Seeing Green: Kellogg Eyes Profit in Organics

With $15 billion Market Growing at 20%, Big Food Climbs Aboard

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NEW YORK ( -- Kellogg co. is heeding Wal-Mart Stores' rallying cry by introducing organic versions of some of its top cereals and snacks, pushing the burgeoning segment into the mainstream and mapping a route to the higher margins that so often elude food marketers.
Kellogg has taken serious note of the $15 billion organic products market that is growing nearly 20% a year.
Kellogg has taken serious note of the $15 billion organic products market that is growing nearly 20% a year.

Though it's a $15 billion market growing at a rate of nearly 20% annually for nearly a decade, organics have largely remained the province of niche players and smaller brands snapped up by the majors in recent years. But the country's largest food retailer, Wal-Mart, has recently committed to doubling its organic products to 400 items by this summer while making the category more affordable for the masses.

And what could be more mass than Raisin Bran, Mini Wheats, Rice Krispies and Keebler Toasteds Crackers? Kellogg this June introduces organic versions of those grocery store stalwarts at prices roughly 15% above their non-organic counterparts, but still well below the typical prices on other organic foods, which can rise to more than double those of traditional foods.

Those increased margins will be especially fat if Kellogg-still in development with marketing plans for the launch-eschews the traditional big blowout advertising campaign for its growing organic lineup. It may well deem such a move unnecessary, considering that the word organic on packaging itself has begun to carry significant marketing clout.

"The organic label is turning into the best marketing label out there as consumers view it to mean the product is healthier and higher quality," said Scott Van Winkle, managing director of Boston-based investment firm Canaccord Adams. Mr. Van Winkle said that, despite its lightning-fast growth, organic still represents only 3% of the overall food industry and marketing expenditures will be commensurate with that. "Nobody will go out and spend $50 million on something that might only be $50 million in revenue," he said.

Craig Minowa, environmental scientist for the Organic Consumers Association, said the perception of organic among mainstream consumers has made a 180 degree shift over the last decade from something that was "immediately believed to have a bad taste and be part of the 'hippy granola movement' to something consumers now see and assume is better all around."

That change means the larger corporations who have hidden their identity behind the mom-and-pop brands they've acquired to assuage early organic adopters' skepticism will come out of hiding. Kraft Foods, which has gone organic until now under the Back to Nature and Boca brands; General Mills, which has organic lines under Cascadian Farm and Muir Glen labels; and, of course, Kellogg, which until now has concealed itself behind a few small organic products from its Kashi unit (see story, below), are all likely to offer up more organic products under mainstream brand names.

Campbell Soup Co. already has a slew of organic versions of its mainstays, recognizing, according to company spokesman John Faulkner, that "a lot of consumers out there want to purchase organic foods at the stores they already shop in and from brands they recognize, and are willing to pay a modest premium for them." That he said, allows Campbell to "trade up the value curve," not to mention prevent its current customers from leaving the franchise in favor of organic options, such as General Mills' popular Muir Glen tomato products.

Over the last few years, Campbell has expanded its organic offerings from organic Campbell Tomato Juice and Swanson broths to also include organic versions of Pace, Prego and V8. While Prego Organic received $2.5 million in advertising in 2005, including some TV, Mr. Faulkner said the products are marketed as part of their larger brand portfolios rather than directly. Currently, Campbell is considering the organic soup category.

The potential pitfall, though, of pushing the organic platform is that marketers could conceivably dilute the perceived quality of their conventional product, Mr. Van Winkle said. But overall, he believes that efforts like Kellogg's will help marketers gain incremental share and boost margins.

"If the world's largest retailer is getting more aggressive on organic," he said, "that's probably a sign that its time has come."
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