by Phil Howard, Michigan State University
• I started studying consolidation in food industries when I was a graduate student at the University of Missouri. When I moved to California where this trend was rapidly occurring – despite the fact that many of the pioneering companies set out to be alternatives to the mainstream food system – people asked me to look into organic brands. In 2003, I put together a chart to visualize buyouts made by the largest food processors, many of which are hidden. Due to widespread interest, I’ve updated it every few years. Interestingly, some companies cited on this chart have told me that they loved it. They showed it to big retailers like Walmart, Costco and Target to convince them that organic was becoming mainstream. – Phil Howard
The organic industry has seen significant consolidation since the late 1990s. Many pioneering organic firms have been acquired by some of the largest food and beverage corporations in the world, such as Nestlé, Kraft and General Mills. But not all organic brands have fallen victim to this trend; at least 18 nationally distributed organic brands have resisted consolidation by remaining independent. The question is how have they managed to remain independent?
It is not for lack of offers. Arran Stephens, CEO of Nature’s Path, notes that, during the peak period of acquisitions, he received two bids on the same day and he continues to receive large, unsolicited offers on a frequent basis. Many other independent firms report similar patterns, with offers that are much higher than typical for the food industry. Refusing such offers means not only giving up millions of dollars, but also facing the near certainty of increasing competition from some of the world’s largest food companies.
These corporations can better afford to influence consumer demand for their products with expensive advertising. They can also subsidize price cutting on organic foods with sales from other products, in order to drive their competitors out of business. Remaining independent is therefore not what an economist would call a rational decision, but what these firms have in common is a strong commitment to values beyond just profit. In many cases, this is due to the principles and ideals of the founder, while in other firms, organizational structures are in place that discourage transfer of ownership.
Four of the remaining independent companies, for example, are organized as cooperatives: Equal Exchange and Alvarado Street Bakery are employee cooperatives, Organic Valley is a producer cooperative and Frontier Natural Products is a wholesaler cooperative. Equal Exchange goes a step further by trading directly with democratically organized, small farmer cooperatives – primarily in other countries, but also in the US –and should the company ever be sold, net proceeds are required to be given to another fair trade organization, not the worker-owners themselves.
The founders of organic food companies have learned firsthand or from others’ experiences the negative consequences acquisitions have on their more idealistic goals. Stephens, who once sold a natural food company called Lifestream – and later bought it back from Kraft – has said he has seen the “soul gutted out” of acquired companies, in most cases within three years. Mo Siegel, formerly of Celestial Seasonings and Greg Steltenpohl, formerly of Odwalla, both have regrets about losing financial control of their companies and the resulting emphasis on profit. Steltenpohl has said, “[Corporations] have an agenda to consolidate and concentrate power and wealth. That’s what their function is… The system itself forces certain outcomes and I really underestimated that.” This recognition is in stark contrast to the optimistic language founders often use when announcing buyouts, with many using some variation of the phrase “We’re not selling out, they’re buying in.”
Competing against an increasing number of such profit focused firms may lead independents to converge toward the rest of the industry in some areas, even as they remain more idealistic in others. Some independent firms sell to Wal-Mart, while others export their products all over the world, which may strike some organic farmers and consumers as contrary to the ideals of sustainability. Another example is introducing products that conflict with the organic movement’s original emphasis on less packaging and processing of foods. Amy’s Kitchen, for example, has introduced frozen, microwaveable oatmeal and while a certified organic Twinkie has yet to arrive, Nature’s Path has introduced organic toaster pastries.
Refusing to converge toward the mainstream is risky when, as Cascadian Farm founder Gene Kahn, who sold his firm to General Mills, explains, “The intense amount of consolidation… has sorted out of a lot of the smaller players. This has occurred on a variety of fronts, including farming, manufacturing, distribution and retail.”
Such changes in the organic distribution and retail sectors create some of the most significant challenges to independence. The entrance of mainstream supermarkets into organic food retailing, for example, has brought with it the practice of charging fees to manufacturers in exchange for shelf space. Dean Foods was able to subsidize such slotting fees for Silk soymilk to place it in the conventional dairy case, which contributed to its dominance in the supermarket channel. Smaller companies often cannot afford the tens of thousands of dollars per product for each retail chain that is required to implement this strategy.
While the more targeted natural/organic retail sector does not typically charge these fees, it is even more consolidated than conventional retailing, with Whole Foods dominating this category. Distribution of processed organic foods also occurs primarily through just two firms, United Natural Foods Inc. and KeHe. The smallest processors can bypass these giants if they sell directly to a nearby food cooperative, which totals approximately five percent of all organic food sales in North America. The shipping costs of expanding direct sales beyond local stores may be prohibitive, however. For larger, independent processors, unless they have already established strong brand identities and relationships with national distributors – or large retailers with their own distribution systems – getting products onto store shelves is quite difficult. As a result, some of the founders of these firms have stated that, if they were starting out today, they wouldn’t be able to make it.
Consumers who want food companies that embody more of the original organic ideals would do well to seek out products from independent organic firms. Although we may not agree with all of their practices, they tend to emphasize more non-economic values, such as a commitment to sustainability and are more responsive to consumer demands than the massive food corporations of the world. Given the very uneven playing field they are competing in, independent organic processors are unlikely to survive without such support.
Philip H. Howard, PhD, is an assistant professor at the Department of Community, Agriculture, Recreation and Resource Studies at Michigan State University. www.msu.edu/~howardp/