The Big Organic challenge

Question: You walk into a grocery store and are greeted by soothing lighting and muted earth tones. Rolling your cart over wood flooring, you find organic produce artfully stacked in faux-distressed wooden crates.

Where are you?

If you answered Whole Foods, you’re wrong. The store in question is a Safeway supermarket – specifically, it’s one of the 1,000-plus stores whose homespun veneer qualifies it as a “lifestyle store,” in the grocers’ parlance.

Maybe there’s nothing remarkable about a supermarket chain choosing to reinvent itself with a remodel, but Safeway’s facelift is a visual representation of the blurring of the once strictly demarcated lines between natural food retailers and Big Grocery.

At the heart of this shift is O Organics, Safeway’s organic private label that is on its way to becoming the country’s top organic brand, leading a surge of private label organics staking a claim on retailers’ shelves. While some laud O Organics and other private labels for making organics more accessible and increasing the overall appetite for natural foods, others criticize the grocery giant for profiting from the demand created by trailblazing organic brands.

Either way, one thing is certain – if small organic producers are to flourish in this market, they have a fight ahead of them.

TAKING ORGANIC PRIVATE

Safeway launched its O Organics line in 2005. The company’s move to organics came as stores like Whole Foods and Trader Joe’s – both of which have strong organic private label brands – were taking a bite out of conventional grocers’ market share.

“The growth of private label brands was probably simultaneous with the growth of Trader Joe’s and Whole Foods,” says David Wright, a senior associate at the Bellevue, Wash.-based Hartman Group, a research and consulting firm that has been tracking organic shopping trends for the past 15 years. “They really pushed the notions of specialized store brands into the spotlight.”

From about 150 initial products, the O Organics line has grown to include more than 300 products, from baby food to frozen pizza, and represents more than $400 million in annual sales, according to Organic Monitor, a research and consulting firm focused on the organic industry. 

Industry observers point to the growth of private label organics as one more indication that organics have outgrown their former specialty status. That private labels would make their way into the burgeoning organic space was inevitable, as it would be for any products that were gobbling up market share.

“If it’s a significant category, you have to realize that private labels will come,” says Eric Newman, vice president of sales for Organic Valley, a cooperative of organic farmers that is one of the country’s largest dairy brands, and whose members make products for private label organic products.

The question is, then, what impact are O Organics and its private label brethren having on other organic brands?

PROFITING FROM PRIVATE LABELS

Many in the industry, including those inside organic brands that face competition from O Organics and its ilk, say that the swell of private label organics heightens the public’s hunger for organics. Think of them as a sort of gateway drug into the larger world of organics.

“Private label has come a long way and Safeway has been leading the charge.That’s helping bring more consumers into organics,” says Todd Kluger, marketing chief of California’s Lundberg Family Farms, the country’s largest grower and marketer of organic rice products. “Any food manufacturer that complains about private labels shouldn’t be complaining.”

But if private labels are bringing more shoppers into the organic fold, they’re also adding pressure to a marketplace that has become increasingly crowded and competitive.

“The truth is, the industry has gotten bigger and is maturing in some ways,” says John Foraker, chief executive of Annie’s Homegrown. “The competitive landscape is getting tough for smaller brands. Private label is really bad news if you’re not the number one or number two brand.”

So what’s a smaller brand to do?

For one thing, they can focus on doing something that’s difficult for private labels, with their uniform packaging and vast supply chains, to do: Tell the stories behind their products. 

Organic heavyweights like Annie’s and Lundberg say such story-telling has been pivotal to their success.

“The organic category had all the signs of an emerging category. Now it’s maturing, but that doesn’t mean there’s not a lot of opportunity,” Wright of the Hartman Group says. “Any brand needs to focus on core attributes. They need to stay focused on the basic elements that indicate quality: where it comes from and who’s making it.”

In the case of Berkeley-based Annie’s, which launched in 1989 with macaroni and cheese in a box and now sells snacks, cereal and condiments, the company has seen its greatest growth in the past five or six years, benefiting from the overall boom in the organic market, Foraker says. He attributes its survival and growth in the face of increased competition to the strength of its brand, with its signature rabbit logo.

“The reason we’re here is that we have a very successful brand and very loyal customers,” Foraker says. It’s also one of organic brands with the national reach and distribution clout to make its way onto the shelves of Safeway and other large conventional retailers.

For smaller producers, cultivating the story behind the food becomes even more important. Even for organic and sustainable food producers who don’t aspire to scale up to the level of a national organic brand, the same rules apply.

“What we have seen farms and food brands succeed with is branding and differentiating that includes transparency and authenticity of how and where products are grown,” says Scott Exo, executive director of Food Alliance, a Portland, Ore.-based non-profit that provides third-party certification for facilities and products, including meat, dairy, vegetables and prepared foods.

That’s been the case for Stahlbush Island Farms, an organic and Food Alliance- certified farm in Oregon’s Willamette Valley that also processes its own line of frozen fruits, vegetables and grains. The company primarily sells its products through natural food retailers, though it also “dabbles in Target and Kroger,” says its head of marketing, Debbie Cozzetto.

The farm has been around for 25 years. When it launched its retail line 15 years ago, private label organics didn’t exist. Now, Cozzetto says, “They’re our biggest competition.”

But Stahlbush has something  working in its favor, besides the compelling back-story of being a family-owned farm. The company grows the produce for its own retail line. As the organic sector expands, sourcing of products and ingredients will become increasingly challenging. For a farm like Stahlbush that controls its own supply, “traceability offers a huge competitive edge,” Cozzetto says.

Then, of course, there are producers who stake their livelihoods – at least in part – on supplying products for private label organics.

One of those is Organic Valley. The co-op started in 1988 in Wisconsin and has grown to include more than 1,600 farmers, an expansion that’s been possible in part because of private labels.

“Private label was part of scaling our business,” Eric Newman says. Early on, the company decided to embrace the private label market, rather than resist it, knowing if it didn’t do so, another supplier would. Now, about a fifth of the co-operative’s sales – or about $100 million – comes from supplying products to private labels, though the company declined to say which ones. The rest comes from sales of the Organic Valley brand and selling its products as ingredients to other companies.

“A lot of people are against private labels because they have the misperception that they won’t make any money,” Newman says. “The margins are lower but there’s no marketing. Brands, especially if they’re young, have to invest an enormous amount of money [in marketing], especially in the early stage.”

While supplying to private labels doesn’t provide the security of selling one’s own brand – private labels can change suppliers more readily – the co-op’s private label business also offers a cushion against larger economic trends.

“The economy has had a big influence on brands. The recession hit and people traded down [to less-expensive private labels] right away,” Newman says. “We were very glad through the recession to have private labels. When you milk, you have to have a place for it to go.” 

While selling to private labels may mean a compromise in communicating to buyers where the milk and cheese in their shopping carts comes from, the trade-off is that it’s able to support more farmers, which was the co-operative’s founding mission.

“Our goal is to provide stable, long-term prices for our farmers,” Newman says. “That’s what our vision of sustainability is.”

With its national network of farmers and processing facilities, Organic Valley’s scale makes it a natural fit for national retailers. But no matter what the company’s size, the key is for it to figure out who its partners are – whether it’s small, independent retailers or national chains – and focus on those relationships, Newman says.

And one more piece of advice for small producers: stay on your toes, whether that means creating new products, getting new certifications like Non-GMO or simply finding new ways to answer the question, “Where does my food come from?”

“You can’t sit still in an environment like this,” Foraker of Annie’s Homegown says. “Conventional players are always right behind you.”