Sign of the Times
September 1, 2007
Sign of the Times
by James Dudlicek, Editor
The Organic Valley team says organics are the future, and their booming business suggests they may be right.
Organic ain’t what it used to be — a bunch of hippies with long hair and sandals, growing their own food and selling their wares by word of mouth to a few like-minded folks here and there, in some obscure, out-of-the-way shop. About the only thing that’s the same is the hair and the sandals. OK, so Organic Valley Family of Farms technically grows its own food, but it’s on a nationwide network of organic farms, with milk bottled at 65 plants in 25 states, sold by major retailers across the country. And the core of consumers — who more often find organic foods in their local mainstream supermarket — continues to grow, yielding sales in excess of $400 million for a line of products including dairy, meat and produce.
The incremental growth over the past two decades for the La Farge, Wis.-based cooperative is proof that organic can work on a national scale, a reach that’s key to spreading the company’s mission.
“Running a successful business model allows us to spread the mission,” says Mike Bedessem, Organic Valley’s chief financial officer. “We want to be innovative, practical and thrifty. If we have a successful business model, people will listen.”
Part of that success is not just serving its customers — with a full line of dairy products including milk, cream, cheese, butter and cultured products — but its farmer members as well.
“We’re not a private company that’s worried about stock value and all that kind of thing,” says chief executive officer George Siemon, a lifelong farmer who prefers the title C-E-I-E-I-O. “Our business is to serve our farmers. That allows us to really focus on being an authentic brand. Our farmers want us to have the highest standards possible. It’s really exciting, because what the farmers want is really what the consumers want: the highest organic integrity possible. So that’s win-win for us.”
Integrity of the organic standards is crucial to the success of the company, which began in 1988 as a co-op of organic farmers. “We’re a pioneer. You might say George and the other pioneers wrote the standards for organic dairy,” says marketing executive Theresa Marquez. “That’s why organic dairy works, because the standards were really developed by farmers. Many think the organic standard is a health claim; it’s a production process. Does it end up having some health benefits? Yes, and it’s being proven more every day. But we still have to remember it was a production process that was led by farmers.”
Organic Valley is itself a leader in the organic dairy arena. The brand ranked fourth overall and second among organic brands (right behind Horizon Organic at third overall) among skim and low-fat milk brands with $92 million in sales for the year ending June 17, an increase of more than 24 percent over the previous year, according to data from Information Resources Inc. (IRI) reported in Dairy Field’s State of the Industry 2007 in August. Among whole milk brands, Organic Valley ranked 8th overall with more than $27 million in sales, an increase of nearly 20 percent over the previous year.
It’s evidence that growth in the organic dairy segment is stronger than widely thought, Siemon says. “Right now, the data’s a little hard to tell, with private label and the Wal-Mart factor, but we think that organic fluid milk is 6 percent of the market right now,” he says. “We’ve got to get out of the grip that it’s 2 percent — things are changing fast. Our success has surprised all of us in the marketplace.”
Further, young mothers have replaced baby boomers as the hot target demographic, Siemon contends. “They’re very concerned about what they feed their children, and milk and yogurt are two of the top items for which they feel concern, and the mass market’s really brought the availability to a whole new audience,” he says. “The mass market’s a major part of why we’ve seen organic triple over the past few years. It’s got access to so many new customers, and it’s working.”
For Organic Valley, it means getting its products into national retailers like Whole Foods, Kroger, Safeway and Wal-Mart, and prominent regional players like Fred Meyer, Publix, Wegmans, Harris Teeter and HEB.
And while some decry the mass market as a threat to organic’s mission, the folks at Organic Valley see it as the gateway to organic’s eventual dominance in the food industry.
“A lot of the pioneers of the organic industry are disillusioned by our success. That’s just tough,” Siemon says. “I always say, pioneers hate settlers. That’s just a lot of what I see out there. The mass market is introducing a whole new world to organics and we have a lot of faith that once they start buying organics, they’ll start thinking a lot more about their food, doing their own research. We embrace the mass market; it’s part of our success.”
Getting It Out There
As far and wide as Organic Valley’s products are available, the company actually does very little of its own manufacturing, which the company’s management team believes is consistent with the organic mission.
“Manufacturing is an enhancement, but it’s not core to organic,” says Louise Hemstead, chief operating officer and a member farmer whose family’s farm was the setting for this month’s cover photo. “So a long time ago, when we were small, we set up relationships with various co-packers around the state of Wisconsin and the Midwest to manufacture products for us. It works well for them and for us. They have a fairly known quantity that we will bring in and produce over a series of months, and we pay well.”
Quality control is tight; co-packers are subjected to internal audits as well as those by Organic Valley customers and to ensure national organic certification. “It’s a complex web, but really not so hard when it started one piece at a time,” Hemstead says. “We have co-processing facilities in 25 states — about 65 plants — doing cheeses, various powders and dry milks for us.”
Organic Valley owns a butter plant in Chaseburg, about an hour’s drive west of the corporate headquarters in southwestern Wisconsin, plus a cheese-cutting operation in the company’s original creamery in La Farge. “That was born out of necessity because at one time we were so small, no one would cut cheese for us,” Hemstead explains of the facility that will be upgraded this year. “We had a few part-timers that would come in a few days a week and they would cut our random-weight cheeses for us. That evolved into six days a week on two shifts. We outsource some of it, our shreds and slices.”
The latest addition is a distribution center in nearby Cashton, which opened to much fanfare in late July. “Those are significant pieces of our business, but really don’t represent the core, which is outsourced — all the fluid bottling and the manufacturing of cheeses,” Hemstead says. “You can’t make blue cheese and cheddar cheese and mozzarella in the same plant, but our customers want blue cheese, mozzarella cheese, cheddar, parmesan. So by working with these specialty cheesemakers, we can meet these requests.”
The arrangement represents what has perhaps become one of Organic Valley’s greatest strengths: being a national supply and logistics chain. Of course, when one thinks of “logistics,” often what comes to mind is great big gas-guzzling semis hauling products from coast to coast.
“While we’ve been growing as fast as we’ve been growing, shipping products all over the United States and the world, we can say we’re not real proud that we’ve been a perfect sustainable company, but that’s what it’s taken to pioneer organic,” Siemon says. “We’d ship product into the West and Northwest. But that would give us an opportunity to build the business; then we could recruit local farmers and do it locally. Anytime we can push to be local, we do.”
Bringing more manufacturing in-house is not necessarily in the cards. “Will we add more processing? Maybe,” Hemstead says. “We talk about reduce, reuse, recycle. What’s better than using existing facilities instead of building new ones? It’s part of who we are and part of who we will be.”
Bedessem adds: “The reason we have farmers in 29 states is a desire to be local, and we’re accomplishing that. That’s why we’ve reached out a long ways away from Wisconsin. One of the fundamental principles of organics is local food.”
And it’s something the farmer members want, Marquez says. “They take such pride in knowing their milk is going local. Our farmer-owners constantly want to see their milk on the shelf in their local stores. It’s fantastic,” she says. “Some farmers actually go to the local stores and say, ‘Why are you carrying someone else’s milk? We’re right here in the neighborhood!’”
Getting What Out There?
For quite some time, organic processors could barely meet demand for milk. Now supply is finally catching up, which bodes well for continued expansion of the category.
“The mass-market consumer is buying milk, yogurt, maybe butter, and then maybe cottage cheese and sour cream,” Siemon says. “The point being, they’re not embracing all the products yet. So should we keep coming out with new products that are way down the list when they’re still maturing into the whole category? We come out with lots of new products, but niching a niche is something we have to watch out for. We’ve been short of milk for 21¼2 years, so really we’re in a new day now where we are seriously taking a look at a lot of the things that are exciting in the cultured dairy products world, now that we’ve got our inventory built back up.”
Organic Valley rosters some 800 SKUs overall, of which nearly 500 are dairy products. One of the products that continues to do well, and the product credited with really helping the company to break into the mass market, is extended-shelf-life milk — not only flavored, as is most common for UHT processing, but white varieties as well.
“It really opened up the mass market for us in some real significant ways,” says Jerry McGeorge, director of cooperative affairs. “I think we were in the forefront, not only in organic but in dairy in this country when we made that decision.”
That decision took Organic Valley from 100 percent HTST-processed milk to 60/40 favoring UHT, Hemstead explains. But while shelf-stable milk would allow shipment across greater distances, Organic Valley works with regional plants to more closely maintain its commitment to a local supply.
“We have milk in Colorado, California, Idaho, Utah and the Northwest,” Hemstead says. “So you’re catering to that area, and people want to see that. And it’s a better carbon footprint. We’re not driving that milk very far. What we bring from the Midwest, then, are the specialty items that people are asking for. You can’t make blue cheese crumbles in 10 states … so all our hard dairy comes out of the Midwest and runs out to the other regions.”
The Midwest and Pacific Northwest tend to be test beds for new products. “The Pacific Northwest has been a test market for a lot of organic companies. If it can’t go in the Pacific Northwest, it probably can’t go anywhere,” Marquez says, chuckling. “For example, we did non-homogenized milk there. Something like that is never going to be a huge seller like gallons of 1 percent, but it does kind of give us a nice, rounded portfolio.”
Organic Valley’s latest project is butter with CLAs — beneficial fatty acids that are known to inhibit cancer. “It’s a very complex product in that it’s actually a natural trans fat. If you say that to anyone right now, they’d say, ‘No, no, no,’ but yet it’s one of the most powerful antioxidants for preventing cancer,” Marquez says. “Right now, if we look at what we’re trying to pioneer in the whole arena of organic and health issues, it makes a lot of sense for us to look at CLA butter, which is from pastured animals. And in organic, test after test is showing 30 to 50 percent higher CLAs in organic pastured animals, so we have an excellent claim that we could be marketing.”
Siemon acknowledges that most of organic’s supposed benefits are based on opinion rather than science, something that Organic Valley hopes to change now that its member farmers have agreed to pay a nickel per hundredweight into a research fund.
“One of the problems with organics is that we don’t have a lot of science, and we need to start getting more science so we can sort through those things,” he says. “We believe it’s time to start backing ourselves up with science. I think there’s a lot of work that needs to be done, and we feel there’s more benefits and positive results to organics that we only have an opinion about, and we’re eager to get the science so we can say, ‘Here it is.’”
Such support would help the company fulfill another of its commitments: tapping food’s inherent goodness, rather than using fortifications.
“We do all we can to make natural dairy products with as few ingredients as possible,” Siemon says. “We really believe organic milk has quality — the quality and as few ingredients as possible is a big part of what we do. Our job is to think of concerns that consumers have and build brand value. We’re always listening for concerns that consumers have and how we can get ahead of them. We’ve been so overwhelmed by the demand for good, old white milk — and we were short of milk until the last seven months. We had plenty of new products to put out, but we’ve been busy just keeping up.”
An adequate milk supply has also made possible the development of a pioneering area for organics: foodservice, through relationships with Sysco, US Good, Reinhart and Performance Food Group. “We’re really trying to invest in the foodservice market because that’s one part of organic that’s just starting to unfold right now. That’s definitely a new market we’re after,” Siemon says. “We’re also making a move into the Asian market — we’re working on some projects there.”
Rooting for Dairy
Siemon pulls no punches when discussing what he sees as the dairy industry’s significant challenges. “I think the biggest challenge for the industry is to not be the mouthpiece for special interests. That’s kind of a harsh statement, but I’m reading all the controversial things and I see the think tanks influencing us, and I think the dairy industry needs to think for itself and not be influenced by these special interest groups,” he says, referring to the debate over artificial bovine growth hormones.
“We do all we can to be positive, and it’s tough. We’re very proud to be a part of the dairy industry, and that means we’re akin to the rest of the industry. We’re on the same side. We just believe in choice to let our farmers farm a certain way, our consumers choose a certain way, and I think the dairy industry has to embrace that the consumer is changing out there. They’re no longer just buying into everything they’re told; they do their own research on the Web, a whole educational thing. I just get alarmed when I see some of the divisive things going on in the dairy industry when I don’t think there’s that much division. It’s the influence of the special interests.”
The choice Siemon speaks of is what Hemstead discussed during a panel discussion on organics at Dairy Forum last January. “It’s not about pitting one against another. We’ve been accused of dividing the industry. That’s not our mantra and our story,” she says. “But what we find is that certain special-interest groups who are losing their market are actually drumming up a division in the dairy industry. The industry needs to be thinking for itself, not for the chemical/pharmaceutical industries.”
Meanwhile, the folks at Organic Valley find comfort in a tide that seems to be turning among conventional milk brands as well. “When we see the new conventional milk coming out that does not use rBGH, we still see organic doing quite well in those markets,” Marquez says. “For example, the organic market in California is quite strong. It’s one of the strongest growing organic markets in the country. Of course, you have 13 organic milks there.”
Marquez says it’s unfortunate that the push toward organics and “food as medicine” comes at the same time that people are also spending much more money on health care. “It’s double what we spend on food. It’s counter-intuitive in some ways. On one side there’s food as medicine, ‘I want to live longer and have a healthy life.’ On the other side, there’s ‘I don’t want my children to have cancer, reproductive problems and a host of other new childhood diseases that are linked to pesticides,’” she says. “Let’s face it, 50 percent of consumers just want to get home and feed their kids, no matter what it is. They don’t have the time [to worry about what’s in their food]; some of them have two or three jobs. You can’t keep putting billions of pounds of pollutants in the environment without people saying, ‘Maybe I should look at organic.’”
Further, Marquez says concerns about food security continue to drive more consumers toward organics at a steady pace since 9/11. “The whole local movement is about food security, and personally I believe — though I don’t think we have the studies yet to prove it — that when people go local and they learn more about their food, they feel more of a connection with food,” she says. “I really believe that once people get connected with their food, people say, ‘What’s more important, local or organic?’ to me it’s a no-brainer: it’s local and organic.”
Technology like the Internet has made it easier than ever before for consumers to learn about food, where it comes from and what goes into it. But while Organic Valley sees a benefit from this education, the basics can’t be overlooked.
“We are a business like any other business, and something the management team and George have always stressed is quality and service,” Bedessem says. “We have to provide products that people want, they have to be fresh, they have to taste good and they have to be convenient to buy. If we do our part, the consumer’s going to do their part, because there’s a natural push toward learning more about food. Consumers will come to different conclusions; that’s why we keep saying it’s about choices. But a number of consumers — and certainly it seems like an exponential increase — have come to the conclusion they have to think about what they’re eating and they’re going to look for foods that satisfy their desire for health.”
In the Community
Organic Valley’s emphasis on local doesn’t stop at delivering products to the store. “We have a non-profit NGO [non-governmental organization], partners who we call the unsung heroes. They have the ear of the organic consumer,” Marquez says. “Whenever we can do partnerships on a regional basis, that’s when they become more powerful. So we have quite a few programs that are very regional. We do over 200 events a year, everything from mommy and baby fairs to bicycle runs to 4K runs.”
The programs are overseen by five regional teams serving the Pacific Northwest, California, the Midwest, Mid-Atlantic and East Coast areas. “We go to our local folks, our farmers, even some of our plant people, and ask them what regional events we should be a part of — what are the organizations that are really making a difference — and then we put back some of our money into those regions by supporting those events and groups,” Marquez explains. “Last year, we gave a million dollars in money and food to these organizations. It’s very important for us to be putting money and attention and support back into these regional communities that support our farmers.”
The company’s advertising follows a similar path. “We do regional advertising — a lot of weekly papers, some billboards, trucks,” Marquez says. “I’d like to see more national advertising, but we just don’t have the money — it’s very expensive. Our strength is not 100 percent in every state, so it makes marketing sense to be very targeted. We actually look at our budget and divide it up by region and customer segment.”
In each region, Organic Valley spends 70 percent of its marketing dollars toward moms and kids, equal to their proportion of the company’s demographic breakdown. “At the same time, we take 5 to 10 percent of our marketing dollars and focus it on what George calls the ‘tipping point’— meaning they’re not really our customers yet, but they ought to be,” Marquez says.
Also helping to spread the message is Organic Valley’s farmer ambassador program, which includes 300 farmers from among the co-ops 1,200 members. The program convenes several training sessions across the country on how to better explain organics to the public and press.
The company also employs what Marquez describes as “buzz marketing,” to get folks talking about the brand. “We’ve identified a dozen influential groups who we talk to all the time,” she says. “If we can get people in every state saying things … every touch point in the company is an opportunity to convert someone. That’s the most powerful marketing we can do.”
Looking ahead, Organic Valley is committed to staying true to its mission: focusing on serving American farmers by creating a successful brand. “Staying true to our mission is a constant education with our staff and with our farmers,” Bedessem says. “It’s about offering farmers choices 20 years from now. We need to nurture and sustain a business model because there is no exit strategy. Other businesses say, ‘We might sell’ … The exit strategy is, 20 years from now, farmers will have choices — they can continue to farm, they can retire, they can sell the farm to the kids. We want to create a business that will allow those farmers to make that choice about what they want to do with their farm.”
Meanwhile, the Organic Valley team will have its hands full managing the growth that has made it a success. “We have grown a business basically over the last 20 years from zero to $430 million,” Bedessem says. “The challenge for us is to see whether as an organization we can grow, because we anticipate the organic industry is going to continue to grow between 15 and 20 percent as it has for the last 20 years, and now that 15 percent in our business is close to $100 million. Can we continue to take a $400 million business and make it a billion-dollar business with all of the systems that we’re going to require?”
The additional challenge, McGeorge says, is dealing with the growth while still maintaining its focus as a co-op. “We’ve been together for a long time and we’re very steeped in that idea of a cooperative with these values that we have,” he says. “But what about the next 150 employees, the next 300 farmers — how do we make sure we bring that to them in a way that makes sense and they’re able to continue the mission we started 20 years ago?”
Marquez adds: “We have a serious dedication to elevating the status of farming — and keeping people in it.”
And the company further has a dedication to organic as a philosophy, not just a buzzword, Hemstead says. “What we do is organic, from the beginning to the end, and it’s what we will be doing in five years. I think that’s a critical piece of staying true to our core mission,” she says. “We’ve been emphasizing pastures for years. We can tell you what month CLAs go up and what month they go down. … What we will be doing is organic.”$OMN_arttitle="Sign of the Times";?> $OMN_artauthor="James Dudlicek";?>