From Cottage Industry to Conglomerates: The Transformation of the U.S. Organic Foods Industry
by Desmond Jolly, extension economist, UC Davis, and Small Farm Program director
Organic products now represent a $3.5 billion market, growing at a rate of 15 to 20 percent per year. Clearly, this represents an important economic opportunity that has begun to attract attention from serious business interests that will eventually "mainstream" organic foods while possibly marginalizing the small-scale farmers that nurtured the industry in its infancy and growth. California's organic industry is the most developed among the U.S. states and territories, and the evolution of the structure of farm production is likely predictive of the pattern that will evolve in the U.S. as a whole.
Structural Trends and Prospects
A survey of California organic growers covering 1992 - 1995 concluded that "...registered organic agriculture was highly concentrated. Two percent of all registered farms, those who grossed over $500,000 annually, captured over half of the state's total sales. Less than 3 percent of all growers, who grossed between $250,000 and $500,000 annually, gained another one-sixth of total revenue. At the low end of the scale, two-thirds of all farms, which grossed under $10,000 per year, realized less than 5 percent of all sales in the state."Statistical Review of California's Organic Industry, 1992-1995, University of California Agricultural Issues Center, (1998).
Table 1 shows the number and percentage of California farms that were certified and registered between 1992 and 1995. From Table 1, we observe that as the size of the operation increases, the probability that the operation will be certified and registered as organic increases, and there is a high and direct correlation between size of operation and the probability of being certified. If certification becomes a significant marketing element, which it is almost certain to become, then the smallest producers may become increasingly marginalized.
Table 1. Percentage of California Farms Certified and Registered between 1992 and 1995.
|Registered Organic||Certified Organic||Certified/Registered |
|Source: University of California Agricultural Issues Center, Statistical Review of California's Organic Agriculture, 1992-1995.|
|$1,000,001 and above||8||17||17||100|
|Total Number of Growers||1,157||1,372||517||38|
The paradox in the growth and penetration of organics into America's consumption mainstream is that small-scale producers were among its most articulate advocates and supported a national organic standard. But the costs of certification, along with the transaction costs that marketers seek to minimize, means that small-scale producers will not be meaningful players in the organic industry as such.
As mainstreaming continues, the role of health food stores is decreasing and natural food supermarkets are developing, mimicking conventional supermarkets in all but their product lines. Two major supermarket chains have evolved, both listed on the stock exchange. A report in the January 1997 issue of Natural Foods Merchandiser magazine is indicative of trends in retail and wholesale marketing. According to the article by Matthew Patsky, "Consolidations, mergers, acquisitions and public offerings were common themes among businesses making up what we call the Healthy Living category. On average, these companies, comprised of publicly traded companies in the natural products industry, posted almost 50 percent gains in 1997."
"The largest industry players, including Pittsburgh's General Nutrition; Austin, Texas-based Whole Foods Market; and Wild Oats Markets in Boulder, Colorado; all saw their stock prices more than double during the year. The total equity value of the publicly traded industry players (market capitalization) surpassed $10 billion for the first time. As a result, industrial money managers met this milestone by including these stocks in the portfolios at most major mutual fund houses. Not surprisingly, some of the best performing funds for 1997 held large positions in this sector. Patsky's article describes one acquisition by Whole Foods, which acquired Amrion for $160 million. Further, "...both Whole Foods and Wild Oats continued to acquire well positioned retail operations in target markets such as Chicago and southern Florida." The Hain Food Group acquired Westbrae Natural in Carson, California, and entered the $100 million sales category.
In the food processing and product fabrication arena, a similar trend towards increased consolidation can be witnessed. For example, Shamrock Holdings, a venture capital company operating with Disney family money, now owns Fantastic Foods and Cascadian Farms, a former independent organic food company. Other venture capital companies own Health Valley Co. and Breadshop's Natural Products. As Patsky notes, "All of these companies are well-positioned to grow rapidly. They have the financial resources and the commitment of their venture owners; they will continue to acquire other natural products brand name companies. Any brand with more than $10 million in revenue is a potentially attractive acquisition for any of these four growing companies."
To date, the evidence on farm structure of the California organic industry strongly suggests that small-scale family operations will be increasingly marginalized from mainstream organic markets. And based on the trends in the food fabrication and marketing segments of the industry, small health food stores will either be absorbed as parts of national retail chains or themselves be marginalized as small players in the burgeoning natural foods and organic foods industry. As of December 1999, Wild Oats owned 105 stores, having gone on a store-buying binge. Drawing inferences from the performance of the conventional food production and marketing system, we can predict that over time, prices of organic fresh products may decrease somewhat in terms of the differentials from their conventional counterparts.
Additionally, the farm share will decline, while the marketing share will increase. Farmers will supply raw product, and food companies will be responsible for the value-added component. Branding and labeling, promotion, advertising and other selling costs will take on greater and greater significance and present significant barriers to entry. The level of competition will decline as the industry becomes more characterized by monopolistic competition and eventually, perhaps, oligopoly.
Small scale farmers will need to even more keenly develop relationship marketing systems based on direct exchanges with consumers, grounded in trust and intimacy. They may need to develop new mechanisms of product differentiation to compete with larger entities. If they are successful in this direction, many can continue to be viable operations for at least the next couple of decades.
Patsky, Matthew. Growth, consolidation, 1997 highlights.Natural Foods Merchandiser, January 1998, 1-4.
University of California Agricultural Issues Center. July 1998. Statistical review of California's organic industry, 1992-1995, July 1998.
This paper was presented at the International Federation of Organic Agriculture Movements (IFOAM) 2000: The World Grows Organic Conference, in Basel, Switzerland, August 25-September 2, 2000.