How Can I Dominate My Competitors?
Considering the inherent earthy-crunchiness of Horizon Organic Dairy (#66 on the Inc. 500), based in Longmont, Colo., it seems unlikely that the milk company would have been started by two middle-aged guys who knew nothing about cows. But the founders understand a discipline that has proved more critical to the growth of the $30-million dairy: how to build a premium consumer brand.
Prior to launching Horizon, in 1991, Paul Repetto had been president of Westbrae Natural Foods, a soy-milk manufacturer, and Mark Retzloff had cofounded Alfalfa's Markets, an 11-unit chain of gourmet/natural-food stores. Sensing an opportunity in the highly fragmented organic-dairy industry--occupied mainly by mom-and-pop purveyors of natural foods and supplied by independent farmers--the pair plied their contacts in the tightly knit natural-foods fraternity to gain shelf space in such health-foods chains as industry leader Whole Foods Market Inc., and Wild Oats Markets Inc., which swallowed Alfalfa's in 1996. Impeccable timing also gave Horizon a boost: sales jumped from just under $1 million in 1993 to $3.4 million in 1994 in part because of the attention the media gave to the potential dangers of recombinant bovine growth hormone--which the Food and Drug Administration had approved for use in cattle in early 1994. By 1995 sales soared to $7.2 million. These days the company claims 75% of the organic-milk market in conventional supermarkets.
Naturally, rivals haven't failed to take notice. Some of Horizon's suppliers, such as Organic Valley/CROPP Cooperative, based in La Farge, Wis., have launched their own regional brands. Giant dairy companies aren't likely to ignore the organic-milk market for very long, given the higher margins it offers: 30%, compared with 20% for conventional dairies.
In Oregon, tiny Echo Spring Dairy has exploited its local-distribution capabilities and sells its brand of organic milk at a competitive price. "There are a lot of regional competitors coming into the market," says Frank Lampe, editorial director of Natural Business, a newsletter based in Boulder, Colo. One source of Horizon's vulnerability: its high costs.
Those costs originate with Horizon's bread and butter: cows. In 1994, Horizon leased half of one Idaho farm from Aurora Dairy Group, a chain of large dairy farms. Aurora's president, Marcus Peperzak, is also Horizon's chairman. Shortly thereafter, Horizon began the three-year process of converting the 4,000-cow operation to organic production, which cost $24 million. Horizon, which makes about 50% of its milk, has spent nearly $30 million to ensure its supply. "We'd prefer to buy our milk from farmers, but there just isn't enough organic supply yet," says CEO Barnet "Barney" Feinblum.
Horizon has also taken steps to improve distribution. Last April it bolstered its presence on the East Coast with the $6-million purchase of Juniper Valley Farms, the leading brand of organic-dairy products in the metropolitan New York market. Soon after, Horizon announced that it would sell a 12% interest to Dallas-based Suiza Foods Corp., a dairy processor and distributor with operations in 46 locations. Despite the fact that it has yet to turn a profit--Horizon bled more than $1 million last year--the company's July public offering was well received, raising more than $50 million.
Wall Street apparently believes that Horizon is well on its way to accomplishing its goal of building a nationwide organic brand. The company projects sales of about $45 million this year, a rise of nearly 50% over 1997 sales. "They've created a national infrastructure and a brand for an undifferentiated product," notes Carole Buyers, an analyst with investment banker Hanifen, Imhoff. "That's going to help them keep their share of the market in the face of new competition."