Costco’s arrival as America’s top organic grocer

Published on Sep 23rd, 2016
Costco sees a big future in selling organic produce – if it can source enough of it.

Costco sees a big future in selling organic produce – if it can source enough of it.

The warehouse giant now ranks number one for organic sales among America's retailers, besting even Whole Foods.

With annual sales already topping $4 billion, it anticipates exceeding $10 billion a year by 2020 thanks to the double-digit growth it expects every year until then. “We cannot get enough organics to stay in business day in and day out,” CEO Craig Jelinek told investors at a Costco shareholder meeting.

Indeed, organic agriculture is one of the fastest growing segments of American agriculture.

According to Forbes, organic food sales have generated double digit growth annually in the US for the past few years and the Organic Trade Association predicts sales will rise by 12-15% annually for the next three years. “While high demand without sufficient supply can lead to increase in prices of these products, Costco’s efforts should enable the company to sell organic food products at competitive prices in its warehouses by focusing on increases in supply, without impacting its margins,” Forbes said.

Now a major player in the field, one of Costco’s priorities is indeed to ensure a greater supply of organic foods at a time when demand is soaring but supply has not kept up, reports the Seattle Times.

An example of how it is pursuing this is Costco’s loan to San Diego-based Andrew and Williamson (A&W) Fresh Produce so it could buy equipment and land in Baja California, Mexico. Costco will have first dibs on organic food produced there.

Costco’s senior vice president of fresh foods Jeff Lyons is quoted as saying that Costco also gave A&W a loan for equipment to grow organic raspberries on other land in Mexico. “By helping them with financing, we got access to and purchased about 145,000 cases of organic raspberries that we normally would not have access to,” he said. Costco is considering doing something similar with other companies, including a large group with operations in Chile and Mexico, the newspaper said.

Meanwhile, it has this year started stocking organic strawberries that are grown on Equitable Food Initiative-certified farms in Watsonville, California, and sold under A&W’s new GoodFarms brand.

Item focused - no organic section

Why has Costco embraced organic food? At the United Fresh show in Chicago in June, Frank Padilla, a Costco vice president and general merchandise manager for produce and meat, listed these reasons:

• it resonates with Costco’s members

• it’s seen as a lifestyle, not a trend

• consumers want to eat healthy

• there are concerns about harmful pesticides & GMOs

• belief in sustainable farming

• similar patterns have been seen in other departments with concerns over antibiotics and added hormones.

Costco approaches organics a little differently to its key rivals. As Padilla stressed, it does not have an ‘organic’ section. As an ‘item’ business, it is selective in what it carries, with a limited number of SKUs, and does not ‘double merchandise’. Costco buyers look for items that complement its food sales mix, which for the 2015 fiscal year was 75% conventional, 14% organic and 11% hot house-grown.

“The danger is that it (an organic product) could be the only choice. If you don’t have the right quality, the right specifications, the right shelf life and value, you are going to turn the non-organic consumers off,” Padilla was quoted by Growing magazine as saying. “We also face the danger that if it’s not available at the time, you may not have that item to sell.”

In his presentation at the show, Padilla said other key facets of Costco’s organic principles are that there must be a reasonable premium to conventional and suppliers must be held to the same food safety and audit protocol.

And he outlined Costco’s strategy in organic food as follows:

• find great growers

• partner & commit to grower

• study the item

• learn the intricacies of certified organic

• develop a specification

• work on supply

• strive for efficiency & consistent supplies.

It is achieving success in the latter that remains’ one of Costco’s biggest challenges going forward as America’s new retail powerhouse in organics.

Costco
Sales in 2015: $116 billion
Headquarters: Issaquah, Washington state
715 warehouses worldwide
501 - US & Puerto Rico
91 - Canada
36 - Mexico
28 - UK
25 - Japan
12 - Korea
12 - Taiwan
8 - Australia
2- Spain
(as at end of 2016 fiscal year)

Images: presentation by Frank Padilla, a Costco vice president and general merchandise manager for produce and meat, at the United Fresh show in Chicago in June 2016.

JB

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