http://fortune.com/2015/05/21/the-war-on-big-food/
Special Report: The war on big food
MAY 21, 2015
(edited)

Try this simple test. Say the following out loud: Artificial colors and flavors. Pesticides. Preservatives. High-fructose corn syrup. Growth hormones. Antibiotics. Gluten. Genetically modified organisms.

“Their existence is being challenged,” says Edward Jones analyst Jack Russo of the major packaged-food companies.

It’s pretty simple what people want now: simplicity.

The $1-trillion-a-year food retail business is at a tipping point.
Steve Hughes, a former ConAgra executive who co-founded and now runs natural food company Boulder Brands, believes so much change is afoot that we won’t recognize the typical grocery store in five years.

The search for authenticity has led organic food sales to more than triple over the past decade and increase 11% last year alone to $35.9 billion, according to the Organic Trade Association.

Perhaps more frightening for Big Food, shoppers are doing something else as well: They’re skipping the middle aisles altogether.

Traditional packaged-food companies, however, aren’t taking the assault lightly. Some are attempting to buy their way into the natural space, acquiring small health food companies by the fistful.

Fortune spent months getting inside several of the industry’s key corporations to understand how they’re responding to the mounting threat. One thing is clear: Big Food is suddenly looking like an underdog.

American shoppers have become skeptical of “the barn on the package.”

Arran Stephens, co-founder and president of organic food company Nature’s Path, says he receives some 50 overtures a year from interested buyers. “I’m talking about all the major names,” he says. “I don’t think there are any that haven’t contacted us.” (He refuses to sell.)

In February, Hershey announced it was starting to transition its products to “simple ingredients. Rather than remove just artificial flavors—or only GMOs or milk from cows raised with the growth hormone rBST—Hershey was going to spike all of them. In their stead would be only ingredients that people understand: milk, sugar, vanilla, etc. Both the milk chocolate bar and Kisses will have “clean labels” by the end of the year.

Hershey’s first formidable task was to convince suppliers that this wasn’t some one-off experiment. “We made ourselves kind of a pain,” says Terry O’Day, Hershey senior vice president and chief supply-chain officer. “Suppliers would tell us how difficult it was, what the incremental cost would be. They’re testing you to see if you flinch when they tell you the price.” When it came to finding GMO-free corn sweetener, so little was available in the U.S. that one vendor had to restructure its operations to create the ingredient for Hershey. When the company broached the idea of using milk from cows that hadn’t been treated with rBST, some families that had been supplying milk to the company for 100 years questioned the logic. “We were asking them to really change the way they did business,” says O’Day. “There’s a lot of emotion that comes out.”

For now, Hershey is absorbing the added costs for the ingredient changes while it looks for savings elsewhere. “We want to prove we can change the supply chain,” Bilbrey says. He believes costs will come down as demand accelerates.

“The smartest thing you can do as a CEO right now is to side with the consumer,” says Stonyfield’s Hirshberg.

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