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5 Retail of organic products from Scotland

5.1 This chapter describes the retail of organic food and drink. We provide an overview of the retail market before describing the retail sector in Scotland and the UK. We describe supply chain issues that have been identified from the public domain literature as well as those raised during our consultations.

Overview of the retail market for organic products

5.2 According to the Institute for Rural Studies, University of Aberystwyth, the global organic market is estimated to be worth £14bn in 2002/03. Organic sales within selected countries are illustrated in Table 5.1.

Source: Lampkin (2003); Yuseffi and Willer (2003, in Soil Association Organic Food and Farming Report 2003)

Retail sales in the UK

5.3 Information on organic retail sales is available at the UK level through the publications of the Soil Association and Taylor Nelson Sofres ( TNS). We have been unable to source information on retail sales in Scotland.

5.4 Total organic sales in the UK in 2002/03 were £1,015m, an increase according to the Soil Association of around 10% on the previous year and representing a tenfold increase since 1993/94. This makes organic sales the fastest growing area in food and drink in the UK.

5.5 The sales for total food and organic are shown in Table 5.2 by product category. This table also shows organic sales as a share of the total food and drink sales in the UK. The results illustrate that organic sales are:

• over-represented inin:
• baby foods
• bread and baked
• dairy and eggs, and
• fruit and vegetables
• under-represented in:
• beverages, and
• meat and fish.

Source: Soil Association Organic Food and Farming Report 2003

5.6 Table 5.3 and Figure 5.1 show the value of organic imports as compared to total organic sales in the UK. Despite a fall in the level of imports over the last year (65% to 56%), the figures show that imports are responsible for a significant share of sales in all product categories except:

• meat and fish
• dairy and eggs.

Source: Soil Association Organic Food and Farming Report 2003

Figure 5.1: UK organic food and drink: total retail sales and total imports 2002/03

5.7 Analysis by the Soil Association reveals that sales of:

• baby foods have almost doubled (19.6%) in the last year. This increase is mainly at the expense of conventional baby food products. The high level of imports for this category is due to stringent quality standards for ingredients required for this product. Future growth is unlikely to be as rapid: opportunities in this sector for the UK industry will be in supplying ingredients of a standard that match the market requirements.
• bread and baked products have increased at the rate of the market as a whole (10.4%) so that the share of this category in the total organics sales remains the same
• beverages have nearly quadrupled in the last year (37%). Within this, organic wine has seen significant growth driven by an expansion in the number and quality of lines handled and an increase in countries producing this product. This has led to a convergence in price between organic and conventional wines. Growth of organic soft drinks has been much lower: the high proportion of imports in this category is the result of supply barriers, including sourcing product type (e.g. citrus fruit) and, where products can be sourced in the UK, supply volume and quality
• meat and fish have increased by almost 50% in the last year. Levels of wholesale meat imports have declined due largely to effort on the part of some supermarkets to ensure this product category is sourced entirely from the UK
• dairy and eggs have also increased at the rate of the market (10.4%) with the result that the share of this category is unchanged. The low share of imports in this category is a result of the over-supply of UK milk
• fruit and vegetables have enjoyed an increase (of 17%) in the last year. Two reasons may explain this: firstly, the role this category plays as a trigger for consumers converting to organic purchasing ( TNS, in Soil Association, 2002); secondly, an improvement in the quality of UK-sourced produce plus greater effort on the part of the supermarkets to source this category locally. It appears that improvement in product quality will be the main factor if significant import substitution in this category is to be achieved
• tracking the purchasing of products in the other categories over time is more difficult because of changes in data quality between years.

Organic retail outlets

5.8 A range of retail outlets are responsible for the sale of organic products. These include direct sales channels (such as box schemes, farm shops, mail or web-based ordering and farmers' markets) as well as independent/specialist and multiple retailers.

5.9 More specialist outlets have emerged to satisfy specific needs. Trends and perceived advantages have been identified by Whitehead and Nicholson (2001) ⁹:

• specialist 'natural' food stores responding to new lifestyles by offering a wide range of organic products, have experienced rapid growth in the more affluent areas for example in London
• farmers markets exploit advantages in providing a direct connection between the producer and the consumer, addressing concerns such as product reliability and traceability
• box schemes exploit advantages in terms of low prices, convenience and product traceability. However, box schemes have shortcomings in offering less consumer choice, notably because of seasonality
• mail order especially over the internet offers convenience.

5.10 Table 5.4 and Figure 5.2 show the proportion of UK organic sales by type of retail outlet. The results confirm that multiple retailers are responsible for the largest proportion of sales by far. However, over the last year the proportion of sales accounted for by the various outlets has shifted:

• sales by multiple retailers fell by 1.2%
• by independent/specialist retailers fell by 0.1%
• direct sales channels increased by 1.3%.

5.11 These results show how the share of total organics sales through some of the direct sales outlets has grown since 2001. This is most notable in farmers markets, but also significant in box schemes.

Source: Soil Association Organic Food and Farming Report 2003

Figure 5.2: Organic sales in the UK by retail outlet

5.12 The Soil Association makes the following observations in relation to changes in sales value in different types of retail outlet. Sales through multiple retailers have grown albeit at a slower rate recently than in previous years. Other changes in the multiples' sector have included the commitment by some to sourcing from the UK; improvements achieved in product quality; and supply chain improvement and consolidation. There has also been a reduction in price of some products that has been driven by deliberate variations in pricing strategy and by UK-sourced products facing up to competition with prices of imported products.

Multiple retailers

5.13 Table 5.5 shows the most recent data we were able to secure on the percentage share of trade between the multiple retailers for organic and the overall grocery market (2000). The data indicate that Sainsbury's, Tesco, Waitrose and Safeway account for most UK organic sales. In 2003, two multiples, Sainsbury's and Tesco were responsible for 27% and 27.5% respectively of UK organic product sales.

Source: TNS

5.14 The multiple retailers have very different strategies on sourcing, on product lines and pricing. Sainsbury's, Tesco, Waitrose and Marks & Spencer have all expanded the number of product lines. Sainsbury's offer has expanded over the last 20 years and now has a very broad product range - over 1,000 product lines, although this is now beginning to contract. Asda and the Co-op meanwhile have pursued a more limited product range, Asda with a consistent set of products and the Co-op with a consistent size of its range but with changing product categories.

5.15 Sainsbury's made a commitment to source from the UK 100% of organic fresh milk, butter, eggs, pork, beef and chicken by 2003 and 55% of all its organic food lines. Asda has made a commitment to local purchasing, not restricted to organics. The Co-op is similarly looking to source from the UK. A number of the multiple retailers run supplier development programmes.

5.16 We have been informed that the pricing strategies of Sainsbury's, ASDA and Marks & Spencer for organic products maintain the same margins as equivalent non-organic products.

Independent/specialist retailers

5.17 At a UK level, sales value of independent/specialist retailers has expanded since 2000, but stabilised over the last year. Independent outlets lost ground to supermarkets as the overall organic sales increased in 2000/01 and 2001/02 but more recently have also lost ground to direct sales (as have supermarkets). Competitive advantages for the specialist/independent outlet include location, perceived product quality, specialist product range, good customer service and an ability to match closely the concerns of its target consumer in the marketing mix - ethical or health dimensions for example.

Farmers markets, box schemes and other direct sales

5.18 According to the Soil Association, the increase in sales through farmers' markets results from a combination of an increase in the overall number of markets; the consolidation of sales in existing farmers' markets; an increase in the proportion of organic products at farmers' markets; and a trend towards selling value-added and processed organic products (increasing sales value). Box schemes, meanwhile, have widened their product range from fruit and vegetables to incorporate meat, dairy, baked products etc.

5.19 According to the Soil Association, there were 450 farmers markets across the UK. Scotland has one of the lowest concentrations.

Retail outlets in Scotland

5.20 Information on organic retail outlets in Scotland is scant. Our research has collated information from a variety of sources on farmers markets, independent retailers and multiple retailers (see Table 5.6). We cannot guarantee that it is comprehensive. From the information available to us, we have identified:

• 649 multiple retail outlets - over half represented by Co-op and Safeway stores
• 27 specialist retailers
• 43 farmers markets - but we cannot be certain that all will offer organic produce
• 17 direct sales operations - of these:
• 11 are box schemes
• 8 are farm shops.

Source: Soil Association, Bio-dynamic Agricultural Association, SOPA, Scottish Association of Farmers Markets, Deli & Good Food Directory to Scotland (The List 2003/2004), Scottish Food and Drink, Organicfood.co.uk, Yell.com.

5.21 Figures 5.3 and 5.4 illustrate the geographical distribution of multiple retailers and Farmers' Markets, producer-retailers and independent retailers in Scotland.

5.22 Multiple retailers are located largely in the central belt but they also occur in rural areas where population centres and the transport infrastructure make a supermarket presence sufficiently attractive. Farmers markets are restricted to mainland Scotland and follow a similar distribution to multiple retailers, suggesting location is influenced by population centres and transport infrastructure. The majority of independent specialist retailers are in the central belt.

Figure 5.3: Distribution of multiple retailer outlets in Scotland

Figure 5.4: Distribution of farmers markets, producer-retailers, and independent/specialist retailers in Scotland Emerging issues and research needs

5.23 Our research identified a range of value chain and system issues and research needs from the perspective of retailers.

5.24 Smaller retailers do not have access to the same sophisticated level of consumer profile information as the multiples. The Soil Association and others do make consumer information of a general nature available but there is merit in exploring further whether this information is pitched at a useful level and if it is actionable in the context of market development and business planning.

5.25 The relationship between the unique selling point, pricing, and promotion of organic produce appears to be a major issue facing the independents, as well as the multiple retailers. Although dedicated consumers will continue to pay the price premium, there is a view that it will prove difficult to increase the sales of organic products to other groups simply on the merits of being organic. Further, justified benefits are needed to back up the value and account for the price premium. Research to identify and/or validate claimed benefits is required.

5.26 Customer trust and integrity are paramount for many retailers including both multiples and specialists/independents: this makes organic promotion, or perceived "over-promotion", a sensitive area for these companies. The chapter on the consumer in this report highlights the range of motivations behind the decision to purchase organic. Retailers therefore face a dilemma in promoting organic products because 'they are better' as this implies other products are inferior or harmful.

5.27 Research and further discussion is required among the champions of organic products to develop more effective, consistent and objectively justified marketing messages which the retailers can take on board confidently, both in their interest and in the interests of organic producers and processors

5.28 Perspectives on organic demand trends vary between type of retail outlet. From a multiple retailer's viewpoint, the upturn in the organic market in the late nineties is very much seen as a temporary 'gold rush' and the last 18 months a period of consolidation. The surge in demand came about mainly as a result of food scares, with organic products being perceived as a safer alternative. In the view of some large firms, there is still a large untapped consumer base, but there is no consensus on this.

5.29 Specific market opportunities as seen from a multiple retailer's perspective include:

• fresh produce:
• horticulture, e.g. in expanded carrot production currently in Fife and Moray Firth
• (for the long term, wheat production or other crops as a result of possible climate change)
• cereal crops - the increase in British organic non ruminant animal production would indicate a gap in organic feed supply
• value added products - especially for producers in Scotland:
• beers, wine and spirits
• baby food, particularly for soft fruit e.g. strawberries and raspberries. As this is processed food, this would help overcome the seasonality barriers
• frozen food, as this would help overcome the time/distance/seasonality of produce in Scotland. (This would require a plant in the area for quick freezing, certified for organic use.)
• other added value categories e.g. dairy in the Lowlands - dairy for mozzarella is already sourced from Lowland Scotland by a London-based processor.

5.30 The picture is more mixed for those producers selling directly:

• for a producer with a farm shop in the Lowlands, dedicated organic consumers have still to be satisfied before it is feasible to expand to tackle new customers
• for a Highland producer running a box scheme into the Lowlands, demand outstrips supply by a factor of five
• for a Highland producer running a farm shop, any increase in demand is marginal at present.

5.31 From producers selling directly, two areas of opportunity were identified:

• fresh produce - in vegetables, onions and garlic in particular
• products - in jams, chutneys and ready-made meals.

5.32 One independent retailer in Scotland viewed opportunities for new suppliers as limited: in its experience, most niches are filled and own customer needs can be sourced from existing catalogues.

5.33 Both independent retailers and multiple retailers indicate that customers are not ready for organic convenience food. According to the Soil Association, Marks & Spencer has found that the organic consumer favours fresh produce over ready meals. In the view of one multiple, consumers are generally interested in fresh rather than processed food. Sainsbury's did expand their range of added value products (e.g. ready-made meals) but decided to scale these back as sales were insufficient. Independents also indicate a low demand for processed, ready-made products.

5.34 Views on the importance of competition in organic sales also vary. For multiple retailers, the significance of competition in organic is dependent on their own position in the market. Some compete on quality and distribution: Sainsbury's as a result competes not only with other multiples (such as Walmart and Tesco), but also with the independent retailers serving niche sectors such as fair trade, functional foods and organic, especially where these independents are numerous, as in London. The point has been made to us that some independent retailers have been bought out by US companies - an indication of the forecast growth of the independent retail sector in the UK.

5.35 Other multiples by contrast do not consider their organic products as a key area of competitive advantage. Rather, they are concerned simply to ensure that customers have the option to buy organic available to them in their stores. Asda for example does not consider independent organic retailers as competitors.

5.36 During our consultations with multiples selling organic products, we were alerted to the competitive threat to these products from a conventional sector that is "raising its game" (some producers selling organic directly have a similar view). An important threat to organic sales is price: this is becoming more significant as conventional food production and supply has improved dramatically through various confidence building measures. These include the reduction in fertilisers and pesticides through farm assurance schemes, enhanced traceability, free-range etc. Consumer pride generally in the quality of Scottish farming is another factor here. There is a view that organic standards must somehow maintain the 'clear blue water' between conventional products to maintain market share. Also, organic products must meet the quality/appearance standards of conventional products, notable in fruit and veg., as most consumers will not accept something perceived to be "inferior" even if it has an organic label.

5.37 For multiple retailers, variability in product appearance/quality is costly: consistency is ultimately driven by their requirements for customer throughput in the store. Any variability in produce may result in customers spending time selecting the better looking produce and results in shelves filled with 'ugly' vegetables late in the day.

5.38 Variability is also costly for processors. At present, multiples and their suppliers have a higher rejection rate on organic produce and there is no ready market for these produce 'outgrades'. The difference between profit and loss is often what a producer can do with the produce outside supermarket specifications

5.39 Improvements in UK supply chains for the organic sector are claimed, but in the view of one multiple the available 'quick wins' have already been achieved with primary producers. A key lesson has been the experience of supply-push activity in the absence of demand-pull. Multiples take some responsibility for this. As an example, Sainsbury's arranged a five-year, fixed price contract with OMSCO, the country's largest milk co-operative. The high price paid to producers suggested excess demand and attracted new entrants to the market. This led to an organic milk "lake" and resulted in an estimated 50% of organic milk being sold as conventional. (The impact on price for organic milk was clearly harmful: the wider impact of increased production and consumption of organic standard product unknown.)

5.40 Further gains in supply chains may be possible by pushing seasonality envelopes, but severe technical challenges exist in achieving this. It should be borne in mind that even if growing seasons can be extended, the technology required to achieve this may involve new or increased environmental dis-benefits, such as increased energy consumption. Other gains may be made through sourcing other ingredients and working closely with food manufacturers, but these also present challenges.

5.41 From a multiple retailer's perspective, there are opportunities for suppliers of products that demonstrate a cost advantage and/or value add (novelty, exclusivity, innovation). Multiples with supplier development programmes are looking for candidate suppliers to be more proactive in coming forward with new offerings. Their view is that it is insufficient simply to promote what is being produced: the proposition put to the multiple must include, as a key requirement, the product's potential in the marketplace. In other words, the supplier must have a market vision for what is possible if they are to influence a multiple's buyers.

5.42 The independent retailers we consulted tend to rely on tried and tested organic suppliers. Supplier research would be undertaken initially in setting up the retail outlet, but having found a trusted and reliable supplier the retailer will often be unwilling to change. Once established, independent retailers appear happy to operate in responsive mode, i.e. to wait for information on produce and products to come to them through catalogues, rep visits or introductory letters.

5.43 We note that some specialist retail outlets with a mission-oriented commitment to "natural" and organic products, maintain relatively long distance supply chains with suppliers in continental Europe, even apparently where Scottish substitutes are available. Concern with the environment in terms of the impact of long distance transport of organic products does not always seem to be factored into their buying decisions.

5.44 For individual producers retailing directly, access to a sufficient supply of produce is critical to maintain customers and market share. This can be thwarted through poor collaboration. For one producer operating a box scheme out of the Highlands, this was the most important factor. Availability and access could be improved by better flows of knowledge of what is being produced by other farmers and growers in the area willing to pool their output.

5.45 For a farm shop in the Highlands, the flow of produce was too slow and intermittent to offer day-fresh produce in the number of lines it would like. This was due to the limited availability of produce (notably greenhouse produce and shortage of supply of field crops - including potatoes) but also the poor logistics infrastructure in the Highlands. Consultees point out that supply of organic produce, unlike supply in continental Europe, is very fragmented, with few integrated organisations that can deliver on a consistent, reliable basis.

5.46 For a farm shop in the Lowlands, an important barrier is the unwillingness among other producers to share information on what might be available and when - partly at least the result of a culture of self-reliance amongst producers.

5.47 Logistics are important to all retailers. A key logistics factor for multiples is driving time (currently a maximum of six hours): this shapes the logistics infrastructure and in some circumstances can influence a retailer's decision to list a supplier or not. Supermarkets operate a depot system into which suppliers deliver. The depots make up the order for branches and these are shipped out overnight for morning delivery. Some suppliers will deliver directly to stores but this is generally discouraged. Sainsbury's for example has about 100 depots in the UK: Scotland may be served from depots in Manchester or the Midlands. Our research reveals collaboration on logistics in some areas between different multiples i.e. they share their logistics network. In one example quoted to us, with a supermarket outlet in Aberystwyth, and a supplier to another multiple located nearby, the supermarket delivery vehicle returning from the Aberystwyth store may pick up goods from its rival's supplier.

5.48 Two multiple retailers we consulted emphasised the importance of the logistics chain between the farm gate through to the retail outlet - and in particular the intermediate depot. The view from one was that " few organic producers want to find out how the chain works".

Skills

5.49 Issues arising relating to skills and the labour force differed with different retail outlets. From a multiple retailer perspective, skills issues related to needs within the supply chain. Upgrading of skills are required to deliver:

• quality:'organic' is insufficient, it needs to be quality organic food (Jamie Oliver).
• marketing: to enhance market awareness amongst farmers of their processors' requirements
• management: including innovative management that can exploit not only the high quality product but also the low quality, as this impacts on profitability.

5.50 For one independent retailer, skills were not considers to be a key issue. Knowledge of organic products is not important for sales staff as customers had a good understanding of their needs and the offering in the shop. However, for another, product knowledge of staff was crucial, including a knowledge of how to use the produce on sale in cooking at home

Recommendations

• the nature of consumer and retail-related information available to smaller producers and processors should be explored to ensure it is fit-for-purpose, accessible and actionable.
• the champions of organic products in Scotland should promote further research into identifying and/or validating claimed benefits of organic products and agreeing to develop a higher profile, more consistent marketing message for use by smaller businesses.
• champions of organic products should (continue) to engage with retailers to develop acceptable and effective promotional messages both in the interests of organic producers/processors and the retailers on whom they depend.
• the variation in views on growth potential, including between retail channels and categories, emphasises the need for quite specific enabling market intelligence for smaller producers and processors.
• there is therefore a need to explore further ways of selling at reasonable price the inevitable "outgrades" produce into other markets.
• the feasibility of extending growing seasons without incurring a net additional environmental cost is an area meriting additional "systems" research.
• it is important to ensure continued awareness among Scottish producers and processors of the drivers behind and the opportunities offered by the multiples' supplier development programmes. Initial support and advice on business and marketing plan development for smaller businesses may be required to help them develop their "pitch" to the managers of these programmes.
• there is a need to explore and develop more effective ways to encourage further collaborative ventures between producers in order to address the demands of retail outlets at all scales of production and supply. A lack of willingness or ability to collaborate means that existing or latent market demand and opportunity remains untapped. There appear to be cultural barriers here to be overcome.

the issue of logistics in assessing the market opportunities and barriers facing organic producers in Scotland supplying into different retail channels and at different scales needs to be examined more thoroughly in order to identify where critical market failure exists and can be addressed. This should be done in the context of exploring wider market opportunities for collaboration between suppliers to achieve benefits of scale.

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