Organic food sector
This document is an information report providing a micro and macro environmental analysis of the organic industry. It gives specific attention to the European and German market and to the retail industry in particular. A brief introduction, also focusing on the reasons and criteria for the selection of such sector, will be followed by an assessment of the aspects at the micro and macro level that affect the players operating in it. To facilitate the analysis I will pretend that the writer of the following report is a manager operating in the broader food industry.
Since we operate in the food retail industry, both nationally (Germany) and on the European level, I suggest, as sales director of this company, to consider entering the organic branch, since it has been growing steadily in the last 2 decades. Organic farming can be regarded as method of production that gives particular attention to environmental protection and animal welfare, thus avoiding the adoption of synthetic chemical means and the production of genetically modified organisms. The industry is highly regulated, requiring producers to acquire special certification to sell goods as organic within given borders.
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The market has been growing steadily, as suggested above, and is still doing so despite the economic and financial crisis; it grew globally by more than 25 per cent since the start of the global crisis between 2008 and 2011. According to the latest data (Fill and ‘FOAM, 2013), 37. Million hectares of agricultural land are nowadays organic (they were 11 million only in 1999) and 1. 8 million producers world-wide are reported (from 252 thousand in 2000). The global sales have also seen a dramatic increase, climbing by almost 200% in the last 10 years.
Although this industry accounts only for 1-2% of the total food production globally, almost 10% of the total food sales share is covered by it. Fig 1 . Organic agricultural land by region, 1999-2010 Despite the number of producers and retailers, as I will elucidate later in this report, has been increasing year after year in order to cover the high demand for this kind of rodents (mostly driven by concerns about private health on one hand and the global environment on the other), I believe there are still good opportunities for ambitious firms to enter – at any point of the supply chain – this relatively new and steadily expanding market. . Macro environmental analysis The environment where firms operate includes several forces that affect their activity, from the acquisition of resources, through the process of transformation of such input, and finally to the creation of an output. The more external forces (general or contextual, such as political, cultural, social and legal) are the ones influencing the rim in a more general way, as opposed to the operational ones, which affect the business on a daily basis (Ian and Christ, 2006).
In this part I will refer to the external range of influences and observe how these can have an impact on the organic industry. As said, the focus will be on the European market and on Germany, which represents the biggest player in the E area and the second largest globally. Selection of factors To carry out this task I have asked my team of analysts to perform a Pestle analysis, which takes into account political, economic, socio-cultural, technological, legal and environmental aspects.
It is usually performed by almost every major and minor organization in order to get an overview of the whole scenario of a particular industry or branches of it. Of course the elements considered vary in importance based on the industry and the goods involved. In the organic sector’s case, the socio-cultural, political and legal aspects are particularly crucial and the report will give a particular attention to these; in addition, other factors not (directly) included in Pestle but that it is important to mention when analyzing this particular industry, are the demographic and regulatory ones.
Environmental issues also represent a major concern. 2. 1 Specific macro-factor analysis 2. 1. 1 Political factors These basically represent to what extent the government (local, national or supra- national) intervenes in a particular industry. Demand for bio products and the growing popularity of organic farming within Europe has fostered the development and implementation – through the European Commission, The EX. Council and the EX. Parliament – of official rules, programmed and plans.
This level of action is closely related to the regulatory one, which will be more thoroughly addressed in the section following this one. The most relevant document to mention in this part is the “European action plan for organic food and farming”, which comprises 21 initiatives in order to develop the market and get better standards by increasing transparency, reliability, efficacy and consumers’ trust. Also at the national level many governments have been providing their plans and policies in order to support the growth and efficiency of the organic industry.
In Germany, for instance, the range of governmental assistance in the last decade has increased significantly both through the Federal Government and the Leander; the measures are directed both to organic agriculture and to the whole supply chain (Nibbler and Kenneth, 2007). Environmental objectives, as well as the opportunity for rural development, are the main goals of the government’s financial, legal and regulatory support for operators dealing in this industry. 2. 1. 2 Legal and regulatory factors The political intervention in the industry is, as discussed, very present and fundamental for its growth.
Although it might benefit the overall sector, the high level of laws and regulations represent nonetheless a potential barrier for new entrants. In 2009 the EX. introduced new regulations regarding the production, control and babbling of organic goods. These put an ever bigger attention to environmental, animal and consumer protection and health. For instance, food can be sold as organic only if 95% of its ingredients derive from organic agriculture and processing. Closed cycles (using internal resources) are favored to open cycles; external resources should be limited to natural or naturally obtained materials.
Only in exceptional cases, thoroughly evaluated by the European Commission, chemical synthetic resources may be allowed if other suitable alternatives are not available. 2. 1. 3 Economic factors Europe has, according to the Research Institute of Organic Agriculture, 25% of the world’s organic farmland, but it represents almost half of the global revenue within organic industry (the American market is still the world’s largest). Sales of organic products were approximately 21. 5 billion Euros in 2011 (Fill, 2013).
The largest market for organic products is Germany, with almost 7 billion Euros (Nielsen and Braun, 2013), followed by the I-J (3 billion Euros), France and Italy (both 2 billion Euros). Fig 2. Sales growth of German market in 2012 The German market grew by 6% in 2012 up to 7. 04 billion Euros, showing a stable Roth and representing 3. 9% of the entire food market; the increase in the previous year had been even higher (9%), influenced by several food scandals that drove more and more consumers from conventional food to bio products.
Fig 3. Sales growth from 2000 to 2012 Fig 4. Organic food sales in Germany (2012) 2. 1. 4 Socio-cultural factors (and demographic ones) A growing number of people are nowadays more informed, health- and environment- conscious than ever; they are thus willing to spend more on healthy natural foods, since there is widespread public belief that organic food is much safer, more atrocious, and environmental friendlier than conventional food.
In any case it is important to note that “regardless of whether any measurable health benefits exist from consumption of organic produce, the public perception of health gains associated with organic produce is undoubtedly influenced by statements that are not (yet) able to be supported by scientific evidence. ” (Givens, 2008).
Demography also plays a very important role in an increasingly aging Europe; in Germany (one of the countries with the lowest birth rate), the typical heavy consumer of this kind of rodents is in his mid ass (thus belonging to the generation of the forerunners of the ecological movement in this country) and with a good income level. Young consumers, such as students and entry level workers, tend to opt for more affordable options. The market is slowly opening to 30+ customers, mostly young professionals fond of a healthy and dynamic life-style. . Micro environmental analysis This section of the report will mainly focus on Porter’s “5 forces analysis”, concentrating the analysis on those factors that can more directly influence the daily activities of a firm operating in the organic industry, affecting its ability to satisfy its customers and make a profit. As the producers’ scenario is particularly fragmented, the study will give particular attention to the German retail industry and often assume the perspective of the five largest specialist retail chains operating in it.
Three forces relate to ‘horizontal’ competition, such as the threat of substitute products or services, the threat of established rivals, and the threat of new entrants; the two remaining forces represent ‘vertical’ competition: the bargaining power of suppliers and the one of customers. . 1 Threat of established rivals (intensity of competitive rivalry) In Germany organic products are sold as follows: 35% in traditional supermarkets (around 40. 00 shops) 23% in specialist shops (around 2000 shops; there are 17 organic supermarket chains, the 5 biggest are Lunar, Vital, Den’s Bio, Basic and Redford). 19% in discounts supermarkets (more than 10. 000 shops) Fig 5. Number of specialized organic outlets in Germany (2008) It is therefore clear that, despite being this sector quite young, the number of actors operating in it is very high; this great level of rivalry determines a high threat to profits.
It is furthermore important to note that these operators vary consistently in cost structures and have different levels of exit barriers; bigger, traditional retailers/ wholesalers (such as Metro, Rowe and Deeds) have an advantage in terms of economies of scale, although they will have to face stronger exit barriers, considering the amount of their investments. According to recent research (Bifocal, 2010), the further development of the specialized organic market sector will see a decrease in terms of market share in favor of traditional supermarkets; nevertheless, the overall turnover will increase.
This is mainly due to the fact that specialized retailers can provide a wider range of products, a more regular supply, competent staff and the availability of non-foods items as well. 3. 2 Threat of new entrants The highest threat is represented by traditional supermarkets with re-branding strategies towards the organic sector, since completely new entrants would face and be discouraged by very strong entry barriers in terms of capital requirements, economies of scale, amount of regulations, experience curve and access to key inputs. The resulting threat to profits can therefore be regarded as medium. 3.
Threat of substitute products There are not many direct substitutes for organic food and as long as a large portion of the public will be convinced that it is safer, healthier, more nutritious and even tastier than conventional one, its higher prices will be Justified and the branch will maintain if not increase the market share. Nonetheless, local farmers’ markets provide a good alternative for individuals fond of food with no pesticides and with a low environmental impact; even so, their prices are not rarely higher than the ones offered in supermarkets (even if specialized) and their presence on the territory is ere scarce.
There are some products and services that could be listed as indirect substitutes, since they also help satisfy the desire of a healthier and CEO-friendly life- style. Fitness centers, wellness programs and sustainable tourism are Just some of these. Despite this, it is important to stress the fact that nutrition is usually regarded as the most crucial factor when it comes to choices taken by consumers in order to improve their personal health and reduce the negative effects on the environment.
The resulting level of threat to profits from substitute products can again be regarded as medium. 3. Bargaining power of buyers Consumers’ power in this industry is mostly influenced by the following factors: Price sensitivity Buyers are ready to spend more than on conventional food provided that this is justified by higher levels of quality, freshness, taste and the certainty (provided by certificates and labels) that the production and packaging of goods respect specific standards and norms.
Despite this general observation, discount supermarkets have been lately offering similar products to the one displayed in specialized chains for sensibly lower prices, alerting customers that a similar quality can be obtained also or half of the usual price. Price sensitivity is therefore increasing. Information availability This kind of consumer is usually extremely educated and informed and consequently expects a high level of transparency, as well as being well aware of the different alternatives available in order to satisfy his demand.
Degree of dependency upon existing channels of distribution Buyers have been increasingly attracted by the offers displayed in the Internet through more or less specialized organic e-shops. This could represent a potential threat (as well as an opportunity for further investment), although most consumers till rely on traditional channels, offering, among other services, the availability of competent and specialized staff.
Availability of substitute products See above The resulting level of threat from this force can be regarded as medium to high. 3. 5 Bargaining power of suppliers Contrarily to the US market, where suppliers are extremely concentrated (with local farmers often signing contracts with big corporations) and represent the real dominant power in the organic industry, in Europe they are still very fragmented.
They do not represent a big threat for the retail industry. It is furthermore not likely for suppliers to tend towards forward vertical integration. The resulting level of threat from this force can be regarded as low to medium The above mentioned observations can be summarized in the following table, which underlines the micro environmental factors within the organic (retail) industry and their level of threat. Fig 6. Porter’s five forces summary 4.
Further relevant specific market issues: recent developments in the target market Researchers Budded and Ham (2011) observe that the traditional parameters necessary to define the usual buyer of organic products (e. . Level of income and education, age, as indicated above), have almost completely lost their previous importance in the last few years; the authors have thus come to the conclusion that marketing campaigns should concentrate on health-orientated specific needs, underlining the naturalness of goods and their lacking of chemically produced ingredients.