Rabobank Industry Note #572 - September 2016
Organic Is Good for You!
Organic Food Sales Grow Three
Times Faster Than Non-Organic
RaboResearch
Food & Agribusiness
Research and Advisory
The organic food industry in Western Europe and the US has been
experiencing a prolonged period of high single-digit to low double-digit sales
growth—and, on the back of ongoing health, food safety, and environmental
and animal welfare concerns by consumers—Rabobank expects this trend to
continue. Until 2025, organic food sales in Western Europe and the US are
forecast to grow (CAGR) by 6.7 percent and 7.6 percent, respectively. That is
roughly three times faster than overall food consumption growth. Food
producers should increase their focus on organic, through new products and
brands, or through the reformulation of existing products to help grow their
top lines. This will also help them to position themselves as responsible
businesses. Short-term growth in the US is somewhat higher, but a
prolonged, much higher growth rate is unlikely, as the supply chain is
currently not sufficiently established.
John David Roeg
[email protected]
+31 30 712 1572
Norbert de Roij van Zuidewijn
[email protected]
+31 30 712 4629
far.rabobank.com
Contents
Organic food increasingly
appeals to ‘concerned’
consumers
1
Organic food will
substantially outpace
overall food sales growth
1
Organic could become
mainstream in some
categories
4
With ongoing strong
demand come supply chain
issues
5
Conclusion
6
Organic food increasingly appeals to ‘concerned’ consumers
Today’s informed consumers in Western Europe and the US are demonstrating an increasing
appetite to buy organic food. Health concerns, food scandals and environmental issues have
always been around. And the growth of organic food consumption is not a new
phenomenon, but an acceleration in the way consumers are being informed—for example,
via social media. Increasing supply chain transparency and new scandals are all resulting in
a changing zeitgeist, the result of which is ongoing robust growth in organic food sales.
Perceived health benefits are the main reason to buy organic
By combining the outcome from eight international studies as to why people buy organic
food, we found that, by far, the number-one reason is that organic is perceived as healthier
when compared to non-organic food (see Box 1). The second reason: concerns about the
environment, followed by perceived better taste, fewer pesticides, better animal welfare,
and a desire for natural and unprocessed foods. Actually, several of the reasons mentioned
above have been contested by experts in studies. A positive impact on the environment,
however, is widely regarded as valid, but with the note that potentially harmful plant-based
pesticides can still be used. Consumers are probably also not aware of the lower yields of
organic farming in relation to global feed issues.
Box 1: In addition to the general high standards of the food value chain, organic
food and ingredients must meet a supplementary set of strict rules and regulations
According to the international studies reviewed, organic food is produced using
environmentally- and animal-friendly farming methods. GMO crops, and synthetic
fertilisers and pesticides are forbidden, and farmers should rotate crops. Organic
farm animals should have access to fields and have more space. They must be fed
an organic diet. Animals should not be given drugs and hormones to promote
growth, and they cannot descend from cloned animals. Organic farming is
preferably conducted in closed cycles using internal resources. Rules and
regulations are laid down in, for instance, European law. Organic products are
certified by controlling bodies. The conversion to organic farming typically takes
two to three years, a period in which farmers may require some form of support
from governments or contract buyers.
Organic food will substantially outpace overall food sales growth
Rabobank estimates that, between 2005 and 2015, organic food sales (CAGR) rose 7.9
percent, to EUR 38bn, and 11.4 percent, to USD 39bn, in Western Europe and the US,
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Organic Is Good for You!
respectively. These growth rates were substantially above overall food sales growth rates,
which were especially low in Western Europe, due to the aftermath of the 2008 financial
crisis. And while consumers were trading down because of the financial crisis, they did not
cut back on organic food spending. In all markets, with the exception of the UK, organic
food penetration rose during the recession (see Figure 1).1
Figure 1: Organic packaged food is outperforming overall packaged food, 2010-2020f
CAGR
16%
14%
12%
10%
8%
6%
4%
2%
0%
2010-2015 total
2015-2020f total
2010-2015 organic
2015-2020f organic
S ource: Euromonitor, Rabobank 2016
As such, organic food’s market share of the overall food market, measured in penetration
rate, showed a marked increase over the period (see Figure 2).
Figure 2: Organic penetration rates are on the rise in Western Europe and the US, 2005-2025f
penetration rate
16%
14%
12%
10%
8%
6%
4%
2%
0%
2005
2015
2025f conservative
2025f base case
2025f optimistic
Source: Euromonitor, Rabobank 2016
With the exception of the UK, penetration rates rose in all markets analysed between 2005
and 2015. In terms of uptake, there is clearly a difference between northern and central
regions of Europe, compared to southern regions. This may be because the diet in more
southern countries is already perceived as being very healthy. We believe additional
elements are lower income per capita, a lower concentration rate of modern retail trade,
higher unemployment rates and, in general, a tendency to be trend followers. In the US, a
similar division is visible, with higher uptakes in affluent areas on the West Coast and in
New England. The lower penetration rate for the UK can be explained by a historically
greater consumer focus on competing labels, such as ‘fair trade’ (see Box 2). Organic still
shows healthy growth rates there.
Figures 1 and 3 show data
for organic packaged food
(excluding organic fruit &
vegetables and fresh meats).
1
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Organic Is Good for You!
Box 2: Competition among 'feel good/good for you' labels
The organic label is not the only one that can frequently be found on foods. An
increasing number of other labels can be found, which may have similar claims
regarding health, the environment, farmer support and animal welfare (or a
combination thereof). Some of these labels have less strict guidelines than the
organics label.
Well-known labels are: fair trade/Max Havelaar, free-range, natural, non-GMO,
Rainforest Alliance and UTZ, to name a few. Strict rules, regulations and control
mechanisms are some of the reasons why the organics label continues to do well.
Organic food will gain further substantial market share in the 2015-2025 period
For the 2015-2025 period, we have made three scenarios for organic food growth in
Western Europe and the US. Our base case scenario shows an average annual growth rate
(CAGR) of 6.7 percent and 7.6 percent for Western Europe and the US, respectively. The
higher rate for the US reflects a higher short-term growth rate, after which we would expect
a more sustainable rate, at around 7 percent. Our optimistic and conservative scenarios
would result in roughly 2 percent to 2.5 percent higher or lower growth rates per annum.
Denmark, Sweden and Switzerland are leading in terms of per capita consumption
Our scenarios result in penetration rate forecasts that show Denmark and Sweden leading
(see Figure 2). Our penetration rate forecasts assume an outperformance of the overall food
market growth of 1.5 percent for Western Europe and 2.0 percent for the US. Potential
higher volume growth or inflation of the overall food market is likely to lead to slightly lower
penetration rate growth, as the organic supply chain will not allow for much faster organic
food production growth.
Germany and France are Europe’s largest organic markets
In terms of size, Germany and France are dominant in Western Europe, whereas the UK
also has a sizeable organic consumer base, despite a low penetration rate (see Figure 3).2
Also noticeable is the growth in the Italian market, driven in particular by high growth in
organic dairy and pasta. The US organic food market is about the same size as that of
Western Europe. Growth in the US is broad-based, with high growth rates noticeable in fruit
& vegetables, baby food, dairy, juices, coffee and tea.
Figure 3: Retail sales of organic packaged food in selected markets, 2010-2020f
USD billion
EUR billion
20
4.0
18
3.5
16
3.0
14
12
2.5
10
2.0
8
1.5
6
1.0
4
0.5
2
0
United
States
(USD)
0.0
2010
2015
2020f
Source: Euromonitor 2016
We include the 13 most
important countries in terms
of organic consumption in
Western Europe.
Alphabetically, these are
Austria, Belgium, Denmark,
France, Germany, Ireland,
Italy, the Netherlands,
Norway, Spain, Sweden,
Switzerland and the UK.
2
Food producers should embrace consumers’ desire to buy organic
The bulk of branded food producers in both Western Europe and North America have been
struggling to maintain a meaningful top-line performance in the past decade. The situation
in Western Europe has been even worse than in the US, due to substantial private-label
growth. In the US, on the other hand, we have lately been witnessing growth of newer,
smaller and innovative food producers at the expense of the bigger food producers. (See
the recent Rabobank industry note Dude, Where’s My Consumer?)
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Organic Is Good for You!
In this environment, the major US food producers (including Western Europe-based
multinationals) have been very active in buying successful natural and organic food
producers. Many have also been introducing organic versions of existing products. As such,
a small part of their portfolios benefit from robust organic growth. In Western Europe, on
the other hand, there was no such development until Danone’s recent announcement that it
had made a bid on listed US-based WhiteWave, which has operations in both the US and
Western Europe. In Europe, brands are mainly local, and the biggest producers are typically
dairy groups.
In view of the above, especially Western Europe-based food producers should increase their
focus on organic product options and innovations in order to tap into a growing segment.
Organic could become mainstream in some categories
When zooming into the various organic food categories in Western Europe and the US, we
notice a major difference in consumer uptake per food category, but also per region. Is it
demand or is it product availability that plays a role here? The jury is clearly out for several
categories, but—with the help of available data and knowledge from other Rabobank F&A
teams—we have been able to categorise a number of organic food categories as having a
high, medium or low penetration rate potential (see Figures 4 and 5). Categories (under the
high section) could become mainstream if their penetration ratio goes beyond 10 percent to
15 percent.
Figure 4: Organic food category penetration rate forecasts—Western Europe, 2005-2025f
40%
High
35%
Medium
Low
30%
25%
20%
15%
10%
5%
0%
2005
2015
2025f conservative
2025f base case
2025f optimistic
Source: Euromonitor, Rabobank 2016
Figure 5: Organic food category penetration rate forecasts—US, 2005-2025f
40%
High
35%
Medium
Low
30%
25%
20%
15%
10%
5%
0%
2005
2015
2025f conservative
2025f base case
2025f optimistic
Source: Euromonitor, Rabobank 2016
In both Western Europe and the US, organic baby food is quickly becoming mainstream.
One could also argue that it is becoming the ‘new’ standard. For manufacturers, the switch
to organic production is possible because some ingredients were already organic or organic-
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Organic Is Good for You!
like—given that these producers were already sourcing premium ingredients. The difficulty
is sourcing all ingredients, given the many recipes for baby food in jars and other products.
In terms of pricing, the slightly higher product price is not an issue for parents who only buy
premium foods for their offspring.
There is increasing demand for organic coffee—yet the issue seems to be with production,
which is rather limited to a few regions in South America, such as Peru and Mexico. In a
country like Brazil, producing organically is not economical for farmers. The taste of the
beans is the most important factor in getting a good price, and by producing organic beans,
farmers risk producing poor-tasting beans.
The potential for organic rice currently seems low, given limited organic rice production in
Asia, Western Europe and the US. Growing organic rice is more labour-intensive and has
much lower yields. And although this might be the case for more crops, rice stands out
because of the additional water management. Note that organic rice is not only found in
rice-only products, but also as an ingredient in baby food and ready meals.
Lastly, we would like to comment on poultry, for which we expect penetration rates to
remain modest. The reason is two-fold. First, the difficulty of valorisation of the entire
animal, and second, competition from other animal-welfare labels like ‘cage-free’. That
being said, from time to time, we do notice strong growth performances in several Western
European markets.
With ongoing strong demand come supply chain issues
A reason why we do not predict ongoing double-digit organic food sales growth is because
that would require similar growth in organic crop and animal production. And that is not
always feasible. With the current growth in consumption, producers already have a difficult
task in sourcing the right quantities. Producers sometimes have to limit product sales due to
a lack of sufficient input. Due to ongoing strong demand for organic products, we see
several programmes around the world to support farmers who are converting to organic
crops—programmes involving governments, food producers and traders.
Changes in the US are necessary to ensure organic is also CO2-friendly
The country with the biggest mismatch in terms of organic consumption and production is
the US (see Figure 6). More than 90 percent of all corn and soy produced is GMO, and thus
not suitable. Only wheat is non-GMO. Essentially, the US imports the bulk of its organic raw
materials, but also finished products, from all over the world—in particular from South
America, Europe and Asia. Cattle held for the organic market are fed corn that can originate
from Eastern Europe. With the above in mind, it’s not difficult to see that, sooner or later,
this behaviour could result in consumer concerns with regard to the CO2 footprint of
‘environmentally-friendly’ organic foods. Local organic foods are certainly a future trend,
although scientists might calculate that more remote (GMO) production could have a better
CO2 footprint.
Figure 6: Penetration rates organic land vs. organic consumption, 2005-2015
penetration rate
25%
20%
15%
10%
5%
0%
2005
2010
2015
2015 organic food / total food (percentage of sales)
Source: IFOAM, Euromonitor, Rabobank 2016
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Organic Is Good for You!
Conclusion
In the next ten years, organic food sales will grow roughly three times faster than overall
food sales. In a low-growth environment, food producers should increase their focus on
organic via new products and brands, or reformulation of existing products to help grow
their top lines. An additional benefit is that an increased focus on organic will help them
position themselves as responsible businesses. In order for growth to continue, the supply
chain must overcome certain constraints—something it has been capable of in the past.
This is the first report in a series on organic food
This is the first report in a series of reports on the organic food industry. Future reports will
go into more depth on supply chain issues, distribution channel trends, and the market
structure of Western Europe and the US.
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