Organic Industry Structure

Winter 2009: v.05 n.03: AGRIART: COMPANION PLANTING FOR SOCIAL AND BIOLOGICAL SYSTEMS

Philip H. Howard
https://www.msu.edu/~howardp

ABSTRACT

“Organic” has undergone a transformation from a movement to a $20 billion a year industry in the United States. This project explores the changes in ownership and control that have accompanied the implementation of a federal organic standard. The transition began in the late 1990s, as the US Department of Agriculture moved to replace an existing “patchwork” of differing state/regional standards. Some of these changes are well-hidden, as few companies that have acquired organic brands make these ownership ties apparent on product labels. At least sixteen major organic brands have resisted enormous buyout offers, and remained independent. The overall trend, however, is increasing industry domination by large, transnational corporations.


INTRODUCTION

Organic food has its origins in a movement to create a more sustainable food and agricultural system, which grew rapidly in the 1970s. Farmers and their allies eventually developed state and regional standards to certify that foods labeled as organic were actually grown according to the practices that they followed. By the 1990s these standards differed slightly from certifier to certifier. The development of the USDA National Organic Standard in place of this “patchwork” was widely predicted to accelerate trends of increasing corporate involvement in this sector (1-3). The first draft of the national standard was released in 1997; this project explores changes in ownership and control have since occurred (4).

ACQUISITIONS

Fig 1: Acquisitions by the Top 30 Food Processors in North America.

Fig 1: Acquisitions by the Top 30 Food Processors in North America.

Most acquisitions of organic processors occurred between December 1997 – when the USDA released a first draft – and the final implementation of a standard in October, 2002. This graphic focuses on the top 30 food processors in North America by sales, according to Food Processing Magazine (5). These firms are represented as large, yellow circles. Organic brands are represented as smaller ovals, either green or blue, with the latter color indicating the presence of strategic alliances. Nearly half of the 30 largest processors have either acquired an organic brand, or entered into strategic alliances with these brands. Few of these giant processors identify these ties on product labels, a practice that is sometimes described as “stealth ownership.”(6)

Cargill’s strategic alliances with French Meadow and Hain Celestial are to develop products with nutritionally enhanced organic ingredients such as phytosterols, soy isoflavones, trehalose, inulin, and chondroitin. Heinz acquired a 19.5% stake in Hain Celestial in 1999 while also transferring ownership of their Earth’s Best brand, but sold all of its Hain Celestial stock in 2005.

Figure 2: Significant Acquisitions.

Figure 2: Significant Acquisitions.

Other significant acquisitions are shown above, with investment firms/venture capitalists represented as large, purple circles. Venture capitalists have played a catalyzing role in changing this industry by acquiring organic brands–often several within the same sector (e.g. bread, chocolate, meat)–with the goal of selling them to transnational food processors for a significant gain in 3 to 7 year.

This graphic also illustrates the increasingly global scope of the organic industry. Food processors from France, Ireland, Hong Kong and Korea have made important acquisitions, in addition to those made by Swiss-based Nestle, and United Kingdom-based Cadbury, shown in Figure 1. A uniform, national standard made it much easier for large firms to export certified organic foods, as well as import organic ingredient.

INTRODUCTIONS

Figure 3: Introductions by the Top 30 Food Processors in North America.

Figure 3: Introductions by the Top 30 Food Processors in North America.

In contrast to acquisitions, most introductions of organic versions of well-known brands occurred after the implementation of the USDA standard in 2002. New organic brands are represented here as smaller, red ovals. More than half of the top 30 food processors in North America have engaged in this strategy. Some, such as M&M Mars’ Dove Organic, were developed specifically for retail giant Wal-Mart, which increased its organic offerings in 2006. While corporate parentage is easily apparent for the majority of these products, Anhueser-Busch first positioned its introductions of Wild Hop and Stone Mill organic beers as if they were unaffiliated micro-brews. This stealth strategy was quickly abandoned after it was revealed in the San Francisco Chronicle (7).

INDEPENDENTS

Figure 4: Major Independents and Their Brands.

Figure 4: Major Independents and Their Brands.

Independent organic companies with an estimated $15 million or more in annual sales are shown as green circles, if they are privately held, or blue circles, if they are organized as cooperatives. Some of these companies sell additional organic products under different brand names, which are represented as smaller ovals. Most of these firms have resisted substantial buyout offers, typically valuations (based on annual sales) that are twice as high as the average for the food industry.

Refusing such offers is extremely difficult, not just because of the enormous prices that potential acquiring firms are willing to pay, but because of the challenges involved in competing against increasingly bigger rivals. Larger 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. The biggest firms also tend to obtain much better terms with organic/natural foods distributors (an industry that has also become highly consolidated) because they make up a higher proportion of sales.

Firms that remain independent commonly display a strong commitment to non-market values. Sometimes this is due to the principles of a charismatic and idealist founder (8). Arran Stephens, president of Nature’s Path, for example, is the author of a spiritual/religious book, and does not want to see the “soul gutted out” of his company, as he has seen happen with buyouts involving his peers (9, 10). Gary Erickson, CEO of Clif Bar, nearly sold his company after his closest competitors were acquired by Nestle and Kraft. Instead, he walked away from an offer of $60 million in cash in order to avoid “growth for growth’s sake, rather than growth to further a vision,” and he has increased his company’s commitment to philanthropy and more sustainable business practices (11). In other cases there are organizational structures designed specifically to discourage transfer of ownership. Equal Exchange, an employee-owned cooperative that trades directly with democratically organized small farmer cooperatives, was founded with the condition that if the company is ever sold, net proceeds are required to be given to another fair trade organization, not the worker-owners themselves (12).

ANIMATING THE ORGANIC INDUSTRY STRUCTURE

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Figure 5: Key to Animation

Figure 6: First and Last Frames of Organic Industry Structure Animation.

Figure 6: First and Last Frames of Organic Industry Structure Animation.

Animation 1: Organic Industry Structure, 1995 to 2007

Information shown in the four graphics above was combined in an animation. This was produced in collaboration with Skye Bender-deMoll, using Social Network Image Animator (SoNIA) software. The animation shows the ownership changes occurring in the organic industry from 1995 to 2007, including acquisitions, alliances and introductions. The year is displayed in gray text at the upper left of the display area. Some of the patterns discussed above are easier to see in this format, including: 1) a low level of transnational corporate involvement in 1995, 2) an increase in the pace of acquisitions beginning in 1997 that results in a high level of transnational corporate involvement by 2002, 3) the catalyzing role of venture capitalists in eventual acquisitions by larger food processors, 4) the large number of organic versions of mainstream brands that were introduced after 2002, and 5) a relatively small number of pioneering organic brands that remain independent.

CONCLUSION

Organic has undergone a significant transformation from its movement origins, and is now a $20 billion a year industry in the United States. Some of the original ideals, such as avoidance of synthetic pesticides and fertilizers remain quite strong. Buyouts of organic brands by transnational corporations have contributed to lower prices and increased availability for foods grown with organic methods, as well as an increased amount of farmland converted to organic production. The changing structure of the industry has coincided with the loss of other ideals, however, such as improving the economic viability of small-scale farms, minimizing the distance foods are transported, and encouraging the consumption of whole, unprocessed foods (13). These impacts are not easily apparent, however, as the ownership changes represented in this project are deliberately hidden by a number of firms.


FOOTNOTES

1. Daniel Buck, Christina Getz, and Julie Guthman, “From Farm to Table: The Organic Vegetable Commodity Chain of Northern California,” Sociologia Ruralis, 37, no. 1 (1997): 3–20.
2. John Ikerd, “Organic Agriculture Faces the Specialisation of Production Systems; Specialized Systems and the Economical Stakes,” paper presented at Colloques de l’INRA, Lyon, France (December 1999).
3. Laura B. DeLind, “Transforming Organic Agriculture into Industrial Organic Products: Reconsidering National Organic Standards,” Human Organization, 59, no. 2 (2000): 198–208.
4. For a more detailed view from a sociological perspective see Philip H. Howard, “Consolidation in the North American Organic Food Processing Sector, 1997 to 2007,” International Journal of Sociology of Agriculture and Food, 16, no. 1 (2009): 13-30.
5. Dave Fusaro, “Top 100: Succeeding in a Difficult Year,” Food Processing (August 11, 2008). Retrieved September, 2008 from http://www.foodprocessing.com/articles/2008/307.html.
6. Michael Sligh and Carolyn Christman, Who Owns Organic? The Global Status, Prospects, And Challenges Of A Changing Organic Market (Pittsboro, NC: Rural Advancement Foundation International-USA, 2003).
7. Carol Ness, “Brewing Behemoth Sneaks into Organics,” San Francisco Chronicle (March 30, 2006): F:1.
8. Quarter, Beyond the Bottom Line: Socially Innovative Business Owners (Westport, CT: Quorum Books, 2000).
9. Arran Stephens, Journey to the Luminous: Encounters with Mystic Adepts of Our Century (Seattle, WA: Elton Wolf Publishing, 1999).
10. Arran Stephens, radio interview, KUOW (Seattle, WA, March 5, 2008).
11. Gary Erickson, Raising the Bar: Integrity and Passion in Life and Business (San Francisco, CA: Jossey-Bass, 2004).
12. Rodney North, “Building Mission into Structure at Equal Exchange,” Business Ethics, 17, no. 2 (2003).
13. Julie Guthman, Agrarian Dreams: The Paradox of Organic Farming in California (Berkeley, CA: University of California Press, 2004).


PHILIP H. HOWARD

https://www.msu.edu/~howardp

Philip H. Howard began studying consolidation in the food industry while earning his PhD in Rural Sociology at the University of Missouri. He started this project as a postdoctoral researcher at the Center for Agroecology and Sustainable Food Systems (University of California, Santa Cruz), using semantic networks. In his current position as assistant professor of community, food and agriculture at Michigan State University he has expanded his visual work to include, cladogram/timelines, treemaps, and a network animation (the latter in collaboration with Skye Bender-deMoll)