Can Organic Food Maintain a Premium Margin?

We’ve come to think of organic foods as higher priced and higher margin than other types of groceries, but that may be starting to change.  On Kroger’s earnings call last week, the company’s CFO noted that natural and organic foods may not be able to maintain their premium margins forever.

Margins I tell you what, there’s more margin pressure now on natural and organic than there’s ever been. It seems that it’s becoming more and more of a competitive category. And so although margins tend to be better in natural and organic, I don’t know that’s going to continue for the foreseeable future.”

This would be a big shift in the natural foods market, and may be indicative of the fact that the mainstream adoption of healthier diets is changing the landscape of the formerly niche industry.  High margins and strong demand have attracted competition, and as organic options become more widespread, the products may struggle to avoid being commoditized.

On the other hand, I can see a couple of reasons that organic food would be able to maintain its price/margin premium over time.  1) if organic foods are more expensive because crop yields are lower (e.g. more losses without pesticides, GMOs), then it would make sense that an organic product would be more expensive than a non organic product because the costs per unit of production are higher 2)  Margins may be defendable because there is a heavy trust factor involved in an organic purchase.  Consumers have to be able to trust that the vendor has made decisions with its supply chain that protect the customer’s dietary values.  This lends itself to branding, which is one of the best ways to protect margin.

 

 

Gross Margin at Supermarkets


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