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HerbThyme’s Travails Raise The Question Of How Retailers Can Address The Low-Volume Organic Issue

Jim Prevor’s Perishable Pundit, May 25, 2010

Our piece, HerbThyme’s Business Director Calls Fraud Allegations Invalid and Inaccurate, dealt with a class action lawsuit alleging that HerbThyme has sold conventional product as organic.

Although we gave HerbThyme a place to say its piece — and we think that the whole concept of the class action lawsuit is prone to abuse and not a sensible way of addressing this topic — we also found that HerbThyme’s Business Director Ben Ho was not as direct as would be desirable as to precisely what HerbThyme did or did not do and when they did or did not do it.

Subsequent to the piece running, we’ve had a lot of conversations with a lot of producers and we have come to think that the industry has a real and specific problem — apart from whatever HerbThyme did or did not do — related to produce fraudulently labeled as organic.

Here is the situation: We have mentioned previously that the percentage of produce being sold as organic is rising much faster than consumer demand for organic might indicate. The reason for this discrepancy is that many retailers, wanting to offer an organic option, but not wanting to double the SKU count, have been looking to standardize low volume products on organic versions. So the retailers may decide to only carry organic leaks or organic herbs.

The logic is simple: Those who want organic, really want organic. They may not buy the product or shop in the store if it is not organic. Most shoppers, though happy with conventional product, are also perfectly content to buy organic. So offering only organic lets the retailer satisfy both markets with the same product. Although there can be price differentials, these are low volume products and minor price differences are not likely to be noticed by most consumers.

It is all fine in theory but, as Wal-Mart learned when it decided to move into organics big time and spent disproportionate amounts of its procurement staff time searching for organic suppliers, wanting to sell organic and actually getting organic product is not the same thing.

What has been going on around the industry is that retail buyers, under instructions from their bosses to standardize low volume items on organic, have had meeting with vendors — people like HerbThyme, though often much smaller. In those meetings, the retailers explain their strategies and the suppliers explain that they would happy to supply organic product, though when supplies of organic are tight, they may have to work together and handle conventional.

Everyone leaves happy, the retailers soon forget the vendor’s soft-peddled warning about “when organic supplies are tight,” and the vendors forget that the retailers have made clear they want only organic.

But there simply isn’t enough organic product to begin to meet these orders.

Of course, the proper response, the ethical response, is for vendors to make that clear in those initial meetings and to clearly shout out each and every time they don’t have organic product available.

The temptation is tough though. These are mostly smaller players, sweating out a living and they have a PO sitting there for the taking if only the product is organic. Our sense is that more than a few small players are grabbing the PO and hoping they won’t get caught.

In other words, this explains why the statement in our interview of HerbThyme’s Business Director Ben Ho was incomplete.

“It doesn’t make sense monetarily; the disparity between conventional and organic isn’t that material. It’s not like we make twice the money by selling organic. The complaint accuses our company of acting fraudulently to become more profitable, but that goes against common sense.”

But what if the gain by selling organic was not a price differential but, instead, the whole business with the retailer — the whole business relationship? That would be a substantial incentive. And, by the way, vendors can be put in an almost impossible situation in these matters as the bad drives out the good. In other words, the shortage of organic product should lead prices to rise, which will bring about production of more organic product. But fraud lets organic be sold at conventional prices — thus explaining those small spreads, as Ho mentions.

In a variant of Gresham’s Law, the fraudulently labeled organic produce tends to drive the true organic out of the market because the price does not rise to a level to justify organic production. We gave a lecture at Cornell on this subject related to food safety, building on George Akerlof’s seminal essay, The Market for Lemons: Quality Uncertainty and the Market Mechanism. Although Akerlof was writing about used cars, the essay really dealt with any item on which buyers and sellers had asymmetrical information — as with organics.

Although these are not the big players, this is poison for the trade’s image with consumers and for the future of organics. It has to be stopped.

Although improving organic certification is desirable, right now the system, which involves tracing the paperwork around organic production, is really not set up as a fraud-prevention program. One can be running a perfectly legitimate organic business, have every certification necessary and commit this kind of fraud with little risk of being caught.

In HerbThyme’s case — if the allegations made in the complaint are true and, based on HerbThyme’s public statements, they are true to at least some extent — it is notable that it was not the National Organic Program’s declaring them persona non grata which brought this to light.

Still, the very nature of these small players means they will likely fly under the radar and so will always be difficult to catch through official channels.

Retailers are also not without blame. They like paying only small differentials for organic and may prefer to turn their heads instead of really investigating the provenance of the product they are selling.

As such, retailers are going to have to assert more authority and demand more specificity. They probably need to contract for these low volume items and get specific representations as to how much will be grown, on which farms at which times. The retailers then need to hire an organization like Primus to go verify it is all happening as intended. They can put in the contract details of how the auditor gets paid.

Trades all have their “dirty little secrets” that nobody wants to talk about. On these low volume items, nobody wants to talk about the disjunction between retail desires and product availability. The result is extreme pressure being put on otherwise honest suppliers to commit fraud, and vendors and retailers being complicit in defrauding consumers.

There is a lot of blame to go around. The point is that all this is a dirty business and the industry has to act now to clean it up. We can admonish morality on the part of vendors and urge government action to broaden certification but really only retailers taking product integrity and honest consumer marketing seriously have the power to solve this problem.

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