IDENTITY CRISIS

THE NUMBERS ARE ENCOURAGING: Almost three-quarters of the U.S. population buy organic products at least occasionally; nearly a quarter purchase them weekly. But even raw statistics fail to capture the dramatic impact organics have had on the way Americans shop, and the way supermarkets sell food. It's difficult to understand how a category that's one-fortieth the size of the $557 billion food business

THE NUMBERS ARE ENCOURAGING: Almost three-quarters of the U.S. population buy organic products at least occasionally; nearly a quarter purchase them weekly.

But even raw statistics fail to capture the dramatic impact organics have had on the way Americans shop, and the way supermarkets sell food. It's difficult to understand how a category that's one-fortieth the size of the $557 billion food business could be so influential. Sales might be relatively small, but the message shoppers are sending is big: They want pesticide-free produce, food animals that are treated humanely and no hormones in their milk.

Indeed, in the five short years since the introduction of the USDA-approved organic seal, consumers have extended their interest beyond organic, into categories focusing on sustainability, fair trade, exercise and beauty care — in short, anything that helps improve health and lifestyle.

“Now that people are concerned about their health in general, everything is building on one another,” said Cynthia Barstow, president of Seed to Shelf, a sustainability-focused marketing firm based in Amherst, Mass. “And the more people see of it, the more they get into it and start to believe.”

The excitement over health and wellness has recharged the entire supply chain. Manufacturers are rolling out new products and services; retailers are discovering unique points of differentiation; and consumers have another option in deciding how to spend their dollars.

But the windfall is in danger of experiencing a downfall.

“I think the original concept of organic has kind of been lost in its success, and part of that concept was that organic foods are locally sourced with an eye to preserving a simpler way of life,” said Tom Vierhile, director of Productscan Online, the Datamonitor-owned provider of new product information.

The exponential growth of whole health into the mass market over the past few years has created a level of tension — between pioneers and newcomers, big corporations and small companies — that no amount of kava kava will reduce. How the entire industry comes to grips with this success will determine the prognosis of the entire movement, with very real implications for everyone involved.


REALITY CHECK

In an increasingly complicated and dangerous world, consumers seem eager to embrace a way of living that reflects their growing belief in simplicity, transparency and safety.

Yet, for all the excitement and talk of change, the average American remains remarkably stuck. They do not exercise for 30 minutes every day. They don't understand labels and ingredients. They eat from a dashboard, and too much of the easy stuff that's not healthful for them. And while they may possess awareness of health and wellness issues, they don't have enough time, energy or money to pursue their ideal lifestyle. The conflict between good intentions and reality is an American consumer paradox.

“People find it difficult to change their whole lifestyle to be healthier,” observed Kimberly Lord Stewart, author of the forthcoming book “Eating Between the Lines.” “They want to, but it's not easy in this day and age.”

It's not impossible, however. The Natural Marketing Institute found that the number of “unconcerned” consumers in its most recent market survey had decreased from 21% to 14% in the past year, a substantial drop. The NMI's 2006 LOHAS, or Lifestyles of Health and Sustainability, report found that those consumers have migrated to other demographic groups that, to some degree, participate in health and wellness.

“You can see this whole concept of mainstreaming at work, whether you're a consumer, retailer or manufacturer,” said Gwynne Rogers, NMI's LOHAS business director. “It's a huge drop for a one-year period.”

The study found that consumer spending within the U.S. LOHAS market for 2005 was $209 billion, a figure that included expenditures on personal health, eco-tourism, alternative energy and hybrid vehicles.

Clearly, the scope of consumer influence is growing, and the impact is having a ripple effect in all areas of the economy.

But there is one aspect to this dilemma that's being forgotten by the industry: The situation in which most overworked and overburdened Americans currently find themselves is just as authentic, to them, as the wellness lifestyle being touted on “Oprah,” cereal boxes and countless supermarket websites.

“They're on a budget, they're time-strapped, they're busy with their families,” said Stewart. “Organics have to come to them, rather than the other way around, which is how it's been in the past.”

More than anything else, the mass availability of organic and whole health products shows that this is a consumer-driven event. The perception — perceived or real — of organics belonging to a small segment of a special population is no longer valid.

Just as the bucolic image of the family farm has evolved into giant fields, the new home of health and wellness can often be found behind the glassy facade of a corporate headquarters.


RESPONSE AND RESPONSIBILITY

Independent natural operators blazed the trail, but the mainstreaming of health and wellness in the past five years has allowed supermarkets to catch up. The so-called super-natural chains, such as Whole Foods and Wild Oats, have only increased pressure on the small-store segment. Statistics show that roughly 46% of total organic food dollar volume in 2005 was sold through the mass-market channel, which includes supermarkets, mass-merchandisers and club stores.

“Some supermarkets have seen a direct profit in using the organic standards to educate their consumers about food — where it comes from and what the labels mean,” said Liana Hoodes, a consultant who's working with the National Campaign for Sustainable Agriculture's organic committee. “Now, we see whole chains dedicated to that kind of information-sharing, and organics give them an instant ability to show the consumer that they care.”

As a sales outlet, supermarkets have received lots of assistance from manufacturers and their representatives. As the end link in the supply chain, stores play a crucial role in helping to execute CPG growth strategies.

“Once the organic standards and the logo came out, stores started to see it all as a viable, competitive angle,” noted Barstow.

Whether vendor-direct or through agents, the retailer stands to gain sales, volume and a reputation if customers are impressed with its health and wellness offerings.

“The stores that really get it are the ones that have people in the stores who are truly passionate about the category,” noted Scott Silverman, retail manager of Go Organic!, the annual promotional campaign that every spring pairs participating retailers with select organic manufacturers. “They're leaders — and cheerleaders.”

The first tour, held in 2005, attracted only a handful of stores. This year, more than 3,600 storefronts will be involved, including those belonging to Lakeland, Fla.-based Publix and Supervalu-owned bigg's in Ohio — two regional operators that have made a name for themselves in the whole health category and are looking to build on it.

“There's really a stronger desire, or more of a burning desire, to figure out this category and run with it,” Silverman said.

Beginning this year, Go Organic! will run two programs: One for conventional chains and another, more specialized, program for independent operators. Silverman and his staff offer an “Organic 101” one-page primer for store-level staff, as well as a media presentation that includes a history of organics and merchandising scenarios.

“It's part of their regular promotional calendars every year, not unlike frozen food month or June dairy month,” he said of supermarket participation. “They're expecting it now.”

Jumping into the health and wellness business isn't risk-free for retailers. Besides the problem of educating associates and sourcing product that is often in scarce supply, supermarkets have to overcome consumer perceptions of them as merchants only interested in selling food. The whole health movement sets a high bar for operators more experienced with outright promotions than educational outreach.

“Consumers are starting to become aware,” said Hoodes. “Every container of milk has a picture of cows in grassy fields, and it comes as a shock when they hear that may not be the case.”

It's rare for a supermarket not to have some sort of organic or health and wellness presence, but a finite number are actually conducting the kind of outreach that embodies the spirit of the whole health philosophy. A report released last month by Mintel showed that food and drink product launches with an ethical positioning nearly doubled last year, with ethical labeling appearing in more diverse product categories. Researchers looked at products linked to fair trade or sustainability, as well as those that made ecological claims or were linked to charitable concerns. Each item arrives in stores with a story that smart retailers will use in merchandising. This is especially apparent in nonfoods, where ethical claims tripled in 2006, according to Mintel.

“Those are mass-market trends that are created and actually impact the natural world, because people are hearing these things and they get translated, and then people look to the natural and organic world to fulfill some of that,” said Barstow.


SHAKING IT UP

A chart of the top 30 food processors in North America in November 2002 shows that organics were already well on the radar for most manufacturers, with the first acquisitions of note occurring as early as 1995, when General Mills introduced Sperry Organic Flour to the marketplace. By the time the national standards were rolled out in October 2002, key CPG companies were already in position: Coca-Cola and Odwalla in 2001; Kellogg's and Kashi in 2000; Philip Morris and Boca Foods in 2000; and M&M Mars and Seeds of Change in 1997. The complete list is much longer.

“When they saw the National Organic Program proposed, and they saw the rate of sales growth of organic foods before that, manufacturers began buying their way into the category,” said Philip Howard, an assistant professor at Michigan State University who specializes in the food industry. “Between then and October 2002, when the standards went into effect, you saw quite a few acquisitions. And the latecomers were willing to pay pretty high prices for some of the companies that were bought. In some cases it was two times annual sales.”

Four years later, in November 2006, the industry structure looked like the flowchart of a mad scientist. Not only had additional, smaller companies been added to the big CPG portfolios, the companies themselves had begun rolling out organic or better-for-you versions of their most popular conventional brands.

“The big companies have been experimenting with introducing organic versions of their own products, like organic Tostitos from Pepsi,” said Howard.

The speedy evolution was not without false starts, tangents and even outright mistakes. Many point to the low-carb phenomenon of 2002 as a pivotal event for many manufacturers, who quickly reformulated products to reduce the amount of carbohydrates per serving. The trend went belly-up within a year and was replaced by an aggressive initiative launched by the newly formed Whole Grains Council to promote that dietary staple — the very food low-carb sought to exclude.

The low-carb event occurred while the whole health umbrella was just beginning to open. That year the organic standards were introduced, and smaller companies that had made it to the cusp of national distribution had a tough decision to make.

“Some of the principal companies that made organic what it is began selling out to larger companies, and that upset a few people in the heart of the movement,” said Vierhile.

When the standards were introduced to consumers in 2002, mainstream manufacturers were already in the game with smaller companies they had acquired earlier. Unless they were avid readers of the business pages, most consumer were not aware of the transactions. People who thought they were supporting a small, mission-driven company were actually handing their money over to large conglomerates, and this also upset whole health advocates.

“Shopping for organics in the absence of full transparency and disclosure is a dangerous process,” said Ronnie Cummins, national director of the Organic Consumers Association. “The whole idea of organic is built on principles large companies don't adhere to. It hurts what organic is all about.”

Manufacturers have been fighting these accusations since the day the standards were introduced. The growth the industry is currently celebrating would not have been possible without large companies, they assert.

“When organic became a national standard in 2002, you saw a lot of big corporations get involved, and they were able to take it into mainstream distribution channels, and also make consumers more aware of it,” said Howard, the professor.

The companies also introduced their consumers to new exercise and family activity programs through their websites, promoted through on-pack labeling their better-for-you choices, and began overcoming the transparency issue by rolling out organic versions of their own best-selling brands. Some observers feel the animosity displayed by health and wellness advocates stems from the sense of betrayal that accompanies the acquisition of many smaller, family-owned enterprises that helped put organics and whole health on the map.

“When you're getting these big offers, you have to think about getting out while you're still ahead,” said Howard. “At the same time, some of these companies that remain independent have decided they're not too sure their values will be carried on.”

Those holdouts face continuing challenges in a market increasingly dominated by the major brands.

“Independence comes with its own hazards. You can be locked out of markets due to distribution or slotting fees and the like,” he said.

The mass-marketing of organics, and health and wellness in general, has consolidated what has always been a fragmented and diverse — even marginalized — way of life. For every small manufacturer that has joined the mainstream ranks through mergers and acquisitions, there remains an advocate and core adherent who warns that current mainstream production methods are a direct threat to certain intangibles at the heart of the health and wellness lifestyle.

“The core consumers from the 1970s began buying organic because it represented something different than the mainstream food system; it embodied values not addressed by the mainstream,” said Vierhile. “They're ideals no longer represented in organic, like social equality and economic viability for small-scale growers.”

Groups like the Organic Trade Association and the Cornucopia Institute have made names for themselves as self-appointed watchdogs, independent of the National Organic Standards Board, a panel of industry participants and consumers appointed by the U.S. Department of Agriculture to help set policy. At times, they've even gone after one another. In this business, passions run high.

The split between the progressives and the traditionalists can be traced to the mid-1990s, when large corporations began courting the small organic, whole health start-ups. Stewart was working as a journalist covering natural foods at the time.

“The big discussion was whether conventional grocery stores were worthy of selling organic,” she recalled. “Many manufacturers said they weren't going to go that route, that they were going to stick to their roots. Others said the product mix should be opened up to all consumers. That was a huge decision, and that's when the infighting started.”

The fight is not so much over the products or production methods as it is for the heart, soul and pocketbook of the consumer.

Critics of the present way of doing business have been successful in scratching the years-old veneer erected by large manufacturers around their smaller organic and whole health subsidiaries. Shoppers are beginning to learn the true parents behind the homey, quirky brands they thought were still independent.

“The idea of organic is the picture of a bucolic farmstead, and finding out that it's not is a shock to many,” said NCSA's Hoodes. “The new-entry folks are increasingly worried when they hear things about cows not being out on a pasture.”

Manufacturers have been compelled to reassess their business practices. For example, they are becoming more transparent by improving ingredients, and listing them more prominently on packages. They also regularly reserve a chapter in their annual reports for addressing social responsibility issues related to the company's operations.

More moderate voices appreciate the vigilance of the core adherents and the progress made by the supply side. There is even patience for the U.S. government as it continues to wrestle with the whole health movement's amazing success.

“The program has grown so fast and has been so underfunded, you can't say they've fully completed everything they were to have supposed to,” said Hoodes of the USDA and other regulatory agencies. “But we need to hound it as advocates to make sure they get better at accrediting and oversight and enforcement.”


Spreading Influence

U.S. consumers spent $209 billion in 2005 on a growing number of health and wellness components, part of what the Natural Marketing Institute calls Lifestyles of Health and Sustainability, or LOHAS. This just-released, updated snapshot describes an integrated, rapidly growing market for goods and services appealing to consumers who have a meaningful sense of environmental and social responsibility and incorporate those values into their purchase decisions. Here's how the five general LOHAS segments, and their subcategories, fared in the most recent year for which data is available:

Personal Health: $118 billion (includes natural/organic foods, supplements, personal care, alternative medicine, yoga, health/fitness, media)

Eco-Tourism: $24.2 billion (includes eco-travel and adventures, new age/spiritual travel)

Alternative Energy: $400 million (includes green pricing programs, renewable-energy certificates)

Alternative Vehicles: $6.1 billion (includes hybrid vehicles, biodiesel, car sharing)

Green Building: $49.7 billion (includes Energy Star products and homes, other green-certified homes, materials and solar panels)

Natural Lifestyles: $10.6 billion (includes home furnishings/supplies, natural pet products, cleaners, apparel, philanthropy)

Source: 2006 Understanding the LOHAS Market, Natural Marketing Institute/Silvercliff Media


Foreign Affairs

Importing ingredients from overseas has become the norm in today's organic industry. Shortages of domestic commodities, ranging from apricots to almonds, have forced manufacturers to tap their global network of suppliers in order to meet demand. The fear that USDA organic standards are not being met has become a topic of concern.

“You cannot expect the Chinese government to enforce organic standards the way the U.S. certifiers are doing it,” said Ronnie Cummins, executive director of the Organic Consumers Association.

According to the USDA, 40% of the certification firms accredited by the agency are now based outside of the United States. They are charged with ensuring that any product labeled organic stateside is just that, regardless of source.

“No organic product can be sold in this country that hasn't been certified by a USDA-accredited certifier,” said Liana Hoodes, organic committee consultant for the National Campaign for Sustainable Agriculture. “That means they must have followed the same rules as we do inside this country.”

Integrity aside, there's also the perception that the energy and resources required to source critical food components violates the spirit of organic living.

“It makes no sense to transport organic foods halfway across the world when we could be producing them next door,” said Cummins.

Alas, in the business world, mass-market success comes with producing food at the lowest cost and selling it at the greatest profit, and that often means making it in other countries and shipping it back, even if it's thousands of miles. Not only are U.S. labor and production costs higher, observers note there's not enough farmland left to accommodate the acreage required by true organic farming.

“If we were to shift most of the effort to the U.S., we'd have to plow cities under because of the differential in yield between conventional crops and organic crops,” said Tom Vierhile, executive director of Productscan Online, a new products database.
— RV