We’ve grown accustomed to the higher prices and higher margins associated with the organic-food industry. But that may be starting to change. On Kroger's (NYSE:KR) 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.”
That 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. But as organic options become more and more widespread, the products may struggle to avoid being commoditized.
On the other hand, I can see a couple of reasons why organic food may be able to maintain its price/margin premium over time:
- if organic foods are more expensive due to lower crop yields -- e.g., more losses without pesticides, GMOs -- then it would make sense that an organic product would be more expensive than the non-organic because the costs per unit of production are higher.
- Margins may be defendable because there is a heavy trust factor involved the purchase of organic food. Consumers have to be able to trust that the vendor has made decisions with its supply chain that protect the customer’s dietary values. That lends itself to branding, which is one of the best ways to protect margin.
