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24 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 25 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 26 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 27 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 28 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 29 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 30 -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 31