Ewa HudsonrnrnResearch Manager, Euromonitor International09.07.10
Contrary to expectations, organic foods and beverages are weathering the recession. Calculated using fixed 2009 exchange rates, Euromonitor International data show that the global market for organic foods and beverages combined grew by 2% in 2009 compared to the previous year, reaching almost $26 billion in value sales.
North America was the only region registering a small contraction of 1%, but this was compensated for by positive growth in the other organic stronghold geography of Western Europe, which managed an admirable 4% increase to $11 billion. The most dynamic growth rates—albeit from very small base sales—came from Latin America and the Middle East and African regions at 17% and 21%, respectively.
Although it is true that organic food and beverages registered the smallest global value growth out of all the health and wellness categories tracked by Euromonitor International in 2009 (i.e., fortified/functional, food intolerance, better for you, naturally healthy), organic remains a key category in many markets.
The latest Euromonitor data show that organic accounts for more than 10% of total health and wellness food and beverage value sales in Switzerland, Austria, Norway, the Netherlands and Denmark. Organic also made up a substantial proportion of HW sales (health and wellness)—between 5-10%—in the U.S., Canada, Germany, U.K., Italy, Belgium and France.
Organic Baby Food is an Enviable Position
Organic milk formula emerged as the second most dynamic category (after sour milk drinks), boasting a 14% global increase in 2009. This was driven by burgeoning demand in North America and also—although from a much smaller base—Latin America, with a value sales increase of around 50% in both regions. Australasia, too, featured as a high growth region clocking in at 27%. Western Europe accounts for almost 60% of global organic milk formula sales.
Organic baby food finds itself in a coveted position. Overall, the category grew by 8% globally, and the subcategories of organic prepared baby food and dried baby food rose by 7% and 6%, respectively. Many organic advocates believe that babies and children benefit more from eating organic food than adults, because children’s underdeveloped organs are more vulnerable to toxins. Children also eat greater quantities than adults on a pound-for-pound basis.
When it comes to the well-being of their children, parents are not inclined to take risks, and issues like potentially toxic pesticide residues, food additive-induced hyperactivity and allergies worry them a great deal. Hence, organic baby food represents a highly attractive option, and launch activity remains high.
Seemingly untouched by the recession, North American organic milk formula sales rose from just $8 million in 2004 to $95 million in 2009—sales here have nearly caught up with Western Europe, but there is trouble on the horizon, as we are about to discover.
Ingredients Faux Pas
In April 2010, the USDA’s National Organic Program (NOP), which develops, implements and administers organic production, handling and labeling standards in the U.S., stated in a press release that it had made a mistake four years ago (2006) when it decided to permit the addition of the industrially produced fatty acid ingredients ARA, an omega 6 fatty acid, and the omega 3 fatty acid DHA, termed by the NOP back then “accessory nutrients.”
What lends this example particular poignancy is that the ARA/DHA issue concerns primarily milk formula. Around 95% of milk formula distributed in the U.S. contains added ARA and DHA, including the organic formulas sold under the Similac (Abbott Laboratories) brand, and Hain Celestial Group’s Earth’s Best brand. According to Euromonitor International research, Similac is the U.S.’ leading organic milk formula brand, with close to 40% market share in 2009 and sales of more than $36 million, up from $2 million in 2006.
DHA and ARA are usually extracted from their source materials with the aid of the solvent hexane. This is a standard process also used in the manufacture of cooking oils (although not those certified organic). Above certain concentration, hexane is known to be neurotoxic, but with only trace amounts remaining in the final product, this is not believed to have a negative effect on human health. However, it may still take most consumers by surprise to learn that solvent extraction was used in the making of organic foods, and some would be horrified at the thought of exposing their tiny infants to a neurotoxin, no matter how minute the amount.
This creates a dilemma for the baby food industry—the fortification of infant formula with DHA and ARA fatty acids is considered to be the industry standard in the U.S., and if these ingredients are removed from organic versions, they may be perceived as “deficient” and inferior by consumers. So, the heat is most definitely on for organic ingredient manufacturers to come up with a viable alternative.
Organic, No Longer Organic, Then Organic Again
Although several organic food and beverage categories performed quite admirably during the recession, this was not the case for all, and difficulties in sourcing acceptably priced ingredients did play a part.
For instance, the U.S. organic soymilk market crashed from $695 million in 2008 to just $191 million in 2009. Dean Foods, the market leader with an 80% value share (2008) quietly changed its Silk brand from organic to “natural non-GMO” in early 2009, initially without even notifying its retail customers of this change. According to company sources, the sudden switch was due to the rocketing cost of organic soybeans, in addition to the reluctance of the company to increase prices during the recession. Apparently, at the time, Dean Foods’ consumer research had shown that being organic was not a big factor in consumers’ decisions to buy the product.
Nevertheless, the change caused some problems. So in the spring of 2010, and after much criticism from all sides, the company changed the unsweetened version back to organic. Dean Foods also points out that it now sources all of its organic soybeans from North American farms.
It seems the company is also trying to make an effort to placate consumer concerns over the quality of imported organics, such as soybeans imported from China, and move more toward “local” sourcing, which many organic buyers have come to care about a great deal. But it also indicates that it remains impossible for large U.S. companies to source organic ingredients in sufficient quantities from the domestic market, otherwise Dean Foods would probably have turned the entire Silk brand back to organic, rather than just the unsweetened version.
Natural/Organic Personal Care
At the consumer level, the personal care industry has not been as impacted by the “back to nature” trend as compared to the packaged food or beverage industries; and natural and organic products remain a niche—albeit a growing one. As a result, ingredient companies supplying this industry are best served by focusing their sustainability attentions on root issues, such as raw material sourcing and sustainable manufacturing practices. Having said this, natural alternatives to chemical ingredients will inevitably be popular but perhaps only if offered at a reasonable cost.
The key markets for “organic” and naturally positioned personal care products tend to be more affluent regions such as Western Europe and the U.S., primarily because of the higher price points of these brands. The same can be seen in organic foods and beverages. As a result of the growth in popularity of natural and organic products, niche brands have recently started to become more mainstream and widely available. They are increasingly being sold not just in specialist health food retailers but also drugstores and supermarkets, which account for the vast majority of retail sales of personal care products. Natural brands are even launching their own standalone stores. In France, for example, the largest certified organic brand, Melvita, already has numerous stores and has announced plans to expand into the U.K.
While the economic crisis prompted some level of down-trading in many areas of the personal care market, the skin care category showed more resilience than most, as consumers are apparently willing to spend more when it comes to staving off the signs of aging, particularly when a product’s promotion is backed by scientific evidence. It is no longer enough for skin care products to make claims about their role in preventing the signs of aging; they are now under pressure to prove it.
For ingredient suppliers, active skin ingredients with proven efficacy are already among the stars of the market. Overall, volume sales of active skin ingredients rose at a compound annual growth rate (CAGR) of 5% from 2004-2009 and are projected to grow 3% annually during 2009-2014, according to Euromonitor. This is almost double the growth rate forecasted for all personal care ingredients, so it is no surprise to see ingredient suppliers dedicating hefty R&D budgets to exploring new active ingredients and their delivery.
Emerging Markets Drive Natural Ingredient Volumes
With the mature markets of North America and Europe seeing greater emphasis on natural and organic products, the strict natural/organic personal care market is likely to remain a niche. However, there is now rising demand for more natural ingredients in mainstream personal care products, such as liquid soaps; and plant extracts, vitamins and natural fragrances will continue to grow in importance.
Regionally, the BRIC countries (Brazil, Russia, India, China) continue to offer the best growth prospects. The Russian market has started to slow recently but China, Brazil and India remain strong and should be a significant focus for ingredient developers in the coming years. Frontier markets in the Asia and Latin America regions will also emerge as important targets for growth. Meanwhile, although growth will be more limited in the mature markets of North America and Western Europe, these will continue to lead the way in terms of ingredient innovation and technological development.
Bet on Botanicals
Botanicals are particularly well placed to benefit from trends in both developing and mature markets. Currently included in many liquid soap formulations, they could see windfalls from increased sales in emerging economies.
Plant extracts provide a good example of this growth potential. According to Euromonitor, approximately 1800 tons of plant extracts were used globally in liquid soaps in 2009 and this is forecast to rise to some 2200 tons in 2014, thanks to growth in developing markets. However, with mounting interest in all things “natural” in mature markets, plant extracts are also well-suited for fresh “green” formulations that could help spur growth in more developed economies.
Mature Markets Must Be Creative
To succeed in more mature markets, which are expecting much slower growth for this sector, ingredient suppliers will need to get creative. In fact, sophisticated, eco-friendly ingredients might be exactly what these markets need to experience a revival. Of course, many companies have already jumped on this bandwagon, investing in the production of more natural ingredients.
J&E Sozio has launched eco-friendly fragrances for hand soaps for the U.S. market, while Cognis has also created a microsite to promote its range of all natural surfactants—alkyl poly glucosides—which can be used in liquid soaps, body washes and shampoos. Others should follow suit.
Clearing the Way for Certification
The supply of ingredients to the personal care market has become a challenging balancing act. At industry level, manufacturers are required to balance the rising cost of raw materials with increasing pressure to operate in a more sustainable fashion. Meanwhile, customers in the personal care market are demanding ingredients that have scientifically proven benefits but that are still available at affordable prices and with sustainable and/or natural credentials.
Although food industry fairtrade and organic certification standards differ from country to country, the symbols used in most countries are widely understood and recognized by the majority of consumers. However, in the beauty industry, despite strong consumer demand for organic products and the release of the Cosmos organic standard in Europe, there is low recognition of organic symbols and confusion currently reigns about which products are truly “natural.” As a result, many in the industry agree that so-called “greenwashing”—where manufacturers loosely use the term “natural” and organic when marketing a product despite the main ingredients being petrochemicals—has been able to flourish.
Aside from the Cosmos Standard finally being accepted in Europe, many manufacturers are delaying applying for certification until they know for sure what the requirements are. Across the pond in the U.S., a similar story seems to be unfolding, and some companies are not convinced that the various certification standards will eventually merge into, or be surpassed by, just one standard.
The risk for beauty companies is that if they develop a product in accordance with the criteria of one standard, that standard may no longer be valid in the future. Coming up with its own solution to the problem, retailer Whole Foods Market recently decided to require that all personal care products claiming to be natural or organic have certification from either the USDA’s National Organic Program (NOP) or the NSF ANSI 305 standard. This move may provide manufacturers the incentive to invest in developing products in accordance with standards that require a very high degree of organic content.
Fairtrade Beauty
According to Victoria Morton of the Fairtrade Foundation, the U.K. is the biggest single fairtrade market, with 72% of consumers recognizing the organization’s logo. Clearly then, beauty manufacturers managing to achieve certification could have a competitive advantage in using the symbol on a product.
There are several criteria companies must meet for Fairtrade Foundation certification, including: a product must have a minimum 5% fairtrade ingredients; and all those that could be fairtrade, must be fairtrade. The 5% threshold has come under fire from some industry voices for being on the low side. Dr Bronner’s, for example, cited this as a reason for the company pursuing fairtrade certification using the IMO Social & FairTrade Certification System because it requires a higher percentage of product content to be fairtrade (50% or 20% in order to be able to label a product as “made with fairtrade”).
The Fairtrade Foundation has defended its 5% requirement by saying that this enables greater accessibility for companies, and as a result as many companies as possible will be helping those in developing countries. The number of beauty firms with the Fairtrade logo has risen significantly—from 50 in June 2009 to 130 by March 2010.
Growth Opportunities
Although the recession has made many consumers more price-conscious, boosting sales of budget cosmetics, natural beauty has proved it can adapt to reduced budgets, with private label organic certified ranges such as H&M’s Ecocert skin care experiencing some early success in the market.
Naturally-positioned, organic and fairtrade beauty should continue its ascent into mainstream outlets. And as the beauty industry as a whole focuses on the mass end of the market, affordable or private label ranges are expected to push the development of organic beauty products forward.
At the same time, the search for alternatives to ingredients derived from mineral oils will also continue. Mineral oils are facing significant pressure, not only in terms of sustainability but also in consumer acceptance, with several ingredients derived from mineral sources having attracted adverse publicity in the modern era. There is ongoing interest in identifying natural alternatives and the ingredients industry should continue to invest R&D resources in this area.
