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Heating Up the Marketplace with Organics

by Christopher Kolon

There has never been more consumer interest in organic food than now, say industry manufacturers, retailers and analysts. The $3.5 billion dollar organic food industry has grown by over 20 percent each year since 1990, and now accounts for 1 percent of the U.S. food supply. By the year 2000, analysts expect that to reach 10 percent, said Holly Givens of the Organic Trade Association, a membership&endash;based business association representing the organic industry in the United States.

While fiery food manufacturers compete for shelf space in supermarkets and natural food stores, some mainstream manufacturers are jumping on the organic bandwagon with organic&endash;labeled salsas, creating a market niche for themselves. The New Organics Company, producer of a line of organic packaged foods including pastas, salad dressings, cereals, chips and mustards, has developed two organic salsas that are available in over 2000 supermarkets across the country, said Jack Moffatt, CEO. In fact, their line of organic products is marketed only in mainstream supermarkets.

Fiery foods manufacturers collectively spend millions of dollars on product development and marketing with little consideration of this important market segment. But the truth is, no sector of the food service and manufacturing industry can now afford to overlook the potential. "A dedication to organics is no longer an indulgence for many operators. It's a sound business move," said W.W. Naylor, chairman, The National Restaurant Association.

What is Organic?

Organic, certified organic, and natural are terms that may imply a similar theme, but they have distinct and separate meanings which result in specific processes and legalities in terms of manufacturing and marketing your products.

Organic refers to the way agricultural products are grown and processed. According to the National Organic Standards Board, part of the USDA, "Organic agriculture is an ecological production management system that promotes and enhances biodiversity, biological cycles and soil biological activity. It is based on minimal use of off&endash;farm inputs and on management practices that restore, maintain and enhance ecological harmony."

Up until now, organic standards have been defined, maintained and regulated by state and private agencies. The USDA has now proposed national organic regulations which, when implemented, will require all agricultural products labeled "organic" to be in compliance with U.S. organic law. There will be a required seal or statement on each product verifying that it has been grown and processed in accordance with the law and that a USDA approved certifier has verified that the product meets or exceeds the defined standards of organic.

What this means is that organic farmers are restricted from the use of synthetic insecticides, herbicides, fungicides and fertilizers for a minimum of three years before crop harvest. In May, the USDA announced that new organic regulations will also prohibit the use of municipal sewage sludge or genetically altered organisms, as well as irradiation of products. Farmers must keep records and be able to document material usage and farming practices. Botanical and non&endash;persistent pesticides are permitted with restrictions as a last resort when growers are threatened with crop failure.

Even though no synthetic or artificial ingredients may be used in the manufacture or packaging of final products, it is important to point out that a product may be labeled "organic" if the majority, but not all, of its ingredients are organic.

The label "certified organic" requires that you take an extra step and have a public or private organization (a "third party") verify that your product has met or exceeded defined standards. Jo Smillie, vice president with Quality Assurance International in San Diego, California, said state agencies that regulate or certify organic growers usually fall in the state agriculture department, but sometimes can be part of the commerce department of a state government. Not all states have organic laws and those that do, do not necessarily regulate them. "There are three types (of states) in regard to organics," she said. "Those that have laws, those who enforce laws, and those that run certification programs (such as Texas and Washington). A state like California does not have a certification program, but does enforce organic law."

For a hot sauce to legally be labeled "certified organic" every ingredient must originate from certified organic producers (third party verified) and must be stored and processed by a packager who is also third party certified.

"The word 'natural' on a label really doesn't mean anything," said Lisa Bell of Fresh Ideas, a Colorado&endash;based public relations firm for the organic foods industry. Produce grown with synthetic fertilizers or processed with artificial ingredients, for instance, may be included in a product labeled "natural." The consumer may assume that no synthetic ingredients are contained in products labeled natural (and that usually is the case), but there isn't a legal definition. Many consumers are aware of this, said Bell.

Don McLemore, director of standards for New Hope Natural Media, producers of the Natural Products Expo West and East, the largest natural products trade shows in the United States, said that to be included in their shows or advertise in their publications, manufacturers may have to provide written substantiation of their claims, whether organic, certified organic or natural. McLemore may ask to see copies of certification papers and may judge a product to be "natural" on a case&endash;to&endash;case basis, based on company criteria. "I would not expect a natural product to contain synthetic or artificial ingredients," he said.

The Organic Marketplace

"The 'green' consumer is now mainstream," said Harvey Hartman, of Hartman & New Hope, a marketing research and strategic consultant to the natural products industry. "There is a fundamental, cultural change in U.S. lifestyles that extends across the population, from Democrats to Republicans. This change is driven by a concern with nutrition, exercise, ecology, community and spirituality. Part and parcel, organics represents that type of lifestyle," he said.

In The Evolving Organic Marketplace, a report compiled in 1997 by Hartman & New Hope (based on interviews with industry leaders, secondary research of trade and consumer publications, a review of previous nationwide consumer surveys on the topic of food and the environment conducted by The Hartman Group, and the Hartman & New Hope Organic Survey involving 1,000 consumer participants) the authors conclude that the desire for organic products&endash;&endash;currently shared by approximately 46 percent of Americans&endash;&endash;will continue to grow, opening "a vast organic market several times larger than the current 1&endash;1 1/2 share."

The authors have identified fifteen key trends that they say will revolutionize the organic products industry. Among them are: evolving cultural values emphasizing health, nature, community, and spirituality; demographic changes involving aging baby boomers with more children; growing awareness about health, the environment, and even organic issues; reduced price premiums due to better production methods and economies of scale; better quality products; conventional retailing; conventional production and distribution; and expanded retail availability.

They also conclude that the organic marketplace is exploding with growth at a time when the competitive structure of the industry is in flux. "Competition has diversified and intensified, but for the moment the most powerful potential competitors&endash;&endash;the mainstream food companies&endash;&endash;are holding back. A historic window presents itself in which companies today can proactively create their future."

In other words, entrepreneur&endash;led companies have an opportunity to grab the lion's share of the organic market while the national concerns are sitting on the fence.

Mainstreaming Organics

The New Organics Company is one of the country's leading producers of organic packaged foods and the only one who has marketed its products exclusively in mainstream grocery stores. The company, started in 1997, has been shipping product for just over a year. Even so, the line can already be found in over 2000 supermarkets, including Albertson's, Safeway and Vaughn's.

Jack Moffatt, president and CEO, attributes the company's phenomenal growth to the fact that there is a significant group of consumers who are waiting for high&endash;quality, affordable organic packaged foods that are conveniently marketed in mainstream grocery stores. The large grocery chains are beginning to recognize this as well, he said.

"The chains have seen the discount pet stores come in and take a significant part of their business. They are beginning to see the natural foods segment, with its double-digit growth, do the same," he said.

The New Organics line includes pasta sauces, jams, salad dressings, tortilla chips and salsas, among thirty other products. "We went in and priced our products the same as the premium brands and made sure they tasted at least as good as the national brands," he said. Although many organic food manufacturers can get a premium of 20&endash;100 percent and more over conventional brands, Moffatt carefully managed pricing to be competitive. "The cost of raw materials is not outlandish. In a two-dollar jar of salsa you may have eighty cents worth of raw ingredients," he said. New Organics markets each of its products as organic, and even though none are certified organic, the great majority of ingredients in every product do come from certified growers, Moffatt said.

The prominent organic labeling enables his products to stand out from other "me too" products in a saturated category such as salsas, Moffatt said. "We wanted products that would move, that weren't "me too" products&endash;&endash;hey, buy me too! These products go in and out of the dancing door without any real reason for being. Organic gives our products a reason for being (on the shelf)," he said.

Organics: A Fiery Foods Case Study

Although some hot sauce manufacturers might include organic ingredients in their products, there is only one manufacturer, Bahama Specialty Foods, makers of the Not Cool line of hot sauces, that markets a 100 percent certified organic hot sauce--and interest has been phenomenal. "I didn't think in my wildest dreams that (within days of being contacted) the president of Lowes Supermarkets (in North Carolina) would ask her distributors to carry our product," said co&endash;owner Jeff Ensminger, who, along with partner Brandt Maehr, founded their company in November 1997. Their line of 100 percent certified organic Not Cool Hot Sauces is now available in natural foods stores, specialty shops and supermarkets across the South, West, and in British Columbia.

"We took a totally personal approach to developing our product," Ensminger said. "We were committed to making a 100 percent certified organic hot sauce. I wasn't going to make a sauce unless I could find every ingredient I needed certified organic. It wasn't until the R & D phase that we discovered no one else was making certified organic hot sauces. We were very excited and began using it as a marketing tool."

Sourcing organic ingredients, however, was problematic and time consuming. He required his growers to be certified organic, with the documentation to prove it. Ensminger contacted the Organic Trade Association, state agencies across the country, and local growers. He met his habanero supplier at the National Fiery Foods Show®.

Once he had lined up his raw ingredients, he needed to find a packer who was willing to be third party certified. "That means no solvents or anything like that in the facility," he said. He found a packer in Louisville, Kentucky who now packages his product, and he is also negotiating with another packer in Santa Cruz, California.

Initially, Ensminger contacted primary distributors to carry his products, and he met the expected resistance in the guise of restrictive terms, payouts and the like. Then he decided to e&endash;mail Lowes and Ukrops supermarkets. "They responded immediately: 'We want them in our stores!'" he said. After that, the distributors were much more receptive.

Ensminger's approach to pricing was also a personal one. "The first inclination is to see what others are charging (for the same product) and price accordingly. Our interest is in fostering organics as a whole. (To do that) we charged a fair market price&endash;&endash;$3.59&endash;$3.99/unit&endash;&endash;to be in line with our competitors. The organic ingredients are costing about 20&endash;25 percent more (than conventional ones) but we are getting the price (we need)," he said. He said he makes 20&endash;25 percent profit in natural food stores such as Whole Foods, and 5&endash;8 percent profit in grocery stores such as Smiths. Although sales are brisk and expansion is in line with projections, one segment of the market is slower than expected: the specialty shop. "We're not doing what we'd like to in the hot shops," Ensminger said.

Christopher Kolon is a chef, cooking teacher, and freelance food journalist living in Santa Fe.

Who's Buying Organic

Consumer interest in organics is broad and complex, as confirmed by the following statistics found in The Evolving Organic Marketplace:

--60% of Americans are "organic interested."

--40% are "organic uninterested."

--46% actively seek out and purchase organic products.

--13% of organic interested consumers purchased from three or more organic product categories in the last year; 25% purchased from two or more; 58% purchased from one or more.

--77% of respondents can identify at least one defining characteristic of organic products.

--70% expressed the belief that organic products are substantially better for personal health.

--78% expressed the belief that organic products are substantially better for the environment. --80% of consumers interested in organic products would prefer to buy them in mainstream grocery stores.

--Of the 32% of consumers most interested in organic products:

Growing Organic Sales

--According to the National Restaurant Association:

*About 57 percent of upscale American restaurants (those with entrees for $25 or more) offer organic items on their menus.

*About one-third of medium-priced restaurants offer organic items on their menus.

--Whole Foods Market of Austin, Texas, the number one national organic grocery chain in the country, with 85 stores in 19 states, estimates 1998 sales will be $1.4 billion. Its projected growth rate of 30 percent is nearly twice that of the supermarket industry in general. In terms of actual sales, however, supermarkets are still way ahead--Kroger, the nation's largest grocer, has $25 billion in annual sales.

--Wild Oats Markets, Inc., the second-largest natural foods supermarket chain in North America, reported that sales for the first quarter of 1998 were $91.6 million, a 31% increase over sales for the same period in 1997. Net income for the first quarter of 1998 increased 74% to $2.7 million, from $1.6 million in the same period in 1997. The company currently owns and operates 54 stores in 13 states and British Columbia, with 12 new sites and 6 relocations scheduled to open throughout 1998 and 1999.

Source: U.S. News & World Report, 5/18/98.

 

RESOURCE GUIDE

Bahama Specialty Foods
P.O. Box 26
Bahama, SC 27503
(919) 471&endash;4051

Fresh Ideas
Boulder, CO
(303) 247&endash;1100

Hartman & New Hope
10422 SE 14th Street
Bellevue, WA 98004
(425) 452&endash;0818

New Hope Natural Media
1301 Spruce Street
Boulder, CO 80302
(303) 939&endash;8440

New Mexico Organics Commodities Commission
(505) 266-9849

The New Organics Company
500 Airport Blvd., Ste. 130
Burlingame, CA 94010
(650) 696&endash;7360

Organic Trade Association
P.O. Box 1078
Greenfield, MA 01302
(413) 774&endash;7511

Quality Assurance International
12526 High Bluff Drive, Suite 300
San Diego, CA 92130
(802) 434-5535

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