Grass-Fed THE STATE OF THE SPECIALTY FOOD INDUSTRY Sustainable. Organic. Olive. Eco-Friendly IMPORTS, INC.

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1 Grass-Fed THE STATE OF THE SPECIALTY FOOD INDUSTRY 2 $$ IMPORTS, INC. Olive m in

2 THE STATE OF THE SPECIALTY FOOD INDUSTRY 2 By Ron Tanner and Denise Purcell Total U.S. sales of specialty food topped $19 billion in, an increase of nearly 22 percent over 2, according to this year s State of the Specialty Food Industry report, produced by the Specialty Food Association and Mintel. Retail sales in multi-unit outlets, specialty food stores, and natural grocers hit $. billion. The market s growth has slowed slightly, however, since its rebound after the recession, likely due to its maturity. Foodservice sales account for 22 percent of all specialty food dollars, or $2.1 billion. Sales of specialty foods have grown 3 percent in the foodservice channel between 2 and, versus 19. percent in retail channels. (It is important to note that the value of total specialty food sales excludes ingredients and products used for food that is prepared by foodservice operators as well as food prepared off-site at a commissary for sale at a foodservice outlet in nonretail packaging, such as a deli sandwich.) The market size for the specialty food industry is estimated by SPINS/IRI providing three-year scanner data sales for multi-unit, specialty, and natural supermarkets (excluding Whole Foods Market and Trader Joe s) for sales in food and beverage segments. There have been noteworthy changes to this year s methodology. To increase the accuracy of its research, the Specialty Food Association and Mintel reevaluated the methodology for reporting sales of specialty foods through mainstream, natural, and specialty food channels. For mainstream and natural channels, Mintel used SPINS/IRI sales scanner data directly for the 2 time period, rather than estimating growth from the prior year s report. Mainstream channel sales are higher and represent a bigger piece of the pie in this methodology, accounting for roughly 2 percent of retail sales. Mintel notes that this methodology reflects the increased penetration for specialty foods in mainstream outlets. Mintel also reassessed the specialty channel to come up with a more accurate market sizing methodology. In addition to gathering SPINS/IRI sales data for this channel, Mintel collected retailer survey respondent numbers (average transactions per week, average transaction size) that were then annualized. After further review, Mintel estimated that SPINS and survey data combined represent roughly 6 percent of the total channel s sales. ABOUT THE RESEARCH The Specialty Food Association s State of the Specialty Food Industry is a joint research project prepared by Mintel and SPINS/IRI. The research encompasses the three most recent calendar years of sales data and includes figures for specialty food categories, pulled from the SPINS database of mainstream and natural food stores. In addition, Mintel surveyed specialty food manufacturers, importers, distributors, brokers, and retailers to develop the statistics presented in this report. Design by Funnel, Inc. ALMOND butter $$ 2 THE STATE OF THE SPECIALTY FOOD Visit specialtyfood.com/stateindustry2 for more information, infographics, definitions, and brand examples for each of the specialty food categories used in this report.

3 THE SIZE OF THE SPECIALTY FOOD INDUSTRY AT RETAIL AND FOODSERVICE Since 2, specialty food sales at retail have grown 19. percent, reaching $. billion in. The continued rise has been due to successful product innovations and increased penetration in mainstream stores accessible to more consumers. TOTAL U.S. SALES OF SPECIALTY FOOD As major retailers such as Target, Kroger, and Costco continue to embrace specialty foods, more than four-fifths of specialty food sales, or $2 billion, are through mainstream stores. The channel has grown 1.6 percent, but its share of the market is slipping, as the natural food store segment grows, at a rate of nearly 2 percent between 2 and. Dollar sales through specialty food stores have increased by 1. percent over the past two years, growing as fast as mainstream stores. Retail Channels*,3 Foodservice 2,1 Total 19,9 /SPINS/IRI *Retail channels include sales from natural, specialty, and MULO** outlets as well as an estimate for specialty food perishables (PLU or random-weight specialty items sold in bakery, deli, meat, and seafood) sold in these outlets. In addition, these figures include estimated specialty food sales from Trader Joe s and Whole Foods Market. **MULO or Multi Outlet is representative of the following channels: Total U.S. grocery, mass, total U.S. drug, total Walmart, dollar, military, and club. *Editor s note: Natural food stores account for the smallest market share because these figures don t include Whole Foods Market or Trader Joe s, two retailers that do not share their sales data. Mintel estimates that if these retailers sales for specialty foods were included here (minus PLU and private-label items), the natural channel would likely exceed $13 billion in. SHARE OF U.S. SALES OF SPECIALTY FOOD Total sales of specialty foods in the U.S. grew 21. Foodservice: 22 between 2 and. Retail: SPECIALTY FOOD SALES BY RETAIL CHANNEL Mainstream Stores* Specialty Food Stores Natural Food Stores Total Share FOOD Change 2 1, , , , *MULO or Multi Outlet, is representative of following channels: Total U.S. grocery, mass, total U.S. drug, total Walmart, dollar, military, and club. Does not include private-label sales, random weight (PLU) items, or sales through Trader Joe s or Whole Foods Market. /SPINS/IRI THE STATE OF THE SPECIALTY FOOD INDUSTRY 3

4 SPECIALTY FOODS PERFORMANCE BY SEGMENTS Here is a snapshot of the largest specialty food categories, the fastest- and slowest-growing segments, and those with the greatest penetration. The pages that follow offer a more in-depth explanation of this data. Product Category Largest Segments 2 Change 2 Cheese and Cheese Alternatives 3,3 3,. Coffee, Coffee Substitutes, and Cocoa 2,6 3,6 2 Frozen and Refrigerated Meat, Poultry, and Seafood 2, 3, Chips, Pretzels, and Snacks 2,99 3,1 2.6 Bread and Baked Goods 2, 2, Refrigerated Pasta 133. Eggs Refrigerated Pasta and Pizza Sauces Shelf-stable Functional Beverages Nut and Seed Butters Cheese and Cheese Alternatives 3,3 3,. Condiments, Dressings, and Marinades 1,6 1,.1 Cookies and Snack Bars 1, 1,22 1. Specialty Market Specialty of All Sales Fastest-Growing Segments fresh pasta NUT R E BUTT Slowest-Growing Large Segments Specialty Segments with Highest Share vs. Non-specialty Equivalents Total Market Refrigerated Salsas and Dips 1,2 1, 62. Energy Bars and Gels 1,96 1,6. Teas 1, 93 Refrigerated Condiments Beans, Grains, and Rice 1, Does not include private-label sales, random weight perishables (PLU), or sales through Trader Joe s or Whole Foods Market. Data may not equal totals due to rounding /Spins/IRI Salsa THE STATE OF THE SPECIALTY FOOD INDUSTRY

5 More than half of the 1 major specialty food segments grew faster than the specialty food market as a whole from 2 to. Six of these segments grew more than twice as fast as the total specialty food market, led by refrigerated pasta (up percent); eggs (up 6.3 percent), and refrigerated pasta and pizza sauces (up 61 percent). The top 1 best-selling categories have shifted since last year s report. Cheese remains king with $3.1 billion in sales and.2 percent of the retail market, but coffee, coffee substitutes, and cocoa took over the No. 2 spot from frozen and refrigerated meat, poultry, and seafood. Bread and baked goods entered the top five, bumping out yogurt and kefir. Candy and individual snacks; frozen lunch and dinner entrees; and nuts, seeds, and dried fruits and vegetables also moved up the list this year. The specialty food market now has billion-dollaror-more segments. Share Change Share 2 3,.2. 3, , , , , , , , , , , , , , , , THE STATE OF THE SPECIALTY FOOD INDUSTRY Does not include private-label sales, random weight (PLU) items, or sales through Trader Joe s or Whole Foods Market All major specialty food and beverage segments (1 out of ) grew from 2 to, with many achieving double-digit sales growth. The specialty food market overall grew 19.2 percent. Cheese and Cheese Alternatives Coffee, Coffee Substitutes, and Cocoa Frozen and Refrigerated Meat, Poultry, and Seafood Chips, Pretzels, and Snacks Bread and Baked Goods Candy and Individual Snacks Condiments, Dressings, and Marinades Frozen Lunch and Dinner Entrees Yogurt and Kefir Nuts, Seeds, and Dried Fruits and Vegetables Frozen Desserts Cookies and Snack Bars Energy Bars and Gels Refrigerated Salsas and Dips Refrigerated Juices and Functional Beverages Shelf-Stable Fruits and Vegetables Baking Mixes, Supplies, and Flours Teas Oils and Vinegars Water Ready-to-Drink Tea and Coffee Pickles, Peppers, Olives, and Vegetables Seasonings Crackers and Crispbreads Cold Cereals Shelf-Stable Juices Soup Carbonated Beverages Beans, Grains, and Rice Shelf-Stable Pasta and Pizza Sauces Sweeteners Entrees and Entree Mixes Frozen Fruits and Vegetables Shelf-Stable Pastas Shelf-Stable Functional Beverages Frozen Appetizers and Snacks Dairy and Alternatives Shelf-Stable Meat, Poultry, and Seafood Refrigerated Condiments Shelf-Stable Salsas and Dips Nut and Seed Butters Conserves, Jams, and Spreads Puddings and Shelf-Stable Desserts Frozen Breakfast Foods Refrigerated Pasta Milk Hot Cereals Eggs Rice Cakes Refrigerated Pasta and Pizza Sauces Frozen Juices and Beverages Total 2 3,3 2,6 2, 2,99 2, 1,636 1,6 1,3 1,3 1,2 1,6 1, ,1 2,9 /SPINS/IRI SALES OF SPECIALTY FOOD AT RETAIL BY CATEGORY

6 Sales of all food grew an anemic 2.2 percent between 2 and. Energy bars and gels, refrigerated salsas and dips, and refrigerated pasta grew the most during this time period; sales of frozen juices and beverages, cold cereals, and sweeteners experienced the biggest drops. rgy R BA Ene rgy R BA Ene rgy R BA Ene Frozen and Refrigerated Meat, Poultry, and Seafood Bread and Baked Goods Carbonated Beverages Candy and Individual Snacks Chips, Pretzels, and Snacks Frozen Lunch and Dinner Entrees Cheese and Cheese Alternatives Milk Frozen Desserts Cookies and Snack Bars Coffee, Coffee Substitutes, and Cocoa Condiments, Dressings, and Marinades Cold Cereals Water Yogurt and Kefir Shelf-Stable Fruits and Vegetables Soup Shelf-Stable Juices Refrigerated Juices and Functional Beverages Nuts, Seeds, and Dried Fruits and Vegetables Baking Mixes, Supplies, and Flours Shelf-Stable Functional Beverages Crackers and Crispbreads Dairy and Alternatives Entrees and Entree Mixes Frozen Fruits and Vegetables Eggs Seasonings Frozen Appetizers and Snacks Oils and Vinegars Ready-to-Drink Tea and Coffee Shelf-Stable Meat, Poultry, and Seafood Sweeteners Puddings and Shelf-Stable Desserts Frozen Breakfast Foods Shelf-Stable Pasta and Pizza Sauces Nut and Seed Butters Pickles, Peppers, Olives, and Vegetables Energy Bars and Gels Shelf-Stable Pastas Teas Shelf-Stable Salsas and Dips Refrigerated Salsas and Dips Beans, Grains, and Rice Hot Cereals Conserves, Jams, and Spreads Refrigerated Condiments Refrigerated Pasta Frozen Juices and Beverages Rice Cakes Refrigerated Pasta and Pizza Sauces Total 6 THE STATE OF THE SPECIALTY FOOD INDUSTRY Share Change Share ,6 22,196 21,1 19,31 16,693 16, 13,, 1,92 1,33,229,19 9,3,19 6,6,3 6,36 6,2 6,,3,1,39,,219,226,6,21,63, 3,22 2,91 3,162 3,321 3, 2,62 2,36 2, 2,2 1,6 2,9 1,699 1,2 1,9 1,32 1, , ,23 22,39 2,1 19,61 1,61 16,19 1,229,91 1,6 1,3,9,1,16,,3,33 6,39 6,222 6,1,93,36,62,6,,961,9,6,33,36 3,3 3,29 3, 3, 2,1 2, 2,33 2,21 2,233 1,96 1,93 1, 1, 1,2 1,62 1, , 33,9 1. 3, Does not include private-label sales, random weight (PLU) items, or sales through Trader Joe s or Whole Foods Market 2 /SPINS/IRI SALES OF ALL FOOD AT RETAIL BY CATEGORY

7 SPECIALTY FOOD SHARE OF ALL FOOD SALES BY CATEGORY Specialty market does not include private-label sales, random weight (PLU) items, Trader Joe s or Whole Foods Market /SPINS/IRI Specialty Share of All Sales Refrigerated Salsas and Dips Energy Bars and Gels Teas Refrigerated Condiments Beans, Grains, and Rice Coffee, Coffee Substitutes, and Cocoa Refrigerated Pasta Refrigerated Pasta and Pizza Sauces Pickles, Peppers, Olives, and Vegetables Oils and Vinegars Shelf-Stable Pasta and Pizza Sauces Cheese and Cheese Alternatives Ready-to-Drink Tea and Coffee Shelf-Stable Pastas Nuts, Seeds, and Dried Fruits and Vegetables Conserves, Jams, and Spreads Yogurt and Kefir Condiments, Dressings, and Marinades Shelf-Stable Salsas and Dips Chips, Pretzels, and Snacks Seasonings Refrigerated Juices and Functional Beverages Sweeteners Baking Mixes, Supplies, and Flours Rice Cakes Shelf-Stable Fruits and Vegetables Crackers and Crispbreads Nut and Seed Butters Shelf-Stable Meat, Poultry, and Seafood Frozen Desserts Cookies and Snack Bars Shelf-Stable Juices Frozen and Refrigerated Meat, Poultry, and Seafood Soup Frozen Fruits and Vegetables Entrees and Entree Mixes Candy and Individual Snacks Bread and Baked Goods Frozen Lunch and Dinner Entrees Water Frozen Appetizers and Snacks Hot Cereals Cold Cereals Dairy and Alternatives Shelf-Stable Functional Beverages Puddings and Shelf-Stable Desserts Frozen Breakfast Foods Frozen Juices and Beverages Carbonated Beverages Milk Eggs Total Salsa rgy BAR Ene Specialty foods are becoming an increasingly significant part of the U.S. consumer s diet. As a share of the total market, specialty foods reached 1.9 percent in, an increase of 2.1 percentage points since 2. Segments with the largest share include refrigerated salsas and dips, energy bars and gels, and teas (non-rtd); these segments boast penetration of over percent. Energy bars and gels especially have seen a sharp share increase driven by myriad new innovations. noteworthy jumps include fresh food and drink (refrigerated pasta; refrigerated pasta and pizza sauces, refrigerated juices and functional beverages), pantry staples (sweeteners, oils and vinegars), coffee, and tea. THE STATE OF THE SPECIALTY FOOD INDUSTRY

8 SALES GROWTH OR DECLINE BY PRODUCT CATEGORY fresh pasta Specialty Foods All Foods () Change () Change Specialty market does not include private-label sales, random weight (PLU) items, Trader Joe s or Whole Foods Market /SPINS/IRI 2 Refrigerated Pasta Eggs Refrigerated Pasta and Pizza Sauces Nut and Seed Butters Shelf-Stable Functional Beverages Rice Cakes Refrigerated Juices and Functional Beverages Sweeteners Frozen Juices and Beverages Dairy and Alternatives Frozen Desserts Candy and Individual Snacks Energy Bars and Gels Entrees and Entree Mixes Frozen Lunch and Dinner Entrees Ready-To-Drink Tea and Coffee Shelf-Stable Fruits and Vegetables Milk Carbonated Beverages Frozen and Refrigerated Meat, Poultry, and Seafood Water Chips, Pretzels, and Snacks Oils and Vinegars Puddings and Shelf-Stable Desserts Shelf-Stable Juices Bread and Baked Goods Frozen Fruits and Vegetables Hot Cereals Cookies and Snack Bars Coffee, Coffee Substitutes, and Cocoa Condiments, Dressings, and Marinades Beans, Grains and Rice Frozen Breakfast Foods Conserves, Jams, and Spreads Soup Shelf-Stable Salsas and Dips Seasonings Yogurt and Kefir Crackers and Crispbreads Cold Cereals Shelf-Stable Pastas Refrigerated Salsas and Dips Teas Frozen Appetizers and Snacks Shelf-Stable Meat, Poultry, and Seafood Refrigerated Condiments Shelf-Stable Pasta and Pizza Sauces Cheese and Cheese Alternatives Pickles, Peppers, Olives, and Vegetables Nuts, Seeds, and Dried Fruits and Vegetables Total THE STATE OF THE SPECIALTY FOOD INDUSTRY Variance ( point) NUT R E BUTT ALM ON but D ter PIZZA sauce The specialty food market has grown nearly 1 times as fast as all food and beverages from 2 to. Among the growthrate leaders are fresh foods like refrigerated pasta; refrigerated pasta and pizza sauces, and refrigerated juices and functional beverages. Kitchen staples like eggs, nut and seed butters, and sweeteners are also performing well. However, cheese and cheese alternatives the largest specialty category is the third-lowest performer by percent change variance. This may be the result of increasing competition from mass-market cheese producers expanding their selections with specialty items.

9 Unit sales of specialty food jumped 13.6 percent. Sweet and savory snacking is trending, driven by two segments: chips, pretzels, and snacks (+1. percent) and candy and individual snacks (+22 percent). Two other segments from the top 1 are performing exceptionally well: energy bars and gels (+32. percent) and the non-rtd coffee, coffee substitutes, and cocoa (+2. percent). FOOD Chips, Pretzels, and Snacks Cheese and Cheese Alternatives Bread and Baked Goods Candy and Individual Snacks Yogurt and Kefir Condiments, Dressings, and Marinades Frozen and Refrigerated Meat, Poultry, and Seafood Energy Bars and Gels Shelf-Stable Fruits and Vegetables Coffee, Coffee Substitutes, and Cocoa Cookies and Snack Bars Frozen Lunch and Dinner Entrees Frozen Desserts Water Shelf-Stable Juices Baking Mixes, Supplies, and Flours Pickles, Peppers, Olives, and Vegetables Refrigerated Salsas and Dips Carbonated Beverages Nuts, Seeds, and Dried Fruits and Vegetables Seasonings Ready-to-Drink Tea and Coffee Refrigerated Juices and Functional Beverages Shelf-Stable Pastas Soup Teas Entrees and Entree Mixes Crackers and Crispbreads Shelf-Stable Pasta and Pizza Sauces Shelf-Stable Functional Beverages Cold Cereals Shelf-Stable Meat, Poultry, and Seafood Frozen Fruits and Vegetables Beans, Grains, and Rice Oils and Vinegars Frozen Appetizers and Snacks Shelf-Stable Salsas and Dips Dairy and Alternatives Puddings and Shelf-Stable Desserts Refrigerated Condiments Sweeteners Nut and Seed Butters Frozen Breakfast Foods Conserves, Jams, and Spreads Milk Hot Cereals Refrigerated Pasta Eggs Rice Cakes Refrigerated Pasta and Pizza Sauces Frozen Juices and Beverages Total , 13,3 # Million Change () ,2 1, THE STATE OF THE SPECIALTY FOOD INDUSTRY 9 Does not include private-label sales, random weight (PLU) items, Trader Joe s or Whole Foods Market KEFIR 2 # Million /SPINS/IRI UNIT SALES OF SPECIALTY FOOD

10 THE SPECIALTY FOOD SUPPLY CHAIN: MANUFACTURERS FAST FACTS Mean Annual Sales: $2,9,6 Mean SKUs: 33 Seeking to Expand Specialty Food: 2 Largest Share of Total Expenses: Raw Materials Manufacturers had a particularly strong year: percent reported growth of 2 percent or more. More than half (2 percent) indicated they own their own facility, and of those, percent are co-packing products for others. This year, however, almost two-thirds (6 percent) of manufacturers say they re co-packing private labels for retailers up considerably from last year. As specialty food manufacturers grow their businesses, they are increasingly using retail and foodservice distributors to get their products to market. This has resulted in a drop in manufacturers shipping direct to retail. Natural supermarkets rank as the fastest-growing channel (among percent of manufacturers), followed distantly by conventional supermarkets at 1 percent and specialty food stores at 16 percent. Notably, like last year, conventional markets represent a hot and cold channel across all manufacturers, where roughly an equal amount find great success or great failure. Considering that this channel presents myriad roadblocks such as high cost of entry (e.g., slotting fees, minimum orders), it s a channel that specialty food companies should wade into cautiously. DOLLAR SALES CHANGE MANUFACTURER SALES 213 Share of Total Sales Mean Share of Total Sales Mean Up 3 or more 3 Up Up Up 1 9 Unchanged Distributors Retail 33 3 Direct to Retail 39 3 Direct to Consumer Distributors Foodservice Down Down Direct to Foodservice Down Down 3 or more 1 Note: numbers may not add to 1 due to rounding BY CHANNEL IN THE PAST YEAR MANUFACTURERS: IN THEIR OWN WORDS THE MANUFACTURER VIEWPOINT: CHANNEL SALES GROWTH Natural Supermarkets (e.g., Whole Foods Market) Conventional Supermarkets (e.g., Kroger, Safeway) Specialty Food Stores Foodservice (e.g., restaurants, cafes, cafeterias) Mass Merchandisers (e.g., Target, Walmart) Direct to Consumer Online Club Stores (e.g., Costco, Sam s Club) Convenience Stores 1 THE STATE OF THE SPECIALTY FOOD INDUSTRY Fastest Growing in Slowest Growing or Declining in What is the biggest threat to your business? Deep discounting by competitors. High cost of distributor networks; consolidation of food industry behind fewer suppliers. Capital and cash flow management. GMO verification requirements with Whole Foods Market. We use a local dairy and their feed cannot be guaranteed as non-gmo. Continuing litigation around better-for-you claims.

11 THE SPECIALTY FOOD SUPPLY CHAIN: MANUFACTURERS Despite a litigation frenzy over all-natural label claims, 9 percent of specialty food manufacturers offer all-natural products, accounting for more than two-thirds of sales. And 6 percent say they usually/always label products with this claim. GMO-free innovation continues to gain ground and is now the No. 2 natural/ethical claim; percent of manufacturers currently offer one or more products that are non-gmo. And whereas organic food is produced by nearly one-third of manufacturers, it accounts for only percent of sales. PRODUCT INNOVATION Gluten-free remains important, as percent of manufacturers report it to be in 2 innovation plans, up from and 213. With ancient grains trending upward, manufacturers are getting increasingly experimental while also upping the nutritional value of some gluten-free offerings. allergen-free food is less urgent in innovation plans (1 percent). Also worth noting is the continued consumer demand for convenient specialty food. Segments that increased this year versus last include convenient/easy-to-prepare and portable foods. New for this year, Mintel/Specialty Food Association asked manufacturers about high-protein innovations. Few manufacturers are prioritizing this in innovation plans for 2, despite the high-protein buzz. MANUFACTURER PLANS FOR 2 I plan to produce specialty food that is also Local and all-natural products continue to be the most interesting to consumers. Manufacturers are even more optimistic about the growth of these segments in the next three years than they were last year. Non-GMOs are clearly on the upswing and companies believe that this attribute will grow in the near future. Gluten-Free Convenient/Easy to Prepare 3 Indulgent 3 Portable 3 Less Indulgent and More Healthful 2 Functional 2 2 Allergen-Free 1 High Protein 13 NATURAL/ETHICAL PRODUCT GROWTH Interests consumers most today CHARACTERISTICS OF Will grow the most in the next three years Local All-Natural Non-GMO Fair Trade 2 Non-GMO Fair Trade Manufacture All-Natural PRODUCTS SOLD Sales add to more than 1 because multiple answers accepted. of Sales THE STATE OF THE SPECIALTY FOOD INDUSTRY

12 THE SPECIALTY FOOD SUPPLY CHAIN: IMPORTERS FAST FACTS Mean Annual Sales: $2,13, Mean SKUs: Seeking to Expand Specialty Food Offerings: 61 Mean Source Countries: 3 Most importers reported modest sales gains of 1 to 19 percent. Direct to retail now tops importers sales share by channel, but nearly half of importer sales are through retail and foodservice distributors, at 3 percent and 1 percent respectively. Specialty food stores continue to be the fastest-growing channel for importers, with 29 percent selecting it and only percent saying it is the slowest growing. Online sales are heating up too, as 21 percent say it s the fastest growing and none call it the slowest. Club and convenience stores two new segments for this year aren t doing much for importers. Indeed, 39 percent say that convenience stores were the slowest-growing/declining channel. Nearly two-thirds of importers plan to expand specialty food offerings (number of products), while a third say they ll seek to keep SKU counts the same. Average SKU counts have not changed much in the past two years, and annual importer sales were also similar, so it will be interesting to see if additional new products lead to increased sales. All-natural and non-gmo offerings rank as the top two characteristics of products sold, as they have since 213. There has been a slight decline, however, with each of these claims, in terms of percentage of sales. The drop-off with non-gmo, organic, and other natural/ethical claims is surprising but demonstrates that what consumers purchase may be different than what they express concern about. DOLLAR SALES CHANGE CHARACTERISTICS OF All-Natural Non-GMO Fair Trade BY CHANNEL IN THE PAST YEAR of Sales Up 3 or more 1 Up Up Up Unchanged Down 1 9 IMPORTER SALES Import This Type of Product Down 1 19 Share of Total Sales Mean Direct to Retail 36 Distributors Retail 3 Distributors Foodservice 1 Direct to Foodservice Direct to Consumer 6 2 Down 2 29 Down 3 or more THE IMPORTER VIEWPOINT: CHANNEL SALES GROWTH Specialty Food Stores Online Foodservice (e.g., restaurants, cafes, cafeterias) Natural Supermarkets (e.g., Whole Foods Market) Conventional Supermarkets (e.g., Kroger, Safeway) Club Stores (e.g., Costco, Sam s Club) Mass Merchandisers (e.g., Target, Walmart) Convenience Stores Note: numbers may not add to 1 due to rounding PRODUCTS SOLD Fastest Growing in Slowest Growing or Declining in THE STATE OF THE SPECIALTY FOOD INDUSTRY

13 THE SPECIALTY FOOD SUPPLY CHAIN: IMPORTERS On average, importers sourced products from three countries in. By continent, Europe was the most frequent source at 2 percent; followed distantly by South America (1 percent), Asia (1 percent), and North America (1 percent). IMPORTERS: IN THEIR OWN WORDS What is your biggest gripe about the specialty food industry? Mediterranean, Italian, Latin, Spanish, and Indian rank as the top five emerging cuisines, according to importers. Surprisingly, there was a notable drop in some Asian cuisines, especially Thai, Vietnamese, Chinese, and Japanese. Distributors don t want to take on a product without sales already in place. Chefs love the products but don t want to take them on without distributors in place. offerings rank first this year in what importers believe interests consumers, just ahead of all-natural and local. However, importers believe that organics will fall in consumer interest in three years. They are putting much more stock in non-gmos, with more than two-thirds reporting non-gmo will grow the most in the next three years. The cost of getting any brand in natural and specialty on the shelf in multi-store chains. Small food purveyors cannot afford the chargebacks, the required ads, demos, and promotions, let alone the steep chargebacks imposed by distributors. It just homogenizes the available choices for the consumer. Importers say local will be a claim of growing importance to consumers in the coming years, a trend that is cause for concern among some who believe the movement is driving people to purchase fewer imported goods. Importers cite the local focus and currency fluctuations as among the biggest threats to their business. Retailers expecting specialty food manufacturers to have the same amount of marketing funds as the mainstream brands. The lack of information and poor communication between the different levels of the distribution supply chain. EMERGING CUISINES 2 NATURAL/ETHICAL PRODUCT GROWTH Interests consumers most today Will grow the most in the next three years Fair Trade 2 Latin, other than Mexican Vietnamese 23 Chinese Eastern European Mexican African 23 Japanese Caribbean Russian 1 French Thai 6 Non-GMO Italian Korean Local 39 Indian 1 All-Natural Spanish Mediterranean None of the above 29 THE STATE OF THE SPECIALTY FOOD INDUSTRY 13

14 THE SPECIALTY FOOD SUPPLY CHAIN: DISTRIBUTORS FAST FACTS Mean Annual Sales: $,22,3 Mean SKUs: 1, Seeking to Expand Specialty Food Offerings: 69 This may be because specialty and natural retailers continue to minimize direct orders to streamline their procurement operations and keep costs down. This year s sample consisted of mostly small- to medium-size distributors, many of whom reported a strong ; 6 percent grew 2 percent or more. Nearly 1 percent of distributors sales came from online retail in. Distributors fastest-growing channels have shifted to specialty and natural food retailers from conventional supermarkets and online e-commerce, which were cited last year. NATURAL/ETHICAL PRODUCT GROWTH Interests consumers most today Will grow the most in the next three years Local All-Natural According to distributors, local and organic rank highest for consumers today, though local surpassed organic by a considerable margin. Meanwhile, sustainable offerings rank first in terms of what distributors think will grow fastest in the next three years. Distributors are planning significant growth in 2. Nearly percent say they plan to expand offerings, and 3 percent indicated they d do so with private label(s) as well. Just 23 percent say there will be no change, and none plan to cut back. 23 DOLLAR SALES CHANGE Mean Stores Serviced: IN THE PAST YEAR Non-GMO Fair Trade 3 Distributors, importers, and brokers all reported that online sales is one of their fastest-growing channels. 23 CHANNEL SALES GROWTH Specialty Food Stores Natural Supermarkets (e.g., Whole Foods Market) Online Foodservice (e.g., restaurants, cafes, cafeterias) Conventional Supermarkets (e.g., Kroger, Safeway) Mass Merchandisers (e.g.,, Target, Walmart) Club Stores (e.g., Costco, Sam s Club) Convenience Stores 1 THE STATE OF THE SPECIALTY FOOD INDUSTRY Up 2 29 Up 1 19 Up 1 9 Unchanged Down 1 9 Down 1 19 Down 2 29 Down 3 or more Note: numbers may not add to 1 due to rounding 62 THE DISTRIBUTOR VIEWPOINT: Up 3 or more Fastest Growing in 3 23 Slowest Growing or Declining in 23 3 DISTRIBUTORS: IN THEIR OWN WORDS What was your biggest success in? Did more business with shop-at-home services. Health-related specialty. Opening a new conventional grocery store chain account. Order fulfillment.

15 THE SPECIALTY FOOD SUPPLY CHAIN: BROKERS FAST FACTS Mean Annual Sales: $3,1, Mean SKUs: 2,2 Brokers surveyed this year reported higher SKU counts and sales compared with previous years. Coupled with plans to increase their SKUs in 2, especially by developing or furthering private-label programs, the data suggests an optimistic outlook for this channel. Seeking to Expand Specialty Food Offerings: 6 NATURAL/ETHICAL PRODUCT GROWTH Specialty food stores, though serviced by percent of brokers, are rarely regarded as the fastest-growing channel. Instead, natural supermarkets are driving sales. Conventional supermarkets, served by nearly three-quarters of brokers, are not considered growth opportunities. As reported across the supply chain, convenience stores are not typically good performers. Brokers point to local, all-natural, and non-gmo products as most interesting to consumers. Non-GMO and local products will grow fastest over the next three years, which aligns with sentiments from others in the supply chain., eco-friendly and fair trade are expected to record the slowest growth in the next three years. Interests consumers most today Will grow the most in the next three years Up 2 29 Up 1 19 Up Unchanged Down 1 9 Down 1 19 Down 2 29 Down 3 or more CHANNEL SALES GROWTH Specialty Food Stores Natural Supermarkets (e.g., Whole Foods Market, ) Conventional Supermarkets (e.g., Kroger, Safeway) Foodservice (i.e., restaurants, cafes, school/office cafeterias) Online Convenience Stores Mass Merchandisers (e.g., Target, Walmart) Club Stores (e.g., Costco, Sam s Club) 23 Fair Trade BROKERS: IN THEIR OWN WORDS What are you planning to do differently in 2? Note: numbers may not add to 1 due to rounding THE BROKER VIEWPOINT: Non-GMO IN THE PAST YEAR 6 All-Natural DOLLAR SALES CHANGE Up 3 or more 6 Local Stores/ Channels Serviced FastestGrowing Store/ Channel Go outside of our traditional sales area. Expand business in different types of products and different stores. Partnering with other regional brokers. Increasing online sales. THE STATE OF THE SPECIALTY FOOD INDUSTRY

16 THE SPECIALTY FOOD SUPPLY CHAIN: SPECIALTY FOOD RETAILERS FAST FACTS Mean SKUs: 1,661 Average Store Size: 6,2 square feet Average Transaction Size: $3.2 Mean Suppliers: 66 Average Inventory Value: $23,96 Specialty food retailers are, on average, larger in square footage with far more weekly transactions than in past years. Among these retailers, transaction size was $3.2 in, growing nearly 3 percent from 2. This reflects that consumers are using specialty foods more for everyday eating and often stocking up at specialty food stores. Retailers report sales growth, but it s more modest than in other segments of the supply chain. Half of this year s retailers said their sales were up 6 to 19 percent in. About half are seeking to expand specialty food offerings, which bodes well for many in the supply chain. However, about a third of retailers say that they re seeking to develop or further their private-label products. DOLLAR SALES Since 2, specialty grocery and deli/prepared foods departments have led the way in terms of share of sales. Cheese has taken a dip in from numbers: just 1 percent of sales came from cheese, according to retailers with cheese departments, versus percent last year. A new addition for this year, confectionery performs well, accounting for 9 percent of sales. IN PAST YEAR Up 3 or more Up Up Up 1 13 NUMBER OF SPECIALTY Unchanged 1 Down 1 3 FOOD SUPPLIERS Down Down Down 2 29 Down 3 or more 1-1 Up 2 29 MORE THAN 21- CHANGE 3 MEAN # OF SUPPLIERS UTILIZED: 66 Note: numbers may not add to 1 due to rounding SALES BY DEPARTMENT Mean 26- PURCHASES BY TYPE OF SUPPLIER Mean Specialty Grocery 32 Deli and Prepared Foods Produce Meat and Seafood Wine & Alcoholic Beverages 1 Distributors 1 Non-Foods Direct From Non-Local Suppliers 2 Cheese 1 Direct from Local Suppliers (i.e., those that deliver directly rather than through UPS, Fedex, etc.) THE STATE OF THE SPECIALTY FOOD INDUSTRY 1 Confectionery 9 Bakery Mean of sales add to more than 1 because not all stores have named departments

17 THE SPECIALTY FOOD SUPPLY CHAIN: SPECIALTY FOOD RETAILERS Retailers focused on selling local, organic, and all-natural offerings in, as these characteristics accounted for the largest share of products sold in stores. Some 66 percent of retailers sell products with non-gmo claims. Specialty food retailers continue to believe that Mediterranean is an emerging cuisine. In sharp contrast to importers, four of the top five retailer selections (Thai, Indian, Vietnamese, Korean) are Asian cuisines. EMERGING CUISINES SPECIALTY FOOD RETAILERS: IN THEIR OWN WORDS Mediterranean 3 Thai 2 What are some key emerging trends in specialty food? Indian 2 Vietnamese 23 Korean 23 Latin, other than Mexican 2 African 1 Spanish 1 Italian 1 Mexican 1 French 13 Caribbean Japanese 1 Eastern European 1 Local, sustainable, whole grains, humane food production. Smoked flavors, healthy foods, pickled everything. More gluten-free, use of beets, kale, seaweed, coconut, and other good-for-you ingredients. Return to simple, clean, and old-fashioned, i.e. real grass butter, fermented foods, ancient grains. Smaller stores, more specialty grass-fed products, home gardening, far greater delivery options. NATURAL/ETHICAL PRODUCT GROWTH Interests consumers most today Chinese Russian 1 13 None of the above Will grow the most in the next three years Local 3 Non-GMO 2 3 All-Natural 32 2 Fair Trade CHARACTERISTICS OF PRODUCTS SOLD Sell this type of product in store(s) Local All-Natural Non-GMO Fair Trade Multiple answers accepted Carry this type of product Estimated mean of sales Written by Ron Tanner and Denise Purcell, Specialty Food Association s vice president, philanthropy, government, and industry relations, and head of content, respectively. THE STATE OF THE SPECIALTY FOOD INDUSTRY 1