Gary Hirshberg, chairman and co-founder of Stonyfield Farm, remembers the day in 1984 when his partner, Samuel Kaymen, got a call from a buyer with a 35-store chain of supermarkets. The buyer wondered why Stonyfield was selling to his competitor, a seven-store mini-chain, instead of him. Kaymen replied that he only had seven cows. The buyer then barked, “Well, get some more damn cows!”
The two men purchased another dozen cows, enough to supply the milk needed to make yogurt for the larger grocery chain—and today Stonyfield yogurt is carried in about 70 percent of U.S. supermarkets. Its revenues for last year were about $400 million, making it the fourth largest yogurt company in the United States and the largest organic yogurt company in the world. Stonyfield’s compounded annual growth rate has been 15 percent over the last 12 years—a rate consistent with many of the leading organic brands, Hirshberg says. Organic yogurt sales are growing at 21.1 percent annually, while non-organic yogurt sales are growing at less than half that rate (10.4 percent), according to IRI, a data research firm.
Stonyfield’s story is like that of many natural food manufacturers whose customers were once limited to Birkenstock-wearing hippies—and whose success can be tied to mainstream grocery stores’ increasing desire to provide healthier products that a rapidly rising number of consumers, including parents of young children, are now craving.
In fact, purchases of healthful products in conventional stores are up across the board. Sales of allergen-free foods totaled $128.6 million for the past year, up 22 percent from the previous year, while sales of gluten-free foods amounted to $19.5 billion, a 12.8-percent increase over the prior year, according to SPINS, an information provider for the natural and specialty products industry. Sales also rose 13 percent over the previous year for vegan products, for a total of $1.3 billion. And in the largest increase of all, non-GMO product sales rose 64 percent, from $6.4 billion to $10 billion, from 2011 to 2014, according to Nielsen.
Tom Compernolle, a principal in the retail consulting practice of Deloitte Consulting LLP, said 25 percent of those surveyed in the firm’s 2015 American Pantry Study indicated they’re willing to pay 10 percent more for healthy products. In surveys in the 1990s, consumers said they favored health but didn’t always demonstrate that in their purchase patterns. “But this time, it’s for real,” Compernolle says. “It’s not just a consumer impulse to answer that way. People are actually behaving differently.”
A Changing Industry
Organic food still makes up only 4.6 percent of the total food supply in the United States, but it’s now a $35.9 billion industry, up from $24.1 billion in 2010, and is projected to grow 11 percent in each of the next two years, according to the Organic Trade Association (OTA). A 2015 study conducted by the OTA and KIWI showed that 83 percent of parents said they purchased organic food grown or made in the United States, citing concerns about artificial colors and flavors, genetically modified organisms, and pesticides and fertilizers commonly used in conventional food as key reasons. “Organic food is no longer a niche product,” says Laura Batcha, OTA’s executive director and CEO. “The majority of households in the U.S. now include organic on their shopping lists.”
Not long ago, that shopping could be done only at natural food stores and organic giant Whole Foods Market. But that’s no longer the case. Last year, for the first time, more than 50 percent of the total organic food sold in the United States was purchased at conventional grocery stores. Costco, which has now overtaken Whole Foods as the leading organic seller, expects sales of organic foods to rise to $4 billion this year. Vegetarian fare is experiencing a similar uptick. According to a 2013 report by Mintel Market Research, conventional, natural, and specialty supermarket sales of meat alternatives reached $553 million in 2012, with 89 percent of those sales occurring at conventional supermarkets.
For the stores, it’s a matter of dollars and cents. “If you spend 85 cents at Safeway and then go to Whole Foods to spend the other 15 cents, Safeway views that as 15 cents leaking out,” says Hirshberg of Stonyfield. “It wants to offer you everything you want, and that has changed the whole game for mainstream stores.”
He speaks from experience: Stonyfield was one of the first organic companies to sell to Walmart 20 years ago, when organic offerings were still a novelty in mass-market stores. Hirshberg’s willingness to do so upset his activist friends, who were concerned that Walmart would use its size and scale to force Stonyfield to lower prices, which in turn would lead to reductions in its payments to farmers. “This, of course, never came to pass,” Hirshberg says. His reason for making a choice that was, at the time, so unpopular: He was attracted to the efficiency of Walmart’s distribution system, which made food less expensive. “Organic food was never intended to be food for the elite,” he says.
Steve Silva, vice president of marketing for Earthbound Farm, North America’s largest grower and shipper of organic produce, which is carried in numerous chains including Costco, said that economies of scale have helped drive down the cost of its fruits and vegetables, with the price of organic salads and greens now within 20 percent of conventional. “You have a huge number of customers who would buy organic given a small price sacrifice,” Silva said, pointing out that 59 percent of all packaged tender-leaf salads sold are organic. Compernolle of Deloitte says that if current growth trends continue, the price difference between organic and conventional foods could disappear. Catherine Greene, a senior agricultural economist at USDA, disagrees, however, saying organic price premiums are likely to continue because of the additional labor, management, and certification expenses.
Although the changes under way in conventional grocery stores are enthusiastically embraced by many, some argue that the shift is nevertheless overdue. Neal McTighe, founder of Nello’s—a line of organic tomato sauces carried by conventional grocers—says grocery stores have been late to adapt to the preferences of consumers and are doing so in a quest to remain relevant and profitable. “The heightened cultural awareness of where food comes from and why that matters has negatively affected sales of the leading national brands in conventional grocery stores, causing those very companies to begin to add new faces to their lineups and give makeovers to older ones.” Referring to stalwart grocery chains that have existed for decades, McTighe says, “I think many of them have been slow to reinvent themselves, regardless of the pressures from the natural foods movement, and have suffered as a result. Their stores look dated. Their merchandise isn’t creative, and energy is lacking in staff. The shift toward natural foods has set the bar. Either you stay in the past and likely wither away or you reinvent yourself and enjoy the fruits of that labor.”
The threat is real. The top 25 U.S. food and beverage companies have lost an equivalent of $18 billion in market share since 2009, according to a report by Credit Suisse analyst Robert Moskow. Scott Sanders, a former client insight manager for Acosta Sales & Marketing, the largest food broker in the U.S., said smaller companies skewing toward natural, organic, and specialty brands are picking up market share from the large, conventional companies. “Consumers are looking for, and buying, brands that offer greater authenticity and transparency in packaging and ingredients than some of the traditional players,” he says. Gina Papish, West regional manager with MMI Market Solutions, helps traditional retailers source natural and organic products. “We believe this trend toward healthier, clean ingredients will continue its growth and the traditional retailer will need to be a part of this to remain competitive,” she says.
Eric Pierce, director of business insights for New Hope Natural Media, which hosts two huge natural products expos each year, agrees that the move by big grocery chains and food manufacturers toward offering more healthful products is a business decision, one that’s driving huge growth in the natural food industry. The Nutrition Business Journal estimates that the natural and organic food and beverage space will show 75-percent growth between 2014 and 2019, reaching $107.7 billion. Pierce says he’s seeing some of the largest food organizations increasingly sending more of their brand managers and mergers and acquisitions teams to the expos. “They’re looking for inspiration as well as companies they can team up with or potentially acquire,” he says, adding, “We’ve seen more momentum in this space than people have seen in quite a long time.”
Under the Big-Food Umbrella
As Pierce indicates, the last few years have seen several large food manufacturers purchasing smaller organic companies and rolling out their product in mass volume. Some of these deals have triggered concern. “We are not in favor of organic brands being bought up by multinational corporations for whom organic is a niche market,” says Alexis Baden-Mayer, political director of the Organic Consumers Association. She says many of these companies fight initiatives for mandatory labeling that alert consumers to GMOs in their food and points to Coca-Cola, which bought Honest Tea in 2011, as a case in point. Her concern is that the organic company’s process and product could be compromised—or eventually discontinued—by a parent company more interested in the bottom line.
Arjan Stephens of Nature’s Path, an organic-food company based in Canada, has routinely turned down offers to sell. “Some larger companies may not believe in the values of organics but are in it because of the market opportunity,” he says. “If you don’t have that strong a foundation, the values can get diluted and the products you offer can be diluted.” He’s been able to grow his business substantially without selling it: It’s the largest certified organic breakfast cereal brand in North America, with annual revenues between $350 million and $400 million, and is carried in every Target and in more than 1,200 Walmarts.
Other organic companies have welcomed a corporate sale. Earthbound Farm, for example, was purchased by WhiteWave foods last year. “We’ve been growing at a breakneck pace, but we haven’t always had the resources to invest in building out the infrastructure to accommodate that growth,” Silva says. WhiteWave allowed for an infusion of resources to make that happen and had similar values, having already owned Horizon organic milk, he says. Hirshberg—who continued as CEO after selling Stonyfield to Dannon in 2001—said the large companies now realize that with organic products, integrity is key. “If the consumer feels anything has been compromised, you’ll lose that consumer,” he says. “The smart companies really do understand this.”
At Plum Organics, which makes organic baby food, CEO and co-founder Neil Grimmer decided to sell to Campbell’s Soup Company two years ago in order to achieve what he saw as a key objective: “We wanted to be on every high chair and in every lunch box in America to provide a healthier option,” he says. Plum was one of the fastest-growing organic brands in the country, and there was no shortage of interest from potential buyers: “I was getting calls from several major food companies,” he says. He ultimately decided to sell to Campbell’s after its CEO told him at a breakfast meeting that her grandchildren eat his line of baby food. “I immediately understood that with that kind of personal connection, her leadership would provide a different kind of steward for the brand,” he says.
Likewise, General Mills purchased Annie’s Homegrown in an effort to capitalize on the fast-growing organic segment. Steve Young, vice president of marketing with the General Mills U.S. Retail Organization, says that Annie’s continues to operate as a separate company under its previous president, a move designed to maintain the “great-tasting products that Annie’s consumers love and trust.” Since the purchase, Annie’s retail sales have seen double-digit growth and fueled expansion: The brand recently launched a line of organic soups as well as cookies. As Baden-Mayer points out, however, General Mills was one of several companies, including Campbell’s, that campaigned against state ballot initiatives in California, Washington, Oregon, and Colorado that would have required mandatory GMO labeling, both companies taking the position of preferring legislation that establishes federal standards for GMO labeling.
“Organic food was never intended to be food for the elite.”—Gary Hirshberg
Companies providing other types of healthful foods are also seeing success that’s prompting attention from big food companies. Enjoy Life Foods, which makes products that are free of gluten and the top eight allergens, has its brand in 35,000 stores throughout North America, including all the major supermarket chains. The growth coincides with a sharp increase in food allergies, said Joel Warady, chief sales and marketing officer. In February, Enjoy Life Foods was acquired by Mondelez International, one of the largest snack-food producers in the world. Warady says his goal is to ensure that allergy-friendly products are available everywhere, so teaming up with a large company, with its substantial distribution network and capital, was essential.
“We’re still managing the company and making sure the brand doesn’t change,” he says.
Driving Costs Down
Supermarkets’ need to ensure that the healthy products they carry generate a profit has fueled another growth area: private labels. Annual sales of the Simple Truth line at Kroger’s stores, for example, totaled $1.2 billion in fiscal 2014, two years after the brand’s launch. Walmart, which carries 1,600 organic items, launched a line of organic shelf-stable pantry products called Wild Oats in 2014; the products typically cost 25 percent less than their organic competitors. Target’s private label, Simply Balanced, launched in 2013 and now consists of 250 products, with 150 being added this year; approximately 50 percent of the line is certified organic.
At Stop & Shop stores, the Nature’s Promise label is made up of organic and “free from” products. Stop & Shop New England nutritionist Julie Hersey says meeting customer demands while keeping prices low is a major priority. The Nature’s Promise brand of gluten-free pasta runs $1.99 a box, for example, compared to $2.39 for Ronzoni and $3.39 for Tinkyada.
The original private-label store may be Trader Joe’s, which offers a huge number of products carrying its private label (and clever variations on it, such as Trader Giotto’s for Italian products and Trader José for Mexican items) and surrounds them with signs explaining why they’re good for you. All the company’s private-label products—some of which are actually repackaged versions of other brands’ products, sold at lower prices—contain no artificial flavors, no artificial preservatives, no synthetic colors, no GMOs, and no trans fats.
Whole Foods is intent on staying on top of the burgeoning competition, especially when it comes to price. In fact, it’s taking the private-label concept further, with its 365 label essentially becoming its own chain of stores. Called 365 by Whole Foods Market and launching next year, they will aim to deliver a “value-oriented” shopping experience for busy customers.
All of this—the increasing number of natural products, the widespread access, the lower prices—is good news for consumers, says Gunnar Lovelace, founder and CEO of Thrive Market, which sells healthy products online at discounted prices. “It’s part of a larger virtuous cycle,” he says. “We’re making healthy food more available to everybody.”
Organic Goes Digital
Another trend fueling the increase in sales of organic food: its ready availability online. A 2015 survey from the Organic Trade Association, conducted in conjunction with KIWI, showed that 14 percent of consumers purchased organic foods this way.
Door to Door Organics, an online service that sells farm-fresh milk, free-range eggs, humanely raised meats, and sustainably fished seafood in addition to groceries and 120 varieties of organic produce, is one company that has seen its business skyrocket along with the growing interest in healthy eating and online shopping. Founded in 1997 in Pennsylvania, it now operates in 13 markets and 60 U.S. cities. Revenues totaled $26.6 million in 2013, up from $3.2 million in 2009.
Likewise, Swanson Health Products, a retailer of online organic groceries, vitamins, and supplements, doubled the number of items it offers over the last six months, says CEO Ken Harris. Swanson’s grocery revenues have amounted to 35 percent per year, and he’s eager to expand his gluten-free and non-GMO lines to take advantage of growth in those areas.
Online retailer The Green PolkaDot Box—which offers 2,300 organic and non-GMO shelf-stable frozen and refrigerated goods at 15 to 30 percent less on average than other retail outlets—has generated $9 million in sales and processed 100,000 orders since 2011. “We’re just beginning,” says Rod Smith, the company’s founder. “We expect to reach 10 million customers by the end of this year.”