Wal-Mart's next conquest: Organics
It pounded supermarket chains by selling groceries cheaper than anyone else, now the discount leader wants the "naturals" niche.
By Parija Bhatnagar, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Wal-Mart, the world's largest retailer, is pushing into organics with a vengeance.

Who stands to benefit? Organically-inclined consumers because of Wal-Mart's price-busting mentality.

Wal-Mart is doubling its organic food offerings this year and will also launch organic baby clothes and back-to-school T-shirts.
Wal-Mart is doubling its organic food offerings this year and will also launch organic baby clothes and back-to-school T-shirts.
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Who's should be very afraid? Competitors like Whole Foods (Research), Wild Oats (Research) and other supermarket chains who've either built their business on selling "natural foods" or are aggressively expanding into that area.

Wal-Mart (Research)'s already the No. 1 seller of groceries, a category it entered when it opened its first supercenter store in 1988. Today, the company sells fruits and vegetables, milk, bread and other packaged foods in nearly 2,000 supercenter stores and about 100 smaller neighborhood market locations.

However, the retailer introduced organic food products such as milk and vegetables into the mix only about five years ago.

Industry observers believe Wal-Mart hesitated to dive wholeheartedly into the lucrative $15 billion organics market because it didn't think higher-priced natural foods were a good fit with its core low-income consumers.

Not anymore. Today, it's all about organics and "going green " at Wal-Mart, not just in food but in clothing and even in electronics and other household products, especially as the company strives to expand its profit margins, find new growth opportunities and appeal to less price-sensitive customers.

Wal-Mart spokeswoman Karen Burke said the retailer's already doubled its organic choices in fresh produce, dairy and dry food items this year, although she declined to say exactly how many organic food units are currently stocked on the discounter's shelves.

"Many of our customers told us that they're interested in one type of organic product or another. So we wanted to make it convenient for them to buy it at a Wal-Mart," Burke said, adding that Wal-Mart hopes to become the low-price leader in organics.

Among other initiatives, the retailer will launch a line of organic cotton baby clothes in May under its private label "George" and introduce organic infant formula. It'll also sell organic cotton T-shirts as part of this year's back-to-school offerings.

Beyond food, Wal-Mart also wants to take the "healthy" concept into the environment, home and electronics.

To that end, Wal-Mart has promised to buy more fish from sustainable fisheries, it's selling more energy-saving light bulbs and is asking all its laptop vendors to develop more eco-friendly machines that limit the use of hazardous components in them.

From niche to mass market

Holly Givens, spokeswoman for the Organic Trade Association (OTS), sees Wal-Mart's heightened interest in the organics market as a positive development for the industry and for consumers.

"Anytime a retailer looks to expand into organics, it's good news for shoppers because they get more access to these products," she said.

On the vendor side, she thinks Wal-Mart's stamp of approval could also provide an enormous incentive to non-organic farmers to think about expanding into organic food production as a way of boosting their sales to Wal-Mart.

"Organics still represent only about 2 percent of the total food and beverage sales in the United States but the market is growing 20 percent a year. That's much faster than the 2 to 4 percent growth for non-organic food sales," Given said.

Wal-Mart's foray into organics should help to bring down prices for consumers, said Craig Johnson, president of retail consulting group Customer Growth Partners.

"Wal-Mart gets a bad rap for many things. People say Wal-Mart squeezes its suppliers too much and hurts their business because it wants to pass along those savings to consumers through lower prices," said Johnson. "But as this middleman, Wal-Mart has also helped its suppliers to become more efficient and achieve cost savings in their businesses."

Givens declined to comment on whether or not Wal-Mart's pricing policy will hurt organic food farmers other than to say that she believed it was important that organic farmers "are able to earn a living doing what they're doing."

Can Whole Foods stand up to Wal-Mart?

Natural food sellers Whole Foods, Wild Oats, Trader Joe's and even conventional supermarkets that have a small mix of organic products have to be very wary of Wal-Mart because of its size and the volume of business it generates, said Andrew Wolf, analyst with BB&T Capital Markets.

"If Wal-Mart decides on pursuing anything, even if its tangentially related to the what Whole Foods or Wild Oats is involved in, it has to be mentioned with caution," Wolf said.

Indeed, Whole Foods' investors have taken note, with the stock down about 21 percent year-to-date. However, rival Wild Oats shares have fared better, gaining about 43 percent so far this year.

If the Wal-Mart threat was spooking investors, then both companies' stock would have headed south, Wolf said. According to Wolf, who has a "hold" rating on the stock, Whole Foods' is still logging double-digit annual sales but the retailer has ratcheted up its new store growth and that's impacting the bottomline and pressuring the stock.

"No doubt Wal-Mart is a concern. This is a franchise that has a reputation of providing great value to mid and low-income customers," said Wolf. "Right now I don't see too much of a customer overlap between Whole Foods and Wal-Mart. Whole Foods doesn't operate in the same markets as Wal-Mart and it caters to a higher-income shopper. "

Johnson agreed with Wolf.

"I don't see Wal-Mart as a great threat to Whole Foods right now. There's a lot of market share up for grabs in organics," Johnson said. "The disparity of their customer base is too great. So instead of stealing customers away from Whole Foods right away, I think Wal-Mart could successfully expand the natural food market to low and moderate income shoppers. It certainly fits in with Wal-Mart's strategy to move upscale but in a limited way."

Sonja Tuitele, spokeswoman for Wild Oats, said the company was definitely aware of Wal-Mart's organics initiatives, but not too worried.

"We can approach this from two different angles. There's very little overlap between our shoppers and Wal-Mart's. We're a specialty retailer and our customers don't focus on price first," said Tuitele.

"The other way to look at it is that it's a good thing because Wal-Mart could help expose more people to better quality food that's also better for the environment," she said. "Maybe these people don't come to Wild Oats today because of the high prices but at least they'll start to think about what they're putting into their bodies. Once they decide to lead an organic lifestyle, they'll come to us for greater variety of products and the education we provide to consumers about a healthier lifestyle."

Whole Foods could not immediately be reached for comment.


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--Analysts quoted in this story do not personally own shares of the companies mentioned in this story and their firms do not have an investment banking relationship with the companies that they cover.