How Silk Soymilk's Cost-Cutting Dis of Organic Backfired

Last Updated Sep 10, 2010 2:55 PM EDT

Back in early 2009, Silk, the leading brand of soymilk, quietly stopped using certified organic soybeans and removed the word 'organic' from its labels in favor of the more malleable term 'natural'. For a long time, nobody noticed.

But now, the move is backfiring as Whole Foods (WFMI), one of Silk's major customers, is shunning Silk in favor of its own store brand and two other new brands of organic soymilk. It's a classic example of cost cutting gone awry.

Silk, which is owned by dairy conglomerate Dean Foods (DF), apparently decided that paying the extra money for organic soybeans wasn't worth it and switched to cheaper conventional varieties. Molly Keveney, a spokesperson for WhiteWave, the Dean division that owns Silk, explained recently that had the company continued using organic beans they would have had to raise prices. Instead, Silk swapped out organic, kept its prices stable and pocketed the savings.

Of course, cutting costs is an important part of operating a competitive business, and Dean has made this a key priority -- the company pledged in February 2009 to cut at least $100 million in costs annually, a target that COO Joe Scalzo says the company is on track to fulfill. But there are right and wrong ways to cut costs, and Dean picked a lot of the wrong ones.

After swapping out the key ingredient in its product, Silk didn't bother to alter its packaging (except to yank the word organic) or the SKU number, giving some customers the impression that the move was deceptive. The company did continue to make an unsweetened organic variety, but it was hard to find. Shunning organic also diluted the value of Silk's brand, which was built upon the idea of health and wholesomeness.

With 70% of the US soymilk market, Silk executives probably figured that many of its customers wouldn't care about the rareified debate of natural vs. organic. But what they failed to realize is that the brand's core customers, the ones who started the soymilk craze in the first place, do care, and although their share of sales is probably small, their influence is huge.

Witness the reaction at Whole Foods. In response to customer complaints, the company started working earlier this year with Earth Balance, a division of GFA Brands, to develop a new brand of organic soymilk as an alternative to Silk. The result is that while Whole Foods is still selling Silk, it's been downgraded. At my local store in Boulder, CO, Silk has been banished to the bottom shelf. In its place at eye level positioning is Earth Balance, the 365 brand and Organic Valley's new organic soymilk.

WhiteWave says that Silk uses soybeans that are grown in North America (not in China as an organic group claimed) and that are not genetically modified. But non organic soybeans are likely grown with chemical pesticides and synthetic fertilizers, which isn't exactly what is comes to mind when customers buy a "natural" product.

Image by Flickr user j_lai
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