According to the Organic Trade Association’s 2007 Manufacturer Survey, U.S. sales of organic products jumped 21 percent in 2006 to $17.7 billion across formats; 2007 sales are expected to top $20 billion; and by 2010, sales could exceed $35 billion. Do we have your attention yet?

Although organic foods, which represent 95 percent of all organic products sold in this country, currently account for only about 3 percent of total U.S. food sales, brand owners are acting now to secure a place for themselves in the organic marketplace of the future. In fact, ACNielsen reports a whopping 20 percent of all new product introductions in 2006 were labeled organic.

But according to consultant Bill Wolf, president of New Castle, Va.-based Wolf, DiMatteo + Associates, organic food sales by category still don’t match up with conventional food sales. For example, he points out, “Forty percent of organic food dollars go for fruits and vegetables, much more than conventional food dollars,” but organic packaged goods represent only about 12 percent of total organic sales — a disproportionately low share that suggests significant opportunities for future growth.

Indeed, while sales of organic fruits, vegetables and dairy products, which together represent well over half of all organic food purchases, are expected to continue to expand, OTA predicts sales of organic condiments and sauces will jump 20 percent each year from 2007 to 2010; packaged and prepared meals, 24 percent; breads and grains, 22 percent; and the list goes on and on. But who will produce all of these new packaged goods? Enter the contract manufacturer.

Need for Organic CMs

According to one survey, more than half of the 933 wholesale brand companies selling organic products in 2005 reported annual sales of less than $1 million; only 10 listed annual sales in excess of $100 million. Clearly, says Wolf, “Many, many organic companies are start-ups, meaning a majority of them are using co-packers.” But small companies without manufacturing capabilities of their own aren’t the only ones looking to contract manufacturers for help with organics. “Just because [a company has] bricks and mortar doesn’t mean that’s the best place to produce organic,” Wolf says. “Sometimes their operations can’t be scaled down to do an organic line efficiently.” Or they can’t make the transition fast enough.

And the organic movement isn’t being felt only in food segments. Non-food product development continues, albeit on a smaller scale. According to Michael Bishop, president of Lewisville, Texas-based health-and-beauty care manufacturer Actitech, the certification process can take months to complete, and brand owners anxious to bring a new product to market typically can’t wait that long. Plus, there’s a learning curve associated with making products using organic vs. conventional ingredients. “We’ve been thinking about ways to make certified organic cosmetics for two years now,” Bishop says, “and we’re definitely better at it today than we were even a year ago.”

According to manufacturers, “going green” is a lot more complicated than simply replacing non-organic components with organic ones. For starters, not every ingredient is available in an organic form, and when it is, it sometimes performs differently than its conventional counterpart. Add in the inability to use chemicals, preservatives, artificial colors and flavors and other ingredients manufacturers have grown accustomed to, and you’re sometimes looking at reformulating a product from the ground up.

“It’s not brain surgery,” says E. Rod Crossley, principal of Montrose, Calif.-based Crossley Consulting. “But you do have to think outside the box.” Unfortunately, he continues, “Many manufacturers have [made a product] one way for so many years that they don’t think they can do it any other way.”

So they either forego the opportunity to produce organic or seek the services of a contract manufacturer. However, one of the most common reasons brand owners turn to contract manufacturers for organic products is the latter’s ability to more successfully source increasingly scarce raw materials.

Supply and Demand

“If someone had asked three years ago where the shortages are [in organics],” says Wolf, “I could count them on one hand — milk, oats, cheese, eggs. Today, we’re experiencing spot shortages in almost every category. We just don’t yet have the infrastructure for organic ingredients that we have for non-organic,” and it’s starting to have an impact on growth. In fact, 55 percent of those who responded to OTA’s 2007 Manufacturer Survey said a lack of dependable supply kept their company from generating more sales of organic products (compared to 52 percent last year).

The problem is two-fold. During the three years it takes to convert a field to organic, farmers are likely to experience reduced yields; and even when the conversion is complete, they can’t be sure anyone will buy their organic crops. As a result, they’re reluctant to make the transition without having a buyer lined up ahead of time who’s also willing to pay a small premium to get them through the lean years.

“You’re really contracting for acreage,” explains Crossley, adding that there’s no such thing as a spot market in organics. “You can’t buy this stuff like you do conventional ingredients,” he says. “You have to contract early or there won’t be anything left.”

“You have to plan at least a year in advance,” confirms Tim Dodd, president and chief executive officer of St. Louis Park, Minn.-based pasta manufacturer Dakota Growers, which works closely with its own farmers but also uses an organic procurement company to fill in the gaps. He adds that the supply of high-quality organic durum has been particularly tight this year after crop failures in Italy, France and Australia. As a result, raw material prices have at least tripled since last year. But according to the National Organic Program (NOP), which oversees certification, high prices are no excuse for not using organic ingredients.

“The rule says you can use non-organic in place of organic only if organic isn’t commercially available, if there isn’t sufficient quantity or the quality isn’t good enough,” explains Crossley. (The NOP maintains a “National List of Allowed Synthetic Substances.”) “But you can’t opt not to use [an organic ingredient] simply because it’s too expensive,” which can put manufacturers that didn’t contract with growers ahead of time in a real bind.

As a result, says Sterling Crim, vice president and chief marketing officer at Gonzales, Texas-based Adams Flavors, Foods and Ingredients, “We work together with brand owners to source pre-approved alternatives in case of organic ingredient shortages. We both understand that it’s not a question of, ‘If we run into ingredient supply problems. …’ It’s a question of ‘when.’”

Manufacturers try to prepare for the worst and contract for more than they think they’ll need. “But you can’t foresee everything,” adds Jeff Brinkhoff, president of Mount Vernon, Mo.-based B&M Inc. (Red Monkey Foods). That’s why it’s so important to develop deep relationships with multiple suppliers. Because when ingredients are scarce, established customers are likely to get first dibs, putting those new to the game at a distinct disadvantage. But that’s not stopping them.

By the Numbers

The Certified Organic Food Directory, published by San Francisco-based Natural Food Network, lists 6,480 USDA-certified organic processors/manufacturers. But according to publisher Dan Bolton, only about half of those are “true” manufacturers (many of the rest do nothing more than harvest a crop and put it in a box for shipment). Of that 3,200 or so, the majority also produce non-organic products.

Having that certification is “definitely a competitive advantage,” says Jim DePietro, vice president of sales and marketing at Liberty, N.Y.-based Ideal Snacks Corp., which has allocated about 25 percent of its manufacturing capacity to organic.

While manufacturers of “established” organic products such as snack foods are plentiful, “There is a shortage of capacity in some areas,” including companies that can process fresh produce into frozen meals, local and regional meat-packaging houses and frozen meal processors licensed to handle meat, says Wolf. “We’ve seen some people come up with innovative product concepts that were unable to find a certified organic contract manufacturer that met their specifications or could do all the steps they required.”

Certified organic manufacturers are especially scarce in the HBC arena, which many believe represents the next frontier for mainstream organics. The most significant barrier to certification, says Bishop, is the lack of a separate standard for cosmetics and other non-foods, which are currently subject to the same rules that govern certified organic foods. But it’s not always easy — or efficacious — to make cosmetics out of ingredients intended for consumption.

“The rules were never intended to be applied to non-foods,” says Bishop, whose company became certified in 2002 but only recently began producing a certified organic line for a major prestige brand. That company was lucky to find a contract manufacturer such as Actitech, one already set up to produce certified organic; others aren’t so fortunate. In those cases, the brand owner may have to take the initiative.

For example, several years ago, Berkeley, Calif.-based Mexi-Snax, which recently merged with another company to create Natural Snacks LLC, helped one of its existing contract manufacturers become certified so it could produce tortilla chips “made with” organic ingredients (although such products can’t carry the USDA-certified organic seal, they still must contain at least 70 percent organic ingredients and be produced in a certified organic facility). “It’s a win-win,” says Natural Snacks president Blair Kellison. You get to stay with a company you’ve already established a good working relationship with, and the newly certified manufacturer gets to keep your business and, more than likely, attract a whole lot more.

Getting Certified

Just how difficult is it to get certified? It depends who you ask. From the manufacturer’s perspective: “Establishing yourself as a certified organic manufacturer is time-consuming and costly,” says Jane Asmar, director of branded retail sales and corporate accounts at Fowler, Calif.-based National Raisin Co. “The organization has to wrap its arms around a sizable investment.”

At the other end of the spectrum, Joe Smillie, senior vice president of the nation’s largest third-party certifier, San Diego-based Quality Assurance International (QAI), says, “It’s really not that hard.” In fact, he adds, thanks to their experience with HAACP plans, “Most manufacturers already have the expertise and discipline required [to produce organics]. It’s not as big a deal as people think.”

Basically, manufacturers are required to come up with an Organic Systems Plan (OSP) that outlines how they’ll prevent organic and non-organic ingredients from co-mingling and how organic ingredients will be separated from prohibited substances like pesticides. “It’s like a HAACP plan,” explains Wolf. “You identify the critical control points for organic and then build a flow chart detailing how you’re going to protect its integrity.” The key, he says, is to align the OSP with existing procedures rather than building a completely separate plan. “Look at your HAACP plan, your recall plan, your pest-control plan, your sanitation plan, etc., identify where there may be conflict and adjust accordingly.”

Only after the plan is successfully implemented should the manufacturer seek approval by one of the 98 independent third-party certifiers accredited by the NOP. Although certification requires only a plan, “If manufacturers actually implement it first, maintaining organic certification [after yearly audits] is much easier,” Wolf says. “It’s better to spend the money upfront and take care of whatever modifications to sanitation, pest control or other systems are needed than to struggle every time you want to make a change.”

Although it can take anywhere from two months to two years to get initial certification — depending on how much modification is required — that’s really only the beginning. “The challenges really begin after you’re certified and begin producing,” says Ron Rash, president of Yanceyville, N.C.-based The Wizard’s Cauldron. Chief among them is record-keeping.

“Record-keeping is probably the most important part of the whole thing,” Crossley says. “Theoretically, you’re supposed to be able to buy a product at the store, take an ingredient off the label and track it back to the field — or at least the farm — where it was grown.” And that’s no easy feat. But some manufacturers find it less cumbersome than others.

“We’re also FDA certified to make drugs,” Bishop says, “so we’re used to record-keeping. And some of our multi-billion dollar clients require even more documentation than the government.”

Dodd reports a similar experience, thanks to a grade-protection system installed by Dakota Growers years ago to support its high-quality identity preservation program. Designed to keep certain varieties segregated through delivery and processing and allow the company to track them from field to consumer, the system works equally well for organic varieties. At its core, says Dodd, “That’s what organic manufacturing is: An ID preservation program.”

In addition to maintaining records for their own facilities, manufacturers also must make sure their suppliers do the same. Out-of-date certificates — or no certificates — for incoming ingredients represent one of the biggest headaches for certified organic manufacturers, Asmar says. Since the organic business is characterized by a lot of smaller suppliers less likely to have a good handle on record-keeping, “documentation is always a challenge.”

Pocket Damage

So how much does all this cost? Again, it depends on the extent of the product line, the size of the operation, the modifications that have to be made, etc. Fixed costs range from $2,500 to $5,000 for initial certification and from $4,000 to $6,000 a year afterward. “But those are just the hard costs,” emphasizes Rash. “It’s the hidden costs, the soft costs that you have to watch out for — research, record-keeping, storage, vendor qualification, inventorying materials, maintaining separate storage, etc.”

And then there are costs associated with hiring a consultant to help you through the process. “You can do it on you own,” Brinkhoff says, “but having an expert on board sure would help.” Although B&M didn’t seek the help of a consultant when it went through the certification process in 2003, “If we had it to do all over again, we would.”

As the organic certification process has “matured,” adds Crossley, it’s become a lot more complex than it was in 2002 when the NOP was first implemented. “I don’t know how any manufacturer or brand owner could enter the business today without the help of a consultant. They can save you a lot of time and frustration.”

Adds Rash, “Even the experienced companies look for outside help these days.

“I’m convinced organic will continue to grow,” he concludes. “So getting certified isn’t much of a gamble.” But it’s not all about sales. “You’re really taking a political stance. You’re becoming a part of the commitment to sustainability,” he says.

And you can’t put a price tag on that.

Sidebar: Who Buys Organic?

According to an online survey of almost 2,400 adults conducted by Harris Interactive this past September, almost three-quarters of all U.S. consumers purchase organic products at least sometimes.

“Most organic consumers are very mainstream,” says Laurie Demeritt, president of The Hartman Group, a Bellevue, Wash.-based consulting and market research firm that carried out a similar survey in 2005. “These aren’t the tree-hugging, Birkenstock-wearing organic consumers of a decade ago.” OK, those folks still exist — probably among the 7 percent of consumers who say they buy organic products all or most of the time. But the 175 percent increase in organic food sales between 2000 and 2006 was driven primarily by the rest of the population — those who buy organic products occasionally (31 percent) or rarely (33 percent).

“Companies should have an understanding of [core organic consumers] since their interests, tastes and preferences will eventually ‘trickle down’ and help shape the preferences of other consumers,” Demeritt says, pointing to micro-trends within that group toward locally grown, artisanal and seasonal organic products. “But most companies should target the mid-level [organic consumer].”

Who is she? Beyond buying frequency, answers Demeritt, there’s actually very little to distinguish this vast group of shoppers.

While the Hartman Group’s research found that both Asian Americans and Latinos use organics a little more frequently than all consumers combined, “The only other demographics that have any statistical significance are income and education.” (Lower-income households are less likely to use organics, while consumers with post-graduate degrees are more likely to use organics.) However, the Harris poll also found higher usage among Westerners, Echo Boomers (those ages 18 to 30) and Gen Xers (those ages 31 to 42), as well as those who characterized themselves as “liberal.”

While a significant majority of those who responded to the Harris poll believe organic food is safer for the environment (79 percent) and healthier (76 percent), it’s the latter rather than the former that’s spurring organic growth. “There are still those who believe organic is driven by consumers’ desires to save the environment,” explains Demeritt. But that’s not typically the case. “Most consumers become involved because they believe there are health benefits associated with organic.”

She cautions, however, that shoppers are very pragmatic about organic food purchases, willing to spend the extra money only on products that really matter — because they’re feeding them to their children; because they’re concerned about hormones, antibiotics or pesticides; because they eat them often, etc.

“There’s a lot more energy and enthusiasm for certain products than others,” she concludes, “so manufacturers and brand owners should choose wisely when deciding which categories to go into. Some will continue to grow, but others won’t, except among core users, which represent a pretty small piece of the marketplace.”

Sidebar: What is the NOP?

The National Organic Program (NOP) grew out of the Organic Foods Production Act (OFPA) of 1990, which required the U.S. Department of Agriculture (USDA) to develop national standards for organically produced agricultural products in order to assure consumers that products marketed as such met consistent, uniform standards. Housed within the USDA’s Agricultural Marketing Service, the NOP maintains a set of national organic standards, including requirements for production and handling, labeling, certification and accreditation of certifying agents. The NOP became law in October of 2002.

Sidebar: Coming to Terms

Labeling standards are based on the percentage of organic ingredients in a product:

“100 Percent Organic” – Must contain only organically produced ingredients; can display the USDA Organic seal.

“Organic” – Must consist of at least 95 percent organically produced ingredients, with additional restrictions on the remaining 5 percent; can display the USDA Organic seal.

“Made with Organic Ingredients” – Must contain at least 70 percent organic ingredients, with additional restrictions on the remaining 30 percent; can list up to three of the organic ingredients or food groups on the principal display panel, but cannot use the USDA Organic seal.

Products that contain less than 70 percent organic ingredients cannot use the term “organic” other than to identify the specific ingredients that are organically produced in the ingredients statement.

Source: The National Organic Program

Sidebar: Where to go for help

The National Organic Program www.ams.usda.gov/nop

The Organic Trade Association www.ota.com

The Organic Pages Online www.theorganicpages.com

The Natural Food Network www.naturalfoodnet.com