Organics: A Poor Harvest for Wal-Mart

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In the case of organic foods, there also may be a disconnect between Wal-Mart's brand and the products it hopes to sell. The retailer's existing customers tend to be very price-conscious and may not be willing to pay a premium for organic foods. On the other hand, consumers who go to stores like Whole Foods Market (WFMI) or Wild Oats Markets (OATS) are less price-sensitive and may not be lured to Wal-Mart with low prices. "The Whole Foods customer is walking in there to buy organic and is more concerned about how the fruit was farmed," says apple farmer Ricker, "but the Wal-Mart customer is used to shopping with a calculator."

Others in the organic movement are skeptical that Wal-Mart will be able to gain much traction in the business. "When Wal-Mart found that people are buying organics, they decided to get into that too and sell it for just 10% over the regular foods," says Marty Mesh, executive director of the Florida Certified Organic Growers & Consumers, a nonprofit organization in Gainesville, Fla., which provides an Organic Certification program. "Problem is, the same people didn't all of a sudden say, 'I can get it cheaper at Wal-Mart,' and drive across town to get it."

Incompatible Business Models

There may be problems with supply as well as demand. Wal-Mart is known for its hardball tactics with suppliers, driving costs as low as possible and regularly switching suppliers to get the best price. That kind of attitude can alienate farmers, especially organic ones, who tend to plan their crops years ahead of time. They need to keep land pesticide-free for four years to win organic certification. "Is organic really compatible with the Wal-Mart approach? We're finding out that it's not," says Jim Riddle, organic outreach coordinator and guest lecturer at the University of Minnesota.

Consider the case of Organic Valley Family of Farms in La Farge, Wis., one of the country's largest cooperatives of organic farmers. When demand for organic milk soared two years ago, rival Horizon Organic Dairy offered to sell to Wal-Mart for 15% below Organic Valley's price. Wal-Mart expected a similar reduction from Organic Valley, but instead the cooperative pulled out. "Looking for ever-lower costs comes at a real cost to sustainability," says George Siemon, Organic Valley's chief executive. "To have consistent supply, you have to change the paradigm of thinking and think about long-term partnerships."

Farmers like Ricker are now dealing with the fallout from Wal-Mart's faltering demand. He has decided to pare back his organic apple farm, from 150 acres to 120 acres. He says organics are just tough to grow. Without pesticides, insects and disease attack his McIntosh, Gala, and Honeycrisp apples. Production per acre dropped about 30% when he switched from regular farming methods 10 years ago. Now he plans to switch back. "The grocery stores want the perfect, blemish-free apple," he says, "and that's difficult to produce."

Gogoi is a contributing writer for BusinessWeek.com.