It was the global phenomenon that would herald a new age of premium products. But then recession struck. Can a transatlantic trade agreement make the market viable at last for multinationals?
At a sprawling farmers’ market in the former Soviet section of Berlin, they’re forming queues for a slice of the organic lifestyle. Germans and tourists alike are clamoring to sample arange of expensive regional cheese from the Alpenkäse stall. Not that owner MarcLämmle is a model of optimism; “This year, business seems a bit tougher, a bit harder,” he says, in between offering cheese from the end of a knife. At the same time, “People still buy cheese. It’s not like selling a Rolls-Royce.”
Lämmle can foresee continuing profit in selling organic cheese by the slice. But for larger businesses, the crystal ball is harder to come by. Organics were supposed to herald a food revolution, delivering handsome margins predicated on a growing and increasingly aware middle class. Yet they remain a fickle and confusing area for producers, retailers and investors who must navigate a wide range of geographically differing consumer requirements, and unexpected pitfalls.
In places, organic food is more profitable and is growing faster than the broader market. And a recent EU-US equivalency agreement on organic standards could go a long way to expanding trade between two regions that already make up 90% of global sales in the roughly US$59bn industry.
Bilateral trade across the Atlantic currently makes up less than 5% of those sales, as organic food largely remains a regional, premium-priced luxury product. Starting in July 2012, organic products that were limited to one continent or the other can now be sold freely between the two.“It will open up some opportunity because a greater variety of products will be available, perhaps coming more from North America to Western Europe,” says Diana Cowland, an analyst at Euromonitor.
Multinationals have been relatively slow to embrace the market. But in recent years several have begun to quietly acquire brands that could help them gain a foothold. Coca-Cola bought juice-maker Odwalla for US$181m; Kellogg acquired granola brand Bear Naked for US$60m in 2007; and Kraft has owned vegetarian specialist Boca Foods since 2000, doubling the brand’s sales to more than US$70m.
Nestlé, like its peers, has made acquisitions of the sort of premium brands and natural products that organic-loving consumers tend to buy: San Pellegrino water, PowerBar energy bars and Skinny Cow ice cream. The company has also tweaked its motto to de-emphasize candy bars and shift to health and wellness: “Good food, good life.”But when it comes down to it, Nestlé Chairman Peter Brabeck-Letmathe thinks organic products (known as ‘bio’ in parts of continental Europe) are less important than a general good health message for a company that had sales of US$91bn in 2011 – despite its emphasis on creating “shared value” for local producers. “It sounds good. It is good. We have to help our farmers who make these products. It allows them to create added value for people who are willing to pay for it,” Brabeck-Letmathe said during an interview at the Salzburg Festival. But “it’s a privilege. We also have to think of the world food supply”.
Even though dairy is the biggest category of organic products worldwide, with US$6bn sales in 2010, some food companies are moving organic lines to ‘natural’ categories which don’t involve the rigorous regulation or higher prices of organic. US-based Dean Foods repositioned its Silk and Horizon milk brands to natural, which cut into overall organic sales. Ocean Spray moved some beverages from organic to non-organic.“Provenance, ethics and sustainability are still big areas of consumer interest, although these can increasingly exist without the ‘organic’ label,” says KPMG’s Richard Peberdy, a Partner in the UK firm. “For example, consumers are willing to spend more on free range eggs, as they associate the product with healthier, happier animals. They do not necessarily expect added benefits from an organic label.”
But though the trend to downplay the organic label seems increasingly pervasive among marketers, some experts advise not to throw the baby food out with the cranberry juice. They say multinationals should be careful not to give up too quickly on the organic market, which still has room to grow and wind in its sails. “Some categories are doing very well. Others are not,” says Cowland. “It takes a lot of strategy. You have to target the right consumer. In most instances organic is more expensive so you have to offer customers a product that they are willing to pay the extra cost for.”
Organic baby food, for example, “was incredibly resilient during the recession”, she says, with brands such as Germany’s HiPP Organic and the US-based Hain Celestial Group experiencing strong growth. Sales jumped 7% in 2011 to more than US$1.8bn and could reach US$2.3bn by 2015.
Organic rice is selling strongly because of interest from the Chinese middle class. Organic coffee grew a whopping 8% globally in 2011. Euromonitor expects organic packaged foods as a whole to grow more than 4% per year until 2015. While that’s down from the double digit growth rates the industry saw in 2006-2008, it’s still above the overall packaged food level of 2% in 2011. “The products that have done well have an element of functionality,” Cowland says. “Baby food has added minerals and vitamins or nutrients like omega-3. You are getting added benefits. Consumers believe they can get more for their money.”
Similarly, some regions are more interested in organic products than others. While the UK has seen a slowdown, demand in Germany – Europe’s most developed market for sustainable produce, with penetration across all socio-economic groups – remains strong. Asia Pacific, North America and Latin America also have organic sales rates approaching pre-recession levels. “In the UK, people perceive organic products as more expensive than their conventional counterparts even though it is not always true,” says Cowland. This perception is borne out in retailers’ figures: the only British supermarket to enjoy an organic sales lift over the past couple of years is the high-end retailer Waitrose, which is dramatically outperforming the market. Other retailers have reduced shelf space devoted to organic.
Despite recent efforts from large discount retailers in the US to use their buying clout to bring down industry prices of organic food, demand blunted by recession has halted their ambitions. “Is the [discount retail] customer ready to embrace a full set of organic products? The answer is no, not yet,” says George Siemon, Chief Executive of Organic Valley, the largest organic cooperative in the US and a supplier of discount retailers.
In parts of Europe, things are very different. Discount retailers such as Lidl have expanded space and held 30% of German organic sales in 2010, up from 20% in 2006. One secret of their success is extensive and innovative ranges of private-label organic products at competitive prices. Private-label organic is an under-the-radar success story elsewhere, too. US supermarket Safeway’s O Organics is fast becoming the leading organic food brand in the country, according to research company Organic Monitor. The private label now houses more than 300 certified organic lines and exceeds US$400m in annual sales. It has expanded into food-service outlets and is developing a presence in Latin America, Asia and Africa. At specialist natural foods retailer Trader Joe’s, 80% of all stock is own brand. It currently has yearly sales of over US$8bn. “Retailers are proving to be quite successful with private labels because they offer organic products at competitive prices,” says Amarjit Sahota, President of Organic Monitor. “In some cases, the organic products are cheaper than conventional ones.”
Looking to the future
The new trade agreement means producers won’t have to re-certify or adopt new organic standards when selling abroad. Farmland devoted to organics is expected to increase in the US, as well as in EU countries with export-oriented food industries such as Italy or Greece. That has implications for M&A, says Peberdy, who expects growing interest in healthy and natural foods. “Organic will benefit from this, though acquirers will require further analysis on the importance of organic within this wider category.”
Organic Monitor expects an uptick in the European organic sector, where small and mid-size businesses could grow or merge. Consumer prices are likely to stabilize, with a wider selection to choose from. US grocers can more easily carry organic pasta, chocolates and cheese from Europe. However, the EU and US hold just 30% of global organic farmland, with the bulk in 160 other nations in Asia, Latin America and Africa. And Brabeck-Letmathe is just one critic who believes the wealthier, organically conscious consumer class in Europe and the US has reached saturation point. Awareness of organic products in China and India is low and there are few guarantees consumers there will care about (or be willing to pay for) them.
Economic growth in BRIC nations, and recovery elsewhere, will sway the cycle back in organic’s favour. Peberdy feels better storytelling could also help: “In the past, marketing has focused negatively on non-organic food being bad rather than promoting the health aspects of organic. “The bigger challenge is for organic to resonate with consumer values of ethics and sustainability at an accessible price point. If the industry can crack that, it will really take off.”
Whether the trade agreement alone will be enough to spur the much-promised organic consumer revolution is unclear. But it serves as a sign the major players believe there is still a market to be tapped – and the long term desire to monetize it.