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Corporate America Looming Larger in Organic Sector

From Agribusiness Examiner #274
August 1, 2003
By Al Krebs <avkrebs@earthlink.net>


LARGE FOOD COMPANIES WIELDING
THEIR CLOUT, ATTACHING THEIR OWN
BRAND LOGOS TO ORGANIC FOODS

JAY KRALL, WAS STREET JOURNAL: In a risky reversal of marketing tactics, some of the world's best-known packaged-food companies have planted their brand names smack-dab onto organic versions of their products.

H.J. Heinz Co.'s Organic Ketchup hit supermarkets last year; in April, PepsiCo Inc.'s Frito-Lay introduced Tostitos Organic Tortilla Chips. Meanwhile, Tyson Foods Inc.'s Nature's Farm organic chicken is selling in grocery stores in the Northeast, while in several cities Unilever unit Ben & Jerry's Homemade is testing organic ice cream in four flavors (vanilla, strawberry, chocolate fudge brownie and sweet cream with cookies).

Until recently, big food makers looking for a foothold in the growing organic industry have made it a point to keep their names and logos off organic offerings. Last year, when General Mills Inc., Minneapolis, introduced Cascadian Farms organic cereals, the Big G logo was conspicuously absent from the box. The rationale has been that consumers who try to avoid pesticides and additives may not trust big corporate brands.

But now, more companies are wielding the clout of their big brands to secure shelf space in the organic section of mainstream supermarkets.

Until recently, the market for organic products had been almost exclusively in boutique health-food stores and the Whole Foods Market Inc. chain. While U.S. sales of organic foods have nearly doubled over the past five years to $11 billion, they still amount to only about 2% of the $485 billion Americans spend on food in stores. Nevertheless, the long-term growth potential is getting hard for large food makers to ignore. "We're betting on the future," says Robin Teets, a Heinz spokesman. "We wanted to be there when it does start to take off."

Generally, organic-food stores, both small independent shops and big

retailers, aren't rushing to carry organic-food items from the big mainstream companies. The big health-food supermarket chain Whole Foods, for example, doesn't carry Tyson's organic chicken.

Bob Goldin, executive vice president of the Chicago consulting firm Technomic Inc., predicts a slow, cautious rise for big-brand organic products. "None of the mainstream companies have made a big push" for organic foods, he says, partly because they don't want to undermine their nonorganic flagship products. "While these are different products, there's a risk of causing consumer confusion," he notes.

Some food companies encourage retailers to display their organic items in the health-food aisle, far from the regular version of their brand, says Karen Brown, senior vice president at the Food Marketing Institute, a Washington group. One reason: Companies may worry that by displaying their regular and organic items side by side, it might prompt consumers to question the quality of their nonorganic food. Other companies, though, want their organic products sitting next to the standard version, reinforcing the association with a brand shoppers know and trust. "They're still feeling it out," Ms. Brown says. "There's no hard-and-fast rule on this."

Some consumers are turned off by efforts to give an organic product the imprimatur of a household name. Beth Ritchey, a 24-year-old investment representative in Chicago, says she isn't "a hard-core organic person," buying organic foods only occasionally. But she says she wouldn't buy big-name organic foods, such as organic chicken from Tyson, the huge Springdale, Arkansas, poultry processor, because she doesn't trust many large food concerns. Besides, she says, scanning the tofu offerings in the organic section of a Dominick's supermarket, owned by Safeway Inc., Pleasanton, California, "I'm willing to pay more to support the smaller companies."

Big-brand organic products seem more likely to prosper if priced below established organic brands. Tracey Zemitis, 31, of Santa Monica, California, says she generally distrusts big food companies but can't deny their organic offerings are sometimes cheaper than the small organic brands she normally buys, such as Seeds of Change.

Few big-name organic products have made their way to her grocery store, though she is keeping an eye out for them. "I can't buy organic all the time. It's noticeably more expensive," she says.

In some cases, the difference in price between an organic product and its conventional counterpart is significant. Heinz Organic Ketchup costs about 30% more per ounce than their nonorganic variety. McCormick & Co.'s Gourmet Collection Organic Oregano, available nationwide, costs about $4.99 for a
half-ounce jar, 52% more than the $3.29 price on its regular gourmet
oregano selling in a Chicago grocery store.

Tyson is betting consumers are willing to pay more. In the past six months, Tyson has brought its Nature's Farm organic brand into Kroger Co. stores and other supermarkets in the Northeast. The Tyson logo sits directly above the quaint farmhouse on the package. In conventional stores that stock organic chicken, it typically is the only brand offered.

And it is more expensive. At a Giant Eagle store in downtown Pittsburgh, boneless breasts of Nature's Farm sell for $5.99 a pound. Conventional, private-label chicken breast runs $4.99 a pound. Tyson declined to disclose sales for the organic product, but says it is expanding its availability throughout the region.

The economics of organic foods are a change for big food producers, which rely on economies of scale in processing and distribution to offer low prices. In the organic market, such savings are often dwarfed by the high cost of producing organic food. Organic feed costs nearly twice as much as
conventional grain. Tyson's organic chickens can't be processed if they
become sick and are treated with antibiotics. "Add all that up and you have one high-priced bird," says Harold Heinze, director of marketing for Tyson's fresh-chicken division.

DEAN FOODS, NATION'S LARGEST DAIRY,
ACQUIRES HORIZON ORGANIC MILK

MARGARET WEBB PRESSLER, WASHINGTON POST: Many shoppers already equate organic milk, juice and eggs with the distinctive cartoon cow used by Horizon
Organic, one of the nation's largest organic food producers. The company has large stretches of shelf space in natural foods supermarkets such as Whole Foods, and is quickly gaining a foothold in mainstream retailers as well, including Starbucks.

But if you're not familiar with the company --- or Happy the Cow --- you are about to get acquainted.

Colorado-based Horizon was purchased earlier this month for $216 million dollars by Dean Foods Co., the nation's largest milk producer, which already has direct links into thousands of the nation's supermarkets and other food outlets.

It's part of a recent effort by many traditional food companies to get into the organic business, either with their own products or by buying already-successful organic companies. Over the last four years, General Mills Inc. has acquired Cascadian Farms, French food giant Groupe Danone bought a stake in Stonyfield Farm, and H.J. Heinz Co. has invested in Hain Celestial Group Inc.

Though organic sales total about $13 billion a year --- less than two percent of the food market --- they have been growing at more than 20% a year. That demand, coupled with the movement by mainstream retailers to offer more organically made alternatives on their shelves, make it likely that organic products will become much more visible. And Horizon is poised to take advantage of the trend.

"Horizon Organic will be able to put its products into the Dean system, and the sales at Horizon will expand dramatically," said Scott Van Winkle, a specialty food and nutrition analyst for Boston-based Adams, Harkness & Hill, which has no investment banking relationships with either company.

Horizon was founded just 12 years ago with one product, organic nonfat yogurt. It then bought an organic farm in Idaho and a dairy farm near Annapolis, where it is holding an acoustic music festival this weekend. The main engine of its growth has been milk, which now accounts for 55% of its sales of more than $200 million.

There are still some significant barriers to growth for organic products, however, including their higher prices. A half-gallon of regular milk at a local supermarket might cost $1.89, compared with more than $3 for a half-gallon of Horizon Organic.

Some industry observers also say organic-product companies need to be careful with their marketing, ensuring that their message doesn't scare consumers about the nonorganic choices they make.

"People have way too much to worry about today," said Linda Gilbert, president of HealthFocus, an Atlanta food and nutrition consulting firm. "I wouldn't want my brand associated" with scare tactics.

Horizon's entry into the organic dairy products business has coincided with growing controversy about possible harmful side effects from the common practice of treating dairy cows with antibiotics and synthetic growth hormones, which boost milk production. The scientific community has reached no consensus about the use of these treatments, but some studies suggest there could be a link between the use of growth hormones and certain cancers, and between the use of antibiotics and drug-resistant strains of disease. Though the Department of Agriculture has approved the use of growth hormones and antibiotics in the dairy supply as safe to humans, many organic consumers are not convinced.

Parents tend to be especially attuned to such concerns, making families the backbone of Horizon's business.

"Our franchise skews to families with young kids," said Charles F. Marcy, Horizon's chief executive.

Now, Horizon is moving into some new product lines for kids too. Aiding the company in its efforts is Happy the Cow, which has always been the company's logo but also suits the sensibilities of young consumers. Among the new offerings are puddings, flavored gelatins, yogurt tubes and this fall, the first organically made baby formula.

"There's a big hole" in the infant formula market, Marcy said. "Customers are telling us we really need an organic alternative."

The trick, Health Focus's Gilbert said, is not impugning the quality of beloved traditional brands, which could create a backlash among consumers. People don't like to feel guilty or anxious about what they eat, she said.

Horizon's Marcy agreed that some organic companies hawk the message that "there are things in conventional products that can really hurt you." Horizon has tried to avoid that approach by using Happy the Cow to help create an "upbeat, fun" approach to marketing, he said. "It's made a serious product approachable."

At least, approachable to those who can afford it. Another major issue Horizon and other organic producers have to tackle is the price barrier to its products. Gilbert said her research shows that is a problem for shoppers because "they don't understand why it costs more."

Marcy said retailers tend to put the same markup on more expensive organic products that they do on traditional products, which makes them more profitable. Horizon Organic is trying to convince retailers to keep retail prices lower to spur volume.

That may be a tough sell, but industry experts still predict that prices will start coming down as more retailers stock organic products and industry giants like Dean Foods put Horizon Organic into more outlets. Already, Horizon is in the midst of a major deal to expand its products into Cosco's club stores nationally.

"I do think we're only seeing the beginning of this," Marcy said.

ORGANIC FARMERS' SECOND THOUGHTS
ON NATIONAL STANDARDS AS LARGE FOOD
COMPANIES BEGIN TO COOPT MOVEMENT

MICHAEL POLLAN: As a consumer who generally tries to do the right thing, I've always thought the decision to buy organic was a no-brainer. But in recent years
organic has grown to include paradoxes such as the organic factory farm and the organic TV dinner. And now, there is even organic high-fructose corn syrup. We are not far from organic Coca-Cola.

At Indian Line Farm, in Great Barrington, Masschusetts, weeding is still done by hand.
Now these aren't absolutely good or absolutely bad developments. As offensive a concept as organic high-fructose corn syrup may be, a product like organic Coke will sponsor a lot more organic acreage in this country. But this is certainly not what the founders of the organic movement had in mind.

It's worth remembering what they did have in mind. There were three legs to the original organic dream. One was growing food in harmony with nature --- a non-industrial way of farming that treated animals humanely and did not use chemical pesticides. The second leg was that our system of food distribution should be different; food co-ops, farmer's markets, and community supported agriculture could replace the national agricultural system. And the third leg was the food itself. We shouldn't be eating red delicious apples; we should be eating ten different kinds of apples because biodiversity in the apple tart means biodiversity in the orchard.

The lesson to be learned is that consumers of all kinds, but especially eaters, are producers in the most important sense. With every food purchasing decision, we are helping to create the world we want to live in, one bite at a time.

For all sorts of reasons -- some good, some mistaken --- the organic community decided more than a decade ago that it needed federal recognition and regulations. Big companies wanted to sell organic products nationally, but they needed standard rules. And farmers thought that a standard label would give credibility to organic, which it did. But once we had an official federal organic standard, small farmers lost control of the niche.

Today the organic dream is in peril. In fact, many of the best farmers in this country no longer even use the word organic. The USDA developed a set of rules --- and they got pesticides, hormones, and many drugs out of the system. All wonderful. But if you look at the new rules, that's all they address. There is nothing written about the kind of food that may be called organic, or its distribution. There is no rule against high-fructose corn syrup.

A myriad of synthetics are allowed in processed organic food. And we find ourselves with an organic transcontinental strawberry: five calories of food energy that use 435 calories of fossil-fuel energy to get to a supermarket near you. This is organic food forced through the industrial system, shorn of its holism. What has been lost is that one key insight about organic: that everything is connected. The organic dream has been reduced to a farming method.

The way we spend our food dollars is one of the most important votes we cast, and the choice we consumers are increasingly going to be faced with is not organic or conventional, but local or organic. I come down on the side of local. When you buy local, you're voting for a short, highly legible food chain --- one that supports all three legs of the original vision.

This shorter food chain brings the consumer and producer together, and the producer gets to tell her story. Organic label or not, it had better be a good story: clean food, grown without pesticides, the animals being treated humanely. Another reason to buy local is that farms produce more than food
--- they produce a kind of landscape too, which your food dollars help to conserve.

Michael Pollan is the author of The Botany of Desire. This article is adapted from a talk hosted by the Great Barrington Land Conservancy.

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