Organic and Natural Food Growth Stalls with Increased Commodity Costs

Implications: Increasing commodity costs are having a negative impact to the growth of organic and natural foods.As commodities increase consumers are being more selective and price sensitive in their grocery shopping.This trend does not bode well for retailers like Whole Foods (WFMI) and the manufacturers that supply items to the leader in the organic and natural foods segment.

Analysis:  Organic and Natural food items already command a hefty price premium vs. their regular food counterparts.As all items increase by 10-20%, consumers are beginning to trade down to lower cost branded and private label items. They are also reducing the number of grocery trips to the high end retailers like Whole Foods.  

For manufacturers like Hain (Hain) and United Natural Foods (UNFI) that get a large percentage of their sales from Whole Foods, this spells trouble for their sales growth.In addition, key retailers like Super Valu (SVU) have just announced the introduction of their own Wild Harvest line of Organic and Natural foods.While the timing may not be optimal for Super Valu, they nevertheless will siphon off some sales from Whole Foods by offering items that are 10-15% less in price and more readily available using the more plentiful locations of their stores.For Hain and United Natural Foods the key to offsetting the lower growth in Whole Foods is through gaining sales at traditional grocers like Super Valu and Kroger. 

  Longer term the positive trend for growth in the Organic and Natural foods will continue.However, for 2008 I would expect tough sales comparisons for Natural Food manufacturers as consumers watch their wallet when shopping for food.