Are organics really a win-win investment?
In a slow growth industry where innovation is paramount, mainstream food producers are increasingly drawn to the lucrative organic sector. The rewards are enticing, but the path to profit can be paved with difficulties, as Joe Ayling reports.
If organic food ever was the domain of long-haired hippies wearing sandals and kaftans, this is certainly no longer true. The global organic food sector continues to grow by 15-22% per year, as outlined by the just-food report 2006 Global market review of the whole, natural, organic and ethical food markets - forecasts to 2012. Given that the overall food and drink industry has shown typical growth of around 2-6% a year, it is not hard to imagine why so many companies are considering including organic products in their portfolio.
Launching an organic range may grant companies an ethical edge and offer consumers confidence in product traceability, but there are associated negative factors to consider, such as potentially off-putting premium prices, shorter shelf lives and the need for 'negative' marketing of the downsides of conventional food.
The just-food report found that the global organic food and drink business was worth US$36.7bn in 2005, and is projected to reach $133.7bn by 2012.
Europe accounted for a 47% share of the 2005 organic business, worth $17.4bn. Germany has one of the highest overall market values in the world, despite per capita consumption remaining fairly low, according to the review. The country's market is expected to reach a value of EUR10bn (US$12bn) by 2012.
Brazil is another country expected to adopt the organic way of life, particularly in terms of exports, by adding to its estimated 650 organic food sales outlets.
UK Soil Association market intelligence officer Sally Williamson told just-food: "We have seen increases in organic sales during every year so I think we would expect this to continue. Sales are generally concentrated in Western Europe and the US, but less developed areas are growing.
"Latest results, from between 2003 and 2004, showed big increases in Poland, the Latvian organic market double, and the Lithuanian organic market increase by 80%. Italy's growth was not intensive to begin with, but has shown more of a natural growth - it now maintains 15% of Europe's total organic land.
"Thailand, India, the Philippines and Latin America are producing a lot more organics but a lot of this is exported."
Generally speaking, being an advocate of organic foods enhances the ethical reputation of a company, especially considering the furore connected to the EU moratorium on GM food imports. According to the Soil Association, which supports organic farming, investors need to share this kind of morality to thrive.
Williamson said: "A lot of people consider organics an ethical decision but there is also a financial motivation for food and drinks companies. On the whole, the companies that do best are in it for ethical reasons and this keeps them going."
Other reasons to market organic products are the development of trust and traceability between retailers and consumers, and better tasting products, according to the just-food review.
"It is all about awareness as people become more concerned about health issues. Organic foods taste good as well though, and from our research we found that the quality of taste is one of the biggest reasons to buy organic," continued Williamson. "Taste is one of the two main factors, along with avoidance of health negatives such as pesticides and antibiotic residues."
The premium tag attached to organic lines was found by the review to build trust levels, although this is also a barrier for more cost-conscious shoppers. Organic foods carry a higher price tag, largely due to expensive farming production methods.
This means, for example, that parents buying baby food face a choice between an expensive organic product and one with alleged "health negatives". While they may be able to choose the reassuringly expensive option when it comes to feeding their baby, they may not be able to afford organic food for the whole family.
Marketing campaigns focusing on the negative aspects of not eating organics are off-putting to some consumers, and a more positive spin may be required for successful future advertising, according to the market review.
Williamson told just-food: "Organic milk advertising is more positive and I would like to see the rest of the market follow suit to attract consumers. Fruit and vegetables will continue to grow, dry products saw a huge growth last year, and so did organic eggs and poultry."
The most popular food category purchased globally by organic shoppers is fruit and vegetables, followed by eggs, dairy, meat, bakery, frozen and then baby food.
Heinz this year re-launched its jarred organic baby food, called Heinz Simply Organic, a decision the company said was based on the popularity of the range. Simply Organic brand manager Victoria Swing said: "The Heinz Simply Organic range has been developed from the insight that as mums start to wean their babies, they want to gradually introduce new flavours and have absolute confidence in the food they are feeding for a natural and nutritious start to weaning."
Heinz told just-food it believes that organic buyers are generally driven by internal health which is all about wholesome nutritious food and food that is sustaining and natural. The UK food company's Organic Baked Beanz range grew 4% in the year up until January 2006.
Organic products are expected to be available "in significant quantities in all supermarkets," according to the just-food review, although it was also deemed unlikely that the majority of people will purchase organic for more than 75% of their groceries unless costs come down.
"When you think of organic food you think of fresh products, and all companies will be looking to increase their ranges of these products. They have been experiencing growth and will be expecting this growth to continue," added Williamson.
Consumer demand is sure to maintain its upward trend, making organics an appealing venture for food companies seeking to innovate. However, the expense of cultivating or sourcing organic ingredients, and the complicated business of marketing organics, will remain a significant obstacle for all but the wealthiest or most committed food manufacturers.
Find more information on the just-food report 2006 Global market review of the whole, natural, organic and ethical food markets - forecasts to 2012
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