Organic Demand Exceeds Supply
It’s probably safe to say that those who have maintained that “organics” were just another food fad were mistaken.
According to The Natural Marketing Institute’s 2005 Organic Consumer Trends Report, 30 percent of U.S. consumers use organic products.
The consumer demand for organic foods continues to increase exponentially (sales were up 18 percent for 2004 vs. 2003 according to NMI) and the biggest obstacle to achieving even greater growth in key categories has been a lack of supply.
Dairies supplying organic milk, for example, have had a difficult time keeping up with demand.
According to a report by Stacy Delo on MarketWatch TV this weekend, the dairy cooperative Organic Valley has seen demand for its products outpace growth by 11 percent. The co-op says it had to pull out of a deal with Wal-Mart last year because it could not keep up with the demand for organic milk.
Milk is not the only product category where supply is a concern for organics. According to Ms. Delo’s report, sales growth for organic meats is expected to grow 31 percent a
year until 2008. Consumer concerns about mad cow disease, antibiotics given to livestock, and a number of other factors has led a growing number of consumers to choose organics
over conventional fresh cut and processed meats.
Moderator’s Comment: How do you see the organic food industry changing as demand for these products continues to
grow? How can retailers use organics to differentiate when many of their competitors are also selling similar products?
– George Anderson – Moderator
Organics are a great way for the small producers to compete with the corporate giants. While corporations utilize their mass to buy lower and create efficiencies of operations, mass and efficiency don’t lend themselves to organics. Organics tend to require someone to baby sit the growing and harvesting process. Now how can we find a way to invest in this phenomenon other than buying stock in Whole Foods? As an aside, I will say to all that spending double for organic food is not going to do much for you as long as you have to breath the air and drink the water. Also, stay away from cars, trucks, cities, planes, dogs and 1 million other things that can hasten you death.
What may be more meaningful is a shift in the demographic profile of organic users. Organic food is growing among people under 30, new parents and people with chronic health conditions, who are being told to eat cleaner and lower on the food chain. Hello, baby boomers!
“Organic” is a regulated term by the USDA and other bodies around the world, with specific inclusions and exclusions, administered by third-party certifiers. The troublesome term is “natural,” which doesn’t really mean anything.
Wherever it comes from, organic interest translates to double-digit sales growth as prices, in many cases, have come down. The more I read about chemical agriculture and food production, the happier I am to have organic produce and meat to eat. Plus: it tastes better. Why not eat organic if you can?
Another factor is that economic times are, at the moment, rather good. Natural and organic products would seem to be vulnerable when the economy dips. Just as consumers trade down from brands to private label, value brands, generics, etc. in bad times, I’d expect that a significant portion would trade “down” to “regular” products when cash runs short.
Wait a minute: Doesn’t the Natural Marketing Institute report referenced above say that in 2004, “approximately 30% of U.S. consumers [used] organic products, down from a high of 40% in 2003?” Isn’t that a 25% DECLINE, regardless of increased prices? As NMI’s President noted, “This apparent paradox may indicate increased usage among a dedicated user base which translates into higher sales.” Ya think?
What I’m seeing is that in spite of greatly expanded availability of organic foods, fewer people are actually seeking and consuming them. If this continues, organics will more and more take on the characteristics of a fad diet, with a declining group of dedicated users representing the vast bulk of consumption, and fewer and fewer new adopters.
The growth of organics is NOT driven by objective scientific facts about the food supply. This is one reason the regulatory apparatus has been so slow to get involved in any significant way, and is unlikely to do so in the future. A “UL” type designation is much less appropriate than the Jewish (U) for kosher. If there is to be any consistency to the concept, the “believers” will have to come to recognize an orthodox organic authority. There are a number of smaller organizations across the country that might serve this purpose, but no one with sufficient image muscle to likely grab the center of the stage to be THE authority.
Having said that, I agree that “organics” are here to stay. I believe that the forces driving that are the growth of disposable income, or at least of a segment of the population that has it, coupled with the desire for distinguishing quality. Distinguishing quality? Aha. Now we are talking brands. “Organic” is a brandable concept, that conveys the IMAGE that is essential for a thriving brand.
Years ago, I wrote a brief essay breaking value into three components: intrinsic, added and perceived. For a food, its intrinsic value is its ability to provide essential nourishment. Added value comes from convenience, packaging, etc. But the real potential for profit comes in perceived value. This is the main component in paying $2 for a bottle of Perrier, whose intrinsic value you can get from any public faucet for free.
In many ways, organics represent an incredible branding opportunity. But notice my comment above about “distinguishing quality.” For any organic brand that achieves megabrand status (some are already on their way), the “distinguishing feature” will be harder and harder to maintain. Questions about the organic “religion” are bound to creep in. The Center for Science in the Public Interest will not be your friend once you have mainstream success.
I agree with Mark Lilien, and will add that as more of the smaller organic manufacturers are bought up by the big guns in the food industry, shoppers will be more likely to be distrustful. There’s this image of the small organic grower who is passionately into the product and who would never cheat that is at least partly well-earned. And there’s the image of the big manufacturer out to grow volume at the expense of truth, which is also at least partly well-earned. As prices go up (and I agree they will eventually come down after supply/demand issues get better resolved) and shoppers see more of the “big names” on the labels, they are going to complain about profiteering. According to a recent survey we did, shoppers already think that retailers and manufacturers are making extra money on “healthy” foods. Unquestionably, there has been some taking of rather long margins by both sides.
Certainly it is already changing from a mom and pop industry to one where both existing companies are bringing in professional managers and larger companies are entering the market with a lot of resources. This was clear at the joint FMI – All Things Organic show in May. There were a lot more suits in the booths on the All Things Organic floor and a lot more organic offerings by the big branded manufacturers on the FMI floor. I expect a slew of acquisitions of organic lines over the next 12 to 18 months, some by big CPG companies and others by the equity/venture capital groups trying to make a play of it. This commercialization of the market can help and harm retailers. It will help by improving the rather dated supply chains now deployed at many organic foods companies. It may harm retailers by decreasing the potential for organics as a point of difference versus Wal-Mart and others.
For some products in the short run, the impediment may be supply or price, but over time, as the demand is seen to be huge and rising, there will be a greater supply and the prices will come down.
In the longer run, the threat to this industry is that there is no dominant, agreed-upon standard and method of affirming through inspection, that something is “organic.” And there will be mistrust, as well as fraud and scandal, as a result, which will undermine the industry.
Since the government is unlikely to take strong action in this area, it is up to the industry CEOs to show true leadership. What’s needed is a “UL” for the food industry.
George, you can’t sell “similar” products. Either something is organic or it isn’t. This, of course, is one of the problems and the open door at which big manufacturers are pushing. Definitions and standards that were simple, clearcut, internationally accepted and independently monitored (well established procedure) are being tweaked to enable growth (of businesses, not just raw ingredients). I’ve read of more than one dairy, for example, where the herd is now so large that it takes all day to milk them and they never get outdoors. But they are fed on organic whatever therefore they can be considered to be organic.
Big companies are using size not only to market brands in an attempt to build trust but also to market alleged advantages of scale. To truly dedicated organic fans, scale is the last thing they want. Which includes factory produced convenience foods and snacks, just for another example. They may be made from organically produced (another euphemism) raw ingredients but they may also contain high levels of fat, salt, sugar or whatever just like non-organic varieties. The omission of artificial additives and preservatives, and the lack of pesticides in the original farming criteria may go some way to satisfying requirements but simply meeting the minimum standards for getting an organic label on a packaged food is not necessarily good enough. Nor is having to fly stuff thousands of miles around the world because there are insufficient local supplies.
These are just a few of the ways the industry has, and will continue, to change. I will not go on here and now but warn you that I could. Unfortunately, it’s yet another incidence of practice perverting principles.
Sales_pro, you are correct, sir. But given that we’re all going to die, I’d rather eat tomatoes that taste like tomatoes in the interim. Or chicken that tastes like chicken. Your mileage may vary.
(P.S. Price differential between organic and non-organic is in the 20-30 percent range, not double. Bad but not hideous.)
I’d like to see some scientific evidence that those who eat organic live longer. Remember, life itself has been proven to be fatal. Now when we are talking scientific proof, we have to include a lot of facets. But other epidemiological studies of “healthy” populations have been conducted, so there should be some models. BTW, does the Framingham Study have a means of distinguishing organic eaters from us regular folk? If so, this would be a great place to start.
And as to organic tasting better, I say, maybe. It reminds me of a taste test survey we conducted many years ago in which the “natural” product received high marks, overall, although on every individual attribute it was downrated. It seemed pretty clear that the obvious “natural” nature of the product was creating an image that the mind was registering but that the palate couldn’t detect… Another case of the “organic” religion.