Produce Brands Racing to Capture Enduring Product Placement and Price Premiums at Retail
We are in the midst of a reimagined produce section within your grocery store.
Hello and welcome to the fourth edition of The Modern Acre Newsletter. In case you missed it, check out my podcast recording with Tim and Tyler on Episode 357 of The Modern Acre Podcast where we discussed my last newsletter featuring Thrive Market.
I am deviating from normal programming in which I analyze an individual food and ag business and suggest how it can expand. This edition instead focuses on the retailer’s produce section.
If you’ve worked in branding and marketing, food and ag startups or venture capital, fresh produce, and or retail, this newsletter is for you.
Today's produce section is bifurcated between Conventional and Organic.
Retailers have two different formats: grouping by produce type or grouping by growing type. Within the industry, these two formats are colloquially referred to as integration and segregation.
Produce type: Organic and Conventional side-by-side for every produce category.
Growing type: Organic-only section and everything else is Conventional.
New players have entered the space over the last decade and they want a say in shaping the future produce section. I segment these players into four groups:
Controlled Environment Agriculture (CEA)
Regenerative
Food Waste Fighter
Trait Optimizer
The below table is a primer on the four groups.
As many of these players are venture-backed, I imagine they have pitched investors on their version of the future produce section. “Organic and conventional over there and our produce in its own dedicated section!”
But, if all four groups have their way, the produce section may instead look like this:
Two options for each produce category – conventional and organic – increase to six. This doesn't even take into account the multitude of brands within a segment.
Most of these players have higher production costs, so there is a need to pass incremental costs to the supply chain and for retailers to capture a premium from consumers. Even if growing and distribution costs are lower, some may argue these groups are providing a premium offering beyond Conventional and Organic and therefore should fetch a premium price.
Premiums to consumers will be justified on the basis of taste, nutrient density and / or positive environmental benefit, depending on the group.
But how will that retail premium be established? Will regen be 20% more expensive than organic, 10% more than CEA and food waste fighters, but 10% less than trait optimizers? Alternatively, will all four groups form a new price band, call it a 20% premium over organic?
Retailers are the gatekeeper to which new individual SKUs and standalone sections, i.e., a CEA section, make it to the produce section and I reckon startup founders and investors aren't underwriting – accounting for the risk – how much they are.
Maybe the produce section follows the way of the drink aisle, which has seen an explosion of brands with dozens of options for consumers to choose from. If so, then the following is off base.
I doubt this will be the case as produce is the crown jewel of a grocery store. Retailers want their produce section to exude quality, freshness, and an ease to navigate. Six choices for each produce type may complicate that message.
As such, there may be a bit of a zero-sum game going on. It is unclear if all new four groups can capture enduring, defensible (1) product placement and (2) price premiums. But, at least a couple will. I believe they will through a combination of:
BRANDING
PRODUCT EXPANSION
GEOGRAPHY EXPANSION
LOWER COSTS
The following does not draw a conclusion to which group(s) is best poised to capture enduring placement and premiums. We are too early to draw conclusions. Rather, the following explores which groups are best currently positioned across brand, product expansion and geography expansion, which may provide insight to long-term winners.
I will also touch upon whether any of these four groups can create an enduring position in the marketplace without requiring a price premium.
BRANDING
Price premiums will not be captured without branding. Otherwise, there is no differentiation between offerings.
Branding has long been challenging in produce. How many produce brands can you think of? Driscoll's, Cuties, Dole, Organic Girl... probably not many others.
Building brands in produce is challenging because most produce is sold bulk or loose. This means it's not in a bag nor box, unlike CPG (consumer packaged goods). As a result, there is little to no real estate for branding.
An externality of the rise of these four new produce groups that need to use branding to capture premiums: increased packaging.
We are already seeing this in two of the groups: CEA and trait optimizers. CEA companies are furthest along in the brand-building journey with each company selling their leafy greens and strawberries in plastic, transparent packaging.
A New York-local trait optimizer company Row 7 launched products like potatoes, squash and beets in Whole Foods this past fall. While their squash is sold “loose,” their beets and potatoes are sold in packaging. This one is interesting as most people are accustomed to purchasing beets and potatoes in bulk whereas most consumers are used to purchasing leafy greens in plastic clamshells.
As I put my consumer hat on, is it wrong to say that I'm okay and even like buying produce in packaging? I'm a sucker for a good story so enjoy reading what the brand has to say, it gives me more confidence in supporting the brand, and with that, justifying the premium price.
Increased packaging is not necessarily a net negative for the environment. A Life Cycle Analysis (LCA) would need to be run to consider potential environmental savings from, say shorter transit for indoor grown produce, and net that against the environmental footprint of packaging. It is even more complicated as produce sold bulk is often put into the thin plastic bags that grocery stores offer so the environmental footprint of that packaging needs to be added in for bulk.
PRODUCT EXPANSION
To avoid the proliferation of packaging in the produce section, each of these four groups need to expand their portfolio of produce with a goal to create a new section within the grocery store like how some retailers have an organic section. This will make conversations with retailers more strategic when thinking of a devoted "section" within produce and elevate the conversation from Retailer Buyers to Retailer Directors / VPs of Produce.
Regen is best positioned to create a devoted section within a produce section as they are most likely to consolidate branding efforts like today's Organics. You may know some Organic brands from the tag or sticker, but that is less important than the fact that it is organic! I believe this will hold true for regen. As such, regen may be better served prioritizing produce type expansion over national expansion.
I can see retailers creating a regenerative section within produce with umbrella 'regeneratively-grown' branding, paid for by a regen ag trade association. This would be similar to Avocados from Mexico today, which pulls money from different avocado growers and suppliers to unites branding efforts to increase avocado consumption: a rising tide lifts all boats.
A tale of caution for regen folks that are looking to do just this: a dedicated, standalone section may yield less foot traffic than expected.
Today, some retailers opt for integration of organic produce versus segregation (i.e., its own section) because their data suggests more shoppers engage with organic when in this format.
The below table illustrates how I break it down. The format type does not greatly impact shopper engagement with organic produce for both the ‘Always Organic’ and ‘Never Organic’ personas. It does for the ‘Sometimes Organic’ persona.
A retailer that organizes produce by growing type (segregation) has introduced complexity for the ‘Sometimes Organic’ shopper who now has to navigate to the organic section. Compare this to the integration format, where the shopper walks to the bananas, seeing organic on the left and conventional on the right, proceeds to avocados, seeing organic on the left, conventional on the right. The retailer has lowered the mental load for the shopper, thereby increasing foot traffic for the organic produce SKUs.
If regen brands and retailers continue to use a dedicated regen section, they’ll need to use creative branding and powerful storytelling to lure shoppers to their new section.
GEOGRAPHY EXPANSION
Regen's key challenge is meeting the scale requirements of national retailers.
A national retailer often has five to ten suppliers for a single produce type such as apples. Can regen come close to offering a national retailer the same amount of consolidation? If that retailer has to source instead from mid double digit regen suppliers throughout the country for a single category to supply their thousand plus stores, that's probably a non-starter. Regen folks talk about this as "the messy middle."
Regen needs to meet the surety of supply for national retailers in a way that doesn't overly complicate their procurement.
CEA has pros and cons related to geography expansion. From an operational, tech and execution framework, yes, CEA can demonstrate competency and positive unit economics in one indoor farm and replicate the farm in other hubs around the country. However, the CAPEX of these indoor farms is highly dependent on debt financing and with high interest rates, the unit economics of CEA may be challenged. This is the supply side of the CEA equation.
On the demand side, there are further complications. On the West Coast, you’ll find Plenty leafy greens. On the East Coast, if we stick with leafy greens, you’ll find Bowery and Gotham Greens. Retailers may not want three (or more) indoor grown brands for crunchy lettuce alongside their organic and conventional crunchy lettuce.
Trait optimizers and food waste fighters may be best optimized for geography expansion because both plug into the existing supply chain. Trait optimizers sell seeds and or plants to growers and food waste fighters apply their coating to produce at supplier packhouses.
LOWER COSTS
Or, what if price premiums weren't the only way for the supply chain to increase their margin dollars?
To varying extents, all four of these groups tout lower growing costs.
The regenerative and trait optimized groups both speak to reduced pesticide usage, a farmer’s highest or second highest cost, alongside labor.
CEA farms are often based much closer to demand regions relative to field grown produce, decreasing distribution costs. This is especially so when considering half of the produce consumed in the U.S. is imported.
Reducing supply chain inefficiencies such as food waste can lead to increased margin dollars for the produce supply chain.
CONCLUSION
More consumer choice within the produce section is coming.
Retailers are the gatekeepers and these new produce players will have to collaborate closely with Retailer Produce VPs to realize the produce section in their investor deck before the other groups capture the price premium.
Please let me know your thoughts in the comments section!
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