Natural Product Industry Battles Price Inflation

ANAHEIM, Calif. While growth in the natural and organic product sector shows no signs of abating, suppliers and retailers of these products are beginning to feel the same upward pricing pressures as their mainstream counterparts. In 2011, the Consumer Price Index for both food-at-home and food-away-from-home is projected to increase 3% to 4%, stemming from higher food commodity prices and energy prices,

ANAHEIM, Calif. — While growth in the natural and organic product sector shows no signs of abating, suppliers and retailers of these products are beginning to feel the same upward pricing pressures as their mainstream counterparts.

In 2011, the Consumer Price Index for both food-at-home and food-away-from-home is projected to increase 3% to 4%, stemming from higher food commodity prices and energy prices, as well as strengthening global food demand, according to the U.S. Department of Agriculture. Globally, food prices surged to a new historic peak in January, according to the United Nation's Food & Agriculture Organization. The simultaneous rise in oil prices is only exacerbating the situation.

Already pricier than conventional foods, many natural and organic foods are undergoing their own price inflation this year, despite efforts to absorb costs, according to a number of suppliers, wholesalers and retailers interviewed by SN at Natural Products Expo West [3], held this month at the Anaheim Convention Center. (National Products Expo West is produced by New Hope Natural Media, a division of Penton Media, which is SN's parent company.)

Last year, nutrition industry sales totaled approximately $115 billion in the U.S., an increase of 6% over 2009 levels, according to Nutrition Business Journal. But suppliers at Expo West were hoping price increases don't detract from that growth this year.

John Morgan, vice president of marketing and design, Sensible Portions, Fairfield, N.J., part of the Hain Celestial Group, observed wide-ranging price pressures in the natural food category. “When we go to our customers and explain the situation, they know because they've already heard it from five other vendors,” he said.

But Morgan was optimistic that the industry would do its best to protect its customer base. “What this business has to watch out for is prices,” he said. “If they go up too much, when do people start cutting back? Specialty items can't let that happen.”

Janica Lane, director, Partnership Capital Growth, San Francisco, expects that the natural and organic industry's growth in the past 10 years will help cushion the impact of commodity and gas costs increases. “Price is always a concern in natural/organic,” she said. “But it's very popular today and as the demand has grown, so has the supply side. It's better able to handle these swings in the market.”

Bob's Red Mill, a whole grains food company in Milwaukie, Ore., has tried to hold the line, despite input costs that have increased approximately 5% in recent months, said Matthew Cox, marketing director. “When we save, we share our savings; when we go up, we pass some onto the customer and we eat some. But it's got to be a relationship built on trust.” The company experienced 20% growth last year despite a difficult buying environment.

Barbara's Bakery, Petaluma, Calif., is formulating price increases that will take effect over the next three to four months, based on the rising cost of wheat, corn and sugar, said Kent Spalding, vice president of marketing, declining to speculate on how much they would be. “We're trying to absorb the price pressure we're getting, but we're looking at price increases to stay whole,” he added, noting that Barbara's was able to hold the line in 2008 when commodity costs also rose.

Natural food consumers are “probably less price sensitive” than conventional shoppers, though price increases “do have an impact,” said Spalding.

Kari Snelling, a buyer for Nature's Best, a distributor in Brea, Calif., said she has seen price increases but not more than in the past; in fact, she saw more increases in 2008. “Our vendors are responsible,” she said. “They realize there is a price threshold for our products, so they are very sensitive to pricing.”

Snelling agreed that the natural food consumer is more focused on lifestyle than price. “But every family has a budget so it's important to keep a balance,” she said. Nature's Best is trying to do its part by making truckload buys and engaging in other efficiencies.

BULK PRICES WAY UP

Natural food retailers interviewed at Expo West were more emphatic about price increases than suppliers. “Prices are up big time,” said Kathy Spude, general manager, Mount Hope Foods, a single-store operation in Cottonwood, Ariz. Bulk foods, in particular, have been hit hard, with prices up 30%, she said, adding that packaged food prices have not changed as drastically.

In the case of bulk organic quinoa, which has shot up to $7 per pound from $3 per pound in the past week due to a bad crop, Mount Hope Foods will be switching to a non-organic variety just to keep prices stable, while offering some of the organic quinoa for shoppers who insist on it. In the case of bulk organic pecans, the store bought a large quantity so that it would not have to raise prices.

But other bulk retail prices have gone up, said Spude. “Some customers get mad at us; they say we're gouging them. We try to explain our mark-up is the same — it's because the product has become more expensive.”

Bethany Reyant, a natural food manager and registered dietitian at a Cash Wise Foods store in Owatonna, Wis., observed “slightly” higher prices for natural and organic foods, though grass-fed meat price increases have stood out. “The ground beef still sells even with the higher prices, but people are cutting back on steak and other cuts,” she said.

At New Life Health Centers, a chain of four stores in Tucson, Ariz., prices are up across the board, including supplements and grains, said Lorraine Oakes, an employee there. “Shoppers complain but they still buy — it's a way of life for them,” she said. “Anyway the free therapy they get offsets the cost. We're like ‘Cheers’ — we know their name, their ailments.”

Prices at Artesian Health Foods, a store in Tracy, Calif., are up at least 5%, said Chris Parrish, an employee there. What helps the store mollify shoppers is pointing out that in conventional supermarkets, prices may be the same but packages are smaller. “We talk them through it,” she said.

Additional reporting by Bob Vosburgh