Last week, Honest Tea announced it had sold a 40 percent stake to Coca-Cola Co., becoming the latest organic brand snapped up by a mainstream player. Coke will own the company outright in three years, though co-founder and CEO Seth Goldman expects to continue to run and guide the 10-year-old company independently.
"This is obviously something I believe in, and we're just starting to realize our potential, so I'm not going to pick up my toys and go home," Goldman told me by telephone.
Honest Tea is just the latest in a long line of organic food successes that were later acquired. Others include Kashi, bought by Kellogg; Cascadian Farms's deal with General Mills; Stonyfield's with France's Danone, and Silk and Horizon Organic with Dean Foods. Even Dagoba Chocolate was bought out by Hershey's.
But I'm starting to wonder if these deals will become a thing of the past.
Look at the life cycle of these start-ups. They start small, focusing on natural food and organic customers in alternative retail venues, whether in food co-ops or natural food supermarkets like Whole Foods. If they succeed, they win legitimacy and jump to the mainstream through a partnership with a major company.
There has been a strong rationale for the deals. The start-ups need greater mass distribution; the mainstream players need a legitimate brand to break into the organic market. This logic has worked well for years, so why question it now?
First, the retail market is far more competitive in natural and organic foods than it was. You have mainstream retailers, even Wal-Mart, with a major presence in the area. As the mainstream expands into the field, the core retailers in the space — the natural food giants and co-ops — need to set themselves apart to remain authentic to their customer base.
To do so, I believe they will focus on more quirky brands, artisan products, local and small-scale organic producers, and meats from smaller farms (as opposed to Tyson organic chickens), as well as private store-branded products, per the Trader Joe's model.
It's certainly a benefit if organic and fair trade foods move further into the mass market, but why sell the same items that can be bought at Wal-Mart, Safeway, Kroger or Costco?
In offering a deeper and wider artisanal food experience, natural food stores will feed the core customer and foodie who has always been at the heart of the business. And in doing so, they will maintain a sense of authenticity. They simply have no incentive in promoting a brand that can then leapfrog out of their store and onto a larger competitor's store shelf. The increasing bifurcation of the market, into mass and specialty, will make that jump harder.
The second reason this trend might be coming to an end is saturation. How big an appetite will large companies continue to have for organic brands? Once they own one or two, there is not much incentive to buy another. And given the spate of recent deals, the market for small entrepreneurial organic brands is nowhere near where it was even five years ago.
So where does that leave a small company?
In a more difficult spot than the early organic brands. If you want to meet the needs of the specialty retailers, you'd eschew a mass market identity. But if you go mass market, you risk undermining your identity in the specialty channel.
Seems to me, business just got tougher for the start-ups.