With the health craze in full swing, companies like Trader Joe’s (subsidiary of privately-held Aldi) and Whole Foods Market (WFM) are doing stellar business. Whole Foods Q3 sales figures released on July 29 were up 8% to an impressive $3.6 billion, and the grocery chain is expanding its brand to create a chain of discount natural food stores called 365 by Whole Foods Market. With the high cost of producing, shipping and selling organic food, how can some stores sell organic produce for less than others? (For more, see: How Will Whole Foods Finance Its "365" Stores?)
What Does Organic Mean?
“Organic” in the United States has an actual legal meaning. For food to be labeled "100% organic," it must have been certified by the USDA as having not been grown with synthetic fertilizers or bioengineered seeds and materials, nor has it been exposed to certain pesticides or sewage sludge.
Foods can be certified either as 100% organic, organic (meaning 95% organic) or made from organic ingredients (70% organic). Unethical producers have been known to put imitation organic labels on produce while smaller producers forego pricey official certification while still maintaining that their products are organic.
Why Organic Can Never Be Cheap
Organic foods are costly to produce for a multitude of reasons. The first is that the cost of materials is higher. Synthetic fertilizer is cheap to buy, transport and use, whereas organic fertilizer is costly and heavy. Furthermore, organic farmers practice crop rotation meaning that high-profit crops are not constantly planted on the land. This effort to nourish the soil results in a lower revenue for an organic farmer than for a traditional farmer who can plant cash crops year round.
By not using certain pesticides, weeds need to be picked by laborers and more crops may be damaged by the end of the season from insects and other pests. The cost doesn’t stop there—once harvested, organic produce must be kept separate from non-organic produce to prevent contamination.
The separate packaging and distribution requires deep-cleans in between machinery use and dedicated organic product distribution channels. Until recently, this has not been possible. Organic foods have been limited to small or specialty grocery stores and farmer’s markets. (For more, see: Is Organic Really Worth The Extra Money?)
How Do Discount Organic Food Stores Work
Trader Joe’s and Whole Foods were able to tackle a huge problem that plagued the organic food market: supply and demand. With prices so high, many people couldn’t afford to shop organic, and without demand, farmers had little incentive to grow organic produce. In the U.S., farmers receive massive subsidies to continue growing food and, in some sectors, are guaranteed a price floor to ensure that they remain profitable. The weak demand and few subsidies for organic farmers meant that it was significantly riskier to grow organic.
Trader Joe’s and Whole Foods though were able to institute a de facto price floor. Whole Foods was until recently the largest organic grocer in the country, and if Whole Foods wants a million organic avocados a year, organic farmers will appear to fill the demand. (For more, see: Why Costco Is Boosting Its Organic Offerings.)
By increasing demand for organic products and growing their chains, Trader Joe’s and Whole Foods solved some of the causes of high organic food costs. They also set-up a distribution chain and were able to smooth out some of the inefficiencies in the organic foods market.
With Whole Foods new sister-chain 365 by Whole Foods Market debuting next year, we can all hope to have less expensive organic food as demand for it increases and the distribution routes are strengthened.
The Bottom Line
Organic food will never be able to benefit from economies of scale in the same way that most products can. The more farmers try to automate or mass produce to lower costs, the more likely they will fall into the same trap that Etsy (ETSY) sellers did when demand got too high—the business will outgrow the abilities of the owner.