Organic foods finding a niche, but that`s all

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The wave of organic packaged foods may have crested at mainstream retailers.

Organic foods and beverages are pulling back from startling growth levels in recent years and settling into a small niche space at mainstream retailers, food industry executives and analysts said this week.

The recession put a halt to the double-digit sales growth organic foods saw earlier last decade. But even when the economy improves, organics are not likely to rebound to such lofty heights as consumers and retailers now have other priorities for spending and shelf space.

"It's hard if you are a big company to do things that move the needle in that space," said Greg Pearlman, managing director and head of the US food and consumer group for BMO Capital Markets. While Pearlman expects 2010 to be an active year for deals in the food industry, he did not see a big play for manufacturers in the organic space.

Health and wellness is still expected to be a big trend in the food industry, analysts and executives said at the Reuters Food and Agriculture Summit in Chicago. But that interest will be spread across items like those with lower sodium, reduced calories and even a focus on removing allergens from food.

"Retailers are looking for the best assets for the limited amounts of space" they have, said Ken Harris, CEO of consulting firm Kantar Retail US, part of Britain's WPP.

Some organics and their less-regulated cousins, natural foods, may be losing out in that battle for shelf space.

Organic sales are still growing, but the pace has slowed sharply.

During the 52 weeks ending February 20, supermarket sales of packaged foods and nonalcoholic beverages with "organic" claims rose 1.9% to USD 4.4 billion, according to Nielsen data. That compares with an 11.7% increase the prior year, and increases of 24.5% in the period ending in 2008 and 29.1% in the period ending in 2007.

Organic food was a hot topic in the grocery industry in the middle of the last decade, with even Wal-Mart Stores Inc saying in 2006 that it would double its organic offerings. Mainstream manufacturers jumped on the bandwagon, coming out with organic versions of products like pasta sauce and ketchup.

To qualify as "organic" in the United States, food must be farmed without the use of pesticides, antibiotics or genetically altered organisms, while "natural" foods refer to those that are minimally processed.