No Longer Just a Fad: Challenges in the Organic Food Supply Chain
The demand for organic food products has increased dramatically in recent years. Sales of organic food and beverages crossed $100 billion in 2018, a 6% increase from the previous year1. North America and Europe have played a leading role in the growth of the organic food sector due to the high awareness among consumers. Strong end-use demand has resulted in the growth of distribution networks for organic food in supermarkets, drugstores, pharmacies, catering and the foodservice sector. This huge customer demand has enticed various companies, such as General Mills and Campbell, to enter the organic food market.
The healthy eating movement has impacted the buying decisions of consumers from across generations, with millennials and baby boomers alike shifting from well-known brands to locally-sourced organic products. Costco, an American warehouse retailer, reported around $4 billion in organic sales in 20162. The appetite for organic fruits and vegetables is so high that in the United States, organic farmers found themselves unable to keep up with the demand from retailers like Costco. This acceleration in the demand for organic food has significantly increased supply chain challenges for FMCG companies.
The Land Problem: There Aren’t Enough Organic Farms
The supply of organic food and beverage products is dependent on organic farming, a time-intensive process that faces challenges such as higher costs, insufficient suitable land availability and pest attacks. Thus, organic farming practices are not as common. Globally, only around 70 million hectares out of 4.8 billion hectares of agricultural land is dedicated to organic farming. Australia contains 35.9 million hectares, over 50%, of this organic agricultural land. This significantly reduces the negotiation power of buyers and at the same time, increases the risk of inconsistent supply.
FMCG companies are tackling this issue from different angles to ensure a continuous supply of organic food ingredients. For example, Cliff Bar — after initially importing organic figs from Turkey — negotiated with growers in California, which led to a 10-year contract that involved turning conventional agricultural land into organic farms. General Mills entered the organic food industry by acquiring Annie’s Homegrown, an organic pasta, meals, and snacks company. They recently entered into a sourcing agreement with Gunsmoke Farms to convert 34,000 acres of conventional farmland into certified organic acreage by 2020. General Mills announced a similar transition agreement with Organic Valley, an organic cooperative in the U.S., to help dairy farms convert to organic dairy production.
The Next Big Challenge: Fake Products, Transportation, and Distribution
In the recent past, the organic food industry has been grappling with the issue of fake products as non-organic products have been incorrectly labelled as organic. Separating organic and non-organic food ingredients and products during different stages of the manufacturing and distribution process is also a challenge for the industry. Manufacturers and distributors are implementing standards to reduce the risk of fake organic claims and the mixing of products. To reduce such issues, companies either can invest in two different machine set-ups to produce organic and non-organic food products or can sanitize the same machines between their use for organic and non-organic food processing. However, these solutions will increase expenses for the company and impact production time. Further, the transportation and distribution of organic food products presents another challenge due to the involvement of different teams, that may lead to labelling errors. Thus, it is important for companies to formulate practices to maintain organic food standards and reduce potential contamination.
Supply Chain Planning: The Way Forward
These challenges, in addition to changing norms in organic food sector, will require industry giants to work on streamlining the organic food supply chain while managing the complexities of global sourcing associated with organic foods. Companies will need to adapt to changing industry demands, collaborate with local farmers and involve them in value chain planning, change the procurement process, and invest in the production of food products. Thus, as the demand for organic food accelerates, companies will have to manage their supply chain in order to meet this demand while ensuring affordability and competitiveness.
1 Holbrook, E. (2019, September 25). Sales cross the $100 billion mark - organic food is the new trend. Retrieved from https://www.environmentalleader.com/2019/04/global-organic-food-sales-br...
2 Ledbetter, C. (2017, December 7). Apparently, Costco Sells More Organic Food Than Whole Foods. Retrieved from https://www.huffpost.com/entry/costco-more-organic-whole_n_7513358.
3 Robert, M. (2019, June 25). Global organic food market nears €100 billion. Retrieved from https://www.euractiv.com/section/agriculture-food/news/global-organic-fo...