So far, so good

25-May-2009 - Last updated on 14-Mar-2017 at 12:05 GMT

Food processors are having to take the bad with the good in the ever-changing world of organic food and drink, reports Elaine Watson

UK sales of organic food were up 1.7% to £2.1bn in 2008 - a respectable performance, says Soil Association director Peter Melchett, in "marked contrast to the prophecies of doom made by some"

What he does not say is that organic sales in the first quarter of 2009 slumped by a fifth (TNS Wordpanel), with certain categories experiencing falls of more than 50%, suggesting that for some suppliers at least, the prophets of doom may have been onto something.

Looking on the bright side, however, many brands are riding the storm and some retailers - Asda and the Co-op Group - are bucking the trend (Asda increased sales of organics by a whopping 25% in 2008 - albeit off a low base - while the Co-op Group's organic sales were up 15%). Tesco, however, saw a 9.9% drop, Sainsbury a 4.4% fall and Marks & Spencer a 9.6% slide.

One thing is certain, space allocated to organics is under more pressure than ever and product development - at least for own-label - is on the back burner. Indeed, one supermarket source reveals her employer is "undertaking no developments on organic products" at all.

While some retailers have reduced the space devoted to organics lately, this process actually began well before the recession, stresses Simon Wright at the Organic Consultancy. "Once organics were taken out of 'organic ghettos' and merchandised alongside conventional products, it was a case of survival of the fittest and there was a real shakedown [as slow sellers were delisted]." But it's not in retailers' interests to throw out the baby with the bathwater given that organics can offer attractive cash margins and bring in customers who will also spend more on deli items and other high-margin lines, he says.

Winners and losers

For brands such as Green & Blacks, space reductions have merely cemented their market-leading positions and reduced clutter. Indeed, sales were up 7% last year, says brand manager Natalie Brown, who has also launched new creamy milk chocolate and strawberry ice cream this year. "Taste and quality is at the heart of what we do; we don't just hang our hat on organic. We're also benefiting from the lipstick effect; people want affordable indulgencies."

However, some smaller players will be under significant pressure to increase their rate of sale or face expulsion.

Indeed, many of the horrific year-on-year sales declines shown in data from Nielsen reflect delisting, rather than appalling sales on shelf, per se. A 60% drop in sales of Rachel's organic milk in the three months to the end of March, for example, is not a reflection of its performance in general, stresses marketing director Steve Clarke: "Last year Sainsbury's significantly reduced our distribution across its portfolio. The performance you quote is simply as a result of this situation. Where our brand remains listed, rate of sale remains healthy."

Category by category, there are winners and losers according to TNS Worldpanel data, with strong sales of organic frozen veg, babyfood (organics now account for almost half of category sales), tea (up 20% in the 12 weeks to April 19), canned food, cheaper cuts of meat and squash. However, 2008 sales of chilled convenience foods fell 5.9%, organic bread and bakery slumped 18.2%, confectionery dropped 21.3% and crisps, nuts and savoury snacks were down 6.6%. 2009 figures show even sharper falls.

"Sales of Rocks organic squash were up 30% in 2008," says Russell Smarts, boss of parent company 3V Natural Foods Group. "But the picture's mixed. Our nut butters are doing pretty well, but fruit spreads less so. A good product and loyal customers are what matters. You can't hang everything on organic. With own-label being cut back, now's the time for organic brands to do what they do best: innovate."

While it is easy to attribute lacklustre sales of organics purely to the recession, the continued growth of some other premium-priced products suggests this is too simplistic.

As Soil Association policy director Peter Melchett himself recognises: "The downturn has given increasing profile to 'single issue' market alternatives to organics such as free-range, local, pesticide-free, fair trade, seasonal and 'natural' foods. To cut through the confusion the organic movement needs to demonstrate more forcefully than ever that organic principles encompass all these single issues and deliver a set of interlocking benefits that can and will still motivate consumers."

Sales of organic milk, cheese, meat and poultry grew by 10.6%, 11.5%, 13.3% and 17.7% respectively in 2008, demonstrating that where the benefits of organic production are understood, commitment remains firm among "ethical consumers", he notes. It is not then surprising that sales of more processed organic foods, where, by implication, the benefits are less clearly understood, have been badly hit.

Tesco, which saw the biggest year-on-year declines in organic sales, accepts there is work to do: "We want to be clearer on packaging and, at point of sale, what the benefits of organic are." Stephen Grey, Asda technical manager for organic produce, also suspects shoppers require more education: "For too many shoppers 'organic' means merely 'pesticide free'." Even loyal customers are buying organics "partly as an act of faith", suspects Wright.

But what should the organic lobby be shouting about? Pinning down specific benefits is fraught with difficulties, both from the legal point of view (substantiating claims), and from a PR perspective. After all, it is by no means indisputable that organic food always has a lower carbon footprint, or is better for you. You can also make animal welfare claims without being organic. Even a slogan as nebulous as 'Organic: good for nature, good for you' (as adopted in Ireland) could fall foul of advertising codes in the UK, predicts Wright.

Of course, some elements of the food industry are privately pleased that organics are struggling, he notes. Thus any sign that key players might be losing faith is seized upon with glee, notably the decision by Rachel's to drop 'organic' from its logo (even though the word is still prominent elsewhere on its packaging).

Rachel's, meanwhile, has been forced to issue a statement underlining its ongoing commitment to organic dairy farmers. Frustrating though this episode has been, says marketing director Steve Clarke, it does underline that more work is needed to get the message across. "No-one has summarised the benefits of organic in a way that is memorable, clear and impactful. This remains an industry challenge."

Rachel's yoghurts, meanwhile, are performing well, up 18.3% in the first quarter owing to a combination of distribution gains, rate of sale increases and promotions, he says. However, "retailers are being more cautious about NPD and are increasingly looking for evidence that new products will be a success before launch"

Rival organic dairy firm Yeo Valley is also performing well in the circumstances, says marketing director Ben Cull. "While not totally immune to the recession, sales have remained relatively buoyant, and our biggest sales categories - yoghurt and milk - are in growth."

What does organic mean?

Nevertheless, "the reality is that most consumers just associate organics with being free of unnecessary chemicals and pesticides", he says. If consumers understood that higher animal welfare, sustainability, health and ethics were "all building blocks of organic", he argues, the price premium would be far easier to justify.

If organic dairy is holding up reasonably well, however, juices and smoothies have struggled. But unlike rivals with greater exposure to suicidal promotional activity on one-litre lines in supermarket chillers, RDA Organic has spread its bets with more 250ml single serve packs in independents, health food stores and foodservice outlets, says boss Patrick O'Flaherty. But supermarkets are still an important route to market for brands, he says: "The multiples are looking carefully at space allocation to premium - which includes organic, but they are also looking for brands to innovate." Shelf allocation for organics will drop further this year, predicts David Patmore, md at fellow organic juice firm Grove Fresh, "but brands that survive will emerge stronger"

Whether the UK growers and farmers supplying these organic manufacturers will weather the storm is another matter, however.

In the short-term, the weak pound has given them a boost. However, long-term predictions that the rising cost of nitrogen fertiliser will ultimately close the price differential between organic and non-organic farming are of scant consolation today, with oil prices still well below last year's record highs. And while beef has better prospects, UK organic pork production is expected to plummet 40% this year.

The key challenge in dairy, meanwhile, is finding a market for the glut of milk produced in spring, says Richard Hampton at organic milk co-op Omsco. "The organic cheese market has to get bigger." With revenues falling, many organic farmers have simply reverted back to conventional production, he says. "The market has lost more than 20M litres in the last few months, and before you know it, you've lost large chunks of the industry."

Given that organic milk is not significantly more expensive than conventional milk, and dairy products are relatively low ticket items, the industry needs to drive home the message that organic is affordable, he adds. "If you're just after milk, you can go organic for less than £1 a week."

When it comes to poultry, however, consumers have more difficult choices to make, says Russell Downing at organic farmer and manufacturer Sheepdrove. "You can buy our organic chickens for £12, free range for £8-9, or two for £5 from the supermarket."

However, anything that raises awareness of animal welfare issues has to be good for organics overall, he says. "Hugh Fearnley Whittingstall and Jamie Oliver weren't promoting organics, but they did make people think about where their meat was coming from, which has to benefit organic farmers. We certainly saw a big surge in demand after those programmes. The challenge is keeping the issue alive." FM

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Sales by sector 2007-2008

Milk +10.6%

Yoghurt +1.5%

Fresh red meat +13.3%

Home cooking ingredients +13.5%

Eggs +2.2%

Chilled convenience foods -5.9%

Bread and bakery -18.2%

Biscuits +13.4%

Cheese +11.5%

Fresh poultry +17.7%