by Kathy Leonard
As I began to think about this article, I was struck by the many parallels between the organic and natural food industry and socially responsible investing (SRI). As investors, what should we be considering as we evaluate these industries? What can we learn from them? What can both of us do better?
According to Nutrition Business Journal\’s (NBJ) 2010 Healthy Foods Report, looking back over the past decade, healthy foods sales have clearly outperformed total foods sales with a 7 percent compound annual growth rate (CAGR), compared to 3 percent for total foods. In 2009, the total U.S. food market grew 1.6 percent, reaching $628 billion in sales, while healthy foods grew 1.8 percent to reach $143 billion in sales.
According to the Organic Trade Association’s 2010 Organic Industry Survey, sales of organic food and beverages in the US have grown from $1 billion in 1990 to $24.8 billion in 2009. Leading the charge is the organic fruit and vegetable segment, which now represents 11.4 percent of all fruit and vegetable sales, according to the same survey. Organic sales growth continued to outpace total sales of comparable conventional food and Non-food items by a significant margin. While organic food sales were up 5.1 percent in 2009, total food sales were up by only 1.6 percent. Organic non-food sales experienced 9.1 percent growth, while total comparable non-food item sales actually declined by 1 percent. Organic food and beverage sales now represent about 3.7 percent of all food and beverage sales in the US.
As in SRI, organics have seen strong growth from a small base and remain small relative to the overall market. Such dramatic growth may not be sustainable. How quickly can our industries get to scale?
NBJ reports that turf wars persisted in 2009 between the organic and natural categories. Less expensive and less regulated “natural” offerings gained share from organic, where the costs of certification, consumer confusion over the added value of organic, and higher price points led industry veterans to migrate toward natural. Is this actually an expected progression that we should try to better understand and factor into product design and marketing?
What does the consumer want as it relates to quality, taste, price, and health? What does the consumer understand and value? As with SRI, the solutions are the opportunities. Socially responsible investors will recognize many of these same challenges from their own work.
Consumer education is key to moving forward on many of these issues. As both of our industries grow; more options, nuances and refinement take place. Can the growing universe of terms and definitions that hope to inform consumers result in them being overwhelmed, confused, frustrated and paralyzed? Are we preaching to the choir or are we expanding the reach of our current clients as well as inviting the uninitiated to step through the door? We need to pay attention to our clients and customers and what they are doing today and why. We need to marry that with a focus on where the puck is going versus being too concerned about planting our stake in the ground. We need more education, but we need it to be effective to a diverse group of consumers. Companies that do a good job conveniently educating their customers on why they need to choose these types of products and why their product is the best choice, and inspiring them to make the change, will be the most successful.
Understanding when and why clients consider making these changes can inform product design and marketing. Households welcoming children into their families, for example, are experiencing enormous change and reprioritizing many things in their lives. Healthy foods can be a likely candidate.
While consumers are concerned about many issues relating to sustainability, some may worry that what they do is just a drop in the bucket, so why bother? How do the choices they make effect meaningful change for them and the other stakeholders? In SRI we can point to South Africa, tobacco and the growth and impact of both proxy voting and community investing. First Whole Foods Market and now Wal-Mart have had a big impact for natural products. Not only have they significantly expanded distribution; they have pressed their suppliers to rethink how they source, manufacture, package and transport those goods. Another example is the debate over genetically modified foods and the economic and environmental considerations that must be considered.
After 27 years in SRI, I am amazed that so many investors still believe the myth of SRI underperformance. Are all of the issues surrounding performance and quality really completely understood? Can issues such as climate change or personal health trump other considerations? How do the recent recalls of peanuts, eggs and pet food from China, along with the disaster in the Gulf impact stakeholder decisions?
Cost, always a consideration, is an even bigger challenge during trying economic times. When prices dropped for conventional food products, consumers trying to save money were put off by the wide price gaps of conventional vs. organic in categories such as dairy and meat. Thus organic dairy was a disappointment in 2009, with sales shrinking about 1 percent. How can we do a better job at reaching out to a wider audience to help them understand the true cost of their decisions? How can we make that true cost relevant more quickly, so it can\’t be perceived as someone else\’s problem or expense?
As with SRI, there are many tools at our disposal. Public policy can be a powerful ally. Support of organic standards, incentives for farmers to transition to organic, the consideration of true costs, professional training in organics and agriculture, and taxing unsustainable behavior would all expand and support the industry.
Mainstreaming is a term that is often applied to SRI and it also relevant to the organics and natural products sector. According to the Organic Trade Association’s 2010 Organic Industry Survey, the mass market channel commanded the lion’s share of organic food sales in 2009 with more than half (54%) of organic food passing through mainstream grocers, club stores and retailers. Natural retailers were the runners-up with 38 percent of total organic food sales, conceding some sales to mass market because many consumers assume—although not necessarily correctly—that organic products are cheaper in mass market.
In both industries a variety of opinions exists as to how to view mainstreaming. Are the mass marketers and/or larger companies (who buy up smaller companies) our partner, with significant resources to help educate the consumer and help deliver product to those that might not otherwise buy? Do they raise the bar, make us better companies, and provide liquidity, capital, and R&D as well as scale in manufacturing and distribution? Or are they the competition that at the end of the day dilutes important aspects of the company, its culture, products and services? In 2009, White Wave’s Horizon Dairy brand launched its first non-organic products and dropped the word “organic” from its name. Recently, Unilever, the parent company of Ben & Jerry\’s announced they would phase out the use of the term “all natural” for products that contained processed or artificial ingredients.
A successful company needs adequate financing and capitalization. It needs a plan to manage its growth. How quickly can the company get to scale? Are the right folks at the top? Do they have the skills and vision necessary? An investor needs to evaluate all of these questions.
The last few years have been very difficult for investors and as a result many are approaching their future investments differently. Their confidence is tentative and they have a strong desire to know more about their investments. The economic outlook is fragile, yet cautiously optimistic. There will be bumps and a number of issues could derail that outlook. The consumer, corporate America, and the federal government will be closely watched to see how they deal with deficits and spending. Companies with strong balance sheets may have the upper hand. Not only will they be able to weather the storms, but also they will have cash they can deploy to take advantage of opportunities. They can also consider paying sought-after dividends.
Companies with defensive characteristics may be preferred. This could make it challenging for early stage companies. The preference could be away from cyclicals and towards staples.
Many feel that much of the growth will continue to happen outside the US and could be especially robust in the emerging markets. Many of those countries do not face the same headwinds that exist in more mature markets in the US and abroad.
As consumers attempt to balance their personal and financial health in conjunction with environmental health and sustainability, what trends will emerge? Some friends within the industry have suggested that taste, convenience, authenticity, innovation, the ability to differentiate your company, as well as nutritious food will be consistent themes from successful companies. Solutions that help reduce a company\’s carbon footprint, especially as it relates to packaging and transportation, will be important to follow. Support of local companies has garnered a great deal of interest. Many of those companies are small and privately owned. How will that shape the landscape going forward?
Both of our industries have seen tremendous change in the last 10 years. We should applaud our victories, but let\’s not forget the losses and the battles we have not yet won. The Sustainability Revolution is coming. It is an opportunity to learn from our mistakes, ask the right questions, and to make the necessary changes so we can open the door to new and creative solutions. I want to challenge both of our communities to rally for what lies ahead. As Worldwatch Institute’s founder Lester Brown says, “Saving civilization is not a spectator sport.” I am confident we will both emerge as powerful and important forces that change the way businesses, consumers, and governments make decisions and that we will play leading roles in ushering in this great transformation.
I want to thank Mark Retzloff of Aurora Organic Dairy, Barney Fienblum of Greenmont Capital Partners, Justin Gold of Justin\’s Nut Butter, and Doug Radi of Rudi\’s Organic Bakery for taking time out of their very busy schedules to share their thoughts. I also want to thank my teammate at UBS, Phil Kirshman. I could not have done this with out any of you.
Article by Kathy Leonard, Institutional Consultant and a Senior Portfolio Manager at UBS Financial Services, Inc. She has been a Financial Advisor specializing in Socially Responsible Investing (SRI) since 1983; helping individuals, businesses and non-profits integrate their social and financial goals. Ms. Leonard has been a member of the Social Investment Forum (SIF), the social investing industry membership association, since 1991, and was elected to their Board in 2003. She serves on a number of boards and investment committees and often speaks on SRI. Contact Kathy at kathy.a.leonard@ubs.com
