Is Organic Food Off the Menu? Séan Rickard March 2009 SM
We are going to look today at the organic food revolution and how the recession is impacting that. To help us do that, Séan Rickard who is an economist with substantial experience of food and food pricing is going to help us. Now Séan, how do you see the situation? SR Well what is happening at the moment is that a sector which had been growing quite strongly for the last ten, fifteen years has fallen back quite sharply. And I think the reason for that is not altogether to do with the downturn in the economy, but that has obviously impacted on consumer spending. I think always there was too much hype around organic food. We misunderstood the reasons why people were consuming organic food. SM So give me some more information then. Why were people consuming organic food, and why are things changing therefore? SR For the last twenty five years the affordability of food has been steadily declining, people sought new taste and food experiences. They then took holidays abroad, when they came back they wanted to eat the sort of foods they had eaten abroad and part of that trend was organic food. For the vast majority of people it was not an article of faith, they did not have to eat organic food, but perhaps on a Saturday they might buy an organic chicken, or they might occasionally buy organic bread, but that is what it was – it was part of this pattern of choice, of wider experience. Now this is discretionary expenditure. The moment things begin to tighten, and two things are happening at the moment, the affordability of food has started to rise again. We have had some very high prices for agricultural produce over the last couple of years. Food price inflation is still running at around nine per cent a year compared to the economy generally. An d on top of that, of course, people are worried about their incomes – perhaps some people are now unemployed or think they might be unemployed, so they are cutting back. They have reduced their discretionary expenditure. They have done exactly what one might expect if they were merely exercising choice, rather than making the decision that concerned a value or a value in their life. SM So people were predicting a rapid straight line growth, year on year‐so this is no longer true? SR No it certainly isn’t. I think we have to put all of this into perspective Séan Rickard because the organic sector would be happy to tell you that they had enjoyed thirty, forty per cent growth per year for many years. Well forty per cent of next to nothing is still next to nothing. For the £140 billion a year we spend on food in this country, we spend less than £2 billion on organic food. Very roughly about one and a half per cent of our food consumption is organic. It is a niche market, it will remain a niche market, it will remain a market for discretionary expenditure, it will never become anything more than that. SM So let’s have a look at some of the implications of this. Let’s look first at the suppliers. I read that suppliers are going to get quite squeezed by this. SR When it comes to the organic sector it is a very labour intensive, and incidentally fuel intensive sector. The price of oil has fallen back somewhat, but labour costs of course remain a major cost for any business and as long as they are insisting on organic feed for animals etc, they are paying very high prices indeed. So on the one hand consumers are no longer so keen to pay the premiums for organic food, and on the other hand their cost base is not falling as fast as for other sectors. So you are absolutely right, organic businesses are being squeezed and squeezed very markedly. One of the ironies of this, of course, is that after many years of resisting pressure the government eventually did turn to subsidising the conversion of conventional farms into organic farms and we have seen people converting – it takes about three or four years to convert – and just as they are coming to the end of their conversion period they find there is no market, they find their cost base is much higher than it should be and they are in serious trouble. It really goes back to a fundamental lesson here – governments should keep out of these things. They usually end in tears. SM Let’s have a look at the retail sector – the Waitroses and the Marks and Spencers that have made a real thing of organic food – we are whole, you may be willing to pay a bit extra, but here it is: some really good food for you. That seems to be going into reverse, doesn’t it? SR It certainly is. Marks and Spencer have seen a fall in their sales and we have recently seen Waitrose talk about producing what they call a value line now, which is really code for saying a cheaper range of products. They are forced to respond to reality of the current situation. The food sector, although we all have to eat, it can’t be immune from the economic downturn and people are looking more carefully at what they spend on food and trying to spend a little less at this time. That is bound to last at least for another year or so and what we see at the retail level is quite a big shift actually. The high priced, the prices didn’t matter end of the market – Marks and Spencers and Waitrose– are seeing falls in their sales. At the other end, the so‐called value stores, the Aldis and the Nettos are seeing Page 2
Séan Rickard fifteen, twenty per cent increases in their sales. Of course they have a relatively small share of the market, but it shows there have been quite big movements, quite rapidly in the food market. And what is the lesson of this? At the end of the day, economics matters. What consumers are really interested in is value rather than values. SM So if we take in the UK, a retailer like Asda, they have seen quite an increase in their profitability and sales. Do you see that continuing? SR Well what Asda and Sainsburys, and indeed Tescos, are all doing now is producing these what they call value brands. They are really offering consumers cheaper food. They are fighting back against the low priced end of the market by themselves offering lower priced products to consumers. I am absolutely certain that in two years time when this recession is moving behind us, we will still see the market dominated by the Tescos, the Sainsburys and the Asdas of this world. I am sure by then Marks and Spencers and Waitrose will be recovering and there will be a lot of wiser consumers out there who will perhaps not put quite so much effort into buying organic produce in the future. SM So you are seeing a long term shift? SR I think we have got to be careful because if we talk long term, the very long term trend is of course that food does become relatively cheaper than other prices. That is why people can afford in developed countries to become much more choosy about what they purchase about what they purchase. So I see it a little bit like this. Organic food will remain a niche market, but we will have many other niche markets developing – we are already seeing things like Fair Trade products, we see free range products etc. They are all niche markets for people who have a lot of discretionary expenditure. As that comes back in two or three years time, those markets will perhaps once again enjoy some growth. But we have to keep it in perspective, at the end of the day people are really beginning to spend their extra discretionary money where food is concerned on eating out. That is where it has been going over recent years and that is where it will return to over the long run. SM Séan, thank you very much for those perspectives. Page 3