Europe's vital organics market

Growing European demand for organics presents challenges and opportunities for outside suppliers. Jim Hight of Nutrition Business Journal assesses the current state of European organics

Consider this scenario: mass merchandisers and supermarket chains leaping into organics. More consumers buying organic food for health and wellness. Government organics logos investing organic foods with new status. Organics brands extending their lines into new categories, while shelves are crowded with organic products from large food companies and private-label store brands. And all this rapid growth causing some critical raw-material shortages.

It sounds like the US organics-food market, but it is Europe's — even though the market there is generally considered more mature than its US counterpart and growth rates have slowed.

According to US and European organics market specialists, the European organics market is exhibiting the same trends and drivers as those in the US. For those in the US nutrition industry who have heard only how different the economics of organic agriculture are on the two continents — with EU farm policies driving organic conversion for agricultural, environmental and social benefits, while US policies focus on standards and market differentiation — the similarities might be surprising.

"Europe is pretty much mirroring the United States," says Tiffany Landry, an export programme consultant for the Organic Trade Association, who attended the 2006 Biofach organic-products trade show in Nuremburg, Germany. "Organic-product categories are the same, the nature and pace of sales growth, the income and education levels of the organics consumers."

According to a summary by Biofach organisers, this year's event drew more non-European exhibitors and attendees. "The number of countries represented certainly increased," Landry says. "There were more Asians, more Australians and New Zealanders and even attendees from countries we'd never seen before, like Tunisia."

The host country had the largest commercial presence, with 713 German exhibitors, followed by 278 from Italy, 187 from Spain and 109 from France. About 15 US companies exhibited, most of whom were ingredients suppliers or brands with a significant ingredients business. This probably reflects the nature of market opportunities for American organics suppliers in Europe.

According to Manuela Rehn of the organic-food consultancy ÖkoStrategie Beratung, the European organics market is difficult to enter for US manufacturers because of the strong presence of so many European brands already offering a wide variety of organic products.

Peter Guyer, president of international food brokerage Athena Marketing International, agrees. "Europe is a highly competitive market, and there are other European as well as international competitors. In general Europe is fairly price sensitive, too, particularly in Germany."

Tougher regulations
Achieving European market presence also requires meeting elaborate and stringent product-registration regulations, but Guyer says that US manufacturers can do well if they have innovative products.

The organics ingredients market in Europe is becoming open to products from outside Europe as domestic supplies are increasingly constrained, Rehn says. In the last year European organic-food processors have had to scramble to obtain supplies of organic specialty grains, nuts, honey, raisins, beef and other commodities. Tropical and temperate fruits are already sourced from outside Europe, and the need for more imports of these and other types of raw materials will likely increase as sales growth outpaces the rate at which conventional farmland in Europe is transitioned to organic.

"At the moment, I think we can still source a lot of ingredients from within the EU market," Rehn says. But she notes that mass-merchandiser chains such as Lidl and Aldi, as well as supermarket chains and even drugstores, are expanding their organic-product sets. "Lidl has more than 2,600 stores. As they extend their range in organic products, we may face some constraints in terms of the available organic land base in Europe."

The price factor
As in the United States, lower prices are seen as a major factor for expanding the consumer base for organics in Europe. "People still connect organic with expensive," Rehn says. "In Germany, the discount stores are very popular. As they introduce organic lines, they'll attract consumers in much larger numbers."

Pressure to reduce retail prices also is making the organic transition less attractive to German farmers, according to the February 2006 Biofach Trendletter. "As the prices for organic food are tending to drop, the farmers are currently not particularly willing to convert," it states. Furthermore, some observers predict that financial support for organic farmers in Germany may decline in coming years because of the transition from a Social Democrat-Green government to a more conservative Christian Democrat government.

Then there's the government organics label, Bio-Siegel, that has inspired broader confidence since its introduction in 2001
Then there's the government organics label, Bio-Siegel, that has inspired broader confidence in the organics segment since its introduction in 2001. Yet natural products made with conventional ingredients maintain a hold in the marketplace on the strength of claims for nutritional value and healthfulness, Rehn says. "On one side there's a big push for organic products, and on another side there's a big push for conventional products that address lifestyle and wellness, such as low fat and whole grain."

Although she can't offer a value estimate, Rehn notes that producer associations that promise higher standards than the German government's 95 per cent organic standard have maintained significant consumer loyalty despite the prominence of the Bio-Siegel seal.

"These associations such as Demeter, Biopark and Naturland have their own labels, and they have higher standards than Bio-Siegel," Rehn says.

As discounters such as Lidl seek less-expensive commodity products, there may be additional market space for these value-added producer groups. "In Germany, they were the first organic wave in the 1980s, the people who brought up all these ideas in the first place," Rehn says. "This is a chance for them, with marketing effort, to explain to consumers how their organic values are different from the market standard."

Organics retailers expand
Along with growth in the organics offerings of supermarkets and discount chains, organics stores are also expanding. German chain Basic opened four new stores in the last year, bringing its total to 13; and Alnatura opened six for a total of 22 in the country, according to Rehn.

Biofach reported that an all-time-high number of 60 new organics supermarkets opened last year, bringing the total for the country to 300.

"Most organic products are sold over the counter in the conventional retail food trade (36.5 per cent), followed by the organics food trade (26 per cent), direct marketers (16 per cent), health food stores (7.5 per cent), drugstores (7 per cent), and the balance through other channels," the report states. Drugstores are the fastest-growing channel, with 25 per cent growth, compared to eight per cent growth for direct marketers, 15 per cent for organic retailers and 17 per cent for conventional retailers.

German organics sales grew 15 per cent last year, reaching a total volume of $5.1 billion. OkoStrategieBeratung pegged growth slightly higher at 17 per cent, accounting for approximately 2.5 per cent of total German food sales.

Germany and UK lead
Organic Monitor (London), which tracks organics markets worldwide, estimated the German market grew 12 per cent to about $4.2 billion in 2004, but European expansion was in the 5 per cent range to $13.7 billion, with estimated 4-5 per cent growth projected for 2005.

"The market situation is more upbeat now," after slowing somewhat in 2003-04 due to consolidation, says Organic Monitor director Amarjit Sahota. "However, overall market growth is still low due to the market stagnating in many European countries." Although Germany and the UK are reporting high growth rates of between 10-15 per cent, other European countries are reporting much lower growth rates, he notes.

The high growth in Germany is partly due to a large increase in retailers, Sahota explains. "In the UK, we are seeing most growth in non-supermarket channels, ie, organic food shops, home-delivery schemes, catering and foodservice, etc."

This article is excerpted from the Organic Food Industry 2006 issue of Nutrition Business Journal.

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