Organic Food

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Health Markets:

Market Assessment Publications Ltd.
Market Study November 2003

The organic foods market grew in retail sales value by 10.3% in the year ending April 2003. This has continued the fall in annual growth rate since the year ending April 2000, although growth in the organics market is still much more substantial than that of the total grocery market. This decrease is attributed to both a maturing sector and a certain level of saturation — in that the reported 8% of consumers who are the most regular organic foods purchasers (according to the Soil Association) account for around 60% of sales. A now static 75% to 80% of households buy some organic foods in a year. Growth would be expected to improve again if larger purchases started to be made by the substantial majority of more occasional consumers, with organic foods representing just 1.1% by value of total foods sales. This is a much lower penetration level than in Germany, Switzerland, Austria, Sweden and Denmark.

Organic variants are widely available in staple foods and drinks — such as fruit, vegetables, milk, bread, rolls, meat, tea, coffee, fruit juice and eggs — as well as a comprehensive range of processed foods, such as yoghurts, chilled desserts, cheese, ice cream, breakfast cereals, cereal bars, biscuits, cakes, ready meals, soups, sauces, preserves, pasta, chocolate, meat pies and baby foods. Some of the highest growth recently has been achieved in fresh meat, baby foods and milk.

There has been continued Government support for organic farmers and growers in recent years, and particularly since 2002 in terms of Action Plans and financial grants for the organic conversion of agricultural land following the serious interruption caused by the foot-and-mouth crisis in 2001. However, a recent downside has been the sudden supply of large quantities of organic milk on the market, much of which has had to be sold as non-organic milk. This has been the result of substantial areas of converted land coming on stream in 2002, and could be followed by an oversupply of organic eggs, meat and vegetables — leading to further price pressures in an area where higher prices are needed to offset the lower productivity inherent in organic farming.

Imports represent a sizeable, but declining, share of the organic foods market, at 56% of total retail sales — with hot and cold beverages, baby foods, fruit and vegetables, cereals and baked goods, and multi-ingredient items showing the highest import shares. This is due, in many cases, to longer growing seasons for primary foods and to the inability to grow certain products in the UK. By far the lowest import level is in dairy products, with imports of meat recently falling substantially.

An increasingly dominant share of organic foods sales, 80.9% in 2003, continues to be made through the grocery multiples — particularly Tesco and the pioneers of organics, Sainsbury's and Waitrose. The balance of sales is made through independents, various health food shops and, increasingly, the direct outlets of farm shops, farmers' markets and box schemes. Major international food manufacturers are increasingly entering the organic foods market, formerly characterised by small, niche producers. These include Unilever Bestfoods, HJ Heinz, Müller Dairies, Gerber Soft Drinks, Arla Foods, W Jordan, Premier International, Weetabix, Yoplait Dairy Crest, Warburtons, Kallo Foods, Nutricia and AB Foods.

Others have also entered or expanded in the market through acquisitions, such as Masterfoods with Seeds of Change, Unilever with Go Organic, RHM with The Enjoy Organic Company, Kallo with Whole Earth Foods, and Horizon Dairies with Rachel's Organic Dairy and Deans Foods.

In the future, market growth for organic foods and non-alcoholic drinks is put at between 7.9% and 10% per year.

Executive Summary

1. Introduction

REPORT FOCUS 3

Definition 3

Genetically-Modified Crops 3

RESEARCH 4

2. Strategic Overview

ORGANIC FARMING 5

Soil Association 5

Organic Conversion Information Service 5

Table 1: Breakdown and Number of OCIS Enquiries by DEFRA Region
(%), Years Ending April
2001-2003 6

Table 2: Breakdown and Number of OCIS Enquiries by Subject (%),
Years Ending April 2000-2003 7

DEFINITIONS OF ORGANIC FARMING 8

THE ORGANIC CHALLENGE 9

CERTIFYING BODIES 10

GOVERNMENT ACTION AND ASSISTANCE 12

GROWTH OF ORGANICALLY-MANAGED LAND 14

Table 3: Organically-Managed Land in the UK by Country by Type by Area (000 ha and %), Years Ending April 2001-2003 15

Figure 1: Total Organically-Managed Land in the UK by Type by Area (000 ha), Years Ending April
2001-2003 16

Table 4: Organically-Managed Land in England by DEFRA Region (000 ha and %), Year Ending June 2003 17

Table 5: Organically-Managed Land in the UK by Use of Land (000 ha and %), 2002 and 2003 18

NUMBER OF ORganic PRODUCERS AND PROCESSORS 19

Table 6: Number of Organic Food Producers and Processors/Importers in the UK, Years Ending April
1995-2003 19

Figure 2: Number of Organic Food Producers and Processors/Importers in the UK, Years Ending
April 1995-2003 20

Table 7: Location of Producers and Processors/Importers in the UK by Country (% and number), Years Ending April 2001-2003 21

Table 8: Location of Producers and Processors/Importers in England by DEFRA Region (% and number),
Years Ending April 2001-2003 21

GENERAL ISSUES DRIVING OR AFFECTING THE MARKET 22

Claimed Health Benefits 22

Environmental Concerns and Animal Welfare 23

From Niche to Mainstream 24

Demographic Changes —
Growth in Disposable Income 25

Table 9: UK Household Final Consumption Expenditure at
Current and Constant 1995 Prices (£bn), 1995-2002 26

Figure 3: UK Household Final Consumption Expenditure at
Current and Constant 1995 Prices (£bn), 1995-2002 26

Historical Trends in Food Consumption 27

Table 10: Consumption of Traditional Staple Foods in the UK by Type (g/ml/number per person per week), 1950-2000 27

THE ORGANIC FOODS MARKET IN SUMMARY 29

Market Size 29

Table 11: The UK Organic Foods Market by Retail Value (£m at rsp and %), Years Ending April
1999-2003 29

Table 12: The UK Organic Foods Market by Retail Value by Sector (£m at rsp and %), Years Ending April 2002 and 2003 30

Imports 30

Major UK Producers and
Processors 31

Advertising Expenditure and Promotions 31

Table 13: Main Media Advertising Expenditure on Organic Products (£000), Years Ending
June 2001-2003 31

Exhibitions 31

Distribution 32

Market Forecasts 32

3. Market Sizes

THE organic foods
MARKET 33

Table 14: The UK Organic Foods Market by Retail Value (£m at rsp
and %), Years Ending
April 1994-2003 33

By Sector 34

Table 15: The UK Organic Foods Market by Sector by Value and Market Share (£m at rsp and %), Years Ending April 2000-2003 35

Fruit and Vegetables 36

Dairy Products 37

Milk 37

Yoghurts/Chilled Desserts 38

Cheese and Butter 38

Ice Cream 38

Eggs 39

Cereals and Bakery Products 39

Hot and Cold Beverages
and Wines 40

Multi-Ingredient Items 41

Ready Meals 41

Soups and Sauces 42

Pastas and Rices 42

Chutneys and Condiments 42

Jams and Marmalades 42

Chocolate 42

Meat and Meat Products 43

Baby Foods 43

ORGANIC IMPORTS 44

Table 16: Estimated Import Levels for Organic Foods by Sector (%),
Year Ending April 2003 45

THE ORGANIC MARKET AT FARM GATE PRICES 46

Table 17: UK Organic Foods Sales at Farm Gate Prices by Type by Value and Market Share (£m and %),
Years Ending April 2001-2003 46

Figure 4: UK Organic Foods Sales at Farm Gate Prices by Type by Market Share (%), Year Ending
April 2003 47

Table 18: Breakdown of UK Organic Foods Sales at Farm Gate Prices by Sector and Type by Value (£m),
Years Ending April 2001-2003 48

THE ORGANIC MARKET AT PROCESSOR LEVEL 50

Table 19: UK Organic Foods at Processor Level by Sector by Value and Market Share (£m and %), Years Ending April 2001 and 2002 50

4. Advertising and Promotion

ADVERTISING EXPENDITURE 51

Table 20: Main Media Advertising Expenditure on Organic Products by Selected Sectors (£000), Years Ending June 2001-2003 51

EXHIBITIONS 52

5. Distribution

RETAIL SALES 54

Table 21: UK Organic Foods Retail Sales by Type of Outlet by Value and Market Share (£m at rsp and %),
Years Ending April 2001-2003 55

Grocery Multiples 55

Table 22: Market Share of Organic Foods Sales by Multiple (% of value), Year Ending September 2003 56

Figure 5: Market Share of Organic Foods Sales by Multiple (% of value), Year Ending September 2003 56

Table 23: Number of Organic Products in Store by Multiple, 2003 57

6. An International Perspective

THE GLOBAL MARKET 58

Market Size 58

Australasia 58

South America 58

North America 59

Other Countries 59

THE EUROPEAN MARKET 59

Table 24: Organically-Managed Land in Western Europe (m ha),
1991-2001 60

Table 25: Share of Organic Land in Western Europe by Country
(%), 2003 60

Figure 6: Share of Organic Land in Western Europe
by Country (%), 2003 61

European Market Size 62

Table 26: Organic Land Area, Number of Organic Farms and Organic Retail Sales in Selected European Countries
(000 ha, % and £m at rsp),

2003 62

Scandinavia 63

Denmark 63

Sweden 63

Germany 63

France 64

Italy 64

The Netherlands 64

Belgium 64

Switzerland 65

Austria 65

7. PEST Analysis

POLITICAL FACTORS 66

ECONOMIC FACTORS 66

SOCIAL FACTORS 67

TECHNOLOGICAL FACTORS 67

8. Consumer Dynamics 68

SOIL ASSOCIATION FINDINGS 68

BMRB ACCESS RESEARCH SUMMARY 68

Table 27: Organic Foods — Levels of Agreement with Selected Statements (% of respondents), June 2002 and August 2003 69

BMRB RESEARCH FINDINgs in depth 70

Buying Organic Foods 70

I Buy Organic Foods on a Regular

Basis (S1) 70

I Buy Organic Foods Very
Occasionally (S2) 70

Table 28: Buying Organic Foods Regularly or Occasionally
(% of respondents), 2003 71

I Never Buy Organic Foods (S3) 73

Nowadays I Buy More Organic Foods Than I Used To (S4) 73

Table 29: Organic Foods — Never Buying or Buying More Than Before (% of respondents), 2003 74

Price Factors 76

I Think Organic Foods are too Expensive (S5) 76

I Would Buy More Organic Foods if They Were Cheaper (S6) 76

Table 30: Organic Foods — Price Factors (% of respondents),
2003 77

I Think Organic Food Prices Have Become More Competitive With
Non-Organic in Recent Years

(S7) 79

I Think It’s Worth Paying the Extra Money for Organic Foods (S8) 79

Table 31: Organic Foods — More Price Factors (% of respondents),
2003 80

Taste and Health 82

I Think Organic Foods Taste Better Than Non-Organic (S9) 82

I Think Organic Foods are Better for you Than Non-Organic (S10) 82

Table 32: Organic Food — Taste and Health (% of respondents),
2003 83

Certainty and Availability 85

Just Because a Food Item is Labelled Organic, You Cannot be Certain That it is in Fact Organic (S11) 85

I Have to Shop Around to Find all the Organic Foods
That I Want (S12) 85

Table 33: Organic Food — Certainty and Availability (% of respondents), 2003 86

Concerns About Organic
Foods 88

I am Concerned about the Use of Chemicals and Treatment of Animals in Farming and Growing

(S13) 88

I Think That the Government Should Do More to Assist Organic Farmers and Growers in the UK (S14) 88

Table 34: Concerns About Organic Foods (% of respondents), 2003 89

9. The Future

OVERVIEW 91

DEMOGRAPHICS 91

MARKET FORECASTS 92

Table 35: The Forecast UK Organic Foods Market by Retail Value (£m at rsp and %), Years Ending April
2004-2008 92

10. Further Sources

Associations and Certifying
Bodies 93

Publications 95

General Sources 95

Government Sources 95

Bonnier Information Sources 96

Other Sources 97

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