A recent study from marketing research firm NPD Group predicts that the biggest eating trend among consumers over the next decade will be a move to organic food and beverages as Americans decide to eat better. One company that hopes to benefit from this change in diet is Dean Foods (NYSE:DF), whose wholly owned subsidiary WhiteWave Foods, possesses two of the strongest brands in the organic and natural food industry. Horizon Organic is the largest organic milk brand in the U.S. generating $433 million in sales in 2008 and a 42% market share while its Silk brand is the largest soy brand in the world with sales of $427 million in 2008 and a 78% market share.

All told, the WhiteWave division delivered $1.5 billion in revenue in 2008 with better days to come. Which is why I was surprised to read Horizon Organic is looking to upset the apple cart by introducing its first non-certified organic "natural" milk to its customers feeling it in the pocketbook. The organic industry thinks it stinks. I think it's a useful experiment. Time will tell who's right.

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Simple Semantics
I've always held a skeptical view of the organic food movement. It seems strange that consumers should pay double or triple the going rate for a healthier tomato.
The arguments made by the Cornucopia Institute against Dean Foods' planned move to sell "natural" milk through its Horizon Organic brand, are extremely puzzling.

Mark A. Kastel, Senior Farm Policy Analyst at The Cornucopia Institute, had this to say about the move, "Responsible participants in this industry are using their marketing strength to ramp up organic demand. Dean has instead chosen to profiteer at the expense of the hard-working family farmers who have built this industry."

In essence Kastel thinks that while other sellers of certified-organic milk are promoting the benefits of this certificate, Dean's "natural" label could be confused with the certified-organic. At a lower price, it could take market share away from the certified-organic sellers. (Learn more in Top 10 Green Industries.)

The assumption from this statement seems to be that it's better to subsidize family farmers than it is to provide healthy milk at a cheaper price. But Dean Foods is simply satisfying one of the four Ps of marketing. As long as there is no effort to deliberately confuse consumers, those who believe the dairy producer is being deceitful are just plain wrong.

A Small Piece Of A Larger Pie
When all is said and done, this little disagreement represents less than 8% of Dean Foods' total 2008 revenue ($12.45 billion) and that's being generous. According to its annual report, the organic portion of its business (Horizon, Rachel's) accounts for 34% of WhiteWave Foods $1.5 billion in sales. That would mean Dean Foods is putting family farmers at risk, not to mention its own reputation, for a measly $500 million. I don't think so. That's like Warren Buffett robbing a convenience store for a Cherry Coke. It just isn't realistic.

To you or me, a half a billion dollars is significant. To America's largest dairy producer, it's one or two successful product introductions.

For instance, take its new joint venture with Hero, a European leader in fruit-based foods. Together, they are marketing Fruit2Day, a healthy fruit juice at a lower price than other super-premium juices. Hero has grown European sales of the product to $64 million operating in two countries in just a few short years. Dean projects $200 million in sales for the U.S. With these kinds of profits lined up, it seems unlikely that Dean is targeting the family farmer.

Top Direct and Indirect Competitors




Company


Market Cap


P/S


Dean Foods (NYSE:DF)


$3.0 B


0.25


SunOpta (Nasdaq:STKL)


$141 M


0.13


Hain-Celestial Group (Nasdaq:HAIN)


$613 M


0.54


Con Agra (NYSE:CAG)


$8.3 B


0.65


Kraft (NYSE:KFT)


$37.7 B


0.92


Source: As of market close July 13, 2009



The Bottom Line
When Clorox (NYSE:CLX) introduced its Green Works all-purpose cleaning products in 2008, people were skeptical. A year and a half later, the furor's faded away. I suspect the same thing will happen with Dean Foods. It's not backing off from its cheaper alternative to organic milk and that's a good thing. Scare tactics from lobby groups of any kind should never influence a company's decision.

On July 6, Dean announced it was paying $455 million for European soy beverage company Alpro. This tells me management is pressing on with its healthy agenda. I for one think they'll do just fine and eventually so too will its stock. (Retail grocers are no longer a homogeneous group selling products in the same manner. Find out how to evaluate these companies in Evaluating Grocery Store Stocks.)

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Tickers in this Article: DF, STKL, HAIN, CAG, KFT, CLX

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