From The Fall 2004 Issue of Natural Grocery Buyer

Costco Does Organic Homework

The chain’s managers are learning all they can about organic food

Vicky Uhland

Items that might be found in a Costco Wholesale Corp. merchandising manager’s office:

• Regional sales spreadsheets
• Distribution data
• Family photo
• Nutrient breakdowns for organic blueberries
• Scientific study on the lifespan of DDT in soil.

Club stores are one of the fastest-growing channels for natural and organic foods, and Costco executives are making sure they don’t miss out on the phenomenon. “We’re getting more customer demand for products that would be perceived to be free of those bad things that are put in from an industrial standpoint, so we’re trying to become students of organics, looking at what are the quality attributes of an organic product,” says Jeff Lyons, Costco vice president of fresh foods and corporate foods.

Club stores, with their giant cans of spaghetti sauce and bags of chips big enough to satiate a football fan for the entire preseason, aren’t an obvious option for discerning organics shoppers. But according to The Hartman Group’s Organic Food & Beverage Trends 2004 report, 13 percent of consumers shopped for organic items in club stores in 2003, up from 4 percent in 2000. And a recent ACNielsen survey found that 35 percent of “heavy shoppers” at club stores report that they are affluent, and another 37 percent say they’re “living comfortably.”

“The average income for a Costco member is about $50,000 a year, and 90 percent own their own home,” says Jon Hauptman, vice president of Barrington, Ill.-based Willard Bishop Consulting. “The club demographic is very favorable to natural and organic products because of that higher-than-average income.”

But naturals and organics shoppers have more in common than their bulging wallets. Lyons believes they want to be reassured they’re getting food that truly is good for them and the environment. That’s why he and Costco regional food department managers are studying up on organics. “We don’t want it to be just a marketing ploy that we carry organics. We have a very astute membership, and they read package [labels]. What if we’re not delivering what people expect from organics?”

In some cases, the fact that a product carries the U.S. Department of Agriculture organic seal isn’t enough, Lyons says. “I don’t care that they may have the stamp—I want to know what the processes are that validate their claims.” He’s asked growers how long their land has been fallow and if they’ve ever farmed with chemicals, because he’s read studies that DDT and Alar can remain in the soil for 10 years.

On the other hand, he notes, “Sometimes pesticides are better than the residue of an insect or a bird on a plant. The key is that we want a good, clean washing process. We want the product as food-safe as possible.”

Issaquah, Wash.-based Costco doesn’t have a list of uniform standards or questions for organic growers and suppliers. “I could see us doing that in the future, but now we need more education,” Lyons says.

Club stores’ liberal sampling policy also can help acquaint customers with unfamiliar natural or organic brands.

Costco caters to the organic consumer’s goal of buying fresh, local products by purchasing 60 percent of its deli food regionally, Lyons says. Also, “We buy as close to the resource as possible to keep transportation costs down.” But club stores’ need for large amounts of stock can play havoc with that plan. “The problem is replenishment. We can run out of an item if it’s popular. As organic companies get bigger and bigger, there will be more stock.”

For fresh foods that are carried nationally, such as salad greens or baby spinach, Costco contracts directly with organic growers. “We give them a list of our needs and they plant to our specifications,” Lyons says.

That strategy can help cut down on the cost of organic items. Despite Costco shoppers’ affluence, a $2 or more markup on an organic food versus conventional might be too much, Lyons says. “Fifty cents more is a more fair value for our consumer.”

When it comes to marketing and displaying those organic and natural foods, Costco doesn’t do anything differently than it does for conventional foods, Lyons says. “It’s not a process of advocacy for us, of ‘Oh, look at us, we have organics.’” But Hauptman of Willard Bishop notes that the club shopping experience already has aspects favorable to organic products marketing.

“Club buyers are predisposed to trying new products because they’re used to being exposed to products they might not have seen before. Club stores are a place to go and treasure hunt—you’re not sure what you see will be there the next time. Many purchases are made on impulse.”

Club stores’ liberal sampling policy also can help acquaint customers with unfamiliar natural or organic brands, Hauptman says.

But if that small, unfamiliar brand isn’t sampled, organics buyers might never see it in the vast number of rows and shelves that make up a club store. Products need strong, visual packaging that can attract buyers from a distance, Hauptman says. He calls it the “5 by 5 rule”—an item should convey its value in 5 seconds from at least 5 feet away.

Organic and natural products also need to be delivered on pallets or, in the case of produce, in 3-pound bags, to reduce the need for hand stocking and thus save labor costs, Hauptman says.

Vicky Uhland is a free-lance writer and editor based in Denver. Reach her at vuhland@mindspring.com.