mises their viability if unforeseen problems meet limited cash re-
sources to solve them. Annie’s Naturals is a great example of a busi-
ness that maintained its focus on profitability despite the temptations
to grow faster through aggressive and unprofitable strategies. Annie’s
Naturals remained disciplined in building its retail expansion gradu-
ally, managing carefully the upfront store charges and maintaining
price points that ensured an attractive gross margin. One year, its
largest retail customer ceased ordering, which led to a roughly 25 per-
cent decline in revenue, yet Annie’s re-
mained profitable because its remaining
sales were priced with sufficient margin
to more than cover its operating expense
base. Annie’s Naturals eventually recov-
ered that customer and became even
more successful.
So how much of a margin is healthy?
Stronger business models generate at
least one-third in gross profit for every
dollar of sales, which leaves enough room
to support a good sales effort, a sufficient
administrative infrastructure and profits.
Lower margins aren’t always a bad omen,
but getting below 30 percent means
higher risk and the need for sharper management to avoid getting
caught in a bind. For example, some marketers have chosen to lower
margins in order to make significant sales gains with particular cus-
tomers, but most trade-offs like this need to be temporary and lead
fairly quickly to a margin recovery through higher throughput and ef-
ficiencies. Offering discounted pricing for selected customers can also
complicate relationships with other retailers who don’t get the price
breaks, running the risk of eroding a company’s trade image. One
food manufacturer we know recently had priced a great deal of vol-
ume at low margins to help cover its manufacturing costs, but conse-
quently it failed to build capital reserves for the future. When that
low-margin customer reduced its order volume, this company immedi-
ately went into a loss position and the profits from its other customers
weren’t sufficient to make up the losses.
Annie’s Naturals built
retail expansion gradu-
ally and ensured attrac-
tive gross margins that
enabled it to handle
major setbacks and
still grow. What
percentage of
sales could you
lose at once and
still survive?
2. Understand and Challenge Your Products’ Position in the Market-
place. Organics is a crowded market, with a multitude of companies
operating in every conceivable category. It is essential to develop the
processes and disciplines to constantly revisit current configurations of
consumer purchasing patterns and preferences and anticipate (even
help mold) how they are likely to change. Creating something new is
challenging and sometimes risky. We’re drawn to what we can observe
and imitate, but even small evolutionary and inspired changes to for-
mulas, packaging, configurations, sourcing, etc. can upturn an entire
category and open huge opportunities that can be widely exploited
(both offensively and defensively). In the case when an enterprise does
not have tangible competitive differences, that assessment should be
an important wake-up call to an entire organization about the need to
innovate. This is especially important for companies that have a long
history of relying on the same prod-
ucts and base their sales strategy
on brand heritage and personal rela-
tionships with retail buyers,
rather than a compelling
feature/value/price consumer
proposition. One of the simplest ex-
amples of clever innovation is the ex-
perience of Hansen’s Beverage
Company’s Monster energy drink
(clearly not organic). Monster came
late to the energy drink market after
Red Bull, yet Hansen’s cleverly per-
ceived that Red Bull’s small 8-ounce
can wasn’t aimed at the most impor-
tant consumers of energy drinks:
young males. Monster launched a 16-
ounce can and built a multibillion-
dollar business on that foundation.
Finally, marginal changes to prod-
ucts, such as just adding a different
flavor, are rarely considered true in-
novation and can actually cause more
harm by diluting the impact of cur-
rent offerings and increasing opera-
tional complexity. The best
innovations offer more convenience
and personal satisfaction in compari-
son to existing products, and don’t
just add to an already crowded shop-
ping cart. It’s about having a better
understanding of the shopper’s cal-
culus between product features, price
and value relative to alternatives.
3. Regularly Assess Your Skill Set. If
the organic market is increasingly dynamic and challenging, the operational demands on its participants are
similarly difficult. These demands are
raising the bar on the skills and resources that companies need to be
successful. As companies grow and
face more and different types of obstacles (for example, expanding production capabilities or broadening
the base of retail relationships), it’s
even more challenging to match the
person with the right skill set to the
obstacle. Many companies with under
$50–$75 million in revenue depend
heavily on the capabilities of a hand-
