Organic Foods: a Growth Industry
Jean Frank’s refrigerator is an unlikely beachhead for a revolution. But she and thousands like her are fomenting a rebellion in the grocery business and, as a result, in the way farmers grow America’s food.
Two years ago, while pregnant with her son and preoccupied with health, Frank quit going to places like Ralphs, Lucky and Vons in favor of Whole Foods Market and Wild Oats--two fast-growing chains specializing in organic and natural foods.
Frank and her compatriots have turned organics into the hottest corner of retailing.
No longer does the “O-word” signify sorry-looking fruit or bulk beans in a dingy health food co-op serving counterculture souls. Aficionados now can pair organic cabernet sauvignon with fancy organic cheese and crackers.
Breathe the word “organic” today, and venture capitalists and big food processors salivate over the 20%-plus sales growth that the $3-billion industry has enjoyed annually since 1990. Meanwhile, mass-market chains’ growth has wallowed at 3% or less.
In the last 18 months, 10 natural products companies, many of them organic food makers, have sold stock to the public, raising nearly $640 million. More offerings loom.
Merger and acquisition fever rages as companies and distributors consolidate to gain clout. Prime examples: A year ago, investor Roy E. Disney bought organic frozen vegetable pioneer Cascadian Farm. And catsup and pickle giant H.J. Heinz Co. snapped up Earth’s Best, a booming organic baby food company.
Consumers are benefiting as bigness helps shave the lofty premiums paid for organic food, and availability and selection improve.
Rampant growth has moved this emerging industry “off the natural foods screen and onto the global agribusiness screen,” said Bob Scowcroft, executive director of the Organic Farming Research Foundation in Santa Cruz, a pro-organics group.
That worries many activists. They fear that the dreaded profit motive will steer bigger companies away from the good-for-the-Earth philosophy that initially guided the organic movement and toward a bottom-line model where--heaven forbid--it is only a matter of time before the organic Twinkie.
“They’re going to ‘sanitize’ it in some sense,” said Ann Gentry, owner of Real Food Daily, an organic vegetarian restaurant in Santa Monica. “They’ll take the nature out of it, the intuitive, seasonal flow, the creativity of farming.”
Other health food veterans have mellowed out.
“I can only be glad for the fad,” said Aurofree B. Walker of Venice, who was shopping for organic chocolate chips and produce at the Whole Foods store in West Los Angeles with her 2 1/2-year-old son, Jericho Apollo. “As far as I’m concerned, whatever it takes to bring organic farming into the mainstream is fine.”
First U.S. Standards to Be Proposed
In an effort to bring some order to the process, the U.S. Department of Agriculture is about to formally propose the first federal standards governing the organic industry. In the works for seven years, the regulations--certain to spark controversy--would define what may or may not be labeled organic and would overlay a hodgepodge of often contradictory state rules and certification procedures.
After so many years, why has organic suddenly gone from a movement to a mega-trend?
Peter Roy, president of Whole Foods, based in Austin, Texas, ticks off a handful of reasons. The population is aging, and people want to lead healthier lives. They are taking nutritional supplements and treating themselves with homeopathic remedies. Home gourmets and restaurant chefs are demanding better taste and quality, turning to farmers markets and individual growers. Concerns about food safety and pesticides are rising, particularly among parents.
Together, these trends are building a huge appetite for organic foods--those grown without the use of synthetic chemicals--and natural foods, those with no artificial flavorings, preservatives or colorings.
Fast approaching $1 billion in annual sales, Whole Foods has focused its expansion drive in the last three years on buying successful independents in major markets with dense populations of well-educated customers. It gained a foothold in the Southland with the 1993 purchase of all seven Mrs. Gooch’s outlets, then the best-known Southern California purveyor of natural foods. Whole Foods now has 76 stores nationwide, with a goal of 100 by 2000.
The transition was not smooth. When the Whole Foods name supplanted Mrs. Gooch’s in 1996, many customers got turned off. Unlike purist Sandy Gooch, Whole Foods was offering beer, wine, coffee and national brands of ice creams and other snacks containing such unmentionables as white flour and refined sugar.
“When it was Mrs. Gooch’s, I could rest assured,” said Martha Oaklander of Los Angeles. “Now that it’s Whole Foods, I’ve gone back to reading labels.”
Finding the real stuff often requires patience. Depending on the season, 40% to 80% of the produce at Whole Foods and rival Wild Oats--a 51-store chain based in Boulder, Colo.--is organic. Some customers are disappointed in the selection. But both stores are building relationships with growers, and sometimes that means supporting their harvests through a multiyear transition from conventional to organic farming.
Shopper Jean Frank of Ladera Heights says that even the conventionally grown produce at the natural foods chains is an improvement over what she used to find.
“I was throwing out a lot of produce from the mainstream stores,” she said. “Now I don’t.”
Price remains a barrier when compared to non-organic foods, and the retailing of natural foods is largely an upscale phenomenon. Organic dairy products, for example, can run two to three times the cost of conventional items. But the gap is narrowing as volume grows. Some organic items, at certain times of the year, are priced below mainstream varieties.
Frank said she does not notice a premium. She watches for specials and finds many items cost less than their traditional counterparts; organic romaine lettuce one recent day was priced about the same as conventionally grown lettuce in supermarket ads.
Traditional grocery chains are scrambling to get a piece of the organic pie. The California Farm Bureau Federation estimates that half of major U.S. grocery stores carry organic products, and producers say that number is certain to grow.
Four veterans of food retailing and manufacturing this year founded the New Organics Co., with the aim of producing the nation’s first line of competitively priced organic products strictly for major supermarkets.
With offices in Burlingame, Calif., and Boston, the company recently began shipping pasta and sauces, salsas, chips, pretzels and other products to Hughes, Albertsons, Vons and others. It targets a competing national brand--Pace salsas, say--and urges grocers to charge about the same price.
Although short supplies of ingredients have bedeviled many an organic food producer, New Organics Chief Executive Jack Moffatt says the company has managed to find sources while keeping a lid on the premiums it must pay.
“We’re staying away from situations where the organic raw materials are really expensive,” said Moffatt, a past CEO of Canadian grocery giant A&P.;
For its pastas, New Organics turned to Italy, contracting with organic wheat growers and manufacturers there. That goes against the grain for many organic old-timers, who say food should be locally grown and consumed. But New Organics’ market is mainstream customers for whom that presumably won’t be such an issue.
Despite the rapid expansion, there is plenty of room for growth: Organic foods account for less than 1% of the $400-billion-a-year food business.
Firm’s Success Draws Other Farmers’ Notice
For organic companies trying to invade mainstream retailing, greater size often makes the difference. With 4,000 acres of certified-organic table grapes, Pavich Family Farms in Terra Bella in Kern County is one of the world’s largest organic operations. In the 1980s, many big chains turned the Paviches down flat when they attempted to market their organic grapes, prunes and raisins. Now, brightly colored Pavich packages are ubiquitous in conventional markets such as Ralphs and Vons, as well as natural food stores.
“Our size became our advantage,” said Tom Pavich, one of the operation’s second-generation managers.
Location is another matter. As organic farmers--who use compost to fertilize and who fight predatory insects with cover crops and beneficial insects--the Paviches are the minuscule exception in Kern County. They operate under the constant threat that neighbors’ drifting chemical sprays could jeopardize the organic certification on their vineyards and citrus groves.
Occasionally, the Paviches have called on California Certified Organic Farmers, the Santa Cruz-based nonprofit organization that certifies their operation and more than 650 other organic producers in the state, to verify that their vineyards are free of residue.
The Paviches’ wild success--last year they shipped more than 2.5 million packages of organic table grapes and other fruits and vegetables, up from 600,000 in 1983--is making other farmers take notice. And, Pavich says, the use of compost and cover crops is increasing in the county.
Elsewhere, as the industry picks up steam, companies are joining forces and eager investors are buying in. “There continues to be more [investment] money than places to put it,” said Michael Burbank, an analyst at Montgomery Securities in San Francisco who follows the industry.
Two years ago, Chicago investor William R. Voss formed a firm, recently renamed Natural Nutrition Group, to buy stakes in natural products companies. It now owns Health Valley Co. of Irwindale, the nation’s largest organic and natural brand, and Breadshop Natural Foods of Santa Cruz.
Housed in a massive facility off the Foothill Freeway, Health Valley produces breakfast cereals and granola, cookies, crackers, soups and other products. It is the nation’s biggest purchaser of organic ingredients, supporting more than 100 farmers in California, the Northwest and the Midwest.
Although Health Valley sales had been dropping before the acquisition, since then the company has achieved “substantial double-digit growth,” Voss said. Sales by Breadshop, which makes crunchy granola, muesli and other cereals, also are surging.
As industry players grow, the stepped-up competition for the limited quantities of high-quality organic ingredients worries Voss.
“We think all the time about future supply,” he said. “But I worry more about the human capital to do it.”
The “human capital” was part of the bargain last year when Shamrock Capital Advisors, the Burbank investment firm of Roy Disney and Stanley Gold, bought industry pioneer Cascadian Farm to complement its ownership of Fantastic Foods, a maker of instant soups and other natural convenience foods. Cascadian Farm founder Gene Kahn stayed on as CEO.
Kahn is an industry guru, having turned to organic farming in Washington state in 1972. Initially, he grew “ugly carrots and oversized zucchinis,” then expanded into jams and pickles. Now the company, in the western Washington town of Sedro-Woolley, also makes frozen juices, desserts, fruits and vegetables. Welch’s, the jelly and juice company, bought Cascadian in 1990 and last year sold all but a minority stake to Shamrock.
Bill Benford, managing director at Shamrock Capital Advisors, said the company hopes over time to build a national brand under the name Small Planet Foods. It aspires to sales of $250 million a year, up from $65 million or so.
With Shamrock providing funds for growth, Kahn said, Cascadian has become “a unique blend of life-stylers and MBAs.” The chief operating officer is a former brand manager for General Mills’ Chex cereals. When Cascadian held a 25th anniversary party in July, the guests included farmers who arrived in Lear jets and hippies who used to weed carrots alongside Kahn.
“You had a transition from a movement to a business,” Kahn said. “You have to play by the rules of the food business. It doesn’t mean we’ll lose the meaning of organic. Rather, it’s the chance to have a much greater presence.”
Indeed, big traditional companies are said to be queuing up to hop aboard the organic bandwagon once federal rules become official. Gerber already has launched an organic baby food line to compete with Heinz’s Earth’s Best. And cereal makers Kellogg and General Mills and agribusiness giant ConAgra are said to be gearing up to go organic--in a niche way.
Genetic Engineering a Contentious Issue
Meanwhile, the Department of Agriculture is plugging away at its longtime effort to establish national “field-to-fork” standards for the industry. Anticipating controversy, the agency early on involved industry representatives as part of a 15-member National Organic Standards Board. Many board members had hoped that the draft rules would have been published by now.
Many industry veterans are counting on the pending federal standards to improve things.
The voluminous proposals, mandated by the 1990 Farm Bill, would for the first time officially define organic, allow for a USDA organic seal, and set up a system to verify compliance. They are expected to undergo extensive public scrutiny and go into effect late next year at the earliest.
One of the most complex and contentious issues is whether to allow genetic engineering in organic foods. Many organic veterans worry that the government will open the door to combining genes from different species, a process that is anathema to the movement’s philosophy.
Controversies over the rules aside, the industry is eager for an official stamp to ensure integrity as it grows to a projected $10 billion in the next decade.
“They will standardize the basic principles,” said Katherine DiMatteo, executive director of the Organic Trade Assn. in Greenfield, Mass. “That’s going to help us a lot. In the marketplace, organic will be identifiable.”
