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Wal-Mart Goes Organic

The small companies that make their livelihood growing and peddling organic food fear the entrance of major retailers will destroy the industry.
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Amid Wal-Mart's vast aisles of discount jeans and $19 coffee makers, the organic milk and farm-fresh lettuce still seem a little out of place. But it should come as no surprise that the world's largest retailer is now staking its claim in the organic food industry. Growing at a clip of 15% to 20% a year, with revenue now topping $14 billion, organics have become big business -- forcing small grocers and multinational corporations alike to take a closer look.

The fear is that the industry will become a little too big -- ultimately forcing out smaller players, causing companies to abandon core organic principals, and resulting in less-healthy, poorer-quality products for consumers. "The pressures to weaken standards are relentless," says Marion Nestle, a nutrition, food studies, and public health professor at New York University and author of Food Politics and What to Eat. "What Wal-Mart will do remains to be seen."

Wal-Mart, frequently cast as a small-business killer, is just the latest corporate giant to plough the organic field. The company perhaps more associated with economy-size bags of Cheetos began selling organic produce and dairy products this spring, along with snacks like Organic Rice Krispies. The three largest U.S. supermarket chains -- Kroger, Ahold, and Safeway -- now offer organic sections in their stores, while Whole Foods, which helped usher organics into the mainstream, now boasts 183 stores and $4.7 billion in sales.

For many shoppers, "organic" still conjures up images of quaint New England farms, locally grown produce, and happy cows. Perhaps more than anything, however, it's an image of "small" food -- food that's been grown with a human touch on a small scale. "You want to believe that there's a farmer in overalls and they love the land and love their products," says Connie Hatfield of Country Natural Beef, a Brothers, Ore.-based, 94-ranch co-op that produces organic-style beef. "But those people can't feed [a city like] Washington."

Therein lies the challenge facing food producers and retailers -- finding a way to meet begging demand, while staying true to their small-company roots.

Growing Organically

Whole Foods, the company as responsible as any for taking organics beyond the Birkenstock set, has had to juggle its rapid expansion with the limits posed by its small-farm suppliers. How do you mass-produce something that's entire philosophy seems to stem from small-scale production? Organic peaches bruise easily for a cross-country trip to stores, organic meat takes longer to grow and is more expensive, and an organic farm can't churn out the millions of pounds of rot-proof tomatoes needed to line supermarket produce aisles.

In some cases, keeping items organic, natural, and ethical simply isn't practical. Whole Foods recently stopped selling live lobsters after failing to find a way to get them to market in a way it felt was in line with its humane principles and at a cost consumers could stomach.

To stay as "small" as a $4.7 billion company can be, Whole Foods has used a model of regionalization that's trickled down to its suppliers and been mimicked by other organic businesses. Its stores are divided up into 10- and 20-store regions, each responsible for its own supply chain. "There is no big corporate group who's dictating what every store should be selling," says A.C. Gallo, COO and co-president of Whole Foods. "We really encourage the local and regional [store managers] to buy and support local farmers." That model could prove difficult to emulate for big-box stores, which critics say could cause them to cut corners.

Some already accuse Whole Foods of relying too heavily during the produce-unfriendly winter on large, distant farms that violate the "buy local" spirit. Even so, the company says it's attuned to the threat posed by even larger companies entering the organic market. If Wal-Mart or another giant player started pushing for looser regulation of organics, Gallo says, "We would fight, and the rest of the organic industry would fight real hard to maintain'¦ standards."

Other companies, including some of Whole Foods' suppliers like Country Natural Beef, are taking an even more decentralized business models to stay true to their small-farm roots. Hatfield and her husband Doc have helped shepherd Country Natural Beef's expansion to supply 49 Whole Foods stores while preserving the "small" feel of a family farm. "We've copied what Whole Foods does," she says -- using a central headquarters but regionalized management and production.

To meet growing demand, the co-op brings new, small farms into the fold and holds them to the same strict standards. Almost all the profits go directly back to the farms, and the expansion into large markets like Whole Foods has helped revitalize agriculture for small-business owners like the Hatfields. "We're in a sector of business that for a long time, you watched your neighbors go broke," Connie says. "Now, our families are coming back."

Food Fight?

But stories like Country Natural Beef are the sunny side of the industry's recent history. The organic milk sector shows the market's growing pains -- and what critics say is a cautionary tale of what could happen with giants entering the fray. At the top of the heap is Horizon Organic, which holds roughly 40% market share. Below Horizon are smaller companies like Organic Valley, a collection of small farmers with 15% market share. Horizon sells to Wal-Mart, Organic Valley doesn't.

Horizon has taken criticism from organizations like Mark Kastel's Cornucopia Institute, a Cornucopia, Wis.-based advocacy group dedicated to small farms. "We think these companies are deceiving their customer base and violating the spirit, if not the letter, of organic law," Kastel says of Horizon. By Kastel's account, Horizon's dairies are mass production "factory farms" that he sees as a reflection of a big-business mentality.

But even though Kastel questions whether this large-scale farming is philosophically "organic," consumers ultimately may care about the health benefits more than the animal-rights issues. "The organic regulations are not about scale," says Horizon spokeswoman Sara Unrue, but instead are "about a method of production." While organic rules forbid most pesticides, hormones, and chemicals, and require that animals be given some access to pasture, they technically say nothing about the size of a farm.

But the infighting points to the larger conflict ongoing in organics -- the question of just what makes organic "organic" for the consumer in the grocery store. Is it small farms, independent farmers, and happy cows that validate the higher prices, as Kastel claims? Or is it simply healthier food and a lack of chemical residues, as others argue. "The organic community had best get its act together, or else it will lose credibility with consumers," NYU's Nestle says.

Nestle worries about big organic companies' real intentions as they face pressure to maximize profits, or cut costs and quality to meet the demands of retailers like Wal-Mart. "People will pay more for organics if, and only if, the system is clean," she says. If not, an industry built on thinking small may soon find dirt on its overalls.




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