THE NATURAL/ORGANIC FOOD
MARKET IN THE UNITED STATES

October 2000

(Également disponible en français sous le titre,

Le marché des produits alimentaires naturels/biologiques des États-Unis))

The Market Research Centre produces a wide range of market reports by region and sector for Canadian exporters. For further information please contact:

THE NATURAL/ORGANIC FOOD MARKET IN THE UNITED STATES

The U.S. market for natural and organic products is valued at between $16.3 billion⁽¹⁾ and $29.7 billion annually, depending on the source of information. This is one of the most dynamic sectors within the U.S. food market, with 3000 to 4000 new product introductions each year and projected annual growth of 15-18% for the foreseeable future.

Although organic foods account for less than 1% of total retail food sales, this sector is growing faster than any other area of the food industry. Since 1992, sales of organic foods have increased by more than 20% annually with continued strong growth expected for at least the next decade. In 1999, total organic food sales were estimated to be worth nearly $9 billion.

Unlike most areas of the U.S. food industry, consumers have yet to establish brand preferences for the majority of natural and organic products. This lack of preference gives new products a good chance to become established in a market devoid of a few dominant products that hold a significant share of market sales. In addition, some of the large retailers and distributors of these products have begun establishing their own private-label brands. These product lines tend to be in their infancy, with retailers and distributors looking for new items to expand the current selection.

In 2001, the United States Department of Agriculture (USDA) expects to enact its new National Organic Program (NOP). The NOP is intended to replace the individual state regulations and certifying procedures that currently regulate the industry. The new standards will require that all producers, processors, and handlers be certified to handle organic products. Farms handling less than US$5,000 annually in organic production are exempt from certification.

TABLE OF CONTENTS

EXECUTIVE SUMMARY

MARKET OVERVIEW

Key Factors Shaping Market Growth

Opportunities

Actual and Planned Projects

COMPETITIVE ENVIRONMENT

Local Capabilities

International Competition

Canadian Position

Competitive Advantage Through Canadian Government Policies and Initiatives

PRIVATE-SECTOR CUSTOMERS

MARKET LOGISTICS

Channels of Distribution

Direct Sales

Distributors and Wholesalers

Food Brokers

Market-entry Considerations

Suggested Business Practices

Export Regulations and Procedures

PROMOTIONAL EVENTS

KEY CONTACTS AND SUPPORT SERVICES

BIBLIOGRAPHY

OTHER REFERENCE MATERIAL

Internet Sites

THE NATURAL/ORGANIC FOOD MARKET IN THE UNITED STATES

Statistics as to the size of the U.S. natural foods market vary considerably depending on the source of information and which products are included or excluded from the calculation. In general, most sources estimate that natural and organic foods have annual sales of between $16.3 billion and $29.7 billion (US$11-20 billion) and this figure is growing by 15-18% annually.

As is the case with conventional foods, packaged groceries account for the largest share of natural food sales. Bulk foods and perimeter/prepared foods, which include meat, deli, seafood, bakery, and foodservice, are the next largest categories, holding a 13% market share each, followed by produce with a 12% market share.

Table 1. Natural Food Sales vs. Overall Food Sales, by Product Category, 1999

The natural food industry has undergone a significant change over the last decade. The industry is no longer primarily made up of small, poorly organized producers who had little interaction with the consumer. As the industry matured, companies who wished to remain competitive were forced to address many facets of their organizations including the development new products, upgrading of equipment and facilities, investment in market research, increased communication with consumers, and the improvement of packaging and advertising techniques. In some cases, this has meant forming partnerships or alliances with other natural and organic food producers.

Sales of organic foods are growing faster than any other segment of the food industry. Since 1992, organic food sales have increased by more than 20% annually. In 1999, sales of organic foods were estimated to be worth nearly $9 billion with a projected growth rate of 20% in 2000. By 2010, annual sales of organic foods are projected to be $18-20 billion.

Although organic sales have experienced tremendous growth in recent years, the industry still represents a relatively small portion of total farming and food consumption. Currently, it is estimated that organic foods account for only 1% of total retail sales and 0.2% of total farmland in the United States. Therefore, the organic industry has quite a way to go before it accounts for a significant share of total food sales.

Farmers are also being encouraged to begin farming organic products to increase incomes as these products command higher prices than conventional crops. The premium prices that organic foods command may be essential to maintaining the existence of small farms in developed countries such as Canada and the United States.

As the natural foods industry has continued to grow and mature, a significant number of mergers and acquisitions have helped consolidate the market. In 1999, more than 96 deals--with an estimated value of between $7.4 billion and $8.9 billion--were completed. Analysts expect this trend to continue, as the natural and organic food marketplace is still dominated by a large number of small companies.

In general, increased consumer health consciousness is the single most important factor driving the growth of the natural and organic food sectors. Within the United States, and internationally, consumers have become far more aware of the quality of what they eat, the ingredients that the foods contain, and the processes that the foods go through (e.g. treatment with pesticides, use of antibiotic drugs in animal feed, food irradiation) before arriving at the point-of-sale.

Increased publicity about food scares such as salmonella, listeria, and E. coli have also aided sales of natural and organic products. However, U.S. citizens have not reacted as negatively toward genetically modified (GM) foods as European consumers. Industry analysts believe that U.S. consumers are more open to the concept of GM foods because they have a higher degree of trust in government food safety agencies than do European consumers.

Packaging has become an important factor in the success or failure of natural and organic foods. Not only do consumers look for environmentally friendly packaging materials but many successful products have focussed on packaging that is easy to carry and consume, as consumers of these natural and organic foods tend to be quite active.

One factor that has hindered the growth of the organic food sector is a lack of consistent supply. Improved distribution channels, production techniques and a growth in the number of producers has helped reduce the number of instances of retailers running out of a product. However, this problem has not been completely eliminated and retailers continue to seek out producers who can not only supply a new or innovative product, but those who can supply a product consistently.

Labour shortages may also be a barrier to the growth of the organic food industry. Not only are the number of farmers decreasing, while organic production requires increased labour, but some analysts have suggested that the rapid expansion of this market may result in a shortage of qualified inspectors to certify organic foods.

Advertising

Not surprisingly, since most companies are relatively small, advertising expenditures have also been small. Even large companies have generally relied upon product packaging or point-of-sale advertising to inform consumers about the benefits of their products. Although advertising is still expensive for the vast majority of producers, the competitive nature of these markets is forcing producers to spend more on advertising than ever before.

Most advertising for natural and organic foods is in the form of print advertising in trade magazines or store magazines. As many products are new to the market, or at least new to a significant portion of consumers, a picture of the product is a key component of a successful marketing campaign. Larger producers are also beginning to use newspaper and radio advertising in their marketing strategy.

Coupons (particularly peel-off stickers) and in-store demonstrations have also proven to be quite successful. These set-ups encourage consumers to try a product at little to no cost while giving producers an excellent opportunity to communicate with, and get feedback from, consumers.

The U.S. natural and organic food market represents a good opportunity for Canadian exporters. This market is experiencing strong annual growth across numerous product sectors. In 1999, producers introduced more than 4200 new natural and organic food products, up from less than 3200 products the previous year and around 3500 in 1997. Teas were the most commonly introduced item, accounting for 6% of all new products. Other popular product introductions included fruit-flavoured drinks (5.1%), spices, extracts, and seasonings (4.6%), and sauces and gravies (4.4%).

In most product categories, consumers have yet to establish brand preferences for products. Canadian producers who are new to the U.S. market, therefore, can readily compete with domestic products that have already been available for an extended period of time. Many U.S. retail outlets and distributors have also begun selling private-label, organic/natural foods and beverages and are actively looking for potential suppliers of these products. Retailers and distributors with private-label brands aim to have a significant number of products under one label in an attempt to generate customer loyalty, increase store margins, and offer lower-priced products to consumers.

The organic dairy industry has experienced the strongest growth of any organic food sector over the past few years. The dairy industry has averaged annual growth of approximately 50% in recent years. Although this rate of growth is not expected to continue, analysts predict that the growth organic dairy industry will continue to outpace the growth of the overall organic food market.

Soy products have been especially popular in the dairy segment. In November 1999, the Food and Drug Administration (FDA) approved the allowance of health claims for soy products containing at least 6.25 grams of soy protein per serving. The health benefits of soy include lowering levels of LDL (the so-called "bad" cholesterol), reducing the risk of heart disease, and alleviating the symptoms of menopause.

Organic or natural foods that are targeted at children also represent a good opportunity for Canadian exporters. In many cases, consumers that are somewhat unwilling to pay higher prices for food for themselves, believe that organic or natural foods are of better quality than conventional items and are willing to pay more for these products for their children.

A relatively new area that has attracted a significant amount of consumer interest is concept of ready-to-eat, natural or organic meals and ingredients. Retail outlets offering this type of foodservice have experienced extremely positive feedback from consumers, who have shown a willingness to pay restaurant prices for healthy, great-tasting foods that can be taken home.

Good opportunities exist in, but are not limited to, the following product categories:

• meats;
• fresh/frozen/processed fruits and vegetables;
• ice cream;
• breakfast cereals;
• healthy snacks;
• health bars;
• herbal preparations/nutritional supplements;
• prepared salads;
• prepared meals;
• condiments/sauces;
• alcoholic beverages;
• deserts.

Actual and Planned Projects

In September 2000, MotherNature.com, a leading source of information and e-tailer of vitamins, minerals, supplements, and natural foods, agreed to provide Web hosting services to United Natural Foods Inc. (UNF). With a customer base of over 6500 retailers, UNF is the leading independent national distributor of natural products in the United States. MotherNature.com will provide access to its 16 000 natural and organic products to UNF who, in return, will market this product to their customer base. Both companies are expected to benefit from a broader product offering for their customers through the Internet, with minimal start-up costs.

In March 2000, the Hain Food Group purchased the speciality tea maker, Celestial Seasonings, for nearly $495 million in stock. Hain also agreed to assume $11.6 million in debt. The combined revenue of the two companies, which is now called the Hain Celestial Group Inc., is approximately $640 million annually. This agreement will extend the distribution system of the new company and will further develop Hain's reputation as the leading supplier of natural and organic products in the United States.

In an attempt to reduce consumer fears over GM foods, a coalition of biotech companies are spending $74 million (US$50 million) this year on a marketing campaign to educate consumers about these products. The marketing campaign, which includes $47.5 million in television and print advertising, is being funded by companies such as DuPont, Dow Chemical, Monsanto, Novartis (Switzerland), Zeneca (United Kingdom), BASF (Germany), and Aventis (France). The ads focus on the reduced use of chemical pesticides, the increased yields, and the nutritional benefits of GM foods.

National Organic Program

In 1998, the United States Department of Agriculture announced a set of regulations designed to create a national standard for the organic food industry. However, this first attempt was thoroughly condemned by farmers, consumers, and activists who were all concerned that the new standards would allow products that had been genetically altered, fertilized with sewer sludge, or irradiated to carry an organic label. In response to this public outcry, the USDA carefully reviewed more than 275 000 comments on the initial proposal and released a revised proposal earlier this year.⁽²⁾

The new National Organic Program (NOP) is intended to replace various state regulations and certifying procedures with one set of national standards. The NOP will require all organic farmers and processors to be certified by the USDA. This new set of rules, which have generally been well accepted by the both consumers and farmers, are expected to be enacted at some point in 2001. Farmers and processors who do not abide by these new standards will be subject to substantial fines.

Although various parties have voiced concerns over implementation, enforcement, and recall, perhaps the most widely expressed concern is the effect that these new standards will have on small farmers or processors. Historically, small farms/companies have provided the backbone for the U.S. organic food industry. However, many people within the organic food industry believe that small producers may be unable to compete with larger businesses due to the high costs associated with the new record keeping and certification procedures. This may lead to a high degree of consolidation within the organic food industry as small businesses are acquired by or merge with larger partners.

Local Capabilities

Organic food production occurs in every U.S. state. The USDA estimates that there are currently 12 000 organic producers in the United States and anticipates that this number will increase. The vast majority of producers are small and operate on a regional level, selling their products in locations as diverse as roadside stands or large supermarkets. The top organic items produced in the U.S. include tomatoes, lettuce, carrots, apples, grapes, broccoli, strawberries, squash, mushrooms, and peaches.

The natural foods industry is quite similar to the organic industry with the majority of its producers operating being small, privately owned companies operating on a regional level. Most of these companies depend on product innovation to increase sales; however, this generally results in the growth of the industry as a whole through the expansion into new product categories.

A number of large companies have entered the natural and organic food industries in recent years. Just a few of the large players in this market are Kraft Foods, Quaker Oats, Mars Inc., H.J. Heinz Co., J.M. Smucker Co., General Mills Inc., Chiquita Brands International, and Gerber Products Co. Typically, these large companies reduce their risk in entering the organic market by purchasing established organic brands instead of developing their own products. However, most of the aforementioned companies focus on one or only a few product sectors and are not broad-line marketers.

Only a handful of companies offer a broad selection of products over many product categories. The largest of these broad-line companies are the Hain-Celestial Group, Eden Foods Inc., Worthington Foods Inc., Gardenburger Inc., New Organics Co. Inc., Natural Value, Organic Food Products, and Walnut Acres Organic Farms. The two largest distributors of natural foods (Tree of Life Inc. and UNF) and the two largest natural food supermarkets (Whole Foods Market Inc. and Wild Oats Markets Inc.) also have a broad selection of natural and organic foods that are sold as private-label brands.

With the growth of the natural and organic food market, both within the United States and internationally, the number and type of organic producers/manufacturers has changed dramatically over the last decade. The number of large producers has increased substantially and products from many countries around the world are available in the U.S. market. In addition, the presence of large multinational companies has increased significantly although most of these companies entered the market by acquiring smaller producers. Companies such as Novartis, Danone, and Nestle all produce natural or organic products that can be found in the United States.

For the most part, the U.S. market is largely self-sufficient in terms of organic foods. However, the rapid growth of the organic food industry will provide Canadian suppliers with excellent opportunities to enter the U.S. market. A growing number of consumers are seeking out healthy alternatives to everyday products and Canadian suppliers of new, unique, or niche products may be able to develop a presence in the market.

Canadian manufacturers of organic foods should benefit from consumer perceptions of Canada as a clean, pure and unspoiled source of foods. In addition, nutraceutical manufacturers are increasingly looking for (foreign) suppliers of organic or natural ingredients to use in the preparation of finished products.

Agri-Food Trade Program

The Agri-Food Trade Program (AFTP) is a cost-shared contribution program designed to support Canadian agri-food industry activities in areas of market readiness, market access and market development. The objective of the AFTP, which combines the Agri-Food industry Market Strategies (AIMS) and Agri-Food Trade 2000 (AFT2000) programs, is to increase sales of agriculture, food, and beverage products in domestic and foreign markets.

A priority of the AFTP is to encourage Canadian agri-food associations and alliances to develop and implement sectoral export market development strategies to improve their global competitiveness.

The Canadian Commercial Corporation (CCC) gives Canadian companies access to financing and better payment terms under the Progress Payment Program (PPP). The PPP concept was developed as a partnership between major Canadian financial institutions and the CCC. It enables the exporter's bank to open a project line of credit for the exporter's benefit, based on CCC approval of the project and the exporter's ability to perform. The CCC will also act as a prime contractor on behalf of Canadian small and medium-sized enterprises, giving those businesses increased credibility and competitive advantage.

Export Development Corporation (EDC) offers export financing and insurance to Canadian exporters. Additionally, insurance can be provided for larger transactions that are subject to the terms and conditions established by the buyer. EDC prefers to work through letters of credit, bank credits or bank guarantees. Approval for financing is considered on a case-by-case basis.

The New Exporters to Border States (NEBS) program introduces the essentials of exporting to Canadian companies that have not yet exported to the United States. NEBS provides participants with practical information and first-hand exposure to U.S. border state markets.

Exporters to the United States (EXTUS--formally NEBS Plus) helps Canadian companies that are already exporting to U.S. border states to expand to other regions of the United States. For more information on NEBS and EXTUS, call 1-888-811-1119, visit http://www.dfait-maeci.gc.ca/geo/usa/nebs-e.asp or send an E-mail to Roman.Borowyk@dfait-maeci.gc.ca.

The North American Free Trade Agreement (NAFTA) is a comprehensive free trade agreement among Canada, the United States and Mexico, which came into effect January 1, 1994. The NAFTA has opened markets to Canadian exporters through the elimination of tariff and non-tariff barriers. Efforts have also been made to address export issues of direct concern to small and medium-sized enterprises (SMEs) in terms of trade facilitation, such as infrastructure improvements for the transport of commercial goods.

In recognition of the important role that SMEs play in the national economies of the NAFTA countries, a number of customs-related trade facilitation initiatives have been undertaken to simplify customs procedures and reduce bureaucratic impediments to cross-border trading. For example, the North American Trade Automation Prototype (NATAP) is a joint initiative among Canada, the United States and Mexico to streamline the customs clearance of commercial goods. The Prototype is based on a foundation of common data elements, documents and processes, and will attempt to show that most of the duplication required today could be eliminated. It will also test the use of Intelligent Transportation Systems (ITS) and the concept of a seamless border for low-risk and pre-approved drivers. The Prototype is a low-volume field test currently being operated at six sites, including two on the Canada-U.S. border.

SMEs can now also benefit from a standard procedure for moving commercial samples, professional equipment, tools of trade and exhibition material across borders on a temporary basis, and from the dissemination of accurate, consistent and easy-to-understand information relating to customs laws and procedures. For further information, contact the Canada Customs and Revenue Agency, Trade Agreements Information Line at 1-800-661-6121 or (613) 941-0965, or the NAFTA Customs Web site at http://www.nafta-customs.org.

The Program for Export Market Development (PEMD) helps Canadian companies enter new markets by sharing the costs of activities that companies normally could not or would not undertake alone, thereby reducing risks involved in entering a foreign market. Eligible costs and activities include market visits, trade fairs, incoming buyers, product testing for market certification, legal fees for international marketing agreements, transportation costs of offshore company trainees, product demonstration costs, promotional materials, and other costs necessary to execute a market development plan. Activity costs are shared on a pre-approved, 50/50 basis.

The PEMD refundable contribution ranges from $5,000 to a maximum of $50,000. Preference is given to companies with fewer than 100 employees for a firm in the manufacturing sector and 50 in the service industry, or with annual sales between $250,000 and $10 million. Other components of the program include international bid preparation (Capital Project Bidding) and, for trade associations, developing international marketing activities for their membership. For additional information visit http://www.infoexport.gc.ca/pemd-e.asp or call 1-888-811-1119.

WIN Exports, a database of Canadian exporters and their capabilities, is used by trade commissioners around the world and by Team Canada Inc partners in Canada to match Canadian suppliers with foreign business leads, and to share information on trade events. To register your company in WIN Exports or for more information, visit http://www.infoexport.gc.ca/winexports/home_e.html or call 1-888-811-1119.

Although consumers of organic and natural foods still represent only a small portion of total consumers, the increased availability, visibility, and interest in these products has resulted in strong growth. Currently, over 6% of adults are considered to be regular consumers of natural foods (regular consumers are considered to be those who shop at health and natural food stores at least once every four weeks), up from 4.9% in 1994. More than double that number of consumers are estimated to be occasional consumers of natural foods.

Within the organic sector, one-third of all consumers have purchased an organic product within a six-month time period. Of the remaining portion of consumers, 60% have never purchased an organic product but are willing to try. This represents a significant shift in consumer perceptions of organic foods as five years earlier, only 30% of consumers were willing to try organic products.

Although consumers still consider the typical key purchasing criteria (e.g. price, quality, value, taste), there has been a noticeable change in the mind set of the organic buyer. Historically, consumers purchased organic foods based primarily on environmental concerns, whereas current consumers purchase these products on the premise that the products are healthy and better for themselves and the consumers feel they are helping the environment at the same time.

Most consumers of organic foods begin their foray into organic buying in one of three categories: produce, dairy, or baby food. Only after sampling products in one of these categories do consumers tend to expand their organic purchases to other store departments to supply their additional needs.

As is the case with conventional foods, women comprise the largest share of natural and organic food shoppers. Women tend to be more aware of the nutritional value of the foods and beverages that both they and their families eat.

The largest consumers of natural and organic foods tend to be people over the age of 45. These consumers have shown the greatest interest in eating healthier products as a form of preventative medicine, to decrease the chance of health problems. Other attributes of frequent purchasers include people with post secondary education, those who have above average incomes, and one- or two-person households who do not have the expense of children. Organic baby food provides the one exception to these attributes, as many parents have shown a willingness to purchase premium-priced baby food while maintaining low levels of interest in purchasing organic products for themselves.

Channels of Distribution

In 1999, health and natural food sales were split evenly between mass market retailers (i.e. supermarkets) and natural food stores. However, supermarkets and other mass market retailers have slowly been gaining a larger share of this market. In 1997, mass marketers accounted for only 47% of natural food sales. This shift in market share is due to the growing demand by consumers for natural and organic products, which, in turn, has led to supermarkets stocking an increased number of these products. Sales through supermarkets also allow manufacturers to access a larger number of consumers than solely through natural food outlets, which consumers must make a concerted effort to visit.

Table 2. Share of U.S. Health and Natural Food Sales by Retail Outlet Type, 1999

Carrying a larger number of organic and natural foods also benefits supermarkets. Not only do these products have higher prices, which increase sales figures, but the growth potential is also greater for these products than for conventional items. Between 2000 and 2003, analysts predict 2-4% annual sales growth for supermarkets, while sales natural foods are expected to grow by 10-12% annually.

Within the natural food retailers category, two chains dominant sales. Wild Oats Markets Inc., based in Boulder, Colorado, is the largest retail chain with 120 stores under the names Wild Oats, Alfalfa's, Henry's, Nature's Northwest, Sun Harvest, and Capers. Whole Foods Market, based in Austin, Texas, is the second-largest natural foods retailer with 105 stores. Due to the size of these retailers and their well-developed distribution systems, prices in their stores tend to be around 10% higher than at a regular supermarkets, lower than those found at most natural foods retailers.

Although natural food stores can be found throughout the United States, certain regions have a significantly higher proportion of stores than other regions. For example, the Pacific region accounts for 25% of all natural food stores as consumers tend to be more health and trend conscious in this region. The South and the Northeast have the next largest proportion of stores with roughly 20% of the total natural food outlets each. While the Pacific region continues to be the leader in health food outlets, the Central and Northeast regions have experienced the strongest growth in recent years, with 10-20% annual growth.

As the number of natural and organic products requiring refrigeration or freezing increases, both mass market retailers and natural food stores have increased the number of refrigerator and freezer units in their stores. This is especially true for supermarkets, which tend to be fully stocked of conventional items and have had difficulty find enough space for refrigerated/frozen natural and organic products.

Sales of groceries via the Internet are steadily increasing and may, in the future, represent a good method of accessing natural and organic food consumers. Currently, the market for on-line grocery sales in the United States is estimated to be worth $7.4 billion and is expected to more than double by 2004.

Currently, direct sales of organic and natural foods to retailers account for approximately one third of total sales. However, as retailers increasingly seek out methods of reducing costs, the number of products purchased directly from manufacturers has steadily increased. The lower costs associated with direct sales allows retailers to price products more competitively with conventional goods. This is especially important for natural food outlets that are attempting to offer products for prices close to supermarket prices.

Many of the large national and regional natural food stores have established centralized warehouses. This allows these retailers to purchase products, in large quantities, directly from the manufacturer and distribute them to a large number of stores at a lower cost than was previously possible.

Distributors are required to ensure that all imported products comply with U.S. food and beverage regulations. However, manufacturers must also take the initiative to ensure that products meet with U.S. import and labelling regulations. Although one distributor can help with access to a specific region of the United States, multiple distributors may be necessary to ensure more widespread distribution. In 1999, approximately two-thirds of the products carried by natural food stores were purchased from wholesalers and distributors.

The level of service provided by distributors varies significantly. Some distributors simply deal with the logistics (e.g. transportation, storage) of products, while others will become more involved in marketing and promotion. When seeking the services of a distributor or wholesaler, exporters should consider the relationship that these individuals have with local governments, buyers and banks; the condition of their facilities; and their willingness and ability to keep inventory. Canadian producers are advised to review U.S. import regulations with a qualified lawyer before entering into an agreement with a prospective partner.

Canadian producers should also find out if U.S. distributors carry competing products or own separate companies that produce similar products. A handful of distributors sell private-label natural or organic foods. For example, UNF owns a number of companies which manufacture a variety of private-label natural foods.

Similar to the retail market, the number of wholesalers and distributors is slowly decreasing due to a growing number of mergers and acquisitions. In fact, the largest natural food distributors, including Tree of Life, Inc. and UNF, have expanded their operations primarily through the purchase of smaller wholesalers and distributors.

Most new food exporters choose brokers to sell their products and service their accounts. Brokers do not take title or possession of the goods, but instead act as "outside" sales staff. Some of the advantages of using a broker's services include:

• comparatively low start-up and overhead costs (no sales, no costs);
• quick access to an established network of buying contacts;
• a local presence to service clients; and
• the broker's knowledge of both the market and the product's promotional requirements.

Many brokers have established solid relationships with retailers and wholesalers, and have regular appointments with their buyers. As a result, they can often be instrumental in helping exporters to introduce new products.

When seeking the services of a broker, exporters should consider:

• the market segments and customers it serves;
• its reputation within the industry;
• the size of its sales force;
• its product knowledge;
• the number and location of its offices;
• the services it offers;
• the products it currently sells; and
• its interest in the exporter's goods and in those of its competition.

Any written agreement between an exporter and a broker should be prepared by a lawyer and, as a minimum, should cover the following points:

• territory covered;
• exclusivity and payment terms;
• performance criteria;
• collection of receivables;
• duration of agreement; and
• procedures to terminate the agreement.

It is important for an exporter to build a close and active working relationship with the chosen broker, so that the exported products are given the necessary exposure. Exporters should plan to make multiple trips to the market while attempting to establish a product in the United States. In order to ensure strong product support from a broker, companies should also spend time "educating and motivating" the entire broker's staff. In addition, producers should plan visits to the market to make joint sales calls on buyers. Manufacturers have the most interest, knowledge, and excitement in their product(s), which should be passed on to distribution partners.

Some markets may require that a broker and distributor be used, while other areas can be most effectively serviced through direct sales and distribution (DSD). In some niches, distributors will perform the functions of both the broker and the distributor--more of a DSD.

For information about food brokers in the United States, exporters are encouraged to seek a retailer's recommendation; contact a local industry association such as the Association of Sales and Marketing Companies, or contact the closest Canadian Consulate.

Also, a report entitled "Working with a U.S. Food Broker: A Guide for Canadian Exporters" can provide useful information on the principal-broker relationship. This report is available on InfoExport at: http://www.infoexport.gc.ca/docs/view-e.asp?did=5191&gid=229

Suggested Business Practices

Generally, business practices employed in Canada and the United States are quite similar. However, Canadian exporters should note that success in the United States will require additional dedication, commitment, persistence, aggressiveness, and resources. The relative maturity and intense competition within the U.S. food market has led to customers having come to expect significant after-sales service and incentives. In addition, customer loyalty may not be strong if similar products can be found with added benefits, such as lower costs.

Canadian exporters are strongly encouraged to hire a certified customs broker to manage border procedures. Customs brokers are familiar with all information required by the exporter, and are able to provide insight on such market access issues as import restrictions based on quotas, health regulations, documentation, labelling and product testing. Customs brokers typically charge exporters on a per-shipment basis.

To retain the services of a U.S. customs broker, an exporter must first authorize the brokerage firm (by power of attorney) to file entries on its behalf with the U.S. Customs Service (USCS). The USCS also requires the exporter to post a bond, usually in an amount equal to the value of the shipment plus duties and fees. Exporters should complete the required documents and forward them in advance to their customs brokers, who can then notify the USCS of entry and arrange for clearance. The original documents must accompany the shipment, and must include the following:

• pro forma invoice;
• bill of lading;
• inward cargo manifest;
• health certificate, as required by the U.S. Department of Agriculture;
• NAFTA certificate (for individual or annual shipments valued at more than US$2,000).

Exporters may also wish to consult a product broker. These individuals find buyers for products outside the normal distribution channels.

Bill of Lading

The bill of lading is the shipper's acknowledgment of receipt of the shipment. Each shipment may contain a set of bills of lading, one copy of which should be kept on file, while other copies are sent to the importer and customs broker, respectively. The bill of lading should include:

• description of the product(s);
• weights and measurements of the packages and their types;
• ports of origin and destination;
• names and addresses of shipper, importer and customs broker;
• any freight or other charge incurred;
• number of bills of lading in the full set; and
• the carrier's acknowledgment of receipt "on board" of the goods for shipment.

Depending on the product, it may be necessary for exporters to include storage temperature and requirements on the bill(s) of lading.

Packaging and Labelling

Goods should be properly packed and marked for shipment, to reduce both the risk of damage and pilferage. Properly packaged and labelled goods will also help to expedite customs examination. Food samples (not for resale) are generally not held to as stringent labelling requirements, but must be marked as samples and shipped in compliance with U.S. import regulations. This also assumes that shipments are appropriate sample sizes. Manufacturers should attach a note explaining why a sample size was chosen if they feel it might be deemed excessive upon border inspection.

Manufacturers of organic and natural foods should put a greater emphasis on packaging materials. Many consumers of these products base a portion of their decision on what influence packaging materials may have both on the product itself and on the environment. Manufacturers should ensure that all packaging materials are recyclable and, if possible, avoid plastics. In addition, many products found in aluminum cans advertise that can liners are used to separate the food from the metal.

Labelling of natural foods is somewhat free of legislation as the term "natural" can be broadly defined. Terminology used on packaging is guided more by the truth in advertising rules. However, the FDA has established regulations for health claims made by natural products. The only areas that are permitted to make health claims to promote their products are:

• fibre-rich grains, fruits, and vegetables--reduced risk of heart disease and certain types of cancer;
• fruits and vegetables--reduced risk of cancer;
• calcium--reduced risk of osteoporosis;
• folic acid--reduced risk of certain birth defects; and
• soy protein--reduced risk of heart disease.

Historically, U.S. manufacturers were not required to list foods that contained genetically altered ingredients on product labels. However, in May 2000, the FDA passed a new regulation that requires such products to be labelled, but only if the modified ingredients change the product itself or its nutritional value.

U.S. national organic standards will not only ensure that products are grown, processed, handled, and sold in a uniform fashion but they will also regulate the labelling of products. Organic foods and beverages will be labelled according to the following criteria:

• products labelled as "100% organic" must contain (not including water and salt) not less than 100% organically produced raw or processed agricultural product;
• products that are simply labelled "organic" must contain not less than 95% organically produced raw or processed agricultural product. Any remaining product ingredients must consist of non-agricultural substances or non-organically produced agricultural products approved in the National List of Allowed and Prohibited Substances;
• products labelled "made with organic (specified ingredients)" must contain at least 70% organically produced agricultural products; and
• products with less than 70% organic ingredients may include the word "organic" only in the list of ingredients.

Products that adhere to the aforementioned regulations will be permitted to use the USDA organic seal.

Imported products may be labelled "organically produced" if the USDA determines that the product has been produced and handled under an organic program that meets or exceeds the requirements of the NOP.

National List

The National List is a list of substances that may or may not be used in organic production and handling operations. The list includes both synthetic and non-synthetic substances that may be used in organic food production and also identifies natural substances that may not be used.

The National List was created as part of the Organic Foods Production Act of 1990 and is regulated by the National Organic Standards Board in collaboration with the Secretary of Agriculture. The list is revised annually, with new items being added while others are removed. Decisions on whether or not a product can be used is based on seven criteria:

• effect on human health;
• effect on the farm ecosystem;
• toxicity and mode of action;
• availability of gentler alternatives;
• probability of environmental contamination during manufacture, use and disposal;
• potential for interactions with other materials used; and
• overall compatibility with a system of sustainable agriculture.

Organic Standards

In 1990, the Organic Foods Production Act (OFPA) was enacted as part of the Farm Bill. The intention of the OFPA was to establish standards for the production and handling of organic foods and beverages. Currently there are 49 certifying agents (36 private certifying agencies and 13 state-run certification programs), ranging from small non-profit associations that certify only a few producers to large agencies that certify hundreds of producers throughout a number of states. Unfortunately, there is a significant discrepancy in the rules and procedures that were enforced by various certifying agencies. As a result, the OFPA has spent a number of years developing the National Organic Program (NOP), which will regulate the entire organic industry and thereby make certain that all organically produced foods adhere to the same policies and standards.

Highlights of the NOP production standards include:

• all organic growers and handlers must be certified (handlers do not include brokers, warehouses or transportation operations that merely store or move products from one place to another);
• growers who gross less than US$5,000 annually are exempt from certification;
• five-year records must be kept of all management practices and materials used in organic production;
• for producers and handlers of organic and conventional foods, separate records must be kept for organic products;
• organic crops must be grown on land that has been kept free of banned substances for a minimum of three years prior to harvest;
• farmers are responsible for establishing an acceptable buffer zone between organic and conventional crops in order to prevent pesticide or fertilizer drift;
• organic livestock must be fed organic feed;
• organic livestock must be kept in good housing conditions with periodic access to the outdoors and direct sunlight; and
• medications, feed, and processing additives are all strictly regulated by the National List.

It is recommended that Canadian exporters of organic products carefully review the NOP to ensure that their products adhere to U.S. standards.

The U.S. government requires that some documents be authenticated, such as certificates of sale and letters authorizing an exporter's local agent or importer to act on their behalf. Documents must first be notarized in Canada, then can be authenticated, at no cost, by sending them to the Authentication and Service of Documents (JLAC) division, Department of Foreign Affairs and International Trade.

Cash-in-advance and open-account sales are the most common methods of payment. Payments can easily be made by cheque or bank transfer. A buyer's credit rating can be checked with bankers, other suppliers and private credit analysis institutions. EDC offers insurance programs to protect Canadian exporters against non-payment by U.S. buyers. Some exporters have found it helpful to maintain a U.S. business address and bank account; however, companies should first consider the legal and tax implications of such an arrangement.

PROMOTIONAL EVENTS

KEY CONTACTS AND SUPPORT SERVICES

Agriculture and Agri-Food Canada-Regional Trade Contacts

International Trade Centres

For export counselling or publications for Canadian exporters, contact a local International Trade Centre by calling 1-888-811-1119.

Export-oriented Canadian Food Industry Associations

A detailed list of both provincial and national Canadian food industry associations can be found on the Agriculture and Agri-Food Web site at: http://ats.agr.ca/public/associations-e.htm.

U.S. Government Contacts

Canadian and U.S. Industry Associations

BIBLIOGRAPHY

Advertising Age. "Natural Foods Experiencing Organic Growth: 'Health Foods' No More, New Options Attract Consumers and Food Marketers," November 1, 1999.

Associated Press Newswires. "Farm Scene: Going Organic Improves Profits but Carries Risk," June 28, 2000.

Associated Press Online. "Hain to Buy Celestial Seasonings," March 6, 2000.

Business Wire. "MotherNature.com Announces Retail Web-Hosting Agreement With United Natural Foods, Inc.," September 18, 2000.

Chemical Market Reporter. "New Proposed Standards for Organic Foods," May 29, 2000.

Deseret News. "Sowing the Difference in Grocery Marketing," June 20, 2000.

------. "Health Foods Going Mainstream," August 18, 2000.

Environmental Nutrition. "New and Improved Proposal for National Organic Standards," April 1, 2000.

Federal Register. National Organic Program, March 13, 2000.

National Post. "Retailers to Yank GM Foods from Shelves: Farmers 'Nervous'," January 5, 2000.

Natural Foods Merchandiser. "The Natural Food Products Market Increased 11% to Over $28 Bil in Sales in 1999," June 1, 2000.

------. "Over 96 Merger and Acquisition Deals Took Place in the Natural Foods Industry in 1999," June 1, 2000.

New York Times. "Organic Farming, Seeking the Mainstream," April 9, 2000.

Packaged Facts. Health and Natural Foods Market, May 2000.

PR Newswire. "Heinz to Acquire 19.5% of Hain Food Group," September 27, 1999.

Progressive Grocer. "All-Natural Kids," May 1, 2000.

The Scotsman. "Baby Boomers Begin the Backlash Against GM Foods," January 5, 2000.

St. Petersburg Times. "Biotech Battle Now a War of Words," May 10, 2000.

Supermarket Business. "An Organic Niche," December 15, 2000.

Vegetarian Times. "Certifiably Organic," June 1, 2000.

Internet Sites

Agri-Food Trade Service: http://ats.agr.ca

Appropriate Technology Transfer for Rural Areas (Sustainable Agriculture Organizations and Publications): http://www.attra.org/attra-rl/susagorg.html

Associations of Sales and Marketing: http://www.asmc.org

Canada Business Service Centres: http://www.cbsc.org

Canadian Food Inspection Agency: http://www.cfia-acia.agr.ca

Canadian Food Trade Alliance: http://www.cfta.ca

Canadian Organic Advisory Board: http://www.coab.ca

Canadian Organic Growers: http://www.cog.ca

Centre for Food Safety and Applied Nutrition: http://vm.cfsan.fda.gov/list.html

Department of Foreign Affairs and International Trade: http://www.dfait.maeci.gc.ca

ExpoGuide: http://www.expoguide.com

ExportSource: http://exportsource.gc.ca

Food and Drug Administration (FDA): http://www.fda.gov

Food Labelling Homepage: http://vm.cfsan.fda.gov/label.html

Food Safety and Inspection Service: http://www.fsis.usda.gov

Governments on the WWW-United States of America: http://www.gksoft.com/govt/en/us.html

InfoExport: http://www.infoexport.gc.ca

Inforganics: http://www.inforganics.com

International Federation of Organic Agriculture Movements: http://www.ifoam.org

Organic Consumers Association: http://www.purefood.org

Organic Farming Research Foundation: http://www.ofrf.org

Organic Favorites (Links): http://www.kurmakka.fi/links0.html

Organic Growers and Buyers Association: http://www.ogba.org

Organic Trade Association: http://www.ota.com

Strategis: http://strategis.gc.ca

Tradeport: http://www.tradeport.org

Trade Show Central: http://www.tscentral.com

Trade Show News Network: http://www.tsnn.com

United States Environmental Protection Agency: http://www.epa.gov

United States Food and Drug Administration: http://www.fda.gov

USDA National Organic Program: http://www.ams.usda.gov/nop

Whole Foods Market: http://www.wholefood.com

Wild Oats Markets: http://www.wildoats.com/wild_cuisine/index.html

Table 3: Currency Conversion Rates for the Canadian dollar, and the U.S. dollar (using average annual rates)

Source: IDD Information Services, Tradeline, 2000.