Food corporations hunt organic, natural startups

Anaheim, Calif. – Big Food and the organics industry are gaining an appetite for each other.

With sales of conventional packaged staples lagging, food giants like Minnesota's General Mills are on the hunt to acquire or learn from much smaller companies in the fast-growing organic and natural foods space. And many of the entrepreneurs behind those startups are getting increasingly comfortable with the idea of taking money and other help from global corporations.

It is a striking contrast to the early days of the organic movement, which started out with an anti-establishment tilt that scorned companies that mass-produced heavily processed food. But it reflects dramatic changes in what Americans want to eat, which increasingly is food that is as healthy and natural as possible.

While there is still tension, that shift has created an incentive to work together. "We all kind of need each other, which is really interesting when you think about jumping into the foxhole with your enemy," said Bill Capsalis, a Boulder, Colo.-based consultant to emerging food brands and 30-year industry veteran.

Organic foods still account for a small percentage of total U.S. food sales — about 5.5 percent — but are growing at a much faster rate than nonorganic foods. In 2017, organic food sales increased 6.4 percent compared with 1.1 percent for nonorganic food, according to the Organic Trade Association.

Large food manufacturers like Conagra, Danone and General Mills look at numbers like that and see an opportunity to jump-start their languishing sales growth. In the past decade, Golden Valley-based General Mills has made a series of acquisitions of organic food makers, headlined by the $820 million purchase of Annie's Homegrown in 2014.

"We need to continue showing up to give people what they need, in whatever the times demand," said Carla Vernón, president of General Mills' natural and organic business.

The newfound warmth between big food companies and the natural foods movement was on full view earlier this month at Natural Products Expo West, a 39-year-old gathering of the natural and organics industry that now swarms with venture capital-backed, grow-fast-sell-quick startup companies.

The conference began in 1981 as an annual gathering of like-minded people from what were then fringe groups — co-op grocers, natural food makers and other reformers looking to disrupt the status quo of America's food system. The goal was simple: to share ideas and refine their alternative approaches to growing, making, buying and selling food that could be better for the planet and people's health.

Over the next three decades, consumer interest in buying natural and organic food and health products grew and the large, traditional processors took notice. The U.S. Department of Agriculture established its National Organic Standard in 1997, triggering a wave of acquisitions of organic processors. A second wave began in 2012, notes Philip Howard, a professor at Michigan State University who tracks consolidation in the organic food industry.

Many of the natural and organic industry pioneers were nervous their movement was being co-opted. Large companies botched several of the early acquisitions by forcing a large, bureaucratic approach to business on the smaller brands, inadvertently stripping them of the passion that drove innovation and success.

"General Mills has been acquiring natural and organic brands in earnest for 20 years. And in those years, honestly, we've made mistakes in how we integrate those brands, and I'm sure some of those mistakes have been mine," Vernón said. "We now recognize the importance of protecting the heartbeat."

Now Expo West reflects the explosion in interest in the natural and organics space, ballooning from 3,000 attendees at its first conference to more than 86,000 this year.

Buyers, distributors and venture capitalists walk the hall floors, looking for the best new concepts among the 3,600 companies. Money and new business is the ultimate goal for most of the small brands paying thousands of dollars for booth space.

Two years ago, General Mills decided the natural-foods industry's attitude had thawed enough to take a more visible presence at the event. The company shifted the focus of its booth from hawking its new natural and organic products to educating attendees on environmental issues it's working on, like regenerative agriculture and pollinator habitat restoration.

On a hotel pool terrace near the conference one evening, top people from General Mills mingled with the founders of some of Minnesota's food and agricultural startups — companies like muesli-maker Seven Sundays, hemp processor Manitoba Harvest and cold brew-producer Bizzy Coffee.

"Ten years ago, 'Big Food' was like a dirty word here," said Jon Nudi, the food giant's president of North American retail. "We wouldn't even put General Mills on our [name] badge."

Now, the company has one of the largest exhibition booths at the event with live soil and water demonstrations, pollinator education zones and its name hanging proudly from the ceiling. An army of employees with General Mills badges covered the sprawling Anaheim Convention Center grounds for the five-day packaged goods extravaganza, and company leaders participated on issue-oriented education panels.

Vernón said the response has been overwhelmingly positive. "We feared the skepticism of General Mills would overshadow the good work of our natural and organic brands," Vernón said. "But Big Food must be at the table if we are going to make a difference at scale."

Not everyone embraces the arrival of Big Food.

In a hotel suite five floors above a raucous street party at Expo West, founders from organic food companies that ranged from tiny startups to the Wisconsin-based industry power Organic Valley gathered at an invite-only meeting one evening to share ideas on how companies can remain independent and buck the financial model often imposed on startups.

The purpose of the meeting, part of a new "steward ownership" movement, is to give entrepreneurs information about other ways to finance a company that protect its mission and still produce enough profit to sustain the business long-term.

"The food market is so hot with conventional companies acquiring organic products," said Natalie Reitman-White, a vice president at Oregon-based Organically Grown Company. "We have a rebellion of people here who love their companies and the social mission."

She said these companies don't want to be "on the treadmill" that comes with accepting venture capital or outside ownership.

"Yes, you have to be a healthy, viable company," Reitman-White said. "But the profits have to benefit the people and mission, not the other way around."

The large food companies, for now, are left to straddle the gap of protecting brands they've acquired because of their uniqueness, while trying to boost profits.

Vernón said her natural and organics group can play a big role in building investor confidence in General Mills' ability to make good acquisitions that pay off for the shareholders. But she acknowledged there is a balance that is important to maintain.

"We have to show that we will make good investments with their dollars," she said, "while also keeping these brands special."