5 April 2002

Organic milk lesson learned the hard way

Even seemingly secure food chains may not deliver

results if basic rules are overlooked, as the organic milk

industry has found to its cost. Robert Harris finds out

what lessons have been learned

FARMERS have long been exhorted to strengthen their position in the food chain. Speak to customers, find out what they want, when they want it, and meet those demands.

Thats exactly what the Organic Milk Suppliers Co-operative set out to do a couple of years ago. The result was the Organic Dairy Initiative, described as a breakthrough that guaranteed all partners in the organic liquid milk chain a fair margin. It was launched in a blaze of publicity by supermarket giant Sainsbury in spring 1999.

The five-year agreement aimed to match milk volume to projected sales growth, guaranteeing a minimum price of 29.5p/litre to organic dairy farmers. Yet, a year later, the overall price had tumbled to 24p/litre.

What went wrong? OMSCo marketing director David Whiting says both the co-op and the retailer were naive.

"There was basically a lack of consumer research. A latent demand existed from core "greens", who had been unable to buy enough organic milk. But the other consumers who were expected to come on board werent there," says Mr Whiting. "The occasional buyers remained just that."

As a result, dizzying growth figures in the early days proved unsustainable. Demand for organic liquid milk grew by 50% in 1998/99 to 225,000 pints/week, accounting for 1.6% of Sainsburys total milk sales. By August 1999, the retailer predicted that share would top 15% in five years.

But almost two years on, just 2.3% of all supermarket milk sales are organic. "Players in the chain should have realised this was like starting a completely new market," says Mr Whiting.

"Even some basic research would have identified an initial hard core willing to buy organic milk at any price, and occasional buyers who have a completely different mindset.

"In effect, no-one knew what the consumer looked like and no-one had done any promotion." In a sophisticated, consumer-driven environment, this would never have happened, he adds. "But a group of farmers who were not used to the realities of the marketplace assumed that the retailer would know."

Unfortunately, lack of demand coincided with a flood of newly converted organic dairy farmers. OMSCo membership doubled last spring to 231 members. "Given the promises made by Sainsbury, it is not surprising that OMSCo encouraged as many producers as it could to convert," says Mr Whiting.

Within weeks, organic liquid milk was 50% oversupplied. While producers are still paid the full organic price for the proportion of milk going into that sector, the rest is sold on to the depressed conventional market. The overall average farm-gate price has slumped to about 23p/litre.

"Its very tough – and unsustainable," says Mr Whiting. Nevertheless, he is convinced that the market can, and will, improve. "Over 80% of organic milk is bought by less than 0.5m households. There are 24m homes in the UK, so we are not after the whole world."

With only "a handful" of new farmers due to join OMSCo this year, he is confident that farm-gate prices will bounce back. "But we need the whole chain to get together. When that happens it is reasonable to suppose we could move the market in a matter of months."

Organic milk sales are growing – by 16% overall in 2001 and 28% in the supermarket sector. Even allowing for a small uplift in supply, the market could be back in balance within two to three years. But Mr Whiting is convinced that a joint effort throughout the food chain could speed up the process.

"Too often, participants in the food chain get together but leave out the crucial final link – the consumer. Our research shows that consumers want someone to tell them about the benefits and that is what we are doing."

For now, OMSCo is bypassing the rest of the chain and pushing its organic message directly (see panel). But a limited budget means a limited impact, so Mr Whiting has to persuade other members of the food chain to promote the product as well.

"We need to build a core brand and not just rely on supermarket own-labels. We need to tell consumers about the product and we need to market it more effectively, both through stores and in the catering sector, too," he says.

"That will cost money and we are now in the process of persuading our partners to invest some of their profits. Everyone in the supply chain should have been doing that long ago. But its not too late to put things right." &#42

OMSCo is using a variety of techniques to promote organic milk. One vehicle is an e-mail file of the Cerne Abbas giant extolling the claimed fertility-promoting virtues of organic milk. There is a Drink-in-the-View campaign, where organic farmers place posters alongside public rights of way which cross their land. The co-op is also promoting a baby feeding guide in consumer magazines.

OMSCo is pushing the message that organic milk is produced with almost no pesticides, no genetically modified feedstuffs and without wholesale use of antibiotics. It also makes plenty of references to a better environment and improved animal welfare.

"But we are not trying to slag off the conventional industry," Mr Whiting maintains. "We are doing what any competitor would do – trying to persuade consumers to trade up. That will be to the long-term advantage of the industry, by allowing more farmers to trade up to organic production.

"Unfortunately, conventional milk has been become a loss leader in supermarket stores and thats a tragedy to the whole industry. We must not follow suit. If price were so vital, not one premium brand would ever have been launched."

ORGANICMILK ERRORS

&#8226 Lack of consumer research.

&#8226 Early growth figures unsustainable.

&#8226 Marketplace quickly oversupplied.

&#8226 Producers prices slumped.