Download picking best-of-the-bunch organic brands

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GREEN
FIELD
PICKING BEST-OF-THE-BUNCH
ORGANIC BRANDS
The organic market is one of the most fertile in today’s food
industry. In fact, sales of organic products are expected to grow
14% annually from 2013 to 2018.1
So it’s no surprise that food and beverage industry insiders are
looking to harvest the next crop of mega organic brands. General
Mills wants to grow its organics business to $1 billion by 2020.2
Walmart is introducing a massive line of organic SKUs under the
brand name Wild Oats. Van’s Natural Foods was just acquired by
Hillshire Brands for roughly three times its annual revenues.3
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But, for all the excitement, only some
organic categories have the potential to
achieve substantial scale and growth. How
can would-be investors tell which organic
categories and brands are ready to go
mainstream?
The answer starts with dividing organics
consumers into two groups: core and casual
consumers, as illustrated in Exhibit 1. While
core consumers are committed to the organic
category, casual users are motivated by the
aspirational benefits of the organic category
—health, freshness and feel-good factors—
for only some products and occasions.
Organic brands with the most growth
potential address the needs of the casual
organics consumer to appeal to the broadest
possible consumer base across three key
drivers: category dynamics, price premium
and brand equity.
EXHIBIT 1: Big opportunity: targeting casual organic consumers.
ORGANIC FOOD PENETRATION
CORE ORGANIC PURCHASERS
10%
I never buy organic food
3%
I almost exclusively buy organic food
16%
I often buy organic food
30%
I rarely buy organic food
CASUAL ORGANIC PURCHASERS
41%
I sometimes buy organic food
Source: Kurt Salmon research
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The most attractive organic growth categories will be
those that have built the capacity to serve mainstream
demand, narrowing the cost penalty for organic producers.
Category Dynamics
Consumer interest in organics varies by
category, as illustrated in Exhibit 2. In
certain categories, organic penetration is
high even when the price premium is high—
the organic growth sweet spot. Categories
heavily used by children have high organic
penetration, since families will spend to
protect their children and pets. In fact, 43%
of respondents to a recent Kurt Salmon
consumer survey said they plan to increase
spending on organic pet food.
Consumers are also more concerned about
organics in categories that are eaten raw in
large volumes, like fruits and vegetables. In
contrast, organics are less important when
taste trumps health—think categories like
ice cream and beverages—or when organics’
benefits are perceived to be less meaningful,
such as in canned foods and condiments.
Price Premium
Bringing organics into mainstream distribution works best at a reasonable price
premium. Core users are committed to
using organics wherever possible and are
comparatively insensitive to price premiums in most organic categories, but they are
only a minority of the population—about
19% of households, according to a Kurt
Salmon survey.
The much larger pool of casual consumers,
on the other hand, is often dissuaded from
choosing organic because of price. In fact, a
Kurt Salmon survey shows that 65% of
consumers cite high prices as the primary
barrier to purchasing more organic food.
Casual core consumers are willing to pay just
10% more for organic vs. the 23% premium
core consumers are willing to fork over.
As illustrated in Exhibit 3, the lower the
price premium, the more organics gain
share, primarily from increased utilization
from casual users.
That being said, it is unwise to bet on
narrowing price premiums over time in an
industry highly dependent on supply costs
and constraints. The most attractive organic
growth categories will be those that have
built the capacity to serve mainstream
demand, narrowing the cost penalty for
organic producers.
Brand Equity
Many organic brands have surprisingly
little brand equity when compared to their
non-organic competitors, despite high
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EXHIBIT 2: Consumers reach for organic more often in raw, kid-focused categories.
PERCENTAGE OF CORE ORGANIC SHOPPERS BY CATEGORY
33%
Fruits and Vegetables
21%
Dairy
19%
Baby Foods
18%
Meat, Poultry, Seafood
16%
Nutritional Supplements
15%
Breads and Grains
12%
Cereals and Breakfast Foods
Pet Foods
11%
Snack Foods
11%
Frozen Foods
11%
Prepared Foods
8%
Canned Goods
8%
Beverages
8%
Condiments
8%
Source: Kurt Salmon research
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sell-through. This happens most often when
a brand has managed to establish itself as
the market leader, perhaps through firstmover advantages in sourcing, but has failed
to establish much of a brand meaning
beyond “organic.”
For example, Earthbound Farm has a
healthy market share in the packaged
produce category, but its brand affinity
suffers, as it has not truly established a
unique positioning compared to lowerpriced private-label organic offerings like
Safeway’s “O” brand or the leading nonorganic competitor. Despite being an organic
offering, consumers had higher net advocacy
for the leading non-organic brand. (See
Exhibit 4.)
On the other hand, Stonyfield Farm, an
organic yogurt brand, has established a
brand meaning far beyond the benefits of
EXHIBIT 3: Lower price premium, higher organic adoption.
ORGANIC PENETRATION VS. PRICE PREMIUM
ORGANIC
PENETRATION
20%
FRUITS & VEGETABLES
15%
PREPARED FOODS
DAIRY
10%
BREADS & GRAINS
SNACK FOODS
BEVERAGES
5%
CONDIMENTS
MEAT/POULTRY
0%
20%
30%
40%
50%
ORGANIC PRICE PREMIUM
Source: Kurt Salmon analysis, Supermarket News, Organic Trade Association
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EXHIBIT 4: Without a bigger story to tell, organic brands lose net advocacy battle.
NET ADVOCACY
YOGURT
Stonyfield Farm
21%
Dannon
9%
POTATO CHIPS
Kettle
17%
8%
Lay’s
MAC & CHEESE
Annie’s
ORGANIC
WINS
5%
Kraft -3%
BREAD
Rudi’s
15%
19%
Nature’s Own
TEA
Honest
3%
Arizona
KETCHUP
Organicville
13%
CONVENTIONAL
WINS
5%
Heinz
16%
DELI MEATS
Applegate Farms -3%
9%
Hillshire Farm
LETTUCE
Earthbound Farm
Dole
Source: Kurt Salmon research
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-9%
Organic
5%
Conventional
organics, with a differentiated brand story
and a strong and successful innovation
pipeline, including its new answer to Greek
yogurt, a creamy, high-protein organic
cheese snack with a striking black label. The
brand has established clear differentiation
from the leading non-organic competitor
across a variety of “healthy” attributes while
remaining competitive in required core
attributes like quality and taste.
A Recipe for Success in Organics:
Amy’s Kitchen
Amy’s Kitchen shows how an organics brand
can continually grow beyond its roots.
Amy’s started as one of many small organic
brands that were attempting to bring the
convenience of frozen entrées to the natural
food space. Frozen entrées are also a
favorable category for organics, especially
since many of Amy’s recipes are fairly
indulgent—from burritos to ethnic entrées
—and the organic and vegetarian formulation helps consumers feel they are offsetting
the guilt associated with indulgent products
and convenience cooking.
Amy’s has also been smart about managing
its price premium vs. conventional products.
Everyday shelf prices of its mac-and-cheese
and lasagna entrées range from 10% to 25%
Excerpt from the Kurt Salmon Review.
© 2015 Kurt Salmon
above mainstream market leaders such as
Stouffer’s. Amy’s makes this possible through
slightly lighter pack sizes and less frequent
promotion. Plus, ingredients are only a small
portion of the cost of goods sold, so the
organic premium is minimal.
Most importantly, organic is an important
part of Amy’s brand name, but hardly the only
brand message. Consumers give the brand
high advocacy ratings because of its unique
recipes, fun backstory and on-trend ethnic
flavors. Amy’s has also made vegetarian
compatible with tasty, which is no minor feat.
As a result, Amy’s has been able to expand
into every section of the freezer case and is
about to enter the fast-food business. Amy’s
pulls in more than $300 million in annual
revenue, with strong prospects for continued
growth.4 v
AUTHOR
Peter Hsia, Partner
[email protected]
1 FoodNavigator-USA.com, 2014
2 Advertising Age, 2015
3 The Wall Street Journal, 2014
4StartupWin
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