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US: Organic Supply Chains Consolidate as
Supernatural Emerges
Organic food & drink companies need to
innovative to keep their share of the supply chain as market
consolidation occurs.
Following the
approval of its acquisition of rival Wild Oats, Whole Foods Market has
become the single most important natural food retailer in North America.
The growing power of this ‘supernatural’ retailer is expected to
consolidate supply chains of natural and organic foods.
Whole Foods Empire
Whole Foods Market
was finally given the go ahead last month by the US Court of Appeals to
complete its purchase of Wild Oats. The Boulder-based retailers accepted
a US $565m offer from Whole Foods Market in
February 2007, however the deal is only now being completed. Wild Oats
operates 114 natural food stores in the USA and Canada, reporting
US $1.2bn in sales in 2006.
Not all of Wild
Oats stores will be integrated into Whole Foods. The retailer has
announced that 35 stores – operating under the Henry’s Market and Sun
harvest banners – will be sold to the private equity firm Smart & Final.
Another 8-10 Wild Oats stores will be closed down. The remaining 70 plus
stores will slowly be re-branded into Whole Foods Market.
The Texas-based
retailer was already operating 188 stores in the USA and Canada prior to
the merger. Its retailer tally is expected to exceed 300 by 2010.
Supplier challenges
Whole Foods
Market’s expansion has not been entirely welcomed by natural and organic
food companies. With its closest rival acquired, there is cause for some
alarm amongst suppliers as the retailer strengthens its bargaining
power. Natural and organic food companies have already been marginalized
by mass market retailers.
Large retailers
like Kroger and Safeway have come into the market and introduced organic
ranges, many under their private labels. Most, like Wal-Mart, have
encouraged their large conventional food suppliers to develop organic
lines. Mass market retailers have thus used their existing supply chains
for their organic product ranges.
With few openings
in the mass market, most dedicated natural and organic food companies
have continued to focus on natural food retailers. Although the USA has
about thousands of such retailers, most sales
are from large supermarket-type formats. Whole Foods Market, Wild Oats
and Trader Joe’s are the leading chains of natural food supermarkets.
With Whole Foods
Market now dominating this sector, many natural and organic food
companies could be further marginalized.
Whole Foods
Market, like all retailers, will seek to rationalize its supplier base.
As this happens, the number of its current suppliers will decrease.
Private label
producers will be adversely affected as some manufacturers of Wild Oats
and related brand products will see their markets disappear. Whole Foods
Market will slowly replace these lines with its own 365 brand and
private label products.
Manufacturers of branded products will also be affected as Whole Foods
Market streamlines its product portfolio. It
is likely to use the same suppliers of its Whole Foods Market stores for
its newly acquired Wild Oats stores. Loyal and larger suppliers
could be favored over small suppliers.
The greater bargaining power of Whole Foods Market could also squeeze
existing suppliers who will have fewer market options.
Size dominates
Big was always beautiful for the mass market retailers; large-scale
production could also be favored by Whole Foods Market.
If
this proves to be the case then the organic food industry will suffer
another blow as smaller companies continue to suffer at the hands of
large manufacturers.
The American
organic food industry has already received much criticism for its
large-scale producers. Just last month, the USDA imposed restrictions on
Aurora Dairy because of its large dairy farms. The company operates five
dairy farms in Texas and Colorado, ranging from 4-8,000 head per farm.
In spite of its large farm sizes, Aurora Dairy remains a dedicated
organic company.
Other sectors of
the organic food industry are now almost entirely controlled by large
conventional food companies.
White Wave Foods, a leading
producer of soy foods and organic dairy products, is owned
by
Dean Foods. It was formed by the acquisition and merger of Horizon
Organic and WhiteWave in 2003. Stonyfield Farm, the leading organic
yogurts producer, is owned by French multinational Danone. Large food
companies that have launched organic products include Unilever, Campbell
Soup, ConAgra, Kellogg’s, Tyson Food, and Pepsi Co.
It is hard to
imagine that with consumer interest in organic foods so high, dedicated
natural and organic food companies are feeling threatened.
The entry of mass
market retailers has encouraged large food companies to come into the
organic sector. And now, the growing bargaining power of Whole Foods
Market is making some dedicated organic companies feel threatened in
their traditional channels.
As supply chains
continue to consolidate, how can the organic companies compete?
Survival strategies
Finding a niche is
perhaps the obvious answer.
Some organic food
companies will ‘re-find’ their roots and focus on the independents.
Before the days of large natural food shops and the supermarkets, most
organic food sales were from small ‘mom & pop’ shops that focused on
health foods.
Others will move
forward by using the internet to set up home delivery schemes and deal
direct with consumers. This is already so for organic fresh produce
companies that are marketing their products as regionally produced and
having ‘no food miles’.
Other organic and natural food companies will re-align their business
models to the changing market conditions.
Some will adopt high organic production methods to differentiate their
products, whilst others will focus on new product development.
By developing novel organic and natural products, these companies are
differentiating themselves from new entrants that have launched ‘me-too’
organic products.
The few independently-owned remaining organic and natural food companies
are highly successful with this strategy. Companies like Golden Temple
and Amy’s Kitchen have showed that the organic
entrepreneurial spirit can and will live on!
Related Report:
#3001-40 The
North American Market for Organic
Food & Drink
Posted: October 31st 2007
This article was produced
by Organic Monitor for FoodNavigator-USA.com
(http://www.foodnavigator-usa.com)
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