Organics expensive compared to conventional produce

If you were take a quick stroll through any Canadian grocery store you would likely find a number of organic fruits or vegetables to buy. Over the last couple of decades organics have grown in popularity amongst customers and increased in importance amongst grocery retailers, that is if penetration to the produce department is any indication. Purchasing power is increasing with customers that consider organic fruits and vegetables vital for healthy living, and their dollars are increasingly being spent on organic foods. Organic customers have always been willing to pay for premium foods (like organics) but they never wanted to over pay. Once the organic business reached critical mass, these customers hoped that the cost of organic produce would drop, approaching parity with conventional produce. Many traditional grocery retailers would say that dollar sales of organic produce are close to or surpassing double digit penetration. That would be an indication that we are entering critical mass for organic produce. But what does this mean for costs? Is organic produce approaching price parity with its conventional cousins?

During the last week of March in 2017 Execulytics Consulting completed a pricing analysis of organic produce. The findings will provide little comfort to organics customers. The study included representative baskets of organic produce items offered from three different grocery operators in Ontario. The retail prices of those products were then compared to the prices of the same conventional items in the same location. To protect the innocent, I will not reveal which retailers were included in the study, after all this is not an exercise in shame, but more so one of discovery. And what I discovered was that it costs a lot of money to be an organic produce shopper. Let’s dive into the specifics.

The items in each retailer’s basket were spread across fruit, vegetables and value added produce and in cases where the product was packaged to a set amount, the conventional price was equivalized so that it represented the same quantity. The first retailer’s basket consisted of 30 organic products along with alternatives in the conventional produce category. The conventional version of the basket rang up a total of $87.91, whereas the organic version came in at a lofty $135.20. The organic basket cost 54% more than the conventional basket and the average per item premium was 66%! Not exactly parity by any stretch of the imagination. I was shocked! I expected a premium but not anything as high as 50%. I hoped that maybe this one retailer was an anomaly, perhaps they were out of touch with customer demands. My hopes were dashed when I crunched the numbers for the second retailer.

The second retailer was less advanced in their organic assortment so their basket consisted of only 16 items. Despite the smaller basket, the results were virtually the same. The conventional basket had a total cost of $40.08, while the organic basket was $61.88. Again a 54% premium! The average per item premium was 62%. This, I thought was getting ridiculous. Surely the third operator would yield more organic friendly results. Well, the results were mixed. The larger assortment of 35 items had a conventional cost of $113.70 while the organic basket was $166.18.  Although this represented a slightly lower premium of “only” 46% and an average per item premium of “only” 52%, their price levels were significantly higher than the other two retailers. In fact, the third retailer indexed at 134% and 128% respectively on like organic baskets with the other two retailers.

These results beg the question, why are organics so expensive to purchase? Why are the grocery gods punishing organic customers so harshly? Aren’t they doing good for society by purchasing organic? This analysis does not uncover the answers to these questions, however deductive reasoning would determine that it lies either in the cost from the producer or in the retailers’ desire to profit at a more aggressive rate than it does on conventional produce. My bet is it is a combination of these two forces.

What’s the big deal? So what if both growers and retailers want to harvest the profitability a little bit on organics? It’s a free country, isn’t it? Or many free countries in this case. Yes, it’s true we are operating in countries where the free enterprise system thrives. Companies can profit however and wherever they can to fund their operations and maintain viability. The free enterprise system ensures that if profits get too high, competition will swoop in and undercut current prices. Until this happens the free enterprise system encourages profiteering.

Does this mean both growers and retailers alike should continue their profiteering ways with respect to organic produce? Sure, if they want to get swallowed by new and mighty competitors. And I’m not talking about a measly 10% of produce sales, I’m talking about their whole business! A close look at the demographic changes in North America suggests a monumental shift in purchase behaviour in the grocery stores. As millennials displace gen X’ers in grocery purchasing power, they bring with them a love of organics. Once new competition swoops in to undercut prices, as promised by the free enterprise system, they won’t just steal away organic produce sales, they will also steal away the customer’s entire wallet. Organic produce will be so important for these new customers that it will be worth switching supermarkets for. And for supermarkets it will be worth switching growers for.

I learned a few things during my exercise in discovery. One, I learned that being an organic produce shopper is very hard on the wallet. Two, I learned that grocery giants Aldi and Lidl have both ramped up their organics programs in their respective marketplaces. Given their record of success and their devotion to low cost, it’s a good bet that they understand the benefits of satisfying the new organic shopper and that they will satisfy them at a significantly lower price level than Canadian incumbent grocery stores. And third, it’s only a matter of time before Aldi, Lidl or both make their entry into Canada. I guess one thing I did not learn was whether or not incumbent Canadian grocery companies would be ready.