And Where Are The Organic Companies?

Introduction

The UK organic food industry enjoyed exceptionally high growth rates between the mid 1990s and 2002. High market growth attracted a large number of new entrants, resulting in the competitive landscape to change tremendously. The market was previously the domain of dedicated organic food companies however this is no longer the case. Dedicated organic food companies with high market share are now the exception rather than the norm in an organic food market that increasingly resembles the non-organic food market.
Conventional food companies now dominate almost every product category in the UK organic food industry. Less than a handful of dedicated organic food companies have high market share in the product categories they operate in. This is shown in the table, which lists the leading companies by organic product category.

Hijacking or Long-term interest?

Some may argue that large conventional food companies have hijacked the organic food industry. Why and how has this happened?
Exceptionally high market growth rates in the late 1990s were largely due to supermarkets stepping up marketing activities for organic foods. Tesco, Sainsbury’s and Waitrose were the frontrunners in marketing organic foods. Organic foods became important to the multiples which looked to capitalise on high consumer interest. However the retailers faced supply chain problems with products coming at irregular intervals and product quality a major issue, especially for fresh produce. They faced this problem because of the fragmented nature of the organic food industry with small dedicated organic firms ill-equipped to meet the requirements of large retailers.

To meet the required volume and tight specifications of supermarkets, large conventional food companies were encouraged to enter the organic sector. Supermarkets also prefer to source as few suppliers as possible and it made commercial sense for the same company to supply organic and non-organic products. As a result, many suppliers of conventional fruit & vegetables, meat & dairy products to supermarkets became involved in organic products in 2001.

Conventional food manufacturers were attracted to the business potential of the organic food market, which was expanding by over 20 % per year. Almost all successful food products were available in organic versions in British retailers in 2002. Competition in the organic food market was now at its peak due to this influx of new entrants. Large conventional food companies launched organic versions of existing products for the supermarkets, with which they already had strong supply chains. Dedicated organic food companies begun to focus on specialist retailers once again as opportunities dried up in the multiples. Dedicated organic enterprises continued to spring up in these years, however few could survive in the crowded marketplace.

Growth in the organic food market slowed to 15 % in 2002 and consolidation was inevitable as a large number of companies crowded the marketplace. Many large conventional food companies withdrew from the market as business opportunities failed to materialise. A notable exit was made by Müller, the leading brand of conventional yoghurt. The German company launched organic versions of its yoghurts with a multi-million pound campaign in July 2001, however it withdrew within a year.

Consolidation of suppliers continued in subsequent years as retailers streamlined their product ranges to focus on core organic products. Although the UK market is reporting healthy growth, interest from new entrants has tapered off due to many companies exiting after suffering heavy losses. It is safe to say that the conventional food companies that remain in the organic food industry will be in for the long-term. Companies like Arla Foods and Moy Park are highly established in their industry sectors and their strong relationships with retailers will ensure they remain leading players.

Acquisition Target: Organic and Profitable

Another reason for few dedicated organic food companies to have strong market positions is that many successful brands have been swallowed up by large conventional food companies. Green & Black’s, one of the fastest growing organic brands, was bought by Cadbury Schweppes in May 2005 for about 30 million Euros. Cadbury Schweppes was attracted to the high sales growth of the Green & Black’s brand, which doubled between 2002 and 2004 to 33 million Euros. The company reported 69 % sales growth in 2004 alone and accounts for 5 % of all large chocolate block sales in the UK.

The American company Horizon Organic, now part of Dean Foods, entered the UK market via an acquisition spree in 1999 and 2000. It bought several organic dairies and consolidated them into one operation based in Aberystwyth (Wales). The company operates under the Rachel’s Organic name, which is the second leading brand of organic yoghurt in the UK. Other organic brands that have been bought by large food companies include Go Organic (Unilever), Kallo Foods (Koninklijke Wessanen) and Whole Earth (Koninklijke Wassanen).
The latest acquisition target has been Cauldron Foods, a leading producer of organic and vegetarian-based meals. The company was acquired by Premier Foods, a large British food group, for 42 million Euros in October 2005. Cauldron Foods’ organic ready-meals are highly successful in specialist retailers and supermarkets.

Table: Leading Companies by Organic Food Categories

Source: Organic Monitor

Although Organic Farm Foods remains the market leader in Fruit & Vegetables, its market share has halved from over 50 % in the mid 1990s. The entry of supermarket pre-packers like MBM, Wealmoor and Worldwide Fruit has caused market fragmentation.
Arla Foods and Dairy Crest, two large conventional dairy companies, supply the bulk of organic milk to the multiples. Yeo Valley Organic has leveraged its domination of the organic yoghurt market to launch complementary organic dairy products.
Conventional meat companies supply the bulk of organic meat to retailers. Companies like St Merryn and ABF supply most volume, whilst dedicated organic companies focus on specific product lines. Eastbrook Farm, the leading dedicated organic meat company, specialises in organic pork products.
Conventional beverage companies dominate the organic beverages market. The Belgian firm Alpro supplies most organic non-dairy drinks, whilst Gerber Foods leads the organic juices market. Dedicated organic companies are important in the organic tea and coffee markets.
Green & Black’s, the leading brand of organic chocolate, is now part of Cadbury’s. Cauldron Foods, another leading producer, was also acquired by a large food company in 2005. Important dedicated organic companies are Hipp Organic, Alara WholeFoods and Duchy Originals. Hipp Organic and Alara WholeFoods lead the organic baby food and organic breakfast cereal markets respectively.

Yeo Valley Organic

Yeo Valley Organic is the leading dedicated organic company in the UK, reporting about 90 million Euros sales in 2004. The organic dairy was started by Yeo Valley, a dairy that has been producing yoghurts from its own dairy herds since the 1960s. In 1992 Yeo Valley was approached by organic dairy farmers who were looking for an outlet for their organic milk. It started producing natural organic yoghurt and then set up a separate company, Yeo Valley Organic, in 1996. This company has been a leader in the organic yoghurt market since. Yeo Valley Organic has leveraged its dominant position in the organic yoghurts market by launching complementary dairy products. Its product range includes organic milk, fresh cream, butter, desserts, frozen yoghurts, cheese, ice-cream, and fruit compotes. These products are found in supermarkets and specialist retailers across the UK; it also exports organic dairy products to Europe, the Middle-East and Asia. Yeo Valley Organic has won a number of awards for its innovative product range. It is also one of the few companies to receive an award from the Queen for its work in encouraging sustainable farming. A factor behind Yeo Valley Organic’s market leadership is product innovations. The company has invested in research & development and has introduced a number of new organic dairy products. It launched a number of new products in 2005 that included Greek-style yoghurts, and new varieties of ice-cream and cheese.

Duchy Originals

Duchy Original is owned by Prince Charles, an avid supporter of organic farming. The company was set up in 1992 with organic oaten biscuits the first product. Over the years, the company has launched a wide range of products under the Duchy Originals brand. In 2005, over 140 organic products were in the product portfolio including bread, milk, meats, snacks, soups, preserves and ready-meals. Duchy Originals sales, increasing by over 25 % per year, reached 83 million Euros in 2004. Although it is one of the leading dedicated organic brands in the UK, all its products are made by other companies. The company’s expertise is in marketing. However it is venturing into organic food production with plans unveiled to open an organic bakery in April 2006. The success of the Duchy Originals brand led the company to diversify into non-food areas with the launch of outdoor furniture in 2003. Expansion into the natural hair care market followed with the introduction of shampoos and conditioners in June 2004. Twenty additional body care products – including liquid soap, moisturiser, soap and shower lotion - were launched in March 2005 under the Duchy Collection brand in March 2005. Apart from diversifying into non-food products, Duchy Original is developing an international presence by focusing on export markets. Its organic products are found in a number of European countries, North America and Japan.

Future Outlook

Healthy growth rates in the UK organic food industry continue to grab the attention of conventional food companies. Most are taking a cautious approach to market entry, with fast-track entrances no longer fashionable due to the failure of big names like Müller. Some conventional food companies are using acquisition as a route into the organic sector. Premier Foods and Cadbury Schweppes are two multinationals that have used this method to access market opportunities.

Although few have strong market positions, dedicated organic food companies are continuing to grow by focusing on product innovations and branding strategies. Yeo Valley Organic and Duchy Originals have both leveraged the strength of their brands to expand into new product areas. Others are developing novel products as organic is no longer a guarantee of success in this highly competitive marketplace.