Organic Market Primed for Growth

Last year, Information Resources Inc. (IRI; Chicago) revealed a significant trend in its annual New Product Pacesetters report. The market research company found that many of the most successful new brands of 2007 included those with a health and wellness bent. In fact, consumer demand for health and wellness consumer packaged goods (CPG) is dramatically increasing. Now more than ever, consumers are looking for products that can help them gain and maintain optimal health. And with that trend, the demand for a particular type of CPG eco-brand-organic-is also rising.

The organic market is a rapidly growing sector in the food, nutraceutical, and beauty industries. According to the Organic Trade Association (OTA; Greenfield, MA), 3% of all food and beverage purchases in 2006 were for organic products. Industry analysts expect that number to grow as high as 5% in the near future.

And the big CPG players are taking notice. In the past few months, big companies like Nestlé (Vevey, Switzerland), Safeway (Pleasanton, CA), and even Wal-Mart (Bentonville, AR) have announced plans to introduce or expand their organic offerings.

Organic, a Definition

But in a world where consumers are constantly bombarded with health-related marketing messages, just what does the term organic signify?

"First and foremost, organic is a certified product that guarantees the process in which it was made or produced, from the kind of feed used, to how it is delivered to the supermarket," says Rick Carmont, world category manager of organics for Fonterra (Auckland, New Zealand). "It is not a nutritional claim. It is not a health claim. Strictly speaking, it is a process claim."

And it is a claim that is stringently regulated by the U.S. Department of Agriculture (USDA; Washington, DC). "Organic food is produced with the use of renewable resources and conservation of soil and water," says John Sweeney, technical manager for Cargill's (Minneapolis) beverage category. "Meat, poultry, eggs, and dairy products come from animals that are given no antibiotics or growth hormones. All other organic foods are produced without conventional pesticides, synthetic fertilizers, sewage sludge, bioengineering, or ionizing radiation."

USDA currently certifies three levels of organic: 100% organic, organic, and made with organic ingredients. Food manufacturers must use 100% organic ingredients and processes to qualify for the first category and 95% organic ingredients for the second (the other 5% of the ingredients must be on a USDA-approved list). To qualify for the third claim, a product must contain 70–95% organic ingredients.

But if organic is not a health claim, why all the fuss-especially when products that bear the USDA organic seal can cost up to 50% more than conventional products?

"Organic is important for a whole host of reasons," says Mitchell May, CEO of the Synergy Co. (Moab, UT), a manufacturer of certified-organic products. "If we, as a society, want to affect global warming and minimize it, organic farming can do it."

Organic farming is more environmentally friendly than conventional methods, producing less carbon and water pollution, and using fewer chemical compounds that can enter the food chain, May says.

"The organic process also has a profound effect on health," May adds. "Organic foods are free of carcinogens, known toxins, and pesticides. Given a choice between an apple that has been treated with chemicals versus one that has just been sun-ripened on the tree, to me the choice is pretty obvious."

In addition to environmental and health concerns, there is another reason to consider buying organic-the taste. "I've converted a lot of my friends to organic because you can taste the difference," says Barbara Apps, director of business development and marketing for Aloecorp Inc. (Austin, TX). "The flavor of an egg is going to depend on what the chicken eats. And when those chickens are organic or free range, and eat grasses and other natural things, you are going to taste the difference."

Barriers to Entry

With food prices on the rise, one consumer barrier to buying organic is the cost. USDA expects that food prices could increase by up to 5% this year, and with that jump, some investors fear that shoppers will look more at the price label than the organic label.

May believes that even at a 25% premium, however, shoppers will still remain loyal to organic products. "Organic costs more because it requires more manual input," he says. "You can't use chemicals to make the food grow faster or kill insects. You have to use beneficial insects to eat the other insects or use organic, naturally mined ingredients to help the soil. In the long run, when you take into account the benefits, organic is an incredibly good buy."

Can the use of organic ingredients ever be detrimental to a product? Apps says that strict regulation has taken its toll on some products in the beauty and personal-care sector.

"With a good skin-care product, you are going to have to add preservatives to make sure your customers are safe," she says. "But since organic products can't use those preservatives, many of them use alcohol, which dries the skin. Those kinds of products can give the organic industry a bad name."

Apps believes that more investment is needed from large CPG companies for research and development to find organic-certified preservative systems.

"They have the investment dollars to do the research required to create more-natural preservative systems and better natural flavors," she says. "And with that investment they have the ability to make the end organic products more affordable to a larger number of consumers."

But are those large companies willing to make that investment? Many are taking the plunge into the organic market. However, Jeff Hilton, president of the public relations firm Integrated Marketing Group (Salt Lake City), says that consumers still need to be educated about what organic really is.

"Most of the research suggests that less than half of consumers really understand what organic means," says Hilton. "That's cause for concern. But an even greater cause for concern is that most consumers don't understand the benefits of organic products."

In a market that is quick to label products pure and natural, it's easy to see how organic ingredients and products might get lost in the fray.

"You've got organic, sustainable, local, environmentally friendly, clean," says Hilton. "All of these eco-brands out there in the consumers' minds are all competing for awareness, and that can be confusing for consumers."

One way around these issues, Hilton suggests, is to grab the reins in promoting organic as a brand.

"We tend to talk about organic in terms of what it isn't," says Hilton. "We've all heard it isn't chemicals and it isn't pesticides. But we really need to push the 'better for you' messages, such as how organic is better for your health and has better food quality and taste. It's better for the environment and a better way to support our farmers."

That proactive messaging is necessary to really brand organic so that consumers understand it and are willing to pay to buy more organic products.

"OTA, in partnership with leading organic manufacturers, should take some responsibility for the branding," says Hilton. "The term natural has come to mean almost nothing. Consumers have no clue what it means. Organic is in danger of having the same thing happen to it over time."

What Happens Next

There is no question that the organic market will continue to grow. But how much bigger it will get is the subject of much debate.

"Organic is just in its infancy," says Hilton. "There is tremendous potential for it to grow." He argues that that's why branding is so critical. "We must pre­pare the brand for the long term, put legs under it, so to speak, so that as the mar­ket develops, it can sustain its growth."

And although some are concerned about mainstream retailers entering the market, others believe that it will give the market just the boost it needs.

"The number of consumers who buy organic remains small without those companies, and that has prevented the industry from growing the way it could," says Apps. "These companies can get the products into mass-market stores and make them available to a wider range of people. I see continued double-digit growth in the next five years."

Fonterra's Carmont is a bit more guarded. "Granted, my focus is more on dairy, but it's my view that organics would hit a bit of a glass ceiling of 5% of food and beverage sales around the world," he says.

However, Carmont still recommends that companies move into the organic market anyway. "It isn't necessarily a big change," he says. "You can buy most ingredients for your products with organic certification. And it's an exciting proposition for many of the larger food companies to see the kinds of opportunities that are now available."

May cautions that going organic requires a staunch commitment. "Many companies want to get involved because it's a growing market trend that is vastly outpacing any other segment of the food or dietary supplement industry," he says. "They want in on it financially, but they are not sure how to do it properly." Synergy works with its partners to help them achieve their own organic success, but May says it's not something that should or can be undertaken lightly.

"Organic takes commitment. It takes really good planning. And it takes a long-term vision," he says. "Those may sound philosophical, but they translate into day-to-day realities when you are thinking about organic ingredients."