Background: U.S. grocery giant embraces organic and fresh foods
A technologically savvy grocery retailer in the U.S. uses industry-leading data analytics and advanced supply chain systems to bring fresh, natural and organic foods to the masses at affordable prices. In 2018, its organic produce business exceeded $1 billion in sales, making it a key player in the organic food market, which in the U.S. in 2017 reached $45.2 billion in sales, equivalent to 5.5% of food sold in retail channels.1 One of the company’s brands, which represents products that are free from 101 artificial ingredients, generates over $2 billion in annual revenues. The company has also become an emerging leader in the transition toward online ordering and grocery delivery, positioning it for potential share gains in a highly fragmented industry.
As the largest grocer in the U.S., the company has exposure to livestock factory farming, which is prone to adverse environmental outcomes tied to climate change, water scarcity and water pollution. In fact, the livestock sector contributes to 14% of global greenhouse gas emissions—more than the transport sector.2 Related social impacts include the health implications of antibiotic overuse, pandemic contagion risk and reputational damage tied to changing consumer attitudes around animal welfare.
Scope and Process: Focus on environmental and animal welfare risks at factory farms
We seek to invest in and engage with companies that are proactively addressing supply chain risks and opportunities, as illustrated by our Interaction with Kroger touching on factory farming and animal welfare within the grocery supply chain. Since 2017, we have regularly communicated with the company by email, conference call and in person.
In 2018, Neuberger Berman participated in a collaborative letter-writing campaign through the Farm Animal Investment Risk and Return (FAIRR) initiative. This campaign targeted public disclosure of efforts related to alternative protein offerings, two-degree climate scenario analysis and overall sustainability strategy. Our due diligence included meetings with grocery competitors, suppliers and non-governmental organizations (NGOs).
Outcome: Enhanced disclosure and a more sustainable supply chain
FAIRR now recognizes the company for its proactive approach to sustainability. The company identified objectives to address the risks and opportunities in its agricultural supply chain. For example, it put in place a goal to source 100% cage-free eggs by 2025, up from 21% today as suppliers make them available. The company is also engaging its suppliers on reducing antibiotics across all proteins (poultry, beef and pork) and eventually transitioning to low or no antibiotics proteins while also offering alternative plant-based proteins in their stores.
1Organic Trade Association (OTA), 2018 Organic Industry Survey conducted 1/25/2018 – 3/26/2018.
2Food and Agriculture Organization (FAO), 2016 Global Livestock Assessment Model (GLEAM).