Editor's Choice

1 Organic Food Company: Behind the Bunny

Robby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The organic foods industry has been growing rapidly in the past decade. According to RNCOS, the industry grew at an annual compound growth rate of 18% during 2000-2008, and in the next few years will be growing at around 14% per year. That kind of growth would have most companies salivating.

Annie’s (NYSE: BNNY) is a widely recognized name in the world of organic foods. The company sells premium products to health-conscious consumers, avoiding artificial flavors, preservatives, and synthetic colors. Since its IPO in March, the stock’s performance hasn’t given shareholders much to cheer about, with erratic swings and a rollercoaster ride that’s currently in a trough. What should investors be looking for in the company? What elements of the business should shareholders be keenly tuned-in to?

Strengths

A Remarkable Brand - The company wants to ingrain its brand into the minds of consumers, and of that, it’s done an excellent job. Annie’s designs its packaging with bright colors to suggest the fanciful nature of the organic brand, the logo elicits the seemingly homemade quality of the food, and their mascot – Bernie, the “Rabbit of Approval” – is depicted any time the “Annie’s” trademark appears. The animal is even represented in the ticker symbol (BNNY).

Passionate Consumers - Annie’s has generated enthusiasm and deep-seated loyalty with its consumers. While the organic foods maker began as a niche brand sold only in natural-food co-ops, the company has been able to expand into more mainstream grocery stores while retaining that fervent following of repeat customers. Annie’s has been able to garner a much wider customer base as the demand for premium organic products grows. These days, it’s not only the customers in natural-food co-ops that love Annie’s products; the biggest-name grocery stores consider the brand valuable to their strategy.

Weaknesses

Reliance on Organic Fervor - The foods that Annie’s produces are premium goods – priced significantly higher than foods without the "natural" or "organic" label. While the demand for organic foods has grown tremendously in the past decade, there’s no guarantee that consumers will continue to be as enthusiastic about paying more for the Annie’s brand, when the same shelf displays less-expensive alternatives.

Economically Vulnerable - A recessionary economy could strain the revenues of any business, but Annie’s is particularly vulnerable. The food industry typically carries with it a thin profit margin. Grocery stores can withstand poor economic conditions because customers can’t forego food purchases – they will always need to eat, no matter the state of the economy – but as their incomes drop, consumers will opt for the cheaper substitute to whatever foods they would usually buy. As the premium good, Annie’s would be one of the first brands avoided in favor of inexpensive foods. 

Opportunities

As demand for organic foods grows, Annie’s revenue will naturally increase, and the company aims to reach a wider consumer base by expanding distribution. By negotiating superior shelf placements, Annie’s can boost sales and catch the attention of shoppers that normally would purchase more conventional foods. The company’s sales have increased at a 16% compound annual growth rate, and the growth of the organic industry will mean growth for Annie’s.

Threats

Annie’s faces aggressive competition from food companies on all sides, from the small niche producers to the giant manufacturers. In the natural foods business, Annie’s competes with Hain Celestial (NASDAQ: HAIN), Newman’s Own, and Nature’s Path Foods. Conventional food manufacturers including Kraft (NASDAQ: KRFT), General Mills (NYSE: GIS), and Kellogg (NYSE: K) have the resources and scale to develop their own organic brands, and have the advantage of diversified offerings – both organic and non-organic. General Mills offers Cascadian Farm foods, the Muir Glen line of tomatoes & sauces, and Lärabar organic brands. Kellogg has been growing its Bear Naked granola brand, and the company has successfully transformed the Kashi-branded cereals, crackers, cookies, and bars into ubiquitous choices for healthy snacks. With so many companies competing in a crowded space, Annie’s stands to lose market share if the business can’t keep up with the rest.

Bottom Line

Annie’s – like any other company – needs to strategize a contingency if their primary market disappears. As long as the organic industry continues to grow in the future, the company should be able to capitalize on that growth. Annie’s customers are more than just casual shoppers – some of them are aficionados –and while the competition will always be there, and economic troubles can never be totally eliminated, Annie’s brand has the muscle to make its own success and gratify consumers for years to come.


Robby Greengold ownes shares of Hain Celestial. The Motley Fool owns shares of Hain Celestial. Motley Fool newsletter services recommend Hain Celestial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure