AVCJ Awards 2019: Responsible Investment: Organica

From a social perspective, Organica was a winner for SEAF from day one. The impact-focused private equity firm was immediately attracted to the Vietnamese organic food company’s origins as a female-founded business as well as its devotion to a progressive mission statement in an often stubbornly traditional industry.

Organica was established in 2011 by Pham Phuong Thao, who, as a young mother, had begun to have concerns about Vietnam’s pesticide-heavy food system. These concerns were quickly addressed in a more social context by helping consumers lead healthier lives through certified organic produce and natural non-genetically modified foods. By 2014, Organica had two company-owned, tropical vegetable and fruit farms and its first shop in Ho Chi Minh City, which was stocked with 20 items.

SEAF invested in January 2019 after about a year of relationship building and negotiations via its Women’s Opportunity Fund. The fund, a strictly women-only vehicle backed by the Australian government and headed by Jennifer Buckley, a senior managing director at SEAF based in Singapore, aims to invest up to six start-ups in Southeast Asia. Although women are the focus, the impact agenda extends to themes such as job creation, sustainable agribusiness, healthcare, education and environmental sustainability.

“Pham was very motivated in her conviction that everyone in Vietnam has the right to clean, safe, healthy food that doesn’t come out of an agricultural system using pesticides and other chemicals for production,” says Buckley. “But that was a two-part goal. First, she had to teach smallholder farmers to make that organic conversion and get them and different government bodies up to speed on what organic farming was about. Then, she had to actually create a retail distribution business to ensure those products could be sold.”

Clean supply

Organica’s operations now encompass 30 employees, three directly owned farms, eight contract farms under exclusive partnership agreements, six physical stores across Ho Chi Minh City, Hanoi and Da Nang, and an e-commerce component. The company sells around 1,000 certified organic items including fresh foods, dry foods, spices, cosmetics, family care products, and personal care products made of cotton with international certifications throughout its retail stores.

Products are sourced from local farms, as well as from the US, the EU, Australia and Korea. The origin of products is authenticated by Vietnam’s unique electronic traceability service called Traceverified. About 80% of inventory is certified organic, with the remaining 20% deemed on par with organic products although not officially certified.

Two shops in Ho Chi Minh City and the online service have been added in the months since SEAF’s investment, and Pham Phuong Thao reports that warehousing capacity has been more than doubled. The private equity firm has also helped the company work with new farmers to ensure they are protecting natural resources, conserving biodiversity and implementing the necessary practices to become certified organic suppliers.

“The investment allowed us to extend the retail network, and that tangible build-out has been important, but equally important is the advice and support that SEAF has provided,” says Pham. “We’ve had multiple sessions on things like performance reviews, merchandising mix, and inventory policy. For example, we have more than 700 SKUs [stock keeping units], and if you don’t have insights in the composition of those SKUs, you start losing sight of what’s selling well and whether or not you have enough to sell, or too much to sell.”

The key end-impact of these efforts is in the popularization of organics foods in a market with limited awareness despite a strong need; Vietnam is said to have seen a substantial increase in the use of toxins in its agriculture industry over the past decade due to inadequate government policy on pesticide management. In this way, SEAF and Organica’s most important work may be influencing other smallholder farmers.

Best practices

The challenge here is keeping operations up to the strict standards of US and EU organic certifications, and Organica has brought in a specialist consultant for this purpose. Supply chain management is a central consideration as pre-processing, sorting, labeling, and packing stages must all be monitored for organic methodology, which generally involves protecting natures resources, conserving biodiversity, and using only approved organic substances.

All phases of cultivation are subdivided for ease of recording, monitoring and cross-functional management, with each stage carrying a diary. Crop rotation and intercropping techniques alongside soil preparation and nutritional supplementation must also be implemented. Pests can be deterred only by natural means such as garlic, chili, or pickled neem herbs.

Land selection is also critical. Exacting international standards for organic-quality production require sites be deemed sufficiently free of heavy-metal pollution, industrial waste and cross-contamination from adjacent chemical plantations. It’s a big commitment for the smallholder farmers, especially since the conversion of a traditional farm to a bona fide organic one is a process of at least three years. Nevertheless, that’s the easy part.

“Once one farmer goes organic, their neighbors tend to follow pretty easily, so the agricultural side of it and having products ready to sell is not that difficult,” Pham explains. “It’s more challenging on the retail side because it’s a very weakly regulated environment, which means you have to build up customer confidence and awareness. Anyone can set up a store and say it’s organic with no certification. So, it’s hard to show customers who are the true organic players.”

This is an important insight because it reveals that doing the right thing in terms of sustainability is not just a matter of implementing best practices and policies – it’s an operational challenge. SEAF’s due diligence into Organica found a company that was focused on ensuring that employees understand what organic food is all about from farmers to shop clerks. Staff management, however, was not up to snuff.

Good governance

Organica scored a 3.2 out of 5 on SEAF’s in-house gender equality scorecard system, reflecting shortcomings in female participation in value chains, workplace safety, child protection, and career path development. The company’s commitment to employee welfare and social impact through skills and knowledge development was noted, but there was no HR manager in place to realize the agenda.

SEAF’s input in this area to date has included the implementation of policies and procedures around talent management, workplace benefits, and best-practice health and safety services such as reporting lines for staff concerns about child protection.

“We are looking to formalize HR as a function by making sure that Organica has the toolkit and framework it needs to do the right thing,” says Buckley. “It’s not so much about awareness but more about being in a position to be able to do it, which is hard work.”

The biggest value-add in sustainability terms, however, was in back-office governance. This included revising the company charter and labor manual, as well as disentangling personal and company bank accounts. SEAF also helped redefine the relationship between Organica and Karst, a related-party entity owned by the founder and two individuals that provides pork to Organica. This was necessary to ensure transactions between the two companies were done on an arm’s length basis and without conflicts of interest.

“Environmentally, the company was already operating at a very high level, but it was weaker on the governance side in the sense that it had been a founder-driven business so there wasn’t much need in the past to think about those processes,” says Buckley. “The idea of having shareholders involved in the business wasn’t a problem but the company hadn’t been institutionalized at all in the past. Some of the early work was very basic, like just setting up board meetings.”

SEAF led the search to hire an auditor and design key-metric management reports, along with a process for ensuring transparency in internal reporting. Ultimately, the idea is to confirm the sustainability of the investment by interpreting relevant data in a reliable way. This includes contextualizing results against standardized metric sets and reporting frameworks such as the Global Impact Investing Network’s IRIS reporting guidelines, which SEAF has helped develop.

“We had to be very involved in bringing on and working with the chief accountant in order to set up the new financial reporting practices and improve business planning and forecasting,” says Buckley. “We need to make sure that the entrepreneurs have the mechanisms in place to deliver, manage information, and scale effectively. This was also an important part of the process in helping the entrepreneurs determine what impact we collectively wanted to track and ensure we have the systems in place to measure this on a regular basis”.

The go-forward plan is to open 2-3 new stores in the near term supported by a build-out of the e-commerce platform and additional investment in marketing, including content across both digital and traditional channels. There will also be further investment in logistics and warehousing, retail upgrades and an expansion of the team.

“Some of the latest progress has been around recruitment and focusing on putting the right people in the right places in the company so we can move into rolling out different policies and procedures,” says Buckley. “But Organica is still a new investment, so we’re just scratching the surface in some of the work that we’re doing here.”

Pictured: Robert Webster (right) of SEAF receives the Responsible Investment Award from Alvarez & Marsal's Oliver Stratton

 

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• Topics
• Southeast Asia
• Expansion
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• Vietnam
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