Sales of organic foods have been growing at a rapid clip, as more consumers look to these products as alternatives to mainstream food items. According to Mintel (Chicago) and SPINS (San Francisco), sales of organic food increased 51% between 2002 and 2004, from $3.5 billion to $5.3 billion. In constant 2004 dollars, this represents a 43% increase in sales. This figure does not include sales of organic foods through restaurants or other foodservice establishments such as caterers, nor does it include sales of prepared organic foods in supermarket or natural food store delis, restaurants or takeout departments.
Organic food is part of the natural food universe. Natural foods are those that are minimally processed, environmentally friendly and free of artificial ingredients, though they can be produced with fertilizers and hormones, or be genetically modified.
No strict government code governs the use of the term “natural” but, as of 2002, the USDA established a set of national standards defining the use of the term “organic” with respect to food products grown both in the U.S. and abroad. According to the standard, to be considered organic, foods must be produced without conventional pesticides, fertilizers made with synthetic ingredients or sewage sludge, hormones, bioengineering, or ionizing radiation.
Before a product can be labeled organic, a government-approved certifier inspects the farm where the food is grown to make sure the farmer is following all the rules necessary to meet USDA organic standards. Companies handling or processing organic food also must be certified. The regulation of the organics industry presents consumers with a consistent product, and consumers who previously may have been suspicious of the organic pedigree of a specific product now find the term “organic” has a precise meaning.
Concern About the Food SupplyConsumers look to organic foods because of concerns about the integrity of the food supply. In a study of the organic food industry (published in 2004), Mintel asked a group of consumers about food safety. Almost half (49%) said their level of concern was “high.”
As with many safety matters, however, a much smaller percentage is so concerned that they will seek a solution and be willing to pay for it. The proportion of consumers concerned enough to take the action of “actively shopping for organic food” has risen to 10% in 2004, up from 7% in 2002, while occasional buyers rose to 34% from 30%.
While consumers tend to be most concerned with taste, convenience, and price when it comes to buying food, they often cite cleanliness/safety, which applies to the store itself as well as what is being bought, as another major consideration. The tangible benefit of organic items, producers claim, is that they are healthier for people and the environment, since they have been produced without fertilizers, pesticides, hormones, or genetically modified products.
Organic Food SegmentsThe biggest segment in the organic market, fruits and vegetables, comprises fresh organic produce items, both those sold in bulk and those packaged (e.g., bagged salad greens). Also included in this segment are shelf-stable, frozen and refrigerated fruits and vegetables. Sales of organic produce account for almost 45% of total sales, having gained 4.3 share points in 2002-2004 as the segment benefited from increased distribution.
Sales of organic dairy products (including milk, cream, butter, yogurt, cheese and other dairy items) amounted to 14.5% of the market in 2004, down slightly in the two-year period. This channel is followed by organic beverages (including soymilk; frozen, shelf-stable and refrigerated fruit juices and juice drinks; functional beverages; carbonated beverages; and water). The organic beverage segment has not been as successful as the overall market at conveying benefits to consumers, resulting in a market share decline of 3.1 percentage points in 2002-2004.
Sales of grain-based foods, which amount to some 8.5% of the overall market, increased 53% between 2002 and 2004. Clearly, the impact of the low-carb diet trend on the organic grain-based food market has been negligible. This may be because consumers who are followers of organic foodways feel their choice to eat organic foods provides them with a healthy diet and, therefore, they do not need to follow low-carb diet plans.
Sales of packaged and prepared foods and sales of snacks, desserts and confectionery products each account for less than 10% of the overall market. Sales of the snacks/desserts segment have increased at twice the rate of packaged/prepared foods, as snack manufacturers have been more aggressive with product rollouts and promotion.
The fastest growing segment is also the smallest. Sales of organic meat and poultry increased 267% between 2002 and 2004, as more consumers seek out what they perceive to be safer sources of beef, chicken and other products. Sales of other organic foods, which include meat alternatives, sauces, salsas and condiments, increased 22% between 2002 and 2004. A wider variety of organic products (through a growing number of channels) have contributed to this sales increase.
Organic Prepared FoodsIncluded in the segment are a number of “convenience foods” such as frozen meals, canned soups, entrées and baby foods. New product launches which make it possible for the consumer who wants to serve organic meals to do so quickly and easily have brought the organic market into the same “convenience” universe as non-organic packaged foods. Companies producing organic meal kits and “easy to prepare” organic mixes and meals have capitalized on the consumer desire for what is perceived as “healthy convenience” foods. Segment growth will continue to come from manufacturers' ability to make organic foods more accessible (e.g., convenient) to the average consumer.
Amy's Kitchen (Petaluma, Calif.), a privately held manufacturer of natural and organic shelf-stable and frozen meals, side dishes, soups, sauces and salsas, is the clear leader in organic prepared foods, with a 38% share of the market. The second-largest player is Tender Harvest, a Gerber (Novartis, Basel, Switzerland) baby food brand with an 11% share of sales. Tender Harvest is made from all organic ingredients and was launched to compete with Earth's Best, the first organic baby food brand (currently licensed to Hain Celestial, Boulder, Colo.). Tender Harvest, which as a Gerber brand enjoys a much greater distribution network than Earth's Best, has a more significant place in mainstream channels: Earth's Best is more likely to be found in the natural food channel.
Imagine Foods (Garden City, N.Y.) and Health Valley (Hain Celestial) each account for just under 5% of organic prepared foods sales and other, smaller players account for the rest--some 40% of the market. The variety of smaller manufacturers shows the extent to which the organic prepared foods market is highly fragmented and open to a lot of spirited competition.
What the Future HoldsThe only wrinkle in the growth of organic foods may be the lack of farmland meeting government requirements for growing organics. Land farmed in the usual (non-organic) method must lie fallow for a number of years, until it is deemed to be pesticide- and chemical-free. If consumers continue their drive to consumer organic foods, can the industry support this desire? Also, will prices remain substantially higher than non-organic foods even after production increases? Even a large increase in production will leave the industry at a relatively small scale when compared to non-organic farming.
These twin issues could, perhaps, slow the organic industry in the U.S., keeping it a niche industry, albeit a successful one. An answer may be to “outsource” organic farming and ranching to countries with available, arable, already organic acreage. However, outsourcing agricultural products may meet with resistance from consumers who feel food safety may be compromised. In addition, there are the issues of preserving organic foods during transport and whether these foods can hold up as well as the non-organic products that have been bred to withstand shipping over long distances. Clearly, prepared food products that use organic foods could take advantage of lower production costs outside the U.S. more easily than organics that need to be sold fresh.
Expansion in organic food products requires a number of conditions, including sustained consumer interest and availability of organic-certified farmland on which to grow the crops. Consumer interest is paramount, and food safety is likely to remain the most important issue for consumers. Food scares surrounding non-organically grown products (e.g., Mad Cow Disease, chemical and pesticide residue in fish) will drive consumers to seek the perceived safety of organic alternatives. As long as organic foods can be considered a “safe haven,” more consumers will turn to them.
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