Organic Demand Triggers Growing Pains

Fresh Cut Greens Display

Handling requirements necessitate extra care during transport and warehousing.

As organic offerings become a larger portion of what mainstream supermarkets sell, the category suddenly demands more attention to growing pains throughout the supply chain, according to wholesalers.

Organic produce accounts for 9.5 percent of all produce dollars for the 52 weeks ending July 1, 2017, according to Chicago-based Nielsen FreshFacts. Dollar sales in the category increased 10 percent while volume increased 12 percent.

In today’s world of stricter food safety rules, it’s critical organic produce is shipped on separate skids and identified as organic. To prevent commingling with conventional produce, U.S. Department of Agriculture National Organic Program standards are also strict. Distributors say keeping items separate is the best way to handle organic produce.

If a group of supermarkets requests an organic papaya program but the demand is for two pallets, how can a distributor make that work, if realistically, the volume needs to reach 10 pallets? That’s where the supply chain enters the equation, say wholesalers. Demand is one thing, but making it happen is the responsibility of distributors working closely with retailers.

Handling Concerns

Organic rules require no commingling with conventional product. “Like a junior high dance, no skin-to-skin contact is allowed for organic and conventional product,” says Jonathan Steffy, director of sales and retail services for Four Seasons Produce Inc., which distributes organic product from Ephrata, PA, to customers in the Northeast, Mid-Atlantic, Midwest and parts of New England.

Because packaging separation prevents residue from conventional product affecting organics, a box of conventional apples stacked next to a box of organic apples doesn’t represent a problem. The dynamic, however, changes with wet produce, such as vegetables packed with ice. The situation becomes even more challenging when truckload orders are not large enough to fill single organic items on one pallet. For example, a 90-case order might include 40 items of conventional and organic combined in the same truck.

Also, when some of the national retailers first order organic produce beyond a few stock-keeping units like bananas, carrots or product in packages, people need to ratchet-up their attention to the supply chain part of the equation, says Steffy.

It’s easier for distributors to solve that challenge at the warehouse level, where processes can be built into their put-aways through storage rules that prevent iced conventional product from dripping on organic, says Steffy. All organic iced product should be stacked on the skids above the conventional wet product or shrouded with slip sheets of plastic to prevent cross-contamination, he says. Wholesalers that sell both must include those types of rules to prevent commingling, adds Steffy. Retailers should also ensure the same care to prevent commingling in the stores’ back rooms, he says.

In general, the industry is doing a good job keeping the two separate, maintains Steffy. But he cautions smaller distributors, or those who may be organizing their own mixed loads, may not be paying attention to all the rules.

Wholesaler Role

Wholesalers play an important role with shippers using forward distribution centers, says Eric Mitchnick, director of the specialty division for E. Armata Inc., on the Hunts Point Market in Bronx, NY. “Because a lot of the retail chains don’t want to take a lot of extra product, having shippers utilize forward distributors is very important,” he says. “Forward distributors and wholesalers are critical in helping support the chains, foodservice operators and the smaller retailers. It’s a strong aspect of the organic business.”

When a wholesaler is involved, a buyer can purchase cautiously, says Mitchnick. If a retailer only moves five pallets of organic Romaine hearts, if it’s short a pallet or two, the wholesaler can supply the shortage. “This makes the wholesaler more important in the dynamic of the whole organic realm, as long as it has the proper quality and the right label,” he says. In organics, shorts are more prevalent because buyers prefer not carrying large inventories of organic product. As many believe organics don’t possess the same shelf-life as their conventional counterparts, buyers often order more frequently, he says.

“Like a junior high dance, no skin-to-skin contact is allowed for organic and conventional product.”

— Jonathan Steffy, Four Seasons Produce Inc.

At Lakeside Organic Gardens, which grows and ships more than 45 organic vegetables from Watsonville, CA, almost all of its retail customers now purchase direct loads. Dick Peixoto, partner, says there is a learning curve because while chains may purchase full loads, it’s the mixed loads with several different items to a pallet that organic shippers must make work.

Peixoto recently worked with a retail customer that operates 17 stores. The retailer was purchasing from distributors but approached Lakeside and worked out a deal to buy full truckloads of mixed organic product. “Distribution is definitely a factor,” says Peixoto. “We are doing more full loads of organic than before. Lots of trucks come to us already loaded with organic berries and vegetables. Before, organic was just part of the load. Now it’s the whole truck.”

Fresh-cut sales growth is increasing and growers report an increase of organic supply movement to fresh-cut processors. “It has become a growing market,” says Peixoto. “There’s a lot of processed product that is eliminating conventional products from the shelves, like organic bagged salads and Romaine hearts. Many customers handling organics have removed the conventional counterpart from the shelf, particularly if the price points are similar, says Peixoto.

Commoditization Trend

Like conventional produce, many retailers receive organic produce predominantly through direct shipments. Retailers try to source as close as possible to the grower. One trend is the commoditization of certain organic items, such as apples. During Washington state’s season, many retail buyers receive shipments directly from the larger grower-shippers. During the import season, however, when volumes are smaller, buyers will often rely more on wholesalers, says Rick Feighery, vice president of sales for Philadelphia-based Procacci Bros. Sales Corp., and Plant City, FL-based Santa Sweets Inc.

Romaine lettuce, celery hearts, strawberries, grape tomatoes and carrots are organic staples that are relatively easy for retailers doing organic programs to load at the same shipping points as conventional, he says. “There is quite a bit of those commodities going through warehouse operations direct to retailers versus through wholesalers whether in Chicago, New York, Philadelphia, Baltimore and even in the Southeast. That has brought some decrease in movement while our direct-to-store deliveries are seeing incredible increases,” says Feighery.

A diminishment in wholesale volume on certain items is a natural progression following increases in direct shipments, he says. Procacci works directly with growers to supply its retail partners fresher product that’s closer to home. Because cold storage facilities in closer proximity to East Coast buyers provide fresher product for California shippers, the forward distribution trend also helps organic movement, he says, adding, there are many pieces of the puzzle with logistics being one of the biggest. Growers and distributors want to maximize trucks, so bringing a full load east and splitting among customers keeps costs down, he says.

“Wholesalers are heavily involved,” says Feighery. “The wholesalers’ place is still there with organics. We provide a good service to our retailers.” But, he says, organics are still relatively low volume. As volume increases with specific items, more items will ship direct. For slower moving products, wholesalers can add value by providing different pack sizes, different overall sizings of the product as well as labeling for proper register scans, he says.

A majority of larger retailers receive organic product direct, but many smaller operations receive via a mix of forward distribution and direct. Many chains, which may operate as many as 30 stores in the Midwest, don’t own distribution centers, says Andy Martin, president of A&A Organic Farms Corp., which ships from Watsonville, CA. “They rely on distributors to source everything, bringing it on truck, breaking it down and delivering to each store,” he says. “They have distributors do the dirty work. That’s working well. The larger chains that have warehouses are more apt to work directly with the shipper.”

The downside is while a shipper may win a bid from a distributor for one week and believe it has made a connection with a chain store for its business, the store may then decide to purchase broccoli from someone else because it’s $1 cheaper, which makes for inconsistent business, says Martin. In certain markets, wholesalers on the produce terminals remain highly involved in distribution. There’s a lot of walk-up and cash business in typically aggressive marketplaces, he says.

Product Consolidation‭ ‬

Fullerton, CA-based Veg-Land Inc., and its subsidiaries, JBJ Distributing Inc., and Fresh Cut Inc., works direct with customers and doesn’t use many outside carriers for organic shipments. Some of its other customers use freight forwarders and trucking companies, says Jimmy Matiasevich, co-owner. Matiasevich says some of the larger transportation companies are gaining ground by engaging in forward distribution.

One trend is logistics companies — as well as some large retailers ­— are using JBJ’s cross-dock and consolidation services. JBJ serves as one of a larger retailer’s four different product consolidation points. New driver hours-of-service rules, expected to begin in early 2018, should increase product consolidation so that a truck can load half a dozen organic items in one spot versus driving to several shippers, says Matiasevich.

Retailers and wholesalers are heavily involved in organics, says Matiasevich. “The market wholesalers and foodservice wholesalers are dabbling,” he says. “There are some retailers that specify what they would like for us to grow, but it depends how heavily involved a retailer wants to be.” Another trend is buyers requesting sustainability certifications. The certification systems aren’t uniform, but require paper trails throughout the system.

In terms of handling, organics and conventional are closer than ever because of tighter food safety rules, says Stefanie Katzman, executive manager of the Bronx, NY-based S. Katzman Produce Inc., and Katzman Berry Corp. “A decade ago, rules were more stringent on how one could handle organics,” she says. “Because of the focus on food safety, there’s not as much difference anymore.” With the regulations, Katzman says she avoids cross-contamination with every lot entering its docks.

Many specialty stores that focus on organics have emerged in Manhattan because of increased demand. In the populous New York and tri-state region, organic demand is increasing. As late as 2014, organics constituted less than 1 percent of Katzman’s sales. Today, the segment is about 3 percent of sales, but many of the company’s conventional vendors tell Katzman they are considering growing organics in 10 percent of their fields.

After constructing organic sections in their stores, customers who purchase 100 boxes of conventional lettuce will now buy five boxes of organic. Katzman can bring a truckload of organics and sell 90 percent of it to the larger chains while sending 10 percent to the smaller operators who are increasing their organics programs. The movement allows those smaller operations to purchase 30 percent from two truckloads, she says. “There are new people trying new things.”

Midwest, Southeast Reported As Growing Organic Regions

By Doug Ohlemeier

The East Coast and West Coast represent the strongest organic produce markets, but more areas are becoming bigger buyers of the category.

In the past, pins on a wall map would mark customers’ locations, which was predominantly on the two coasts with everything blank in-between except for Kansas City, MO. Today, organics ship all over the country in every state, says Dick Peixoto, partner with Lakeside Organic Gardens, which ships vegetables from Watsonville, CA.

The Pacific Northwest Corridor, including western Canada, is in a growth pattern as is the Midwest. “The Midwest is catching on,” says Peixoto. “It’s a big area, but with fewer people. It’s not as strong as the coasts, but before, you wouldn’t even hear about it (in the Midwest). Now, we get customers from the Midwest on a regular basis. It has definitely grown.”

Some regions were weaker than others in organic produce demand, but that has changed, says Andy Martin, president of A&A Organic Farms Corp., based in Watsonville, CA. Regions including the northern areas of the Midwest, North Dakota, South Dakota and Montana, aren’t as weak as once thought. “Most everybody is drawing organic now,” he says. “You may think North Dakota is dead, but not really.” Someone is selling to Minneapolis, but delivering to North Dakota. “Packers are seeing a lot more product going to Michigan, and the Southeast is a huge organic territory,” says Martin.

Four Seasons Produce Inc., which distributes conventional and organic produce from Ephrata, PA, has wholesaled organic product since the 1990s. In the past, the category represented less than 5 percent of its business. Today, it’s about half, says Jonathan Steffy, director of sales and retail services. During the early 2000s, the distributor focused on natural food stores. As distributors built critical mass within the supply chain they could provide more opportunities to mainstream grocery stores building organic programs, he says.

Today there is more organic produce demand from Midwestern shoppers. “While the coasts certainly still drive a lot of organic demand, other parts of the country are also increasing,” says Steffy. “There was a time when other than Wisconsin and Minnesota, there wasn’t much organic demand in the middle of the country. That’s definitely changing.”

Rick Feighery, vice president of sales for Philadelphia-based Procacci Bros. Sales Corp., and Plant City, FL-based Santa Sweets Inc., notes an increasing demand in Midwestern and Southeastern markets. “We are seeing an increase in the Southeast,” he says. “The strengths, however, are still on the West Coast and the Northeast. The organic business is definitely increasing. The organic category is seen throughout all 50 states now.”

Since 1988, Fullerton, CA-based JBJ Distributing, Inc., has distributed a full line of organic produce. Jimmy Matiasevich, co-owner of JBJ, Veg-Land Inc., and Fresh Cut Inc., says the organic category is increasing in demand. “Because it’s such a growing category, there are areas that have more demand than others,” he says. “But all in all, demand is throughout the entire United States. The Southeast wasn’t ever a big mover in the past, but as organic pricing gets closer to conventional, consumers can make a choice and afford it.”