German Groceries The Organic Retail Revolution

Organic food is one of the biggest growth sectors in food retail. But thanks to price wars, mass production, and rapidly expanding retail chains, the landscape is changing rapidly and not every environmentally-conscious grocer is winning.
Quelle: dpa
Organic foods are more popular than ever: An apple bearing the German symbol denoting its organic origins.
(Source: dpa)

The organic food store Bittersweet in the city of Hannover is going out of business. Since 1983, it has sold everything from free-range eggs to organic pomegranates to its loyal base of local customers. But just before Christmas, it cleared the shelves.

“Dear customers. Unfortunately after 34 years we will be closing our doors,” says a sign that has been posted on the shelves by Bittersweet’s owner, Sahak Hakobyan. The business is insolvent. And Bittersweet is not the only one. Recently one of Hakobyan’s competitors, a few blocks down the road, also closed its doors.

Interestingly enough though, the shuttered stores are just one side of the current situation with environmentally-conscious edibles in Germany. The other, more upbeat side will be seen in February, when the ecological food retail sector will gather at its biggest annual trade fair, the Biofach; more than 2,500 exhibitors and 48,000 visitors will converge on the city of Nuremberg. “Building an Organic Future” is the 2017 motto. And for many, that future is very bright indeed. In 2016, the organic food market in Germany grew to €9 billion, around $9.61 billion, the best year on record. A decade ago, it was just €2.9 billion.

Because Germany is going through what locals call a bio-boom - that is, an unprecedented organic boom - as sales of organic food and products soar. But underlying the healthy numbers is a rapidly changing, and ruthlessly competitive retail landscape.

All large mainstream retailers now plan to increase their organic offerings, under their own names, and through well-known organic brands.

Organic supermarket chains like Alnatura and Denn’s are opening new stores at an extraordinary rate. Until recently, Hannover's Bittersweet had only a single competitor. Now the city boasts ten franchises from the large organic chains. Across Germany, one in four of all organic stores - a total of 2,560 - is now a large franchise operation.

In other words, the organic boom is displacing the sector’s earliest pioneers. It is very similar to the 1970s retail dynamic, which saw small stores blown away by the arrival of supermarket chains. Ironically, the very forces that early organic retailers despised — mass production, price wars, franchising — are now radically disrupting the market.

But there is an even bigger threat on the horizon. Conventional supermarkets, as well as discounters, are quickly muscling in on the booming market. For years, mainstream German chains like Aldi, Lidl, Rewe and Edeka stocked some organic products. A typical Rewe store, one of the country’s best-known chains, already stocks around 2,000 such articles. Kaufland stores, slightly more downmarket, carry around 1,200. Even discounters like Aldi, Lidl, and Penny stock considerable amounts of certified organic food produce.

Now the next eco-wave is about to hit. According to information received by WirtschaftsWoche, almost all large mainstream retailers now plan to increase their organic offerings, under their own names, as well as through well-known organic brands. The “organic” label, it seems, is a surefire way to appeal to a certain prosperous demographic. This is a group for whom “morally correct food is a status symbol and organic guarantees a basic quality,” said Daniel Kofahl, a sociologist focused on food.

What was once a niche market has become a broader movement, with much growth still to come. “We are going to substantially expand our organic section,” said Patrick Müller-Sarmiento, head of Real, a self-service warehouse chain. Alain Caparros, chief executive of Rewe, will this year start testing a new kind of store, focused on fruit, vegetables, and “regional organic produce.” And Lidl’s head of German operations Marin Dokozic now even uses an old Green Party slogan: “Organic for all.”

In fact, mainstream chains are already the dominant force in organic retail. In 2015, organic supermarkets, farm shops, and old-school stores like Bittersweet made up around 31 percent of the market together. But more than half of all organic sales took place in mainstream retailers. And their dominance is growing: Their organic sales jumped 13 percent in 2016, says market research firm Nielsen.

 

This is confirmed by Lukas Nossol, head of marketing for the organic retailer Dennree. “Aldi, Lidl, Rewe and Edeka are the real competitors,” he says. Mr. Nossol is the son of Dennree’s founder and chief executive, Thomas Greim, who started the business 40 years ago, delivering dairy products in a clapped-out Opel truck. He often drove 3,000 kilometers a week, but business grew fast. Dennree went on to become Germany’s biggest organic food wholesaler: In 2015, revenues were €820 million. The company now sells 12,000 organic products wholesale, while its Denn’s supermarket brand has 252 stores.

“In the past year we sold around 7,500 tons of organic bananas,” said Mr. Nossol. For an organic retailer, that is an enormous quantity, but it is trivial for the supermarkets and discounters. Mr. Nossol is worried by the concerted advance of the big players. “Those chains regard us as just a mid-sized family business,” he says.

In order to fight back, Dennree has evolved from a wholesaler to a kind of alliance of organic retailers. It doesn’t just sell quinoa and goat’s cheese; if needed, it can supply advertising, store construction, and property management. In addition, its franchise network is growing rapidly. Last year alone, it opened 43 new stores in Germany and Austria. But rival Alnatura is growing just as quickly.

In the organic sector, big players like Dennree and Alnatura are hunter and hunted at the same time. On the one hand, their larger ranges and lower prices are annihilating smaller traders. On the other hand, the organic chains are forced to go for growth: Only economies of scale allow them to compete on price against the mainstream chains.

For Alnatura, there is also a lot more at stake than market share. Its expansion is also a bid to free itself from the German drugstore giant, DM, with which it had a close relationship going back decades.

Today, if you walk through one of Germany’s hundreds of DM stores, you will see up to a thousand organic items, from chia seeds to breakfast couscous, with some 350 sold under its own brand. Until very recently, the shelves would have been filled with equivalent Alnatura-branded products.

That partnership between DM and Alnatura went far beyond a normal retailer-supplier relationship. Retail experts spoke of a “brand symbiosis”: for three decades, Götz Rehn, Alnatura’s founder, and Götz Werner, head of DM, shared a vision of organic retail. And they were close friends and brothers-in-law.

Mr. Rehn set up Alnatura in 1984. Soon after, he made a deal with Mr. Werner which reads like an esoteric manifesto. Their aim was a “humanization of commercial life,” on the basis of “social organics,” an idea from 20th-century guru Rudolf Steiner.

But Mr. Rehn was hard-headed enough to drive Alnatura’s growth, both in his own retail outlets and as a supplier to DM. The partnership was a roaring success for both companies, with DM’s rapid expansion bringing Alnatura products to even more customers. Between 2006 and 2015, Alnatura’s turnover climbed from €185 million to €760 million. In 2014, the marketing consultants Brandmeyer declared it to be Germany’s best-loved food brand.

However, behind the scenes, all was no longer sweetness and light between the two companies, now both major players in their sectors. DM demanded better prices from Alnatura, and more transparency in pricing and supplier relations. Mr. Rehn refused, whereupon DM withheld payment of €2 million in Alnatura invoices. A court battle loomed.

“Because of the dispute, Alnatura cancelled its supply deals overnight,” said Christoph Werner, head of purchasing for DM, and the son of the company’s founder. Germany’s largest drugstore chain suddenly had huge gaps to fill on its shelves: Until then, Alnatura had been its only organic supplier. “We had to find replacements fast,” he added. The company also decided to rapidly launch its own organic brand.

DM had existing plans for such a launch, but on a much smaller scale, confirmed Erich Harsch, the company’s chief executive. But now they had to go large, and in a very short period of time. And they managed: Soon the company had launched a complete line of organic products, “at least as good as, and often better” than Alnatura, said Mr. Harsch.

Mr. Rehn was also finding new partners: Alnatura now sells through DM’s main competitors, Rossmann and Müller. Even more significantly, the company is now selling its branded products on the shelves of Germany’s largest food retailer, the supermarket chain Edeka. “If we hadn’t done that deal, I would not be here today,” said Mr. Rehn at last November’s presentation of Alnatura’s figures, where he announced a small rise in annual revenues, to €762 million, in spite of falling out with DM.

We are seeing a period of radical transition. Organic stores no longer have a monopoly on organic brands. Klaus Braun, organic retail expert

Alnatura’s move caused consternation among the community of organic suppliers and retailers. The deal with Edeka is widely seen as “opening the floodgates,” said Klaus Braun, an expert on organic retail who has been monitoring the sector since its earliest days, back in the 1970s, long before it turned into a billion-euro business. Old relationships broke down, he said, as the business changed. Organic retailers complain loudly about the “disloyalty” shown by some brands to the trade. The big manufacturers complain in turn about poor returns from small organic traders.

“We are seeing a period of radical transition,” said Mr. Braun. “Organic shops no longer have a monopoly on organic brands.” This is true of Alnatura products, but also of other top German organic brands like Söbbeke, Bauckhof, and Lavera, which have all long been available in supermarkets and drugstores.

Many organic farmers have also swallowed their previous objections to large supermarkets and discounters. Diana Schaack, of AMI, a leading agricultural market information firm, said even two years ago, “buyers for meat processors and wholesalers” were desperately trying to source products at major organic trade events. “Prices shot up and the market was cleared out,” she added.

To avoid this happening again, many large buyers are now going direct to organic farmers, courting them with offers of guaranteed prices and orders. “Some are even offering ten-year contracts,” confirmed Ms. Schaack.

As for Mr. Hakobyan, the ex-owner of Hannover’s recently-closed Bittersweet store, also wants to start anew with the meat trade. In 2017 he will tour a food truck around festivals and trade fairs, serving Armenian meat specialties. However his meat won’t be coming from any organic farms. It just wouldn’t make financial sense, he says.

 

Henryk Hielscher is an editor at WirtschaftsWoche, a sister publication. To contact the author: [email protected]