THE ORGANICS OUTLOOK

Declining birth rates among high-income customers have upped the competitive ante for organic baby-food makers, with some retailers paring back on offerings because of falling sales.But other retailers told SN that organic baby food is a strong segment, and the Organic Trade Association, Greenfield, Mass., is predicting slow but steady growth over the next five years. Meanwhile, recent data from Information

Declining birth rates among high-income customers have upped the competitive ante for organic baby-food makers, with some retailers paring back on offerings because of falling sales.

But other retailers told SN that organic baby food is a strong segment, and the Organic Trade Association, Greenfield, Mass., is predicting slow but steady growth over the next five years. Meanwhile, recent data from Information Resources Inc., Chicago, show organic baby-food sales are trending down.

Clearly, it's not easy to take a quick snapshot of this fluctuating segment, which is influenced by many factors.

The number of babies under one year old dipped slightly after 1995, when the infant head count was 3.85 million. It is projected that the head count for 1999 will be just under 3.8 million. Moreover, according to the OTA's Manufacturers' Survey published in 1998, organic baby-food manufacturers say that birth rates have been declining among their usual customers -- higher income, more highly educated parents.

"Bad press about pesticides [have driven] consumers to make their own baby food," another manufacturer claimed. Names of the survey respondents were kept confidential, said Holly Givens, spokeswoman for the OTA.

One retailer cited still another reason for declining sales: parents may be rushing their children into table food so that they can better fit into mom and dad's hectic lifestyle.

Bob Savage, a food broker who sells Gerber products to 2,000 supermarkets in the Carolinas, including Winn-Dixie Stores, Harris Teeter, Food Lion, Ingles Markets, Bi-Lo and Publix Super Markets, said that the company's organic Tender Harvest line is doing exceptionally well, beating out Earth's Best and corralling about 80% of the organics business.

Even customers who unintentionally purchase the organics line find that it tastes better, claimed Savage, executive vice president of Crossmark Sales & Marketing, Charlotte, N.C. "Tender Harvest has almost begun to cannibalize the regular Gerber line."

Although some retailers in other parts of the country claim that organics brands don't do much promotion, Savage said that he does.

"Our strategy is to promote Tender Harvest along with [Gerber] Third Foods in the life-stage set. (First Foods is for the younger babies, with the core part of the business in Second Foods, Savage explained.) On special at three jars for 99 cents, the Second Foods "sells like there's no tomorrow," Savage said. "So [in promoting Tender Harvest] we try to promote away from Second Foods. Just doing a price reduction gives you a big lift in sales."

Tender Harvest's price is reduced once a quarter, Savage said, for four weeks, selling at two for $1 and linked with Third Foods, also at two for $1.

At Russo's Giant Eagle, Chesterland, Ohio, Chuck Caplan, manager of the independent's Cleveland Heights store, said organic baby food -- specifically Earth's Best -- has been doing very well in all four Russo's units.

"The mothers of the nineties want the best for their kids," he said.

"In organics, we carry Earth's Best jarred line and two dry cereals." As for margins, he said, "We make a little bit more on Earth's Best than the other [non-organic food], maybe a dime a jar, because everyone else carries the other." So customers looking for organic have to come to Russo's.

In sales volume, organic baby food is about equal to the non-organic segment. "We sell the same amount of cases as of Beech-Nut and Gerber," Caplan said.

Organic baby-food manufacturers are anticipating a 2% annual increase in sales to the year 2002, according to Givens of the OTA.

From 1992 to 1997, she said, the category grew 6% each year. "Compared to the overall growth of 22% a year in the organic-foods industry, baby foods are a little bit more mature and not expected to grow as much as the rest of the field," she said.

Nonetheless, a quick look at the history of the organic segment reveals that, while the category has been profitable, it has not been without its problems. More specifically, some baby-food manufacturers have waffled over whether it was worth it to get behind the segment and commit promotional and marketing dollars to its growth.

Earth's Best, Boulder, Colo., was the first organic baby-food brand, according to Richard Theuer, vice president of research and development for Beech-Nut Nutrition Corp., a division of Milnot, St. Louis. Milnot acquired Beech-Nut in September 1998.

Earth's Best was launched sometime in the 1980s, Theuer said. Beech-Nut launched its own organic line, called Special Harvest, in 1991. The company discontinued the line in 1994 for business reasons, Theuer said. Beech-Nut was the first baby-food company to remove starches and sugars, and it was the first to market baby food in "stages," he said. A company policy on pesticides that is "mentioned in passing but not promoted," said Theuer, assures parents that pesticide levels in Beech-Nut baby foods are negligible to non-detectable.

In late 1996, Organic Baby came on the scene, with a small line of 13 items. In the same year, Earth's Best was acquired by Heinz U.S.A., Pittsburgh.

In November 1997, Gerber, the largest baby-food manufacturer, with a 70% market share, launched its own organic line, Tender Harvest. Suddenly, Earth's Best found itself challenged by Gerber in the mainstream supermarkets and by Organic Baby in the natural-products stores.

Organic Baby, a 20-item line distributed by United Naturals, Dayville, Ohio, is now available in 48 states and in most chains, according to John Raiche, director of marketing for United Naturals' Eastern region. It is, for example, the only jarred baby food carried in Stop & Shop's natural-products set. The Tender Harvest line now has 16 items, and Gerber is contemplating more.

Earth's Best recently moved again, from Heinz to Hain Food Group, Uniondale, N.Y. Hain plans to bring out more items under the same brand, for infants and toddlers, according to Irwin Simon, president and chief executive officer of Hain.

"Earth's Best got lost in the Heinz organization," Simon told SN. "Now it's our challenge to get out and meet those guys head-on."

In April, when the Earth's Best brand moved to Hain, there was a lot of promotional activity, Simon said, especially in California, with Ralphs and Lucky stores. "We are introducing the brand in Fry's, and it's on hold at Wal-Mart Supercenters," Simon said.

A brief look at the sales history of the organic baby-food segment reveals that the category has been on a roller-coaster ride.

According to IRI, the Earth's Best brand peaked in the second quarter of 1996, shortly after Heinz bought it, and declined until the most recent quarter, when it perked up a bit.

Earth's Best was at $6.4 million in sales for the 13-week period ended June 30, 1996, and had been steadily increasing up until that point, from the 13-week period ended July 3, 1994. The brand then began to decline through 1998, but showed a small increase for the last 13-week period, ended March 28, 1999, with $3 million in sales.

The same analyzer report from IRI shows that Tender Harvest, from category leader Gerber, has also been slipping. The line reached a high of almost $7 million for the 13-week period ended June 28, 1998, but sales for the 13-week period ended March 28 of this year dropped to $5.8 million.

What the statistics seem to indicate is that organic baby food, a must for some consumers, will continue to be a viable segment, but that it has peaked as a category within the last few years. It now remains to be seen if one or more manufacturers can bring up sales again.

Dorothy Lane Markets, Dayton, Ohio, a three-store independent, finds organic baby food growing "very fast," according to Wayne Chrisman, director of the Oakwood store.

At the same time, a category manager for a midsized East Coast chain who did not want to be identified said the retailer has carried the Gerber Tender Harvest line "forever" without doing well with it.

He said that the units which have a store-within-a-store format for natural products recently switched to Organic Baby. "It's too early to tell how it's doing," the source said.

A grocery buyer from a northern California chain who also did not wish to be identified said, "Earth's Best is gone now; we've deleted every stockkeeping unit. It's not selling. We still have Gerber, Tender Harvest and Beech-Nut. There must be a lot of consumer confidence in those brands.

"Our coastal stores are where the customers seek organics. A number of independents and 10,000-square-foot natural-products stores are selling health-food items, because the clientele is there," he said.

Another industry source told SN that Raley's Supermarkets, West Sacramento, Calif., which has a strong commitment to natural food, does not carry organic baby food in its natural-food sets. Raley's has a natural-food store-within-a-store in its units. Raley's did not return calls for comment.

Tom Rose, category manager for baby food for IGA Fleming, Oklahoma City, said organic baby food is "not doing that much. It's not promoted. We stock Gerber's Tender Harvest, but I wouldn't say it's setting the world on fire.

"I think it would do better in an urban area, rather than in the outlying rural areas that our stores are in. You need a big store, and an upscale neighborhood to make that work," Rose said.

Some segments are down, said Gerber's director of infant feeding, Steve Colton, but, on the whole, the company is pleased with the performance of its organic line as well as its regular baby food. Colton said the organic products are not hurting sales of the non-organic varieties.

He disagreed with Rose's urban, upscale characterization of organic baby-food customers, but he did agree that sales are stronger in the nation's population centers.

This February, Gerber introduced another line, called Nature Lock. While not organically grown, the Nature Lock products undergo a different cooking process, which is supposed to make these products taste fresher.