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updated 1/18/2007 3:57:40 PM ET 2007-01-18T20:57:40

A year after Wal-Mart laid out ambitious plans to become a much bigger player in the organic foods business, the giant retailer is running into trouble over its organic effort with consumer activists and government regulators.

It was March of 2006, at an analysts' conference, when Wal-Mart's vice-president of marketing, Stephen Quinn, said that the company would double its offerings of organic products within weeks. The company promised to make organics affordable to more consumers by offering what executives called "the Wal-Mart price." In July, the Bentonville (Ark.) retailer even launched an ad campaign on The Food Network, HGTV, and parenting and women's magazines, with tag lines like: "Know what goes well with organic milk? Organic cereal and knock-knock jokes."

Now there are questions about whether "the Wal-Mart price" might come at a cost to organic foods. State officials in Wisconsin have launched an investigation into the retailer's practices after complaints that Wal-Mart may be misleading consumers. A central question is whether signs on store shelves and banners above the shelves describe foods as "organic," while the foods nearby do not qualify for the label, under federal guidelines. "We are beginning an investigation that will look into signage and whether it can be considered misleading," says Jim Rabbitt, director of the Bureau of Consumer Protection at the Wisconsin Department of Agriculture, Trade & Consumer Protection in Madison. The bureau plans to examine the practices of Wal-Mart and other retailers for 30 to 60 days to determine how big an issue this is.

The U.S. Agriculture Department is reviewing a complaint about Wal-Mart's practices from the same watchdog group that notified Wisconsin officials. The USDA has not decided whether to pursue its own investigation. "We are seeking more information to determine what action should be taken," says Joan Schaffer, spokeswoman for the national organic program at the USDA.

Wal-Mart officials say that the company has done nothing wrong. A spokeswoman points out that the company has more than 2,000 locations that offer up to 200 organic selections, in addition to thousands of nonorganic offerings. Karen Burk, company spokeswoman, wrote in an e-mail that if there were any inaccurate signs or banners around organic foods "we believe it to be an isolated incident." She added that, "The USDA certification label is featured on the packaging of the organic selections we offer for further customer information and verification. We have sent procedural guidelines to our stores for proper management of these identification tags."

Retailers and farmers involved in organic foods worry that giants like Wal-Mart may muddy the waters about what is and is not organic. Some are upset over the allegations and wonder whether other supermarkets will take steps similar to those alleged. "A huge amount of work went into coming up with a standard of quality in the organic industry," says Randy Lee, CFO at PCC Natural Markets, the largest co-op operating in the U.S., which runs eight stores in the Seattle area. "If these allegations are true, then it very easily erodes those standards and comes with a significant business impact on other retailers that have higher standards."

The watchdog group that prompted the Wisconsin investigation is called The Cornucopia Institute and has been active in what it calls "family-scale" farming. It has produced photographs of items that are not certified organic or are only partially organic that appear on shelves at Wal-Mart with banners or signs that say "Wal-Mart Organics." The photos from Cornucopia show items that could be easily mistaken for organic. Many have descriptions such as "all natural" or "natural," including Stonyfield Farms All Natural Yogurt and Florida Crystals natural sugar.

Organics have been a booming business for food manufacturers and for retailers, growing 15 percent annually for the last five years. It's extremely lucrative: Supermarkets typically charge a 30 percent to 40 percent premium in price for organic food, compared with conventionally grown food.

Retailers and farmers are anxious to protect this growing business. Lee, of PCC Natural Markets, says that if Wal-Mart is placing nonorganic items under its organic banner, then it will have a ripple effect on other national grocery chains. PCC and other organic retailers say that they train their employees and store managers rigorously to ensure high organic standards. They wonder how strong Wal-Mart's commitment to organics is. "Where is the USDA in all this?" asks Lee.

The USDA has come under fire in the past for not taking action on similar complaints. Two audits of its organic program, performed by the American National Standards Institute in 2004 and by the USDA's Office of Inspector General in 2005, were highly critical of how the USDA has handled complaints of potential violations of organic standards. The 2005 report states that "in fiscal year 2003, the eight complaints referred to the national organic program for a decision have not been resolved, one of which involved a possible prohibited substance being added to an organic product." The USDA counters by saying that complaints about organic food aren't treated like an emergency. "It's not like this is a food safety issue," says spokeswoman Schaffer.

Mark Kastel, co-director of The Cornucopia Institute, says that it launched its inquiry after a visit in September to Wal-Mart's prototype store in Plano, Tex. After noticing labeling problems in its organic offering, it sent off a letter to Wal-Mart's CEO Lee Scott suggesting that the company correct the problem. Kastel says that consecutive visits to Wal-Mart showed that the company hadn't heeded its advice, so Cornucopia filed a legal complaint with the U.S. Agriculture Dept. in November and followed up with a complaint with the Wisconsin Agriculture Dept. on Jan. 13. The latest assessment came after visiting stores and finding alleged violations in at least four states — Wisconsin, Illinois, Iowa, and Minnesota. "Wal-Mart is coming up with a different kind of organic for its consumers," says Kastel.

Copyright © 2012 Bloomberg L.P.All rights reserved.

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