Last updated on September 5th, 2012 at 04:24 pm
Organic Alliance Inc., a global grower, shipper and distributor of fresh foods focusing on organic and Fair Trade agriculture, has issued the following special letter to shareholders:
It is my privilege to report that Organic Alliance Inc. (ORGC) has reached the critical mass needed to solidify its market position in the $29.2 billion U.S. natural, organic and Fair Trade foods market.
Today, we continuously stock our products on the shelves of leading national grocery chains including Safeway, Kroger and Trader Joe’s with others coming into our pipeline. These expanding relationships, and our increasing organic, Fair Trade and conventional product offerings, now serve as the foundation for the robust growth we anticipate near and long term. These products currently include mangoes, tomatoes, cucumbers, zucchini, green beans, squash, apples, pears and bell peppers.
Based upon supply contracts in place, we expect a substantial step up in revenue and profit margins—beginning in the fourth quarter of 2012—with additional dramatic increases in 2013. Our target is to become cash flow positive in the first quarter of 2013.
Organic Alliance reaches inflection point
After a two-year period of corporate reorganization, we have today emerged as a financially and operationally stronger organic foods company capable of capitalizing on growth trends, strong industry contacts and our in-house expertise. Most recently, we have refined our business model to become more vertically integrated in our supply chains for consistent access to certified product, as well as better control over our product cost and quality. This gives us a strong competitive edge, increases our value to retailers and strengthens our profit margins.
During the past year, we have focused on building a strong corporate infrastructure. Today, we have a sophisticated growth strategy that is scalable, a veteran management team, and a supply chain network that we believe will support $50 million to $60 million of annual sales. Our hard work and commitment has created a foundation that enables us to build significant market share in this important and growing sector of our economy.
Large, growing addressable market
The growth of certified organic foods in the U.S. is impressive. U.S. organic food sales rose from $6.1 billion in 2000 to $29.2 billion in 2011, a compounded growth rate (CAGR) of over 15 percent. Registering a third straight year of double-digit gains, sales of organic fruits and vegetables rose 11.7 percent in 2011 to $11.8 billion.
Further, Wall Street now seems to favor the organic industry’s strong prospects. Whole Foods posted second quarter sales that increased 14 percent to $2.7 billion. “Sales trends remain strong as it appears that the growth of the natural and organic industry has accelerated,” wrote Meredith Adler, an analyst for Barclays Plc. Another market leader, United Natural Foods Inc. (UNFI), reported sales for the quarter ended April 28 of $1.39 billion, a 15.3 percent increase year over year.
The financial media recently added, “There are countless other organic players looking to feed off consumers’ insatiable appetite for healthier foods. The freshly debuted Annie’s (IPO) reported a 17.5 percent increase in quarterly sales last week ($43 million), while Hain Celestial reported a 31.5 percent jump in sales ($379 million) as net income 53.6 percent.”
Competitive differentiation and synergy
The food industry is trending toward shortening supply chains by eliminating middlemen and vertically integrating closer to the field. This trend has been strengthened by the global movement toward “knowing where your food comes from,” as evidenced by the Fair Trade, organic and local movements. Major retailers are clearly favoring distributors that have this ability, particularly internationally. We have deep management experience in direct sourcing and vertically integrating international supply chains, which provides strong value to supermarket buyers.
As consumer demand rises, the increasing challenge for these buyers is the tight supply of certified organic and certified Fair Trade products. Our technical expertise in organic and Fair Trade certification allows us to quickly develop, certify and exclusively source new certified supply—alleviating tight supplies for our retail partners. This ability also enables us to develop and introduce a number of “first-to-market” Fair Trade certified products giving our company an important first mover’s leadership position in this young, fast growing market while boosting our value proposition to retailers.
Vertically integrated business model
By controlling more of the supply chain from seed to supermarket, we will continue to reduce costs and substantially increase our profit margins. Further developing supply chains we control, either via outright farm ownership, or through grower joint ventures, allows us to support targeted retailers with an increased variety of certified organic and Fair Trade products, sensible pricing, steady supply and inspiring multi-media stories from our producing communities.
Currently, we are focusing our supply chain integration strategy in Mexico with select greenhouse grower partners. Mexico is the U.S.’ largest food supplier with fresh produce exports to the U.S. growing 25 percent in 2010 to $6 billion. Additionally, greenhouse agriculture is one of the fastest growing Mexican agricultural exports to the U.S., having increased 35.8 percent in 2010 and boasting a CAGR of 34.6 percent from 2000 to 2010. We intend to replicate this strategy in key Latin American food exporting countries such as Argentina, Chile, Peru and Costa Rica.
Fair Trade certification: the future of global food markets
We are dedicated to the practice of Fair Trade, and are positioned to be the U.S. leader in Fair Trade fresh produce sales as consumers continue to drive its explosive growth. Like organic, a principal impediment to Fair Trade sector growth is the lack of certified supply and inconsistent quality and pricing—issues we are uniquely positioned to address with our extensive experience in Fair Trade supply development.
Global Fair Trade sales have followed the rise of organic at an 18 percent annual growth rate and reached a total of $4.8 billion in 2009. Mainstream retailers such as Walmart and Whole Foods have demonstrated strong interest, with each offering a growing number of Fair Trade products including private label. In 2007, Whole Foods launched its “Whole Trade” initiative requiring 50 percent of its imported food to be certified as Fair Trade within 10 years. Fair Trade sales in U.S. mainstream grocery outlets grew 24 percent in 2010, while Fair Trade fresh produce sales in the U.S. increased an incredible 42 percent in 2011.
Fair Trade certification offers growers the ability to trade directly with improved payment terms while guaranteeing workers have dignified wages, with a premium for community development, while providing the market with better, more sustainable products. Consumers are assured that their products were produced responsibly. Retailers get to distinguish their product offering.
Organic Alliance: strategy for growth
We have set an ambitious series of goals to accelerate our progress, to establish Organic Alliance as the go-to supplier of top quality organic and Fair Trade fruits and vegetables and to build our earning power. Our goals for the next 12 months include:
• Reinforce Management Team. I am quite proud of the world class team we have assembled at Organic Alliance, which brings management experience from companies ranging from Whole Foods, Sunkist Growers and Chiquita Brands International to Fair Trade USA, Fresh Express, Albert’s Organics and others. I invite you to review our senior management roster on our website, from the home page, at http://www.organicallianceinc.com/management.html.
• Increase Organic & Fair Trade Produce Supply. We will continue to utilize our robust certification expertise in developing new certified organic and Fair Trade production. This will increase the variety, volume and year-around availability of our organic and Fair Trade fruits and vegetables supply—including a number of products that we will introduce to the market for the first time.
• Capture Market Share. We will establish new retailer relationships with major national/regional grocery stores, and key broadline distributors, while building upon our existing relationships. Our vertically integrated supply chains reduce product cost while our development of new Fair Trade and organic certified items allow us to rapidly gain market share.
• Build Brand Value. We will build the Organic Alliance brand with the intrinsic value our products carry: “Food that is good for the planet, good for farmers and good for you.” Through promotional partnerships with retailers, cross-category packaging and branding we will communicate at the point-of-purchase our brand value along with the inspiring stories of our grower communities, which further differentiates our products in the fresh commodity market.
• Form Strategic Alliances. We will continue to form strategic alliances through joint ventures or other agreements with growers, key industry suppliers, strategic customers and distributors that will generate growth and provide increased stability in our supply chain. Such alliances allow us to control or own more of the supply chain and agricultural production for higher margins and reduced risk.
• Diversify into Growing Market Segments. We will build on our early work of processing our organic and Fair Trade certified fresh commodities into bulk and retail-branded processed foods such as dried, juices and frozen. Having established control over the raw material, these value-added items are the natural next progression for our product offering and represent a large potential for high margin revenue growth.
• Communicate Proactively. We have engaged senior investor relations and corporate communications professionals to assist us in keeping shareholders informed and communicating effectively with Wall Street. We plan to launch a major website upgrade, and social media campaigns, to more fully tell our story and those of our growers, their families and communities.
• Increase Revenue, Margins and Cash Flow. Based upon supply contracts in place with harvest schedules starting this fall, we expect a substantial step up in revenue and profit margins beginning in the fourth quarter of 2012 with additional dramatic increases in 2013. Our target is to become cash flow positive in the first quarter of 2013.
In summary, we now have a solid corporate infrastructure, excellent and rapidly growing supply lines, national retailer and distributor relationships and an outstanding highly motivated management team. I appreciate your confidence, as it is a privilege to lead this company into what I strongly believe to be an exciting and rewarding future.
Parker Booth, CEO