growth comes from their acquisitions, but then they replace everyone. The turnover at Hain is crazy.”

On Conventional Supermarkets/Discounters

"Conventional retail is where we see more growth opportunities due to the sheer number of stores."

“We [the natural products industry] used to be a fringe business. We sold quality products that could command a premium. But conventional retailers are all about price -- not quality.”

“Conventional retailers are getting into natural [products] with the speed of light. They will force lower prices on [natural] manufacturers.”

On Kroger

“Dealing with Kroger is vastly different [from] almost any other conventional retailer. Unlike [Koninklijke] Ahold [NV] or some others -- they don’t demand slotting fees [from natural and specialty vendors.] They understand that small natural vendors have to make margin.”

“[Kroger is] talking about lowering retails on our product [by about 20%]. I don’t know when it will happen, but they’re not taking it out of our margin. It’s all them.”

“Kroger just started its first major test of Vitacost’s software starting a test with King Soopers. There’s now a King Soopers website [Live Naturally] where you can order all kinds of [natural/organic] things, and they’re pulling from Vitacost’s Nevada warehouse. That warehouse is supplied by UNFI so it’s a nice piece of low-cost business for UNFI right now. It’s still experimental so that’s why they’re letting UNFI handle it. Of course, eventually Kroger will take over. But Kroger needs UNFI right now on this. It could be great for UNFI short term.”

On Target

“Target [Corp.] is showing strong growth for us [in natural]. They’ve been late to the game, but sales have really picked up.”

On Ahold

“UNFI has been working closely with Ahold to develop the bfresh stores. Before the merger [with Delhaize Group], they told us they planned to open upward of a dozen stores [in the Northeast]. I don’t know how the merger is going to affect those plans. I’ve asked but haven’t heard back.”

“[Ahold’s bfresh] is a great concept. I don’t know why Whole Foods didn’t go with this size [8,000-9,000 square feet]. Why open a [365] private-label store that’s 30,000 square feet? It’s going to cannibalize whatever their store is that’s nearby.”