Climbing On the Organic Gravy Train


By Thane Peterson These days, organic foods are the fastest-selling food category not just in the U.S. and Canada but in Japan and much of Western Europe. The reasons: mad cow disease, concerns about genetically engineered food, and general public angst over the quality of the food we eat.

Now, the big trend in North America is that organic foods, which until recently consisted mainly of regional niche brands with a sort of counterculture flavor to them, are going mainstream. And, consumer food fears aside, the big reason is that the first U.S. standards for organic foods -- enforced by U.S. Agriculture Dept. -- will officially come into effect in 2002. That will assure consumers for the first time that uniform national standards are observed by the purveyors of organic foods.

Some food-industry experts figure that organics will account for all the growth in the North American food market for at least the next five years. Its share of the market -- now less than 2% -- could quadruple by the end of the decade.

Sensing a major business opportunity, big food companies such as General Mills are buying up organic brands with an eye toward dramatically expanding their franchise. To get a bead on the trend, I checked in with Mark Rodriguez, 48, a former hotshot at Dannon who is now CEO of Acirca, a privately held New Rochelle (N.Y.) company that acquired the venerable Walnut Acres organic foods brand. Acirca has the backing of former America Online honcho David Cole and North Castle Partners, a Greenwich (Conn.) private equity firm that specializes in investing in health-oriented companies.

Rodriguez, who built Dannon's North American bottled water and specialty food sales from $60 million into an $800 million business by the time he left in April, 2000, has shut down Walnut Acres' original hodgepodge of organic brands and is focusing on building a national franchise in a few market segments. So far, Acirca has introduced Walnut Acres organic salsas and soups, which are pretty widely available in stores such as Kroger, Whole Foods, and Jewel-Osco. The company is buying up smaller organic brands, such as pasta sauces, and plans to add additional product segments in coming months. Here are edited excerpts of my recent talk with Rodriguez:

Q: Why would you leave a job with a successful company like Dannon to go into organic foods, which is pretty much a backwater of the food business?

A: I think there's going to be a high correlation between [the fast growth] of the bottled-water business in this country between 1990 and 2001 and how the organic foods industry will develop. What drove high sales of bottled water was consumers' desire [to eat and drink] less alcohol, sugar, and caffeine -- wanting to do something positive that would lead to better health. That took the bottled-water industry from about $800 million [in annual sales] to about $5 billion when I left Dannon last year.... When you talk to current consumers of organic foods, you find that 90% of them cannot even recall a brand. So, there is a huge branding opportunity.

Q: You commissioned the Roper Starch organization to do a consumer survey on organic foods. What stands out to you about the results of the survey?

A: Three-quarters of Americans are concerned about the quality of the food supply. Sixty-six percent of Americans say organic products are not a fad and will become a larger part of their purchasing decisions in the years ahead. We think those are very strong foundational elements for this industry to explode in coming years. But the watershed event will be the adoption of the National Organic Program by the USDA and the application of the USDA seal on packaged organic products in October, 2002. We believe that single move will really accelerate the growth of this entire industry.

Q: What is it about the national standards that are going to give consumers confidence? After all, it was the product of years of lobbying and compromise. Why isn't it just going to be like a lot of other government standards -- full of loopholes?

A: [Organic foods previously] was a cottage industry with brands distributed regionally rather than nationally, so you had wide variances in the quality specifications. Today, you have national standards that we think are stringent and achievable. [Organic food companies] have to be able to show that 95% of their product -- after removal of water and salt -- is certified organic in the growing and manufacturing process. You also have to show segregation of the product all the way through the supply chain.

Q: But if I buy organic soup instead of Progresso or Campbell's or whatever, what is it I'm going to get that I'm going to like better?

A: You're going to get a product that is certified to not contain synthetic pesticides, hormones, and genetically modified ingredients all the way along the supply chain.... All this is certified by an independent third party [the USDA]. So you're not just depending on the manufacturer. You have a third party performing audits in supply chain, in the factory, in the warehouse to ensure that the rules are being followed.

Q: By, say, 2010, what percentage of packaged food sales do you think will be organic?

A: The North American organic [food and beverage] business is about $8 billion this year. We believe that by 2005 it will be about a $20 billion industry. You can run the math and [come to the conclusion that the] $12 billion in additional [sales] represents all the growth in the North American food business over that period. That would be [around] 3% or 4% of the total food business.... Our guess is that by 2010, somewhere around 8% of the North American packaged-food business will be organic.

Q: Will the same thing happen in restaurants?

A: That's harder to quantify, but today you do see more and more chefs incorporating more and more fresh organic ingredients into their meal plans. Even in a place like TGI Fridays, they're selling about 1 million natural beef hamburger patties per month.

Q: If there is going to be this huge growth, where is all the needed organic food going to come from?

A: There are farms converting [to organic growing methods] every day to satisfy the growing demand.

Q: But isn't organic farming inherently less productive? When I was growing up out in farm country, we were always taught that herbicides and pesticides and modern farming techniques were making North America the breadbasket of the world.

A: We can reference studies, and the answer from our perspective is clearly no. It's not less productive.

Q: Still, lot of people believe organic foods are more expensive than conventional foods. Are prices actually higher? And what's going to happen to prices over time?

A: On a per-ounce basis, prices are higher today than they are for conventional goods. That would be a function of [organic goods having] a less efficient supply chain all the way through. [But] you will see the gap between organic and conventional food consistently narrow in the years ahead. Peterson is a contributing editor at BusinessWeek Online. Follow his weekly Moveable Feast column, only on BW Online


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