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Walmart announces plan to cut prices on some organic products

April 12, 2014 at 5:33 PM EDT
Organic food sales totaled some $30 billion in the U.S. last year and suppliers can barely keep up with demand. Earlier this week, the nation’s largest retailer, Walmart, announced that it would slash prices of some of its organic products by 25 percent. Hari Sreenivasan speaks with Phil Wahba who covers the retail industry for reuters about the effects this change will have on consumers, retailers and foodmakers.
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HARI SREENIVASAN: Organic food sales totaled some $30 billion dollars in the U.S. last year and suppliers can barely keep up with demand. Earlier this week, the nation’s largest retailer, Walmart, announced that it would slash prices of some of its organic products by 25 percent. The company said it acted after research showed that nine out of 10 of its customers would purchase organic products if they were affordable. For more on what this move could mean to consumers and businesses we’re joined now by Phil Wahba, who covers the retail industry for Reuters. So, first of all, what’s the significance? The largest retailer in the country, but beyond that why is this news so important?

PHIL WAHBA: Well, this news is so important because people think that this is going to be the inflection point that will make organic foods more mainstream. And so Walmart already sells about 1,600 different items that can be considered organic, but they’re mainly dairy and produce. Now they’re adding 100 items from under the Wild Oats brand, and those will not have the typical premium that you see with organic food. It’ll be, there’s a 25 percent premium typically, and that will be gone. So a lot of people think that this is a way to bring organic food to lower income shoppers and make it more mainstream.

HARI SREENIVASAN: And does that mean that other retailers adjust their prices?

PHIL WAHBA: Well, the impact will actually be more on foodmakers, a lot of analysts say. So there won’t be that much pressure on Whole Foods because there isn’t that much overlap between the Whole Foods shopper who’s a bit more affluent and the Walmart shopper. But what’s gonna happen is people think that there is going to be more of the line that’s used for farming in the U.S. will be used for conventional farming — I mean, for organic farming rather than conventional. And so that in turn will lower cost and it’ll create a virtuous cycle for organic foods, and in turn that will pressure companies like ConAgra and Kellogg, among others, to offer more organic foods.

HARI SREENIVASAN: So this is really more of a pressure on those manufacturers of food to start creating more organic food into the pipeline for retailers then?

PHIL WAHBA: Absolutely.

HARI SREENIVASAN: So even as we see these trend lines going up in terms of consumption and sales, this is still a very small fraction of the overall food market?

PHIL WAHBA: That’s right. It’s roughly 4 percent of food spending in the United States, but it’s growing by about 10 percent per year, and if you look at companies like Walmart or Target they get a huge amount of their sales from grocery. And Walmart gets about 55 percent of its revenue from grocery and it has been a struggling business for them. And so this is a way for them to give a boost to their overall grocery sales.

HARI SREENIVASAN: And what does this do for the producers of food? Let’s look at the supply side and the farmers. I mean right now it seems like these prices are buoyed up because the supply is shorter than the demand.

PHIL WAHBA: Well several groups, such as the Environmental Working Group and the Center for Science in the Public Interest, believe this is going to be an incentive for more farmers to use more of their land for organic farming. And what’s going to happen is that you’ll have more resources, you’re going to have economies of scales. And so overall organic food prices — beyond these 100 items Wild Oats items Walmart will be selling — will fall and that will in turn pressure the package food makers.

HARI SREENIVASAN: And so this isn’t necessarily likely to happen anytime soon. Even if a farmer turns over his land into organic crops, his or her land, this takes a couple of years for the FDA to give you that seal, right?

PHIL WAHBA: Well, it’s, you know you can’t just turn your farm — use your farm differently from one day to the next. But the reason this has been seen as a pretty big deal is that it’s a turning point now in food consumption. And if organic food now has typically been associated with more affluent shoppers, urban shoppers, and a lot of people think this is the first step towards it becoming mainstream and viable for lower income shoppers.

HARI SREENIVASAN: And what kind of products under this Wild Oats brand will Walmart be selling?

PHIL WAHBA: Well the thing that’s important to remember is that this is not going to be dairy and produce. So these 100 products include things like tomato paste, olive oil, garbanzo beans. So it’s packaged food as well. The other 1,600 items that Walmart sells that are considered organic, which are mostly produce and dairy, they will keep that organic price premium.

HARI SREENIVASAN: And is this also trying to catch up with the trend of younger people who are more conscious about what goes in their food?

PHIL WAHBA: Yeah, you know there’s lower income shoppers are like everyone else. They want to eat in a healthy manner, they want to eat foods that are good for them that are produced in a manner that’s sustainable for the economy. So it’s as you mentioned before, Walmart’s own research found that 90 percent of its shoppers would be willing to buy organic food if it were affordable.

HARI SREENIVASAN: Alright, Phil Wahba from Reuters. Thanks so much.

PHIL WAHBA: Thank you.