Organics Fail to Yield Cash Crop for Food Giants
$14 Billion Category's High Prices Turn Off ConsumersBy Stephanie Thompson
Published: October 15, 2006
NEW YORK (AdAge.com) -- It's been enthusiastically embraced by marketers, blessed by Wal-Mart and touted as the holy grail of growth for an industry desperately in need of it. But after a stupendous start, organic foods are looking suspiciously like a sensation sizzling out.
Consumer resistance to high prices is thwarting efforts to expand the nation's $14 billion organic foods business.
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Organics are a $14 billion business with a brisk growth rate, but they account for only 2.5% of total food sales despite hundreds of millions spent by major marketers in the past 12 months to make them mass. Some marketers are spending more to introduce organic versions of mainstream foods than they are earning from sales of organics, as consumers balk at paying double the price for organic versions of their favorite products. It's all mounting evidence that the trend, like the low-carb craze before it, is hurtling toward a crash.
Prego and Ragu
"Most of my consumers couldn't care less," said one Midwest grocery executive who recently discontinued Campbell's Prego organic pasta sauce and Unilever's Ragu organic sauce due to low sales, and who predicts the same fate for Kellogg's organic cereals. "I see this going the same way as low-carb."
With the notable exception of Wal-Mart, which has pledged to sell organic products at only 10% higher than average price to make them affordable for the masses, all but the very high-end grocers tend to treat organic foods as niche, ditching many entries from large marketers and turning away new ones.
After an expensive flop with its Carb Options line, Unilever this year introduced Ragu organic pasta sauce with $20 million in advertising, only to see it wither on the vine. An executive close to the company said Unilever has failed to sell enough to cover its marketing outlay for the brand and has been forced to "scale its organic strategy way back" as a result. By next year the brand will be limited to -- at most -- 15% of traditional grocery stores, mainly those that cater to upscale clientele interested in organic products.
'Definitely slowing down'
Although Unilever recently launched three varieties of Bertolli organic pasta sauce and has some Lipton organic teas, it's unlikely to introduce much in the space beyond that, the executive said. "The mainstream-organic trend is definitely slowing down," he said, "and though it won't likely come to as drastic an end as low-carb, it definitely appeals to a much smaller demographic than originally anticipated." Unilever declined to comment.
Others, such as Kraft, are not willing to abandon the organic market just yet, given the fact that the segment saw sales growth of 16.2% to $14 billion last year, according to Nutrition Business Journal. But that number still represents less than 3% of food sales -- and some 41% of total organic-food sales are from commodity fruits, vegetables and meats.
Major marketers' success in the segment to date has come not from organic versions of their stalwart brands but from independents they've snapped up, such as General Mills' Cascadian Farm and Kraft's Back to Nature.
Organic Macaroni & Cheese
Indeed, some of the entries seem discordant with the image of organic foods as fresh, natural and healthful. Among Kraft Foods' offerings are organic Kraft Macaroni & Cheese and two DiGiorno frozen pizzas made with organic flour and tomatoes. The country's largest food marketer also plans to roll out organic versions of Kraft salad dressings in January, believing there's still plenty of life left in the segment.
"The consumer demand for natural and organic products is increasing, and Kraft is bringing organics more into the mainstream so more and more consumers have access to [them]," a spokeswoman said.
The launches, however, are unlikely to be shelved near their faster-moving nonorganic counterparts. One wholesale grocery executive said she didn't accept the organic version of Kraft's blue-box dinner because "it was too far a stretch to expect consumers to pay $2.29 for it when I sell the regular blue-box at two for 99 cents. It would just sit on my shelf."
Against the grain
She was equally skeptical about the salad dressings -- unless Kraft plans to price-promote them along with the rest of the line, something that goes against the grain for organic products, which appeal to major marketers mainly for their premium prices.
That's not to say marketers have given up. H.J. Heinz, which has done relatively well with its Heinz organic ketchup, is gauging retailer interest in Classico organic sauces, notwithstanding the problems rivals Ragu and Prego have had with their organic lines. And Campbell Soup Co., despite gaining spotty distribution for its Prego, Pace and V8 organic offerings, is sticking with them and its more consistent performer, Swanson organic broth. "We have dedicated resources and logistics to organics and, though not huge, they're a small niche component of our overall sales," a Campbell spokesman said.
And they're likely to stay niche. "Organic tends to play best in fresh produce and in fresh dairy, and it has far less relevance to shelf-stable products," said Landor Managing Director Allen Adamson. When the organic label becomes overused, he said, "it loses some of its horsepower and its ability to be a differentiator."
So don't count on organic products becoming the flailing food industry's growth rocket. Without them, food marketers are finding little to innovate around. According to a slew of retailers and marketers in recent weeks, the 2007 pipeline promises little in the way of true product development.