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qf" +(l-q>)q0. Note that, the consumption of the organic-labeled product before the NOP can result in utility enhancement (qB > 0) or utility discount (qB <0) depending on the values of q>, qf" and q0. In particular, for cp <
(cp >
) the
consumption of the organic-labeled product will result in utility enhancement (discount). The greater (p is, the greater is the likelihood that the consumption of the organic-labeled product will result in a utility discount. Moreover, the smaller (greater) the utility discount, qB, (utility enhancement, q0) from the consumption of the GM-contaminated (GM-free) product, the greater the likelihood that the consumption of the organic-labeled product will result in a utility enhancement. Note that the sign of the term qB does not alter the qualitative nature of our results. For demonstration purposes the term qB is assumed to be positive - the consumption of the organic-labeled product before the NOP results in a utility enhancement. A consumer's purchasing decision is determined by comparing the respective utilities derived from the consumption of the non-labeled and the organic-labeled product. A consumer who is indifferent between the two products, denoted by A, derives the same utility from their consumption, i.e., Unl (X) = UB (k) . The
27
differentiating attribute X that characterizes the indifferent consumer is, thus, given by: (4)i=p°~p"' Consumers with a level of aversion to interventions in the production process such that X<=[0,X] will find it optimal to buy the non-labeled product while consumers with a X value in the interval X e (X, 1] will find it optimal to buy the product labeled as organic. Figure 1 depicts the consumption decisions, product market shares and consumer welfare before the introduction of the NOP. Consumer
V-PH
V + qo-Po
V-q„i-p„i
V-Po
0
X
X
1
Figure 1. Consumption Decisions and Welfare before the NOP
In Figure 1, the downward sloping line with slope qnl depicts the utility schedule U ^ - the utility derived by consumers with different levels of aversion to interventions in the production process, X, from the consumption of the nonlabeled product (that can be either GM or conventional). The upward sloping line with slope q% depicts the utility schedule C/f - the utility derived from the consumption of the organic-labeled product by consumers with different X values. The point where the two curves cross, if it exists, corresponds to the consumer who is indifferent between the consumption of the non-labeled and the organic-labeled product, X. Obviously, if a A does not exist, all consumers will find it optimal to buy the same product, either the non-labeled or the organic-labeled product,
28
depending on the relative product prices and perceived qualities. Aggregate consumer welfare is given by the area underneath the kinked dashed line depicting the optimal utility schedule; the maximum utility consumers with a differentiating attribute A e [0,1] can be derived from the consumption of their most preferred product. Figure 1 also depicts the market shares of the non-labeled and the organiclabeled product denoted by %nl and %„ , respectively. Since consumers are uniformly distributed in the interval [0,1], and buy one unit of their most preferred product version only, the indifferent consumer X determines the market share of the non-labeled (x n i) product [10]. Thus, the market shares of the non-labeled and the organic-labeled product are given by: (5) Z«i=*- =
Po ~ Pnl
Qo+lnl
(6)^=7-i = - ^
+
^ - ^
+
^
Since the mass of consumers has been normalized to one, %nl and %° give the demands for the non-labeled and organic product, respectively. As shown in equation (5), the non-labeled product can have a positive market share if and only if it is offered at a price lower than the price of the organic product, Pnl < Po. The smaller the price difference between the organic and the non-labeled product is, the greater the market share of the organic product. Recall that, since the products are vertically differentiated, if Po ~~Pnl, the organic product will capture the entire market.9 The price of the organic product is expected to be higher than the price of the non-labeled product. However, due to higher costs associated with the production of the organic product and the incurring of certification and labeling costs, price premiums paid for organic food have been estimated to average 20 percent [5]. Solving equation (6) for the price of the organic product, we derive the inverse demand for the organic product before the NOP, D„ , given by Po=
9
+
B
This result can be represented graphically as a parallel shift of the U 0 utility schedule in Figure 1 up to the point where its intercept is equal to V - pnl.
29
Pnl +1o
+
0
1
yB /j
O
Figure 2. Demand for the Organic Product before the NOP
As shown in Figure 2, when p0 falls below pnl, the organic product captures the entire market. For any given price, p0, the greater the utility enhancement from the consumption of the organic-labeled product (qB) and the utility discount from the consumption of the non-labeled product (q nl ), the greater the demand faced by the organic sector. 4
Consumption Decisions and Welfare under the NOP
The new NOP rules specify that airy form of genetic engineering and/or the inclusion of GM ingredients in the production of organic products are prohibited. In effect, in the absence of misrepresentation and cheating, the organic label has become equivalent to a GM-free label. The utility derived from the consumption of a product labeled as organic after the introduction of NOP, U„ ,i& given by: 0)Uf=Uo=V + Aqo-po Note that equation (7) is equivalent to equation (3) when the probability,
30 Note that A < A (since qB0
1 V+
lif
v-Pnl
II
Qnr
q0-p0
V + qBa-po
l"o
i i
V-Pc
Y'
<-
Xnl
: Xnl
V
-<3nl-Pnl
Xc •><..
B
x0 •••••••• — w 1
Figure 3. Consumption Decisions and Welfare under the NOP
In Figure 3, the utility schedule associated with the consumption of the organic-labeled product under the NOP, U„ , is shown as an upward sloping curve with slope q0. The bold kinked line represents the optimal utility schedule under the NOP. The introduction of the NOP increases the market share of the organic product by A - Z and the aggregate consumer welfare by the vertically hatched area in Figure 3. The greater the increase in the utility enhancement from the consumption of the organic product due to the introduction of the NOP (i.e., the greater is the term q0 - q%), the greater die increase in the market share of the organic sector and in aggregate consumer welfare because of the NOP. This effect can be represented graphically as a counterclockwise rotation of the U* utility schedule through its intercept at V - p0. The increase in aggregate consumer welfare results from an increase in the utility of two different consumer groups. The first group includes consumers with intermediate levels of aversion to interventions in the production process, A e [A, A J, who switch their consumption to the organic product as a result of the NOP. The second group includes consumers with relatively high levels of aversion
31 to interventions in the production process, X e ( X, 1], who both before and after the NOP consumed the organic-labeled product but after the NOP receive greater utility knowing that the organic label is a GM-free label. Implicit in the analysis depicted in Figure 3 is the assumption that the price of the organic-labeled product will not be affected by the NOP. This assumption implies that the supply curve of the organic product is perfectly elastic (i.e., there is free entry in the production of the organic product), which further implies that there exists an outward shift of the demand curve because the NOP increases the market share of the organic product without affecting its price. This result is depicted in Figure 4 as a move from the market equilibrium at e0 (before the NOP) to the market equilibrium at e ; (after the NOP). Figure 4 illustrates the potential market equilibria for the organic-labeled product under the NOP.
XBo X'o Xo 1 Figure 4. Potential Market Equilibria in the Organic Product Market under the NOP
The introduction of the NOP could result in higher certification and segregation costs for the organic sector, however, due to the requirement that products labeled as organic must be GM-free. Even though such an increase in certification and segregation costs is not expected to be substantial, if it occurred, it would cause an upward shift in the supply curve which would lead to a higher market price for the organic product under the NOP.10 This result is shown in
Note that a similar increase in price would occur under decreasing returns to scale in organic production with and without an increase in segregation and certification costs due to the NOP.
32
Figure 4 as a move from the market equilibrium at e0 to the market equilibrium at e'l-
An increase in the price of the organic product due to the NOP could affect both the observed market outcomes and the aggregate consumer welfare. The nature and magnitude of this effect depend on the extent of the increase in the price of the organic product. In particular, as long as the increase in the price of the organic product is such that the U„ utility schedule crosses the C/f before it crosses the Unl utility schedule, both the market share of the organic sector and aggregate consumer welfare will unambiguously increase under the NOP, resulting in an outcome similar to the one illustrated in Figure 3. Figure 5 illustrates another plausible market outcome resulting from a potential increase in the price of the organic product due to the NOP.
0
X
X X
Figure 5. Market and Welfare Effects from a Potential Increase in the due to the NOP
1
Price of the Organic Product
In Figure 5, the increase in price of the organic product is such that the U„ utility schedule crosses the U„ after it crosses the Unl utility schedule. In this case, the market share of the organic product is reduced due to the NOP by X-X. Note that, in this case, a group of consumers that consumed the organic product before the NOP will find it optimal to switch their consumption to the non-labeled product after the NOP is introduced. These consumers incur a welfare loss because of the NOP, shown by the dotted area in Figure 5. Consumers with high levels of aversion to interventions in the production process consume the organic product
33
both before and after the NOP and incur a welfare gain from the consumption of the GM-free organic product. This welfare gain is represented by the vertically hatched area in Figure 5. The net effect of the NOP on the aggregate consumer welfare is ambiguous under this scenario and depends on the relative magnitude of the welfare gains and losses. Interestingly, under this scenario, the net welfare effects of the NOP can be positive even though the market share of the product most valued by consumers (the organic product) decreases. Obviously, if the increase in the price of the organic product under the NOP is high and such that the U* utility schedule lies below the U„ utility schedule for all values of k, the NOP will have an unambiguous negative effect both on the market share of the organic sector and on aggregate consumer welfare. This outcome is not very plausible, however; had the organic sector anticipated such a high increase in costs because of the NOP, it would never have lobbied for its establishment. The market and consumer welfare effects of the NOP have been examined for consumers that are uniformly distributed in terms of their aversion to interventions in the production process. The implications for the analysis from relaxing this assumption are rather obvious. If, for instance, the distribution of consumers within the unit line is skewed towards high values of aversion (i.e., relatively more consumers are opposed to interventions in the production process), the market and consumer welfare effects of the NOP would be magnified. The reverse will occur under a distribution of consumers skewed towards low levels of aversion to interventions in the production process. 5
Concluding Remarks
The chapter examined the effects of the new national organic standards of the NOP on the markets for organic, GM and conventional food products. Specifically, the chapter examined the effect of the NOP on consumer purchasing decisions and welfare under the current no labeling of GMPs regime. A simple vertical product differentiation model was developed to account for heterogeneous consumers that differ in their willingness to pay for products with different levels of interventions in their production process. The analysis focused on processed food products, where both the physical characteristics and the process attributes of the available products (i.e., organic, GM, conventional) are indistinguishable to consumers. In such a case, consumers must rely entirely on product labels for informed consumption decisions. One of the implications of the NOP is that it turned the previously ambiguous - in terms of the information it revealed about the presence or absence of GM ingredients - organic label into a GM-free label. Analytical results show that the nature and magnitude of the market and welfare effects of the NOP on the organic and conventional-GM sectors and on
34
consumer welfare depend on the level of consumer aversion to interventions in the production process, the market share of the GM product in the total production of the non-labeled product (which determines the probability that the non-label product consumed will be GM), the level of consumer uncertainty regarding the content of the organic label prior to the NOP, the distribution of consumer preferences and the effect of the NOP on the price of the organic product. The results suggest that, as long as there is no price increase due to the NOP, the introduction of national organic standards results in an unambiguous increase in both the market share of the organic sector and the aggregate consumer welfare. When the new standards cause the price of the organic product to rise, the market and welfare effects of the NOP are ambiguous. For relatively high price increases and small enhancement in utility from the consumption of the organic product, the NOP is shown to benefit the conventional-GM sector (by reducing the market share of the organic product) while causing consumer welfare to fall. Interestingly, under certain combinations of price increases and utility enhancement values, while the NOP causes the market share of the organic product - which under the present framework of analysis is valued the most by consumers - to fall, it causes aggregate consumer welfare to rise. The framework of analysis developed in the present study can be utilized, with certain modifications, to analyze the effects of the NOP on markets for fresh produce. In fresh product markets, the physical characteristics of the different product forms (i.e., organic, GM, conventional) may differ and may reveal information about the product's process attributes. In this case, the use of a horizontal rather than a vertical product differentiation model might be more appropriate for capturing heterogeneous consumer preferences. The study of the economic implications of the new organic standards of the NOP in fresh product markets is the focus of future research. References 1. Caswell J.A. Should Use of Genetically Modified Organisms be Labelled? AgBioFomm 1 (1998) pp. 22-24. 2. Crespi J.M., and S. Marette. 'Does Contain' vs. 'Does Not Contain': How Should GMO Labeling Be Promoted? European Journal of Law and Economics (forthcoming). 3. ERS (Economic Research Service). Organic Food Industry Taps Growing American Market, USDA, ERS: Agricultural Outlook/October 2002. Retrieved from the World Wide Web: http://www.ers.usda.go\7publications/agoutlook/oct2002/ao295b.pdf. 2002. 4. ERS (Economic Research Service).U.S. Organic Farming in 2000-2001: Adoption of Certified Systems. Retrieved from the World Wide Web: http://www.ers.usda.gov/publications/aib780.
35 5. FAO. Organic Agriculture. Retrieved from the World Wide Web: 6. Fulton M , and K. Giannakas. Inserting GM Products into the Food Chain: The Market and Welfare Effects of Different Labeling and Regulatory Regimes. American Journal of Agricultural Economics (forthcoming). 7. Giannakas K. Information Asymmetries and Consumption Decisions in Organic Food Product Markets. Canadian Journal of Agricultural Economics 50 (2002) pp. 35-50. 8. Giannakas K., and M. Fulton. Consumption Effects of Genetic Modification: What if Consumers are Right? Agricultural Economics 27 (2002) pp. 97-109. 9. Hartman Group. The Organic Consumer Profile, A National Study Conducted by the Hartman Group, January 2000. http:/www.fao.org/unfao/bodies/COAG/COAG15/X0075E.htm,2002. 10. Mussa M., and S. Rosen. Monopoly and Product Quality. Journal of Economic Theory 18(1978):301-337. 11. NOP (The National Organic Program). Labeling and Marketing Information. Retrieved from the World Wide Web: http://www.ams.usda.gov/nop/FactSheets/Backgrounder.html. 2003. 12. Runge C.F., and L.A. Jackson. Labeling, Trade and Genetically Modified Organisms (GMOs): A Proposed Solution. Journal of World Trade 34 (2000) pp. 111-122. 13. Thompson, G.D. Consumer Demand for Organic Foods: What We Know and What We Need to Know, American Journal of Agricultural Economics 80 (1998) pp. 1113-18.
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37
DEMAND FOR ORGANICALLY PRODUCED FRUITS AND VEGETABLES IN NORTHERN GREECE EFTHIMIA TSAKIRIDOU Lecturer, Dept. ofAgric. Development, Demokritos University of Thrace, Orestiada, E-mail: [email protected] KONSTADINOS MATTAS
Greece
Professor, Dept. ofAgric. Economics, School of Agriculture, Aristotle University of Thessaloniki, P. O. Box 225, 54006 Thessaloniki, Greece E-mail: [email protected] YORGOS ZOTOS Professor, Division of Business Administration, Dept. of Economics, Aristotle University of Thessaloniki, 54006 Thessaloniki, Greece E-mail: [email protected] This paper attempts to estimate the factors affecting the demand for organically produced fruits and vegetables. Taking into account the rapid growth of the market for organically produced products, and the fact that there has been an upward trend in the interest for healthy products with fewer agrochemicals, the need to identify consumer characteristics that affect the demand of these products has become critical. A randomly selected sample of 660 people was interviewed from March to July 2000 in the prefecture of Thessaloniki. Among them, 316 were actually organic food consumers. Demographic characteristics and consumer attitudes were included in a two-stage single equation probit model, in order to derive the most important factors affecting the consumption of organically produced fruits and vegetables. Results indicated that the most important factors that affect the demand of the two organic product categories are household income, level of education and employment. In addition, positive attitudes towards organic product prices and attributes, attention to food labels and interest in chemical residues found in food products positively determine the demand for organic fruits and vegetables. Income elasticities were found to be significant and positive, indicating an elastic demand for both organic food categories.
1
Introduction
Over the last ten years, consumers have expressed increasing concern about the environmental impacts of products. Food habits and dietary patterns are rapidly changing. Consumers are more informed about health and nutrition, ask for more information and express greater concern about food quality and safety [5,21]. Considerable attention and interest has been paid to foods free of chemical residues and additives, such as organically grown food products. Organic fanning is an environmentally friendly form of agriculture, which has been growing rapidly in recent years. The interest in organic farming has developed due to several problems conventional farming faces, such as increased production cost, limited support of agricultural products, chemical residues and environmental degradation [20]. Organic farming has emerged as a promising and profitable alternative agricultural practice. The main objectives of organic farming
38
are: (i) toreducechemicalresiduesin food and ecosystems; (ii) to create sustainable practices that retain andrestorenutrients to soil; (iii) toreducethe overconsumption of ever-scarce water supplies [21]. Throughout the whole supply chain of organic products there appears to be a number of difficulties both at the production and marketing level. Organic farmers face a lot of constraints, such as insufficient technical knowledge, lack of technical support from experts and labourrequirements.Furthermore, there are barriers to the expansion of the market of organic products, such as temporary, localized supply shortages and surpluses, limited distribution channels, lack of information and availability about organic prices that are unable to cover production cost [11]. Consumers' awareness, perceptions and concerns about the use of agrochemicals in food production can be translated into market behaviour and alter demand for food products in the marketplace towards healthier commodities, such as organic food products [5]. Several studies have been conducted examining consumers' attitudes towards these products. Most of them have measured attitudes regarding the purchase of organic food products [5, 6, 15] and elicit willingness to pay for organic relative to conventional counterparts [1, 2, 3, 7, 16]. However, research related to the identification of factors that explain consumers' demand for organic food products is rather limited [18, 19]. In this paper an attempt is made to analyse organic food consumption patterns and to conduct an analysis of demand for organically produced fruits and vegetables in Northern Greece. For this purpose, a survey was conducted in order to investigate consumers' willingness to participate in the market of these products as well as whether this willingness is translated into consumption. The model applied in the analysis is the two-stage Heckman's model, which is described in the following section. 2
Theoretical Background
The analysis of the factors that affect the demand for various commodities is mainly focused on examining the role of sociodemographic consumer characteristics. These factors cannot be examined by using time-series data, which are mainly considered in demand analysis. In such cases, the use of cross-section primary selected data is taken into account. The use of cross-section data in demand analysis faces a serious difficulty. During the survey conduction, many of the respondents denote a zero expenditure or quantity for the commodity being investigated [13]. This can be attributed to one or more of the following reasons [12]: • the consumer cannot find the specific product in the market, • the price of the product may be prohibitive for the consumer's income, • the survey period may be short,
39
• •
the consumer does not prefer this product due to health, ethical or social reasons, regarding organic food products, the consumer may not be informed about them.
To handle the problem of zero consumption, a number of different models have been developed, the so-called limited dependent variable models [10]. One of these models, which is applied in the present paper is Heckman's model [4]. The basic idea of Heckman's model is that the probability for a consumer to participate in the market of an z'th commodity, is expressed by the value of a dummy variable z* and is determined from factor w. What can be observed however, is whether a consumer participates in the market (z=7) or not (z=0). Under this hypothesis, we can determine the probability for a consumer to participate in a particular market (1st stage). In the second stage, we consider the quantity that is consumed, which is measured only for those who participate in the market [9, 10]. The mathematical expression of Heckman's model is: 1st stage: Probability to participate in the market of the commodity (Probit)
Zi*=y'Wi + Uj
zi = 1,
if zi'>0
(1)
z, = 0, otherwise 2nd stage: Consumption equation (OLS) C*=P'Xi + Ui
Q = 1,
if C,*>0
(2)
Ct is not observed if z, = 0, The formulation of probit model (1) is provided with a dummy variable z*, an error term ui, a mean value equal to zero and a variance equal to one. In addition, wi is the vector of independent variables that affect the participation of the consumer in the market of the product being studied, and y is the vector of parameters that have to be estimated. The formulation of model (2) is provided through another dummy variable C*, with error term e„ mean zero and variance o/. The vector xt includes the explanatory variables, which affect the consumption of the product, taking into account that the consumer has already decided to participate in the market; /? is the vector of parameters to be estimated. The vectors of
40
independent variables w, and x, may or may not include the same set of variables. Heckman's model assumes that the error terms «, and e, are correlated. The correlation coefficient of errors is represented by p [13]. Based on equation (1), the probability for a consumer to participate in the market of organic products is: Prob(zrl)=
(3)
The expected quantity of product a consumer has decided to consume is:
E(ct \zt =]) = p \ + paMr'w, ywy'^i)
(4)
where
Methodology
A survey that utilized a self-administered questionnaire was designed to obtain the data needed for the present study. The metropolitan area of Thessaloniki in Greece consists of 14 municipalities, each of which corresponded to a cluster in the sampling procedure. A total of 660 usable questionnaires were collected. More precisely, all the residents of the above areas were considered as potential consumers of organic fruits and vegetables. Among these consumers, 445 stated that they were aware of organic products, and 316 appeared to be real buyers of organic products. However, only 86 and 114 respondents respectively, reported quantities of organic fruits and vegetables consumed during the six-month period before the conduction of the survey. The majority of the respondents (52.2%) lived in the centre of the city, whereas 30,3% were residents of the West and 17,5% of the East municipalities of the metropolitan area. Most of the respondents were women, married, who hold a
41 university or college degree, were employed either in the public or in the private sector, with an average household size equal to four persons. Moreover, the majority of the survey participants was born in urban areas and share a medium income level. Heckman's two-stage model was implemented in order to estimate the demand of organic fruits and vegetables. The model was selected since only a part of the 316 participated in the survey and in the market of the studied products, denoted the quantities consumed. In the first stage, all the consumers who participated in the market of the studied products were considered. The second stage included only those consumers who denoted the exact quantities of organic fruits (86 observations) and vegetables (114 observations) that were purchased and consumed during a six-month period before the conduction of the survey. The quantity of organic fruits and vegetables each participant in the survey purchased and consumed is examined in the second stage as a dependent variable, whereas income, demographic and sociological characteristics, as well as attitudes towards the environment and organic products are used as independent variables. All the independent variables are assumed to affect the quantity of organic fruits and vegetables that is purchased and consumed. The consumption equation (second stage of Heckman's model) takes the form of double-logarithmic Engel's function: ln(E/m) =a + bln(X/m)
(6)
where E/m is the quantity of a product that is consumed by an individual, and X/m is the household income (or the expenditure). Therefore, the dependent variable (lq,) represents the quantity-consumed logarithm for each product, and the variable linc2, the income logarithm. In this form of function, the income coefficient b represents the value of income elasticity for the product being estimated [14]. The description of the independent variables used in the analysis is provided in Table 1.
42 Table 1: Description of the variables used in the estimation of the model DEPENDENT VARIABLES (consume organic fruits): if YES = 1, otherwise = 0. rql logarithm of the quantity of organic fruits (kgr) that was consumed during the sixLql month period (consume organic vegetables): if YES = 1, otherwise = 0. rq2 logarithm of the quantity of organic vegetables (kgr) that was consumed during the Lq2 six-month period INDEPENDENT VARIABLES (gender): if man = 1, otherwise =0 gender (household size): number of household members = adults + (0.5xchildren < 18 years size old), if < 20 years old = 1, otherwise = 0 agel if 21-30 years old = 1, otherwise = 0 age2 if 31-40 years old = 1, otherwise = 0 age3 if 41-60 years old = 1, otherwise = 0 age4 if > 61 years old = 1, otherwise = 0 age5 annual household income (in million drs) / 6 months linc2 logarithm of annual household income / 6 months lninc2 (education level): if primary school = 1, otherwise = 0 edl (education level): if high school = 1, otherwise = 0 ed2 (education level): if university student - post-graduate studies = 1, otherwise = 0 ed3 (occupation): if Civil Servant = 1, otherwise = 0 rol (occupation): if Private Servant = 1, otherwise = 0 ro2 (occupation): if private enterprise = 1, otherwise = 0 ro3 (occupation): if retired = 1, otherwise = 0 ro4 (occupation): if other occupation = 1, otherwise = 0 ro5 (place of birth): if urban area = 1, otherwise = 0 bill (place of birth): if semi-urban area = 1, otherwise = 0 bir2 bir3 (place of birth): if rural area = 1, otherwise = 0 (eco-awareness): 22-35 = 1, otherwise (0-21) = 0(1 statements) Dl (organic prices): 10-15 = 1, otherwise (0-9) = 0 (3 statements) D2 D3 (organic product attributes): 16-25 = 1, otherwise (0-15) = 0 (5 statements) (health): 7-10 = 1, otherwise (0-6) = 0 (2 statements) D4 (organic products market): if 10-15 = 1, otherwise (0-9) = 0 (3 statements) D5 (attention in food labels): if 4-5 = 1, otherwise =0 XI (interest for chemical residues in foods): if X2>22,5 then X2 = 1, otherwise = 0 X2
However, a brief explanation is needed for dj and Xi. In order for these variables to be used as dummies the following procedure was undertaken: dj variables were used to measure consumer attitudes towards organic products and the environment. For attitude measurement a five-degree Likert scale was used. Respondents were asked to denote the level of agreement or disagreement with 22 statements. Each scale was represented by a number (from 5=totally agree to l=totally disagree). These 22 statements were clustered in five units such as: 'ecological awareness' (7 statements), 'organic product prices' (3 statements),
43
'quality attributes of organic products' (5 statements), 'health and consumption of organic products' (2 statements) and finally 'demand and supply of organic products' (3 statements)11. Variables XI and X2 were derived from the same procedure described above. More precisely, variable XI is derived from the question "pay attention to food labels", and takes the value 1 if the respondent states 'always' (=5) or 'usually' (=4). Otherwise it takes the value 0. Finally, variable X2 (interest in chemical residues in foods) is also a dummy variable, which is derived from the same procedure described for variables dj. The restricted number of observations included in the second stage of Heckman's model lead to the elimination of some variables. Analytically, variables agel (> 20 years old) and age2 (21-30 years old), and variables rol (civil servant) Kca ro2 (private servant) were eliminated and the variables derived were age 12 and rol2, respectively. 4
Results
The reference consumer in the applied demand model either for organic fruits or for organic vegetables is female, over 60 years old, with a high level of education (from university student to post-graduate studies), who owns a private enterprise and was born in an urban area. In the probit equation this reference consumer is represented by the constant term. 4.1
Demandfor organic fruits
According to the results obtained from the analysis, the socioeconomic factors that positively influence the probability for a consumer to participate in the market of organic fruits are household income, education level and occupation. Thus, an increase in income, a consumer that has completed primary education, and has employment is more willing to participate in the market of organic fruits. On the contrary, facts with a negative effect on organic fruit market participation are aged between 41 and 60 years old and have been born in semi-urban areas. As a result, consumers who belong to this class of age and those from semi-urban areas are not willing to participate in the market.
11 For example, when a consumer totally agreed in all the three statements, the maximum value of the unit was 15 (totally agree = 5 X 3 statements). If the respondent was neutral (3= neither agree or disagree) or disagreed (2=disagree, l=totally disagree), the maximum value of the unit for this consumer was 9 (3X3 statements). Therefore, if the summation of the responses was greater than 9 (from 10 to 15), the unit was represented from a dummy variable (i.e d5) that took the value one. Contrarily, if the summation of the statements was from 0 to 9, the dummy variable d2 was equal to zero.
44
Considering variablesrelevantto consumers' attitudes, variables d3 (quality attributes of organic products), XI (attention in food labels) and X2 (interest about chemical residues in food) appear to be statistically significant with a positive sign. This means that consumers who consider organic products to be of better quality compared to their conventional counterparts, those who pay attention to food labels and are interested in the level of chemical residues in food products have a higher probability of participating in the market for organic fruits. The results suggest that the estimated model was capable of making over 74 percent correct predictions on consumers' probability to participate in the market of organic fruits. The estimated log-likelihood ratio is 64.88 and significant at the 0.01 significance level. In addition, the R-square values indicate that the estimated model is statistically valid and fits the data reasonably well (Table 2). Considering the second stage (consumption equation), the majority of independent variables appear to be significant and therefore influence the consumption of organic fruits. Among the socioeconomic consumer characteristics, all the variables included in the model that represent household income, level of education and occupation positively affect the consumption of organic fruits. Therefore, all consumers who hold a primary or secondary education, as well as all employees, or other job occupants, whether they be retired or not (aside from entrepreneurs) consume these products. Socioeconomic factors that negatively affect the consumption of organic fruits are age and place of birth. Therefore, all the respondents aged until 60 years of age and those from semi-urban and rural areas do not consume organic fruits. Variables relevant to consumer attitudes dl (ecological awareness), d2 (organic product prices), d3 (quality attributes of organic products), XI (attention to food labels) and X2 (interest in chemical residues in food) positively influence the consumption of organic fruits. The exception is variable d4 (health and consumption of organic products), which has a negative effect. This means that consumers with ecological awareness, those who are satisfied from the prices of organic products, who consider organic products to be of better quality compared to their conventional counterparts, as well as consumers who pay attention to food labels and are interested in chemical residues in foods consume higher quantities of organic fruits. The R-square value (0.46) is higher than in the probit equation and indicates that the estimated model is statistically valid and fits the data reasonably well (Table 2).
4.2
Demandfor organic vegetables
Results obtained from the model estimation for organic vegetables indicated that the socioeconomic factors that positively influence the probability for a consumer to
45
participate in the market of organic vegetables are age, household income and occupation. Thus, consumers between 41 and 60 years old, with a higher income, as well as a retired consumer, are more willing to participate in the market of organic vegetables. Considering variables relevant to consumers' attitudes, variables d2 (organic product prices), d5 (satisfied from the market of organic products) and XI (attention to food labels) are statistically significant with a positive sign. This means that consumers who consider organic product prices reasonable, are satisfied from the market of these products and those who pay attention to food labels have a higher probability of participation in the market of organic vegetables. The results suggest that the estimated model was capable of making over 74.3 percent correct predictions on consumers' probability to participate in the market of organic vegetables. The estimated log-likelihood ratio is 93.51 and significant at the 0.01 significance level. In addition, the R-square values indicate that the estimated model is statistically valid and fits the data reasonably well (Table 2). Considering the second stage (consumption equation), the majority of independent variables appear to be significant and therefore influence the consumption of organic vegetables. Among the socioeconomic consumer characteristics, age, household income, level of education and occupation positively affect the consumption of organic vegetables. Therefore, consumers aged between 31 and 60 years old, with a higher income, all consumers from primary education until graduates from high schools, as well as retired consume these products. Socioeconomic factors that negatively affect the consumption of organic vegetables are gender and place of birth. Therefore, men and consumers from semiurban and rural areas do not consume organic vegetables. Variables relevant to consumer attitudes d2 (organic product prices), d3 (quality attributes of organic products), d5 (satisfied from the market of organic products), XI (attention to food labels) and X2 (interest in chemical residues in food) positively influence the consumption of organic vegetables. This means that consumers who are satisfied from the prices of organic products, those who consider organic products to be of better quality compared to their conventional counterparts, those who are satisfied from the market of these products, as well as consumers who pay attention to food labels and are interested in chemical residues in foods, consume higher quantities of organic vegetables. The R-square value (0.37) is higher than in the probit equation and indicates that the estimated model is statistically valid and fits the data reasonably well (Table 2).
46
4.3
Income elasticities for organic fruits and vegetables
Income elasticities for both organic fruits and vegetables were directly estimated in the second stage of the Heckman's model, where the double-logarithmic function form of Engel's curve directly provides the value of income elasticity. Therefore, the value of coefficient b equals the value of income elasticity. Analytically, for organic fruits the value of income elasticity equals 2.22, indicating an elastic demand for this product category. Similar is the value of income elasticity for organic vegetables (2.61), which means that the demand for organic vegetables will significantly increase as the income increases. The values of elasticities for organic fruits and vegetables indicate that both products are luxury commodities.
47 Table 2: Model estimation for organic fruits and vegetables Organic Fruits Consumption Equation
tratio
Probit Equation
t-ratio
Consumption Equation
t-ratio
-0.015477
0.077 15
-0.23848
-1.2231
-0.39780
-2.144
-0.10329
0.895 1
0.007294 6
0.073187
0.030071
0.3313
0.14858
0.27484
0.080416
0.2001
0.50818
2.3589
1.0471
3.641
0.073524
0.29084
0.35661
1.573
3.684
1.9122
5.5007
2.6067
4.773
2.085
0.18637
1.0144
0.57649
3.355
Variables
Probit Equation
GENDER
-0.10886
SIZE
-0.066527
AGE12
-0.25155
-1.0933
-0.45015
AGE4
-0.54227
-2.3976
-1.3143
AGE3
-0.84607
-1.2998
-2.4352
LINC2
1.2992
3.9150
2.2188
ED2
0.20094
1.0317
0.53331
t-ratio
0.55028
Organic vegetables
0.64740
1.666 2.792 2.530
EDI
0.81067
1.9985
1.3308
1.617
0.24971
0.67902
0.51669
1.538
R05
0.36919
0.90403
0.84469
1.755
0.20586
0.54959
0.16838
0.5299
R012
0.S3815
1.5110
1.0610
2.018
0.19159
0.58925
0.17460
0.6225
R04
0.65280
1.0938
1.7718
2.566
0.82105
1.4041
1.6689
3.447
BIR3
-0.23273
-1.0344
-0.59611
-0.20208
-0.93816
-0.56599
-2.700
BIR2
-0.28989
-1.3740
-0.66901
-0.26769
-1.3399
-0.61362
-2.874
Dl
0.30062
0.84682
1.6399
3.469
0.018804
0.060441
0.21394
0.7392
D2
0.20380
1.0679
0.55832
2.408
0.33604
1.7618
1.0611
4.904
D3
0.30288
1.4632
0.53698
1.538
0.16964
0.85632
0.51079
2.609
D4
-0.23595
0.24197
0.47060
-0.033812
DS
0.42570
1.316
0.77998
1.5009
0.86235
2.285
XI X2
0.45170
2.075
2.645
0.06381
0.96987
0.59270
0.33581
1.8127
0.57862
1.783
0.36937
2.0596
0.74298
2.987
0.62487
2.6640
1.6766
3.010
0.26476
1.2730
0.43407
2.009
3.1350
2.619
3.4460
4.129
-42.024
-4.395
LI CONST ANT
-1.5629
2.216
-2.3069
-3.0867
-36.411
3.246
-2.5868
-3.4691
Model stat sties (organic fruits)
Model statistics (organic vegetables)
Probit Equ ation
Probit Equation
LR = 64.88 lnL = -152.54 R2 (Madda la) = 0.18 R2 (Cragg - Uhler) = 0.27 R2 (McFadden) = 0 17 % of right predictions = 74%
Consump tion Equation
R2 = 0.46 lnL = -66 59
LR = 93.51 lnL = -159.86 R2 (Maddala) = 0.26 R2 (Cragg-Uhler) = 0.3 5 R2 (McFadden) = 0 23 % of right predictions = 74.3%
Co nsumption I.quation
R2 = 0.37 In! = -96.12
48
5
Summary and Conclusions
This paper provides an empirical examination of the factors affecting the demand for organic fruits and vegetables in Northern Greece. Based on primary data collection, the survey attempted to identify the profile of actual consumers of these products, applying Heckman's model. Factors like household income, gender, age, level of education, occupation, as well as attitudes towards the environment and organic products were considered as independent variables in the model and their influence in the probability of market participation as well as in the quantity consumed, was measured. Results revealed the most important factor that affects the choice of a consumer to participate in the market of organic fruits and vegetables is the level of household income. Consumer characteristics that have a positive effect on the probability to participate in the market of organic fruits are education and occupation. Factors relevant to attitudes towards the environment and organic products that positively influence consumer choice to participate in the market of organic fruits are satisfaction from the quality attributes of organic products, attention to food labels and interest in the existence of chemical residues in food products. Factors that were found to have a positive effect on the consumption of organic fruits are, level of education, occupation, ecological awareness, satisfaction from the quality attributes of organic products, satisfaction from the prices of organic products, satisfaction from the market of organic products, attention to food labels and interest in chemical residues in foods. On the contrary, age and place of birth negatively affect the consumption of organic fruits. Consumer characteristics that have a positive effect on the probability to participate in the market of organic vegetables are age and occupation. Factors relevant to attitudes towards the environment and organic products that positively influence consumer choice to participate in the market of organic vegetables are positive attitudes towards organic product prices, satisfaction from the market of organic products and attention to food labels. Factors that were found to have a positive effect on the consumption of organic vegetables are age, level of education, occupation, positive attitudes towards organic product prices satisfaction from the market of organic products, attention to food labels and interest in chemical residues in foods. On the contrary, place of birth negatively affect the consumption of organic vegetables. The income elasticity estimated, reveals that both organic fruits and vegetables are classified as luxury goods with an elastic demand. This means that an increase of consumer incomes will have positive effects for the demand of organic fruits and vegetables, despite the higher prices of these products in comparison to their conventional counterparts.
49
References 1. Bagnara, G.L. (1996). Brand Name and Added Value in Horticultural Products : Analysis of Consumer Perception. Proceedings of the Fifth Joint Conference on Agriculture, Food and the Environment. Working Paper WP964. 2. Beharrell, B. and J.H. MacFie (1991). Consumer Attitudes to Organic Foods. British Food Journal, 93(2), 25-30. 3. Buzby, J.C, J.R. Skees and R.C. Ready (1995). Using Contingent Valuation to Value Food Safety: A Case Study of Grapefruit and Pesticide Residues. In Valuing Food Safety and Nutrition, edited by J A. Caswell. Westview Press, Boulder, Colorado. 4. Heckman, J. (1979). Sample Selection Bias as a Specification Error, Econometrica, 47, 153-161. 5. Huang, C.L. (1996). Consumer preferences and attitudes towards organically grown produce. European Review of Agricultural Economics, 23, 331-342. 6. Jolly, D.A., H.G. Schutz, K.V. Diaz-Knauf and J. Johal (1989). Organic Foods: Consumer attitudes and use. Food Technology, November, 60-66. 7. Lai, Y., W. Florkowski, C. Huang, B. Bruckner and I. Schonhof (1997). Consumer Willingness to Pay for Improved Attributes of Fresh Vegetables: A Comparison between Atlanta and Berlin. Paper submitted to the WAEA Annual meeting, July 13-16, Reno, NV. 8. Lazaridis, P. (1999). The Structure of the Demand for Basic Foods with Horizon 2010. in N. Maravegias, "The Greek Agriculture towards 2010", Papazisi eds., Agricultural University of Athens, 79-155 (in Greek). 9. Lazaridis, P. (2000). Demand Functions with Insufficient Data of Consumer Expenditure: An Application in the Demand for Prepared Meals. Proceedings of the 5th Panhellenic Conference of Agricultural Economics, Stamoulis eds, Athens, 582-598 (in Greek). 10. Maddala, G. (1983). Limited Depended and Quantitative Variables in Econometrics. Cambridge: Cambridge University Press. 11. Park, T. A. and L. Lohr (1996). Supply and Demand Factors for Organic Produce. American Journal Agricultural Economics, 78, 647-655. 12. Pudney, S. (1989). Modelling Individual Choice, the Econometrics of Corners, Kinks and Holes. New York: Basic Blackwell Inc. 13. Sana, A., O. Capps, Jr and P. J. Byrne (1997). Calculating marginal effects in models for zero expenditures in household budgets using a Heckman-type correction, Applied Economics, 29, 1311-1316. 14. Sapounas, G. (1985). Applied Demand Analysis. Theory, Methods and Implications. Athens: Special Scientific Studies of Agricultural Bank of Greece (in Greek).
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15. Schutz, H.G and O.A. Lorenz (1976). Consumer preferences for vegetables grown under 'commercial' and 'organic' conditions. Journal of Food Science, 41,. 16. Siikamaki, J. (1996). Consumer preferences for using pesticides in agriculture - a contingent valuation approach. Paper presented at the 8th Conference of EAAE, Edinburg, 3-7 September, 1996. 17. Taniguchi, K and W.S. Chern (2000). Income Elasticity of Rice Demand in Japan and Its Implications: Cross-Sectional Data Analysis. Paper prepared for 2000 AAEA meeting. 18. Thompson, G. D. (1998). Consumer Demand for Organic Foods: What we know and what we need to know. American Journal of Agricultural Economics, 80(5), 1113-1118. 19. Thompson, G. D. and J. Kidwell (1998). Explaining The Choice Of The Organic Produce: Cosmetic Defects, Prices And Consumer Preferences, American Journal of Agricultural Economics, 80, 277-287. 20. Tzouramani, I., Ch. Fotopoulos and K. Mattas (1996). Supply Chain Management of Greek Organic Agricultural Products, Paper presented at the 70th EAAE Seminar "Problems and Prospects of Balkan agriculture in a restructuring environment", Thessaloniki 9-11 June, 2000. 21. Zotos, Y., P. Ziamou and E. Tsakiridou (1999). Marketing Organically Produced Food Products in Greece: Challenges and Opportunities. Greener Management International, 25(Spring), 91-104.
51
TRENDS IN THE MARKETING OF ORGANIC GRAINS AND OILSEEDS IN THE U.S. C. L. REVOREDO Department of Agricultural and Applied Economics, College of Agricultural and Environment Sciences, Griffin Campus, University of Georgia, Griffin, GA 30223-1797. USA E-mail: revoredo&grifftn.
usa. edit
This paper analyzes the marketing of organic grains and oilseeds in the United States in order to assess their future trends. Grains and oilseeds are interesting because they are inputs in the production of final goods (e.g., edible oils, pasta, flour, bread, breakfast-cereals, animal feed, etc.). Therefore, observed price premiums with respect to similar conventional products at the farm level are related to price premiums observed at the final goods markets. Available information indicates that both supply and demand for organic products will continue growing, due to the substantial potential demand and to the entry of mainstream processing firms in the production of organic products. This is also confirmed in the simulation results, which also indicate that investments in marketing infrastructure for organic products should reduce marketing margins and observed price premiums.
1
Introduction
The purpose of this paper is to analyze the marketing chains of organic grains and oilseeds in the United States in order to assess their future trends. However, since marketing costs are associated with the transacted volume, the paper also addresses the trends in the supply and demand for grains and oilseeds and their processed goods. Grains and oilseeds are interesting cases because, in contrast to fresh vegetables and fruit, they are "raw materials" for the production offinalgoods (e.g., edible oils, pasta, flour, bread, breakfast-cereals, etc.). Therefore, because of this productive configuration, observed price premiums at the farm level reflect price premiums observed at thefinalgoods markets. Most of the information used in this paper is based on reports of organic associations or interviews with farmers or processors engaged in handling organic products. There exists little statistical information about how the marketing of organic grain and oilseed products operates. This is probably due to the fact that although the organic market has been growing at a fast pace, it still represents a small share of the conventional market. The fact that an important part of the marketing is transacted by direct contact between sellers and purchasers renders it difficult to collect information about marketing channels and price premiums at each stage of the marketing chain. The paper starts with a description of the supply, demand and the marketing of organic grain and oilseeds and their processed products. The emphasis is not only to
52
present the main characteristics but also to point out elements that can affect the organic market in the future. In the next section, a partial equilibrium simulation model is built in order to assess probable trends of the organic market. Since at the retail level organic products may compete, at least for some consumer segments, with conventional products, the model considers the interaction between conventional and organic foods. In the subsequent section, the model is used to simulate the effect on price premiums and marketing margins, of increases in the planted area with organic products, a reduction in the costs of fanning organic products, a reduction in the costs of processing organic products, and expansion in the demand for organic products. Finally, somefinalremarks are presented. 2
Organic and Conventional Grain and Oilseed Markets in the US
2.1 Supply One of the constraints for the expansion of organic markets is the small supply of organic grain and oilseeds. This creates two kinds of problems: first, neither the farmers nor the processors can take advantage of the scale economies to reduce their production and marketing costs. Second, a low level of production cannot ensure the sufficient quantity of homogenous quality products as required by processors. In this section we analyze the supply of raw materials (i.e., farmers' output of organic grains and oilseeds) and the supply of organic processed goods. 2.1.1
Raw materials
Table 1 presents information about the planted area for organic and conventional grains (corn, oats, and wheat) and soybean. A planted area with organic grains and oilseeds represents a small fraction of the planted area for similar conventional products. In 2001, each organic crop represented less than 1 percent of the total planted area. However, one can observe that since 1995 these shares have been steadily growing due to both the fast growing pace of the organic farming and the decrease of the conventional production. According to Greene and Kremen [9], based on 2001 statistics, North Dakota is the state with the largest planted area with organic grains (64 thousand acres); however, if we analyze by crop, Minnesota leads in planted area with corn (19 thousand acres) and Montana in wheat (39 thousand acres). With respect to organic soybeans, Minnesota and Iowa are the two leading states with 30 and 27 thousand acres, respectively.
53 Table 1. Total acreage planted for selected organic grains and oilseeds 1995-2001 (Acres)
Corn Total acreage Conventional Organic Share organic/total
1995
1997
2000
2001
71,245,000 71,212,350 32,650 0.05
80,227,000 80,184,297 42,703 0.05
79,545,000 79,467,088 77,912 0.10
75,752,000 75,658,449 93,551 0.12
12.6 30.8
-0.9 82.5
-4.8 20.1
5,169,000 5,139,252 29,748 0.58
4,404,000 4,374,229 29,771 0.68
4,403,000 4,369,746 33,254 0.76
-18.7 124.5
-14.9 0.1
-0.1 11.7
70,850,000 70,767,857 82,143 0.12
74,496,000 74,359,929 136,071 0.18
74,105,000 73,930,533 174,467 0.24
13.2 74.0
5.1 65.7
-0.6 28.2
70,989,000 70,863,313 125,687 0.18
62,529,000 62,347,738 181,262 0.29
59,617,000 59,422,360 194,640 0.33
2.6 30.8
-12.0 44.2
-4.7 7.4
(%) Conv. growth rate (%) Org. growth rate (%) Oats Total acreage Conventional Organic Share organic/total
6,336,000 6,322,750 13,250 0.21
(%) Conv. growth rate (%) Org. growth rate (%) Soybeans Total acreage Conventional Organic Share organic/total
62,575,000 62,527,800 47,200 0.08
(%) Conv. growth rate (%) Org. growth rate (%) Wheat Total acreage Conventional Organic Share organic/total
69,177,000 69,080,900 96,100 0.14
(%) Conv. growth rate (%) Org. growth rate (%)
Source: Green and Kremen [11], NASS-USDA [13]
54
There is no official data about US average yields obtained in organic fanning. Information about yields of organic grains and oilseeds comes from experimental studies from several U.S. universities (see Welsh [17] for a comparison between these studies). Table 2 presents the results from the South Dakota State University experiment station. These results were selected because they compare yields obtained in organic and conventional crops. The results show that, except in the case of corn where organic yields were 20 percent higher than the conventional ones, yields from organic and conventional agriculture are very similar. However, as pointed out by Welsh [17], based on the existing evidence, conventional farming systems seem to produce higher yields in areas of higher precipitation (e.g., Corn Belt), while organic farming systems do better in drier areas (e.g., Great Plains). Table 2. Crop yields by study and cropping system, South Dakota State University Experiment Station Trials ,1986-92 averages
Unit Study 1 Corn Soybeans Spring wheat Oats Alfalfa Acres per crop (average)
Bushel/acre Bushel/acre Bushel/acre Bushel/acre Metric tons/acre
Study 2 Soybeans Spring wheat Barley Oats Acres per crop (average)
Bushel/acre Bushel/acre Bushel/acre Bushel/acre
Conventional
Organic
76.2 26.6 55.1 4.6 127.0
29.6 41.5 58.5 135.0
91.2 27.0 39.8
162.0
28.6 39.5 63.0 162.0
Source: Smolik et al [14], taken from Welsh [17].
While for some farmers the production of organic crops is associated with a lifestyle or concern about environment, expansion of organic agriculture is certainly associated with the profitability obtained with organic crops. According to Welsh [17], there is no conclusive evidence that organic farming is more or less profitable than conventional agriculture. However, there are several issues that may affect the profitability of organic farming and therefore its adoption by farmers engaged in conventional agriculture. First, with respect to the acreage destined to a specific crop, as pointed out by Greene [7], organic farmers grow a diversity of field crops because of the role of crop rotations in controlling weeds and maintaining fertility in organic farming systems. This may reduce yields and potential output in
55
comparison with the conventional agriculture. Second, in terms of revenue, in the U.S., transition from conventional to organic agriculture takes three years, and producers normally do not obtain the premium paid to organic products before that period [8]. Third, in terms of fixed costs, organic farmers have to face the cost of certification, which includes not only the certification fee but also keeping records of input use and other farm activities. However, it should be noted that currently this cost is partially subsidized by USD A [5]. Fourth, in terms of variable costs, organic agriculture requires more labor force and diesel fuel than conventional agriculture, however, it does not require chemical inputs [5]. 2.1.2
Processed products
Organic processed products (e.g., flour, bread, edible oil, etc.) are certified as organic when they are prepared using at least 95 percent of organic ingredients. However, in the absence of some commercially organic ingredients, conventional ingredients can be used. When the product contains 70 to 95 percent of organic ingredients, processors may label the organic ingredients on the package [4]. The organic food processing industry includes firms (manufacturers, millers, distributors, and exporters) that deal with both conventional and organic products and those firms that only process organic products. An example of the first kind of firm is General Mills, which produces organic corn and wheat cereals. It also represents a mainstream firm that expanded its operations into the organic sector. On the other side of the spectrum, Eden Foods is an example of the second kind of firm, processing and retailing organic foods since the late of 1960s [4]. In general, the operation of firms producing organic processed products is similar to that of firms processing conventional agricultural products. However, the level of production and the need to maintain organic products free of non-organic components impose higher costs to the organic processing industry. First, as pointed out by Heid[ll], for the case of grain milling, a substantial part of the processing costs are variable costs. These costs decline relative to the fixed costs as the mill capacity increases. Therefore, given the low scale of production of organic processing, its costs must be higher than conventional processing costs. Second, according to Greene and Dobbs [8], due to insufficient raw material organic manufacturers sometimes have to wait longer than they would have liked in order to process by schedules. Third, a number of plants process both conventional and organic grains and edible beans. According to Dimitri and Greene[4] organic and conventional grown ingredients must be kept separate, and the organic ingredients must be stored in containers that do not compromise the organic nature of the food. Both organic and conventional ingredients must not be treated with ionizing radiation, excluded methods, and synthetic methods. The techniques used by processors to prevent commingling of organic and non-organic products are costly [8].
56
2.2 Demand The scarce information for organic products shows that sale of grain and oilseed products have been growing at a fast pace. Overall, according to Harper [10], approximately 50 percent of the US consumer base appears to be interested in organic products, these being the same people that are most likely to be purchasing organic food products in the future. This population can be divided into four groups. The first group includes consumers that have historically been the "core" believers in organic food. They are highly educated, mostly 'baby boomers' and are passionate about organic and the environmental benefits it provides. Great taste has historically not been one of their top concerns. The second group is well-educated, affluent, mostly urban professionals that are focused on their well being and the benefits that a food may bring to their health. The third group is much more demographically reflective of the US population in general. They are more family oriented, shop in traditional supermarkets and are interested in the impact of chemicals and pesticides on the environment and the food supply. They are willing to pay a little more for organic food but are not willing to go out of their way to purchase organic food. This segment is probably more oriented to traditional tastes and the organic food must be provided to them in the convenient form at the supermarkets they frequent. The last group is composed of consumers that are single and young. They are interested in the environment but organic may or may not be on their radar as a factor leading to improvement of the environment. It is important to note that for the grains and oilseeds sector, the export market is also an important alternative. Thus, in the case of grains part of the US production is exported to Europe, UK being the major importer. In the case of soybeans the major importer is Japan, and these imports, as pointed out by Bertransen and Dobbs[l], have important effects on the price premiums between organic and conventional soybeans in the US. Another information about the demand for grains and oilseeds comes from Welsh [17]. He quotes O'Neil, who interviewed nine grain millers and eight manufacturers of grain-and-soy-based foods in 1997, to discern the potential for organic grains as an economic opportunity for U.S. farmers. She found that the organic grain market has been growing 10 to 20 percent annually and should continue to do so. Some of the interviewed persons believed that demand for organic grain would double or triple in the next few years. For instance, organic soybean markets were expected to continue its growth fueled by medical research in the benefits of soy-based foods. She also determined that markets are developing for organic grain by-products such as corn syrup, alcohol, germ, and bran, and the demand is increasing for organic livestock feed. [17]
57
2.3
Marketing issues
The market for organic foods is changing rapidly with US sales of organics growing at over 20 percent a year. Conventional processors are looking at organic foods as an attractive niche. The purpose of this section is to provide information about the characteristics of the marketing process at the farm level and at the processing firm level, and also about the price premiums observed for organic raw materials and for processed products. 2.3.1
Marketing of raw materials
The small scale operations related to the production of organic products in comparison with conventional products create problems for the matching of buyers and purchasers. In this sense, organic farmers, in the absence of traditional marketing channels, have to create their own network to market their product. According to Born and Sullivan [2], marketing organically produced grains is different than marketing conventional grains. While for the latter farmers can move their entire crop to elevators, in the case where the marketing of organic production is done usually by means of contracting with a specific buyer. In this sense, the organic market consists of a multitude of buyers with individual supply needs, from small to very significant quantities. This is also the situation for the marketing of soybeans [5]. It is important to note that under the described situation the marketing skills required by organic producers are somewhat different as well. While conventional grain producers can increase their returns by taking advantage of market fluctuations, organic producers tend to get better returns by taking advantage of knowledge, experience, and relationships. Thus, experienced producers know where markets are, know how to negotiate, and have established themselves as reliable suppliers through long-term relationships with buyers [2]. Table 3 presents the main channels for the marketing of grains and oilseeds. Table 3. Marketing chain for organic grains and oilseeds
Farmer - cooperative - cleaner - manufacturer - distributor Farmer - cleaner - manufacturer - distributor Farmer - cooperative - cleaner - broker - manufacturer - distributor Farmer - marketing agent (often contracts with farmer, and cleans) - manufacturer Farmer - cooperative - processor of feed grain - distributor - livestock producer Farmer - processor of feed grain - distributor - livestock producer Source: Dimitri and Greene [4]
58
2.3.2
Marketing of processed products
There are two basic channels for processed goods as shown in table 4. In the first case a distributor who acts as a middleman, moves processed products from manufacturer to retailers. In the second scenario, the manufacturer moves the products directly through to retailers [4]. One aspect that increases the cost of marketing organic products in general is to transport the processed good through the chain avoiding any kind of contamination. Table 4. Marketing chain for processed products
Farm - manufacturer - wholesaler - retailer Farm - shipper/procurer - manufacturer - wholesaler - retailer Source: Dimitri and Greene [4] It is important to note that not only are more conventional manufacturing firms expanding their operations into the production of organic goods but organic associations are also joining conventional supermarkets to promote organic products. An example of this effort is the campaign between Organic Alliance (St. Paul, Minnesota) and the national supermarket chains A&P and Kroger, Co. According to Dimitri and Greene [4], in the year 2000 more organic food was purchased in conventional supermarkets than in any other venue. That is, nearly half of the US$ 7.8 billion spent in organic foods was purchased in conventional retail outlets. As shown in table 5, except for purchases of organic oil, conventional stores represent a significant share of the sales. Table 5. Shares of selected processed organic food sales by venue 1/ (%)
Pasta Health/Natural food store Conventional store
Cereal 59 41
Oil 64 31
Soy 75 11
21 77
Notes: 1/ The percentages do not sum 100 due to sales in other venues not included. Source: Dimitri and Greene [4].
With respect to futures trends in the marketing costs of organic processed products, Greene and Dobbs [8] point out that organic processors seemed attuned to industry trends and had potential expansion plans ready. 2.3.3
Price premiums in raw material and processed products
Table 6 presents information on the premiums paid for organic corn, soybeans, wheat, and oats. Prices for these commodities are consistently higher than their conventionally grown counterparts.
59
According to Bertransen and Dobbs [1], unlike the case of other commodities, changes in organic soybean prices did not tend to mirror changes in conventional soybean prices. According to them, this may be attributed to the strong influence of the Japanese market on the demand for organic soybeans. It is important to note that although the table shows significant price premiums for all the crops, farmers can not always sell their organic products at premium prices. These prices can vary widely from one year to the next, and thus a rapid and substantial expansion in organic acreage of particular crops could cause prices to decline. Born and Sullivan [2] point out that organic premiums are unstable because the organic market, like all specialty markets, is small and easily oversupplied. Table 7 presents information about price premiums for processed products. In contrast to table 6, which accounts for several years of data, premiums in table 7 correspond only to one month, July 2003; therefore, they should be considered only as referential. Table 6. Price premiums for selected organic grains and oilseeds 1995-2002 (US$/Bushel) 1995 1996 1997 1998 1999 2000 2001 2002 Com Price Conventional Organic Absolute premium Relative premium
2.38
3.49
2.30
1.90
1.61
1.61
1.65
1.96
3.46 1.08
5.06 1.57
4.50 2.20
4.16 2.26
3.74 2.13
3.51 1.90
3.01 1.36
3.96 2.00
45.38
44.99
95.65
118.95
132.30
118.01
82.42
102.04
1.54
1.95
1.66
1.25
1.07
1.18
1.45
1.99
1.97 0.43
3.17 1.22
2.96 1.30
2.43 1.18
2.04 0.97
2.00 0.82
2.00 0.55
3.64 1.65
27.92
62.56
78.31
94.40
90.65
69.49
37.93
82.91
(%) Oats Price Conventional Organic Absolute premium Relative premium
(%)
60 Table 6. (cont'd) Soybeans (Clear Hilum, cleaned) Price 3.49 2.38 Conventional Organic 3.46 5.06 1.57 Absolute 1.08 premium 45.38 44.99 Relative premium
2.30
1.90
1.61
1.61
1.65
1.96
4.50 2.20
4.16 2.26
3.74 2.13
3.51 1.90
3.01 1.36
3.96 2.00
95.65
118.95
132.30
118.01
82.42
102.04
(%) Spring wheat Price Conventional Organic Absolute premium Relative premium
4.17
4.92
3.74
3.28
2.86
2.79
2.93
3.50
6.09 1.92
7.67 2.75
6.49 2.75
5.69 2.41
5.49 2.63
5.72 2.93
5.75 2.82
5.54 2.04
46.04
55.89
73.53
73.48
91.96
105.02
96.25
58.29
(%) Source: Based on Streff and Dobbs [2003] Table 7. Price premiums for organic processed products, July 2003
Product Flour Unbleached white White Whole wheat - all purpose Whole wheat - pastry Whole wheat - bread Buckwheat Rye Soy Pasta Alphabet Noodles Couscous (whole wheat) Elbows Lasagna Linguine Spaghetti
Unit
Prices (US$) Organic Conventional
Premiurn %
lLb. lLb. lLb. lLb. lLb. lLb. lLb. lLb.
2.13 1.32 1.25 1.28 1.32 1.95 1.95 1.95
0.54 0.54 0.54 0.38 0.32 1.13 0.54 1.14
295.9 145.4 132.3 238.6 315.1 73.3 262.5 71.5
lLb. lLb. lLb. ILb. lLb. ILb.
2.19 2.55 2.39 2.49 2.99 2.09
0.49 2.15 0.66 1.49 0.99 0.99
346.9 18.6 260.3 67.1 202.0 111.1
61 Table 7. (cont'd) Bread Whole Wheat 1 Lb. 1.99 1.79 Oil Canola 0.24 0.04 1 Oz. Fl. Soybean 0.13 0.06 1 Oz. Fl. Sunflower 0.23 0.03 1 Oz. Fl. Safflower 0.36 0.09 1 Oz. Fl. 0.16 Extra virgin olive 0.77 1 Oz. Fl. Animal feed 0.18 0.06 Whole com lLb. 0.17 Whole oats lLb. 0.11 Source: Own elaboration, based on prices for organic products quoted in the Internet and prices for similar conventional products quoted in Kroger Co.
11.2 446.0 115.1 636.3 287.3 383.9 218.2 50.0
Although all the selected processed products present a price premium for organic products, the range of variation is high, going from 11 percent for the whole bread to 446 percent for sunflower group. Among all the selected groups, oil is the one that presents higher premiums (all of them above 100 percent). While the difference in price may be explained by the higher cost of the main organic raw material, certainly, one should consider also other costs associated with marketing and processing organic products.
3
Modeling the Interaction of Organic and Conventional Markets
To analyze the expansion of organic agriculture due to several factors, we require a model that captures the interaction of organic and conventional markets for the case of grains and oilseeds. Let us consider the following simple model. There are two representative consumers (named 1 and 2). While consumer type 1 only consumes organic foods, consumer type 2 may consume both organic and conventional foods. In addition, consumer types have the following utility functions, where Q°and Q c are the quantities consumed of organic and conventional good, and §'s and i)/s are utility function parameters. U 1 (Q)=
C
W Vi -Q° 2 + 2^2
Q°
Q c +M>3 -Q c 2
' v J Under the usual assumption for partial equilibrium analysis that the consumers' income is large enough, one can obtain the demand for each good for each
62
consumer by solving the following maximization problem, where P is the price of the organic product and P the demand for the substitute conventional product. Max B = U J ( Q ) - P 0 Q ° - P Q°,Q C
C
Q
C
i = 1,2
The demands derived from the previous problem are for demands for the final processed products and not the demands that the farmers face (i.e., raw material demand). In addition, in order to compute the aggregate demands we will assume that there are N consumers of type 1 and N consumers of type 2. To derive the supply of the processed good and the derived demand for raw material let us assume the following production function for the processed good industry. The quasi-fixed proportion production function has been intensively used to modeling processing industries, see for instance, Huang and Sexton [12] ;
M'
K
, •
Q ' ^ m i n — ,K 0 , r L ^
i = 0,C
where A.j represents the technical coefficient that gives the requirement of input M1 to produce one unit of the final processed product. L is the other factor of production (assumed a composite production function) and K oi and K I ; are parameters. Assuming that r is the return to the composite factor L (exogenous to the industry), P f l is the price paid to the farmer, it is possible to compute the supply of processed goods and the derived demand for the raw material by solving the following problem: l 1
Max^P^-r-^-'' '* -P^-VQ1 Q!
K
i = 0,C
o,i
To close the model we need to model the supply for the farm product (i.e., raw material for the processed good industry). We will assume that the farmer faces quadratic variable costs, where 9's are positive parameters and CFl is the fixed cost for producing good i. The farmer solves the following problem to find the optimal yield per acre (i.e., Y1): M a x ^ P ^ - Y ' - C ^ - e o j Y 1 - - ^ YM Y'
2
i = 0,C
v ;
To compute the aggregate supply we will assume that A c acres are planted with the conventional product and A 0 with organic product. Certainly, it is possible to make the acreage decision endogenous as a function of the profit per acreage. However, given the scarce statistical information available, it is better to consider it as simulation variable. Finally, solving the consumer, the industry and the farmer's
63
problems it is possible to compute the quantities demanded and supplied, and prices for conventional and organic, processed and farm products. 4
Marketing Margins and Price Premium of Organic Products
This section uses the previous model to analyze the effect of changes in some variables on marketing margins (i.e., farm to retail price margins) and on the price premium of organic products with respect to conventional at the farm and processed level. We analyze the effect of (1) an increase in area planted with organic products; (2) a reduction in the costs of organic farming; (3) a reduction in the costs of processing organic products, and (4) an expansion of the non-typical demand for organic products (i.e., increase in the number of consumers that purchase both organic and conventional products). It is important to mention that the following simulations should not be considered forecasts but exercises of comparative statics. I calibrated the model parameters for the wheat market and for the production of flour. These parameters correspond to the utility function, technology, and farming costs parameters. In the absence of information about the organic wheat industry, information about the conventional wheat industry from Heid [11] was used. The goal in the calibration process was to reproduce the observed price premiums for wheat and for flour. Although I only simulate the wheat-flour case, this simulation may be considered informative for the other products, too. Table 8 presents the simulation results. The first two simulations, which are related to fanning organic products, indicate that organic production can continue expanding at a high rate without this affecting the price premium received with respect to the conventional products. This is due to the premiums that some consumers are willing to pay for organic products and to the small size of the production of organic products in relation with their similar conventional crops.
Scenarios
Table 8. Effect of different variables on marketing margins and price premiums Percentages Marketing Margins 1/ Org./Conv. Price Premium Organic Conventional Farm Level Retail Level
Baseline Simulations 1. Increase in organic acreage 2/ By 30 percent 60 percent
158.3
.. ..
29.4
58.3
216.0
.. ..
58.2 58.2
215.9 215.8
64 Table 8. (cont'd) 2. Decrease in org. farm costs By 30 percent 60 percent 3. Decrease in org. proc. costs By 30 percent 60 percent 4. Expansion of non-typical demand 3/ By 10 percent 20 percent
.. .. 80.8 3.3 .. ..
.. .. 29.4 29.4 .. ..
58.3 58.2
215.9 215.9
126.1 295.5
215.9 215.8
52.4 47.4
204.2 194.2
Notes: ".." means no change with respect to the baseline scenario 1/ Baseline marketing margins are from the model, in the absence of statistical information. 2/ Total acreage remains the same, and new organic farmers are farmers adopting organic practices. 3/ Demand from consumers that may purchase both organic and conventional products.
Decreasing the processing costs for producing organic products and expanding the non-typical demand for organic products, have more substantial effects on marketing margins and price premiums. Decreasing the processing cost of the organic flour industry reduces the marketing margin for organic flour. This expands the demand for organic wheat, increasing the organic wheat price and the price premium withrespectto the conventional wheat. Finally, expansion of the non-typical demand for organic flour increases the consumption of both organic and conventional products,resultingin a decrease in the price premium of organic wheat and flour with respect to the conventional ones. 5
Final Remarks
The organic grain and oilseeds markets have been growing at a fast pace and they would probable continue do so in the future. Available evidence points out that there is an important potential demand for organic products, although, in contrast to the initial demand for organic products, this demand seems to be not only interested on the "organic" attribute but also on the product presentation, flavor, etc (i.e., cosmetic characteristics). In addition, there is an important potential foreign demand for both grains and oilseeds and for their processed products. On the supply side, the trend seems to be an increasing entry of mainstream companies in the production of organic products and the expansion in the variety of organic products offered by these firms. With respect to the marketing margins in the organic processing industry, evidence seems to point out that they are higher than in the conventional processing industry. The main factors seem to be the small operation scale of organic processors and the costs associated with handling organic raw materials (e.g., avoiding contamination with non-organic products). In the absence of statistics, or at least detailed case studies, it is difficult to precise whether the observed
65
maiketing margins in the organic industry reflect above normal profits or just higher costs. However, if the latter is the right scenario, as the organic industry expands, marketing margins should tend to decrease, as more marketing infrastructure for organic products (e.g., elevators and plants dedicated only to organic products) is created. It is important to acknowledge that if the grain and oilseed processed organic industry expands, a major constraint would be the availability of raw materials of homogenous quality and prompt delivery as required by manufacturers. In this sense, one should expect more manufacturers engaging in production contracts to secure them a steady supply of raw material, and to see price premiums paid to farmers to motivate them to adopt organic farming practices. References 1. Bertransem, S. K. and Dobbs, T. L., Comparison of Prices for 'Organic' and 'Conventional' Grains and Soybeans in the Northern Great Plains and Upper Midwest: 1995 to 2000, Economic Pamphlet 2001, June (2001). 2. Born, H. and Sullivan, P. Marketing Organic Grains. Current topic, Appropriate Technology Transfer for Rural Areas, February (2002). 3. Dimitri, C. and Richman, N. J. Organic Foods: Nice Marketers Venture into the Mainstream. Agricultural Outlook, June/July (2000). 4. Dimitri, C. and Greene, C. Recent Growth Patterns in the U.S. Organic Foods market. U.S. Department of Agriculture, Economic Research Service, Market and Trade Economics Division and Resource Economics Division. Agriculture Information Bulletin 777, September (2002). 5. Dix, K., Farming without Chemicals in Ohio, Innovative Farmers of Ohio. August 22 (2000). http://www.ifoh.org/introduction.htm 6. Glaser, L. K. and Thompson, G. D. Demand for Organic and Conventional Frozen Vegetables. Selected paper to be presented at the American Agricultural Economics Association Annual Meeting, August 8-11, Nashville, Tennessee, (1998) 7. Greene, C , U.S. Organic Agriculture Gaining Ground. Agricultural Outlook, April (2000), pp. 9-14. 8. Greene, C. and Dobbs, T., Organic Wheat Production in the United States: Expanding Markets and Supplies, Wheat Yearbook, USDA, March (2001). 9. Greene, C. and Kremen, A. U.S. Organic Farming in 2000-2001: Adoption of Certified Systems. US Department of Agriculture, Economic Research Service, Resource Economics Division. Agriculture Information Bulletin 780, February (2003). 10. Harper, S., Organic Processed Food Future Trends in the United States. Mimeo, (2000).
66
11. Heid, W. G. Jr. U.S. Wheat Industry. USD A-Agricultural Economic Report 432, April (1980). 12. Huang, S. and Sexton, R. J., Measuring Returns to an Innovation in an Imperfectly Competitive Market: Application to Mechanical Harvesting of Processing Tomatoes in Taiwan, American Journal of Agricultural Economics, 78 (1996) pp. 558-71. 13. NASS-USDA, Crop Production-Acreage-supplement, Accessed July (2003), Webpage: http://jan.mannlib.cornell.edu/reports/nassr/field/pcp-bba/ 14. Smolik, J. D., Dobbs, T. L., and Rickerl, D. H. The relative sustainability of alternative, conventional and reduced-till farming system, American Journal of Alternative Agriculture 10(1995) pp. 25-35. 15. Streff, N. and Dobbs, T. L. Prices of Crop Products Grown Organically in the Northern Plains and Upper Midwest, Economic Commentator, April 4, 437, (2003). 16. The Natural Marketing Institute (NMI). The 2002 Organic Consumer Trends Report. October (2002). 17. Welsh, R. The Economics of Organic Grain and Soybean Production in the Midwestern United States, Policy Studies Report No. 13 Henry Wallace Institute for Alternative Agriculture. May (1999).
67
CURRENT STATE OF THE ART OF LEGISLATION AND MARKETING TRENDS OF ORGANIC FOODS WORLDWIDE
IOANNIS S. ARVANITOYANNIS University ofThessaly,
Dept of Crop Production and Agricultural
Fytokou Street, Nea Ionia Magnesias, E-mail:
384 46, Hellas
Environment
(Greece)
[email protected]
ATHANASIOS KRYSTALLIS National Agricultural
Research Foundation
National Institute of Agricultural 5, Parthenonos E-mail:
(N.Ag.Re.F.),
Economics and Rural
Str., Athens 141 21, Hellas
Development
(Greece)
[email protected]
The growth of and interest in organic agriculture has emerged due to various problems encountered (health problems owing to pesticides, hormones, environmental problems brought on by to pesticides, decreasing biodiversity, threatened food security) which researchers hope to solve. Regulation EEC 2092/91 provided the organic farming sector with a means of asserting its special character and giving the credibility it required to take its place on the market for foodstuffs. Labelling and advertising of a food product may bear indications referring to organic production methods in the sales description only where at least 95% of the ingredients of agricultural origin are organic. Products with an organic content of 70% to 95% may bear indications referring to organic production methods only in the list of ingredients but not in the sales description. Regarding the socio-demographic profile of the organic product buyers, most studies agree that it is mainly women, who buy larger quantities and more frequently than men. Slight differences between gender groups are observed as regards their willingness to pay. The age factor does not seem to play an important role either, with the younger seeming slightly more willing to buy (more and expensive) due to their greater environmental consciousness. This willingness, however, does not translate into demand due to their lower purchasing power. On the other hand, the presence of children in the family seems to play an important role, positively influencing organic purchase. Despite high price premiums for organic food, higher household incomes do not necessarily indicate higher likelihood of organic purchases. Some lower income segments seem to be more entrenched buyers. Although there is conflicting evidence, those who are more likely to buy organic generally are female, in younger age groups, with higher levels of education and income, or families with children.
68
1
The Emergence of a New Kind of Farming: Different Approaches
Organic farming has been the outcome of theory and practice since the early years of the 20th century, involving a variety of alternative methods of agricultural production, mainly in northern Europe. There have been three important movements: • Biodynamic agriculture, which appeared in Germany under the inspiration of Rudolf Steiner; • Organic farming, which originated in England on the basis of the theories developed by Albert Howard in his Agricultural Testament (1940) and • Biological agriculture, which was developed in Switzerland by Hans-Peter Rusch and Hans Muller. Despite some differences in emphasis, the common feature of all these movements, which are the source of some of the terms protected by Community rules, is to stress the essential link between farming and nature, and to promote respect for natural equilibrium. They distance themselves from the interventionist approach to farming, which maximises yields through the use of various kinds of synthetic products. Despite the vitality of these movements, organic farming remained undeveloped in Europe for many years [1]. Organic farming differs from other farming systems in a number of ways. It favours renewable resources and recycling, returning to the soil the nutrients found in waste products. Where livestock is concerned, meat and poultry production is regulated with particular concern for animal welfare and by using natural foodstuffs. Organic farming respects the environment's own systems for controlling pests and disease in raising crops and livestock and avoids the use of synthetic pesticides, herbicides, chemical fertilisers, growth hormones, antibiotics or gene manipulation. Instead, organic farmers use a range of techniques that help sustain ecosystems and reduce pollution [2]. It was only in the 1980's, that organic farming really took off, when the new production method continued to develop, along with consumer interest in its products, not only in most European countries, but also in the United States, Canada, Australia and Japan. There was a major increase in the number of producers, and new initiatives got under way for processing and marketing organic products. This situation conducive to the development of organic fanning was very largely due to consumers' strong concern to be supplied with wholesome, environment friendly products. At the same time, the public authorities were gradually recognising organic farming, including it among their research topics and adopting specific legislation (e.g. in Austria, France and Denmark). Some Member States also grant national or regional subsidies to organic farmers.
69 However, despite all these efforts, organic farming was still hampered by lack of clarity: consumers were not always sure about what was really covered by organic farming, and the restrictions it implied. The reasons for the confusion lay, among other things, in the existence of a number of different "schools" or "philosophies", the lack of harmonised terminology, the non-standard presentation of products and the tendency to blur the distinctions between concepts such as organic, natural, wholesome and so on. The situation was not helped by cases of fraudulent use of labelling referring to organic methods [1]. Since 1999 the Global Codex Alimentarius of the FAO also covers organic agriculture. The Codexguidelines are intended to guide and promote the establishment of definitions for organic agriculture and requirements for organic food labelling, to assist in their harmonisation, and in doing so, to protect consumers and to facilitate international trade [3]. To define the concept of organic farming, one may refer to the definition developed by the Codex Alimentarius, on the basis of contribution from experts from all over the world. According to the Codex, organic farming involves holistic production management systems (for crops and livestock) emphasising the use of management practices in preference to the use of off-farm inputs. This is accomplished by using, where possible, cultural, biological and mechanical methods in preference to synthetic materials [4]. The Codex guidelines specify that an organic production system is designed to: • enhance biological diversity within the whole system; • increase soil biological activity; • maintain long term soil fertility; • recycle wastes of plant and animal origin in order to return nutrients to the land, thereby minimizing the use of non-renewable resources; • rely on renewable resources in locally organised agricultural systems; • promote the healthy use of soil, water and air as well as minimise all forms of pollution that may result from agricultural practices; • handle agricultural products with emphasis on careful processing methods in order to maintain the organic integrity and vital qualities of the product at all stages; • become established on any existing farm through a period of conversion, the appropriate length of which is determined by site-specific factors such as the history of the land, and type of crops and livestock to be produced [5].
70
2
Legislation and Labelling
The European Community adopted a legal framework (Regulation (EEC) No 2092/91) in the early 1990s. The movement towards official recognition of organic farming later spread to several other countries, and was followed by international initiatives. Since Regulation (EEC) No 2092/91 did not include any standards for livestock it was further supplemented by Regulation (EC) No 1804/1999. As a consequence of this amendment, the following products were covered; unprocessed agricultural crop products intended for human consumption, livestock and unprocessed livestock products, feeding stuff [6]. Labelling and advertising may refer to organic production methods only where they make it clear that the information relates to a method of agricultural production. The product concerned must comply with the provisions of Regulation (EEC) No 2092/91. Moreover, the operator must be subject to the inspection measures laid down in the Regulation, and the name and/or code number of the inspection authority must be indicated. The rules on indications referring to organic production methods stipulate the minimum percentage of agricultural ingredients that must be of organic origin. Labelling and advertising of a food product may bear indications referring to organic production methods in the sales description only where at least 95% of the ingredients of agricultural origin are organic. Food products may thus contain up to 5% of ingredients produced by conventional methods as long as those ingredients are not available (e.g. exotic fruit) or in very short supply on the Community organic market. Part C of Annex VI to Regulation (EEC) No 2092/91 lists the ingredients concerned. Products with an organic content of 70% to 95% may bear indications referring to organic production methods only in the list of ingredients, but not in the sales description. The percentage of ingredients of organic origin must be specified. Where the ingredients of organic origin represent less than 70% of the content of a product, the labelling and advertising may not bear any reference to organic production methods. Community rules do, however, provide a possibility for referring to the conversion period [1]. The current labelling in the US has several similarities to the EU legislation and is provided synoptically in Table 1.
71 Table 1. Labelling Consumer Product Packages. Labelling category "100 percent Organic" (Entirely organic; whole, raw or processed product) "Organic" (95%or more organic ingredients)
"Made with Organic ingredients
" (70 to 95% organic ingredients)
Less-than 70% organic ingredients
3
3.1
Principle display panel "100 percent organic"(optional)
Information panel "100 % organic"(optional)
USDA seal and certifying agent seal(s) (optional)
Certifying agent name (required); Business/Internet Address, tel. (optional)
"Organic" (plus product name) "X% organic" (optional) USDA seal and certifying agent seal (S) (optional) 'Made with organic (ingredients or food group(s))" (Optional) "X% organic" (Optional) Certifying agent seal of final product handler (optional) Prohibited: USDA seal
"X% organic" (Optional)
Prohibited: Any reference to organic content of product Prohibited: USDA seal &certifvine agent seal
Certifying agent name (required); Business/Internet Address,(optional) "X% organic ingredient" (Optional) Certifying agent name (required); Business/Internet Address, tele. # (Optional) Prohibited: USDA seal
Ingredient statement If multi-ingredient product, identify Each ingredient as "organic" (optional)
Identify organic ingredient as "organic" (required if other organic labelling is shown) Identify organic ingredient as "organic" (required if other organic labelling is shown)
"X% organic" (Optional)
Identify organic ingredient as "organic"(optional
Prohibited: USDA seal & certifying agent seal
)
Other package panels "100 percent organic"(optional
) USDA seal and certifying agent seal(s) (optional)
"X% organic" (Optional) USDA seal and certifying agent seal (S) (optional) 'Made with organic (ingredients or food group(s))" (Optional) "X% organic" (Optional) Certifying agent seal of final product handler (optional) Prohibited: USDA seal Prohibited: USDA seal & certifying agent seal
Required if % organic is displayed)
Brief Reports on Organic Demand in International Markets
World organic demand
Demand for organic products around the world is at an all-time high. According to the International Trade Centre (ITC) of the United Nations Conference on Trade
72
and Development and the World Trade Organisation (WTO), retail sales of organic food by major market countries (the US, Europe and Japan) totalled $20 billion in 2000 [7], and exceeded $26.5 billion in 2001, incurring a 23% increase from the previous year (Organic Monitor, in [8]). From these sales, 46% take place in Europe, 37% in North America, 16.5% in Asia and only 1% in Australia. According to modest forecasts, organic retail sales are expected to exceed $82 billion by the year 2008. The world average yearly increase rate will approach 17%, with Europe still leading with 43% market share. However, the largest increase rate is expected in the heavily export-oriented producing countries of Australia and New Zealand, in which half of the world organic production already takes place [8]. Key factors that affect consumer demand for organics include awareness and knowledge of organics, motivation, willingness to pay and availability. In general, consumers of organic products are affluent, educated and health-conscious. Some consumers prefer organic food grown locally and avoid imported products, and others are indifferent to the source. In some markets, organic products are sold through small local specialty markets but in others, organic products sit in supermarket shelves next to conventional products, available to a wide cross section of consumers. The number of organic products is proliferating and today there is an organic version of nearly every conventional commodity and processed food item. Some of today's time-pressed organic product consumers crave convenience and variety, and mainstream retailers who strive to meet consumers' preference for onestop shopping require a steady and reliable supply of organic products.
3.2
Organic demand in the US— the profile of the US organic consumer u
In an effort to achieve more balanced health and nutrition, a growing number of US consumers are turning to organic products. The organic industry has grown from an average of $6 billion in revenue in 1999 to $7.8 billion in 2000. Sales of US manufactured organic products grew 38% during the year 2000. This rate far surpassed the estimated 20-25% annual growth for the organic market in general and the conventional grocery industry's annual growth of 3-5%. The fastest-growing food categories between 1999 and 2000 were soy-based foods and other meat/dairy alternatives (215% growth), meat, poultry and eggs (64% growth) and dairy (40% growth). Continued growth was also projected at an overall rate of 38% from 2000 to 2001. New products are being introduced rapidly. For example, over 800 new organic products were introduced in the first half of 2000. Desserts made up the majority of new products in 2000, while most new products introduced in 1999 were beverages. However, fresh produce remains the top-selling organic category ($2.2 billion sales in 2000), followed by non-dairy 2
Data from "New Market Surveys on Organic Food", available at [9], [10] and [11].
73
beverages ($1 billion), breads and grains ($800 million), packaged foods such as frozen and dried prepared foods, baby foods, desserts and soups ($650 million) and dairy products ($550 million). Markets for organic flowers, fibres and other agricultural products have also been developing in recent years. Most organic herbs and flowers (excluding those used as an intermediate good) are sold locally and direct to the consumer, through internet sales, subscription programs or farmers' markets. Markets have been developed for organic cotton and are emerging for rayon, linen and other fibres. Organic food is sold to consumers through three main venues in the US: natural food stores, conventional grocery stores, and direct-to-consumer markets. One of the most dramatic changes since 1998 was the shift to mass-market channels: less than half (49%) of organic food manufacturers' products moved through health and natural food stores, down from 62% in 1998. Mass-market groceries, meanwhile, accounted for 45% of organic food product sales in 2000, compared to only 31% of the year 1998. Farmgate, wholesale and retail price data have indicated substantial organic premiums for fruits, vegetables and milk over the last decade. Monthly farmgate price premiums for several major fruits and vegetables consistently exceeded 100% between 1992 and 1996. Supermarket scanner data showed similar results for frozen vegetables during this period, as well as a 60% premium for organic milk over conventional milk brands from 1997 to 1999. Organic grain and soybean crops also enjoyed substantial price premiums during the 1990s, exceeding 50% for corn, soybeans, wheat and oats during 1993-99. Price premiums are also found of about 34% at the retail level for clothing made from organically grown cotton in 1996. Conventional and organic grain prices have both fallen since 1999, but organic prices still carry a substantial premium over conventional prices. Supermarkets have seen a steady rise in consumers seeking to achieve better nutrition and overall health. Many US consumers see organic products as being the most natural food available in stores and thus a sharp increase in their popularity was observed. While most used to view organic shoppers as a small group of individuals who were considered more nature-conscious, today's organic consumers comprise about one-third of all shoppers and represent nearly half of all grocery shoppers in stores that carry organic products. Organic and non-organic US shoppers both share and differ in their shopping preferences. However, the key-differences can be seen among organic consumers in the sense that: a) organic shoppers rank high-quality fruits and vegetables as the number one factor in choosing a primary grocery store, whereas non-organic shoppers chose a clean/neat store as their top factor; b) organic shoppers earn a high annual income and spend more money on groceries; c) organic shoppers are usually more educated. In addition, organic shoppers are likely to be women who work more than 20 hours per week and the largest percentage of these shoppers are between the ages of 25-39.
74
Organic and non-organic shoppers do share similarities in the planning of their grocery trips. They use newspaper and magazine circulars and compare prices at different stores. However, non-organic shoppers are more likely to cite low prices as a top factor in selecting a supermarket more often than organic shoppers do. This is perhaps because organic products generally are higher priced than non-organic products. Interestingly, organic shoppers remain loyal in their shopping habits, only visiting an average of 2.5 grocery stores a month. In comparison, non-organic shoppers visit an average of 3.1 stores in a month. Clearly, organic shoppers are much more likely to cite the availability and the broad selection of organic products to be the most important factor in selecting their primary supermarket. They also tend to be much more loyal to one store, indicating that retailers may want to pay particular attention to this group as it grows.
3.3
Organic demand in Europe13
Europe is a primary market for organic products with a total retail sales value reaching $13 billion in 2001, however it is not a uniform market. Not only are there differences in language, business customs, regulations, and consumer preferences, but the distribution and retail systems also vary, thereby affecting the availability of organic products. The European market is characterised by fast growth, the entry of major players into the organic marketplace, a wide range of product offerings, and consumers who are familiar with the concept of organics. The overall growth in the organic market for Europe is estimated at 15% per year. Conventional supermarket chains are gaining an increasing share of organic retail sales in some countries (Sweden -80%, UK -70%, France -50%), whereas in countries like Germany and the Netherlands organic retailing is less centralised, concentrated instead in smaller specialised organic shops and health food stores. 1. United Kingdom Compared to other European countries, the UK's organic market is lagging in its development, but the situation is dynamic. Demand is growing at 40% a year, outpacing supply, which is growing at 25% annually. In 2000, UK retail sales of organic products totalled about $900 million, up from $250 million in 1995. Fresh produce accounted for about 50% of the total; other important categories are cereal, baby food and dairy products. Typical consumers of organic products are individuals from the highly publicised food safety and environmental scares. Mainstream shoppers also are becoming interested in organics, and according to a recent report, one third of UK consumers buy organic food. Currently, almost 70% The following information about specific markets was gleaned from a variety of source including Foreign Agricultural Service of the US Department of Agriculture (FAS/USDA), found in [12]
75
of organic sales occur in supermarkets, a sector that is dominated by a relatively small number of large chains, some of which are investing in significant resources and working directly with domestic farmers to increase the supply of organic food. Despite subsidies to encourage producers to convert to organic production methods, the UK will likely remain heavily dependent on imports, which now account for about 70-75% of total organic food sales. 2. The Netherlands Organic products have been a bit slow to take off in the Netherlands, because of consumers' resistance to higher prices and the reluctance of mainstream supermarkets to offer organic products unless they can be priced competitively relative to conventional products. Organic products currently receive about a 20% premium in the market. Organic retail sales were estimated at $600 million in 2000. The Netherlands plays a pivotal role as a global trader and entry point to the EU for many food products, including organics. Many organic products landing in the Netherlands are re-exported to other markets in the EU. 3. Germany Germany is the largest market in Europe for organic food and the second largest in the world after the US. Organic product sales totalled about $2.5 billion in 2000. Nevertheless, this represents only about 1.75% of total German food sales and a fairly low per capita consumption level, compared to more developed organic markets in Europe, like Denmark and Sweden. Organic sales are estimated to rise in the medium term at about 10% annually. The most significant categories in demand include fresh fruit and vegetables, dairy products, bread and bakery products and baby food. Farm conversions to organic production have risen rapidly in recent years, making Germany self-sufficient in cereals, vegetables, milk and meat. Although the majority of organic foods are sold through small shops, large-scale retailers are carrying more products and that trend is expected to continue. 4. France Organics is still a niche market in France in terms of value, representing only 1.0% of total retail food sales compared to certain other EU countries. However, the market has been growing at a rate of 12% per year, and that rate is expected to reach 20% per year in the near term. In the year 2000, sales of organic food products in France are expected to reach $1.25 billion. Growing demand, coupled with a government initiative to stimulate domestic production and improve distribution, is expected to boost organic food sales to $2.6 billion by the year 2003. The range of organic foods available in France is still relatively limited. Major domestically produced organic products include grains, prepared cereals, dairy products, fresh and processed fruit and vegetables, baby food, meat and poultry.
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About half of the organic food is sold through supermarket chains, and the rest is sold through health food stores, open-air organic food markets, and direct-toconsumer outlets. Retail prices for organic produce average 25-35% higher than conventional foods. 3.4
Organic demand in Asia
Asian countries can vary greatly in their approach to organic food consumption. The following Asian markets demonstrate a growing demand for organic products and somewhat less stringent import restrictions. For example, although Japan and Korea are strong markets for organic products, they have a more restrictive policy, posing a particular risk for marketing organic products (for example, if the product is fumigated, the price premium is lost because it cannot be sold as organic). 1. Taiwan About 1,000 small specialty stores and some supermarkets in northern Taiwan carry organic foods. Appealing first to people with special health needs, organic foods are now starting to attract the more affluent and educat6ed segments of the population. In 1999, two stores specialising in organic foods open in an area known as Taiwan's Silicon Valley. Further evidence that the organic sector is developing quickly was the establishment of a new organic food retailer last year, UniPresident Organics, the result of a partnership between Taiwan's largest food company and largest organic food importer/distributor. 2. Hong Kong - Japan Organic foods have been in demand in Hong Kong since the early 1990s. At first, the market expanded slowly, attracting mainly western and Japanese consumers, but more recently, many affluent, educated, health-conscious Chinese who have resided or been educated overseas are seeking organic products. In Hong Kong, organic food is still a relatively new concept. Most organic products are marketed as health food through specialty shops, but awareness is growing as consumers learn more about the diet-health connection, the controversy over GM food, and tiie latest trends from Japan, where organic food is in great demand.
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4
4.1
Consumer Behaviour Towards Organic Food
The "Green " Consumer
Nowadays, environmental consciousness is not only an ideology of activists, but also a matter of "market competition" [13], which influences consumer behaviour [14]. Many consumers exhibit preferences for environmental amenities, either directly through polls or surveys, or indirectly, by participating in outdoor activities, environmental organisations or causes, or undertaking conservation, recycling, or other stewardship activities [15]. The knowledge of the "green consumer" is important for the whole food supply chain and especially for the retailers, since the environmental issues influence the purchase and nutritional decisions of 6 out of 10 consumers in the UK and US [16]. Since the early 90's many US polls have indicated that the percentage of consumers with a strong degree of environmental awareness ranges from 37-96% [15], from 70-90 percent [17], or, from 60% to 90% [14]. This is consistent with MTNTEL, which concludes that 27% of the British adults are prepared to pay up to 25% more for "green" products [18]. As a group, environmentally responsible products have obtained a market share between 20% and 30% in a number of retail product categories in the UK [14]. Teisl et al. (1999) [19], claim that the potential effect of an eco-seal varies significantly across individuals with different levels of education and environmental involvement. Further, the effect of the seal seems to be dependent on the type of other information available to the individual. Similarly, Tiilikainen and Huddleston (2000) [20], claim that environmentally concerned North American and European consumers have been usually characterised as higher income, young to middle aged, better educated, female (for a wider literature review on the profile of the "greens" see [21]). It is worth mentioning here the results of a survey by Davies et al (1995) [22]. They classified UK consumers according to their willingness to buy environmentally friendly products in "light green", "dark green" and "green of the armchair". The "dark greens" comprised 39% of the sample and were these who mentioned that actively seek to buy environmentally friendly products. They were mainly women with children, who are more influenced by quality rather by price and which are guided by the «green» specifications when they decide what to buy. Only a tenth of the consumers were not interested at all in the environment, without factors such as ignorance or confusion concerning the environmentally friendly products influencing their behaviour. The final conclusion was that the more earnest consumers of such products are women in the age between 35-44, of a higher socioeconomic and cultural level, who purchase at super markets and have children over 6 years old.
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The growth of certification programs around the world also suggests a rise in consumer preference for a variety of environmentally friendly products, from apples [23] and seafood [24], to textile [25]. The need for industry to participate as a partner in this process has been widely endorsed both at the governmental level (e.g. World Commission on Environment and Development, 1987) and by firms' institutional bodies [26]. Reinhardt (1999) [27], suggests that managers should make environmental investments for the same reasons they make other investments: "because they expect them to deliver positive returns or to reduce risks". And Teisl et al. (1999) [19], point out that, from a business perspective, eco-labelling may allow firms that use environmentally preferred production methods to gain market share and maximise any value-added rents. Hence, "green" consumerism might be characterised as a shift in tastes in response to firms' marketing claims, stimulating an increase in the consumption of those products perceived as environmentally friendly, ceteris paribus. It is assumed to act as a driver to stimulate the "greening" of industry. However, in order for this to happen, it is a necessary condition that "green" consumers can, first, differentiate between competing products or processes on the basis of their environmental characteristics, and, secondly, that the market allows "green" consumers to reveal their preferences [26]. While enough attention has been paid to the general preferences for environmentally friendly products, Sriram and Forman (1993) [28] and Teisl et al. (1999) [19], claim that our knowledge regarding the nature and the degree of "sacrifice" that consumers are willing to make for this matter is limited. Blend and van Ravenswaay (1999) [23], argue that different opinion poll data do not account for economic factors such as prices and income that affect the demand for ecolabelled products, nor for the effect of variation in the attributes of eco-labels, such as how much environmental improvement is promised or whether it is certified by an independent third party. Also missing, until recently, has been the opportunity for consumers to cast meaningful votes in the market, to differentiate among products on the basis of environmentally sound production/management techniques. Because consumers cannot know how goods are produced, information problems may result in inefficiencies and social welfare loss [15]. As a result, Hussain (2000) [26], concludes that, even though most people consider environmental issues to be of significance, this does not necessarily translate directly into "green" consumerism. Although van Dam (1991) [29] proposed earlier that this is not necessarily inconsistent behaviour, since consumers might face trade-offs between environmental friendliness and other product attributes, there are also opposite opinions to environmentalism. Troy (1994, in [18]) argues that consumer purchases do not seem to reflect their intentions as measured by environmental surveys. Thompson and Kidwell (1998) [30], claim that the expected growth in the market share especially of fresh organic produce in US supermarkets failed to materialise in the early 90's as consumer concerns apparently did not translate into changes in purchasing behaviour. Peattie (1995) [31], suggests
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that such observed differences are usually blamed upon an over-reporting of environmental concern and not purchase. Reinhardt (1999) [27], argues that environmental problems do not automatically create opportunities to make money. Simultaneously, the opposite stance -that it never pays for a company to invest in improving its environmental performance- is also incorrect. 4.2
Factors that affect consumer behaviour towards organic foods
One type of environmental and wider quality and health consciousness is the purchase of organic products. Growth in organic farming in the EU has consistently been around 25% per year for the past ten years [32] and similar expansion is reported in the US. As there is no indication of any change in the EU trend, the sector could expand from the 1998 level of 2% of the Utilisable Agricultural Area (2.8 million hectares and 113,000 holdings) to 10% by 2005 and 30%by 2010 [33]. This level of growth has tremendous implications for the provision of training, advice and other information to farmers, as well as for the development of certification procedures, thereformingof the whole supply chain and the need for a deep organic consumer knowledge. As the retail value of the EU sector should reach EURO 25-35 billion by 2005, the sector progresses from niche to mainstream. The retail sales value of organic food and beverages in Western Europe, the US and Japan was a total of US$ 10.5 billion in 1997, increased to 20 billion in 1999. Over this period, sales rose from US$ 4.2 to 8 billion in the US, 1.8 to 2.5 billion in Germany, .8 to 1.25 billion in France, .75 to 1.1 billion in Italy and .45 to .9 billion in the UK. A total of 130 countries are now producing certified organic food, 90 of which are developing ones, with ideal environmental and production conditions for the development of a satisfactory organic produce [32]. In the short to medium term, lack of supply will be the main problem rather than lack of demand. This could open up opportunities for producers and exporters in developing countries. Nevertheless, there is a number of potential risk factors: other forms of environmentally friendly and sustainable agriculture could provide stiffer competition in the future and it would be very dangerous to assume that producers will always have price premiums. On the other hand, most developing countries are still faced with a lack of technical know-how and market information, access and finance [32], with Greece being one of them. However, the more organic products become available, the more consumers anticipate that in the near future the organic "concept" will be similar to the conventional in terms of general philosophy [34]. In addition, the organic producer will tend more and more towards the model of the businessman [35]. Various studies concerning consumer behaviour vis-a-vis the organic products have been conducted since the mid '90s: a) in many Western European countries ([22], [36 - 52]),
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b)intheUS([30], [53-57]) c) in Eastern European Countries ([58], [59], [60]), as well as in developing countries (e.g. Turkey: [61], [62]). Most of the above mentioned international studies have researched how consumers perceive the organic concept, the issues related to the demand for organic produce, consumers' attitudes and the factors that facilitate or hinder the acceptance of these products. They reveal that purchase motives are attributed to environmental/ethical concern, quality/health consciousness and exploratory food buying behaviour, as well as to specific product attributes such as nutrition value, taste, freshness, and price ([22], [36], [42], [44], [49], [50], [54], [63 - 67]). Some studies also reveal a variety of other purchase motives that seem to reflect national interests, such as "support to organic farmers" for the German consumers [42] or "animal welfare" for the British [68]. Not surprisingly, the main reasons cited by European retailers, including Greece, when marketing organic foods are health, environmental protection, taste and animal welfare, demonstrating a kind of market orientation towards organic food ([41], [46]). The reasons that account for a reversal in favourable attitude towards organic products are price and availability ([22], [36], [38], [42], [54], [69]), lack of some special value in the eyes of consumers ([36], [63]) and doubts about product guarantees, lack of promotion and misunderstanding of organic way of production in terms of its main goals [42]. Regarding consumers' willingness to pay extra for organic products, Davis et al. (1995) [22], mention initial studies that suggest a 5% premium in 1987, while they calculated it at about 30% in a sample of Irish consumers in 1995. Fotopoulos and Krystallis (2001) [70], argue that the Greek organic consumers of their countrywide sample expect to pay up to 63% (an increase from 19%) for a variety of food products including oranges, olive oil, raisins, bread and wine. Hutchins and Greenhalgh (1997) [37], note that approximately half of the consumers of thensample were willing to pay more for organic foods, the majority of which reaching levels of 10-20%. Meier-Ploeger and Woodward (1999) [68], claim that 52% of the German consumers of their sample were willing to pay more for organic fruits and vegetables, 34% for animal products and 39% for grain products. Zanoli (1998) [65], concludes that surveys generally underestimate the real amount of these premiums due to respondents' "free-riding" behaviour. In real market, final consumers often pay up to 300% premiums for organic purchases. On the other hand, it is true that willingness-to-pay results' validity is often depended on the measurement method followed. For instance, results generated by conjoint analysis are considered more realistic than those sourced from methods where consumers are directly asked for their willingness to pay, such as contingent valuation. In general, as societies move from the first stages of organic products' acceptance to more mature levels, a certain reversal of the non-purchase factors' importance is observed, from price to availability ([36], [49], [50]).
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Regarding the socio-demographic profile of the organic product buyers, all the above studies agree that they are mainly women, who buy larger quantities and more frequently than men. Slight differences between gender groups are observed as regards their willingness to pay. Davis et al. (1995) [22], suggest that men would pay more at a percentage of 41% compared to 44% of women. The age factor does not seem to play an important role either, with people belonging to the younger age category seeming slightly more willing to buy (more and expensive) due to their greater environmental consciousness. This willingness, however, does not translate into demand due to their lower purchasing power. On the other hand, the presence of children in the family seems to play an important role, positively influencing organic purchase ([30], [52]), although more attention should be paid to the children's age as an organic purchase factor. Disposable income seems to affect mainly the quantity of organic products bought and not the general willingness to buy. However, despite high price premiums for organic food, higher household incomes do not necessarily indicate higher likelihood of organic purchases. Some lower income segments seem to be more entrenched buyers. Although there is conflicting evidence, those who are more likely to buy organic generally are female, in younger age groups, with higher levels of education and income [56], or families with children. It is worth noting that, according to Kyriakopoulos and Oude Ophuis (1997) [39], environmental, health and quality-consciousness that ignore the consumer as a moving force of competition risks to be static over time. To trace the views of Greek consumers on this matter is a challenge that can be a critical parameter of success. Innovative products based on consumers' needs and demands can be a solution, providing producers with clear directional lines concerning the preferences and motives of the «eco-product» purchasers. 5
Conclusions
Table 2 summarises the problems where organic agriculture may be a solution or part of a solution. It should be noted that there might be other solutions that could deliver the same results as those found for organic. One of the main features of organic agriculture is how well it integrates a number of important issues, which means that even if there are other solutions to each individual problem below, there is no other solution that to such a large extent, addresses most of the problems facing rural communities at the moment. Apart from 'problems to be solved' the most obvious reason for introducing organic production resides in consumers' demand which is currently on therise[71].
82 Table 2. Problems expected to be solved through the implementation of organic agriculture. (XXX= high relevance, XX= certain relevance andX= relevance depending on conditions) Solutions / Positive measures Relevance of organic Problems to be solved agriculture No use of chemical pesticides Health problems caused by XXX pesticides Antibiotics hormones etc. in Improved animal systems XXX animal husbandry causing Integrating animals and crops XXX health problems Meeting needs of animals XXX Alternative disease treatments XXX Environmental problems XXX No use of agrochemicals caused by agro-chemicals Pollution caused by animal Integration of animal and crop production XXX Reduced animal density/self-sufficiency of manure and organic waste animal feed products Falling bio-diversity in No use of agrochemicals XXX surrounding environment No GMO crops XXX Diversified production XXX Falling bio-diversity within Diversity and greater number of crops XXX agricultural production No use of agrochemicals X Farmers organisation Direct marketing Recycling of nutrients from society X (Depending on the quality of the waste products, awareness of society, cleaning processes etc)? Increase income in rural areas, and decrease Urban migration leading to XX money flow from rural areas poverty and slums Organisation, capacitation Local / regional development
Social and cultural degradation Threatened food security
Increase income in rural areas, and decrease money flow from rural areas Increase infrastructure and organisation of rural areas Vitalising old values or creating new values Increase self-reliance and status of rural areas and populations Increase production
Availability of production resources Increase income Stable production Decrease input dependency Increase diversity -less risk Soil improvement - more resilience Optimal use of local resources
XX
X
Long term higher, short time lower, depending on conditions 7
Depends on the conditions X (pests could cause fluctuations.) XXX XXX XXX
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(Food safety) (Food sovereignty)
Table 2. (cont'd) Limit un-safe food Increase consumer awareness Local production Local seeds Local inputs Increase consumer awareness
XXX XXX XX XX XXX XXX
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MARKETING ORIENTATION AND ITS CONSEQUENCE FOR THE FOOD CHAIN JON HENRICH HANF AND RAINER KUHL Justus-Liebig-University
Giessen, Department
Chair of Food Economics and Senckenbergstr.
of Agriculture
Economies
Marketing
3
35390 Giessen Germany Email: ion.h.hanf0).aarar.uni-aiessen.de Ramer.KuehMi3iaarar.urihaiessen.de Agri - food markets have been undergoing a dramatic change. The former primarily seller dominated markets have been transformed to buyer-dominated markets. Buyer orientation results in a marketing orientation philosophy. Therefore organisations must have proper knowledge of their target markets, their customer focus groups and the driving forces of their business. The underlying concept is the marketing orientation as a core competence of a successful network. The authors predict that the present competition of a single enterprise will be substituted in the future by a competition of vertical co-operating "Supply Chain Networks" steered through co-operating management systems like ECR and CPFR being customer orientated. In the paper the following questions must be answered: Does marketing orientation change the quality understanding in business and production processes? Does a more precise customer segmentation change the handling of commodities within the network? In terms of networks, which incentives will be used to guarantee the customer orientation of the whole chain? To answer these questions, chain systems must be analysed in terms of which quality attributes are perceived as important by the consumer and how can they be transmitted into the system. Key words: Customer segmentation, chain systems, change of quality perception
1
Introduction
Even though in many publications it has been shown that the saturated agri-food markets have been transformed from seller dominated to buyer dominated markets many agri-food enterprises still act as if they have not realised this change, yet. But today this change implies being customer orientated as a competitive necessity to stay in the market. For this reason, this kind of buyer orientation results in a marketing orientation philosophy of the firm. Market orientation is defined as
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the extent to which an actor in the marketplace uses knowledge of the market, especially of the customers as a basis for decisions on what to produce, how to produce it and how to market it (Grunert et al. 2002). Being marketing orientated has several implications for agri-food firms: • Getting to know the customer by customer segmentation, • Forming chain systems and • Changing quality perception. Chapter 2 discusses the need to enhance customer orientation. Being rather heterogeneous than homogeneous, the customer has to be addressed as specifically as possible. Hitherto an organisation must have proper knowledge about its target market, its customer focus group and the driving forces of their business to achieve a long lasting competitive advantage. Chapter 3 addresses another implication of a stringent marketing orientation. After the recent food scandals consumers, as well as politicians, called for a new defined quality approach. For the whole food chain, every single production step should be monitored and documented to achieve transparency and traceability throughout the whole chain. This definition of a chain network requires one enterprise to be responsible for the whole production process. On account of this, it has to be considered that the old patterns of horizontal and vertical competition and distrust must be changed to a new form of competitive environment. This environment can be described by co-opetition i.e. firms co-operate within defined networks but compete with other networks. In this sense, co-opetition can be explained by intra network co-operation but inter network competition. The fourth chapter delineates the consequence of enhanced transparency within chain systems on food quality. Formerly trust attributes are converted to inspection attributes or even better-to-shop-attributes. But in this context two cases have to be considered. On the one hand with the increase in the use of modern inspection technology formerly non-measurable or too costly to measure ingredients might now be subject of less-cost intensive inspection procedures. This could lead to an enlargement of spot market transactions. But on the other hand customer orientation implies that quality attributes are derived from the quality perceptions of consumers. Information overload, asymmetric information, time constraints and emotional attitudes of quality (e.g. animal welfare) have to be considered as attributes of quality leading to an increase of trust attributes. In the final chapter the authors conclude that changes in the agri-food business and in consumer behaviour will force companies willing to stay in the market to orientate its activities on the final consumer demand and on the membership conditions in a specific food chain. This again implies a change in competition.
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2
Customer Segmentation
Basic economic literature shows that consumer demand determines the action of the firms. When studying business literature, one discovers that the perspective of the aggregate level is changed to a level of smaller segments. In this chapter the authors will work on: • •
The development of German Agri-food markets and Customer segmentation.
At the end of the section an in-between conclusion will sum up the findings of this chapter. 2.1
Development of the Agri-food markets
As the determinants of food demand, two development categories have been mainly considered: • •
the growth of the population as well as the income and food consumption trends.
- The growth of the population and income development From World War II until the 1970s a steady increase of population growth could be observed. From the 70 s up to now the food industry has been confronted with a stagnation of growth. Even though the re-unification cannot be considered as a growth of population, for both the eastern and western German food firms it had a great impact. While the West German products could succeed in gaining considerable market shares in former East Germany, the majority of the East German firms had no success in entering the West German market. In the same period a steady increase in people's income could be observed. Yet, it has to be considered that the rate of unemployed people has risen constantly since the 1970's. The percentage of income spent on food has continuously fallen over the time portrayed, but in absolute value the amount of money spent on food has increased. For the growth and income developments, some general tendencies can be given rather easily while for food consumption trends, it is more difficult. - Food consumption trends Up to the beginning of the 1970's food consumption patterns were basically determined by a supply of low differentiated food products and traditional meal compositions, i.e. what was produced was consumed. Since then, the consumption is affected by heterogeneous trends. Major long lasting food trends in Germany are indulgence, well-being, convenience and ethnic food. These trends were established years ago but are still
92 prevalent today. It can be observed that long lasting trends change over time. While in the beginning of the 1980s canned food and defrosted pizza was considered as convenience, nowadays chilled food, packed meat for a single person etc. is considered as such (Kohnen 2003). Product and service differentiation activities by food suppliers took place together with changes in consumer food preferences. Consequently, consumers' demand differentiation allows food suppliers to no longer address consumer requirements with a somewhat average supply of food products and services. Consumers are more and more heterogeneous in their consumption habits. Empirical findings which will be presented below support this view. A qualitative analysis of the effects of the eating culture and habits of German consumers, released by the Rheingold Institute, comes up with some interesting findings that are summarized in three consumption pattern underlying trends: • • •
Multitude of options; Individualisation and De-sensuousness or de-voluptuousness (Rheingold 1998).
Multitude of options: Eating is done anywhere and at anytime. Traditional rigid eating patterns are today unknown. For example, eating out is done frequently either in canteens, fast food locations or in good restaurants. But, even though people are aware that they live in a consumers' world of surplus, they feel unwell about the multitude of options and thus the decisions they face everyday. Additionally, eating is not any longer a voluptuous experience instead, food is seen as a sort of fuel for physical activities the body needs. Individualisation: Consumers are increasingly needing smaller package sizes since they eat alone and more special pieces are selected e.g. instead of a whole chicken, only parts (wings or legs) are bought. Being to some extent overwhelmed by the total amount of food offered people need some method to ease the decision making process. Brands might give this support. Since food is seen as "only" fuel the price is the most important variable. Therefore, a tendency towards low priced products is observed. But on the other hand in order to save time an increase of the demand for functional food and OTCs (over the counter) can be observed. De-sensuousness: Of major relevance for this paper is the finding that by the trend of de-sensuousness people automatically build up psychological barriers or distances towards food product characteristics. Not knowing where food originated from nor how it is processed, consumers fear losing control over their own food consumption. Especially the discussions about GMOs and hormones used in beef production as well as and the recent food scandals enhance this type of increasing insecurity. (Rheingold 1998) Together with these qualitative findings two major trends have been identified as a result of the BSE and FMD crisis. Firstly, German consumers demand a very high and a newly defined quality at every day low prices. Today, quality is defined on the one hand by objective characteristics like taste, smell, fat content, and other measurable characteristics. But, on the other hand product features, like
93 transparency, documentation, and control of the production process within a supply chain, which are merely a matter of trust (Hanf/Kuhl, 2002) are required more and more. As a result of the food scandals, German consumers are once again aware that food products are not only shopping or inspection goods but highly credence goods. It can be stated that consumers do not differentiate between diseases proved by scientists of being dangerous for humans and ones of being harmless, i.e. FMD was regarded as dangerous as BSE by consumers. Consequendy, if a food processor or a retailer wants to sustain his competitive position in the German market, he has to be the trustee for the new defined quality at the lowest price possible. Secondly, an exponential rise in the demand of organic food could be observed (Bruhn 2001). There are some indicators showing that the consumption patterns of the pre BSE period are returning. That is why, the observed dramatic growth of organic food products will slow down but will keep increasing (Hanf 2002). It can be concluded that up to the 1970' s the German food market was steadily increasing in volume and turnover and the consumer consumption patterns seemed to be rather homogeneous. But since the 1970s the food market showed signs of saturation and indicated that the consumers demanded more heterogeneous food varieties. The formerly more or less "average" consumer has changed towards a more sophisticated consumer. This consumer acts individually, loves and hates all the options he has, takes food as a source of energy and fears the latent food quality uncertainties. In addition, German consumers are "smart shoppers" always in search of the cheapest price. 2.2
Customer segmentation
Being customer driven should be a competitive necessity for firms to increase customer loyalty and to satisfy the heterogeneous demand shown above. On that account, some major trends have been identified by the authors showing the dynamics of the food business. If firms are willing to use these trends, they are able form consumer segments. Hitherto, the buying process must be analysed and implications for the management must be gathered leading to the question of the smallest possible unit of customers being targeted. The following topics are relevant in this context: • • •
Differentiated buying process; Customer relationship management and Mass customisation.
- Differentiated buying process In general, management systems assume that there is an identity between the buyer of a product who is identical with the consumer and even identical with the initiator of the purchase. This statement is certainly true for a single person shopping just for his own purpose. For families, Engel et al. (1995) divide the consumer into five
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groups according to the following characteristics: 1. Initiator/Gatekeeper, 2. Influencer, 3. Decider, 4. Buyer, and 5. User. The initiator/gatekeeper is described as the person initiating the families to think about buying products and gathering information to guide the decision. The influencer is described as the individual whose opinions have decisive influence on the criteria the family apply in the buying process. This also includes the decision which products or brands most likely fit to those evaluation criteria. The decider is the person with the financial authority and/or power to choose on which products or brands the family's money will be spent on. The buyer is the person who acts as the purchasing agent, visiting the store, calling the suppliers, writing checks, bringing products into the home. The user is the individual who uses the product (Engel et al., 1995). Take an academic family as an example. The children initiate the idea to have a barbecue. The father is considered to be an expert of food products. That is why, he influences the decision about the choice of meat. The mother has the purchasing power and also actually buys the meat. The barbecue meat is eaten and enjoyed by the whole family. For a retailer it may be essential to address the right person to make sure that the actual buying process is done in his shop. As a result of the decline of gender differences traditional joint decision making made together by husband and wife is now to some extend replaced by a strictly separated decision process. Engel et al. showed that decisions on grocery items are still made dominantly by the wife but they also indicate a slide movement towards a joint decision making process (Engel et al. 1995). - Customer relationship management A traditional way of segmentation is to divide the consumers according to the family cycle: single, young couple, full nest I, II, III, empty nest and single partner (Kroeber-Riel 1992). Nowadays, by using the tools of data warehousing and mining new consumer segments can be identified more easily. Customer Relationship Management (CRM) uses this detailed knowledge about the customer to customise the assortment to the smallest segment of customers, which can be reached within economical restraints. As a first result we can state that the complex "buyer - actual demander" has been developed over time to an increased heterogeneity. As a consequence the average assortment has grown over the years. As we have demonstrated earlier, on the one hand the demand for a greater product variety within one shop grew because the demand got more heterogeneous and on the other hand it grew because people recognised that time is a scarce resource. The appearance of the so called "one stop shopping" outlets could be seen as a result of this new perspective (Nieschlag et al. 1997). Running a "one stop shopping" outlet in Germany means to carry over 15.000 food products in order to satisfy the heterogeneous demand. Using data mining techniques this heterogeneous demand can be clustered into small groups.
95 - Mass customization The movement towards serving smaller market segments in order to fulfil diversified consumer needs raises the question of how far this segmentation can go. The benefits of mass production can be offset by increasing diseconomies of scale of enhanced product differentiation at some point. The question is whether mass production procedures can be transferred successfully to segmented markets and if mass customisation of food products or categories can be a driver in this respect. First, we take a general look at the retail sector as a whole. For a couple of years there have been different approaches to this topic, especially in the textile industry where there have been some successful attempts to implement mass customisation. In Germany several textile retailers are working with a mass customisation concept. Mainly dresses and suits, but also shirts and shoes are produced subject to that concept. The fact that the total number of these concepts is increasing indicates that it may be a profitable way to differentiate against competitors. Another example of successful mass customisation is the cosmetic line of Procter & Gamble (P&G). In the U.S. the P&G brand "Reflect.com" offers every female customer individually mixed cosmetics within a price range of high end drugstores (Lebensmittelzeitung 1999 / 2000). For the food business the authors have not found any example of mass customisation in Germany. However, an example was found in U.S. market. Procter & Gamble tried to mass customise the mixture of coffee, but this attempt failed. A recent attempt has been found under www.Mycereal.com General Mills has offered to customise breakfast cereals according to individual preferences. 2.3 Conclusion The authors showed that the continuous population and income growth enabled firms to be production orientated for a long time. But since the 1970's this environment changed and firms operating in the German agri-food business have to re-model their business concept. First, they have to be more consumer-orientated in order to satisfy the increasingly heterogeneous demand. As a result, firms have to work towards an optimisation of their Customer Relationship Management. Even though there are somefirstattempts of a mass customisation concepts of food products the success is questionable. But a detailed Category Management trying to arrange the assortment on behalf of the perception of the customer might be considered to some extent as a first step towards mass customisation. But even though firms may have detected a certain trend or attitude of the customer it is not a static but very dynamic relationship with its customers which has to be worked on steadily. Secondly, the firms have to form new business models being able to put in work the transparency and traceability demanded by the consumers and politicians. This can be achieved by the forming of chain systems.
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3
Chain Systems
To achieve transparency and traceabiliry agri-food firms have to build tight and long lasting downstream and upstream relationships with suppliers as well as purchasers. By organising product and service transactions within co-operative chain relationships the formerly dominating spot market transactions will be substituted by transactions within networks. This development affects the competitive behaviour as well as the way transactions are organised. For this reason, in this chapter the authors will concentrate on the topics of • •
Co-opetition and Supply Chain Networks.
3.1 Co-opetition To explain co-opetition some background information must first be given. Therefore, the authors will continue as follows: • Brief description of the historical development • Implication of co-opetition. - Historical development Traditionally, most of the agricultural goods were considered to be commodities and suppliers could easily be substituted. It was common for transactions to be made on the spot market. Only for those few agricultural products for which it was difficult to replace the suppliers, did firms integrate vertically. Another reason for vertical integration was the attempt to gain a higher stake of the marketing bill by the farmers through the building of co-operatives. Since the markets developed from growing to saturated markets, competition became intensified. Throughout the whole food chain, a concentration process was taking place, especially in the retail business where few powerful companies survived. Today the CR10 is higher than 80%. As a result of this concentration firms saw themselves confronted with fierce horizontal as well as vertical competition generating a business climate of conflicts, distrust, and opportunism. In the 1990' s an increase in contract production was observable. A representative survey of the contracting situation in the German farm sector displayed large differences in the importance of contract farming in different product markets. For barley (for brewing), seed and processed vegetables the highest amount of contract-production was found. While for beef and egg production and fresh vegetables contracts were rarely used (Drescher 1997). Catalysed by the BSE and MKS crisis in the beginning of the new millennium a rethinking has taken place. Increasing collaboration between the participants of a food supply chain on subjects like product development, quality guarantee systems
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and improved logistics can be observed. As a result spot markets are being substituted by contract-production and vertical co-ordination (Hendrikse 2003). - Implication of co-opetition Traditionally, firms have competed with their horizontal rivals for the best distribution channel and the highest market share. With their upstream and downstream counterparts firms have fought on conditions and prices. The scope of these actions has been to gain the highest rewards just for the own company i.e. profit maximisation on the cost of the other business participants has been the target. Business relationships basically were short term orientated. Thus, the single market transaction was considered to be the objective to follow. But since spot markets have been replaced by co-ordination mechanisms, competition has also changed. Co-operation mechanism can only be installed if firms start to work jointly and not against each other. Within a co-operation, at least two firms try to reach a goal by shared actions. Examples of forms of co-operation are strategic alliances, co-operatives, subcontracting and franchising. But, if at least two firms are work together in order to achieve a shared goal, the traditional understanding of competitive behaviour is misleading. In order to create transparency and traceability firms have to pass sensitive business information throughout the whole chain. Therefore, chains have to be built which work co-operatively internally but compete externally with other cooperating chains.
Figure 1. Intra chain co-operation, but inter chain competition
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Figure 1 demonstrates a model of this form of intra chain co-operation, but inter chain competition. The overall objective for each single chain and the participating firms is to work jointly in order to produce goods and/or services demanded by the consumers. All chain systems focus on serving the consumer. Consequently, they compete with each other. On account of this, these chain systems face an intra chain co-operation but an inter chain competition i.e. these firms compete and co-operate at the same time. This phenomena is called coopetition, using the terminology of Nalebuff/Brandenburger (1996). The main characteristic for co-opetition is that firms have to think about complementary assets. These assets are used in a co-operation in order to compete against the rivals. Whether a horizontal or vertical co-operation takes place is not of importance (Henke/Ltick 2003). In the context of the agri- food business co-operatives are a traditional way to co-operate horizontally. But, since the BSE and FMD crises mentioned an increasing tendency to co-operate vertically, co-operatives are substantial in Germany. Even though a multitude of different forms of co-operation exists in the following paragraph the authors will analyse in detail the consequences of a marketing orientation in supply chain networks. 3.2
Supply Chain Networks
Marketing orientation can be characterised as sets of activities dealing with the generation and dissemination of, and response to consumer wishes and demands (Grunert et al. 2002). As pointed out previously, consumers as well as the politicians demand higher food safety and more reliance of quality attributes for every food product. To enforce these requirements responsibility for the entire food production process has to be guaranteed. This could best be done by a participant of a supply chain who acts as the trustee for all attributes - especially the credence ones - of the food product. This role could be played by a so-called chain captain of a Supply Chain Network. In the following part, the authors discuss these points: • • •
Definition of networks and supply chain networks The role of a focal company A "unique relation proposition"
- Definition of Networks and Supply Chain Networks Traditionally economics discusses two forms of business transactions. One was through spot market transactions and the other was by vertical integration. But, institutional economics introduced different approaches in the form of hybrid organisational concepts. Hybrid forms are the systematic optimisation of activities through inter-firm co-ordination and co-operation. In general, market transactions are perceived to be unable to pool capabilities and resources of different economic actors while with vertical integration, flexibility and market incentives are lost
99 (Iliopoulos 2003). In the following chapters the authors will concentrate on one specific form of hybrid - the network approach. Networking is a generic term, widely spread in sociology and management sciences. This term covers all arrangements defining recurrent contractual ties among autonomous entities (Menard 2002).
Netzworkbreadth
Network length Number of levels or ochelons Figure 2. Network (Omta et al. 2001)
Networks are not particularly designed to explain vertically organised ties. They rather more generally address all questions on inter-organisational relationships of more than two firms (Lazzarini et al. 2001). Collaboration in networks is enhanced by complementary abilities of the firms. This viewpoint is attached to the resource based view of a firm, i.e. the success of an enterprise is determined by its ability to focus on its own strength and competencies. These strategic resources are heterogeneously distributed across firms and differ among each firm leading to the question about the core competencies of a firm which are a central concept of the resource based view of the firm (Barney 1991). Core competencies are defined "as the collective learning in the organisation, especially how to co-ordinate production skills and integrate multiple streams of technologies" (Prahalad/Hamel 1990). By focusing on core competencies a single company on the one hand is able to capture the returns of applying economies of learning, scale and scope. On the other hand this firm faces the high risk of specialised production orientation. By collaboration specialised firms are able to share their strengths to create a more competitive entity and simultaneously reducing firm individual risks. In network theory collaboration is not only based on financial benefits. Beside pecuniary incentives power and trust are key concepts to motivate economic actors to work jointly together (Uzzi 1997). The role the single firm plays within the network is determined by its power, its competencies, its interests, existing rules,
100 and the aim of the network (Omta et al. 2001). Through mutual dependency of assets developed within networks companies can secure the investments they have made to sustain the network (Menard 2002). The degree of dependency of a single firm also determines the role it plays within the network. But, even if a supplier is to a high degree dependent on the focal company this supplier still has some power. In reerence to the resource dependency theory, the focal company cannot totally dispose of this firm (Pfeffer et al. 1978). This implies that both parties have an interest in a true partnership. A true partnership implies that within a network common values exist based on loyalty and trust worthiness. Albach used the term of a "strategic family" (Albach 1992). An example of a strategic family in the food business is the network of McDonalds who calls itself the McDonalds family. Having outlined the essentials of network theory it has been shown that networks could be used for the organisation of horizontal and vertical cooperations. Because this paper is written in the context of the food chain, an explicit vertical form of network is introduced. As a supply chain network the authors understand the joint and co-operative behaviour and actions of companies that are related by vertical product and information flows in the supply chain in order to provide a product or service the end consumer. The objective of most of the supply chain networks is to produce higher quality and/or higher efficiency by cooperation rather than by full integration of the supply chain or by market transactions (Hanf/Kuhl 2002). - The Role of a Focal Company The focal company or chain captain is liable with its reputation for the correctness of each product being produced by its supply chain network (SCN). The increasing importance of reputation or brand image can be observed by the retailer's efforts to create a brand for their own company and the building of "blockbuster brands" (brands with more than 1 billion € turnover) by manufactures (Hanf/Hanf 2003). The following graph presents a generic SCN consisting of several independent firms aiming to serve the heterogeneous customer demand. The figure demonstrates the growing complexity and task of organisation for the focal company the more supply chains have to coordinated (for the sake of simplicity the authors will explain this figure solely for only one retailer). The range of products a retailer is responsible for (in the sense of traceability, quality assurance, trust) consists of thousands of products. But just for the retailer's own labelled products he himself is considered to be the focal company. Since the chain captain is liable without limitation for the correctness of the production i.e. for all credence characteristics, he must avoid any type of defect within the entire network. To avoid opportunistic behaviour the chain leader has to create a sustainable win - win situation for every actor involved in this chain network. The focal company has to set incentives to create a situation, in which every actor has a self interest to secure the sustainable stability of the whole network
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(Picot et al. 2001). On the one hand these incentives must be of monetary nature to create a short term win - win situation (i.e. higher profits). On the other hand, the incentives have to be of non-pecuniary nature to create a long lasting "unique relationship proposition", which cannot be imitated easily by competitors. Heterogeneous consumer demand
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Figure 3. Supply Chain Network of a Retailer
-A" Unique Relation Proposition " A "unique relationship proposition" is defined as an exclusive benefit perceived within a loyal and long lasting relationship between at least two economic actors striving for a common goal by co-operation. These exclusive benefits could be higher profits or joint growth in the future. But for some participants of the network this might be just to stay in business. The co-operation in supply chain networks relies on confidence and understanding. These characteristics have to grow over a long time and create the space to achieve a superior joint solution of a problem (Hanf/Kiihl 2002). Hitherto, benefits of co-operation are such that the participating firms are able to concentrate on their true core competencies to generate economics of scale and scope and to reduce risk (Hanf/Kuhl 2003). Especially in the food business, where numerous small and medium sized firms are active, co-operative networks give those firms the chance to concentrate on their
102 core competencies. By co-operating, SME's (small and medium enterprises) can better exploit their core competencies and at the same time reduce the risk inherent by focussing on single activities. 3.3 Conclusion Saturated markets in the agri-food business as well as alterations of consumer demand catalyse the building of chain systems that are able to produce along a big scale but still fulfil the demand for quality. For the numerous SME in the German agri-food businesses two alternatives exist. One opportunity is to lose their independence by merging or by a friendly or unfriendly takeover. Another alternative is to stay independent by joining or by building a network. For networks non-monetary incentives like trust and power are mandatory beside economic terms. Introducing the "unique relationship proposition" the authors show how these thoughts should be used to secure the loyalty and trust worthiness within the chain network. In an environment of co-opetition a superior intra chain cooperation generates a competitive advantage to outperform the competing supply chain networks. The authors conclude that in the German agri-food business it is necessary to be marketing orientated. This strategy implies that it will be a necessity for firms to become a player in a supply chain network in order to remain in the market. To outperform the inter-chain competitors the own supply chain network has to build up a strong "unique relationship proposition". 4
Change of Quality Perception
In the preceding chapter the authors explained why it should be essential for food companies with a strong marketing orientation to become a participant of a supply chain network. Membership in a supply chain network might be beneficial for a company because it may profit from the activities of the chain captain as far as the trust generating activities are concerned. The key driver for the establishment of a food chain is the reliable transfer of trust attributes of product quality to the consumer. Thus, the question of this chapter will be to analyse which role trust attributes will play in future. We will answer this question by pointing out the following aspects: • • •
Detailed description of trust attributes, The relevance of modern technology and Dynamic quality perception by the consumers.
103 4.1
Trust attributes
The distinction between different product attributes, first introduced by Nelson (1970) and the introduction of trust attributes in the economic literature by Darby and Kami (1973) changed the perception of food products. It became apparent that with information on attributes, food products evolved from rather uncomplicated raw commodities to somewhat more sophisticated goods. Until the beginning of the 1990s these findings have been used extensively in the literature on agricultural economics. Since the mid 1990s works on trust attributes got more popular and were frequently used in publications (Anderson 1994). Trust attributes are characterised as such product and service characteristics that cannot be detected under ordinary circumstances by the buyer, neither before nor after the buying process has finished. For experience goods the verification of the correctness of die attributes can be exercised right after the purchase. For search goods the buyer is able to find evidence of the attributes even prior to the purchase (Hanf 2000, Picot et al. 2001). The before mentioned food quality crises affected consumers in the sense that they realised that food products consist of shopping, experience and trustworthiness. Knowing their inability to prove the correctness of trust attributes themselves, people reacted in the case of food crises with a sharp reduction of food demand (Bocker/Hanf 2000). For food products trust attributes can be divided in: •
metaphysical like "organic", "animal welfare" and "produced in a special region", chain transparency and traceability or • risk related trust attributes like "salmonella free" and "free of cholesterol" (Hanf 2000). While metaphysical trust attributes are generally affiliated with the production process risk related attributes are generally part of the product itself. Bounded rationality, asymmetric information and time restraints are factors that create a situation in which consumers are not able or not willing to prove the quality of food products. Most of the trust attributes are considered to be components of quality by the consumers. Considering that quality is a multi attributed construct this perspective will have some interesting implications on the marketing orientation and the resulting chain orientation of a modern agri-food enterprise. In analogy to the quality definition of the Total Quality Management concepts, the following three dimensions are of relevance: • Customer orientation i.e. the quality attributes must be recognised by the customer as such attributes; • Process orientation i.e. the whole production process must be included, e.g. from farm to fork and • the fitness of use of the product (Garvin 1987).
104 Taking these dimensions of quality they imply a dynamic change in the perception of the quality by the consumer. A few years ago, the majority of consumers was not very much interested in getting guarantees such as that it would be possible to trace every piece of meat back to the feeding industry. But nowadays, it is a competitive necessity for every meat producer to deliver a record of traceability and transparency. Within that context, we can expect that the requirements for enhancing the preconditions of an increase of transparency of all quality attributes will be fostered. This claim will especially hold for trust attributes that will be subject to the aforementioned dynamic developments. For this reason, it would be interesting to analyse the effects of modern technology on the transparency of trust attributes and on the other hand the effects of changing consumer perception of quality that dynamic process. 4.2
The relevance of modern technology
Trust attributes can be either process or product immanent because trust attributes are of a metaphysic nature as well as of a risk related nature. Constitutional for an credence attribute is that the buyer is not able to find proof of quality characteristics before or after purchasing the good. This lack of balance is dominant in the current situation. Under dynamic considerations the invention and the use of new inspection technologies will enhance transparency of additional product quality attributes at reasonable prices. Innovative technologies transform former credence attributes into experience goods. Take this first piece of evidence: for many years buyers of a food product had to trust the supplier who claimed that the given food product was produced in a specific regioa Birth or slaughter certificates (for meat) or written documents (plant products) testified the promised attributes of regional origin. This form of documentation delivered some form of evidence and proof. But, in the end whether the animal or the plant product has its origin in the assigned region was a matter of trust. Today, modern methods of molecular analysis in small-scale technical units provide analytical solutions to detect and measure quality attributes on a low price basis and in a short period of time. With these instruments it is possible to trace back the finished product to the region it is originated from. Applying this technology it would not have happened that one of German largest retailer, Aldi, sold a sparkling wine trusting the producer that the wine was as promised and documented a "real" Prosecco. But, upon being to supply the market it became evident that this sparkling wine product had its origin not in the assigned region of Veneto, but in Sicily (Hubert 2003). This example shows that it is likely in the near future that the economic relevance of trust attributes will undergo a kind of transformation. We can probably expect that that all existing and demanded trust or credence attributes will be transformed into experience or even to search attributes. Such a transformation has a high impact on the thoughts presented. In the extreme case if there is no trustworthiness any longer needed all products could be
105 purchased on the spot market. The focal companies would still be able to provide all trust required of them. As a result networks would lose their relevance and transactions would be once again done either on the spot market or by a vertical integration. 4.3
Quality perception by the consumers
But, the thoughts presented in the preceding chapter are only one side of the coin. After demonstrating the developments of the market and consumer trends new developments, knowledge and challenges arise permanently. These trends will be transformed into a new quality perception of the consumers. This implies that new trust attributes will evolve. Again these new trust attributes have to be guaranteed for by the focal company. On account of this, the need to build a supply chain network is as important as before. 5
Conclusion
In this paper it has been demonstrated that the effects of the changing market conditions and the increasing sophistication of consumer demand underline the necessity of a clear marketing orientation and vis-a-vis a chain orientation as a competitive requirement. Trust attributes like transparency and traceability are components of the perceived quality of consumer firms of the agri-food sector which have to form supply chain networks assuring the trustworthiness of credence attributes. This trust can only be assured by closer co-operation. This collaboration must be ascertained by creating a "unique relationship proposition". A second result is the evolution of co-opetition. The formerly known horizontal and vertical competition of single companies is changed into a competition of chain systems versus chain systems i.e. there is an intra chain co-operation but an inter chain competition. A third finding was that even if modern technology would be able to transform all recently known trust attributes into experience or shopping attributes, the business dynamics will continuously create new trust attributes. For this reason, the authors predict that chain networks will be necessary in the future. Future questions within this scenario are whether markets as we know them today will vanish. And how the exchange of goods and services within these chains will take place, if price as the only element determining markets exchange no longer exists.
106 Literature
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107 14. Hanf,J.H./Kiihl,R.: "Outsourcing - Stellt das Outsourcing eine Basis fur kooperatives Handeln in der Agrar- und Ernahrungswirtschaft dar?" Genossenschafts-Kurier 1/03 S.23, 2003 15. Hanf,J.H./K.uhl,R.: "Consumer values vs economic efficiency in food chains and networks" in J.H Triekens/ S.W.F. Omta (eds): Paradoxes in the food Chain and Networks, pp. 35, Wagening Academic Publishers, 2002 16. Hendrikse,G.W.J.:" Governance of chains and networks: a research agenda" Journal on Chain and Network Science, Vol.3, No. 1, pp. 1-6, 2003 17. Henke,M/Liick,W.: "Coopetition - Kooperationsstrategie fur den Mittelstand ", Frankfurter Allgemenine Zeitung, p.22, 30.06.2003 18. Hubert,W.: "Umstrittene Werbung" Weinwirtschaft 15/03 p. 14, 2003 19. Iliopoulos,C: "Vertical Integration, Contracts, and the Theory of the Cooperative Organization", paper presented at the conference "Vertical Markets and Cooperative Hirachies", Bad Herrenalb, Germany, 12-16 June 2003 20. K6hnen,F.: "In der Frische liegt die Zukunft", Lebensmittelzeitung, p.51, No.22, 2003 21. Kroeber-Riel,W.: "Konsumentenverhalten"Vahlen Verlag, 5. Aufl. 1992, pp. 453-62 22. Lazzarini,S./Chaddad,F./Cook.M.: "Integrating Supply Chain and Network Analysis: The Study of Netchains", Journal on Chain and Network Science, Vol.1, No.l, pp. 7-22,2001 23. Lebensmittelzeitung: "Der Umsatz geht (vielleicht) am Handel vorbei",06.05.1999 24. Lebensmittelzeitung: "Individuelle Massenpodukte "hoch komplex", 12.10.2000 25. Menard, C.:" The Economics of Hybrids Organisations", Presidential Address, ISNIE, MIT, 29 Sept. 2002 26. Nalebuff, B.J., A.M. Brandenburger: Co-opetition, New York, 1996. 27. Nelson,P.: "Information and Consumer Behavior", Journal of Political economy, 78, pp. 311-329, 1970 28. Nieschlag,R./Dichtl.E./Horschgen,H.: "Marketing"Duncker & Humbolt Verlag, 18 Aufl., 1997, pp. 890-95 29. Omta,A.W.F./Trienekens,J.H./Beers,G.: "Chain and network science: A research framework", Journal on Chain and Network Science, Vol.1, No.l, pp. 1-6, 2001 30. Pfeffer,J./Salancik,G.R.: "The External Control of Organizations" Harper & Row, 1978, New York 31. Picot,A./Reichwald,R./Wigand,R.T.: "Die grenzenlose Unternehmung"Gabler Verlag, 4.Aufl. 2001, pp. 316-19 32. Prahalad,C.K./Hamel,G.: "The Core Competence of the Corporation"Harvard Business Review, May - June, 1990, pp. 79-91 33. Rheingold: " Ernahrungstrens 2000+", Research Study, 1998
108 34. Uzzi,B.:" Sozial Structure and Competition in Interfirm Networks: The Paradox of Embeddedness",Administrative Science Quarterly, Vol.42, pp. 3567
109 MARKETING AND DISTRIBUTION OF QUALITY PRODUCTS: A DUTCH EXAMPLE G.M.L TACKEN AND J.J. DE VLIEGER Agricultural Economics Research Institute (LEI), the
Netherlands
It is becoming more difficult in the Netherlands to sell homogeneous products at a moderate price. To keep a sustainable position in the market, it is necessary to develop new products and new production systems. The basis for this development has to be a combination of changes in markets and in the capabilities of firms and farms. Consumers want to choose from a large variety of good-quality products. Farmers - especially those with a medium or small farm - are looking for methods to improve the added value of their farm. The objectives of both farmers and consumers could be fulfilled by producing high-quality speciality products. However, the marketing and distribution of regional products requires large efforts in the field of horizontal and vertical cooperation and the right choice of marketing channel and marketing concepts. For many Dutch farmers this implies learning new skills. Given the differences in optimal scale between farmers, processors and retailers, many farmers have formed producers' groups. In this paper, we approach the problem by means of theoretical frameworks about chain development, horizontal cooperation and management. This leads us to formulate a number of hypotheses. We discuss a number of cases to see whether these hypotheses are supported by real-life examples, and then draw a number of conclusions.
Keywords: regional products, marketing, chain development, producer groups 1
Introduction
The Dutch agricultural and agribusiness sector needs to change its international competitive strategy, because it is becoming all the more difficult to compete with countries that have lower production costs. So far the Dutch strategy has been to deliver a homogeneous, average product at a moderate price - a strategy oriented towards bulk products and bulk markets. In this strategy the price of a product of a certain quality was the most important aspect of international competition. Especially for Dutch farmers with small farms, it has become more difficult to receive a reasonable income in this competitive strategy. Moreover, Dutch farmers with large farms are afraid that this strategy will not give them opportunities in the long term. This strategy can only be long term effective if Dutch firms and farms are able to adapt their production scale constantly to the worldwide standards and to introduce more mechanization and automation in their farms and processing units. However, the changes in societal demands, governmental policy, farm structure and market demands have resulted in a situation in which this cost-price approach no longer automatically generates a competitive advantage for every firm.
110
From a societal viewpoint scale increase, mechanisation and more automation is no longer acceptable. Government policy is answering to these societal demands and giving more importance to environmental aspects and animal welfare. This makes additional investments for farmers necessary: the animals must have more room to move, lie down and stand up. A lot of pesticides are no longer acceptable in horticulture and in animal farms prevention of the emission of odours and nitrogen to the air also entails additional costs. These extra costs in addition to the general increase in wages have made necessary a large and, in principle, continued increase in farm and firm size. Next to that, the competition for land has increased in our densely populated country, which leads to higher prices per square of meter land. For farmers with a lot of land this has an equity increasing effect. For farmers who want to buy land, it has become very difficult to realise acceptable returns on investment. Therefore, it is impossible for every farmer to follow a cost-price strategy and to increase the scale of his or her production. Small farmers are unable to increase production size and large farmers can only survive in a price competitive market if they keep up in scale. This market and production situation has resulted in more attention for differentiation strategies, in order to add more value to the product. In the European consumer market, the increase in general welfare has resulted in a consumption pattern in which the aspect of self-expression has become more important. The result is a more differentiated demand, in which such aspects as variation and exclusiveness play a greater role. In its diversity the Dutch agribusiness must be able to answer this trend. In this paper we first define the problems Dutch farmers and the agribusiness firms face as a result of these developments as well as on the possible strategic solutions. The problems are related to three aspects, namely marketing (including product development), distribution, and horizontal and vertical coordination. In the following section we further elaborate the problem by describing the current situation and recent developments in the Dutch agribusiness. We then discuss the theoretical aspects of the problem addressed. Thereafter we illustrate practical solutions with help of a number of examples based on high-quality products, and then draw a number of conclusions. 2
Recent Developments in Dutch Agriculture
The Dutch agribusiness complex consists of a number of subcomplexes, of which in the year 2000, dairy farming was the most important in terms of added value (31%). The horticultural complex is the fastest growing subsector. Although our agricultural trade is still growing, growth is not as high as that of other goods. In 2001, agricultural products made up 19% of all Dutch exports. In the EU, the Dutch market share in the European agricultural trade was about 20%. The Dutch have a dominant position with respect to cut-flowers, vegetable seeds and broilers.1'1 The
111 Netherlands even rank above the USA, as the world's largest net exporter of agricultural products. Our most important trading partners are other EU countries, especially our neighbours: Germany, Belgium, France, Great Britain and Italy[2]. In 2002 the Dutch exported almost 75% of our total export of agricultural products to EU countries, and 60% of our imports were imported from EU countries. In recent years the Dutch exporters have lost market share in Germany and gained market share in France and Great Britain. This implicates that the Netherlands lose market share in markets with a significant amount of price competition and gain market share in markets that demand higher quality products. The average growth in Dutch agricultural exports was 5% in 1993-2001[2]. This figure is somewhat lower than the average growth of the export of all EU countries. The Dutch market share shrank from 23% in 1993 to 20% in 2001. For potatoes, vegetables and pork, the loss in market share was considerable.[1] The value added in Dutch agribusiness has increased between 1990 and 2000.[3] However, the increase was less than that in other sectors of the Dutch economy. As a result, the importance of agribusiness shrank in this period from 13% to 10.4%. The share of the total agribusiness complex based on Dutch raw materials also shrank between 1995 and 2000, from 7.5% to 6.2%. The Dutch competitive posiuon[1] can be analysed further. Earlier research of LEI shows that the following four determinants turned out to be relevant: market adaptability, supply chain effectiveness, costs and efficiency, and strategic potential/41 The results of research projects in cut flowers, cheese, broiler meat, fruit and vegetables show that a more differentiated approach to product and assortment is needed not only to stay competitive on the long run but also to meet the wishes of consumers and retailers better. Good, clearly positioned products and measurable product propositions are necessary in order to maintain the connection with the high-quality segments of the market. Therefore speed and effectiveness in product development and responsiveness are needed. This can be reached by segmentation of the market, such as organic and non-organic products or non genetically modified organisms and genetically modified products. These segmentations are based on consumer concerns about environmental problems and animal welfare, but segmentation on origin and authenticity is possible as well. Next to market demands, the power fields in agricultural supply chains have been changed. Retailers are concentrating more and more on the buying of products/11 In almost every EU country, the five largest retail organizations have a market share of 40-70%. This development has resulted in the concentration of agricultural processing firms. Price competition in these markets is fierce, but knowledge of local markets is still very important since the wishes of local buyers are still very diverse. Dutch companies have responded to these developments by the acquisition of foreign enterprises or by finding local partners. In the main export markets of the Netherlands the population is almost stable these days. This and the diminishing share of food in the buying pattern of consumers reveal a mature market. In surviving in these markets an increase in market share can only be found
112
in meeting consumer demands better than competitors and having a broader base than only price. In summary, the Dutch agricultural sector still dominates in the European export market, but in keeping this position it is very important that Dutch farmers keep their license to produce and that supply still meets the changing demands. For Dutch exports the short distance to large consumption centres and the knowledge of the demand in the local markets is still advantageous. 3
Theoretical Aspects
Dutch companies mainly relied on the cost leadership strategy in the past years. But is there an alternative? In this section we discuss the theories that can be used to find a solution to the transition process that Dutch farmers have in mind. For vertical coordination we looked at network theories, supply chain management theories, transaction cost theory and the new property rights theory, for horizontal coordination at theories for cooperations. We end this chapter with market development theories. 3.1 Networks Porter151 stated that 'the essence of strategy relates a company to its environment'. He distinguished five forces that determine the competitive position and strength of a company: its suppliers, substitutes, new entrants, rivals and customers. Further, he defined three possible generic strategies in being competitive: cost leadership, differentiation and focus. For the internal organisation of a company, Porter (1985) developed the value chain concept. He stated that by improving the links between the value adding processes, a company can increase competitive advantage. If a company chooses cost leadership, it is important that in all value adding processes, cost reduction is the main objective. In implementing this approach the Dutch agribusiness faces NGO objections. In finding alternatives the network approach could be more suitable. Porters viewpoint is mainly based on the viewpoint that companies should be primarily competitive in their relationships with their environment. From the network approach, companies should build up cooperative relationships with the key stake holders in their environment. From this viewpoint being competitive in the long run, is not dependent on selling power, calculation and winning but more on building durable partnerships and trust from all stakeholders. An organization's strategy should be based on its strengths, and especially on the capabilities and competencies that distinguish it from other companies. Capabilities and competencies play a major role in this resource-based school of thought.[6] The central tenet is that every company has unique capabilities and competencies.
113 The central premise of the various network theories is that every firm has relationships with surrounding firms (i.e. each is a node in a network) and other stake holders. Several factors influence the nature of the relationship and the extent to which the firms can benefit from this relationship by exchanging information, building trust and learning from each other. These factors are the stability of the relationship, the internal capacity of firms to share information and to learn, the willingness and enthusiasm to enter a new relationship, and the complexity of the product. This implies that besides economic motivations interdependence, informal relationships, mutual gain, power, trust and commitment are also key issues in being competitive on the long run. Stability is the primary factor influencing the nature of the relationship. In building trust and in learning from each other, it is important for firms to have frequent and long-term contacts, because learning and trust develop over time.[71 Moreover, learning effects can be greater when there is a certain level of trust between the participating firms.[8] However, relationships should also vary now and then.'71 Although these two statements may seem contradictory, when relations have been stable for a while, this stability can form the basis for variety/91 The reason for promoting variety is that within new relationships new possibilities arise for the participating firms to gain knowledge from the new partners/81 This is important because innovations usually arise through new combinations of existing knowledge.'71 The benefits cooperating firms obtain from a relationship are influenced not only by the stability and variety in relations, but also by their internal capacity to share information and to learn. For instance, firms that are experienced in working with other firms are probably better at maintaining the relationships and at benefiting from them than those that do not have this experience. Dyer and Singh stated that firms are aware of this because 'firms with collaboration experience have been found to be more desirable as partners'.[10] In addition they claim that these firms are more likely to benefit from these partnerships by generating value through them. The degree to which firms are able to maintain a relationship and to benefit from it is also influenced by their willingness and enthusiasm to enter a new relationship. It is expected thatfirmsthat are more willing and enthusiastic to enter a relationship will make more effort to maintain that relationship, for instance by not readily accepting attractive trading alternatives'111 Enthusiasm also influences the ability of firms to learn and to teach According to Hakansson: "The more the firms show interest and are prepared to both learn and teach, the more they can benefit from the relationship.''81 Once the firms are convinced of the expected positive economic returns from a relationship, the employees have to develop and maintain the necessary relationships. If they possess the right personal assets to work together, gain knowledge, share information and stimulate their colleagues at other firms, the chances for innovations and the possibilities to solve problems grow and necessary information regarding consumer wishes is shared. This in turn
114 leads to increased sales and profits and supports the continued existence of the newly developed relationship. Apart from therelationshipsbetween the firms and their internal competencies, the complexity of the product also influences the nature of the relationship and the extent to which information is shared. Usually less information sharing is required in relationships established with the goal of producing and marketing a standard product than in those established for specialized and complex products/81 In addition, the learning effects are assumed to be smaller forrelationshipsconcerned with simple products than for those focused on complex products.'81 In short, network theories show that the nature of the relationships and the degree to which firms are able to benefit from them, can be described by three factors, namely trust, sharing of information and learning. Only if, during the chain building process, attention is focused on the social as well as the economic aspects of working together, chains will be built on a solid foundation of mutual commitment and trust and will be better able to withstand turmoil and to fulfill the promise of profit in the long term. 3.2
Supply chain and transaction cost
In order to successfully meet customer demand and to increase competitiveness, the individual business is dependent on its management's ability to integrate the firm's intricate network of business relations - which is why supply chain management has become a leading paradigm in business management. Stern has stated that 'the channel should be viewed as an orchestrated network that creates value for end-users by generating form, possession, time and place utilities/121 In a channel, institutions can be eliminated or substituted, while functions cannot be eliminated: they are shifted forwards or backwards when institutions are eliminated. In this context, a supply chain is a process of interdependent activities in which its various components (suppliers, producers, manufacturers, and distributors) interact with the aim of producing and/or purchasing raw materials and transforming them via semi-finished products into end products, and then delivering these end products to consumers in order to satisfy their demands/131 Successful supply chains are often managed consciously. Lambert has defined supply chain management as: "The integration of key business processes from end user through original suppliers that provide products, services and information that add value for customers and other stakeholders.''141 The central aspects in this definition are the integration of key business processes and the value added concept. The latter concept is derived from Porter's value chain. He distinguishes primary activities (the physical creation, sale and transfer of a product) from
115
supporting activities (firm infrastructure, HRM, technology development, and procurement that supports the primary activities). All organizations have to make both long-term strategic and short-term operational decisions: the major decisions concern location, production, inventory and transportation/151 However, in the supply chain the actors may have different and even conflicting objectives. To solve this problem, the chain must be managed as a whole and attention must be paid to the functional trade-offs.[16] This means that the focus must be on increasing the margins rather than on dividing them, and thus creating a win-win relationship based on trust. Coase (1937) already argued that in every supply chain costs can be avoided by internalizing market mechanism costs (information, negotiation and enforcement costs) within a firm by vertical integration. In principle, there is a spectrum of possible marketing arrangements, ranging from open spot markets to full vertical integration. Williamson maintains that the optimal institutional arrangement depends on three basic characteristics of transactions, namely uncertainty, frequency and asset specificity.[17] As each of these factors increases in importance, it becomes more important to coordinate vertical relationships more closely.[18] Hobbs has argued that technological, regulatory and socioeconomic developments are responsible for changes in product characteristics and transaction characteristics, and are therefore the drivers behind the changes in transaction costs and vertical coordination/191 The basic idea behind supply chain management and collaboration between actors is to reduce uncertainty and to better satisfy consumers at a lower cost. Van der Vorst distinguished four types of uncertainty: demand and distribution uncertainty, supply uncertainty, process uncertainty, and planning and control uncertainty.1201 By identifying the uncertainties surrounding the decision variables responsible for the most desirable performance, it is possible to choose effective redesign principles to reduce or eliminate the uncertainties with respect to, for instance, roles and processes, customer order lead-times, the coordination of logistical processes, the creation of information transparency, and the joint definition of objectives and performance indicators for the entire supply chain. To determine whether and, if so, what changes are necessary in vertical organization as market circumstances and competitive policy are changed, transaction cost economics tells us to look at the characteristics of the relation, namely uncertainty with respect to demand and distribution, supply, process, planning and control, frequency and asset specificity. The greater each of these aspects, the more reason for closer coordination. 3.3
New property rights theory
In contrast to transaction cost economics (which suggest vertical integration as a solution to protect relationship-specific investments), new property rights theory explicates the adverse effects of vertical integration on the investment incentives of
116 the transaction partners. The starting point of this theory is the impossibility to draw up enforceable contracts. Real-world contracts are always incomplete and action and payments must often be determined ex post, either unilaterally or through negotiation. Relationship-specific investments create the possibility for hold-up, that is for the ex-post appropriation of revenues by the non-investing contract party. Therefore, incomplete contracts can lead to underinvestment in the economic relationship. Vertical integration may solve this problem. However, such integration brings with it costs as well as benefits, because a shift in ownership affects the incentives to invest in the part of the firms concerned. The costs he in the inefficiency problem of ex-ante investments. A possible hold-up leads to underinvestment in the economic relationship. Grossman and Hart have defined a firm as being a collection of non-human assets under common ownership, where ownership means holding residual rights of control.'241 In a buyer-seller relationship, the optimal asset ownerships are: a) The buyer should be given more assets, as investments by the buyer become more important (for generating a surplus) relative to investments by the seller. b) The buyer should be given those assets that make the total added value most sensitive to the buyer's investment. c) If an asset has no influence on the buyer's investment it should be owned by the supplier; thus, no outsider should ever own an asset. d) Joint ownership - meaning that both parties have the right to veto the use of the asset - is never optimal: as a consequence, highly complementary assets should be under single ownership. This theory shows that with respect to relationship-specific investments, underinvestment may result from the hold-up problem. This problem can be solved by changes in asset ownership, as explained by Grossman and Hart. 3.4 Cooperatives In building horizontal cooperation relationships between primary producers, legal organisation in a cooperative turns out to be most interesting from a tax viewpoint and from a liability in law viewpoint. Next to that, cooperatives can be established for a number of reasons. Schrader has given seven reasons for farmers to start a cooperative™: • To acquire symmetric information. Asymmetric information can lead to a loss of income both for a private person and for society as a whole. A cooperative which collects information for all members can resolve such asymmetry. • To jointly exploit the scale advantages in supplying and processing stages. • To gain and use market power (countervailing power) in negotiations with suppliers and buyers.
117 • • • •
To deliver services and markets not available otherwise. To secure the supply of raw materials and a market for products. To reap the profits of coordinating, for instance, the processing capacity. To realize risk reduction by pooling the risks and the market prices during the year. Neo-classical economics relates the existence of cooperatives to market failures as a result of asymmetric market power or information. Transaction cost economics explains the existence of cooperatives by pointing to the need to reduce transaction costs to the lowest possible level. With the help of cooperatives, farmers can also solve the hold-up problem related to asset specificity. Farmers can influence the activities of the cooperative and thus protect the asset-specific investments in their farm. However, the cooperative has collective ownership of assets. This may lead to long term decision processes and conflicts on decisions and revenues and, as a result, to weak incentives to invest in cooperatives. Such weak incentives can be expressed by the free-rider problem both inside the cooperative (becoming a member with all revenues, without paying an entry fee) and outside it (having the revenues from the work of the cooperative). The horizon problem is a result of investments in assets that are profitable in the long run, so that members will not receive all the possible revenues. The portfolio problem is related to the difference between members as regards the risks they want to take. This can result in the avoidance of risky investments. Then there is the problem related to the cost of having influence in the organization. These costs increase if the cooperative has a more differentiated character. The problems regarding investments in cooperatives can be solved with the help of an extension of the theory on incomplete contracts, as Cook and Iliopoulus showed/225 They came up with the following rules to solve the problems: • Clearly valued and transferable stocks in the capital of the cooperative (horizon and portfolio problem). • Restricted membership (free-rider problem). • Detailed arrangements concerning the quality and quantity of the produce delivered (free-rider problem). • Investments in the capital of the cooperative when becoming a member (freerider and horizon problem). • One product (portfolio and influence problem). Concluding, one can state that in building horizontal cooperation relationships founding cooperatives are most interesting for Dutch primary producers. However, cooperatives can have long decision processes and relative risk adverse investment behaviour. Therefore it is expectable that cooperatives can be less market oriented than a private firm.
118 3.5 Market development theories In the development of markets it is very important for the market offering to be positioned and differentiated from the product of competitors. This can be done by creating a unique selling proposition, but also by double-benefit positioning or triple benefit-positioning.[25] In reference to product differentiation, competitive advantage can be discussed. A market offering can be differentiated along five dimensions: • Product: form, features, performance quality, conformance quality, durability, reliability, repairability, style, design. • Services: order ease, delivery, installation, customer training, customer consulting, maintenance and repair, miscellaneous services. • Personnel: competence, courtesy, credibility, reliability, responsiveness, communication • Channel: coverage, expertise, performance • Image: symbols, media, atmosphere, events On basis of defining the positioning of the product and a segmentation of the potential market, a target group of customers has to be chosen and identified. In defining the target group it is essential that the selling company has insights in their needs. After this process the new products can be launched in the market. 3.6 Hypotheses The change by the Dutch agribusiness sector from a cost leadership strategy to a differentiation strategy is associated with new product development, a number of changes in marketing of products and distribution and horizontal and vertical coordination. This part of the paper provides an overview of the changes that can be expected. Thereafter, a number of hypotheses are formulated on basis of the theories discussed. To formulate hypotheses, first an overview of the implications of the switch to a differentiation strategy is given A differentiation strategy places greater emphasis on the importance and the process of product development based on the wishes and demands of users and consumers. This means extra investments in research (market and production technology) and in promotion. But in changing from cost leadership to differentiation there is also a greater risk of failure. Differentiation also implies the development of other/new distribution channels and greater demands on logistics (separation of the flow of goods). Furthermore, the assortment of firms increases which means higher stock costs and a need for larger stores (supermarkets). These developments result in greater uncertainties and new specific investments for the firms in the production chain. According to the ransaction cost theory, the change from a cost leadership strategy to a differentiation strategy will lead to the growing importance of closer horizontal and vertical coordination (HI). With respect to relationship-specific
119 investments, in case of hold-up problems or underinvestment changes in asset ownership can be expected (H2). As a result of the greater information asymmetry, the need to exploit scale advantages to gain and use market power and to reduce the risks more cooperatives will be founded (H3). In order to make investments possible and to protect them, these new cooperatives need restricted membership, detailed arrangements about quality and a strict relation between stocks and investments by members (H4). This is in accordance with the theory on incomplete contracts. Network theory underlines the importance of building good relationships between a cooperative and its stakeholders and social aspects as trust and commitment in the relationships between partner firms (H5). Based on strategic management theory, an improvement of the links between the value-adding processes can be expected, for instance by redesigning the chain (H6). The market development theory underlines a switch from product or production orientation to market orientation in marketing and product development, in which the wishes and demands of users and consumers are taken into account (H7). 4
Dutch Examples
In this part of the paper we discuss the structure and behavioural aspects of some examples of the changing from a cost leadership strategy to a differentiation strategy, in order to find clues that confirm the hypotheses made on the basis of the theories. We examine the following cases: the introduction and distribution of organic milk and dairy products; pork produced in an environmentally friendly manner; new horticultural cooperatives; and new regional products.
4.1
Organic milk and dairy products
In 2000, the Dutch market for organic milk and dairy products was 70-100 million litres;1261 two years later 100-110 million litres. The market share of organic dairy products in the total Dutch milk and dairy market is now 1.9%. In 2002 about 300 farmers produced organic milk. They are organized in one producer association (Natuurweide/Ekomelk-Noord), which concludes contracts with the two large Dutch dairy multinationals - Campina and Friesland Coberco Dairy Foods - to process the milk and sell the organic milk products. The organic milk is processed in specialized factories. In the contracts the price of organic milk is linked to the price of standard milk. Attempts to release the link between the two types of milk have not been successful, because the processors are reluctant. Despite these attempts, the average income position of organic milk producers has improved in the last two years. In 2000 the difference between the two prices was about 4-7 euro cents per litre, and in 2002
120 about 6 euro cents per litre - resulting in, on average, 40% more income for the farmers. Dutch organic milk and milk products are mainly sold in the Netherlands. Some of the organic cheeses are exported as well, mostly to Germany. The processors sell the milk to supermarkets (market share in 2000: 78%), health food stores (16%) and other outlets. The market share of supermarkets grew in 2002 to 84%, while the market share of health food stores remained the same (16%). The market share of other outlets dramatically diminished. The main products are milk and milk products, such as yoghurt. Cheese and butter are less important products. Campina is the market leader in the Netherlands with a market share of over 60%. The distribution of organic milk products to supermarkets costs an extra 2-3 eurocents per litre. The consumer price of organic milk products has a premium of about 40 euro cents per litre. This is not entirely due to the higher costs for separate collection of the milk and distribution of the end products but is mainly the result of the strategic position of milk in Dutch supermarkets: most supermarkets consider standard milk as a low-margin product with which to attract customers, while organic milk is seen as a speciality (i.e. high-margin) product. This organic milk production case illustrates a number of the hypotheses. First, it underlines the growing importance of vertical and horizontal coordination (HI). Although the milk is processed by cooperatives, the producers of organic milk conclude contracts in order to reduce the uncertainty about the price (H3). Further, they have their own marketing organization to avoid the problems of incomplete contracts (H4). This example also illustrates differences in costs for collection and distribution and the better (i.e. stronger) market position of organic products, because they are not used for advertising stunts. Finally, growth market for organic milk and milk products shows that the producs are an answer to growing consumers'concern about the environmental and animal welfare impact of agricultural production and the healthiness of the products (H7). 4.2 Pork produced in an environmentallyfriendlymanner In 1995[27] a Dutch pig farmer wanted to increase the added value of his pigs and opted to produce them in an environmentally friendly manner. To realize his desire, he had to develop and position a totally new product in the Dutch market. With the help of the Milieukeur (environmental hallmark) foundation he developed a husbandry system, which can only be applied by certified pig farmers and which would be acceptable for Dutch customers. The right to award and withdraw the certificates and the task of controlling compliance with the rules was given to a new, separate independent firm. After defining the husbandry system a supply chain had to be developed to produce and sell the pigs. To generate a reasonable stream of slaughter pigs, eleven pig farmers invested in an environmental friendly farm and organized themselves in a cooperative. Their Milieukeur pigs are slaughtered in a certified slaughterhouse
121 and de-boned and cut up by a certified meat wholesaler. The pork meat end products are branded with the Milieukeur label. The pigs are sold collectively by the Milieukeur foundation. The foundation has contacts with other partners in the food chain. This cooperation is not formalized but based on mutual trust and dependency. An important condition therefore is the common strategy and competencies. The foundation has relationships with all other partners and it coordinates the product and the financial and information streams. Only a restricted number of butchers and supermarkets are allowed to sell the Milieukeur pork meat to consumers. The most important reasons to found a cooperative of pig farmers for Milieukeur meat were to develop a scale that complies with that of chain partners and to guarantee the stability and the continuation of supply. The most important function of the cooperative is to coordinate the quantity of pigs and their time of delivery. The members pay a contribution and an entrance fee. Initialy the members had to get used to this cooperation because they have lost the freedom to decide about the sale of their pigs. But later on, the participants decided to expand the cooperative activities with buying feed on a collective basis. In this case, a cooperative of farmers is founded. This cooperative is restricted to one specific product in conformity with the theory of incomplete contracts (H4) and the expectations mentioned in H3. There is also a form of cooperation with chain partners that makes use of trust and commitment, as is underlined by network theory (H5). The close cooperation with other chain partners is in line with transaction cost theory (HI). In this case we also found changes in asset ownership and a redesign of the product chain, because the position of the slaughterhouse and the de-boning unit is different: they are paid a fixed price for their services (H2). Although a pig farmer took the initiative, he did so in response to growing consumers' concern about the environmental impact of pig production (H7). 4.3 New horticultural cooperatives In response to changing market conditions and the diminishing turn over at traditional auction houses, growers of fruit and vegetables in the Netherlands have established new cooperatives of primary producers.[23] These cooperatives (over 70 since the early 1990s) unite the producers of a certain crop in order to collectively develop products, implement quality assurance programmes, organize sorting and packing, bargain with customers, and carry out product-specific marketing activities. In the Netherlands, the auction system is not merely a mechanism for price determination: the auction houses were established as grower-owned cooperatives in order to increase the income of their members. However, many large growers left the auction cooperative because they felt that the cost allocation system (a percentage of sales) meant that they were subsidizing the small growers. A more important reason for leaving was that the innovative growers felt that market
122
opportunities for speciality products were not being exploited by the auctions. Speciality products require a special marketing effort, for which the auctions did not have the expertise; in addition, the auction clock provides a disincentive for product differentiation, because products are sold in quality classes comprised of products from different growers. Finally, the members of the auctions did not have the opportunity to sell a part of their products to alternative channels, even though they knew that the price of direct sales to wholesalers would result in a higher income. Growers who wanted to leave the auction cooperative and contract with wholesalers directly were faced with a problem: the wholesalers were not interested in dealing with individual growers and the growers knew that their bargaining position was weak when negotiating individually. They therefore established new producers' organizations, as either a bargaining association or a marketing cooperative. Cooperatives were only established in situations that asked for services (sorting, packing, brand name) that went beyond collective bargaining and for which investments by members were required. The new producers' organizations either were established as truly independent organizations or they maintained a relationship with the auction cooperative. In the latter case, their bargaining power vis-a-vis the auction is decisive for their possibility to make unilateral decisions. This example illustrates how changes in market conditions and particularly the growing demand for differentiated products resulted in new institutions and new forms of horizontal and vertical cooperation (HI + H3). For new producers' organizations, it also shows the relationship between investments and restricted membership (H4) and the need to redesign the product chain (H6). It also illustrates the need for growers to organize the chain and to get involved in marketing (H7). 4.4
New regional products
In the Netherlands a lot of new regional products have been launched on the market to add value and to get away from the bulk market; most of these launches were performed by a farmer or a group of farmers. Such initiatives are not always successful, however. A large number of them disappear after some time because they do not reach an interesting scale. There are a number of reasons for this,1281 but they all underline the difficulties of changing the competitive strategy from a cost leadership strategy to a differentiation strategy, and the need for changes in the field of economic organization. An important reason for failure is related to difficulties in the establishment of a new production and marketing chain. This concerns the selection partners and the horizontal and vertical coordination, including a lack of coordination and of the relevant knowledge about, for instance, market orientation, chain management, the production process and cooperation. Another important reason for failure is that the participants have different strategies and goals. The lack of a common goal and strategy sooner or later leads to a split. The last reason for failure often lies in the
123 field of marketing: the pressure to start production is so high that essential market research is skipped. In some cases, the name of the product is not always suitable, for example the image of the region does not fit with the product sold. In other cases, the marketing channels used reach only a very small part of the population or not in line with the most interesting market segment for that product. The critical success factors are the cooperation between the partners, their enthusiasm and their ability to work together (HI + H5). Also the knowledge about the use of the available resources is important. This applies both to the knowledge of the production process (including quality assurance) and to the organizational aspects of the production chain (H6). A last aspect is development of the market for the class of products to which the new regional product belongs (H7). 5
Conclusions
This paper and especially the cases discussed have illustrated that a change from a cost leadership strategy to a differentiation strategy is not a simple matter: it requires learning and applying new knowledge about, for instance, marketing, cooperation and chain management. It also demands coordinated working in two areas: the product and the production chain development. The cases also showed that in such a process of transformation, the expectations about likely developments based on modern theories (e.g. supply chain and transaction cost, new property rights, cooperatives, networks, strategic management and channel marketing theories) can be helpful. This applies to the seven hypotheses we formulated. However, not all of these hypotheses are fulfilled in every case. In practice application of theories has to be in accordance with the specific situation. This brings us to the final conclusion. The theories discussed help us to advise farmers, processors and wholesalers about how to make the switch from a cost leadership strategy to a differentiation strategy. But first a careful analysis of the specific situation must be performed in order to establish what changes must be made in what direction and which theories could be applicable. When providing such advice, the wishes and ambitions of farmers with respect to the elements they want or have to control are especially important. If they want to control more than just the bargaining process, what they need are investments and a cooperative venture rather than an association is then the best legal organisation structure. References 1. Wijnands, J.H.M. and H. Silvis (2000) Onderweg: concurrentiepositie Nederlandse agrosector. LEI, DenHaag, rapport 3.00.03
124 2. Silvis, H and C. van Bruchem (several years), Landbouw-Economisch Bericht. LEI, Den Haag. 3. Koole, B and M.G.A. van Leeuwen (several years) Het Nederlands agrocomplex. LEI, Den Haag. 4. Hack, M.D., J.C.M. van Meijl, A.F. van Gaasbeek and J.J. de Vlieger (1999). Competitiveness monitor for the agribusiness. LEI, Den Haag, Onderzoekverslag 166. 5. Porter, M.E. (1980) Competitive strategy: techniques for analyzing industries and competitors. The Free Press, New York. 6. Prahalad C.K., Hamel, G. (1994) Competing for the future. Harvard Business School Press, Boston. 7. Borgstein, M.H. et al. (1997) Keten en plattelandsontwikkeling. Markt-, ketenen netwerkkennis toegepast op het landelijk gebied: een programmeringstudie. Nationale Raad voor Landbouwkundig onderzoek/Netwerk voor Onderzoek en Ruimtelijke Ontwikkeling. Den Haag. 8. Hakansson, H.V. Havila, and A.C. Pedersen (1999) 'Learning in networks', Industrial Marketing Management, 28, 443-452. 9. Oerlemans, L.A.G. Meeus, M.T.H., Boekema F.W.M. (1998). 'Do networks matter for innovation? The usefulness of the economic network approach in analysing innovation'. Tijdschrift voor economische en sociale geografie, 1998, number 3, pp 298-309. 10. Dyer, J.H. and H. Singh (1998). "The relational view: cooperative strategy and sources of interorganizational competitive advantage'. Academy of Management Review, 23,4,660-679. 11. Chaston I. (1999) 'Existing propensity to co-operate: an antecedent influencing the potential performance of small-business networks?' Environment en planning C: Government and policy, 17, 567-576. 12. Stern, W.L. El-Ansari, A.I. Coughlan A.T. (1996). Marketing channels, 5th edition. Prentice-Hall, London. 13. Coppola, L. (2002) Supply chain implications of imported non-genetically modified soybean and maize gluten feed in the EU. Wageningen University and Research Centre. Wageningen. 14. Lambert, D.M. and M.C. Cooper (2000) Issues in supply chain management. Industrial Marketing management, 29, 65-83. 15. Ganeshan, R and T.P. Harrison (1995) An introduction to supply chain management. Retrieved from the WWW: http://silmaril.smeal.psu.edu?misc/supplv chain intro.html 16. Stevens, G.C. (1989) Integrating the supply chain. International Journal of Physical Distribution and Materials Management, 19,8,3-8. 17. Williamson, O. (1979) 'Transaction-cost Economics: the governance of contractual relations'. Journal of law and economics. 22,233-61.
125 18. Kennett, J. M. Fulton, P. Molder, H. Brooks (1998) 'Supply chain management; the case of a UK baker preserving the identity of Canadian milling wheat'. Supply Chain Management, 3, 3, 157-166. 19. Hobbs, J.E. andL.M. Young. (2000) 'Closer vertical co-ordination in agri-food supply chains: a conceptual framework and some preliminary evidence'. Supply Chain Management, 5,3,131-142. 20. Van der Vorst, J. (2000) Effective food supply chains. Generating, modelling and evaluating supply chains scenarios'. PhD thesis, Wageningen University, Wageningen. 21. Schrader, L.F. (1989). 'Economic justification', in D.W. Cobia (ed.) Cooperative in agriculture, Engelwood Cliffs, NJ: Prentice Hall, 121-137. 22. Cook, M.L. and C. Iliopoulos (2000). 'Ill-defined property rights in collective action: the case of US agricultural cooperatives', in: C. Menard (ed.) Institutions, contracts and organizations. Perspectives from new institutional Economics. Edward Elgar, Cheltenham, UK: 335-348. 23. Bijman, W.J.J. (2002) Essays on agricultural co-operatives: governance structure in fruit and vegetable chains. PhD thesis, Erasmus Research Institute of Management, Rotterdam. 24. Grossman, S.J. and O.D. Hart. (1986). 'The costs and benefits of ownership: a theory of vertical and lateral integration'. Journal of Political Economy. 94,4,691-719. 25. Kotler Ph., (2003) Marketing Management, Pearson Education International, New Jersey 26. Meeusen, M.J.G. et al. (2002). Biologische ketens in 2001. LEI, Den Haag, rapport 5.02.03. 27. Haan, D. de (2002). Samenwerking als overlevingsstrategie. PhD thesis, Katholieke Universiteit Nijmegen, Nijmegen School of Management. 28. Janzen, R, and J.J. de Vlieger. (1999) Ketenonderzoek streekproducten. LEI, Den Haag, rapport 3.99.11.
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127 MARKET SUCCESS OF PREMIUM PRODUCT INNOVATION: EMPIRICAL EVIDENCE FROM THE GERMAN FOOD SECTOR KEVIN T. MCNAMARA Dept. of Agricultural
Economics, Krannert Building, R.610, Purdue
West Lafayette, Indiana E-mail:
University,
47907-2056.USA
[email protected]
CHRISTOPH R.WEISS Dept. of Economics,
Vienna University of Economics & Business Augasse 2-6, 1090 Vienna, E-mail:
Administration,
Austria.
[email protected]
ANTJE WITTKOPP Dept. of Food Economics & Consumption Studies, University of Kiel, Olshausenstr. 24118 Kiel, Germany. E-Mail: awittkopp@food-econ.
40,
uni-kiel. de
It is well documented that a large share of new products does not survive the first year in the market. Research reported in this paper examined the relationship between product quality and innovation success. In contrast to existing product innovation research that focused on industrial goods, this study used food product data in a 2002 German food manufacturing firm survey. Results suggest that premium quality increases a firm's new product introduction success rate. Furthermore, larger firms tend to have higher success rates. Intensity of competition and retailers' market power reduce firms' new product introduction success rate.
1
Introduction
New products are of major importance for companies' performance. With them a firm aims to achieve certain sales and performance objectives. However, successful innovation requires considerable financial resources, thus it is a risky venture. In 2000, the German food industry spent 1.7 billion EUR on innovations, thereof spending 1.1 billion EUR on current innovation expenditure (i.e. staff and material expenses) [1]. At the same time, strong domestic and foreign competition and increased retailer market power limit firms' profit potential from their new product innovations. Market pressure also emanates from reduced product life cycle times because of fast technological changes and ever-changing customer needs. Thus, high numbers of failures of launched products are not astonishing. According to Fredericks and McLaughlin 50 per cent of new product innovations are sorted out within theirfirstyear in the market as they did not meet performance objectives [2]. In view of this, a question concerning a successful innovation strategy arises.
128 Within the scope of this paper we will go further into key determinants of product success. Existing literature focuses on industrial goods/products and firm specific attributes associated with marketing success. This paper focused on the effect of producer market structure and downstream trade level, as well as superior product quality (premium quality) on firms' product innovation success rate in the German food industry in 2002. Premium quality is one means of differentiating products from competitors' products, allowing for the development of imperfect competition and, thereby, giving a firm a competitive advantage. Hence, producers of premium products might attain higher (retail and consumer) prices. Consequently, premium quality products are associated with higher profits and stay on the market longer, giving the introducing firm a higher new product success rate. Retail market power, however, might have a negative impact on product success rate to the extent that retail firms can exert price pressure and lower attainable prices and manufacturers' profits. Emphasis is given to the food sector for three reasons. First, as Clarke et al. emphasize, among all areas of retailing, food retailing stands out to have experienced the most significant changes in market structure during the last decades [3]. Second, the food sector is particularly interesting because of the large number of innovations per year. According to Madakom 32,478 new products were introduced into the German food market in 2000. Innovative activity and a product's success or failure are heterogeneous among food industry sectors [4]. Third, the premium trend in foods is becoming increasingly important. The majority of firms is aware of the role of (superior) product quality in product success. This paper is arranged in three sections. Section 2 gives a review of empirical literature on determinants of product success. Data and empirical evidence is reported in Section 3. Section 4 offers conclusions. 2
Literature Survey
Understanding the influence of product and market attributes on the success of new product introduction is a key market development issue. Research of factors influencing product success has examined the issue by country, industry, method, innovation type, and performance (success) measures. Often the success measure used is subjective. The research has provided several insights into firms' new product marketing activity. Most of the research on new product marketing success has examined industrial product marketing. This section provides an overview of the general literature and then discussion of empirical results examining product innovation in the food industry. Early research on new product success tended to be descriptive case studies [5]. Research then moved to groups of cases [6] and surveys of larger extent [7]. A general criticism of this literature was the lack of information relating to the
129
measurement of either product innovation success or failure. Rothwell et al. addressed this shortcoming in an analysis on innovations in the chemical industry in the United Kindom (SAPPHO project) [8], They used pairwise comparisons of 86 successful product innovations and failures in the chemical industry to test for factors associated with market success. Their research suggested that market factors (understanding of consumer needs, marketing) were important for new product introduction success. They also found a firm's organization and management structure were positively associated with a firm's ability to launch new products. Cooper examined the importance of product advantage, quality, and innovativeness to new product marketing success in a Canadian study (NewProd project) [9,10,11]. He also examined the relationship between the marketplace (degree of need for products in product class, degree of satisfaction with competitors' products), firm characteristics (such as synergies, R&D, advertising and promotion, market research, management, production resources as well as sales force and distribution resources) and successful product introduction. The study concluded that product innovations launched in markets with large demand, size and growth tended to be more successful than those launched in smaller markets. Further work by Cooper and Kleinschmidt identified the importance of quality of execution of innovation activities, such as marketing and technical support, and the role of product innovativeness, firm image, strong brand name and technical competence of the company in new product introduction [12,13]. Maidique and Zirger examined new product marketing in the U.S. electronic industry (Stanford Innovation Project)[14]. Their analysis of 276 products suggested that firm variables (management support, R&D process, marketing skills and resources, early market launch) were positively associated with successful product introduction. Production characteristics and marketing strategies (such as high performance-to-cost-ratio, product quality, utilization of synergies, customer satisfaction) were associated with new product success. Results of Link's research on the introduction of industrial goods in Australia[15] supported Maidique and Zirger [14]. Link's study also suggested that factors associated with the success and failure of new product introductions tended to be highly situation specific and differ according to the level of new product's innovativeness. Hultink and Robben examined factors associated with successful introduction of consumer goods, unlike prior research that focused on industrial goods[16]. They found successful consumer products were more innovative and associated with a broader assortment. Successful products were characterized by more personal selling and were launched in an early stage of product life cycle. In a later study Hultink et al analyze specifically the difference between industrial goods and consumer goods[17]. They showed that successful consumer goods (industrial goods) are more often developed in short to moderate (short) cycle times and introduced into moderately (strong) growing markets, have a relatively high degree of newness, launched with higher (similar) promotion expenses and priced similar to the competitors. Furthermore, industrial goods introduced in the maturity phase
130
of the product life cycle to markets with only few competitors tended to be most successful. New product marketing research has generally examined industrial goods and consumer goods, although food industry products have been examined. Nystrom und Edvardsson were the first to examine new food product marketing [18]. Their study examined 20 major Swedish food manufacturers and their introduction of 121 new products marketed over the 1969-1978 period. The study found a positive relationship between firm's technology use and new product marketing success. Grunert and Sorensen examined the Danish, German and U.S. yogurt markets [19]. In contrast to earlier research, they focused firms introducing new products rather than on the new products themselves. They found evidence that a firm's product quality, market knowledge, marketing, and product development activities were associated with successful new product marketing. Likewise, Kristensen et al. focused on the company and its new product marketing success rate [20]14. Regression analysis of success rate on introduction and various control variables revealed that the launch rate, an extent to which trade fairs are used to promote new products, consideration of customer needs, market research, and market analysis were associated with new product success in the Danish food industry. Roggenkamp [21] examined the new product innovation in the German food industry. He studied index points for 111 products introduced over the 1987-1998 period. The index was developed according to retailers' perception of the specific product's marketing success. The index points were used as an endogenous variable in regression analysis of product success on market structure variables. Roggenkamp found a positive relationship between market size (an inverted ushaped impact of concentration) and a negative association between new product marketing success and product differentiation. To summarize, new product innovation research provides insight into firm market and product factors associated with marketing success despite heterogeneity, industry, methods and research design. The research suggests that investment in the product development process, realization of synergetic effects, R&D and technological activities, and a strong market orientation supported with advertising and promotion are associated with new product marketing success. Products that are highly innovative, benefit customers, have good performance-to-cost-ratios, and are unique tend to be most successful. The research results also stress the importance of product quality. While the majority of literature examined industrial products, there have been a number of studies relating to consumer goods and the food industry. One study examined the German food industry [21] but has noticeable shortcomings in applying a subjective measure of success and aggregated 4-digit data. Therefore, Kristensen et al. do not specify which proportion has to be exceeded in order to be considered as successful [20].
131
the study could reveal the impact of market structure, but could not allow for firm characteristics and product attributes. In contrast to this, the present study uses survey data and the success rate of new products, i.e. a firm-based measure of products' success. While the literature has shown that product quality is important for product success, it is less clear how strategies formed to develop and introduce premium products (superior quality products) can increase product success. This paper's aim is a) to analyse factors determining new product success, b) to focus in particular on the relationship between premium quality and innovation success and c) to control for the influence of competitive intensity and retailers market power. 3
Data and Empirical Evidence
For this purpose we surveyed food industry firms in Germany in spring 2002. The survey questionnaire was designed to obtain data on companies' competitive environment, determinants of product innovation activities, and new product success. Special attention was given to collecting information about the introduction of premium products. Five hundred and thirty nine questionnaires were mailed to companies in food manufacmring listed in the "Presse-Taschenbuch Ernahrung", a handbook on food industry which is published by the Federation of German Food and Drink Industries (BVE) [22]. From 539 questionnaires, 119 (22 %) were returned. For further analysis only 44 questionnaires could be used due to data restrictions. The dataset consists of companies of all sectors of the food industry, which federal states are located in and the size categories they belong to. The majority of respondents were in the bakery, brewery and dairy sectors, the fewest from the malthouse, condiments, and coffee and tea processing sectors. Most respondents were smalland medium-sized companies (59%), with employment in the 3 to 8,500 job range. As endogenous variable and firm-based measure of new product's success we use the fraction of products launched within the period 1999 to 2001 which are still in w tn firm's assortment today, i.e. SR = ^^^Amp i AWP is the number of new or improved products launched within the period 1999 to 2001, and RNP is the number of those launched products which are still in firm's assortment today. Thus, we measure the average success rate of product innovations.15 Since 0 < SR < 1, one may be suspicious of the assumption of normality. Further, one may wish an estimator which ensures that predicted values for SR are in the interval (0, 1). A popular transformation to alleviate these problems is the logit transformation [23] where the dependent variable becomes TSR = ln[SR /(l - SR)]. The definition and descriptive statistics of all variables used is reported in Table 1. A similar measure has also been used in previous empirical studies [20],
132 Table 1. Definition and descriptive statistics of variables used (n = 44)
Percentage of launched products being a success (75ft). Logit transformation. Dummy variable for premium quality of products (TPREM4). Respondents were asked to evaluate their degree of picking up the premium quality trend with product innovations on a scale from 1 (not important) to 5 (very important). TPREM4 is set equal to 1 for firms reporting premium quality trend to be important and is set equal to zero otherwise. Consumption trends (ITREND). Respondents were asked to rank the importance of consumption trends for the market success of their most successful product innovation on a scale from 1 (least important) to 6 (most important). Advertising support (IADV). Respondents were asked to rank the importance of strong advertising support for the market success of their most successful product innovation on a scale from 1 (least important) to 6 (most important). Dummy variable for R&D activity (RD567). company's share of total sales spent on average on research and development on the following scale: (0) if the share is 0%; (1) if the share is between > 0% and < 0.25%; (2) if the share is between 0.25% and < 0.5%; (3) if the share is between 0.5% and < 0.75%; (4) if the share is between 0.75% and < 1%; (5) if the share is between 1% and < 1.5%; (6) if the share is between 1.5% and < 2%; (7) if the share is > 2%. RD567 is set equal to 1 for firms reporting R&D activity to be in group 5,6 or 7, and it is set equal to zero otherwise.
Mean (Std.Dev.)
Minimum Maximum
0.485 0.894 0.409 0.497
-0.325 3.178 0 1
4.409 1.245
1 6
2.955 1.238
1 5
0.136 0.347
0 1
133 Table 1. (cont'd)
Firm size (F1RMSIZ). Respondents were asked to classify firm sales on the following scale: (1) if sales are < 1 Mio. EUR/year (2) if sales are between 1 and < 5 Mio. EUR/year; (3) if sales are between 5 and < 25 Mio. EUR/year; (4) if sales are between 25 and < 50 Mio. EUR/year; (5) if sales are between 50 and < 100 Mio. EUR/year; (6) if sales are between 100 and < 250 Mio. EUR/year; (7) if sales are between 250 and < 500 Mio. EUR/year, (8) if sales are > 500 Mio. EUR/year. Dummy variable for the degree of competition in food manufacturing (COMP5). Respondents were asked to rank the degree of competition in their own industry on a scale from 1 (very low) to 5 (very high). The dummy variable is set equal to 1 if the respondent characterizes competition to be very high, and is set equal to zero otherwise. Dummy variable for retailer market power (PP45). Respondents were asked to evaluate retailers' pricing pressure on a scale from 1 (very low) to 5 (very high). The dummy variable is set equal to 1 if the respondent characterizes retailer pricing pressure to be high or very high, and is set equal to zero otherwise. Number of mergers & acquisitions the company has done between 1995 and 2001 (FUSION).
4.136 2.007
8
1
0.182 0.390
0 1
0.295 0.462
0 1
0.795 1.357
0 5
The research objective was to analyze the determinants of new product success rate. Empirical analyses of innovation success typically are based on those enterprises which have launched a new product in the previous time period. These studies are likely to face a sample selection problem. Suppose, that for some reason large firms are characterized by higher rates of innovation success than small firms. If smaller firms are less likely to be successful, the number of new products introduced by these firms will also be smaller. Small firms would only introduce a new product if this product has an exceptionally high probability of being successful. In any given time interval, therefore, success rates estimated on innovative firms will only be biased towards finding relatively higher success rates for smaller firms. This finding would be the result of a selection process - small firms would introduce only those products with the very best chances for being successful. More formally let the success rate for firm i TSRi be determined by a vector of exogenous variables x,: TSI^ = /? X, + si The actual success rate can be observed only for firms that have introduced a new product in the last three years. Let D77, be a dummy variable which is set equal
134 to 1 if a firm has launched a new product and is equal to zero otherwise. The willingness to introduce a new product DTI* is determined by a vector of exogenous variables w, where DTI is equal to 1 if DTI* > 0 : DTIi = y'wi + ui Further assume that f, and w, have a bivariate normal distribution with zero means and correlation p. The model that applies to the observation in our sample is E^SRftSRpbserved^E^SR^DTI* =
> o]
E[TSR\ul>-fw]
= Pxi + paeAi(au)
= P'xi + PM<x») with au =-fwilau
and !(«„) = ^(/'w,/crj/
ElTSR, \TSRl0bserved ] = J3' xi + J3xAt (au) + v, .16 Least squares regression using the observed data on success rates only produced inconsistent estimates of b. Regressing TSRi on xi and li gives consistent estimates. We use Heckman's estimator for the linear model, which is a two step procedure [24]. First, we estimate the probit equation to obtain estimates of 17
an
'
, the inverse Mill's
x
ratio. In a second step we estimate " ^ by least squares regression of y on various x and ^ . The result of the least squares regression model analyzing the success rates of 44 enterprises in German food industry in 2002 is reported in Table 2. Table 2: Results of Marketing Success Model, least squares regression (n=44)
Explanatory Variables Constant Premium quality of products Consumption trends Advertising support
Symbol
Parameter
Constant TPREM4 ITREND IADV
1.395 0.439 * -0.172 * -0.128
For further details on Sample Selection Models see Greene [23]. 17
The estimation results of the Probit Model are available upon request from the authors.
t-Value 2.583 1.958 -1.888 -1.343
135 Table 2 (Cont'd)
R&D activity Firm size Degree of competition Retailer market power Number of mergers & acquisitions Inverse Mill's ratio Adjusted R-squared
RD567 FIRMSIZ COMP5 PP45 FUSION
0.228 0.128** -0.609 ** -0.403 * -0.1968 **
0.685 2.214 -1.989 -1.647 -2.529
LAMBDA
-0.643 * -1.817 0.323 -37.588 LL(P) -57.022 LL(0) 1.517 Likelihood Ratio Index Remarks: *** significance level = 1%: ** significance level = 5%: * significance level = 10%; LL(P) (and LL(0)) are the log of the (restricted) likelihood function.
First of all, Table 2 shows that controlling for a selectivity effect is important. The parameter estimate for the inverse Mills ratio (Pi) is negative and significantly different from zero. This implies that if the probability of launching a new product is higher than predicted on the basis of the observable variables, the succession rate for this firm will decline. A key interest of the study was to determine if introducing products as premium products would influence its success rate. It is hypothesized that premium quality can be seen as a means of differentiating products from competitors' products,18 allowing for imperfect competition and, thereby, giving the introducing firm a competitive advantage. Hence, producers of premium products might attain higher (retail and consumer) prices. Consequently, premium quality products are associated with higher profits and success rates. To measure premium product quality, interviewed companies were asked to give an evaluation on a scale from 1 ("picking up of premium quality trend is not important") to 5 ("picking Up of premium quality trend is very important") for those products that have been launched during the last three years. Nearly 30 per cent of the respondents affirm that picking up premium quality products is very important and 40.9% report it to be important. So, the majority of respondents seems to be aware of the importance of product quality. For the econometric model, we define a dummy variable (TPREM4), which is set equal to 1 for firms reporting premium trend to be important and is set equal to zero otherwise. The empirical literature suggests a positive relationship between product quality and innovation success Associated with a high consumer willingness to pay.
136 [9,10,11,12,14,19]. Present study supports these findings. Table 2 reveals a weak but positive effect of premium product quality on success rate, the parameter estimate is significantly different from zero at the 10%-level. This result implies that especially products with superior quality have a long life span, i.e. are successful, ceteris paribus. It is a common perception in empirical literature that a strong market orientation enhances product success [6,8,9,10,11,20]. One expression of market orientation is the extent to which a firm picks up on consumer trends. However, the present study reveals that the relationship between taking up consumer trends (ITREND) and success rate is negative. The coefficient is statistically significant along the 10%-level. This result is plausible as a company taking up new trends very quickly also creates new products or modifies existent ones more frequently. Consequently, the original product does not stay long in assortment, its life span is short, which might explain why the impact of taking up consumer trends on success rate is negative. The study also examined the impact of firm size measured as sales per year (FIRMSIZE) on product success. Table 2 reports a significant and positive effect of firm size on the product's success rate. This indicates that large companies' new products have a longer life span, thus a higher success rates than small firms' products. This might be due to better R&D, advertising and promotion resources as well as a sales force of large firms which enable them to market their products more successfully. Furthermore large firms are able to spread fixed costs over a large sales volume, thereby reducing unit costs of production, so that innovations are more profitable in large companies. As merger & acquisition activity (FUSION) leads to larger firm size, which is positively associated with product success, a positive impact of FUSION on success rate was expected. However, this is not supported by data. As Table 2 suggests a firm's merger & acquisition activity reduces product's success rate. Influence is statistically significant at the 5%-level. Although not expected, this effect is plausible since it is the aim of mergers and acquisitions to bundle a firms' strengths. This is mainly done by concentrating on core competencies. As this process includes the outsourcing of those company items and products which do not meet a firm's objectives or performance expectations, the average product's lifespan is low. Consequently, a products' success rates of merged companies is lower than those of non-merged companies. A further interest of the research was the impact of competition and market structure of downstream trade level on manufacturers' product success. Therefore, we included the intensity of competition as well as retailer's market power in regression. Intensity of competition is represented by a dummy variable (COMP5) which is set equal to 1 if the respondent characterizes competition to be very high, and is zero otherwise. We assume the success rate to be lower in high competitive markets than in low competitive markets as fast competitive reactions melt temporary competitive advantages and profits very fast. As expected, the
137 relationship between competitive intensity (COMP5) and success rate is negative and significantly different from zero at the 5%-level. This is due to lower attainable prices and profits in competitive markets, so that a new product might not meet performance objectives and will be sorted out. Consequently, the success rate is low. A negative relationship between competitive intensity and product success is also shown by a number of authors [9,10,14,15]. In line with this is the assumption that oligopsonistic pressure exerted of powerful retailers leads to a strategic reduction in purchases with the aim of reducing prices. Katz stresses that larger buyers can more credibly threaten to integrate backwards thereby exerting more pressure on a supplier [25]. Scherer and Ross argue that a large buyer's purchasing order is more likely to break up potential collusion between suppliers [26]. This lowers manufacturers attainable innovation profits. As the new product might not meet firm's performance objectives, it will be taken out of assortment. Thus, success rate might be low. In the econometric model, we use a dummy variable for retailer market power (PP45), which is set equal to 1 if the respondent characterizes retailer pricing pressure to be high or very high, and is zero otherwise. Present study gives empirical support for the underlying assumption on a negative relationship between buyer power and product success. Coefficient of retailer market power shows a statistically significant negative effect on success rate. This implies that retailers' market power reduces attainable profits, thus, products' success rate is low. Lastly, we controlled for an impact of advertising expenses, measured by IADV, and research and development intensity (RD567) on product's success rate. However, neither variable had statistically significant results.
4
Summary
Thousands of new food products are launched every year. A large share does not survive the first year in the market. In view of increasing innovation expenditure, high competitive pressure, growing concentration ratios in food retailing and enhancements in innovation pace, success of new products becomes a critical issue. This paper examined the relationship of product, firm, industry specific attributes, and markets to the success rate of firms introducing new German food products. Special attention was given to the impact of product quality and market structure in manufacturing and downstream trade level. The analysis was based on firm level data from a survey of food manufacturing firms carried out in 2002 in Germany. The results support the proposition of negative effects of both retailers' market power and competitive intensity on product success. However, these negative impacts might be mitigated if manufacturing firms launch products with superior quality (premium products). Premium product quality shows a statistically significant positive impact on
138 marketing success rates. This implies that premium quality can be seen as a means of differentiation, which gives the manufacturer a competitive advantage, thus is associated with higher prices, profits and success rates. The results imply that in a competitive environment with increasing retailer's market power, developing and introducing a quality product might be a suitable strategy to increase product success. Further, the results suggest that a firm's size is significantly and positively related to its product's success rate. Firms with strong mergers & acquisitions activity and firms frequently taking up consumer trends show low product's lifespan and success rate respectively. Finally, we have to allude to some critical points in present study. The used logit transformed average product success rate implies that, regardless achieved sales volume or profits, a new product is successful if it stays a long time in assortment, thus has a long lifespan. However, this is only true under ceteris paribus condition and causes difficulties if we think of the large number of seasonal food products which are designed to stay only short time in firm's assortment, independent of their actual performance. Consequently, it would be preferable to use monetary measures of product success (such as profit, sales) which have not been available for present study, and in addition are critical to collect. Moreover, future research should turn to individual products, survey their lifespan, record product, firm as well as market characteristics, and aim at using different measuring instruments to compile the diverse dimensions of product success. This could give an in-depth understanding of factors influencing new product's success which is essential to make implications to manufacturing as well as food retailing. Acknowledgement The authors gratefully acknowledge financial support from the Stiftung SchleswigHolsteinische Landschaft (project 2000/02, BA207/7110). References 1. Centre for European Economic Research (ZEW) (2002), Innovationsreport: Ernahrungsgewerbe und Tabakverarbeitung. Branchenreport Innovationen, Vol. 9, issue 1, pp. 1-4. 2. Fredericks, P.J., MacLaughlin, E.W. (1992), New Product Procurement: A Summary of Buying Practices and Acceptance Criteria at U.S. Supermarket Chains. Cornell University, Department of Agricultural Economics, College of Agriculture & Life Sciences, Ithaca, New York, Working Paper 92-12. 3. Clarke, R., Davies, S., Dobson, P., Waterson, M. (2002), Buyer Power and Competition in European Food Retailing. Edward Elgar, Northampton. 4. Madakom (2001), Innovationsreport 2001. Koln.
139 5. Wise, T.A. (1966), The rocky road to the marketplace. Fortune, Vol. 74, issue 5, pp. 138-143, 199-212. 6. Booz, Allen & Hamilton Inc. (1982), New Products Management for the 1980s. New York. 7. Myers, S., Marquis, D.G. (1969), Successful industrial innovations. National Science Foundation, Report NSF 69-17. 8. Rothwell, R., Freemam, C , Horsley, A., Jervis, V., Robertson, A.B., Townsend, J. (1974), SAPPHO updated - project SAPPHO phase II. Research Policy, Vol. 3, pp. 258-291. 9. Cooper, R.G. (1979a), Identifying Industrial New Product Success: Project NewProd. Industrial Marketing Management, Vol. 7, pp. 124-135. 10. Cooper, R.G. (1979b), The Dimensions of Industrial New Product Success and Failure. Journal of Marketing, Vol. 43, issue 3, pp. 93-103. 11. Cooper, R.G. (1982), New Product Success in Industrial Firms. Industrial Marketing Management Vol. 11, issue 3, pp. 215-223. 12. Cooper, R.G., Kleinschmidt, E. J. (1990), New Products: The Key factors in Success. American Marketing Association, Chicago. 13. Cooper, R.G., Kleinschmidt, E. J. (2000), New Product Performance: What distinguishes the Star Products. Australian Journal of Management, Vol. 25, issue 1, pp. 17-45. 14. Maidique, M.A., Zirger, B.J. (1984), A Study of Success and Failure in Product Innovation: The Case of the U.S. Electronics Industry. IEEE-Transactions on Engineering Management, issue 4, pp. 192-203. 15. Link, P.L. (1987), Keys to New Product Success and Failure. Industrial Marketing Management, Vol. 16, pp. 109-118. 16. Hultink, E.J., Robben, H.S.J. (1994), Predicting New Product Success and Failure: The impact of Launch Strategy and Market Characteristics. Rotterdam Institute for Business Economic Studies, Working Paper 94-04. 17. Hultink, E.J., Hart, S., Robben, H.S.J., Griffin, A. (2000), Launch Decisions and new Product Success: An Empirical Comparison of Consumer and Industrial Products. Journal of Product Innovation Management, Vol. 17, pp. 523. 18. Nystrom, H., Edvardsson, B. (1982), Product Innovation in Food Processing. A Swedish Survey. R&D Management, issue 2, pp. 67-72. 19. Grunert, K.G., Sorensen, E. (1996), Perceived and Actual Key Success Factors: A Study of the Yoghurt Market in Denmark, Germany and the United Kingdom. Centre for Market Surveillance, Research and Strategy for the Food Sector, Aarhus, Working Paper No. 40. 20. Kristensen, K., Ostergaard, P , Juhl, H.J. (1997), The Success and Failure of Product Development in the Danish Food Sector. Centre for Market Surveillance, Research and Strategy for the Food Sector. Aarhus, Working Paper No. 48.
140 21. Roggenkamp, L. (2002), Erfolgreiche Innovationen in der Ernahrungswirtschaft: Messung und Determinanten. Justus-Liebig-University Giessen, Department of Agricultural Economics, Discussion Paper No. 33. 22. Federation of German Food and Drink Industries (BVE) (2001): PresseTaschenbuch Ernahrung. Kroll-Verlag, Seefeld. 23. Greene, W.H. (2000), Econometric Analysis. Prentice Hall, New Jersey. 24. Heckman, J. (1979), Sample Selection Bias as a Specification Error. Econometrica, Vol. 47, pp. 153-161. 25. Katz, J.M. (1987), "The Welfare Effects of Third Degree Price Discrimination in Intermediate Goods Markets". American Economic Review, Vol. 77, pp. 154-167. 26. Scherer, F.M., Ross, D. (1990), Industrial Market Structure and Economic Performance. Houghton Mifflin Company, Boston et al.
141 MARKETING TRENDS IN THE UK ORGANIC SECTOR: PERSPECTIVES ON MARKETING PRODUCTS FROM THE SECOND YEAR OF CONVERSION GEORGINA C. HOLT PETER T. GREY PHILIP J. JONES RICHARD B. TRANTER Center for Agricultural Strategy, School ofAgriculture, Policy and Development, The University ofReading, UK E-mail: casagri.rdg.ac.uk
1
Introduction
DEFRA has recently provided a considerable financial boost to the organic sector with the introduction of the Organic Action Plan (OAP) in July 2002. In addition to allocating approximately £15m per year by 2006 to the organic production sector, the OAP introduced ongoing support for organic farmers to bring the UK in line with other EU member states, and makes explicit the need to balance the growth of production and market sectors. To this end, the OAP promotes public sector purchasing of organic foods, regional initiatives, help in overcoming infrastructure constraints (specifically through a network of abattoirs), and an undertaking by the major retailers to help producers to increase the share of UK products in supermarket sales. The OAP target for British produce supplied to UK retailers is 70%. But whilst support to production encourages conversion there are signs that the market is experiencing cycles of boom and bust as suppliers move en masse towards market opportunities. This indicates the need for more analytical study of both marketing practices and purchasing policies. Historically, agricultural marketing, a branch of agricultural economics, focused on improving returns to producers faced with constraints arising from a) the structure of the agricultural industry composed of many thousands of small farms, b) the undifferentiated (commodity) nature of agricultural products, and c) the remoteness of farmer from consumer. As food processing technologies increased in complexity and potential for product differentiation, food marketing grew out of the business and management disciplines and primarily concerned retailer strategies. More recently, due to a strong UK currency rendering exports less attractive, and the loss of guaranteed markets as CAP support moves away from production-oriented support, producers have been compelled to reconsider
142 agricultural marketing and the need to reconnect with consumer demand. At the same time there are now more opportunities than previously for product differentiation at farm level. EU policy has begun to recognize the need for farmers to be able to differentiate their product, as demonstrated by the introduction of a controlled designated name for food from a specific geographical region. This has led to a merger of contemporary agricultural marketing with the methods and approach of food marketing. The data and information presented in this Chapter are derived from an EUfunded study of the potential to market conversion products19. The study is a threeyear examination of the drivers and barriers along the organic food chain as perceived by producers, commercial buyers, and consumers. The discussion in this paper relates to the second phase of the study20, namely an 'Assessment of Marketing Channels for Conversion-Grade Products', which in turn comprised two main activities: • Organic Farmer Survey, and • Interviews with purchasing policy makers From these two complementary surveys each using very different methods, emerges an understanding not just of where and how organic product is marketed but also how marketing practices differ between production and product sectors. In addition, and more importantly, the study identifies the influences on the food market that will impact on future growth of the organic market. 2
Methods
There is no core food marketing theory and researchers effectively employ quantitative and qualitative methods from other social sciences, principally economics and behavioral sciences, to predict relationships between price and profit and develop marketing strategies. A distinction is made between the marketing environment, usually approached through traditional quantitative analysis and forecasting, and an organization's marketing policies and strategies. In recent years, with the food industry moving towards integration strategies there has been renewed interest in this latter aspect. A surge of interest in transaction cost analysis has enabled clearer understanding of the relationship between organizations, and the growing use of 'institutional analysis' has enabled the study of the operational norms of an organization and the means by which organizations enter into agreements, institutional arrangements.
'Conversion' QLK5-2000-01112 20
Copies of reports and papers ensuing from the first phase, 'Case studies of farmers interested in conversion to organic farming' can be obtained from the Centre for Agricultural Strategy
143 The objectives of the Organic Farmer Survey were to identify the different marketing channels for organic and conversion-grade products utilized by agricultural producers and to assess the costs and benefits associated with each. This was achieved through a postal survey of registered organic farmers in the UK. The questions asked related to the volume, value and types of products marketed through different channels and examined the costs and benefits of different marketing channels, farmers' attitudes to the different outlets, and problems encountered in marketing produce. Questionnaires were sent to all 1355 farmers and growers certified with the main UK certification body, the Soil Association, on 1st Jan 2002, resulting in a 42% response rate and final sample n=535. Organic researchers have for some time noted the tendency to 'conventionalize' research on the organic sector. There have been calls for the use of more interpretive (post-modern, pluralist and constructivist) methodologies that challenge the purely positivist and economic approaches and give greater attention to the distribution of costs and benefits, and differences in perceptions among stakeholders'. Within the agrifood sector several methodologies have become popular based around Actor Network Theory, that share the advantages of a flexible, context-specific paradigm able to examine complex and interdependent relationships and situations involving opportunity costs and trade offs. The objectives of the Interviews were to explore the nature of different markets through which organic and conversion-grade products are marketed, including forms of distribution system and product labeling, and identify constraints to the marketing of conversion-grade products through each system explored. This was achieved through a series of one-hour, semi-structured in-depth interviews with representatives of food retailers, distributors and marketing organizations in England. The interviews explored the costs and problems associated with the procurement of organic products, price premium for organic products in different markets, and the potential for marketing conversion-grade products. At the outset of the study it was apparent that the organic market in the UK is currently highly influenced by rapid movements in the development of both the environmentally and welfare friendly products sector, and the local food sector. These markets both compete and cooperate with the organic food market and therefore affect the potential to market conversion grade products. Interviews therefore needed to reflect these influences on the organic market. It was also considered relevant to expand the scope of interviews to organizations influential in developing and promoting these markets, including lobbying organizations and trade associations, as well as commercial companies, in order to obtain a more complete picture of drivers and barriers of organic market development. A target of 30 organizations, reflecting three primary interests identified as potential channels for conversion-grade products-organic, environmental and local, resulted in a final sample of 21 interviews with the following organizations (three with Soil Association staff representing distinct departments) (Table 1).
144 Table 1. Classification of organizations interviewed
Organic traders/ suppliers Multiple retailers
Organic Associations 'Environmental food' Associations and projects Local food, not for profit groups
3
OMSCO21 Lloyd Maunder Gleadell's Hi Peak Waitrose Asda Iceland Sainsbury Soil Association National Farmers' Union Sustain Guild of Conservation LEAF22 Countryside Agency Common Cause Somerset Food Links Foundation For Local Food Initiatives Grassroots Action For Food & Farming East Anglia Food Link
The Structure of Organic Agrifood Marketing
3.1
Current organic market status
The organic UK market is estimated to be
145 predicted but began to plateau at 4%. Nevertheless, 82% of organic sales are through supermarkets and even a 5% niche would be extremely welcome, and in some product areas it could be much higher. The organic market is considered not far out of balance although some imbalances are expected over the next few years. 3.2 Premia In the 1980's organic prices were related more to scarcity than cost of production, and were erratic, part of the process of market stabilization. Producer costs have grown with the market as retailers have introduced product specifications. At times, oversupply has forced the price down but this inverse relationship is not unique to the organic sector, although initially with limited supply, the multiple requests from retailers for supply created a false impression of the level of demand. However, contrary to expectations, organic premium has been retained. Retailing at zero premium was tried and failed so a premium is considered important, however some premiums are doubly conventional, there is a massive agricultural premium for organic cereal, and the industry has been unsuccessful in reaching a 'buzz price'. A mix of product margins depending on volumes, attitudes and the conventional market determines price. The market is prone to seasonal gluts when prices are the same as conventional without any pressure from supermarkets and that is a confusing scenario for the consumer. Due to a buoyant market the largest premium received for in-conversion products was for cereals. Other in-conversion products were sold mainly at low premiums reflecting the lack of a developed market for in-conversion products. 3.3
Organic producer marketing strategies by product sector
Figure 2 is derived from the 'Organic Farmer Survey'24. In the sections following the discussion of marketing strategies comprises findings from the postal survey and interviews integrated in order to provide an holistic perspective of marketing activities.
Further details of the sample characteristics and data on distribution are given in the EC Deliverable obtainable from the Centre for Agricultural Strategy.
146
Figure 3. Production sectors, outlets and value added
The postal survey sample was made up of a large number of small to medium sized units, a large number of which were organic livestock producers, and family partnerships employing very little outside labor. The majority of farms were in close proximity to an urban area. There was a fairly low dependence on farm income for total household income, suggesting farmers had diversified or had offfarm employment. The majority of farms were located in the west of England and
147 Wales, predominantly producing meat and milk. Farmers were generally well educated, but with little or no formal training in organic agriculture. 3.3.1
Fruit and vegetables
Fruit and vegetables have driven the UK market. Fruit and vegetable production is favored by small-scale operations and these benefit from direct markets (box schemes and farmers markets). But, although larger vegetable marketing associations (e.g. Riverford) have expanded several hundred kilometers from the source of production, many direct markets are near saturation. Fruit growers operated relatively small enterprises producing soft fruits. These producers have adopted a direct and local marketing strategy, enabling them to maximize their returns. Vegetable producers show much similarity to fruit producers although wholesalers were relatively more popular. Generally, more vegetable producers than fruit producers are selling through intermediary organizations and retailers. This is likely to be because farms are slightly larger in size, producing greater volumes that can't all be marketed directly to consumers. Nevertheless, many producers of vegetables have managed to market their produce directly to consumers and consequently have managed to sell a high proportion as organic and have enjoyed a good price premium. 3.3.2
Eggs
Egg producers generally operated considerably smaller businesses, both in terms of area farmed and sales turnover compared to the whole sample and produced a variety of organic products amongst which eggs were not the main enterprise. Low dependence on farm income suggests egg producers are often part-time farmers. The marketing pattern for eggs is similar to that for vegetables, and particularly similar to fruit. It is probable then that these producers are employing the same marketing strategy for all three products. 3.3.3
Meat
This situation is somewhat different to the marketing of fruit or vegetables where the majority of producers and output were sold directly to the consumer. Although meat has been a driving force for local sector development the requirement for butcher licensing to cut and sell fresh organic meat has detracted organic meat producers from production for the local market. Organic meat is most likely to be sold to an intermediary organization, slaughterhouse or co-operative. The Organic Livestock Meat Cooperative is the main meat producer association but much meat is sold through conventional intermediaries integrated with supermarkets. These large buying operations buy from the very smallest to the largest farms. Other
148
farms were important for the sale of livestock since organic livestock markets are prohibited. 3.3.4
Milk
Milk producers were relatively more specialized, larger in size, and more dependent on the farm as their main source of household income, compared to producers of fruit, vegetables and meat, and the sector was more male dominated. There is near complete dominance of the organic milk market by co-operatives, wholesale and food processors and there was little difference in the pattern of marketing channels used by large milk producers. This is likely to be because the conventional market infrastructure is mirrored in the organic milk market. The majority of conventional milk is produced under contract and the same situation prevails in the organic market. The Organic Milk Suppliers Co-operative (OMSCO) is the main outlet for organic milk. A guaranteed price offered by Salisbury's in the 1990s resulted in a wave of dairy farm conversions. Unfortunately, some producers were tempted by higher prices without fixed contract offered by private dairies and in the subsequently oversupplied market these prices were not realized. OMSCO has also recently initiated a contract with MacDonald's to supply milk for box drinks. 3.3.5
Cereals
Cereal producers operated relatively larger businesses in terms of area and organic output than producers of other organic products. Milk producers grow cereals predominately for own-use but many farmers selling cereals also retain some output for livestock feed on farm. Grain sales can either be for feed or human food. Due to the very strong demand for organic feed cereals many producers sold their product directly to other (local, organic livestock) farms before harvest under verbal agreement. However, grain is sold predominantiy to grain merchants and cooperatives, or directly to miller/compounders. These outlets were more important for the larger producers. This marketing strategy is similar to that for conventional cereals, and has the following advantages; • Producers are offered a contract, sometimes guaranteeing volume and price. • Grain merchants and co-operatives are able to purchase larger volumes. Grain traders tend to employ dedicated teams that foster one to one contact with suppliers and provide quasi-extension activities concerning grain varieties, land suitability and potential markets. Currently there is a great number of small miller/compounders and it is anticipated that with the change in feed regulations in 2005 these will consolidate into 2 or 3 large companies. A recent joint government and industry funded initiative, has established an organic grain co-operative, Organic Grain Links, to supply a major egg producer on contract, selling into one major retailer. The integrated strategy should enable the egg producer to increase UK feed grain from 10-50% over a five-year period.
149 3.3.6
Fodder
Most organic fodder producers were small scale with relatively small output quantities easily sold to local organic farmers. Producers had a greater representation of females and had generally converted to organic production earlier and relied to a lesser extent on the farm business as a source of household income compared to the sample. Fodder does not require further processing before its final consumption, therefore farmers can sell the product directly to other farms in its current state. As with sales of organic cereals to other farms, the producers were likely to have a verbal agreement with other farms (i.e. local, organic livestock farms) before crop harvest, suggesting strong links between organic farms within an area. 3.3.7
Processed products
Processed product producers have similar farm and farmer characteristics to fruit, vegetable and egg producers, in fact these farms operated very mixed farming systems where production often overlapped the four product sectors. Farms were generally small scale, in both area and sales, and enterprises were unspecialized, thus producing a variety of products. A relatively high proportion of farmers were female, deriving a low percentage of household income from the farm, suggesting part-time farming, and had initiated conversion prior to the recent trend in more 'commercialized organic farming'. These are also relatively marginal farms more likely to be located within a Less Favored Area. The marketing strategy for processed products was similar to that for fruit, vegetables and eggs. Although requiring labor and capital inputs, which can act as a barrier for some producers, farm-processed products are well suited for marketing direct to the consumer because they provide convenience as well as added value arising from small scale and traditional manufacturing processes. 3.4 Marketing outlets 3.4.1
Local markets
A recent swell in project-based support for local food funded through the Soil Association, DEFRA, EU Leader and EU research programs has facilitated the formation of marketing co-operatives, and sale to high street shops and schools. The Soil Association aids the local food sector through a subsidiary company but the Association's main activities have been related to market growth within the large retailers. The use of short supply chains has helped producers to not only gain higher premiums than they might otherwise have achieved, but also to sell a very large proportion of their product as organic. Support for local markets has benefited all fresh produce small-scale farmers (dairy, eggs, meat and vegetables). Local
150 meat product sales have been driven by active producer marketing strategies due to poor performance of lowland beef and sheep farms and boosted by consumer demand for traceability following BSE. There is less demand for and prevalence of cereal products. Direct outlets: On average, producers using this outlet derive less than half the household income from the farm, indicating part-time farming. Fruit, vegetable and egg producers used direct outlets because: • The product is well suited for marketing direct to the consumer because it requires no processing before sale; • Producers are generally small scale and with relatively small output quantities that are more easily marketed direct, for example through a box scheme; • Most of the producers are within close proximity to their market (i.e. within ten miles from a town or city); and • Many of the producers have been farming organically for some time and are likely to have an established loyal customer base. For many producers of organic milk marketing directly to the consumer would not be a viable option for a number of reasons: • There are strict and costly processing and hygiene regulations; • Liquid milk is perishable and requires a chilled supply chain. • Many milk producers are large scale and would need a huge customer base to market their entire volume direct to the consumer. • Many milk producers converted relatively recently and more for financial reasons than earlier converters. It is likely therefore that they have retained their conventional methods for marketing. Producers marketing through high street shops, organic high street shops and hotel/caterers display similar characteristics. They tend to be marketing fruit, vegetables, meat, eggs or processed foods, are small scale, generate a low proportion of household income from the farm business, and have a relatively high representation of female farmers. 3.4.2
Organic cooperatives
Some commodity products are sold through organic cooperatives on contract to major industries, such as British Sugar. Government and industry both pursue this model of integrated supply. Cooperatives are particularly important in the meat sector for the following reasons: • Strict processing and hygiene regulations that accompany the cutting, packaging, storage and distribution of meats would add to cost and make selling smaller quantities of meat more inefficient and uneconomic (a situation that could be exacerbated should further regulations be introduced).
151 •
•
There are few small organic abattoirs, meaning producers may have to travel a considerable distance to deliver and collect the meat once processed, again adding to cost. Whilst the meat producers could not be termed large in comparison with their conventional counterparts, they would certainly struggle to sell their entire output direct to consumers, as this would need a huge customer base. The above reasons make the product much more suited to marketing to an intermediary organization.
3.4.3
Processors and supermarkets
Food processors/slaughterhouse were used little, other than by meat producers, an indication perhaps of the lack of organic processors available to producers in the organic food chain. Supermarkets Larger farms are marketing large volumes and therefore require an outlet such as a supermarket that can handle larger quantities. Some supermarket buyers prefer large-scale producers that provide the product volumes required. 3.5
Supply contracts
The most common marketing arrangements were informal (or no arrangement) and these are likely to exist where producers sell direct to the consumer through box schemes, farm shops and farmers' markets, or small retailers, and their prevalence is indicative of the large number of producers in the sample that sold through one of these outlets. Small-scale producers for marketing fruit, vegetables, meat, eggs and processed products most frequently used these more informal marketing arrangements. However, most producers preferred a more formal marketing arrangement. The three most important reported benefits resonate with the benefits of selling produce through marketing channels direct to the consumer, and help explain why these marketing channels were popular in practice. The four processors that support the Organic Livestock Marketing Co-Operative by 'putting out a rolling guide price over 12 months with 10% leeway' provide some security. 3.6
Marketing for conversion-grade products
The Soil Association allows the use of labeling 'Soil Association approved organic conversion', but without the logo, for single ingredient plant products only, from the second year of conversion. Soil Association approval has also been granted for exceptional situations such as egg production, which was marketed under the labeling 'from land in conversion produced to Soil Association standards' whilst the phrase 'naturally produced eggs in conversion to organic' was not approved. There has never been a large market for conversion produce in the UK. In Germany historically the market for conversion produce was larger due to their
152 organic legislation prior to the EU Regulation, which meant that the whole farm was in conversion status until all land had converted and this could take several years for farmers part converting. The UK organic movement was largely founded on growers and the Soil Association allowed conversion labeling for these producers. In the UK, the conversion label has been used principally in local markets although some imports from the continent continue to arrive and are marketed in low profile. The Soil Association considers the conversion period a necessary part of becoming organic during which time activity should concentrate on fertility building and gaining knowledge. Land should be fallowed on set aside or cover crop sown to avoid exporting nutrients off farm. For top fruit the Soil Association considers there may be some justification for a conversion market due to the longer conversion time in which 'nothing can happen'. However, the benefits of a conversion market to small-scale fruit and vegetable producers are acknowledged and an estimated 25% of Soil Association members could access this market. There are sparse examples of conversion produce on sale. The conversion market has been tried by most of the major retailers in the past couple of decades but none has found a steady demand for the product. Waitrose's Organic Assistance Scheme supported converting apple farmers but products were not marketed. A similar initiative by Sainsbury's with Orkney fisheries did market conversion grade salmon for a limited period of time with the Soil Association's approval. Some primary processors have used conversion grade premium as a means to develop contract-farming arrangements. Within the local food sector, there is some evidence that labeling conversion products has significantly facilitated conversion for a select few farmers. In the context of feed rather than food however, conversion grade grain has found both formal and informal markets. The allowable % for animal feed has provided the basis for a market amongst merchant traders and between neighboring farms and producer coop networks, although much of the informal sale is haphazard with poor notification to potential buyers. But the non-organic/conversion25 allowance is currently being phased out and proposed changes in the EU Regulation from 2005 will remove the allowable percentage of conversion grade in feed grain and that will 'completely evaporate the market'26. [Although some sectors of the industry are of the opinion that only the conventional allowance of 10% will be removed allowing 40% conversion grade grain in feed]. Currently there is quite a lot of trade in conversion grains. Compounders have found conversion grade useful As the % non-grain allowance has reduced from 30 to 20 to 10 % the percentage conversion grade allowable has increased correspondingly so that in 2003 10% non-organic is allowable and an additional 30% conversion grade. Regn. 2092/91: Annex lb Section 4.8 provides derogation from requirement to feed livestock organically for a transitional period expiring on 24th August 2005. Annex 2c Sections 1 & 2 itemises feed materials of agricultural origin that may be fed no later than 24111 August 2003 and will be reviewed with the aim of removing, in particular, conventional materials.
153 in recent years to reduce feed costs for dairy producers burdened by the sharp drop in milk premium. But despite a buoyant market since 2000 arable farmers have been reluctant to convert and even part conversions have tailed off27. There is a perception that sector bodies could have been more proactive in promoting the market. However, the future is not good due to the influx of organic grain from East Europe, where good climate and soils, low labor and land costs, and subsidized exports have reduced market wheat price from an almost guaranteed £180/tonne to £140/tonne. The 'organic' perspective on the conversion market is that it 'dilutes the organic message, confuses the consumer and undercuts the market share of genuine organic. Organic is perceived as confusing enough, because it deals with a system that covers multiple messages, without further confusing the consumer with 'nearly organic' products. Single-issue labels backed by single-issue campaign organizations such as the RSPB are much easier for the consumer to relate to. Introducing further greyness with a conversion label therefore is not considered in anyone interests beyond the small-scale fruit and vegetable grower. The problem for the conversion market is that it is not only transitional but it is also transient. However, if the middle ground consolidated into a 'gray-green' market, this could potentially be encapsulated into a single concept that the consumer can identify with, such as 'doing my bit for the environment'. In which case conversion products could be marketed within a mainstream niche, although not the organic niche. Organic is currently purchased for perceived health benefits and if it were to attempt marketing on the environmental platform there is the danger that the consumer would not wish to identify with such a strong environmental 'activist' identity. Some organizations perceive a premium graygreen market growing but equally there is a danger that with the greening of the agricultural sector in general the gray-green market will be squeezed between a growing organic sector and a green conventional sector and will not be able to retain a premium. Within the local market there is good potential for sale of conversion products either at a small premium for local freshness or on an 'organic de facto' trust basis but these arrangements require considerable and knowledgeable marketing activity.
This may be due to the relatively good IACS rates they already receive, but also arable farms are stockless which makes conversion more onerous. Whereas for dairy, beef and sheep farms, conversion requires relatively few changes to farm practice since mainly fertilisers but not herbicides or pesticides will have been used. The arable sector also faces a mindset problem. These farms have more than any other taken out hedgerows and invested in machinery. Information is seen as key to creating a coordinated stable organic grain market. There is a perceived overall lack of organic arable expertise within the UK.
154
4
Conclusions
The conversion period is typically conceptualized as a period of inevitable economic downturn. Currently, products from the conversion period are not considered 'available' for premium, because full organic status has not yet been achieved. At the same time, new markets are emerging that could potentially allow access to premiums before the conversion process has been completed, that is premiums for products from the conversion period. Outside the organic food market, new markets are emerging that both compete and cooperate with the organic sector. Competing markets arise from the growing 'environmental' sector; products from integrated and low input farming systems and high welfare standards, whilst cooperation between conventional and organic producers is found in the growing local food sector fuelled substantially by grassroots activity. From this perspective it is conceivable that products from the conversion period, conversiongrade products, could enter associated markets, not necessarily under the organic banner but as environmental products in their own right. Environmental labels already exist in the UK. UK supermarkets sell under Conservation Grade and Integrated Pest Management labels but these are promoted little in order to consolidate the organic market and avoid confusing consumers. But, subsidies for integrated and low input fanning systems are increasingly diverting farmers away from the organic option. Documentation and control procedures for organic certification demandtimeand understanding and are seen by many as excessively onerous. Although, the revised Rural Development Regulation makes specific reference to growth of organic markets, future development of the sector may depend on EC and state support for organic farming relative to other agri-environmental methods. Most organic support schemes allow farmers to access payments from agri-environmental schemes up to a maximum overall level but there is considerable variation in funds available under agri-environmental schemes. Whether these schemes are complementary or competitive with organic support contributes to the level of interest in organic agriculture. This situation could increase pressure for environmental and semi-organic labels. The local food market offers scope for marketing conversion products as organic or as 'fresh, natural'. For small-scale organic horticulture and processed food producers it is imperative that the local market is sustained for their existence to be secure. However, the rapid expansion of pioneer local food initiatives over the last ten years has begun to slow and sales through many box schemes are now saturated. Nevertheless, the foundation has been laid for the sector's move from 'direct local' to the local independent sector. This would enable daily access to products and access for consumers who are not prepared to change their shopping habits to access direct markets. The inclusion of local foods into the independent sector provides the opportunity for added value that could be vital in retaining market share and maintaining competitive advantage over supermarkets. However,
155 there are several constraints on the development of this market, including the irregular supply of produce that need to be addressed. Catering outlets are potentially good market opportunities for organic and inconversion products supplying both local tourist outlets, and national hotel and restaurant chains. However, catering outlets were poorly used by both large and small organic farms in the survey. A major requirement for future research on the organic marketing sector therefore is to examine the barriers and drivers of the catering market. As the corporate controlled share of the organic market continues to put downward pressure on organic premiums, the future strategy for converting farmers may lie in lower organic premiums combined with an interim 'conversion' premium obtained indirectly through environmental and local markets. The development of the environmental market seems likely to depend on quality assurance standards, which are under development. Whilst the development of the local food market is likely to depend on the continued trend towards 'new economies' incorporating social as well as environmental aspects of sustainability into food consumption.
References 1. Padberg D.I., C. Ritson, L.M. Alibasu (eds) (1997) Agro-food marketing. CAB International (in association with International Centre for Advanced Mediterranean Agronomic Studies (CIHEAM) Wallingford 2. 1992 EU Council Regn. 'on the protection of geographical indication and designations of origin for agricultural products and foodstuffs' 3. Holt, G., A. Subedi, C. Garforth, (2002) 'Engaging with the Policy Process in Nepal', Working Paper 2: DFID NRSP R7958, International and Rural Development Department, School of Agriculture, University of Reading 4. Padel, S (2002) 'Studying conversion as a human activity system'. UK Organic Research 2000', Aberystwyth 26th-28th March 5. Chevalier, J (2001) 'Stakeholder Analysis and Natural Resource Management' and 'Stakeholder Information Systems' http://www.carletoaca/~ichevali/STAKEH.html#Two 6. MacLeod, G. (2000). "The learning region in an age of austerity: capitalising on knowledge, entrepreneurialism and reflexive capitalism." Geoforum 31: 219-236; Marsden, T., J. Banks and G. Bristow (2000); "Food supply chain approaches: exploring their role in rural development." Sociologia Ruralis 40(4): 424-438; Morgan, K. and J. Murdoch (2000); "Organic vs. conventional agriculture: knowledge, power and innovation in the food chain." Geoforum 31(2): 159-173
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157 THE COMPETITIVE IMPACTS OF ORGANIC PRIVATE LABELS IN GENERAL FOOD RETAILING ASTRID JONAS AND JUTTA ROOSEN Department
of Food Economics and Consumption Studies, University Kiel, Olshausenstr. 40, 24098 Kiel, GERMANY [email protected], [email protected] This paper presents an overview of the pro- and anti-competitive impacts of private-label products in the German market for organic products. A large share of organic products in general food retailing is being marketed under private labels while national brands constitute only a share of 32 %. The big share of organic private labels can increase buyer power of food retailers. Retailers are able to exert pressure on their manufacturers to ensure that they receive products of the required quality and at the lowest possible price. Despite these anticompetitive effects, private-labelled products can also have pro-competitive impacts. The organic food production sector is characterised by many small manufacturers. For them, the production of organic private labels implicates lower costs. Furthermore, private label goods do not have to compete for shelf-space, and producers do not have to pay slotting allowances.
1
Introduction
Since the EU introduced support for the conversion towards organic agriculture in the early 90 's, the supply of organic food strongly increased. Experts are becoming increasingly concerned that this subsidization could disturb the equilibrium on the market for organic products. Already in 1997, the share of organic products being sold as organic was 95 % in the case of potatoes, 90 % for vegetables and fruits, 85 % for cereals, 65 % for beef and 50 % in the case of milk [18]. However, surveys consumer interviews indicate that there is an unsaturated potential of demand for organic products. Furthermore, in Germany the demand for organic products continues to increase. Despite these trends and compared to other European countries, the share of organic products in food retailing remains very small in Germany. According to an estimation of the ITC [24] the share of turnover with organic products ranges between 1.7 - 2.2 % of total food retailing for Germany and between 2.5 - 3.7 % for Austria, Denmark and Switzerland. In light of these numbers, Hamm [16] concludes that the market of organic products has a much greater potential than currently achieved. Although general grocery stores are the most important shopping location for food for German consumers, the distribution of organic products by general food retailers remains minor [23]. Only 37 % of organic products are sold by general food retailing in Germany, while the major share is distributed by nature food stores [19]. The powerful position of food retailers can be a reason impeding the successful listing of organic products. Indeed, the concentration of German food
158 retailing has been strongly increasing for years. By now the market share of the ten largest food retailers amounts to 84 % [29]. Estimates suggest that the five biggest food retailers alone will achieve a market share of over 80 % by 2010 [28]. Because of this market power, retail players reach favourable purchasing agreements and other strategic advantages in the negotiation with manufacturers and suppliers. The increase in products marketed under private (retailer) labels is considered by economists as evidence for retailer's mounting buyer power [40]. Indeed, national brands constitute only a share of about 32 % of organic products sold in German food retailing28 [2]. This shows how important organic private labels have become for German food retailing. Most food retailers have developed their own organic private label. These organic private-label products - sold as premium products - can bear pro- or anti-competitive effects. On the one hand the large share of organic private labels can increase buyer power of food retailers. Retailers are able to exert pressure on their manufacturers to ensure that they receive products of the required quality and at the lowest possible price. On the other hand the organic food production sector is characterised by many small manufacturers. For small producers the production of organic private labels implicates lower costs in particular by decreasing transaction and marketing costs. Furthermore, private label goods do not have to compete for shelf-space, and producers do not have to pay slotting allowances29. In this paper we will discuss the pro- and anti-competitive effects of private labels in the market for organic products. These competitive impacts are considered in three categories, those impacting theretailer-supplierrelationship,those affecting the horizontal competitive position among retailers and lastly those implying the consumer-retailer relationship. Before turning to the competitive impacts, we give a description of the market for organic products and the use of private labels in European, and more specifically German, food retailing. 2
Trends of Organic Products and Private Labels in Food Retailing
2.1
Organic products
The origin of the European organic movement dates back more than 50 years. But it was only in the seventies that nature food stores expanded to commercial significance ([6] cited in [38]). Since the late nineties, organic food has increasingly been achieving mainstream status, especially in West- and North-European countries. The highest market shares are found in Austria, Denmark, Germany, Sweden and Switzerland. This is partly a result ofrelativelyhigh standards of living and strong environmental awareness in these countries. Responding to this shift in 31.63 % of organic products were sold as national brands, 36.74 % were sold as organic private labels and 31.63 % were sold as organic products of the independent food retailers [2]. 29
For more information about slotting allowances cp. [1].
159 consumer demand, supermarkets and food multinationals are becoming increasingly involved in the marketing of organic products. Focusing on a new segment of organic consumers, their growth rates in sales of organic products exceed those of traditional players such as nature food stores who remain focused on the traditional segment of organic food shoppers [38]. The introduction of organic products into mainstream retailing has drastically changed the patterns of distribution. Today, over 50% of organic products are sold by general food retailing in several European countries, such as Austria, Belgium, Denmark, Finland, Sweden, Switzerland, and the UK. In Germany, Italy and the Netherlands, however, nature food stores still have a dominating position ([6] cited in [38]). In Germany only 32 % of organic products are distributed by general food retailing, whereas 67 % of all foods are sold by food retailers. The bulk of organic food is still being sold by nature food stores (38 %), by direct sales and weekly markets (17 %), by bakers/butchers (7 %), and by restaurants and canteens (1 %) [19]. While the share is remaining small, in Germany the turnover with organic products has increased from 1997 to 2002 from 31 % to 33 %. According to Hamm [19] the turnover of organic products has increased from 2001 to 2002 from 2.7 billions € to 3 billion € corresponding to a share of 2.3 % of the total turnover in food retailing [33]. The supply side of the European organic food market is highly fragmented with many small to medium-sized specialised food manufacturers. However, since the nineties, there have been several important developments that are changing the characteristics of the market. Some of the large European food retailers started to offer organic product lines [38]. Food retailers became increasingly involved in the organic market, and launched retailer brands specifically for organic products. 2.2 Private labels DEVELOPMENT OF PRIVATE-LABEL PRODUCTS Many different definitions of private labels exist in the scientific literature. Most often the term 'private label' is used as a pendant of the term 'brand' [13]. However, this paper bears on the following definition: private labels are product labels used by retailers to identify themselves as owner of the brand [4]. For years German food retailing has found itself in a concentration process. Only some companies, mostly companies with big outlets or discounters, have managed to increase their turnover. In 1999 the CR530 of the German retailers reached 44.6 % of total turnover in food retailing (Metro-Group 11.9 %; REWE AG 10.8 %; Aldi-Group 8.7 %; Tengelmann 6.6 %; Asko-Group 6.6 %). Furthermore, the consulting group KPMG [27] estimates that the CR5 of the German food retailing will reach 82.2 % of total turnover in 2005 [27]. This suggests that strong competition is reigning in the food retailing sector. By Concentration ratio of the five biggest firms.
160 increasing its turnover, the market power of a given retailer will increase more than the market power of other competitors.31 And by supplying private labels a retailer is able to increase its market power by fostering customer loyalty. Considering the development of private labels over the years, we can observe a strong change in the strategic positioning of private labels. In the seventies, private labels have been brought into general food retailing in response to discount products. These private-label products were in general 'NoNames'. Their price is low and the quality is inferior to the quality of national brands. These products are products of the 'low-interest' product group and consumers buy them because of their low price. Producers of these products in general are medium-sized companies. In the eighties, a new private-label product group came on the market the 'Pseudo-brands'. Pseudo-brands are low priced and the quality is not quite as good as that of national brands. Manufacturers are interested in producing these types of products either as a second product line ensuring full employment of their production capacity, or because they are specialised in the production of privatelabel products. Since the nineties, retailers have been attempting to place themselves not only on the price level but also on the quality level using private labels. 'Umbrella brand names' or 'mono brands'32 appeared on the German food market. These exclusive private labels are copies of national brands of the same or even of better quality compared to the market leading national brand. Retailers use these products for image building and for customer binding. Considering these different generations of private labels, the following allocation can be found today in Germany: nearly 35 % of private labels are 'pseudo-brands', nearly 50 % of 'NoNames' and nearly 15 % of exclusive private labels [12]. THE ROLE OF PRIVATE-LABEL PRODUCTS Private-label products have several characteristics of importance to manufacturers, retailers and consumers, and depending on the point of view the relative importance of these characteristics will differ. Most private-label products feature a good priceperformance-ratio for consumers. Thus, consumers are able to substitute privatelabel products for high-priced national brands. Furthermore, private-label products complete the scale of available product variety. Cotterill and Samson [8] conclude that price-conscious consumers switch to private-label products because their prices are lower than those of national brands. Although this seems to suggest that privatelabel products are of particular interest to price-sensitive consumers, consumers seem to be less sensitive to changes in the prize of private-label products once they have verified that the private-label product is always cheaper. Private-label products give retailers the possibility to develop their own innovative products. Retailers can bind the consumers by selling private labels and A retailer has market power, if he is able to set the price above the price which would prevail under competition. The price under competition is usually taken to be marginal costs [5]. 32
'Mono brand' means that retailers sell different product groups with different private labels.
161 obtain herewith a more powerful position than their competitors. Manufacturers can reduce overcapacity by producing private-label products in addition to their own product line. Thus they are able to reduce the risk of not being able to sell their products. Overall, producers can enhance the producer-retailer-relationship [4]. Figure 1 shows the market share of private labels in Germany in comparison to several other European countries. Considering the market share of private labels the leading countries are Switzerland, the UK and Belgium, Germany, together with France, takes a medium position. This suggests that Germany, in comparison with other countries, has the potential to increase the share of private labels in the food retailing industry. Czechia • Greece Italy Austria Ireland Sweden Norway Spain Germany
2.10%
• • 2.80% M M E M d 7.20%
B i l ^ H H 7.60% ^ ^ • ^ • B 9.50% Q S B ^ ^ ^ H 10.00% ^^^^BBOam 11-20% ^^^ammBBBm 12.70% I ^ H ^ ^ H 14.60%
France Netherlands Belgium
30%
UK Switzerland
Figure 1. Private labels in Europe 1999 [26].
KPMG [26] estimates that the share of private labels in Germany will increase while the share of national brands will decrease over the next ten years (see figure 2) underlining the increasing importance of private labels for food retailing. From 1980 to 2010 the share of private-label products will more than double from 14.5 % to 32.5 %.
162
2010 ^ H ^^^^^^^^H •
32.50%
2005 ^ H ^^^^^^^^U ^H~27oO%" 1995 ^ H ^^^^^^^H HH2O50% • branded products 1990 ^ H ^^^^^^^^H ^^Hi8~90%
• private labelled products
1985 ^ H ^^^^^^^H ^ ^ ^ 1 8 . 3 0 3
1980 ^ H
^HH4~50^
Figure 2. Development of the share of private-label products in German food retailing [26].
Big British foodretailerslike 'Marks and Spencer' or 'J. Sainsbury' have built up exclusive private labels, which are able to compete with the top national brands. In France, consumers associate private labels with products of bad quality. There, private labels compete with second best or third best national brands [11]. In the USA, private labels are often imitations of national brands, and consumers buy them as perfect substitutes of national brands [7]. However, observing a negative correlation between the market share of private labels and disposable income, Hoch [21] concludes that private labels are inferior goods in the USA. An American study shows that private labels perform better in product categories of high turnover and large margins. Private labels are also more successful when they have to compete against fewer national manufacturers who spend less on national advertising. The authors also conclude that customers care more about the quality of the private-label products than about the lower price [22]. In an empirical investigation, Ward et al. [39] analyse if the launch of private labels has an effect on the prices of national brands in the USA. They conclude that an increase of the share of private labels is correlated with a rise in the prices of national brands. Staahl Gabrielsen et al. [36] analyse the impact of private-label launches on the price of national brands in Norwegian food retailing. They, too, establish that a launch of private labels increases the price of national brands. In addition, Cotterill et al. [9] observe that in general the price of private labels is not an important strategic weapon, if the share of private labels is low, but the price of private labels becomes more important if the share of private labels increases in a given class of goods.
163
In a cross-country comparison it becomes evident that the price position of private-label products differs to a large extent in Germany, France and the UK. In Germany, 76 % of private labels are low priced and 24 % are medium priced. In contrast, retailers in the UK and France also sell high priced private labels. In the UK the share of high priced private-label products (15 %) is nearly as big as the share of low priced private labels (21 %).33 In France we find a share of 42 % for low-priced, 55 % for medium-priced and a much lower share (3 %) of high-priced private-label products [13].
• first (of national brands) 0second (of national brands) Pthird (of national brands) Brest (of national brands) D private labels
1998
1999
2000
2001
Figure 3. Market leadership of brand products and private-label products in Germany [15].
Looking at the development of market shares in Germany from 1998 to 2001, figure 3 shows that private-label products are expanding at the cost of national brands. Only the leader of national brands is able to maintain its market share. The other national brands lost out. The remaing brands in the market lost 4 % of market share from 1998 to 2001. This suggests that the market is diverging into two segments: the leading, successfully branded products on the one hand and the private-label products on the other hand. 2.3
Private labels in the market for organic products
By offering goods that conform to the benefit perception of consumers, retailers can compete successfully with market leading brands. Therefore, it is important that retailers place premium private labels in the food market and not only 'NoNames' The remaining 64 % are medium priced.
164 [3]. In Germany organic private labels belong to the class of exclusive private labels and represent the attempt of the retailer to develop such a brand [34]. They have achieved a considerable market share [2]. With 32 % manufacturers of national brands play a subordinated role for most product categories. Most food retailers have developed their own organic private label group. Some examples of organic premium private labels are 'Naturkind' by TENGELMANN, 'Fullhorn' by REWE AG, 'Grimes Land' by METRO, 'BioWertkost' by EDEKA, 'BioBio' by PLUS and 'Terra pura' by GLOBUS. The first of these organic private labels were introduced in the retail market in the 1980's [14] and most of them are marketed under 'umbrella brand names'. Only 'Aldi', Germany's biggest discounter, markets organic products as 'mono brands' [20]. The product segment of organic products shows a trend for selling high-priced products in Germany as private labels [13]. Table 1 depicts the classes of goods marketed under German organic private labels. Table 1. Classes of goods of German organic private labels [41].
Private label
Retailer
Launch
Naturkind Fullhorn
Kaiser's, Tengelmann Rewe AG, Minimal, HL, Toom, Globus Globus SB Markt Edeka
1986 1988
Spar, Eurospar, Intermarche Plus
Terra Pura BioWertkost/ Gutfleisch Pro Natur BioBio
Classes of goods 1 2 3 4 5 6 7 X
X
X
X
1997 1999
X
X
X
X
2001
X
2002
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
1: nutriments (noodle, cereals, bread, staple food, sweets etc.); 2: fruits and vegetables; 3: meat, fish; 4: dairy products; 5: juices; 6: oil, fat, parfaits; 7: natural stimulants (chocolates, tee, beer etc.)
The private label group 'Fullhorn' is the only private label covering all seven classes of goods: nutriments, fruits and vegetables, meat and fish, dairy products, juices, oil, fat and parfaits and natural stimulants. Most often the categories (3) meat and fish and (7) natural stimulants are not covered by private-label groups. All private label groups cover nutriments. The large share of organic private labels may be an evidence of buyer power of food retailers. Marketing private-label organic products fosters the diffusion of organic products, wins customer loyalty, enhances independence from producers and strengthens group integration and the motivation of employees [14]. In the following, the pro-competitive and anti-competitive effects of organic private-label products will be analyzed.
165 3
Competitive Impacts of Private-Label Organic Products
Private labels alter the way in which manufacturers, retailers and consumers interact. They thus influence the competitive nature of the industry and the competitive position of its actors. Assessing the competitive impacts of privatelabel products is a complex task because they alter the interaction among actors along several dimensions. Table 2 presents a summary of impacts that have been discussed in the literature. We consider the impacts on three levels centred on the retailer as the link between manufacturers and consumers. On each level, impacts may be pro- or anti-competitive. In the following subchapters these effects will be described in relation to the market for organic products. Table 2. Pro- and anti-competitive impacts of private-label organic products.
Relation from Pro-competitive impacts Manufacturer Low price at high quality; Improved supply chain - retailer management; Entry facilitation Higher margins/rates of return; Retail Distinction from competitors; Price pressure Retail Diffusion of organic products; Customer loyalty consumer
3.1
Anti-competitive impacts Lost flexibility due to vertical integration Turnover losses for conventional products Low-cost imitations; Private label as strategic weapon; Insufficient communication
Pro-competitive impacts of organic private-label products
1. Manufacturer - Retailer Relationship From the consumers' perspective the principle benefit of private-label products is that the price most often undercuts the price of manufacturer brands. Retailers use organic private labels to enhance their retail brand image through offering good quality products. However, the quality is not likely to be as good as that of branded goods. Still the pressure from private-label sales may stimulate further product development and innovation by branded manufacturers, thus increasing the product quality variety for consumers [9, 12, 36]. Private labels are thought to foster process innovation while national brands compete using product innovation [37]. The search for suitable partners for the production of organic private-label products often is very difficult as the retail sector has defined quality measures that are not easily met by manufactures. This in particular is a problem in the production of fruits and vegetables, because these products often lack quality or are subject to considerable quality variations [10].
166 Entry barriers for new manufacturers result in higher pricing and lower output by producers. Both these outcomes reduce consumer surplus and result in lower social welfare than if entry were easy. Existing firms can better realise cost-saving innovations or developments than new entrants without any experiences. If there are downward sloping cost curves the production volumes of incumbents allows realising economies of scale which will not be available to a new entrant producing a necessarily small volume initially [11]. Advertising can also form an entry barrier. Brand loyalty can be stimulated by extensive marketing, both making consumers more price inelastic and increasing their psychological switching costs. Advertising also can infer an image of quality on brands that makes them preferable to new products that are not associated to this positive quality signal. Other entry barriers can be the access to shelf space or/and the payment of slotting allowances [11]. Organic private label production can provide a useful alternative entry route to manufacturers before they launch their own-branded product. Thereby they may be able to gain valuable experience and knowledge. Production techniques can be refined and processes that reduce costs can be developed. Private label production may generate valuable cost savings. The responsibility for marketing private label goods is undertaken by the retailer. This reduces the start-up costs for new entrants. Private label goods do not have to compete for shelf-space, and producers do not have to pay slotting allowances [11]. Finally, the threat of further branded entry may also place additional pressure on existing brands, reducing their market power. Organic private labels can facilitate the linkage between producers and retailers and improve the efficiency of the supply chain. The number of agents which are involved in the production/ distribution chain can be reduced by a direct contract between retailers and organic producers [11]. The buying markets are secured by long term contractual obligation. So far, the supply of organic products in the German food retailing still is fairly restrained. A range of organic products only consisting of branded products may bring about the danger that retailers are too dependent on single producers34 [14]. 2. Retail Level Retailers get higher margins selling organic products than selling conventional products [35]. Furthermore, the margins can be much higher by selling organic private labels than by selling comparable branded organic products, because of the increased price pressure that retailers exert on producers [10]. Secondly, organic private labels lead to higher rates of return. At the moment, the rate of return of German food retailing approaches 1 %. In contrast to this, in the UK - with a high share of private labels - retailing achieves rates of return of 3-5 %, sometimes even 6-7 % [10]. Thirdly, by establishing organic private labels, retailers place themselves as 'premium retailers' in the food market. In this way they can distinguish themselves and stand out from their competitors [10]. For example 'HIPP' baby food is a very dominant brand of organic products in German food retailing.
167 Private-label organic products in German general food retailing are cheaper than organic products in nature food stores. Very cheap private label products may be seen as the major retailers' competitive response to the discount stores. This can put new pressure on prices and lead to branded products offered at lower prices35. 3. Retail - Customer Relationship General food retailing promotes the diffusion of organic products. Thus, retailers appear as ,organic diffusion agents' [25]. Retailers get competitive advantages in comparison to their competitors by selling organic private-label products at a lower price than branded organic products. By this, they can bind the customers [14] and convert a short-term customer binding into a long-term customer binding leading to a higher turnover. The establishment of organic products as products of high quality and safety can lead to an image advantage for retailers and higher consumer binding [10]. According to a survey of the Food Economy the topics 'food safety' and 'the retail as a mark' rank among the most important topics in 2002. However, some organic private labels show communicative weaknesses. Hamm et al. [17] show that the private label 'Naturkind' lacks recognition by visitors of an important organic trade fair 'BioFach', so that the image building for the retailer 'Tengelmann' might be limited. In contrast to this, the retailer group 'REWE AG' advertises the organic private label 'Ftillhorn' in journals and achieves high name recognition among consumers. Furthermore, retailers can bind new customer groups such as health-conscious and consumers which are interested in environmental protection. These buying motives have become more important during the last years [32]. 3.2
Anti-competitive impacts of organic private-label products
1. Manufacturer - Retailer Relationship Retailers can normally choose from a number of potential suppliers. Thus, retailers are able to exert pressure on their manufacturers to ensure that the products they receive are of the required quality and of the lowest possible price. This increases the margins of their private label products [11]. It is especially the focus of discounters to offer products at low prices. Their involvement in the organic food industry will erode farmers' and producers' margins. Retail prices of organic foods fell significantly in 2002 and a continuation of this trend will make the industry increasingly unprofitable for organic farmers and manufacturers [30]. Furthermore, increasing production in the face of limited marketing channels may put downward pressure on prices. Lower prices will hurt farmers' margins and
However empirical analyses of private labels (not especially organic private labels) suggest that the price of national brands rise if the market share of private labels increases (cp. [33, 35]).
168 may discourage fanners from converting to organic agriculture [31]. This will result in a small number of potential suppliers. The food retailing sector needs non-varying supplier structures for the diffusion of organic private labels throughout Germany. Food retailers want very efficient suppliers which can react elastically to short term quantity changes [10]. But most producers of organic products are small manufacturers or organized in small organisations. Therefore, the existing supplier structures are in parts not suitable for the conditions demanded by retailers. To a large extent, the existing marketing structure of producers is inadequate for marketing using wholesale. Most manufacturers produce in small quantities, but the retailers need big assortments. Procuring from one single producer retailers can lower their transaction costs [10]. Thus, only some big producers can be considered for the production for organic private labels. 2. Retail Level By expanding the number of organic private labels with a wide assortment, consumers can more easily substitute conventional products by organic products. That means the launch of an organic private label leads not implicitly to a turnover increase. The increase in turnover for organic products will be bought at the expense of turnover losses for conventional products [10]. 3. Retail - Customer Relationship If organic private label products are very similar in packaging to branded products, uninformed or inattentive consumers might mix up the products and purchase the private label by mistake or by thinking that the goods are identical and made by the same manufacturer. Branded goods have an image of quality, performance or even lifestyle. By putting private label products in similar packaging retailers hope to become associated with this brand image. In the short term the imitation of branded products may be beneficial to the consumer. They purchase a product on the same development level as the branded product but pay a lower price. However, if retailers swiftly introduce brand imitations, manufacturers may reduce the level of investment or continue to develop new aspects to products more quickly. This can in long term be detrimental to consumers [11]. If a retailer is able to generate brand loyalty to its store brands, the store loyalty is also increased. Mostly, consumers visit stores to purchase a wide variety of products, not just a single branded good. The greater the store loyalty the less likely consumers will switch stores in search for any particular brand or in response to price promotions or stock-outs in other stores. In the case of insufficient supply of the consumers' usual brand, the switching costs of the consumers will be so high that he would prefer to purchase a secondary brand or private label product [11]. Demand for branded products will be reduced as a result, and their unit cost will increase. Small retailers not engaging in a private label programme, however, have to carry on selling branded products. This worsens their competitive situation and increases the oligopoly structure of the market [40].
169 A big share of organic products is sold as private labels by the food retailing. This bears out a low rate of advertising for organic products. In Germany, only the food retailing group 'REWE AG' does advertise its organic private labels. Thereby, consumers lack information. In Germany most consumers are informed about organic products by organisations or the Federal Ministery of Consumer Protection, Food and Agriculture. They finance an extensive advertising campaign for the 'Okosiegel', the German labelling for organic products, which are produced according to EU guidelines. The 'Nitrofen scandal'36 clearly showed that the demand for organic products depends on the trust of consumers in organic products. During this scandal the sales of organic products decreased considerably. Retailers can lower the risk of such scandals by imposing high quality standards. This is important to contain food scandals that easily reduce sales also in related products groups. 4
Discussion
In comparison to other European countries, the market share of organic products in general food retailing remains small in Germany. This may be linked to the fact that nature food stores have traditionally played an important role. Increasing the involvement of general food retailing into the marketing of organic food may allow reaching new segments of organic consumers. Although many researchers speak of an unsaturated market potential for organic products, retailers hesitate to move into the markets of organic products. Many of them have developed their organic private label but face difficulties in finding suitable suppliers. Retailers search for large assortments of homogeneous quality. On the other hand, manufacturers of organic products face difficulties in finding suitable marketing opportunities (slotting allowances, market power, etc.). The challenge for expanding the market for organic products will be to adjust the structure of the organic food industry to the needs for large scale retailing. Investment into this structural adjustment will only payoff if the surge of consumer interest in organic products is going to last. Future studies could try to discern reasons that keep manufacturers from expanding into general food retailing and retailers from enlisting a larger number of organic products. References 1. Azzam, A. M., Slotting Allowances and Price-Cost Margins: A Note. Agribusiness 17 (3) (2001) pp. 417-422. In 2002 the carcinogenic pesticide ,Nitrofen' was found in organic feed, organic eggs, organic broiler and organic turkey meat in Germany.
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the 'Gesellschaft fur Wirtschafts- und Sozialwissenschaften des Landbaues e.V." during 30.09.2002 and 02.10.2002 in Halle (Saale). 21. Hoch S. J., How should national brands think about private labels? Sloan Management Review 37 (Winter) (1996) pp. 89-102. 22. Hoch S. J. and Banerji S., When do private labels succeed? Sloan Management Review 34 (Summer) (1993) pp. 57-67. 23. IFAV, VerbraucherverhaltenbeimLebensmittelkauf (KoTn, 2001). 24. ITC, Overview world markets for Organic Food & Beverages (forecast) (2002). http://www.intracen.org/mds/sectors/organic/welcome.htm, date: 18.02.2003. 25. Kull S., Okologieorientiertes Handelsmarketing: Grundlegungen, konzeptuale Ausformungen und empirische Einsichten (Frankfurt am Main, 1998). 26. KPMG, Status Quo und Perspektiven im deutschen Lebensmitteleinzelhandel (Koln, 2001). 27. KPMG, Trends im Handel 2005. Ein Ausblick fur die Branchen Food, Fashion&Footware (2003). http://www.kpmg.de/library/surveys/satelht/Trends_im_Handel4.pdf, date: 3.6.2003. 28. M+M EURODATA, Konzentration im deutschen Lebensmitteleinzelhandel. News item 31.10.2000. http://www.mm-eurodata.de/presse/00103102.html date: 26.05.2003. 29. M+M EURODATA, Top 30 des Lebensmittelhandels 2002 nach GesamtUmsatzen. News item 21.03.2003. http://www.mm-eurodata.de/presse/Top30_GesamtUmsatz_2002.pdf, date: 26.05.2003. 30. ORGANIC MONITOR, Challenges facing Kunast in organic food industry. Research news (2003). http://www.organicmonitor.com, date: 16.06.2003. 31. ORGANIC MONITOR, Raising production is not the sole answer to developing German organic food industry (2003). http://www.organicmonitor.eom/rl203.htm#al, date: 16.06.2003. 32. Schade G., Markenbildung bei Lebensmitteln im Europa der Regionen. In Wirtschafts- und Sozialwissenschaftliche Fachgebiete der Landwirtschaftlich-
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173 MEASURING CORPORATE SOCIAL RESPONSIBILITY IN A BUSINESS TO SOCIETY CONTEXT G.W. ZIGGERS Nijmegen School ofManagement,
P.O. Box 9108, 6500
HKNijmegen
Netherlands E-mail: [email protected]
Measuring both customer and societal satisfaction is critical to the process of serving them and outdoing competition. This is also true for agribusiness and the food industry. Predicated on the view that quality is defined as meeting or exceeding customer expectations, the gap approach has contributed significantly to our understanding of the service delivery process in several areas. The gap model serves as a general framework to examine the total delivery system, measure gaps, and explore not only the causes of the gaps but approaches towards their closure. An interesting and important question concerns the extension and applicability of the gap model to the business-to society context. This extension has significant implications for the assessment of the delivery system as well as the measurement and diagnosis of potential gaps. A subjective approach of corporate social performance is chosen. It is argued that social responsiveness can be considered as a requirement of an economic offering, which is experienced and sensed by society without actually consuming it. The developed model provides a modular approach to assess the performance of the delivery system. The delivery system can be assessed at the consumer, channel-member and/or society level. Finally recommendations for further research are provided
1
Introduction
Due to the pressure to understand market conditions, customer and stakeholder requirements is growing to the point where organisations will be compelled to exceed, rather than simply meet, expectations. This is also true for the agribusiness and food industry, especially because these days, it has become more and more difficult to outdo competition on relative tangible aspects like price and product quality [1]. Additional features linked with the product, i.e. the service and social responsibility of an organisation, appear to become more important than the product itself [2]. In adapting to this pressure, organisations have looked to production and service initiatives as a way to create or sustain a competitive advantage. Organisations are returning to a customer-centred focus as opposed to being driven by technology or product innovation. Contemporarily, this service or quality orientation is taking all organisations, especially those with a traditional manufacturing orientation, beyond the traditional product focus towards total quality management (composed of product, process and service excellence) as the
174 ultimate goal of quality initiatives [3]. Measuring both customer and societal satisfaction is critical to the process of serving the customer and society and responding faster and better than competition. Although there is a growing body of research on quality management in the business to consumer context, research which has addressed quality management measurement in the business-to-business environment, as well as in the business-tosociery environment is scarce. Other studies discuss the need to conduct an audit of each participant in the delivery system, among other parties, suppliers, support organisations, and interest groups [3]. It is clear that more work on developing a theoretical foundation for measuring customer satisfaction and delivering high quality - including among others, social responsibility - in the business-tobusiness-to society context is needed. From a theoretical perspective, one of the most effective models to address the issue of quality, in particular service quality, as a means to total quality management is presented in the gaps model [4, 5]. Predicated on the view that quality is defined as meeting or exceeding customer expectations, the gap approach has contributed significantly to our understanding of the service delivery process in several areas. The gaps model serves as a general framework to examine the total delivery system, measure gaps, and explore not only the causes of the gaps but approaches towards their closure. An interesting and important question concerns the extension and applicability of the gap model to the business-to society context. The starting point of the approach is to recognise that there are, or may be, problems with the delivery system and that identifying customer and societal expectations plays a crucial role in solving them. The objective of this paper is to present a model of the quality delivery process in a business-to-business-to-consumer-to society (BBCS) context. The paper concludes with implications and recommendations for future research. 2
Measuring (Service) Quality
As a result of the objective and the approach of corporate social responsibility in this paper, the Servqual-model is one of the most effective models to address the issue of quality, in particular service quality, as a means to total quality management [4,5] As a measurement instrument it provides a general judgement on the delivery process of an organisation, and puts the expectations and perceptions at the centre as opposed to other models/ methods. Predicated on the view that quality is defined as meeting or exceeding customer expectations, the gaps approach has contributed much to our understanding of the delivery process in several areas [3,6]. The Servqual-model [4,5] finds its origin in the service marketing research field. Quality as perceived by the customer is defined as "the extent of discrepancy between customers' normative expectations or desires and their perceptions of the performance"[5,7]. The Servqual-instrument or
175 gaps-model enables one to measure these potential discrepancies in customerperceived quality. It consists of 22 paired questions (based on an earlier discovered set of service attributes that customers might use as criteria in assessing performance [5]) that span five broad dimensions: reliability, responsiveness, assurance, empathy and tangibles [5,8]. The potential discrepancies in customerperceived quality (Gap 5) can be linked to within-company deficiencies or gaps (Gap 1 to 4) (see figure 1, the Gap-model [5]). Criticism of this method of measuring relates to the fact that it is unclear whether satisfaction or quality is measured, as both concepts are defined as the difference between expectations and perceptions. There is still discussion whether satisfaction leads to quality or vice versa [9]. The point of view taken up in this research is that satisfaction in general is used to evaluate a specific context bounded occurrence. Quality on the other hand is the evaluation of a number of successive occurrences made by stakeholders, ending up satisfied or dissatisfied. Quality is much more a long-term evaluation, and, hence, more stable in time than satisfaction [9].
176 consumer
word of mouth com.
personal needs
past experience
external comuni cation
expected service GAP 5
t
perceived service
service delivery
GAP1
GAP 4
external com. to consumers
GAP 3
translation of perceptions into service quality specifications GAP 2
I1 i
management perceptions
ill
Tier
ty ons
provider
Figure 1. The Gap-model [5]
In the scope of this research it can be concluded that the Servqual-model - in comparison with other models/methods, and despite its negative criticism - is the most effective model to address the issue of quality, as a means to total quality
177 management [10]. However this model only makes a distinction between the provider and the consumer. Further details on the quality relationship between provider/ consumer can be found in the substantial amount of research on this subject among others, Parasuraman et al. [4.11], Zeithaml et al. [5], Boulding et al. [12], Cronin and Taylor [13] en Caruana et al. [14]. For more detailed information on the quality relationship in the business-to-business environment more facts are provided in studies from, among others, Kong en Mayo [3], Westbrook en Peterson [6], Parasuraman en Grewal [15] and Ulaga en Chacour [16]. In order to effectuate the objective to develop a framework of the delivery process in a business-to-business-to-consumer-to-society context an extension towards the provider society context is required. This extension has significant implications for the assessment of the (focal) organisation's quality delivery process as well as the measurement and diagnosis of potential quality gaps. In the next section the extension towards the provider-society context of the framework will be elaborated. 3
3.1
A Model of the Quality Delivery Process in the BBCS-Context
Corporate Social Performance (CSP)
With the development of a three-dimensional conceptual model of Corporate Social Performance - the CSP-model - Carroll [17] aims to integrate ideas on 'social responsibility which had developed up to that moment. The model consists of the social issues regarding social responsibility, economic, legal, ethical, and discretionary categories, - e.g. consumerism, product safety, and occupational safety - for which an organisation is responsible, and philosophies of social responsiveness, which range on a continuum from reaction, defence, accommodation to pro-action [17]. The social responsibility of business is defined by Carroll [17] as: "the social responsibility of business encompasses the economic, legal, ethical, an discretionary expectations that society has of organisations at a given point in time ". Criticism of this model concerns, among others, the fact that it is not explained -why organisations are expected to do something and what they are expected to do [18] Building on Carroll's model, Wartick and Cochran [19] attempt to construct a general model of corporate social performance. Their model consists of a principles/processes/policies-approach, by which the principles represent the corporate social responsibilities, the processes represent the corporate social responsiveness, and the policies are developed to address social issues. However, their developed model did not provide a satisfactory means by which the concept
178 of social responsibility could be tested with reasonably accessible corporate data [18]. Wood [20] defines CSP as follows: "a business organisation's configuration of principles of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm's societal relationship." Wood's [20] criticism of the argument of Wartick and Cochran [ 19] stating that Carroll's [17] four categories represent principles of social responsibility (the first element in Wood's CSP-model) is in relation to the fact that people act along the basis of principles instead of categories: "identifying categories, however, is not the same as articulating principles. A principle expresses something fundamental that people believe is true, or it is a basic value that motivates people to act. Categories, in contrast, show how to distinguish among different types of phenomena, but they do not represent motivators or fundamental truths"[20]. Carroll's [17] categories, the economic, legal, ethical, and discretionary responsibilities of firms can be viewed as domains within which principles are enacted, but not as principles themselves [20] "The basic idea of corporate social performance is that business and society are interwoven rather than distinct entities; therefore, society has certain expectations for appropriate business behaviour and outcomes" [20]. However, Porter [1], like Wood argues that organisations are not responsible for solving all social issues. They are responsible for helping to solve problems and social issues related to their business operations and interest. They are responsible for solving problems that they have caused [20]. Social responsibility is relevant to the firm's interests, operations, and their actions. This leaves substantial room for managerial discretion in determining what social problems and issues are relevant and how they should be addressed [20]. Wood includes principles which stand by the moral motives of an organisation and its management in her definition of CSP and takes a moral stand at this.37As she herself indicates principles are the motivators or fundamental truths: "a principle expresses something fundamental that people believe is true, or it is a basic value that motivates people to act"[20]. Hence, as Clarke [18] explains: "Whether a corporation and its management are motivated by enlightened selfinterest, common sense or high standards of ethical behaviour cannot be determined by empirical methodologies available today. These are not questions that can be answered by economists, sociologists, psychologists, or any other kind of social scientist. They are interesting questions, but they are not relevant when it comes to evaluating a company's performance in managing its relationships with its stakeholder groups ". Therefore, in this paper corporate social performance is being examined in terms of the environment of stakeholders, rather than some ideal standard of In her paper [28] "Theory and integrity in business and society" Wood herselfs notes: "I would be bold enough to say that virtually all of us are in this field because of a deep-seated desire to use our talents and gifts to make the world a better place. This motivation comes out in our topics."
179 conduct like Wood [20] employs. The point of departure is the stakeholder with its demands and expectations. As concluded before, it is important for an organisation to understand the wishes and expectations of the customer (channel member(s) as well as the consumer) and the society, in their pursuit to total quality management as a means of remaining competitive. If an organisation and its management (regardless of its motive) meet or exceed demands and expectations of the customer directly linked to the company's product/ markets (i.e. channel member(s) and the consumer) as well as the expectations of society (citizen and non-governmental organisations (NGO's))[20], the organisation delivers quality in the eyes of the stakeholders. For "quality must be judged as the customer perceives it"[6]. 3.2
Corporate Social Performance a Not Product Linked Indirect Quality Requirement
The changing wishes and expectations of customers' keep abreast of the firm's in the course of time developed economic offerings. This natural progression of economic offerings goes from commodities, products, and services to experiences [21]. To escape the development of commodisation of products, manufacturers often deliver services wrapped around their core product, this provides fuller, more complete economic offerings that better meet customers desires [21] However, the 'commodisation trap' which forced manufacturers to add services, now hits services with the same intensity: "today, even professional service providers increasingly discover that their offerings have been 'productised' - embedded into software" [21](figure2).
Carroll [17] Wartick and Cochran [19] and Wood [20] all use a process approach, instead of a focus on outcomes [22].However, "the Wood model is a classificatory device, not a theory because there is no theory logic that relates the elements of the model to one another" [22]. Nevertheless the objective of this paper - the presentation of a model of the quality delivery process of an organization in the business-to-business-to-consumer-to-society context - assumes a process approach and legitimizes working with the ideas presented in this paper, in the development of the desired conceptual model.
180 Relevant to
Differentiated Experiences Services
Needs of custom ers
^y^' Goods
Competitive Position
Comm odities Undifferentiated Irrelevant to
Market
Pricing
Premium
Figure 2. The progression of economic value [21]
All this points to the arising of a new economy, the so-called experience economy [21] or emotion economy [2] based on experiences as an economic offering. British Airways chairman Sir Collin phrases this change as follows: "What British Airways does is to go beyond the function and compete on the basis of providing an experience [..] The company uses its base service (the travel itself) as the stage for a distinctive and route experience"[21] In this paper corporate social performance is considered as the extent to which an organisation meets or exceeds the expectations of society. This goes beyond the legal responsibilities of an organisation, as defined by Carroll [17] and fits in with the line of thought of experiencing an economic offering. Society, i.e. NGO's and the citizen as representatives of certain norms and values prevailed in society, do not consume. Social responsibility, effectuated in the firm's corporate social responsiveness, is therefore not based on experiencing the quality of consuming a real product or service, but on experiences and associations. The latter is considered as an indirect quality requirement. The expectations and perceptions with regard to "offering" a certain quality of social responsibility relate - like experiences - to the sensations existing in society towards the organisation's quality delivery process. These sensations - affected by norm and values - are revealed over a certain duration and are inherently personal [21]. Hence, not directly linked to a product. This makes it different from ordinary consumed products and services. As opposed to societal expectations, indirect quality requirements, the expectations and perceptions towards product (incorporated) and services (to support a product) quality is based on experiencing by means of consuming the product or service.
181 Besides, product quality is directly linked (incorporated) to the product, while quality of service and social responsibility are not, which is illustrated in figure 3. direct quality
prod, quality
service quality
CSR quality
indirect quality
Figure 3. Classification of quality types
Thus, in this paper subjective approach of corporate social performance, in terms of the expectations and satisfaction of stakeholders instead of observable appraisal criteria, is chosen. Also because of the fact that an objective assessment of CSP is almost impossible: "any kind of corporate social performance assessment, including social audits, is inherently value-laden" [22]. The subjective approach also makes the relationship between corporate social performance and stakeholders clear: "the stakeholders evaluate by comparing firm performance to their normative expectations"[22]. The subjective approach is also closely tied to the definition of a social issue, which depends on the existence of a gap between some actual performance which an organisation is rendering and the performance which any relevant public expects from the organisation [22]39. The existence of expectational and perceptional gaps drives the logic behind the BBCS-model, because of the fact that this model measures the quality delivery process of an organisation in the BBCS-context on the basis of potential existing gaps between expectations of stakeholders and actual performance of an organisation as perceived by stakeholders.
It concerns issues in relation to the stakeholders of an organization, and not to society as a whole, for "the impact of a business or corporation on society is a different matter from the impact of business in general on society as a whole [..] Neither business in general nor specific corporations in particular can properly be made responsible for dealing with all social issues" [18].
182
3.3
The BBCS-Model
Research, which has addressed quality management measurement, in particular service quality, in the business-to-business environment, as well as in the businessto-society environment is scarce. The original Servqual-model of Zeithaml et al. [5] has already been extended to the business-to-business-to-consumer context by other research [3,6,15]. The original Servqual-model of Zeithaml et al. [5] and the BBCmodel of Kong and Mayo [3] relate to the service quality, and the service quality linked to a product, respectively. The BBCS-model developed in this paper also relates to the quality of corporate social responsiveness (corporate social perfromance)(See figure 1.4, the BBCS-model). Because expectations and perceptions regarding the quality of social responsibility relate to the sensations existing in society towards the organisation's quality delivery process, then it is logical to assume that dimensions like credibility of the organisation, communication with, and understanding of the society are important factors in a potential development of a discrepancy between the expectations and the perceptions of society, i.e. Gap 5. The importance of these dimensions is also shown in the following quotation: "A part, not apart: it is important to remember that managing socially responsible activity means working with others rather than in isolation: consulting with external bodies in order to understand their concerns (for example, talking to local authorities, employees and customers about what is important to them), measuring their assessment of business performance in priority areas, involving them in action planning, communicating business performance to them, developing the company's priorities as their views and concerns change"[23]. Because of the shift in importance of the dimensions as a consequence of not experiencing the quality of consuming a product or service as a society, there are some amplifications and adaptations compared to the Servqual- and BBC-model, i.e the competence and courtesy of employees is less important. According to the theory on CSP, Carroll [17] and Wartick and Cochran [19] use the four approaches listed by Carroll [17]- reactive, defensive, accommodative, and proactive - to represent the process of social responsiveness. Wood's criticism is that these approaches may indeed characterise various organisational responses to social pressure, but they are not processes themselves. According to Wood's [20] model a corporate social responsive organisation monitors and assesses environmental conditions (environmental assessment), attends to the many stakeholder demands placed on it (stakeholder management), and designs plans and policies to respond to changing conditions (issues management). In case these activities are not or are insufficiently executed, a difference may occur between what society expects of the organisation and what the organisation perceives society expects: Gap 1 in the BBCS-model. Because of the fact that society also is included in the system - next to consumer and channel members - now three sources of Gap 1 are arising in the BBCS-model.
183 In the assessment of the social responsibility of an organisation the outcomes of corporate behaviour are of direct and obvious interest, because the outcomes are the only visible aspects of CSP [20] and the outcomes can be measured and evaluated [18]40. These outcomes are divided into three types: (1) the social impacts of corporate behaviour, regardless of the motivation for such behaviour or the process by which it occurs, (2) the programs companies use to implement responsibility and/ or responsiveness, and (3) the policies developed by companies to handle social issues and stakeholder interests [20]. Weaver et al. [24] also endorse the influence of management on, and their commitment to the translation of the quality policy into rules and instructions: "Research on strategic choice suggest that executives' characteristics including their values and commitment - play an important role in affecting organisational actions". Business ethics research also stresses top management's role in influencing organisational ethics practices".
40
Griffin [29] notes the following: "in organizational effectiveness literature outcomes are different from outputs. Outputs are more easily measured results of actions. Outcomes answer the 'so what?' question. They are more difficult to measure." Scott [29] elaborates further: "organizations produce outputs - goods en services - over whose characteristics they typically exercise considerable control, but outcomes represent the joint product of organizational performance and environmental response. In this sense, environments directly influence outcomes. Outcomes ascertain satisfaction or effectiveness."
184
Norms & Values
Expected social performance
—z Perceived social performance
Business strategy society
Channel communications Consumer communications Society communications
Translation of perceptions into quality specifications
Management's perceptions of consumer, channel member and society expectations
provider
Figure 4. The BBCS-model
At the same time, a socially responsible firm must have the proper number of monitor- and control systems, control mechanisms and (hired) experts (structure) [25]. In case an organisation does not have this at its disposal, and/ or it does not recognise societal effects and/ or actual activities (programs and policies) Gap 2 may arise in the BBCS-model. Gap 2 in the original Servqual-model is described
185 as: "the discrepancy between managers' perceptions of customers' expectations and the actual specifications they establish for the service delivery" [26]. However in the BBCS-model, society is also distinguished as a stakeholder group. As previously argued this stakeholder group does not consume products and/ or services, hence, Gap 2 is described in the BBCS-model as: the discrepancy between manager's perceptions of customers' expectations and the actual specifications they establish for quality delivery including societal requirements. As stated before, as a consequence of not consuming products or services, and therefore not experiencing the quality of consuming a product or service, there is no direct delivery encounter between the focal organisation and society. Nevertheless, in the organisation's relationship with society, the employees should also correctly translate the programs and policies - as formulated by the management - of corporate social responsibility into carrying out their work. In other words the organisation should internally be aligned [3]. If not, Gap 3 of the BBCS-model may arise which indicates the difference between specifications and the actual delivery. From the literature derived on CSP it was discovered that communication, as a means to make the corporate behaviour more transparent, is of imminent importance: "Openness is a feature of an honest organisation. The organisation's transparency is important. The organisation does things well if it provides clarity about its own objectives and values, and about the realisation of these objectives and values. By using openness an organisation can gain the confidence of its stakeholders, it can strengthen its reputation, and it can hold to its people"[21]. It is obvious that the organisation's communication on CSP should be in alignment with the actual performance of the organisation. It is about the acts, not intentions or words only [25]. The organisation's communications with society differs from its communication with the consumer and channel member(s). Communication with society is mostly based on justifying the organisation's behaviour - in particular on social and ecological areas - by which they are responsible for the problems they have caused [20]. By means of internal and external communication, ideas and plans of societal behaviour can be tested before implementatioa By doing so, the organisation provides its willingness and its seriousness in regard with its social responsibility [25]. In not doing this properly Gap 4 may arise, a discrepancy between what the organisation is promising to deliver and what it actually delivers. Table 1 compares the Servqual-, BBC- and BBCS-model with adaptations and amplifications as discussed in this paper.
186 Table 1. The extension of the Servqual model towards a BBCS-model with amplifications and adaptations Developers
B->C Zeithaml et al. [5]
B->B (>C) Kong en Mayo [3]
B->(B->C->) S Goddijn en
ZiggerspOl Quality of
Service
Service surrounding a product
Relationship
Consumer
Channel members)
Quality orientation
Quality Experienced by consuming (direct)
Quality Experienced by consuming (direct)
Which dimensions play an important part in a possible arising discrepancy between expectations and perceptions? (Gap 5) Gapl
Equal important: Reliability Responsiveness Assurance Empathy Tangibles
Important: Responsiveness Reliability
Gap 2
lack of marketing research orientation inadequate upward communication too many levels of management inadequate management commitment to service quality perception of unfeasibility inadequate task standardisation absence of goal setting
But also: Innovation in process issues Innovation in relationships issues
lack of channel member orientation
lack of co-operative alignment between focal organisation and channel member's departments
Social responsiveness Society (including all stakeholders) Quality experienced and sensed based upon Society's value and belief system (indirect) An important part: Reliability Credibility Responsiveness With emphasis on - communication
lack of environmental assessment lack of stakeholder management lack of issues management lack of monitoring and proper controls systems to assess societal effects as a result of organisational commitment. Lack of (proper) programs and policies
187 Gap 3
Gap 4
4
Table 2. (Cont'd) role ambiguity lack of personal role conflict relationships of focal poor employeeorganisation with job and channel members) technology-job fit inappropriate supervisory control systems lack of perceived control lack of teamwork inadequate lack of negotiation and horizontal monitoring of focal communication organisation with propensity to over channel members) promise
lack of alignment of the internal organisation towards societal stakeholders
propensity to over promise lack of (proper) reporting and communication of the organisation's corporate social responsibility activities
Conclusions and Directions for Further Research
A model based upon the Servqual model has been developed to assess social responsiveness. The model is an extension of the provider to consumer and provider to channel member-model, which enables organisations to strive for total quality management as a means of gaining competitive advantage. It is argued that social responsiveness can be considered as a requirement of an economic offering, which is experienced and sensed by society without actually consuming it. Also the BBCS-model provides a modular approach to assess the performance of the delivery system. The delivery system can be assessed at the consumer, channelmember and/or society level. Because of the specific characteristics of the relationship between the delivering organization and society it is more difficult to guarantee reliability and validity of the measured results because sensations are less consistent in time. Moreover, with measuring sensations it is more difficult to get an answer to the question which relates to what one wishes to measure, because of the fact that sensations are effected indirectly and within a person. Besides not experiencing the quality of consuming a product or service as society, it is difficult to generalise expectations of society across a single expectation, because one has to deal with different societal stakeholders. This requires a stakeholder approach rather than "the society" approach in order to assess social responsiveness. Another shortcoming of the Servqual approach in the provider to society context is that the
188 five categories - as defined in the original Servqual measuring method - do not have uniform frames of reference for each situation in the provider to society context. A modification to the approach is necessary. The modifications must correspond to the key functions performed by NGO's. Further research is needed in this modification of the original Servqual approach for the business-(to-businessto-consumer-)to-society context as well as to meet the general criticisms on the Servqual approach.
References 1. Groesbeek, M.J., Maatschappelijk ondernemen. Theorie, praktijk, instrumenten, Uitgeverij Business Contact, Amsterdam, The Netherlands, (2001) 2. Dagevos, H., The emerging emotion economy, Klict Newsletter, Vol. 5, (2000) p. 10 3. Kong, R. and M.C. Mayo, Measuring service quality in business-to-business context, Journal of Business & Industrial Marketing, Vol. 8 (1993) (2), pp. 515 4. Parasuraman, A., V.A. Zeithaml and L.L. Berry, A conceptual model of service quality and its implications for future research, Journal of Marketing, Vol. 49 (1985) pp. 41-50 5. Zeithaml, V.A., L.L. Berry and A. Parasuraman. The nature and determinants of customer expectations of service, Journal of the Academy of Marketing Science, Vol. 21 (1993) (1), pp. 1-12 6. Westbrook, K.W. and R.M. Peterson, Business-to-business selling determinants of quality, Industrial Marketing Management, Vol. 27 (1998) pp. 51-62 7. Parasuraman, A., V.A. Zeithaml and L.L. Berry, Reassessment of expectations as a comparison standard in measuring service quality: implications for further research, Journal of Marketing, Vol. 58 (1994) (1), pp. 111-124 8. Mohr-Jackson, I., Managing a total quality orientation. Factors affecting customer satisfaction, Industrial Marketing Management, Vol. 27 (1998) pp. 109-125 9. Vries, de Jr., H. Kasper and P.J.C. van Helsdingen, Dienstenmarketing, Educatieve Partners Nederland BV, Houten, The Netherlands (1994) 10. Buttle, F., Servqual: review, critique, research agenda. European Journal of Marketing. Vol 30 (1996) p8-32. 11. Parasuraman, A., V.A. Zeithaml and L.L. Berry, Alternative scales for measuring service quality: a comparative assessment based on psychometric and diagnostic criteria, Journal ofRetailing, Vol. 70 (1994) (3), pp. 201-230
189 12. Boulding W., A. Kalra, R. Staelin and V.A. Zeithaml. A dynamic process model of service quality: from expectations to behavioural intentions, Journal ofMarketing Research, Vol. 30 (1993) (2), pp. 7-27 13. Cronin, J.J., Jr. and S.A. Taylor, SERVPERF versus SERVQUAL: reconciling performance-based and perceptions-minus-expectations measurement of service quality, Journal of Marketing, Vol. 58 (1994) (1), pp. 125-131 14. Caruana, A., M.T. Ewing and B. Ramaseshan, Assessment of the three-column format SERVQUAL: an experimental approach, Journal of Business Research, Vol. 49 (2000) pp. 57-65 15. Parasuraman, A. and D. Grewal, Serving customers and consumers effectively in the twenty-first century: a conceptual framework and overview, Journal of the Academy of Marketing Science, Vol. 28 (2000) (1), pp. 9-16 16. Ulaga W. and S. Chacour, Measuring customer-perceived value in business markets: a prerequisite for marketing strategy development and implementation, Industrial Marketing Management, Vol. 30 (2001) pp. 525540 17. Carroll, A.B., A three-dimensional conceptual model of corporate performance, Academy of Management Review, Vol. 4 (1979) (4), pp. 497-505 18. Clarks, M.B.E., A stakeholder framework for analysing and evaluating corporate social performance, Academy of Management Review, Vol. 20 (1995)(1), pp. 92-117 19. Wartick, S.L. and P.L. Cochran, The evolution of the corporate social performance model, Academy of Management Review, Vol. 10 (1985) (4), pp. 758-769 20. Wood, D J., Corporate social performance revisited, Academy ofMangement Review, Vol. 16 (1991) (4), pp. 691-718 21. Pine II, B.J. and J.H. Gilmore, The experience economy: work is theatre and every business is a stage: goods and services are no longer enough, Harvard Business School Press, Boston, USA, (1999) 22. Husted, B.W., A contingency theory of corporate social performance, Business & Society, Vol. 39 (2000) (1), pp. 24-47 23. 'www.business-impact.org' 24. Weaver, G.R., L.K. Trevino and P.L. Cochran, Integrated en decoupled corporate social performance: management commitments, external pressures, and corporate ethics practices, Academy of Management Journal, Vol. 42 (1999) (5), pp. 539-552 25. Cooymans, M.P.M. and E.F.M. Hintzen, Winst en waarden: maatschappelijk verantwoord ondernemen als onderdeel van kwaliteit, Samson, 's Hertogenbosch, The Netherlands (2000) 26. Zeithaml, V.A., A. Parasuraman and L.L. Berry (1990), Delivering quality service: balancing customer perceptions and expectations, The Free Press, New York, USA
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27. SER, De winst van waarden, Advies over maatschappelijk ondernemen, Den Haag, The Netherlands, (2000) 28. Wood, D.J. Theory and integrity in business and society, Business & Society, Vol. 39 (2000) (4), pp. 359-376 29. Griffin, J.J., Corporate social performance: research directions for the 21th century, Business & Society Vol. 39 (2000) (4), pp. 479-489. 30. Goddijn, S. and Ziggers, G.W. Measuring Corporate Social Responsibility in a Business-to-Society Context. In. Trienekens, J.H. and Omta, S.W.F. (eds). Paradoxes in Food Chains and Networks. Proceedings of the Fifth International Conference on Chain and Network Management in Agribusiness and the Food Industry, Noordwijk, 6-8th of June. Wageningen Academic Publishers, Wageningen, Netherlands pp. 59-71 (2002).
191
CONSUMER PERCEPTION AND MARKETING OF ORIGIN AND ORGANIC LABELLED FOOD PRODUCTS IN EUROPE GIRAUD GEORGES ENITA of Clermont-Ferrand, 63370 LEMPDES FRANCE E-mail: [email protected] Despite a high value image towards consumers, origin and organic labelled food products have a low market share in Europe that varies between European countries depending on the main channel used for sale. Among several labels used to highlight food products in Europe, those based on origin (PDO) or provenance (PGI) are increasingly being applied and complement the Organic Farming label. Origin labelled food products are mainly present in Southern Europe but we can find it in Northern countries too. Geographical spread seems inverse for organic labelled food products. Typical food products and food produced organically have always commanded a higher price than conventionally produced foods, a factor that was previously felt to have hindered the expansion of these products. They are still considered as niche markets and were once difficult to obtain other than in specialist outlets and local markets. They are now much more readily available on the shelves of the major supermarket chains across Europe. This article will focus on the place of such specific products within the European food market by means of recent studies. The consumer perception of food labels, his/her purchase behaviour within different sales channels, and the market share estimation of such products, will be seen successively.
1
Introduction
Consumers' fears, triggered by food scares and technological developments such as GMOs, have been translated into serious concern about food safety, ever-increasing demands for quality assurance, and more information about product origin. Moreover, public awareness of the irreversible damage done to the environment by practices that lead to soil and water pollution, the depletion of natural resources and the destruction of delicate ecosystems has led to calls for a more responsible attitude towards our natural heritage. Against this background, extensive agriculture such as organic farming and on-farm processing, once seen merely as a fringe interest serving a niche market, has come to the fore as an agricultural approach that not only can produce safe foods with a distinctive native character, but is also environmentally friendly. Organically produced foods and foods traditionally derived from aregionhave always commanded a higher price than conventional products. This has previously hindered the expansion of these two sectors, which are still considered niche markets. Now, however, one sees more consumers declaring a positive willingness to pay higher prices in return for guarantees relating to food safety and quality. Organically produced foods were once difficult to obtain other than in specialised outlets and local markets, but now are much more readily available on the shelves
192 of the major supermarket chains across Europe. Nowadays we can alsofindprivatebrand origin-labelled or organic food products in most supermarkets. The transition from scarcity to ready availability seems very quick. This paper focuses on the place of these kinds of products within European food consumption. It examines in turn the market share of food labels, consumers' perceptions of such products, and their purchasing behaviour in different sales channels. It concludes with consideration of the methodology of consumer surveys to improve our knowledge of food consumers' actual behaviour. 2
2.1
Food Labels in Europe
Quality products and European food labels
There is an enormous range of branded foods throughout Europe. However, when a product acquires a reputation that spreads beyond national borders, it can find itself in competition with products that pass themselves off as the genuine article and take on the same name. This unfair competition not only discourages producers but also misleads consumers. That is why the European Union has created labels known as PDO (Protected Designation of Origin) and PGI (Protected Geographical Indication) to promote and protect traditional food products (see Table 1). Table 1. Different European food quality labels. A Protected Designation of Origin (PDO) covers the term used to describe foodstuffs that are produced, processed and prepared in a given geographical area using recognised know-how. Example: Italian cheese Pecorino Toscano. On the left, the British version of this label. In the case ofthe Protected Geographical Indication (PGI) the provenance must occur in at least one of the stages of production, processing or preparation. Furthermore, the product can benefit from a good reputation. Example: French dry-cured ham Bayonne. On the left, the German version of this label. A food product with Organic Farming label contents at least 95% organically produced ingredients; the product complies with the rules of the ol'licial inspection scheme; the product comes directly from the producer in a sealed package; the product bears the name of the producer and the name or code of the inspection body. On the left, the French version of this label. Europa [3]
193
Directives on PDO and PGI (2081/92 and 2082/92) complement the directive on Organic Fanning (2092/91). The factors contributing to the birth of these new labels are well known. The European Community has developed such systems for several reasons: • to encourage diverse agricultural production • to protect product names from misuse and imitation • to help consumers by giving them information about the products' specific characteristics. It is easy for the consumer to perceive the taste, smell, appearance and consistency of food, but wholesomeness and safety are often difficult or impossible to identify. Food labels are used as quality cues. Consumer responses throughout Europe vary with region, but seem to be generally congruent. 2.2 Perception of labelledfood products When one focuses on consumers' perception of typical food products within Europe, no single European consumer of such products can be found. Rather, one finds a splendid mosaic with a great diversity of consumer responses. The results are obviously different among countries, but also seem to differ according to the kind of survey. Within the scope of consumer surveys we have to take into account the differences between declarative surveys, focus-group surveys, and scanned data panels. 2.2.1
Food label recall
In face-to-face interviews, we have to keep in mind that responses depend on how consumers control the vocabulary and their own memory. For instance, unaided recall of food labels in France varies with age, as shown in Figure 1. It is interesting that ten years ago the label Appellation d'Origine Controlee was in second place, and the Organic Farming label was lower. Nowadays, all surveys rank the unaided or aided recall of Organic Farming second.
194
Age
18-24
25-34
35-44
45-54
55-64
65-74
75 +
Figure 1. Unaided recall of food labels in France, CREDOC 2001.
Focusing onrecognitionof organic labels, Hamm et al. [7] present interesting estimates from four of the fifteen EU countries (see Table 2). It seems difficult to obtain such data: percentages are often rounded, as they are estimates rather than measurements. Because of the administrative means by which conversion support grants are distributed to farmers, it seems easier to obtain data on organic farming acreage, as arecentEuropean map shows at theregionallevel [13]. Table 2. Consumers' organic label recognition.
% of consumers recognising label
% of labelled organic products
Austria (Austria Bio-Zeichen)
10
80
Denmark (Statskontrolleret 0kologisk)
100
80
Finland (Rising Sun Label)
80
85
France (AB Agriculture Biologique)
41
No data
Country and label
Hamm et al. [7] Table 3. Aided Food recall of food labels in France, (%, n = 375), June 2002.
Do you know the following food labels?
c^m
7d
Appellation d'Origine Controlee
57.2%
Protected Designation of Origin
7.2%
195 Table 3. (Cont'd)
mm
Label Rouge
80.6%
Protected Geographica 1 Indication
2.9%
Organic Farming
61.4%
Organic Fanning
17.6%
Mountain Food Product
42.0%
Traditional Speciality Guaranteed
2.9%
Fair Trade
9.8%
Tradition Terroir
18.4%
m f
Produced in 21.1% Savoie
"IMI * S »
Produced in
? 4 4 %
'"XUVOROMC Auvergne Author
A more recent regional survey that was conducted, shows the same rank among the main labels and a great decline from national to European versions of the same labels (see Table 3). AOC is known by 57.2% of respondents, while PDO is known by only 7.2%; the French version of the Organic Farming label is known by 61.4% of respondents, while the European one is known by only 17.6%. The regional label of the region where the survey was done (Auvergne) obviously is well known. The rate of aided recall of the label called Tradition Terroir is remarkable. Among the 375 respondents, 18.4% said they knew this label. The fact is that it does not exist. It was designed (without registered trademark) specifically for this survey to control for respondents' tendency to answer positively. The aided recall of Tradition Terroir is a measure of docility during face-to-face interviews. Every specialist in surveys will confirm that anybody will answer anything about any purpose so long as the interviewer smiles appealingly to the interviewee.
196 2.2.2
Consumer scanned data panel response to food labels
The usual consumer surveys can only measure verbal responses to questionnaires. They sometimes measure attitudes, but very often miss behaviour. Even in sensory analysis we have an experimental context that may introduce some measurement problems, and many tests are needed to obtain significant results. This is the main reason way the protocol called "consumer scanned data panel" was developed and implemented to measure actual behaviour and to compare it with verbal and hedonist responses. For the same panellists, measurements of attitude and behaviour do not agree. This is a general result in food behaviour because attitude is cognitively managed while behaviour is affect-oriented [10]. This is obviously true for organic and origin-labelled products, which carry more social status and are more likely to be a form of ostentation in social life. A consumer scanned data panel can be defined as follows. Using private credit cards set up by supermarkets, the bar code of a product can be linked to the customer card at the cash register. It is thus possible to identify who buys what, when, how, and how much. Based on the principle of single source data, this kind of survey is called a consumer scanned data panel. Such a kind of survey was used in France with a broader protocol including sensory preference, declared attitude and actual purchase by the same consumers [5]. The study aimed at analysing the purchasing behaviour of consumers regarding Origin Labelled food products compared with commercial brands or the distributors' own label. The survey focused on Camembert cheese and dry pork sausage; no organic versions of these products were present in supermarkets during the study. The results of scanned data panel protocol are very interesting regarding the comparison of actual purchases, hedonist preference and verbal responses of each panellist regarding his or her own purchasing behaviour. In the French study, 13.2% of the panellists actually purchased origin-labelled food products frequently; 31.6% preferred these products in sensory blind tests, but 59.2% declared a positive attitude towards them. On the other side, 75.0% of the panellists did not buy any origin labelled food products during the past year and 46.1% rejected these products in blind tests, but only 1.3% expressed a negative attitude towards them during face-to-face interviews, as shown in Table 4. Consumer responses are more often negative in actual behaviour but become favourable when declared, whereas the sensory responses are more balanced. Consumers' verbal responses seem to be strongly linked to the social image carried by brand status.
197 Table 4. Variation of consumer panel responses according to the kind of measurement, n= 123.
Kind of measurement (Camembert PDO cheese consumption) , . Recorded purchases Hedonist preference Verbally declared Level of response . ... , ^ . J.t , v over one year in blind test attitude Highly positive
frequent: 13.2%
preferred: 31.6%
positive: 59.2%
Highly negative
none: 75.0%
rejected: 46.1%
negative: 1.3% Author
3
Consumers' Purchasing Behaviour for Organic and Origin-Labelled Food Products
Studies of organic consumers usually characterise them as affluent, well educated and concerned about health and product quality [15]. Similar features are found for consumers of PDO-PGI food products [5]. All studies point out that food scares such as BSE, E. coli contamination and pesticide poisonings, as well as concerns over GMOs, have stimulated interest in organic and origin-labelled foods. 3. J
Food labels' share ofEuropean consumption
PDO-PGI food products' market share is not well known, but most estimates put it at about 7-9% of overall food consumption in Europe. Bertozzi [1] gives a partial indication for the cheese market. One rare exhaustive database is built on the number of PDO-PGI labels by country and product category. In the organic food market, variations are seen between different estimates because of the rapid increase per year, as shown in Table 5. Table 5. Increasing organic market share of European food consumption (%).
Organic market share
Au
Ge
Dk
Fr
It
Swe
UK
Swi
1998
2.0
1.2
2.5
0.4
0.5
1.8
0.4
2.0
2000
2.9
1.5
4.5
0.6
0.7
1.6
0.9
1.9
Hammeral. [7]
The most recent cross-tabulated data from European sources [3,6] give the specific features of how both PDO-PGI and organic food products are distributed within the EU. Three clusters of countries appear as shown in Figure 2: • Denmark, Austria, Sweden, Finland and Germany have a high and rapidly increasing market share for organic food products. These countries also have very few PDO-PGI food products. • France, Italy, Portugal, Spain and Greece are high in PDO-PGI products but have a low market share for organic products.
198 •
The third group, the United Kingdom, the Netherlands, Belgium, Luxembourg and Ireland, are low in both organic market share and the number of PDO-PGI products. Organic mar <et share (%)
•Dk
Excluding Wine, Beer and other Drinks
4
r Pearson: -0.404 ( p = 0 . 0 5 )
3
'Ail 2
Swe *Fi
•Ge
% Pdo-Pgi number 0
5
•NL -Lu Be •Ir
1
IS
10
20
•UK •Por D
•Sp
•Gr
Figure 2. Market share of organic or PDO-PGI food products within the European Union, author.
Environmental protection seems to be the second most important concern for the European consumers [8]. However, some studies note inconsistencies in several countries between the political views of self-described environmentalists and their shopping habits [9,16]. Most cross-cultural studies indicate that German consumers can be considered as the most green-oriented and discriminating with respect to organic credentials [11], whereas southern Europeans seem more enthusiastic towards every proposed item about organic farming but cannot discriminate clearly among them [16]. The high green commitment level of some consumers results in a relatively small base of consumers interested in organic and origin-labelled food products. The distinction between regular and occasional consumers is commonly used to describe the driving forces and barriers in this market [12]. Consumers can choose among different sales channels: supermarkets; bakers/butchers; speciality, organic, fair trade or dietetic food shops; and direct sales (farmers markets and weekly markets). Regular organic consumers seem oriented towards speciality shops and direct sales, and consider these short retail channels as a convenient guarantee of the products' authenticity, whereas occasional consumers are more oriented towards supermarkets [15].
199
3.2
Trade-off between speciality stores and supermarkets
The dilemma between dedicated short channels but small market share versus the supermarkets' broad potential but less involved consumers has been pointed out in several summaries and well-documented studies on organic food consumption [7,11,17]. Unfortunately, similar studies about origin-labelled food products are lacking. According to Lohr [11], the analysis of raw data from Hamm et al. [7] confirms that the future of organic food products significantly involves developing sales in supermarkets (see Figure 3). 1.00 {
% Organic food sales in supermarkets
Dk* •UK 075'
•Fi •Sw«
•Ail
Organic market share (%) ,'
•Ir
0.50 •
2
3
4
Fr • •It •NL Be •Ge 0.25
•Gr
r Pearson: 0.685 (p=0.01) •Lu
Figure 3. Relationship between market share and sales in supermarkets in EU for organic foods, author.
Another understanding of this phenomenon lies in distinguishing between conviction stores, which address green-oriented consumers' demands, and convenience stores, which offer organic and origin-labelled products to current shoppers, as Pontier suggests [14]. Bakers, butchers, speciality food shops, delicatessens, farmers markets and weekly markets belong to the category of conviction stores. Supermarkets are larger than convenience stores but belong to the convenience category regarding retail distribution of organic and origin-labelled products. With this distinction, we can explain how conviction stores offer destination products while convenience stores offer interception products, both organic and origin-labelled. Looked at this way, it is not certain that occasional consumers can become regular ones. Daily shoppers cannot transform themselves into militant consumers. The former are more price sensitive and likely to seek organic and origin-labelled
200
products in supermarkets, while the latter are more health-conscious and a bit reluctant to frequent supermarkets [15]. This perspective seems to be discouraging for farmer and retail premium prices. It means that studies measuring willingness to pay cannot support marketing assessments of organic and origin-labelled food products [2,6]. Willingness to pay is measured by means of declarative surveys whose interpretation could be limited by the shortcomings of verbal responses, as highlighted above. The main threat to price premiums for organic and origin labelled food products is that supermarkets are more resistant to charging high prices than are speciality stores [11]. When cross-tabulating data from Hamm et al. [7] we find a significant negative correlation between proportion of organic food sales in supermarkets and the index of organic food premium price41 in Europe (see Figure 4). •
index of organic food premium price
3.00
Gr r Pearson: -0.669 (p=0.05) 225
Ge
•
,
• Lu 1.50
NL •Be % Organic food sales in supermarkets 0
0.25
•Fi 050
D.7S
0.75
•Fr #lr 8 lt
•Au .Swe
«UK D k
'
Figure 4. Relationship between organic foods' premium price and sales in supermarkets in EU, author.
Premium prices do not seem possible in mass marketing distribution, although a substantial high price is necessary for a high quality food product. Despite their low involvement in political concerns relating to consumption, most consumers (and most farmers too) can easily understand that an organic or origin-labelled food product cannot be everything they want it to be at once: The index of organic food premium prices is the number of products with retail premium prices more than 20% above the weighted EU average price divided by the number of products with retail premium prices less than 20% below the weighted EU average price.
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• • • • •
a nutritious, safe and ecological product an organic food with a perfect aspect a tasteful with an unanimous acceptability available everywhere, ready-to-use and fresh with all these attributes supplied at a low price! Marketing food products is a hard challenge. It should not discourage those who are involved in developing organic farming. Marketing organic or originlabelled food products cannot give both a good rate of return and a high turnover. The future of organic and origin-labelled food products appears positively with the regular and occasional consumers' complementary demands. Rooted on regular consumer purchases this market should find its increasing potential in occasional consumer ones. 4
Conclusion
For a consumer who is frequently being uprooted and is stressed by his/her urban environment, the emotional content of where one's food is produced is greater than ever. With a longing for one's home, the consumer becomes an identity seeker. Origin and organic labels respond to this need to identify lost roots or the memory of happy holidays in a rural area. Because of their historical and cultural content, origin and organic labels give a meaning to taste. They provide both a means for busy people living in large urban areas to re-energise themselves and a means of identifying with the area of production. More generally, the demand for origin and organic labels is to be found somewhere between lifestyle habits and changes. The reference to tradition makes modernity tolerable. The future of origin and organic labels is supported, strangely enough, by the development of novel food products such as fat- or sugar-free foods, restructured meat, alcohol-free wine, and GMOs. The arrival of high tech food products should also result in a demand for compensatory products, and thereby favour organic and origin-labelled foods. There is a complementarity between high tech products and foods with origin and organic labels. Consumers are looking for safety and taste. They could balance their food habits by purchasing both kinds of products. The housewife's shopping basket contains both novel and typical foods. With organic and origin-labelled foods, the consumer seeks to be reassured by products with a distinctive native character. With novel foods, he/she is looking for ready-to-eat meals of controlled, healthful composition. Farmers tend to be exclusive (entirely organic or entirely conventional, not both). It is not at all clear that this pattern will continue in consumers' behaviour with respect to food. The consumers' approach towards organic and origin-labelled food products differs from producers'. Producers, and most researchers too, focus
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on origin or organic label with territorial voracity [18]. Consumers focus on origin or organic labels with confidence in mind. Strict rules and high standards for obtaining an organic or origin label obviously are necessary. But it is far from consumers' perception. We are thinking about organic or origin-labelled food products while consumers are mainly eating them. Consumers give an effective response towards food, not a cognitive one. This is definitely an opportunity for the organic or origin-labelled market. From a methodological standpoint, consumption data collection has to be strongly improved especially for niche markets such as organic and origin labelled food products. Accuracy and reliability of these data need to be enhanced in order to supply a representative image of actual consumption. Consumer surveys also have to be improved in order to avoid declarative bias in face-to-face interviews and because food sensory perception can not be easily expressed with a lexical register [10]. Dealing with the consumer as a whole does not allow us to focus only on the stomach or the purse. We have to take into account contradictions, discrepancies and diversity that affect consumer behaviour with respect to food. This is a difficult but exciting challenge. We can expect that the consumer scanned data panel protocol will help us meet it. References 1. Bertozzi L., Designation of origin: quality and specification. Food Quality and Preference 6 (1995) pp. 143-147. 2. Corsi A. and Novelli S., Consumers' willingness to pay a price for organic beef meat. In X1 EAAE Congress, Exploring Diversity in the European Agri-food System, Zaragoza, Spain, August (2002). 3. Europa. "europa.eu.int/comm:agriculture/qual/en/pgi_01en.htm" (2002). 4. Giraud G., Organic and Origin-Labelled Food Products in Europe: Labels for Consumers or from Producers? In Ecolabels and the Greening of the Food Market, W. Lockeretz ed., Tufts University press, Boston, USA, March (2003) pp. 41-49. 5. Giraud G, Amblard C , Trognon L., and Bousset J.P., Scanned data panel as new computerised technology to investigate consumer behaviour towards food products. In 5th Symposium of International Association of Agri-food Economics, Bologna, Italy, September (2001). 6. Govindasamy R. and Italia J., Predicting willingness-to-pay a premium for organically grown fresh produce. Journal of Food Distribution Research 30 (1999) pp. 44-53. 7. Hamm U., Gronefeld F., Halpin D., Kristensen N., Nielsen T., BruseliusJensen M., Scheperlen-Bogh P., Beckie M., Foster C , Midmore P., and Padel S., The organic food market and marketing initiatives in Europe: a preliminary
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8. 9. 10. 11.
12.
13. 14.
15.
16.
17.
18.
analysis (OMIaRD). Institute of Rural Studies, University of Wales, UK, February (2002). Huang C , Consumer preferences and attitudes towards organically grown produce. European Review of Agricultural Economics 23 (1996) pp. 331-342. International Trade Center (ITC), Organic food and beverages: world supply and major European markets. ITC/UNCTADAVTO, Geneva (1999). Koster E.P., The consumer? The quality? In Agoral 96, Lavoisier Tec & Doc, Paris, (1996) pp. 9-19. Lohr L., Factors affecting international demand and trade in organic food products. In Changing structure of global food consumption and trade, Economic Research Service, USDA (2001) pp. 67-79. Michelsen J., Hamm U., Wynen E., and Roth E., The European market for organic products: growth and development. In Organic farming in Europe: Economics and Policy, Univ. of Hohenheim, Stuttgart, vol. 7 (1999). Offermann F. and Nieberg H., Does organic farming have a future in Europe? EuroChoices 2 (2002) pp. 12-17. Pontier S., Consommation biologique et frequentation des points de vente. In colloque SFER Grande Distribution Alimentaire, INRA Montpellier ed. (1997) pp. 377-395. Richter T., Schmid O., Freyer B., Halpin D., and Vetter R., Organic consumer in supermarkets, new consumer group with different buying behaviour and demands. In 13* International IFOAM Scientific Conference proceedings, T. Alfoldi, W. Lockeretz, and U. Niggli (eds), Vdf Hochschulverlag, Zurich, (2000) pp. 542-545. Sirieix L. and Schaer B., Consumers' attitudes towards organic and regional foods. In 67th EAAE Seminar proceedings, B. Sylvander, D. Barjolle, and S. Arfini (eds), INRA-ESR Ed., Le Mans, France, 17-1 (2000) pp. 425-428. Sylvander B., Les tendances de consommation des produits biologiques en France et en Europe. In L 'agriculture biologique face a son developpement, G. Allard, C. David, and J. Henning (eds), INRA ed., Paris, (2000) pp. 193-212. Tregear A., The activities and experiences of speciality regional food producers in Northern England: a qualitative study. In 67th EAAE Seminar proceedings, B. Sylvander, D. Barjolle and P. Arfini (eds), INRA-ESR Ed., Le Mans, France, 17-1 (2000) pp. 359-367.
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FACTORS INFLUENCING CONSUMPTION OF ORGANIC FOOD A. EVES, M. LUMBERS A N D J. MORGAN School of Management,
University of Surrey, Guildford, GU2 7XH, UK
E-mail:
[email protected]
Organic food, once perceived to be on the 'alternative' margins of the food market, now occupies a much more mainstream position. This has been attributed to increasing consumer concerns over food safety in the wake of a series of high-profile food scares and growing consumer affluence. The highest annual growth rates in sales in Europe have been recorded in the UK, Sweden, Switzerland and Denmark, with retail sales of organic food in the UK reaching £1 billion in 2002. Demand outstrips national supply in most parts of Europe and currently the majority of organic foods sold are imported. Fresh vegetables account for the greatest proportion of sales, with the multiple grocery chains dominating the markets of countries with greatest sales. This chapter discusses the factors influencing choice of organic foods amongst European consumers, and thus the factors limiting the growth of the market. It discusses factors such as price, availability, perceived healthiness/safety and ethical food production. It also includes a report of original research carried out in the UK in 2002. The study was based around the Theory of Planned Behaviour, and was similar to a study carried out in 1992 by Sparks and Shepherd.
1
Introduction
Consumers have become more sceptical and worried about what they and their families eat, to the extent that UK consumers are said to have an almost obsessional demand for 'safe' food [1]. This has been attributed to increasing consumer concerns over food safety in the wake of a series of high-profile food scares, including Salmonella in eggs, E.coli, bovine spongiform encephalopathy (BSE), and concerns over the safety of genetically modified foods [2]. Thus the organic food market in the UK is one of the fastest growing areas in the UK food and drink sector and experts believe that it will be increasingly important in the future [3]. Increased living standards may also have played a part in the development of the market [4]. UK sales of organic food are now the second highest in Europe, being strongest in south-east and north-west England, and lowest in the south-west and in Scotland [3]. Retail sales in the UK rose from £121 million in 1994 to £770 million in 2000 [5]. In 2002 the market was valued at £1 billion, and organic produce now accounts for 2 - 3 per cent of food sales [3]. The UK, Switzerland, Denmark and Sweden have recorded the highest annual growth [6], with growth particularly high in Denmark, which also has the highest per capita consumption world-wide [7]. By comparison, Italy has a relatively low consumption of organic produce - although
206
this varies with geographic region [8], and Greece is lagging behind more developed markets, thought to be the result of low availability [9]. Forty nine percent (29 million) of British adults regularly ate or drank organic produce in 2001, compared with 40% of adults in Germany and 38% of adults in France [5]. Eighty percent of UK households say they include organic food in their shopping basket, although 8% of consumers account for 60% of sales [3]. Other authors have also noted the market's dependency on a small number of buyers [10]. The most important organic products in EU markets are vegetables, fruit, potatoes, milk products and cereals [6]. Fresh vegetables account for the greatest proportion of sales in the UK (40%), with fresh fruit, meat and dairy produce accounting for 16, 11 and 10% respectively [11]. 1.1
Factors influencing purchase of organic food
Purchase of organic food is said to be skewed towards specific lifestyle groups [10]. However, where it was once perceived to be on the 'alternative' margins of the food market, some authors state that it now occupies a much more mainstream position [2], appealing to a broader spectrum of consumers [12]. Consumption is still linked to an alternative lifestyle in Italy, however, possibly reflecting the lower level of development oftiiismarket [13]. Organic foods are said to be rapidly becoming the normal purchase of mainstream shoppers who harbour concerns about food safety and damage to the environment [1]. The Director of Communications for a major UK retailer, however, suggested that in terms of product choice, organic food is still essentially a niche market. He insisted that for most consumers price relative to perceived quality (taste, appearance) and product life cycle (Best by/use by date) are the main influences over purchasing decisions [14]. Purchasers of organic foods have been found to come from younger age groups [1,7], to be female [8,9], and from higher socio-economic groups or with higher incomes [1,7, 8, 15,16]. Greater income has been found to relate more to the quantity of organic foods bought, rather than whether it was bought at all [9]. Less affluent consumers have been found to be not interested in organic food, whatever the price [16]. Educational level has been found to be positively related to consumption of organic foods [7,8,13], and in Greece, was found to be the main factor discriminating between consumers with different levels of awareness of organic foods, and to be related to intention to purchase [9]. Other positive influences on consumption of organic foods include the presence of a family or children, and whether the consumer is a professional (9,13]. Many claims have been made about the benefits of organic foods, such as nutritionally superior, healthier, better for the environment and tastier [17]. The UK Agricultural Select Committee, however, was reported to comment that consumers purchase organic products because of the myth of their benefits [1] - casting doubt
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on the validity of the claims made. The UK Advertising Standards Authority (ASA) disallowed claims made by the Soil Association (a group promoting organic food) that organic foods tasted better, were healthier, were better for the environment and that the process of production improved animal welfare. There was a lack of objective evidence to support the claims [18]. Shoppers are reported to buy organic food because they think it is healthier and tastier, contains more vitamins and minerals, and that it is free from pesticides and GM ingredients [19]. A MORI survey also found perceived health advantages to be a motivator for organic food consumption in the UK [20], and a study of Sicilian consumers gave a similar result [8]. In a study conducted in Northern Ireland, the reasons for purchasing organic food in descending order, were health, taste, freshness and quality [1]. Food safety, nutritional content and price were less important. Consumers are said to be driven by product-specific characteristics directly benefiting themselves, rather than production or process specific characteristics [7]. Authors have characterised consumers in relation to organic food consumption [e.g. 8, 21]. For instance four groups of Sicilian consumers were identified [8]: 'Deeply rooted' - consumers who have been eating organic foods for more than 2 years, they are health conscious and perceive organic foods to be more healthy. They are willing to pay a price premium. 'Pioneer' - Occasional consumers, motivated by curiosity. This group was most likely to be influenced by marketing. 'Pragmatist' -concerned about price, with price being an obstacle to purchase 'Nostalgic' - elderly consumers associating organic with genuineness and tastes of the past. Cost has often been given as the main reason for not purchasing organic food [9,22]. In N Ireland, expense was found to be the major reason for not purchasing organic food, followed by availability [1]. By comparison, in a study of Greek consumers, availability was the main reason for not consuming organic food followed by price, probably reflecting the level of development of the markets in the two countries [9]. Lack of added value in the eyes of the consumer has also been identified as significant [9].
1.1.1 Price The comparatively high price of organic foods is one factor hmiting the growth of the organic food market. Weight-for weight premiums on baby potatoes, carrots, iceberg lettuce and oranges in a major UK retailer have been found to be 20%, 79%, 100% and 51% respectively [2]. Price premiums in Greece (1997/8) ranged between 10 and 100% depending on product [21]. More recently, a shopping basket of 13 organic items in the UK in 2002 was found to cost 40% more than non-
208
organic equivalents [23] and a UK family that had switched to organic foods found that their shopping bill increased by 40 - 50% [19]. The price premium is said to reflect the higher costs of producing organic foods, and also the fact that the handling, distribution and marketing costs do not enjoy the same economies of scale associated with conventional high-volume lines [2]. Prices, however, vary widely. In a comparative shopping exercise in the UK, the price of a shopping basket containing 14 organic items varied between £34.68 and £55.46 depending on the retail outlet. The major retailers were not always the least expensive [19]. In Germany a high price policy was seen as desirable, as a high price was associated with a high quality image [12]. The public's willingness to pay premium prices for organic foods has been linked to perceived healthiness [23], and consumers perceiving higher health risks associated with conventional foods are willing to pay more for organic foods that are free of pesticides [7,24]. Sixty per cent would choose organic food for this reason only if it cost no more than conventional food [20]. Existing organic food consumers generally accept the price premium [22], which whilst organic foods occupy a niche market with strong consumer demand might suggest that there is no need to bring organic food prices in line with those of conventional foods. The impact of price premiums has been studied [7]. It was found that as the price differential between organic and conventionally produced food increases, the proportion of consumers buying organic foods decreases. Different countries within Europe were found be more or less willing to accept price premiums over 30%, with the Dutch and Germans most likely to accept high premiums and the Scandanavians and British least likely. This result was attributed to the sales channels for organic produce in the different countries (see below). Most Italians would switch to organic foods if the price premium was, on average, no more than 20% [13].
1.1.2
Availability
Despite a growing number of specialist organic food retailers, and growth in other distribution channels (e.g. farmers' markets and mail order [25]), the multiple grocery chains currently dominate the market, with estimates of between a 70% [2] and 80% [3] market share. In Scandanavia most organic produce is also sold through supermarkets, whilst in Germany organic foods is mostly sold through speciality shops [7]. Small specialist stores also dominate sales in Italy, with grocery chains only recently becoming involved [13]. In Greece specialist shops and direct sales dominate the market [21]. A study of 6 EU countries concluded that retailer involvement was directly related to market growth [26]. The number of organic lines in 10 UK retail outlets varied between 184 and 4000, with specialist retailers holding the largest number of lines. Many shops do not, however, carry a full range of foods [19]. In addition to vegetables, fruits and
209
cereals, there is an increasing demand for processed organic foods, especially amongst consumers who shop in supermarkets [21]. In the short term, it is lack of supply rather than lack of demand that is likely to limit market growth [21]. Neither the UK nor Germany are able to meet internal demand [27]. Despite efforts by the UK government to encourage conversion to organic production, 75% of organic food consumed in the UK is imported [28]. This is more than other European states and is making organic farming in the UK increasingly unsustainable [29]. Many of the imports come from developing countries [6]. Interestingly consumers in the UK and Germany [27] and also Greece [9] are reported to be concerned about the regional origin of products, preferring locally produced products. This may limit market growth. 1.1.3
Health
'Health' relates to both safety (e.g. free from chemicals) and to nutrient content. Most studies show health considerations to be the main motivation for buying organic food, both in Europe and the USA. Concern over food-related health, however, does not show a direct link to consumption patterns for organic foods. The authors suggest that consumption patterns are more linked with market barriers [7]. Older people are generally content with their current foods, and feel that any damage has already been done [1], whilst families with children have been found to be particularly focussed on health aspects, especially in relation to meat and egg products [7]. There seems to be a widespread perception amongst consumers that organic foods have a higher nutritional quality [30]. A literature review [30] pertaining to nutrient content/nutritional benefits of organic foods compared with conventionally grown foods, however, could neither support nor refute the perception, as the quality and quantity of science applied in the area was found to be inadequate. Where compositional differences have been found (e.g. slightly enhanced levels of vitamin C) they were small, and unlikely to have health implications. Heaton [31] criticised previous reviews (including [30]) for allowing 'flawed' studies. On the basis of his own review he claims that the evidence suggests that organic foods are superior, whilst acknowledging that more research was needed. This author is, however, affiliated with the Soil Association, a group that promotes organic food.
1.1.4
Ethical issues
Proponents of organic production claim improved soil fertility, a reduction in the pollution of water courses, encouragement of biodiversity and improved animal welfare [2]. Consumers are becoming aware of the environmental impact of intensive farming and concerned about the welfare of intensively reared animals, with buyers of organic foods motivated by animal welfare issues [32]. There is a
210 reported increase in interest and demand for products that take account of both the characteristics of products and the processes used to produce them [8]. Three groups of life values have been identified amongst regular organic consumers Values associated with human beings, with animal well-being and with the environment [33]. Danish consumers most often buying organic food do so out of concern for the environment and animal welfare [7]. An increasing environmental awareness has also been reported amongst Italian consumers, with 50% of those consuming organic foods identified as environmental activists [13]. Ethical frameworks of choice, however, are contingent on quality and consumers are not willing to accept sacrifices in quality [34]. Trust in labelling and its monitoring is also important to consumers [4, 7, 26]. The UK has a number of labelling schemes, which is thought to detract from market development [27].
1.1.5
Taste
Forty per cent of those choosing organic food claimed that it had a better taste [15], but the truth of this perception has not been widely proven [21]. Organic orange juice has been found to taste different to conventionally produced orange juice, and to be better liked. However, no difference in taste or liking of milk was found. The broad claim implying that all organic food tastes better could, therefore, not be supported [15]. 2
Methods
The factors affecting the intention of UK consumers from the South East of England in 2002 to purchase organic fruit and vegetables were investigated in 2002 using the Theory of Planned Behaviour - TPB [35]. The study was similar to research carried out 10 years earlier, using the same model and a consumer sample from a similar part of the UK[36]. The TPB suggests that behaviour (in this case eating organic fruit and vegetables) is determined by intention to perform the behaviour. Intention is influenced by attitude to performing the behaviour, perceptions of how others view you performing the behaviour (Subjective norm), and perceived control over your ability to perform the behaviour. Attitude is determined by beliefs about the outcomes associated with performing the behaviour (behavioural belief) weighted by an evaluation of whether the outcome is perceived as good or bad (outcome evaluation). In order to construct the main questionnaire, 20 individuals completed an elicitation questionnaire to determine the salient behavioural and normative beliefs about organic fruit and vegetable consumption, and the barriers to organic fruit and vegetable consumption. The items derived covered 6 of the 7 behavioural belief
211
items previously identified [36]. 'Eating organic vegetables was associated with an alternative lifestyle' was not derived, but was included in the questionnaire to determine if perceptions had changed. Three items not previously identified were also derived (* below). To explore problems associated with organic fruit and vegetable consumption, items were extracted from the elicitation questionnaire. These were the same as those elicited previously [36]. The form of the questions is described below. All responses were made using 5-point scales, with the end-points varying by question. Behavioural beliefs: Eating organic fruit and vegetables entails eating organic fruit and vegetables that... • Have a good flavour • Are healthy • Are expensive to purchase • Are easy to obtain in the shops • Are associated with an alternative lifestyle, • Have an attractive appearance • Are environmentally friendly • Have a shorter shelf life* • Have less chemical residue* • There is not a great selection to choose from* ('Extremely likely' to 'Extremely unlikely') Outcome evaluations: Eating organic fruit and vegetables that..., followed by the 10 items above ('Extremely good' to 'Extremely bad'). Overall attitude: Eating organic fruit and vegetables is .... ('Extremely good' to 'Extremely bad'). Subjective norm: Most people who are important to me think I should eat organic fruit and vegetables ('Extremely likely' to 'Extremely unlikely'). Perceived control was determined through three questionnaire items: • How much control do you have over whether you do or do not eat organic fruit and vegetables ('Very little control' to 'Complete control'). • For me to eat organic fruit and vegetables is ('Extremely difficult' to 'Extremely easy') • If I wanted to, I could eat organic fruit and vegetables whenever I eat fruit and vegetables ('Extremely unlikely' to 'Extremely likely'). Problems: Eating organic fruit and vegetables is associated with different sorts of problems (or difficulties) by different people. Please indicate whether or not you
212 consider that the following are problems that affect the amount of organic fruit and vegetables you eat: • • • •
Family influence Friends influence Lack of availability Cost ('Never a problem' to 'Very often a problem').
Intention to eat organic fruit and vegetables: 1 intend to eat organicfruitand vegetables during the next week ('Disagree very strongly' to 'Agree very strongly'). Subjects' identification with health conscious consumerism: / think of myself as a health conscious consumer ('Disagree very strongly' to 'Agree very strongly'). The remaining questions collected age and socio-economic group (SE based on occupation of the chief wage earner in the household, and a description of the job). The sample comprised a convenience sample of consumers in the SouthEast of England. The majority of the questionnaires were distributed electronically, using a snowball method (the initial contact was asked to pass the questionnaire on to 15 others). Initial analysis showed most respondents consumed organic fruit and vegetables only occasionally. To gain more information on more regular consumers, further questionnaires were administered in a specialist organic retail outlet. Data were analysed using SPSS Version 11.0. Data were coded to yield three groups of organic consumers - those who never ate organic fruit and vegetables, those who occasionally ate them and those who ate them on most occasions (or every occasion). Three SE groups were established relating to the UK National Statistics Socio-Economic Classification [37] groupings 1 to 8 (highest to lowest socio-economic status). Groups 1 and 2, formed 'Group 1', groups 3 and 4 formed 'Group 2', and groups 4 to 8 formed 'Group 3'. Beliefs were weighted by their corresponding outcome evaluation, and the sum of these products used as the analysis variable. The three perceived control questions were summed to create the variable 'sum of perceived control'. The sum was shown to be a more powerful variable for analysis than each individual control question. 3
Results
The response rate for completion of questionnaires was in excess of 80%. Results are based on 194 useable questionnaires. Of the 194 respondents 119 (61%) were female and 75 (39%) male. The majority of the sample (70%) was
213 between 20 and 34 years of age (age was not explored as an independent variable). SE groupings are shown in Table 1, reflecting the groupings described earlier. Table 1. Socio-economic background of respondents (number; percentages in parentheses).
Group 1 2 3
Description Higher and lower managerial and professional occupations Intermediate occupations, small employees and own account workers Lower supervisory and technical occupations, semi-routine and routine occupations, never worked and long term unemployed
n (%) 56 (29) 88 (45) 50 (26)
Most respondents (n=108, 56%) reported consuming organic fruit and vegetables occasionally, with 51 respondents (26%) reporting never eating them and 35 (18%) reporting that they ate them on most or every occasion. Females were significantly more likely to eat organic fruit and vegetables, but there was no relationship between socio-economic grouping and frequency of consumption.
3.1
Beliefs about organic fruit and vegetables (Table 2)
The most strongly held belief overall was that organic fruits and vegetables are expensive to purchase. Those who bought organic fruit and vegetables on most occasions were significantly less likely to believe this, and those in the lowest socio-economic group were significantly more likely to believe this. The next most strongly held belief was that organic fruits and vegetables had less chemical residues, with those buying organic on most occasions significantly (p<0.05) more likely to believe this than those who never bought organic fruits and vegetables.
214 Table 2. Mean scores for beliefs about organic fruit and vegetable (overall and by frequency of consumption and SE group), standard deviations in italics. -2 = very likely, 2 = very unlikely. Frequency of consumption Socio-economic group(SE) Eating organic fruit Overall and vegetables means Never OccasMost 1 2 3 eating fruit and ional times vegetables that... -0.83 -0.37" -1.31' -0.69 -0.88 Have a good flavour -0.89b -1.00 0.87 0.83 0.86 0.82 0.80 0.89 0.82 -1.14 -1.26b -1.18 Are healthy -0.783 -1.28" -1.02 -1.22 0.77 0.83 0.95 0.76 0.74 1.02 0.71 Are expensive to -1.51 -1.533 -1.20b -1.59a -1.25a -1.51' -1.78b 0.86 0.63 0.59 purchase 0.71 0.63 0.84 0.65 Are easy to obtain in -0.24 -0.16 -0.34 -0.11 -0.19 -0.24 -0.46 the shops 1.03 1.03 1.11 0.77 1.00 1.06 0.99 Are associated with an -0.04 0 -0.05 -0.06 0.05 -0.14 0.04 'alternative' lifestyle 1.11 1.06 1.01 0.95 0.86 1.12 1.03 Have an attractive -0.04 -0.08 0.03 -0.14 -0.04 0.04 0.06 appearance 0.98 7.07 0.71 1.00 1.01 0.91 1.02 Are environmentally -1.26 -1.04a -1.33" -1.37" -1.30 -1.25 -1.22 friendly 0.82 0.92 0.76 0.81 0.75 0.86 0.84 Have a shorter shelf- -0.58 -0.49 -0.56 -0.77 -0.64 -0.55 -0.56 1.04 1.23 0.97 life 0.95 1.00 1.02 7.75 Have less chemical -1.42 -1.47b -1.60b -1.35 -1.18" -1.52 -1.42 residue 0.84 0.93 0.80 0.74 0.92 0.74 0.79 There is not a great -0.36 -0.438 0.17b -0.33 -0.50" -0.23 -0.56 selection to choose 1.01 0.92 1.12 1.08 0.96 0.93 0.95 from Figures with different superscripts are significantly different (p<0.05)
Organic fruits and vegetables were believed to be environmentally friendly, and also to be healthy. Those who never bought organic fruits and vegetables were significantly (p<0.05) less likely to believe this. There was a direct relationship between frequency of consumption of organic fruits and vegetables and belief that they had a good flavour. Those never buying organic were significantly (p<0.05) less likely to believe this than both other groups, and those buying on most occasions were significantly (p<0.05) more likely to agree with this than those who bought occasionally. Those buying on most occasions were also significantly (p<0.05) more likely to disagree that there was not a great selection to chose from. Responses relating to consumption being linked to an alternative lifestyle were ambivalent, irrespective of frequency of consumption.
3.2
Theory ofPlanned Behaviour(TPB)
The basic structure of the TPB was corroborated by correlational analyses using Pearson's Product-moment correlation coefficient (Table 3).
215 Table 3. Zero-order correlation coefficients between the components of the Theory of Planned Behaviour (* = p<0.05; ** = p<0.01) Sum of Self Subjective Intention Attitude perceived norm identity control £b.e -0.31 -0.31** 0.19** 0.39** -0.53** 0.05 0.48** 0.02 -0.41** Attitude -0.09 -0.03 -0.46** Subjective norm 0.01 0.14* E perceived control 0.23** Self identity -
Significant moderate correlations [38] existed between all factors and intention to consume organic fruit and vegetables, except self-identity where a significant, but weak correlation existed (Table 3). A moderate, significant correlation existed between attitude and summed beliefs weighted by evaluations, and attitude and subjective norm. Sum of perceived control showed no correlation with the other factors and self-identity only weak, but significant, correlation with summed beliefs weighted by evaluations and with intention. Multiple regression of attitudes, subjective norm, sum of perceived control and self-identity on intention to consume organic fruits and vegetables showed all variables to make a significant unique contribution to prediction of intention (Fig 1). The model explained 57% of the variation in intention. Subjective norm made the strongest unique contribution and perceived control, the weakest. By comparison, Sparks and Shepherd [36] found that perceived control made the strongest independent contribution to intention.
Attitudes
Subjective norm
Sum
of
Intention to consume organic fruit and vegetables during the next week
perceived control
Self identity p=0.22*** Figure 1. Regression of intention to consume organic fruit and vegetables on attitudes, subjective norm, perceived control and self-identity. (*p<0.05, ***p<0.001)
216
Regressing attitude against subjective norm, sum of perceived control, intention, self-identity and sum of beliefs weighted by evaluations gave a model that explained 42% of the variation in attitude scores. All factors made a significant contribution, with the exception of sum of perceived control. Sum of beliefs weighted by evaluation made the strongest unique contribution to attitude (P = -0.4, n=194, p<0.001). Regressing the four control problems (family influence, friends' influence, cost and lack of availability) against intention showed that only 8.4% of the variation in intention was explained. Cost made the strongest unique contribution to intention (|3 = -0.25, n=194, pO.OOl), followed by availability (P = 0.15, n=194, p<0.05). Friends' and family influence made no significant contribution to prediction of intention. Family influence (P=-0.20, n=194, p<0.05), cost (P=0.24, n=194, p<0.05) and availability (P=0.14, n=194, p<0.05) were significant predictors of reported organic fruit and vegetable consumption, with cost making the strongest unique contribution. Regressing sum of perceived control against the four control problems showed that none of the four made a unique significant contribution to perceived control. The model also explained only 15% of the variation in sum of perceived control. Sparks and Shepherd [36] had previously found that availability had made a unique significant contribution to sum of perceived control, although the model explained only 5% of variation. They also found that the other three factors did not make a unique contribution. 4
Discussion
Growth in the organic food market in Europe has been large, particularly in the UK, Denmark, Sweden and Switzerland [6]. Although many consumers report purchasing organic food, however, the market is still dependent on a small proportion of dedicated consumers for the majority of sales [3, 10]. There have, therefore been differing views on whether organic food still occupies a niche position in the market or is becoming more mainstream [2, 10, 12, 14]. Some parts of Europe have seen less market growth, which has been linked with the level of retailer involvement [26]. Less developed markets tend to see most organic food sold through specialist stores, whereas developed markets have greater retailer involvement [7, 13, 21]. Purchase of organic foods has repeatedly been linked with younger consumers who are more affluent and more educated, and most of whom are female [1, 7, 8, 9, 13, 15, 16]. These consumers are motivated by perceived health benefits (GM free, pesticide free, nutritionally superior), a perception of improved quality (taste) and in some cases environmental/ethical concerns [1, 8, 19, 20]. To date, however, there is a dearth of objective evidence to support these perceptions [1, 18,
217
21, 30]. Some evidence has emerged to suggest that some produce tastes better, but a general claim could not be substantiated [15]. Similarly, there is some evidence of higher vitamin content, but the difference in levels is too small to be of significance to health [30]. This study has shown that those who do not purchase organic fruits and vegetables are less convinced of the suggested benefits of consuming organic foods, and only those who buy them 'most times' believe that they have a particularly good flavour. Those who do not buy organic foods will need to be convinced of the benefits of consuming organic foods if they are to enter the market, as, as yet it would appear that the price premium is something that they cannot justify (i.e. no added value [9]). More research is needed to confirm the benefits. Research has proved problematic in the past as it is often difficult to compare like-with-like. It is interesting to speculate on the effect on the organic market if studies continue to fail to prove any real difference between organically and conventionally grown foods. The Theory of Planned Behaviour showed subjective norm to make the strongest contribution to intention to consume organic fruits and vegetables, whereas 10 years earlier (in relation to vegetables) perceived control made the strongest contribution [36]. This may well reflect the greater availability of organic foods in the UK, as retailer involvement and the range of food available have increased. Similarly, availability made a significant contribution to 'problems' in 1992, but not in 2002. Availability remains an issue in less developed markets [9]. Meeting market volume requirements across Europe has been achieved through importing the majority of organic foods [6, 28]. If the consumer becomes increasingly concerned over the origin of their foods [9, 27] and more aware of the production and distribution issues surrounding imports (e.g. fair trade and 'airmiles'), the market may suffer. The organic food market illustrates the importance of consumer perception, rather than scientific fact, on market growth. It is a market borne out of largely unsubstantiated benefits, satisfying a need for 'safer' and 'kinder' products. A core of consumers is willing to pay substantial price premiums to obtain these products on the basis of perceived 'added value'. If research, however, fails to prove real benefits that will convince current sceptics, one might question whether the market will grow as predicted [3]. Indeed, those currently consuming organic foods may question whether they are receiving 'added-value' for the price premium paid. References 1. Connor R. and Douglas L., Consumer attitudes to organic foods. Nutrition and Food Science 31 (2001) pp. 254-264 2. Jones P., Clarke-Hill C, Shears P. and Hillier D., Retailing organic foods. British Food Journal 103 (2001) pp. 358-365
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3. Riley H., Feeding Britain's healthy appetite. Supply Management March (2003) pp. 20-23 4. Giannakas K. Information asymmetries and consumption decisions in organic food product markets. Canadian Journal of Agricultural Economics 50 (2002) pp. 35-50 5. Beard M., Britain's top league of organic consumers. The Independent March 22 (2002) 6. Barrett H.R., Browne A.H., Harris P.J.C. and Cadoret K., Organic certification and the UK market: organic imports from developing countries. Food Policy 27 (2002) pp. 301-318 7. Wier M. and Calverley C , Market potential for organic foods in Europe. British Food Journal 104 (2002) pp. 45-62 8. Chinnici G., D'Amico M. and Pecorino B., A multivariate statistical analysis on the consumers of organic products. British Food Journal 104 (2002) pp. 187-199 9. Fotopoulos C. and Krystallis A., Organic product avoidance: reasons for rejection and potential buyers' identification in a countrywide survey. British Food Journal 104 (2002) pp. 233-260 10. Duxbury R., Personal communication. 2002 11. Wright S., Personal communication. 2000 12. Lacatz-Lohman U. and Foster C , From 'niche' to 'mainstream' - strategies for marketing organic food in Germany and the UK. British Food Journal 99/8 (1997) pp. 275-282 13. Cicia G., Del Giudice T. and Scarpa R., Consumers' perception of quality in organic food. British Food Journal 104 (2002) pp. 200-213 14. Hawkins K., Potential growth and implications for patterns of retailing: a food retailer's view. In Winter M., Alternative food Markets: Myths, Realities and Potential Conference hosted by the Geographical Society, London. 2002 15. MORI cited by Wright S., Europe goes organic. Food Ingredients Europe 3 (1997) pp. 39-43 16. Mintel Organic Food and Drink. (Mintel Publications Ltd., London, 1999) pp. 34-46 17. Fillion L. and Arazi S., Does organic food taste better? A claim substantiation approach. Nutrition and Food Science 32 (2002) pp. 153-157 18. Anon., Organic over-hyped again. Food Safety 4 (2000) pp. 8 19. Anon., Costing the earth? Which? May (2003) pp. 22-24 20. Wright S., Europe goes organic. Food Ingredients Europe 3 (1997) pp. 39-43 21. Fotopoulos C. and Krystallis A., Purchasing motives and profile of the Greek organic consumer: a countrywide survey. British Food Journal 104 (2002) pp. 730-765 22. Mintel. Organic food and drink retailing. Mintel June (2000) 23. Bristow A., Organic processed food. Which? April (2002)
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24. House of Lords Select Committee., House of Lords Select committee on European Communities. Sixteenth Report: Organic Farming and the European Union. (TSO, London, 1999) 25. Jones G., Potential growth and implications for patterns of retailing: the farm retail association view. In. Winter M., Alternative Food Markets: Myths, Realities and Potential. Conference hosted by the Geographical Society, London. 2002 26. Holt G., Tranter R.B., Miele M., Vestergaard J., Nielson R., Meehan H. and Sottomayor M., Comparison of markets for organic food in six EU states. In Proceedings of the UK Organic Research 2002 Conference. Aberystwyth, Wales March 2002 27. Meeusen M. J.G., Organic Agriculture: opportunities and threats on the German and British markets. In Proceedings of the UK Organic Research 2002 Conference. Aberystwyth, Wales March 2002 28. Mason J., Organic Farmers losing out to imported goods. The Financial Times 29 July 2002 29. Wyman V., Organic sector faces increasing pressure. Food Manufacture August (2002) pp. 4 30. Williams CM., Nutritional quality of organic food: shades of grey or shades of green? Proceedings of the Nutrition Society 61 (2002) pp. 19-24 31. Heaton S. Assessing organic food quality: is it better for you? In Proceedings of the UK Organic Research 2002 Conference. Aberystwyth, Wales March 2002 32. Harper G.C. and Makatouni A., Consumer perception of organic food production and farm animal welfare. British Food Journal 104 (2002) pp. 287299 33. Makatouni A., What motivates consumers to buy organic food in the UK? British Food Journal 104 (2002) pp. 345-352 34. Vindigni G., Janssen M. A. and Jager W., Organic food consumption - a multitheoretical framework of consumer decision making. British Food Journal 104 (2002) pp. 624-642 35. Ajzen I. Attitudes, Personality and Behaviour. (Open University Press, Milton Keynes, UK, 1988) 36. Sparks P. and Shepherd R., Self-identity and the Theory of Planned Behaviour: Assessing the role of identification with 'Green Consumerism'. Social Psychology Quarterly 55 (1992) pp. 388-399 37. National Statistics UK., National Statistics Socio-economic Classification. 2001 (http://www.statistics.gov.uk/methods_quality/ns_sec/default.asp) 38. Hair J., Marketing Research: A Practical Approach for the New Millenium. (McGraw Publishing, London, 2000)
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ORGANIC FOOD CONSUMERS - THE IRISH CASE S.O'REILLY, M. MCCARTHY AND P. O'DOVONAN Department of Food Business & Development,
National University of Ireland,
Cork
s.oreillvfa),ucc.ie B. HOWLETT The Food Safety Authority of Ireland, Dublin bhowlett@nfc. teagasc. ie
Over the past two decades, growing environmental awareness coupled with concerns about health and quality of diet have led many people to question modern agricultural practices [1], New waves of consumers are demanding organically grown foods, with health concerns prompting consumers to avoid chemical additives and pesticide residues in food fearing, despite scientific consensus to the contrary, that these foods are unsafe [2]. Consumer interest in organics has undoubtedly been fuelled by health scares of recent years, such as BSE and EColi, which continue to raise public concern. Growing awareness and antipathy to the introduction of genetically manipulated foods adds to consumers' fears [3], All these factors have combined to generate an extremely buoyant organic food market in the second half of the 1990's. In Ireland, the key drivers that are influencing certain consumers to choose organic foods include: food safety, healthy eating, sensory qualities and to a lesser extent environmental concerns and animal welfare. Two recent studies have highlighted the importance of these issues to purchasers of organic foods [4,5]. A study of Irish organic meat consumers highlighted the importance of food safety and health in their food choice. Not only were these factors important to them but they believe that organic meat was superior to conventional meat in terms of quality, safety, labelling, production methods and value. In another study, which examined the purchase of organic yoghurt, a means-end chain method examined the importance of values and consequences associated with product attributes. The main end values identified were 'pleasure', 'family security' and 'equality'. Health benefits associated with organic yoghurt were important as respondents believed that organic yoghurt was free of many hazardous ingredients. Purchasers of organic yoghurt displayed high levels of environmental consciousness, however few linked the product attribute 'organic' to improving the environment. Interestingly, animal welfare was rarely mentioned as a motivating factor in the purchase of organic yoghurt. These two studies, discussed in detail in this chapter, provide interesting insights into the views of Irish organic consumers and the importance of their evaluation of the key characteristics of organic foods.
222
1
Introduction
The organic food market in Ireland is valued between €25 and €34m and represents less than 1% of the total Irish food market. This is small in the EU context where on average organic foods hold about a 2% share of the market. However, the Irish market is growing at a faster rate than the average EU market, with predictions of 20 to 30% annual growth over the next three years. The Irish market also differs from the EU in that sales of organic meats are higher than the EU average and this is reflected in a higher proportion of Irish organic production in the meat sector. In comparison consumption of organic milk and dairy products is much lower than the EU average and this is also reflected in a poorly developed production sector [6,7]. The aim of this chapter is to explore the impact of customer evaluation of key product attributes on purchase behaviour. In particular, two product categories are explored, meat and dairy, since the performance of these products on the Irish market is somewhat different to that of other EU countries. This chapter begins with a brief overview of the production of organic food in Ireland, key factors influencing customer behaviour are then reviewed and each of these are dealt with in more detail in the context of organic meat and dairy products. The chapter concludes with some comment about future prospects in the Irish context. 2
Organic Food Production in Ireland
Similar to other EU countries Irish production of organic products has been increasing over recent years; however the product mix differs somewhat from the EU average. Figure 1 below indicates the growth in organic production in selected EU countries measured in terms of agricultural land converted or in conversion to organic production.
223
^
' s s y «* y y
«
<^
Source: Adaptedfrom Foster andLampkin (2000) Figure 1.Certified organic and in-conversion land as a percentage of 1998 usable agricultural area for selected EU Countries [8]
As a percentage of total agricultural area, Ireland lags behind the EU average since, in 2001, about 3.24% of agricultural land and 2.04% of farms in the EU were involved in organic production compared to 0.68% and 0.69%, respectively, in Ireland [9]. Other countries with a similar share as Ireland include: Greece, Norway, and Portugal. Van der Grjp and den Hond [10] categorized EU countries on the basis of both share of agricultural area and growth. Due to their high share but slowing growth rate they grouped Austria, Germany and Sweden together and labelled them as Stabilisers whereas they labelled Denmark, Italy and Finland as Boomers due to their high share and growth rate. Ireland together with Greece, Norway, Portugal and Spain were classified as Potential countries due to low share but strong growth rate. The rest they labelled as Laggards due to low share and growth rate. Thus Ireland presents an interesting case as a country with some potential for increased organic production; it also presents an interesting case of market development. The number of farmers involved in organic production increased rapidly, albeit from a low base, during the second half of the 1990s. In 1995 there were just 300 producers farming 6,400 hectares and by the year 2001 this had increased to almost 30,000 hectares farmed by over 1,083 organic producers. However, approximately 60% or 17,985 hectares of this were in conversion to organic production [7,11]. Figure 2 illustrates this growth.
224
35000 T Hectares 30000 +
-r 1200 Number
•- 1000 •-800 -•600
I Area (ha) -Producers
--400 --200
Source: Connolly (2003) Figure 2. Number of producers and hectares in organic production in Ireland
Most Irish organic food producers are involved in meat production, in particular beef and lamb. A recent survey of 220 producers by the Irish Food Board [7] found that 64% and 22% of respondents, respectively, stated that beef and lamb production was their primary enterprise. In comparison only 12% are involved in dairy production42. However, many producers are involved in a number of enterprises, therefore a wider range of products are produced. Based on the survey findings Bord Bia estimated that 800 to 900 tonnes of beef and 200 to 220 tonnes of lamb were produced in 1999. Their results are presented in table 1. The projections presented in table 1 are based on responses of existing producers and mese suggest that it is likely that this product mix will remain the same over the short to medium term, unless other sectors become more attractive. For example, more farmers may convert to dairy fanning in light of policy changes (CAP Agenda 2000 Mid-Term Review) and increased involvement of large-scale milk processors in response to favourable market opportunities. Furthermore, it is Beef & lamb and dairy enterprises represents 31% and 32%, respectively of farm output (DAF, 2003).
225
likely that daily producers will improve efficiency and thus increase output, since currently there is quite a variation in yield with some producers achieving 4,550 litres/cow and others just 2,270 litres/cow. Table 1. Irish Organic Production and Projected Annual Increase
Type of enterprise
Production 1999 (tonnes)
Projected annual growth over next 3 years (%)
Beef
800-900
20-25
Lamb
200-220
20-25
Vegetables
1,500-1,800
20-30
Fruit
130-160
30-40
Herbs
20-25
20-25
Cereals
1,200-1,500
15-20
Milk (litres)
1.6m to 2.0m
20-25
Source: AdaptedfromBordBia (2000) Agricultural policy has influenced the type and number of farmers converting to organic production in Ireland. In particular, under Special Measure 6 (SM6) of the EU Rural Environment Protection Scheme (REPS) (1994 to 1999), farmers received a payment if they converted to organic farming. Since the majority of farmers that joined REPS were extensive farmers, it followed that the majority of those that availed of SM6 were also extensive farmers. In Ireland most extensive farmers are involved in beef and sheep farming and therefore most of the farmers that converted to organic farming under SM6 were involved in these enterprises. Furthermore, much of the agricultural land in the Western part of the country is best suited to extensive grazing and hence beef and lamb production predominate in this region. Therefore, most of the growth in Irish organic production takes place in the west, for example during the period 1992 to 1997 the number of organic farmers in the western region increased by 400% compared to just 206% in the rest of the country. This may explain, in part, the relatively high production of beef and lamb and the low number of dairy farmers involved in organic production, since the latter are typically more intensive farms. [12]. Market related issues are explored below.
226
3
The Organic Food Market in Ireland
As mentioned above, the Irish organic market is relatively small, however, with an expected annual growth rate of 20 to 30% over the next three years it is predicted that it will be worth about €86m by 2006. The mix of organic food products demanded on the Irish market differs from the average EU market and to some extent reflects the differences in production mix, since organic meat sales account for 25% of total organic market sales, about twice the EU average, and sales of dairy products (10% share) are just about half the EU average. However, vegetables & fruit is the main organic product group (43% share) and much of this (70%) is imported [12]. This is similar to the EU average market share of 40% for fruit and vegetables. Yoghurt sales represent 70% of total organic dairy product sales and 8% of total yoghurt sales [12]. Furthermore a recent study predicted that yoghurt sales would continue increase to about 11% of total yoghurt sales by 2006, this compared with market shares of organic liquid milk and cheese at 1% and 2% respectively [13]. As indicated above the organic milk production and processing sector is rather undeveloped. Indeed no major dairy processors are involved in the organic market and one small-scale organic milk processor supplies the vast majority of Irish product. This processor has been quite successful in establishing a strong brand in the marketplace. Its main competitors are organic yoghurts imported from the UK, in particular Yeo Valley. The performance of organic dairy products in the Irish market merit further investigation since such products present many opportunities for new product development and have been quite successful in a number of other EU countries [7]. Organic meat products also present an interesting case, in that both Irish consumption and production are higher than the EU average and the meat market in Ireland has experienced dramatic changes over recent years due to many factors including food safety, health and convenience. 4
Consumer Behaviour in the Irish Organic Food Market
The majority of Irish consumers are concerned about food safety and this has prompted a growing number of consumers to change their dietary habits and opt for foods free of artificial additives, chemical residues and genetically modified organisms. Other key factors that influence certain consumers to choose organic include: healthy eating, sensory qualities, environmental concerns and animal welfare. The impact of these factors on customer behaviour in the Irish organic meat and yoghurt markets are explored below and compared with behaviour in other EU markets.
227
4.1
Food Safety and Health Concerns
Rising consumer awareness of the links between diet and health have helped increase the popularity of organic foods [14]. Fat was the main concern during the 1980s and early 1990s. However, consumer focus has since shifted to concerns regarding the ongoing BSE crisis, the GMO debate, E-Coli outbreaks and salmonella scares which have all eroded public confidence in food production [14]. Davies et al. [15] argue that because so many food scares occurred over a short period of time, consumers have lost confidence in food manufacturers and this distrust is contributing to the move towards organically produced food. As consumer concerns regarding food safety increases, organic food producers believe that the increase in demand for organic food is a direct response to problems associated with conventional food production systems [16]. Michelsen et al. [17] argue that the indirect promotion of alternative agriculture stemming from reports and debates in the mass media on food scares, have acted as a powerful tool in broadening public interest and knowledge of organic food. However, they argue that this indirect promotion cannot be relied on as a continued method of promoting organic food, nor can they expect the media to consistently favour consumption of organic produce. Mermelstein [18] and Beharrell and Macfie [19] point to a certain level of misconception and ignorance that exists in relation to the intrinsic values associated with consuming organic food. Both studies found that consumers would prefer agricultural producers to revert to organic methods and abstain from adding chemicals to the food chain because consumers felt that these chemicals constitute a real threat to their health. Some perceive organic products to be superior in quality and contain lower levels of toxins implicated in causing cancer [20]. In Ireland food safety and health are the key drivers of demand for organic foods. O'Donavan and McCarthy [4] examined the relationship between buying organic meat and attitudes to health and found that health consciousness was one of the main factors influencing Irish consumer demand for organic meat. They also found that consumer concern about technological hazards in conventional meat production was a strong motivating factor. The debate on the safety of GMO foods has further compounded consumers' fears over the last number of years. Concern over GMOs has made organic foods more attractive. Howlett et al. [5] found that the some Irish consumers link organic to GMO free food. Bord Bia [7] found that 66% of Irish consumers perceived organic as natural, 66% also believed it to be healthy and 33% thought that organic food was GMO free. Howlett et al. [5] found that organic yoghurt customers linked the term organic with purity (free from additives at production level) and consequently considered organic food better for themselves and their family's health. The values associated with these consequences were pleasure and family security. Figure 3 presents the consequences and values associated with organic yoghurt.
228
4.2
Sensory Qualities
Mermelstein [18] maintains that consumers believe that organic foods taste better and are nutritionally superior to conventionally produced foods. He also points out that the claim made by some organic growers that organic food is more nutritious, as it retains a high level of natural vitamins and minerals that can be lost during the production of conventional foods has yet to be scientifically proven. Beharrell and Macfie [19] argue that because consumers believe that organic foods are superior in nutrition and taste compared to that of conventional foods, they are willing to pay a premium for organic foodstuffs. Hutching and Greenhalgh [21] have stated that consumers tend to believe that organic food is nutritionally better for them than non-organic produce. They believe that significant differences in nutritional benefits derived from organic produce is difficult to prove either way, but it is likely that any plethoric nutritional benefit is nonessential and insignificant.
A sense of accomplishment
Pleasure
Environmental , Considerations Longterm consequences Eating 1 enjoyment
\
He
™h
Family Security /
Knowledge \ 'Tr
GMO Punty
Source: AdaptedfromHowlett et ai, (2002) Figure 3. The meaning of organic: The Irish Consumer
In the case of Ireland, O'Donovan and McCarthy [4] found that those interested in purchasing organic meat believed that it was of better quality than the conventionally produced alternative and interestingly many of those who had no
229
intention of purchasing organically produced meat believed that it was of similar or inferior quality to that of conventionally produced meat. Furthermore, compared to non-purchasers the purchasers of organic meat were less likely to believe that conventionally produced product tasted better than organic produce. Howlett et al. [5] found that organic was linked to eating enjoyment and respondents believed that organically produced food was superior in taste to conventionally produced food. In fact eating enjoyment was a fundamental reason for choosing organic. Superior tasting food was linked to their perception that organic was purer and this enhanced the taste of the food product, in this case organic yoghurt. The value of this for these customers was realised in personal pleasure and happiness. 4.3
Environmental Issues
Conventional farming methods are often blamed for the demise of wildlife and bird species. Overstocking of animals, pesticide use and the intensive use of machinery are practices common in conventional farming and all put pressure on wildlife and its delicate ecosystems [16]. Organic products are often differentiated on the basis of environmental benefits, however, it is unclear if consumers appreciate this and that purchasing organic products addresses their environmental concerns. Today environmental concerns are of growing importance to those involved in agriculture, especially in some areas of livestock production, for example, the intensive pig production systems in Netherlands, Belgium and parts of Brittany [22]. Consumers are also concerned about the potential danger of the residues of agro-chemicals used in conventional food production. This is perceived by many as a potential risk to health [23]. Such concerns may ultimately question the way in which food production is performed. Such concerns may also influence food choice. Within the domain of food products, organic food is of particular interest when environmental friendliness and health consciousness are considered as relevant product attributes. It would be expected that consumers of ecologically grown food products would hold strong attitudes towards the environment and hence would reveal environmental concern as a consumption motive. However, several studies [24,25,26,28,29,30] investigating the buying motives of organic food have found that environmental concern plays just a minor role. For example, environmental concerns were mentioned by nine to ten percent of Scottish respondents [24,25]. Schifferstein and Ophuis [26] found that amongst a sample who claimed they bought organic grown foods, the environment seemed a less important (41%) motive than health (70%). Davies et al. [15] found that environment conscious consumers did not necessarily buy organic foods and that a large proportion of the public demonstrated their commitment to the environment by involving themselves in environmentally friendly activities, for example purchasing unleaded petrol or recycling of waste. Similarly, Grunert [27] suggested that Danish consumers have environmental concerns; however this is not reflected in their food choice.
230
The attitudes of Irish consumers are similar to their EU counterparts. For example Howlett et al. [5] found that the environment was not of great concern for the majority of organic yoghurt customers. However, some expressed concern about the long-term consequences to the earth. The long-term negative effects of conventional fanning came under two areas: environmental problems and waste disposal. While there was concern for the environment, this did not directly influence their purchase of organic products, rather product packaging emerged as an important attribute influencing food choice. Therefore, such customers may only buy organic yoghurt if it is presented in environmentally friendly packaging. Furthermore, many customers would not make a trade-off between package convenience with environmentally friendly packaging; rather they expect and are willing to pay for both. O'Donovan and McCarthy [4] found that while buyers of organic meat were more environmentally conscious than non-buyers, they were not significantly so (at the 0.05 level). Furthermore, the views of buyers and nonbuyers of organic production methods were similar. Therefore, it would appear that even though environmental concern plays a limited role in choosing organic foods, both users and non-users perceive these foods as environmentally friendly. It is clearly evident from the above findings that health/safety and environmental factors are motives for purchasing organic food; however health/safety appear to be stronger motives. With respect to organic food from animal origin, such as meat, other relevant concerns such as animal welfare must be considered as a purchasing motive. 4.4
Animal Welfare
The issue of animal welfare does not seem to influence the purchase of organic foods to the same extent as other issues. Verbeke and Viaene [31] found that Belgian consumers viewed animal welfare as an ethical value when considering pork and poultry production. This was due to the nature of the industry, their housing conditions and general treatment of the animals. However, Makatourni [32] noted that UK consumers gained value from improved animal welfare and the second most frequently mentioned value from organic was centred on the animal. The values associated with the animal and animal welfare were: harmonious and happy lives, family and self well-being, and relaxed and satisfied feelings. Interestingly the first two values mentioned stem from concern about one's own health and ones family's health. Makatourni concludes that concern about the animal is not only linked to animal welfare and ethical issues but also to the notion that good animal health and well-being means good human health and well-being which is illustrated in the well known adage 'you are what you eat' (p.351).
231 Equality ^ ^ ^
Convenience
Accomplishment
Family Security Physical appearance
_^~—Economy
Health^_J
Monetary consideration
Brand
Country oforigin
Packaging
Pro-biotic
Organic
Ingredients
Source: AdaptedfromHowlett et al., (2002) Figure 4. Organic Yoghurt: Attributes, Consequences and Values 43
O'Donovan and McCarthy [4] found that animal welfare concern was not a strong motivating influence on Irish consumers' decision to purchase organic meat. They concluded that health motives were a much more important determinant of consumption of organic products. Howlett et al. [5] noted that while animal welfare was not the most important consequence of organic yoghurt consumption, it was linked to knowledge, which in turn was linked directly to one's own and one's family's health. The values, pleasure and security, emerging from these consequences are similar to those identified by Makatouni [32]. Thus it would appear that in the Irish context the ethical issues surrounding animal welfare are less important than the belief that the manner by which the animal is treated influences the healthiness of the resulting product. The use of chemicals and medicines was perceived as bad for the animal and also bad for the person who eats the food produced from this animal. Therefore, ingredients were an important food product attribute and organically sourced ingredients were considered 'pure' and 'natural' ingredients. Figure 4 presents the key attributes associated with organic yoghurt
Attributes are presented in italic typeface and Values are presented in bold typeface
232
and clearly illustrates the role played by the organic attribute as important but nonetheless one of a number of attributes. For example, most respondents choose organic yoghurt with probiotic bacteria as they deemed this to be better for their health. These consumers expect both attributes and were unwilling to trade-off one against the other - once again the importance of the product delivering a bundle of attributes is evident. The organic attribute complements other product attributes for example, these customers sought a good tasting product and linked this to eating enjoyment and they also linked purity with eating enjoyment. Both organic and ingredients were linked to purity. 5
The Irish Organic Food Market - Future Prospects
Connolly [10] found that net margins on both organic beef and sheep farms were greater than those on conventional farms, whereas they were lower on organic dairy farms compared to conventional dairy farms. The organic beef and sheep farmers benefited from lower direct costs, with only slightly higher fixed costs, and REPS payments that were not related to output. In comparison, organic dairy farms produced between 20 to 30% per hectare less than their conventional counterparts and incurred higher fixed costs that were not totally off-set by slightly lower direct costs44, therefore price premium for milk is crucial to the profitability of this enterprise. Table 2 presents producer price premiums for selected organic products. From this data, it appears that the market premium is proportional to that passed back to the farmer. From table 2 it is evident that while margins are rather similar for beef and milk, the latter requires either increased premium and/or increased on-farm efficiency if it is to be profitable. However, while customers generally accept the costs of organic food, production is higher than that for conventional products and that is reflected in a higher price. However, there are limits to how high a premium consumers are willing to pay. More importantly high premiums is a reason cited by some 68% of non-buyers in a recent survey by Bord Bia [7]. Other reasons included availability (52%) and poor variety/limited range (26%). Most Irish consumers are willing to pay a premium up to 20%. For example, 73% claimed that they would not pay a 30% premium. Furthermore, this survey found that the typical customer was female from a higher socio-economic group (ABC1) and married with a mediumsized family. Therefore, the organic market offers many opportunities, but as with all markets, products must be targeted at specific segments, with due consideration given to product attributes and price. Research findings [4,5] reported in this chapter point to specific consumer needs, that in turn reflect basic beliefs and values sought. These needs are satisfied by the provision of a bundle of attributes, furthermore it is likely that the attributes associated with organic foods in their own This is based on a limited sample due to the small number of organic dairy farmers in the country.
233
right are insufficient to satisfy the complex demands arising from customer beliefs and values. Thus a product that provides a bundle of compatible attributes is more likely to satisfy such demands than a narrowly defined organic product. This is most evident in the Irish organic yoghurt market where customers sought attributes such as organic, probiotic, packaging and ingredients to satisfy their needs. Thus, as in all markets, segmentation based on customer needs should improve market share. Furthermore, more fundamental customer characteristics such as beliefs and attitudes may better inform customer segmentation models than the more traditional and broader socio-economic and demographic variables.
Table 2. Producer and Consumer Price Premiums in the Irish Market
Product
Producer Premium
Consumer Premium
Milk
23-30
30-40
Yoghurt
-
20-40
Cheese
-
20-40
Beef
25-34
12-40
Lamb
23-50
20-35
Carrots
55-90
80-140
Potatoes
80-100
40-80
Barley
100-135
-
Turnips
33-65
40-80
Source: AdaptedfromBordBia (1999, 2000) Notwithstanding positive market characteristics government policy has played a crucial role in the establishment of organic production in most EU countries. It is evident that organic food production is highest where the government is very supportive, for example, Sweden, Germany, Italy and Denmark have higher than average acreage under organic cultivation. Organic producers in these countries have benefited from generous conversion payments. This of course is a critical time for a farmer when converting from conventional to organic farming. Any additional support softens the transitional changeover period which, depending on
234
the food produced and the guidelines involved can take three to five years for the transition to be completed. In Ireland we have seen die important role played by REPS SM6 in rapidly increasing the number of farmers involved in organic production Financial incentives are not the only approach to supporting organic farming; there should also be technical and other support programmes to help the organic sector. Regulation 2078/92 makes specific provisions for training and demonstration in relation to good organic farming practices. Just over half the EU member states have made provisions for this regulation, including Ireland. Austria, Finland and Portugal have compulsory training programmes for organic farmers, while in Ireland, farmers are required to pursue a general environmental course [33]. Moreover, the role of regulation in standardising the organic systems employed has been crucial to the development of organic markets in the EU. The European Union has provided a legal framework for the organics market by harmonising production rules for farmers, while furnishing consumers with the guarantees that they have come to expect both in terms of image and the quality of organic products. For the majority of EU countries, the standards established have instilled a high level of confidence in the organics sector. The EU regulation ensures that rules and guidelines for the production and labelling of organic produce are established. The advantage of these legal instruments is that they help to establish the organic sector and, more importantly, they help consumers identify genuine organic produce. In the EU, the use of the term 'organic' for labelling and advertising of organic agricultural produce and food is now limited to products produced according to the principles of production and the rules of processing. This specific protection applies to the equivalent of the word 'biological! in French, Greek, Italian, Dutch and Portuguese and to the equivalent of the word 'ecological' in Spanish, Danish and German [34]. This has facilitated the development of the Irish market given its high import requirement, especially in fruit & vegetables. Indeed the term organic is of great importance in the Irish market, in that a recent survey found that only 6% of Irish consumers recognise Irish logo's of Irish certifying bodies, while 15% recognised the British Soil Association symbol [7]. Howlett et al. [5] noted that the majority of organic customers surveyed in a qualitative study did not recognise the logos of organic accreditation bodies. They suggest that this meant that there is a lack of information from accreditation bodies as to their specific role and what their symbols represent. Interestingly, respondents displayed no real interest in such logos as they placed their trust in the term 'organic'. Thus the protection of the term 'organic' is of paramount importance. 6
Conclusions
The Irish organic market is relatively underdeveloped by EU standards, as is the production sector. However, it is a growth market and since it is growing above the
235
EU average it offers quite a lot of potential. Food safety/health and eating enjoyment are the main factors driving organic food consumption and while both concerns about the environment and animal welfare are motivating factors they are not as important. This is similar to many EU markets. Consumers are willing to pay a premium for organic products. However, in general a premium greater than 20% will depress sales; moreover consumers expect a bundle of complementary product attributes for this price. Therefore, producing and marketing food as just organic may have limited appeal in a competitive and sophisticated market. Rather consumer needs must be identified and a bundle of attributes assembled and targeted at specific segments. The example of organic yoghurt presented in this chapter illustrates this and if other dairy products are marketed in a similar way the dairy products market may grow from its current low base and provide the market returns necessary to stimulate the production and processing sectors. However, it was also evident that efficiency gains in the dairy sector are required to ensure profitability. Notwithstanding market growth and premium prices government policy has been important in the Irish organic industry and has influenced product mix. To date the organic fresh meat has gained from negative publicity surrounding conventionally produced meats. Therefore, it is also likely that the future of this sector will depend on the product development and branding targeted at key customer segments. Imports of organic foods have been quite important in the Irish sector and lack of availability and limited product range has been identified as reasons why customers do not purchase organic foods. Therefore, the Irish production and processing sectors can improve in these areas and this coupled with complementary imports could ensure a wide range of good quality products. In addition, in more advanced sectors, such as beef and lamb, Irish producers could consider export markets and piggyback on the well developed trade in conventional beef and lamb products with many EU countries. In sum, there appears to be scope for increased Irish production to serve a growing market, given that it is already suffering from poor supply, and in time exports in key product areas. However, as with most industries this success will depend on product development and marketing and therefore all actors along the organic food supply chain have a role to play in building this industry.
References 1. Latacz-Lohmann, U. and Foster, C , From Niche to Mainstream - Strategies for Marketing Organic Food in Germany and The UK. British Food Journal, 99(8) (1997) pp. 275-282. 2. Newsome, R., Organically Grown Foods. Food Technology, 12 (1990) pp. 123-130. 3. Jennings, B., Organic Food. Food Processing, March (1999) pp. 22-23.
236 4. O'Donovan P. and McCarthy, M , Irish Consumer Preference for Organic Meat. British Food Journal, 104, (3/4/5) (2002) pp. 353-370. 5. Howlett, B., McCarthy, M. and O'Reilly, S., An Examination of Consumers' Perceptions towards Organic Yogurt. Department of Food Business & Development Discussion Paper Series, 32 National University of Ireland, Cork (2002). 6. DAF, Report of the Organic Development Committee. Department of Agriculture and Food, Dublin, April (2002). 7. Bord Bia, Prospects for Organic Food in Ireland. Clanwilliam Court, Dublin, 2000. 8. Foster, C. and Lampkin, N., Organic and In-conversion Land Area, Holdings, Livestock and Crop Production in Europe. Organic Centre Wales, University of Wales Aberystwyth (2000). 9. Wilier, H. and Richter, T., Organic Agriculture in Europe. In The World of Organic Agriculture Statistics and Future Prospects, ed by Yussefi, M. and Wilier, H. (eds) (International Federation of Organic Agricultural Movements (IFOM)), Tholey-Theley, Germany, (2003) pp. 73-93. 10. der Grjp, N. and den Hond, F., Green Supply Chain Initiatives in the European Food and Retailing Industry. Institute for Environmental Studies, The Netherlands, (1999). 11. Connolly, L., Costs and Margins in Organic Production in Comparison with Conventional Production. Proceedings Signposts to Rural Change, Teagasc, Dublin, February (2002), pp. 91-98. 12. WDC, Blueprint for Organic Agri-Food Production in the West. Western Development Agency, Ireland, (2001). 13. Cowan, C , Ni Ghraith, D. and Henchion, M., The Organic Food Market: An Opportunity for Ireland? Proceedings Signposts to Rural Change, Teagasc, Dublin, February (2002) pp. 81-90. 14. Corke P., Be Natural. Multiple Buyer and Retailer, October (1999). 15. Davies A., Titterington A.J., Cochrane C , Who Buys Organic Food? A Profile of The Purchasers of Organic Food in Northern Ireland. British Food Journal, 97(10) (1995), pp. 17-23. 16. Mintel, Organics Food and Drink. November (1999). http://wrww.minteI.co.uk. 17. Michelsen, J., Hamm, U., Wynen, E., and Roth E., The European Market for Organic Products Growth and Development: Organic Farming in Europe Economics and Policy, 7 (Universaitat Hohenheim, Germany) 1999. 18. Mermelstein N.H., Organically Grown Foods. The Food Technologist, Autumn 1991, pp. 7-10. 19. Beharrell, B. and MacFie, J.H., Consumer Attitudes to Organic Foods. British Food Journal, 93(2) 1991, pp. 25-30. 20. Mahoney, R., Green Acres. Prepared Foods, September 1998. 21. Hutchins, R.K. and Greenhalgh, LA., Organic Confusion: Sustaining Competitive Advantage. British Food Journal, 99(9) (1997) pp. 336-338.
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22. Bansback, R., Towards a Broader Understanding of Meat Demand. Journal of Agricultural Economic, 46(3) (1995), pp. 287-308. 23. McCarthy, M., An Investigation of Consumer Perceptions towards Meat Hazards. Department of Food Business & Development Discussion Paper Series, 26 National University of Ireland, Cork (1999). 24. Dixon, PL. and Holmes, J.C., Organic Farming in Scotland. The Edinburgh School of Agriculture, Edinburgh, (1987). 25. Tregear, A. Dent, J.B. and McGregor, M.J., The Demand for Organically Grown Produce. British Food Journal, 96(4) (1994), pp. 21-25. 26. Schifferstein, H.N.J, and Oude-Ophuis P.A.M., Health Related Determinants of Organic Food Consumption in The Netherlands. Food Quality and Preference, 9 (3) (1998), pp. 119-133. 27. Grunert, K., Everybody Seems Concerned about the Environment: but is this Concern Reflected in Danish Consumers' Food Choice, European Advances in Consumer Research, 1 (1993). 28. Jolly, D.A. Schutz, H.G. Diaz-Knauf. K.V. and Johal, J., Organic Foods: Consumer Attitudes and Uses. Food Technology, 43(11) (1989), pp.15-20. 29. Wilkins, J.L. Hillers, V.N., Influence of Pesticide Residues and Environmental Concerns in Organic Food Preference among Food Cooperatives Members and Non-Members in Washington State. Journal of Nutrition Education, 20 (1994), pp. 26-33. 30. Huang, C.L., Consumer Preference and Attitudes towards Organically Grown Produce. European Review of Agriculture Economics, 23 (1996), pp. 331-342. 31. Verbeke, W. and Viaene, J., Ethical Challenges for Livestock Production: Meeting Consumer Concerns about Product Safety and Animal Welfare. Presented at the 1st European Congress on Agriculture and Food Ethics, Wageningen, The Netherlands, March, (1998), pp. 1-9. 32. Makatourni, K., What motivates consumers to buy organic food in the UK? Results from a qualitative study. British Food Journal, 104 (3/4/5), (2002), pp. 345- 352. 33. Lampkin, N. and Weinschenck, G., Organic Farming and Agricultural Policy in Western Europe, Proceedings of Fundamentals of Organic Agriculture Down to Earth and further a Field, 11th JPOAM International Scientific Conference, August (1996), pp. 223-238. 34. Baillieux, P. and Scharpe, A., Organic Farming. Office for Official Publications of the European Communities, (1994).
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239 DO CONSUMERS CARE ABOUT WHERE THEY BUY ORGANIC PRODUCTS? A MEANS-END STUDY WITH EVIDENCE FROM ITALIAN DATA* SIMONA NASPETTI 1 , RAFFAELE ZANOLI 1 DIIGA, Polytechnic
University ofMarche,
Ancona,
Italy
The paper presents partial results from a European study on consumer motivations and perception of organic food, using the means-end theory and laddering. The means-end chain model (Reynolds and Gutman, 198813 ) gives the possibility to explicitly link product attributes to consumers needs and wants. This theory stands on associations: between concrete product attributes, abstract product attributes, functional consequences, psychological consequences, instrumental and terminal values. As a result, products attributes are means for consumer to obtain desired ends: consumers achieve values through benefits yielding self relevant product attributes. In order to explore the relevant cognitive structures of consumers regarding the place of purchase of organic food, 104 respondents were interviewed using the soft-laddering technique, an in-depth face-to face interviewing approach at measuring means-end chains. Consumers where interviewed in various part of Italy, and vary according to their gender, age, frequency of purchase of organic products, level of knowledge of organic products, and residence (rural vs. urban). The results (ladders) of this semi-qualitative interviews are coded and presented in a set of hierarchical structured value maps (HVMs). The results are discussed and analysed, using insights from previous research. Keywords: means-end chain theory; laddering; organic food; point of sale; shop preferences.
1
Introduction
At the end of 2002 the Italian organic market is estimated worth around 1400 millions euro and a 1,5% share of the whole food market turnover6 . The growth rate of the organic demand in Italy is about 5-15% per year, and the Italian organic market is estimated to be the third largest in value in the EU, after Germany and UK. About 80% of organic consumption is localized in northern Italy and it is mainly directed on fruit and vegetables (38%) and dairy products (14%)18 . In 2002 the number of specialised organic shops were 1,117, 65% of them located in the This paper is a joint effort of the two authors and results have been analysed and discussed together. However, S. Naspetti has written paragraphs 2 & 3.1, R. Zanoli paragraph 3.2, while the remaining parts are common. EU funding (QLK5-2000-01124) "Organic Marketing Initiatives and Rural Development OMIaRD" for part of this work is gratefully acknowledged. This paper does not necessarily reflect the Commission's views and in no way anticipates its future policy in this area. Corrisponding author Simona Naspetti: DIIGA, Universita Politecnica delle Marche, Via Brecce Bianche, 60100 Ancona, tel.: 071/2204648, fax: 071/2204858, e-mail: [email protected]
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North and only 37 (3,3%) in the south, that is in areas where the production is more concentrated2 . However, the largest share of the boom that is affecting the organic demand can be ascribed to developments in large scale retailing: almost all the most important supermarket chains have introduced a full range of organic products during the end of last century. Organic products are put on the shelves of 95% of supermarkets and many of them (namely Coop, Esselunga, Carrefour, Conad, Crai, Despar, Pam, Billa and Selex) have their own private label for organic products. Such tendency is going to be strengthened by further developments in the marketing of some product categories, like meat, which probably will have a remarkable impact on the organic consumption. Supermarkets too, especially those selling fruit and vegetables, are more concentrated in northern Italy7 . On the consumer side, surveys show that the level of product awareness of organic food is relatively high (90%17 ), while the level of information and product knowledge is still quite low even among organic consumers: there is still a lack of information about product's characteristics, certification bodies, labels, etc. All recent surveys 20 '21 reveal that consumers ask for more information. They want to chose with more freedom, and knowledge is an instrument, but they are also interested in more "natural" products: certification and labelling are seen as a starting point, food safety is a desirable target, but most of all they desire to understand and to be aware about how organic production and processing is indeed different from the conventional one, and how organic products can be distinguished. Lower prices and better distribution, of course, would help to increase the demand of organic products. At the same time, potential organic consumers want good tasting products as well as easy-to-use products which aren't perishable. In terms of product development, better packaging and organoleptic quality standards appear to be a target for organic farmers and processors. Organic consumers do not want to be driven by the market, they want to eat healthy and at the same time are not keen to renounce to the pleasures of life. The "health" issue is clearly the key-word to this respect, but it should be coupled with implicit reference to value states such as hedonism, pleasure and achievement, which also act as driving forces. Although a number of researches have identified organic consumers preferences and barriers and shown the state of the organic sector into the modern distribution of food, no study has examined the links between organic store attributes and the consumer store perception. Previous store-perception researches8 have also shown that food stores have some peculiarities respect to other type of stores: when purchasing food, consumers usually perceive that store attributes such as location, assortment, price level, personnel and services offered exercise a consistent influence on store choice, while, among product attributes, perceived food quality is quite important.
241 The dynamic nature of food buyers renders all the aspects mentioned unstable over time: consumers change needs and motivations when going for food purchases8 . To this respect, food scandals and other similar emotionally impacting occurrences may not be durable drives in motivating organic food consumption. There are therefore remarkably many black spots of the organic market that should be analysed by researchers in order to help retailers to understand consumers and developing a successful positioning and increase their loyalty rates. 1.1
Purpose of the study
The aim of the study was to gain further insight into consumers' store perception with regard to organic food products, in Italy. More specifically, the study aimed at evaluating and getting information about: perceived barriers and motivations, possible differences in consumers' cognitive structures relating to different sociodemographics groups, some regional/national differences in beliefs and attitudes towards different retail typologies. 2
2.1
Methodology
Means-end chains and laddering
The empirical work on which the study is based refers to means-end theory4 13 , a conceptual model which studies underlying consumer purchase choices through the deep comprehension of the consumer decision-making processes. This cognitive methodological approach starts from the analysis of the existing linkage between the consumer and the product. The basic idea of this approach is that when a stimulus or event regarding a product (including new products information) come in relation with consumer self-knowledge and his memory, a link between him and the product is built. A network of links between product attributes, personal consequences and values can be revealed to give a deeper insight in consumer motivation. Individual association, that consumer formulate, can be collected and structured in a hierarchical form known as a "means-end chain"4 . In other words a means-end chain (MEC) is a knowledge structure that links consumer knowledge about product attributes with his/her personal knowledge about consequences and values (Figure 1).
242
Values
1
Self-knowledge
Psychosocial Consequences t k
Functional Consequences
t
Product
Product knowledge
AttrihiitPiS Figure 1. Linking values to products: the Means-End Chain Model
By the gradual collection of information on consumers goals, aims and motivations/barriers to the product/service use, the Means-End Chain (MEC) approach tries to describe the existing level of familiarity with the product/service, but also to show the links between the consumer's knowledge about product attributes and product-related outcomes with his/her personal knowledge about selfrelevant consequences and values. Connections between consumer and product occurs through the construction of an associative network between concrete and abstract attributes of the product, functional and psychological consequences tied to the product use, and, finally, the consumer's instrumental and final values. The final result of this theoretical model is derived from a series of cognitive maps (Hierarchical Value Maps o HVM)13 depicting the aggregate consumer means-end chains, linking the product characteristics with consumer's ethics and values. By looking at Hierarchical Value Maps it is possible to discover what motivate consumers to choose a product, in our case a shop, rather than something else. The model gives a more deep view into consumer perception, revealing characteristics consumers judge more important in their choice and linking them into a model of sequential motivations. In this model, product attributes are means which consumers can take advantage of in order to achieve their own aims/ends; in other words, consumers attain their own life goals, by means of those product's characteristics they perceive being important and producing suitable consequences to satisfy their own personal values. Information on the means-end chains - either motivations or barriers contained into consumers mind cannot be obtained by direct asking, as it usually happens in most of consumer surveys, both quantitative than qualitative (focus groups). In most of the cases consumers are not aware of their decision-making process, nor able to reveal the reasons that personally motivate consumers to choose a product/service and links these motivations to product attributes and their
243
consequences. A specific in-depth interviewing technique, named laddering, can be used to reveal respondents true beliefs, feelings and desired ends. To extract consumer relevant product attributes/characteristics, direct elicitation or various other techniques can be used (triadic sorting, free-sorting, ranking, etc.). Afterwards, the most important product attributes are retained for laddering. Consumers are asked to build their means-end chains, that is their own sequences attribute-consequence-value, just repeating an iterative simple question (Why this is important for you?) or variations of such question13 . In this way interviewer speeds up connections between the various elements of the chain and consumers are driven to build up their ladders. The development of such procedure allows the consumer to naturally reveal his personal reasons, those motivating him to choose and that otherwise it would not be in a position to bringing back to the light from the memory. The technique has, in fact, the advantage to force consumer to reflect and reason about attribute-consequence-value relations. 2.2
Study design and data collection
A total of 104 interviews have been conducted in Italy during a period which goes from February to April 2002. Both consumers and non consumers of organic products have been interviewed, in similar quotas: 51% declare themselves as regular buyers of organic food and 49% as occasional or non-buyers of organic food45. In order to compare different types of consumers, potential respondents were recruited in three main areas of the Italian territory. Approximately half of the respondents (54%) were interviewed in Central Italy (Marches) and the remaining 46% of the sample was shared between a northern region (Veneto) and a southern one (Apulia). Consumers were also recruited in different percentages depending on their area of residence: approximately 65% lived in urban areas (Lecce, Ancona or Padova), while the remaining lived in rural areas. Among the respondents, 41% declare to make most of their (organic) food purchases at the supermarket, 39% prefer to buy in organic specialised shops, while the remaining are consumers that buy organic food in open air markets. The phenomenon of small, open-air farmer markets14 is not to be considered as a real alternative to other retail channels, because of their small dimension, very sparse distribution and - with few exceptions - irregular frequency. However, the group of consumers preferring open-air markets for their organic purchases shows some peculiarities.
The national survey is part of a large EU study (OMIaRD) which involves other 7 EU countries: Austria, Germany, France, United Kingdom, Finland, Denmark, Switzerland. The laddering study has been developed to gain more insights into the European organic consumer, together with focus groups conducted in the same countries. For a full account of the research results and discussion21 .
244
Data on consumer means-end chain were collected empirically by means of face-to-face ("soft") laddering interviews46. In order to uncover what personally motivates consumers to choose a specific point of sale respondents were asked to give reasons for shop preference and/or shop refusal and these motivations were linked to product attributes and their consequences to reveal respondents' true beliefs, feelings and desired ends. Once collected all the interviews were transcribed by professional typewriters. Subsequently, the interviewers decoded them in chunks of meaning, and listed them in ladder forms following the iterative coding procedure suggested by Reynolds and Gutman13 to reveal ladders made of linkages between attributes-consequencesvalues. Using a set of codes jointly developed, two independent judges carried out the classification process for all the laddering interviews. The index of reliability10 was 0.72, exceeding the recommended guideline (inter-rater-reliability = 0.70). All disagreements were resolved by discussion. From the 104 interviewed respondents it was possible to extract meaningful ladders and categories of meaning from 96 consumers (for shop preferences) and 55 (for shop refusal). The coding for organic shop preferences results in a list of 47 categories, shop refusal's categories are 53. The software MECanalyst, developed by the Authors47, was used to derive the implication matrixes and the relevant HVMs for both the aggregate group of consumers and each relevant subgroup (regular vs. occasional buyers; urban vs. rural; income levels; levels of product knowledge; consumers with children aged less than 10 vs. consumers with no or older children). 3
Results
Results are to be analysed in the light of the recent increase of the organic range in supermarkets and modern distribution channels in Italy. Multiple retailers engagement into the organic sector is currently reducing the market share of specialised organic shops, albeit not the overall volume sold by these outlets17 . However, consumers have different perceptions about different outlets, specialised shops offering more in terms of "service" and information than supermarkets7 . This may influence the trust and confidence of consumers towards organic products.
"Soft" laddering is a procedure where the natural flow of speech of the respondent is restricted as little as possible, as in a face-to-face interview; "hard" laddering refers to interviews and data collection techniques where the respondents is forced to produce ladders one by one, and to give answers at an increasing level of abstraction . 47
MecAnalyst is a windows-based laddering software developed jointly by Skymax-DG, R. Zanoli, S. Nasnetti. E. Thelen and M. Botschen (httt)://www.skvmax-de.com/mecanalvst/index.htmiy
245
3.1
Where do Italian consumers buy
The aggregate HVM of all respondents is presented in Figure 2 and 3 by distinguishing the shop preferences and shop refusal ladders. The first map shows the means-end chains listed by at least 7 respondents (cutoff=7), and the second illustrates those listed by at least 4 (cutoff=4)48. The codes in the top of the maps (in bold) representing the consumers final motivations or values, are linked by arrows coming from the lower levels: consumer benefits or positive consequences (in CAPITAL LETTERS), and product's attributes (in italic) at the bottom. Each code block contains the code label, the number of chunks it represents and the percentage of subjects that have named it. Bolder arrows refer to links mentioned by a larger number of respondents. A first inspection of the map reveals a quite complex cognitive structure. The average length of ladders is 6.5, the number of ladders per subject is 4.9 and the value codes share of total number of codes is 21,3%. The five value codes are all imputable to the self-enhancement or egotistic domain, according to the Schwartz's classification15 , except one: Harmony with the world, which can be classified as an altruistic or self-transcendent value. This structure confirms previous results on the higher importance of self-enhancement and openness to change in the Italian organic consumer decision making processes. Although all the consumers appear to be driven by a unique motivational framework, subjects declare that the preferred place to shop organic products is, in preference order: supermarket, mentioned by 44% of consumers, organic shop (35%) and local shops in fewer cases. The results confirm that the modern distribution is the preferential purchase outlet for all the consumers, as expected from previous surveys5 . This aspect is also confirmed looking at the consumers cognitive structure. By simply looking at the map one can appreciate that there are two main segments of shoppers, with two different motivational structures: purchasers at the supermarket and at the specialised organic shop. The two sections of the map are quite different, but have the same "leverage point" in Feel good. For both groups of consumers, this consequence is the bridge connecting various ladders to the value level. When looking at maps with higher level of cut-offs, respondents seems to admit their desire for independence - see also the link Have choice -> Self-actualisation - and to be considered a competent/capable housewife to reach higher levels of satisfaction and be happy. The two shopping outlets permit one to obtain this advantages in different ways: at the supermarket the product assortment and convenient location contribute to time saving. At the organic shop consumers can improve their knowledge and information thanks to "advisory" services given by sales personnel. In order to obtain a balance between quantitative validity of the data and aesthetic of the map, different cut-offs have been used for the two analyses trying to keep similar percentages of mapped links on total links (at least 57,7% for shop preferences and 52,2% for shop refusals). Different cut-off levels are going to be taken into account when interpreting the results and evaluating the complexity of the maps.
246 Inner harmony/Happiness nr:28sub:2'J Harmony with the world nr:36 sub:44
DONOTF^L ANONYMOUS NR:15SUB:15
Or&Micshop nr. 34 sub:35
Figure 2. HVM of motivations for preferred point of sales
The altruistic value Harmony with the world is achieved in a slightly different way by the two consumer subgroups. Supermarket buyers refer to the possibility of improving their relations by having time for social activities, those going into the organic shop refer to a generalized feeling of trust they obtain during shopping by the relationships they activate with sales personnel giving them advice and information. Both groups report that this value is linked with the Feel good psychosocial consequence, which - as already illustrated - is central in the cognitive map of all respondents and is related with a general feeling of personal and social well-being. But the "organic shop freaks" group achieve the same value in another - more direct - way, by the psychosocial benefit of Not feeling anonymous, linked with the higher service embedded in the personal selling attitude of organic shop's salespersons. The Harmony with the world value acquires more importance for the subgroup of regular consumers. Compared to the reasons which move non regular buyers, the motivations of regular organic consumers are less egocentric; and regular consumers declare that they mainly prefer to shop in organic specialised shops.
247
Confirming the findings of our previous studies20 19 , frequent users continue to have a more idealistic cognitive structure than occasional consumers, and this may be considered a symptom of a higher involvement. The goal of living an healthy life (Own health), which is also linked with the value which represents a quality of life improvement (Well-being, Quality of life), is equally present in both the consumers preferring the supermarket and those who go for the specialised shop. Concerns about the health risk from food consumption is central in the cognitive structure of all consumers, no matter which is their preferred point of sale. As demonstrated in previous studies, the simplicity of the motivational structure for purchase at the supermarket indicates the consumer's lower involvement into product choice16 . This group of shoppers choose a supermarket because of convenience and for some practical reasons: product assortment (wide range) and location convenience (good location), which in the consumers mind represent a practical and comfortable way of shopping (is practical/convenient). Supermarkets facilities provide an easier shopping for the increasing number of time-impoverished consumers and also more leisure time to avoid anxieties and feel better. The array of increasing offerings in the supermarket, plus the accessibility, that is the distance of shops from home or work, make them a convenient place for their food purchases. Those preferring organic shops are mainly driven by more emotional motivations. They show many cognitive links that are similar to those buying in supermarkets, but the main link leading up to Harmony with the world illustrates the importance of altruistic motivations for these shoppers. In fact, if we increase the cut-off level49, the motivations show a more effective attitude than those of the supermarket-lovers. Subjects selecting these shops, because they are more oriented to altruistic values, show a more complex network of motivations but also have shorter chains. These two elements emphasise the importance of the food choice into consumers' lives50, but also suggest the lower familiarity they have with this kind of shop12 . Since the organic shop is mainly chosen by regular consumers51, it is possible to assume that they do not exhibit a high store loyalty8 even if they have a more detailed knowledge of the store attributes: in other words, regular consumers show a higher shop expertise. While preferring the organic shop, they do not disdain the supermarket whenever it solves their need for a practical, comfortable, andtime-savingway of shopping.
The map is not shown here for simplicity, but is available by request from the Authors. 50
2
More complex structures are proof of higher involvement of the organic shopper group . At the subgroup level, separate maps were derived choosing groups with different socio-demographic characteristics. By comparing maps is possible to observe similarity and divergences between the cognitive structures of the groups. Subgroups maps are not shown here: they are available upon request from the Authors.
248
Regular consumers seem to place the two shop types side by side, and attribute positive qualities to both, as explained above, but then differentiate between the two. Occasional consumers display a clearer choice. Their preference for supermarkets is more evident (64% vs. 28% for the regular organic consumers); the choice is motivated by a salient belief that they can find better quality products in supermarkets and thus have a better diet and better health - "with products which are not deteriorated, I eat more genuine". At the value level, we may have a confirmation of this result by acknowledging the presence of the Health value, that is absent in the regular consumers map. Regular and occasional organic buyers interpret the ease of finding a wide range of organic products in a different way. Probably due to a different attitude towards food purchases, regular consumers seem to appreciate the width and length of the range offered by organic shops (i.e. the number of different product lines and the total number of organic products available), while occasional consumers value the possibility of choice existing in supermarkets: in other words, they like the fact that organic brands are positioned side by side with other non-organic brands, increasing their freedom of choice. Regular consumers, searching for a wider number of product lines, seem more pleasure oriented. Their behavioral response to the store is mostly exploratory and relational u , and they seem to be looking for an intrinsic enjoyment of their shopping experience: they express interest in friendliness of personnel, service and food quality and, according to their cognitive structure, seem less pressed by time. Specialized shops, with competent and involved sales people (good staff skills), grant to these consumers a great variety of advantages, both concrete and psychological. Skilled staff, trying to be friendly and helpful, is important for two reasons: it is a mean to have (good) personal relations with sales staff, since they can give advice and product information, but also they make the consumers feel less anonymous as it happens when going into supermarkets. When sales personnel advise consumers about products characteristics, usage, origin and other information, they make them feel more confident about their choices (Make better decisions), and act as trust builders (have trust) that create the shop loyalty. Consumers experience a pleasant and relaxed feeling, or a sense of home and familiarity. Both urban and rural consumers express a dominant preference for supermarkets and are especially interested in convenience and choice offered by them, but are differentiated by looking at their final motivational stance (driving force): self-actualisation for the urban group and inner harmony, happiness for the rural one. It seems as if rural consumers are willing to find a trade-off between their mainly concrete motivations and the desire of a serene and spiritual life. They even do not want to give up the benefits offered by modern distribution channels as well as those offered by organic shops (the same mentioned in the total map). In the name of balance, they seek life's comforts keeping in mind that life should stay on a human scale. Those living in small urban centres, where the presence of organic
249 specialised shops and organic supermarket shelves is to be considered still marginal compared to large city centres, are probably still affectionate to local traditional small food shops, which for years have been offering the same level of advice as organic shops are currently offering elsewhere. Urban shoppers have no doubts: supermarket is their favourite place, but they express this preference with a nested structure. Supermarkets are reported as exhibiting advantages normally attributed to organic shops, in addition to the other benefits usually linked to them. In fact, the map of urban consumers introduces many interrelations, as if to express a dual need. Although consumers demand high quality standards for conventional products that big supermarket chains usually offers, they also have a need for the level of service associated with smaller shops. In neither group are consumers willing to give up the benefits they associate with each of the different store types. Both groups mention the trust issue as a positive aspect inferred by the possibility of getting help and advice, but the ladder stops at the psychosocial consequence, without attaining the value level. This probably means that consumers feel that having confidence in quality and in staff knowledge is not as important as other benefits. Consumer preferences for more concrete advantages such as saving time and obtaining information are more self-relevant, i.e. reach die value level. We can also hypothesise that both groups take such aspect for granted and therefore do not particularly ask for it. Comparing consumers with low declared income (39,6%) with those with medium or high income (59,3%) reveals that the last group favours neither supermarkets nor specialised shops, whereas low income respondents express a clear preference for supermarkets. Contrary to the findings of our previous studies20 19 , specialised shops are not chosen by consumers with lower incomes. An explanation of this result can be due to adverse selection of respondents in the sample, and not simply ascribed to a lower price perception, which in any case is not appearing in the map. By evaluating organic product knowledge level (or expertise52) two maps have been created: consumers with high knowledge and those with low or medium expertise. The more informed consumers are also those usually preferring the organic shop (mentioned by 40% of the more knowledgeable respondents vs. a 24% elicitation rate of the less expert group). And visual inspection of the subgroup maps renders clear that the less expert and informed consumers have a simpler cognitive structure regarding shopping at the organic specialised shop. Less expertise/knowledge about organic products is therefore coupled with lower frequentations of organic specialised shops. In conclusion, supermarkets are frequented by a wider group of consumers who appreciate the various advantages they offer but are mainly interested in saving Consumer's knowledge was estimated measuring the effective knowledge through a 7-item scale previously tested in a past study20 .
250
time, leading to Self-actualisation. Organic specialised shops are usually appreciated by the same buyers, but are especially suited to regular consumers, working full-time, with medium-high level education and high organic product knowledge. Specialised shops are linked to more social values and to the pleasant feeling of establishing friendly relationships with the staff, in the words of one consumer, "a sort of friendship". Consumer interest in purchasing organic food in open air markets or directly from farmers is totally absent. Lack of time seems to be the main barrier for shopping in these places. Small farmer markets are therefore very marginal as marketing channels. However, these markets seem to provide an occasion for trying new products53. 3.2
Shop refusal
In spite of the increasing interest of modern retail channels in distributing organic products, consumers show a remarkable level of mistrust towards these point of sales when organic purchases are concerned. Reasons put forward for not buying in supermarkets seem to contrast with the preference consumers credit them with, but help to understand in more depth the dynamics of consumer shop preference. It is therefore not that surprising that supermarkets, usually the preferred shopping place for organic products, receive the worst judgment. Supermarket refusal is mentioned by 40% of shoppers, while 15% mention discount shops as the point of sale they will never choose in order to buy organic products. Other miscellaneous point of sales (e.g. drugstores, confectionery shops, etc.) are mentioned by another 15% of respondents. All types of shops display a negative image based on the presence of poor quality products, leading to the health issue, and on the unpleasant atmosphere experienced. Health is again the main motivational domain for store refusal. According to respondents, supermarkets are crowded, chaotic and noisy places, while discount shops are untidy and dirty; their outward appearance reduces consumer confidence (have no trust). Trust in the quality of the products also depends on two factors: doubt about the honesty of supermarkets (strict controls) that sell unknown brands, which may not respect organic standards or do not display certification, and the risk of buying "false" organic products. Discount shops are also criticized for their bad products presentation. The absence of skilled staff in supermarkets and discount stores may induce an avoidance behaviour in consumers, connected with a lack of pleasure in shopping and a negative arousal response to the store atmosphere11 . Fewer interactions with personnel means less product information and consumer distrust for products sold in these shops. Data on "Special situations for buying organic" are not shown but available upon request from the Authors.
251 TTJb/tabi Cut-Cff=4
Inter hanmtyilfypiEss irtUsihl^
WclHMng/Qlcilihullife Setf-aduafstfon nrllsfcM nrl2sib27
IbmwwwUithewirid ir:Esiii25
Sample size=55
rr:llsib:24 Discartdtp ir:8sub:15
Otterpoint
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Figure 3. HVM of shops where consumers prefer not to buy organic products
Consumers food concerns {cannot eat, stay healthy) is another cause of mistrust. Given that shoppers indicate their uneasiness about this issue, safety of food is very important when shopping organic products whatever the shopping place is. But respondents seem to be reluctant to support mass-market structures, mainly for reasons that are linked with their main motivations - health and wellbeing, but also serenity and happiness. The same benefits that are at the basis of the success of supermarkets (e.g. self-service, large assortments, lower handling costs) appear to be, in the mind of the Italian consumers, potential risk bearers. Respondents restate their wish for competent staff who can be of help and give information as a way of building trust, and reiterate the convenience of being able to shop quickly to reach their ultimate goals through an easy, pleasant, and - above all - relaxed feeling. Shopping is usually perceived as a stressful activity, which is combined with busy working days. What consumers want is tranquillity.
252
Supermarket are mainly rejected by regular consumers (55%), whereas only 21% of occasional consumers say no to supermarkets for their organic purchases. Regular consumers express their concern for supermarkets mainly in terms of mistrust. The verbatim expression literally is: "in supermarkets I do not trust the organic origin of the product". The quality perception is again the main - albeit often latent - variable influencing consumer attitudes. Occasional consumers confirm their lower level of experience with respect to shop refusal too; their map is more dispersed and expressing a more undetermined cognitive structure. Low income respondents are the only group showing an important refusal of discount shops; 27% of them mention it as a disliked outlet, while it is not even mentioned by the other income categories, who probably don't even consider discounts as a potential organic point of sale. Low income respondents are, of course, more experienced in shopping at discounts, which appear clearly a secondbest in their cognitive understanding: going into those shops they have had the possibility to come into contact with the unpleasant atmosphere which cause their avoidance behaviour. Consumers with higher incomes are definitely less experienced with this specific type of outlets and, showing a more complex cognitive structure, tend to refuse supermarkets which may be seen as relative counterparts of discounts for their income category. In general, visual analysis of the map reveals a simpler cognitive structure than that exhibited in Figure 2. The average length of ladders is 6.6 - substantially equal to that exhibited by the shop preference HVM; the number of ladders per subject is significantly lower -just 3.4, while the share of value codes over total number of codes is 22,7%, a bit higher than in the shop preference case. This allow to conclude that the level of involvement of consumers is more or less the same for both motivations and barriers, but the shop refusal cognitive structure is less articulated.
4
Discussion
The results of this study clearly demonstrate that different shopping situations activate very different aspects in consumers self-cognition system. The study suggest that supermarkets are perceived as less involving because they activate a smaller amount of important linkages than the organic specialised shops do, and those consumers familiar with organic shops seem to have a more idealistic cognitive structure than occasional consumers, and this may be considered a symptom of a higher emotional participation in food choice. The organic consumer, wishing to buy quality products - healthy, natural and genuine, also ask for a convenient shopping activity and for products easy to use and find20 . Occasional consumers appear driven by practical motivations, rational
253
thought and common sense. Supermarkets is their favourite place for organic food purchases, but they are doubtful about the organic quality of the goods sold, they feel they have no real guarantee. Improvements on this aspects could help development of the organic supply in modern retail stores. Supermarkets, on the whole, exhibit a positive image in the eyes of regular consumers too, but the need of getting advice and obtain information, coupled with the idea of having more human relation when shopping, limits the appeal of this shopping places. Specific marketing efforts, aimed at increasing the relational content of the shopping experience, would therefore act as trust enhancers. A low level of trust (leverage point in the shop refusal HVMs) is indeed the psycosocial constraint to increase the share of organic purchases in modern distribution channels. On the other hand, organic shops show constraints which, on the contrary, could be hardly solved. The small dimension of these places, but mostly their inconvenient location and the lack of parking facilities make them less convenient places for shopping and reduce their competitiveness into the organic distribution channel. However their strengths should be better emphasized by the shopkeepers by putting more commitment in the shop atmosphere. Findings suggest that shopping into organic shops is perceived as more self-relevant than going into a supermarket. Stores full of life and surprises develop a more positive emotional response and have the opportunity to induce pleasant psychosocial benefits in the consumers, increasing their willingness to spend money into the shop and to make unplanned purchases11 . Given that greater involvement and motivation is activated by higher level of consumer self-relevance3 , consumers should be given enough attention and consideration to avoid them feeling anonymous. It is not surprising that salespeople who are able to recognise regular customers and address them by their names if required have a high chance of success. NLP applied to marketing stress the relational factors as the most important in personal selling strategies. A pleasant atmosphere coupled by professional but concerned relations with customers could be the main opportunity for the success (or survival) of organic specialised shops and organic specialised retail chains. References 1. Benouski, B., Quintarelli, L. (2000), Conquistare il cliente con la PNL, Franco Angeli, Milano. 2. Biobank (2003), Negozi di alimenti bio 2002, http://www.biobank.it. 3. Celsi, R.L, Olson ,J.C. (1988), "The role of involvement in attention and comprehending processes", Journal of Consumer Research, 12. 4. Gutman , J. (1982), "A means-end chain model based on consumer categorization processes", Journal of Marketing, 46(2), 60-72.
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5. Hamm, U., Gronefeld ,F., Halpin, D. (2002), Analysis of the European Market for organic food, School of Management and Business, University of Aberystwyth, Aberystwyth. 6. ITC (2002), Overview World Markets for Organic Food & Beverages, http://www.intracen.org/mds/sectors/organic/. 7. Minoia, G. (2000), "I bioconsumatori", Biomonitor, Supplement to AL Food&Grocery, 9. 8. Mitchell, V.W., Kirall, R.H. (1998), "Primary and secondary store loyal customer perceptions of grocery retailers", British Food Journal, 100 (7), pp.312-319 9. Olson, J., Reynolds, T. (1983), "Understanding Consumer's cognitive structures: Implications for advertising strategy", in Percy L., Woodside A. (eds.), Advertising and Consumer psychology, Lexinton Books, Lexinton, MA. 10. Perrault, W.M., Leigh, L.E. (1989), "Reliability of Nominal Data Based on Qualitative Judgements", Journal of Marketing Research, 26, p. 135-48. 11. Peter, J.P, Olson, J.C., Grunert, K. (1999), Consumer Behaviour and marketing strategy (European Edition), McGraw-Hill, London. 12. Reynolds, T.J., Gengler, C.E., Howard, T.E. (1995), "A means-end analyses of brand persuasion trough advertising", International Journal of Research in Marketing, vol. 12 (3), pp.257-66, October. 13. Reynolds, T.J., Gutman, J. (1988), "Laddering Theory, Method, Analysis and Interpretation" Journal of Advertising Research, 28(1), pp. 11-31. 14. Santucci, F.M. (1999), Alia scoperta dei mercatini biologici, Distilleria, Forli. 15. Schwartz, S.H. (1992), "Universals in the content and structure of values: Theoretical advances and empirical tests in 20 countries", Advances in experimental social psychology, 25, Academic press, San Diego, CA. 16. Vannoppen, J., Verbeke, W., Van Huylenbroeck, G. (2002), "Consumer value structures towards supermarket versus farm shop purchase of apples from integrated production in Belgium", British Food Journal, 104 (10). 17. Zanoli, R. (2003), "Nuovi modelli di consumo e prodotti biologici", in Canali M. (ed.): Economie, Societa, Agricolture, Allori, Ravenna, 13-32. 18. Zanoli, R., Marino, D. (2002), "Distribuzione, consumi e mercato", in INIPA/AGER (eds.): Agricoltura ed Ecoambiente: indagine sui nuovi fabbisogni formativi del settore, Ministero del Lavoro e delle Politiche Sociali, Roma. 19. Zanoli, R., Naspetti, S. (2001), "Experience and Knowledge in the purchase of organic food, in Hanafi A., e Kenny L. (eds.): Proceedings of the International Symposium "Organic Agriculture in the Mediterranean basin" (Agadir, Oct. 7-10, 2001), IAV Hassan II, Agadir (Marocco). 20. Zanoli, R., Naspetti, S., (2002), "Consumer Motivations in the purchase of organic food: a means-end approach", British Food Journal, 104 (8), 2002, 643-653 , presented at 72nd EAEE Seminar Chania (Grece), June 2001.
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21. Zanoli, R., Thelen, E., Laberenz, H. (eds.) (forthcoming), Consumer trends and scenarios of the organic market, School of Management and Business, University of Aberystwyth, Aberystwyth.
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257
CONSUMER'S ATTITUDE REGARDING ORGANIC PRODUCTS BRIZ, TERESA., AL-HAJJ, MAYA. Polytechnical
University of Madrid,
Spain
The threat of continued food scares has driven growth in the organic market in the last few years, as consumers have come to distrust many conventional products and have taken a greater interest in food safety mechanisms. This concern for food safety is now at its peak throughout Europe, and Spanish consumers are similarly concerned about the quality of the food they are eating. Spanish organic agriculture has grown very fast in the last decade; the land devoted to organic production methods has increased more than 150 times and the manufacturers are also solidly established. On the other hand, the efforts to boost organic production have to be accompanied by the development of a national action plan for organic food to improve the whole situation of the organic sector and to assure consumers of consistent product quality. As a part of a research project, we describe here the situation of the Spanish organic food sector and the political initiatives carried out, and the analysis of the Spanish consumer, through a national survey carried out by telephone interviews. The consumers' knowledge level about organic products, their behaviour and attitude facing these products are studied. And, as conclusions of this research study, we show possible marketing strategies to satisfy the consumers' needs and preferences.
Keywords: Organic products, food quality, consumer behaviour, action plan, political initiatives, marketing. 1
Introduction
The market of organic products is developing and growing at a very fast rate. Its annual growth rate reaches over 20%, which makes it a unique sector in the agricultural market: there is no other agricultural and livestock product group that has registered this growth rate. However, the organic production still cannot satisfy the demand for organic products in Europe, Japan and North America. Spanish organic agriculture has grown very fast in the last decade, and Spain offers favourable conditions for the development of this kind of farming, which successfully combines environment-friendly, economic and social principles. Spain is the fourth European country regarding organic production, having experienced a significant growth in the last decade. However, the consumption level in Spain is still low, and around 85-90% of the production is destined to exports. Consequently, has been increasing and needs to be fulfilled. The growing interest of consuming organic products corresponds to different types of behaviour.
258
On the one hand, organic products are the answer to the recent food scandals that have appeared the past decade (BSE, dioxins, etc). These food scares have driven consumers to search for 'safer' products and those whose quality is guaranteed, and organic products are categorised within this section. On the other hand, there is a world-wide tendency of change in values, shifting the priority focus from 'materialism' and economic growth to a 'non-materialistic' trend, based on greater consideration of the quality of life, environment, selfsatisfaction, etc. This tendency is an attitude of societies that count on higher levels of income and whose population spends less and less on food (in developed countries, an average of less than 10% of the income). And this is a reason why they have alternatives for satisfying new necessities. 2
Present Situation of the Spanish Organic Sector
In 2002, the land dedicated to organic production in Spain reached 665,055 hectares, which indicates a notable increase, since in 2001, only 485,079 hectares were registered. This means an incline of 37% of the organic land in the last year. Currently, Spain is the fourth European country in organic production after Italy, Germany and Great Britain. The industrial activity related to organic agriculture and the cattle raising are also firmly established, with more than 1,200 processors. Regarding the problems that this particular sector in Spain faces, we can classify them in two sections: problems at the first stage (production level) and problems at the last stages (marketing and distribution levels). With respect to the problems at the production level, one of the greatest obstacles that clearly interferes in the sector's development is the fairly small size of the plots. That means operators do not deal with a big supply and this fact makes the Spanish organic market a weak one. The plots and the production are fragmented over Spain, and therefore the associations in this sector would be fundamental to develop the industry and to improve the commercialisation of these products. (Al-Hajj, 2000) As for the commercialisation problems, one important drawback is the lack of a clear definition of the distribution channel for organic products. The purchases of organic products mainly come from specialised shops and/or herbal stores, and not from large supermarkets or hypermarkets. Another relevant issue is that these products are not always available, although this situation is gradually improving due to increasing demand. Besides this fact, the absence of a generic publicity on organic products presents another problem at the commercialization level, as consumers are confused and lack of information on the attributes and benefits of these products. Regardless of the obstacles, evident progress is taking place. To promote this sector, the Ministry of Agriculture, Food and Fishery (MAPA) has recently
259 presented a Strategic Plan for Organic Agriculture that will be developed in the period 2004-2006. The objective of the action plan is to reach a balanced development of the sector through the promotion of the production and organic elaboration, as well as the evolution of the consumption. The Spanish market is not yet sufficiently mature and this type of initiative will surely boost the market. In our view, there will be an evident difference when the action plan comes into effect. 3
3.1
Consumer Analysis
Methodology
To have a general appreciation of the consumers' attitude, the habits and the knowledge of the Spanish people versus organic products, a survey on general consumers was conducted. The interviews, which reached a total number of 1,003, were carried out by telephone from May 20th to May 30th, 2002. Consumers asked were at least 18 years of age and covered all the age ranges. The survey was carried out throughout the entire Spanish territory, dividing the country into nine zones comprising all the provinces. In addition, the interviews were conducted in different towns, ranging from less than 10,000 inhabitants to more than 500,000 inhabitants. From a statistical standpoint, the margin of maximum error, calculated for an infinite universe, has a level of meaning of 95.5%, and in the most unfavourable hypothesis, p=q=50%, is of 3,16%. Regarding the contents, the questionnaire was divided in different sections: in the first place, several questions were asked about the consumer's demographic circumstances (sex, age, studies, social status, etc.). In the second place, the questions focused on learning about the habits of the people polled concerning organic product consumption as well as the profile of the consumer of these products. In addition, the survey tried to evaluate the perception of organic products regarding their price, and if consumers knew the differences between these products and the ones that were not organically produced. For further information, see the questionnaire in the Annex. 3.2
Demographic and socio-economic distribution
According to genre, the distribution of the interviewed people was made up of 48.4% men (485 interviews) and 51.6% women (518 interviews). Regarding the age, consumers were divided in four age groups: from 18 to 24 years old, from 25 to 44 years old, from 45 to 64 years old and over 65 years old.
260
The age distribution in our sample was the following: 12.6% of the people were between 18-24 years old, 38.9% were between 25-44 years old, 27.5% were between 45-64 years old, and 20.9% of all the consumers were over 64 years old. Regarding the consumers' social class, the respondents belonged to a middle class (41.5% of total), a low social class (36.7%) and a high social class (21.8%) status. In relevance to the education level, 58.3% of the people had acquired a medium level of studies, 24.1% had a low level of education and 17.6% had a high level. The greatest number of interviews corresponded to residents from a medium size town (between 50,000 and 100,000 inhabitants), with a percentage of 32.8% of the people polled. The less frequent answers belonged to big city residents (towns with more than 500,000 inhabitants) with a percentage of 18.1% of the answers. Genre Female 51.6%
Male 48.4%
Age
12,6%
38,9%
H18-24 years old • 25-44 years old B 45-64 years old
20,9%
27,5%
DOver 64 years old
261 Education level Low
High
58.3%
B Less than 10,000 inhabitants • 10,000-50,000 inhabitants 050,000-500,000 inhabitants 18,1%
32,9%
DOver 500,000 inhabitants
Source: Authors. Figures 1-4. Distribution of the interviewed people
3.3
Knowledge of organic products in Spain
An important obstacle for the Spanish organic market is that Spanish consumers' lack of information about these products, leads to a low consumption level. Our study shows that deficiency and how it should be overcome. The Spanish market is not yet sufficiently mature, especially if we compare it with countries like Denmark, Finland, France or Germany. In these countries, the government strongly backs the organic agricultural sector and the demand of the consumers supports increasing sales and a substantial development of its distribution system. By contrast, in Spain there is a lack of information about the whole production chain. The absence of a generic publicity of these products presents another problem at the commercialization level. In addition, there is a general confusion between the terms 'organic', 'biologic', 'ecological', etc. The Spanish law allows the term 'bio' for products coming from conventional agriculture, since the term that refers to organic agriculture is 'eco'. This problem may be solved soon, since actions have been taken from Regulation Committees on Organic Agriculture (CRAE) and they are taking the necessary steps to achieve an only identification to avoid misinterpretations.
262
Nevertheless, the Ministry is trying to boost different initiatives like the Strategic Plan for Organic Agriculture, that will come into effect over the period 2004-2006. In our survey, consumers were asked about the knowledge of organic products. We have already explained that one of the problems for introducing these products to the Spanish consumer is the ignorance they show explaining both what organic products are and the differences between conventional and organic products. To the question of whether they knew what organic products are, 60.4% of the people interviewed answered that they did, while 39.6% of the people did not know about them. Of all the people who affirm they knew the difference between organic and conventional products, there is a group of consumers that, when explaining what organic products are, gave an erroneous definition. This reveals the fact that the real knowledge of the organic products is inferior to what we were considering, that is, that truly only 57.6% of the consumers know organic products, instead of 60.4% (Figures 5 and 6).
Declared
Source: Authors. Figures 5-6. Declared and real knowledge of organic products
Among the interviewed people who claimed to know about organic products, there were no relevant differences between men and women. According to age, the group of 25 to 44 years is the one that declares, to a greater extent, that they know about organic products, whereas those who deny
263
being able to recall them are the interviewed people whose ages are 65 years and over. The social classes that claim to know about organic products belong to high and upper middle classes, whereas the greater percentage of ignorance was found to be in the interviewed people of low and lower middle class. By size of town, those interviewees living in the largest towns (more than 500,000 inhabitants) are those who register greater affirmations, followed by interviewees from towns between 10,000 and 50,000 inhabitants. The inhabitants of the smallest towns (fewer than 10,000 inhabitants) are those that show less knowledge of what organic products are. In summary, the profile of the person with the clearest perception of organic products in Spain corresponds to a young individual (man or woman) from middle to high social class who lives in a large town. Regarding the different definitions of what organic products are, results are shown in Figure 7. Products cultivated without synthetic pesticides Natural products / without preservatives / without artificial colours environment friendly products/ do not pollute Healty food/Low fit food Products cultivated with organc fertilisers They have not been treated artificially Docs not know/does not answer They have not been manipulated / adulterated Product from tilt vegetable garden/from the field / from the land They are more expensive Products in returnable containers Animals brccded in a natural way Bard to find / rare products They are the OMO's products They are cleaner
Source: Authors. Figure 7. Definition given of organic products
Among the definitions given, there are two of them that should be highlighted: a high number of interviewees (39.3%) mention that organic products are those cultivated without synthetic pesticides (a right answer), while 34.4% defined organic products as natural products without preservatives and artificial colours (incomplete answer, although it was accepted). Invalid answers that have not been taken into account to compute the real knowledge of organic products include 'healthy food or low-fat food', 'they are cleaner', 'products come in recyclable containers', or 'GMO products'.
264
3.4
Consumption of organic products in Spain
In most cases, the election of a product is influenced by the budget whereupon it is counted and by the cost of the perception of the expected quality of a certain product. In this respect, three generic product categories have been identified: the 'search' products, the 'experience' products and the 'confidence and credibility' products. While the two first categories refer to extrinsic or intrinsic qualities that are identifiable after the consumption, the 'confidence and credibility' goods have qualities that can only be detected partially after the consumption. In this case, as consumers are not able to judge the intrinsic qualities of the product, they will mainly base their election in the indications of the producer. The organic products clearly belong to this category, as, at first, it is virtually impossible to distinguish a product coming from this type of agriculture from one coming from the conventional systems and where consumer confidence in the product is fundamental. In order to avoid a poor ethical conduct of the producers and to reduce the lack of confidence of the consumers, the goods that belong to the category of 'goods of confidence and credibility' require that confidence is guaranteed by the mark of the manufacturer or a' seal of quality' emitted by the competent organism, or public. In Spain, the control system applied to organic food products is based on the European Regulation 2092/91. Organic operators are inspected by both private and public control and certification bodies. However, the public organisms or Regulation Committees on Organic Agriculture (in Spanish, Consejo Regulador de Agricultura Ecologica, or CRAE) are the most extended. Regarding the private bodies, Sohiscert/Ecocert (www.sohiscert.com). and recently ECAL (Entidad Certificadora de Alimentos de Espafia) (www.ecal-e.com). and Agrocolor (www.agrocolor.com) are the only organisms authorised to carry out the same inspection activities. The organic products that are supported by the control and certification bodies are clearly identified by these bodies' warranty logo, and they may also exhibit the European logo. In our survey, when asking about the consumption of organic products, 51.6% of the people interviewed affirmed that they consume or have consumed organic products, and 48.4% denied having consumed them. These are not the real results, since after asking them which was the origin of the organic products, we realised many people had not consumed 'real' organic products (for example, food from their own farm without being organic producers), so the percentage of the real consumption is lower: just 39.4% of the people seem to have consumed organic products (Figures 8 and 9). The people that had consumed 'real' organic products bought them in specialised shops, in herbal stores, in supermarkets, etc, that is, places where
265
organic products are sold, or also were produced by themselves as organic producers. Declared
Real No 60 6%
Source: Authors. Figures 8-9. Declared and real consumption of organic products
Regarding sexes, there is a difference since the number of men that consume organic products is slightly greater than the number of women that declare they consume these products. With respect to the age groups, those that declare themselves as regular consumers of organic products are consumers between 25 and 44 years old. On the other hand, the less frequent consumers are the youngest ones, aged between 18 to 24 years old (which is consistent with the statistics that people that belong to this age level are the less frequent shoppers: they allege that they are not the ones who do the daily shopping). The main reasons for not consuming organic products, which are shown in Figure 10, can be summarised as follows: 1. In the first place, lack of knowledge of these products and lack of confidence of what they are buying. In this section we may include answers such as 'I do not know about them, I am not informed', 'they may have some chemical component', or 'I am not sure if I have consumed them'. The lack of confidence is specially acute in older people and in people that belong to low or medium-low classes.
266
In the second place, the absence of these products in the consumers' frequently visited shops. This section includes answers like 'They are hard to find or they are not easily available'. This answer was ratified in a high percentage by women, and also, by residents of smaller towns. In addition, the answer 'I did not have the opportunity to buy them' was given by middle-aged residents in populated areas.
They are hard to find /they not always available He/she doesnot know what organic products are He / she does not have the habit of buying them They aremore expensive He/ she doesnct do the shopping Doesnotknow / doesnot answer He/she is not enthusiastic about them cfhas not thought about acquiringlhem There is no any special reason / did nethavethe opportunity to buy them He / she isnet sire if he / she has consumed rhem He / she does not trust if there are realty organicproducts Theymayhavescmechemical coup onent He / she has his / ha-own vegetable garden He/she does not like natural products Other
Source: Authors. Figure 10. Reasons for non-consumption
3.5
Organic products' mostfrequentpurchases
In order to know the consumption habits of the people polled, only those who had declared themselves as consumers of these products were asked about the type of organic products they purchased. Results are shown in Figure 11. Of the people polled that admitted to consume organic products, 77.5% of them affirmed they consumed fresh fruits and vegetables. This answer was declared at the same level by men and women. The age group data was very significant: 84.9% of the interviewees between 45 and 64 years declare to consume organic fresh fruits and vegetables. Furthermore, the social status is important, since 91% of the organic product consumers that claim to belong to a lower class express that they often consume fresh fruits and vegetables. The remaining consumed products are located at a great distance from fruits and green vegetables. The distribution is as follows: cereals and legumes (12.5% of the people consumes them), eggs (8,2% of the people), chicken (6,4%), beef / pork /
267
lamb (6,2%), vegetables and tubers (5,8%), milk (5,2%), dairy products (3,9%), bread (3%), pasta (2,9%), canned food (2,8%), biscuits (2%), oil (1,8%), nuts and dried fruits (1,6%), jams and honey (1,5,%), other kinds of meats (turkey, rabbit, etc.) (1,5%), wine (0,6%), pastry and cakes (0,6%), juices (0,4%), other products (2,5%). i
1
Fresh fiuil and green vegetables Cereals and legumes Eggs
•WHS! ^ JM^H
Chicken Beef/ pork/ lamb — 1 Vegetables and tubers Milk Dairy products Bread Pasta
•• • •B
Canned food
n i °*.i Nuts and dried Suits i Biscuits
Other kinds of meat Jams / Honey Pastry and cakes Wine
i i i i
Juices None Other
Source: Authors. Figure 11. Most frequent purchases of organic products
3.6
Organic products' mostfrequent stores
According to a recent study conducted by Spain's MAPA in 2002, two main commercialization models of organic products can be identified across Europe: 1. Model A, in which most of the organic product sales are made through hypermarkets and supermarkets, as is the case in Denmark, Austria, Sweden or the United Kingdom; 2. Model B, in which the sales are made mainly through specialised stores, which is the case of Italy, France, the Netherlands and Spain. The countries that fall under Model A have a percentage of sales higher than the countries which apply to Model B. Model A countries have a percentage of organic product sales corresponding to 1.375% of the agricultural and food market,
268
while the countries that correspond to Model B reach a percentage of sales of 0.575% of the quota of the food market. The fact is that, as soon as the distribution channels change, and the organic products are available at hypermarkets, affording appropriate information about organic food to the consumer, the consumption may reach higher levels. Anyway, it is a growing market that faces the future with great expectations and a great potential of consumers. In our survey, organic product consumers were asked about the place where they acquired the goods. A great percentage of the people admitted they bought organic products directly from the producer: or directly from the farm. Also, some people admitted they had their own organic vegetable garden. In second place consumers answered they bought organic products in supermarkets or hypermarkets (22.2%), followed by the purchases in specialised stores (13.9%), herbal stores (7.4%) and small shops (4%).
3.7
Organic products' price premium
Spanish consumers do not find the price premium of organic products over conventional ones as the most influencing factor when deciding about purchase. Actually, when they were asked to give a reason for not consuming these products, the difference in price was situated in fourth place. We asked the people to give an estimation of the difference in price of organic products compared to conventional ones. In general, people perceived organic products as being more expensive than conventional ones (65.4% of the people polled gave this answer). Only 12.1% of the consumers thought the price was approximately the same, and 7.1% said organic products were cheaper than products coming from conventional agriculture (see Figure 12).
Organic products are cheaper than ^ — conventional ones&ngg
7.5%
Unanswered 15.0% ^^^^!
1
j H PapS*** ™
They are both the same 12.1%
%
••
M l
***fc-
*, JJS Organic products jgg&tigg||i| are more | H | | | P I « ^ expensive than conventional ones 65.4%
Source: Authors. Figure 12. Perception about the price difference between organic and conventional products
269
Regarding the age groups, the interviewees between 25 and 44 years old, followed by the people between 45 and 64 years old, are the ones that consider organic products to be much more expensive than conventional ones. About social classes, the higher the social class, the higher the perception of organic products as more expensive products. (85.5% of the people polled that belonged to a high class claimed that organic products were more expensive). The opinion of how much more expensive the organic products are varies depending on the consumers. A percentage of 32.9% of them said organic products are 'a little bit more expensive' than regular products; 31.8% declare they are simply 'expensive', and 30.1% manifested organics as 'more expensive'. It is remarkable that only 5.2% of the people polled said organic products were 'a lot more expensive' than conventional ones. The average price premium between organic and conventional products declared by the interviewees is highly variable. A percentage of 25.6% of the people polled estimated the price premium around 10%. Also, 21.2% of the consumers estimated it is around 20% and 14% of the people said the price premium is 30%. Only 8.5% of the polled estimate a price premium similar to that obtained in the results of the last research project prepared by the MAPA in 2002, which is in average a 51,1% with respect to conventional food products. The distribution of answers is shown in Figure 13. 30%-,
Source: Authors. Figure 13. Perception of the price premium
270
4
Conclusions and Recommendations
Consumers lack a real understanding of the concept of organic products. Without any doubt, consumers show increasing concerns about food safety and the preference for natural, chemical-free products. However, they are either unaware of the existence of organic products or of their own value. So, consumers must be educated on the concept of organic food. Besides, the high percentage of people who doubt whether they have or have not consumed organic food is astonishing. That means organic products are not clearly identified by the consumers during their daily shopping, i.e. merchandising of these products must be strongly enhanced. We believe these are problems that do not have a very difficult solution. To solve this lack of knowledge and confidence, an effort by the government, by the producers and by the distributors must be made in order to show the consumer what organic products are and what their benefits are. Also, the existence of a unified only logo at a national level would be a good way to increase the consumer's awareness of these products from the ones coming from conventional agriculture. And not only should the government promote campaigns destined to the consumer, but also support the sector clarifying a few burning subjects like the denomination 'bio', which in Spain can be applied to products that do not come from organic agriculture. The increasing consumer concerns on environmental issues and quality of food should be used as a starting point to educate consumers about the value of organic consumption. The media, as well, could be used as a forum for introducing, to the average consumers, the concept of organically produced food. The knowledge of organic agriculture is a previous requirement to be a buyer. This supports the necessity to foment the communication of the organic agriculture through its seal of guarantee. It is also needed to obtain an active and visible presence in the shelves of hypermarkets and big food retailers, since merchandising is a reasonable tool of communication that benefits both producers and distributors. However, in Spain it seems that the future of the organic sector is very promising since, the last initiatives carried out by the MAPA aim to boost this sector and eliminate, or at least, reduce the obstacles that restrain the development of the organic Spanish market.
References 1. Al-Hajj M., (2000) "Analisis del mercado de productos ecologicos en Madrid". Phd. Thesis Universidad Politecnica de Madrid, Escuela Tecnica Superior de Ingenieros Agronomos, pp.238-240.
271 2. Alvensleben, R., Meier, T (1989). "The influence of origin and variety on consumer perception". ISHS Workshop on measuring consumer perception. August 7-9. Wageningen. The Netherlands 3. Chryssochoidis, G. (2000) "Repercussions of consumer confusion for late introduced differentiated products" European Journal of Marketing, Vol.34, No.5/6 pp.705-722 4. Chryssochoidis, G., Fotopoulos, C. (2000) "Factors affecting the decision to Purchase Organic Food". Journal of Euromarketing, Vol. 9 (3) The Haworth Press, 5. Cobo, F.B., Gonzalez, L. "La agriculture ecologica ante la gran distribucion". In Distribucion y Consumo, (nov-dic 2001) 6. Dunn, Julie., (1995) "Organic Foods Find Opportunity in the Natural Food Industry". In Economic Research Service, (USDA., Food Review, 18 7. Fetter, T.R., Caswell, J.A., (2002) "Variation in organic standards prior to the National Organic Program", American Journal of Alternative Agriculture, Vol. 17, No.2 8. Lampkin, Nicholas., (1998) Organic Farming, Farming Press, Ipswich, UK. Edition espanola: Asuncion Molina et al. (1998) Mundiprensa, Espana, 9. MAP A, (Ministerio de Agricultura, Pesca y Alimentation) (2002) "Estudio del Mercado de los productos de la agricultura ecologica". MAPA, DHV MC. 10. MAPA (2003) "Estadisticas 2002 de Agricultura Ecologica en Espana" 11. Sanz, A. (2003) "El MAPA presenta un Plan Estrategico para fomentar la production agraria ecologica". In Vida Rural, 170.
Annex Consumers' telephone interview N° of survey: Interviewer: Region:
Province:
Ql. - Do you know about organic products? a) Yes b)No Q2. - How would you define them? Q3. - Do you consume organic food?
272
a) Yes b) No. Why?
(Go to Q19)
What type of organic products do you consume? Q4. - Fresh Fruits and vegetables Q9. - Cereals and legumes Q5. - Milk and derivatives Q10. - Meat Q6. - Bread, pasta, cakes and pastry Qll. - Chicken Q7. - Juices and non-alcoholic drinks Q12. - Eggs Q8. - Canned Vegetables Q13. - Others Where do you acquire them? Q14. - Specialised Stores Q15. - Herbal stores Q16. - Supermarkets Q17. - Directly to the Producer Q18. - Others Q19. - Do you think organic products are more expensive than conventional ones? a) Yes b)No Q20. - In your opinion, which is the average percentage of price difference between organic and conventional products? % Q21. - Do you think that organic products are more nutritious than conventional ones? a) Yes b)No Q22. - Do you know about the new functional and/or enriched foods (for example: milk enriched with calcium or juices enriched with vitamins)? a)Yes b)No Q23. - Do you consume these products? a) Yes b)No Q24.-What type of functional or enriched products do you consume? PERSONAL DATA:
273
Q25. - Sex of the interviewed person. a) Man b) Woman Q26. - Age of the interviewed person: Q27. - Studies' level of the interviewed person: a) High b)Low c) Average Q28. - Economic Level of the interviewed person. Over average (> 500,000 pts per month) (3,005 €) Medium - High (Between 350,001 pts. and 500,000 pts per month) (2,103 € - 3,004 €) Medium (Between 200,001 pts. and 350,000 pts per month) (1,202 € - 2,102 €) Medium - Under (Between 100,000 pts. and 200,000 pts per month) (601 € -1,200 €) Under average (< 100,000 pts per month) (< 600 €)
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275
FROM FIELD TO TABLE? THE MARKETING OF ORGANIC PRODUCTS IN NORWAY. ANNE M, JERVELL, SVEIN O. BORGEN A N D OLA FLA TEN Norwegian Agricultural Economics Research Institute ,Schweigaardsgt. Dep, Norway E-mail: anne.jervelli'Sinilf.no
33B, N-0030
Oslo
While 3 percent of the fields in Norway are grown organically in the advent of the 21st century, only a small share of the resulting products reach the consumers as organic food. A number of factors can explain the relative lack of success of organic products through the value chain. Lack of differentiation from conventional foods may discourage consumers. Extra costs limit the interest of processors and retailers. The political decisions and subsidies are directed at production, and have few direct effects on the organization of the value chain. The marketing of organic products has followed different strategies. Organic milk is handled through the national dairy cooperative, and around forty percent is sold as organic varieties of conventional brands. Meat producers have been less successful as only about twenty percent of the certified production is marketed as organic. In some of the more promising cases organic products are marketed in a niche strategy where organic production methods is one of several differentiating product attributes.
1
Introduction
The conditions for marketing of organic food in Norway differ from those of many European countries. The limited size of the domestic market may be a barrier to market specialization and segmentation. Norwegian agriculture is small-scale and conceived of as "naturally clean" by market actors as well as consumers [1], implying that there is less to gain (but perhaps also less to loose) from adhering to organic principles. Over time the government has emerged as an important actor, setting conversion goals and standards for organic production. While conversion grants have convinced an increasing number of farmers to farm organically, the market actors in other parts of the supply chain, including the agricultural cooperatives, have been more reluctant in developing marketing strategies for organic products. Only a minor part of organic production is sold as such to the consumers. Our article explores this situation in more detail. The organic food sector is a field where multiple actors, often with conflicting interests and strategies, meet. Marketing efforts are therefore developed in a contested terrain. From this perspective our article has two aims: First, to give a picture of the current situation for production and marketing of organic foodstuffs
276
in Norway and second, to discuss the future development of the market for organic products in Norway on the basis of the strategic interests of important actors. The article is organized as follows: The next section gives a brief background to the recent growth in organic production and the role of government involvement. Following this we present an analytical framework for analysing the marketing of organic products and our main data sources. Section four describes the motivations and strategies of different types of actors. Finally we discuss some emerging trends and the future development of the organic food sector in Norway. 2
Background
The driving force and 'first movers' in the development of a market for organic products were growers and consumers who established alternative production and distribution systems. The movements were initially targeted towards a relatively small and narrow segment of growers and consumers; a phenomena for "the particularly interested", but materialized in the form of a national eco-label and accreditation organization called Debio in 1986 [6]. The consensus that organic production should constitute an unignorable part of the Norwegian agricultural sector, evolved gradually through the 1990s. Ecoorganizations played an important part, but the development was also spurred by the need for an internationally recognized label and control system. Debio, a member organization founded by a number of dedicated organic producer organizations, has, since 1994 been appointed the tasks of control and inspection in the areas of both production and trade of organic products. They also certify farmland for public economic support for organic farming and receive approximately 2/3 of the budget from public grants, whereas 1/3 is from fees from users of the certification system. The Government has linked organic production to a wide range of values; such as food safety, greater product diversity, enhanced farm incomes, sustainability, environmental effects, positive spill-over effects to conventional agriculture, and reduced overproduction of food. The government has also formulated as a target that at least 10% of the agricultural land in Norway should be organically farmed by 2009. Financial support to organic agriculture was introduced in the early nineties. Farmers choosing to produce organically can first receive a conversion grant, and after conversion, annual area and livestock payments. In 2002 around 3% of agricultural land was converted or under conversion, while just over 1% of all milk and between 0,5 and 1,5% of the important grazing animals (beef and lamb) were produced in organic systems [1]. Figure 1 shows the development of the organic dairy sector in the period 1997 to 2002. It is notable that a relatively rapid development in the farmer's fields has not been followed by the same development in the marketing of organic products.
277
The share of organically produced milk and meat reaching consumers is less than 20 and 40 percent respectively [1,18].
wo?
tare
it»
jam
ami
ace
Figure 4. Production and marketing of organic milk in Norway 1997-2002 (Source: BFJ 2003).
The government has signalled a vision of an expanding organic sector in Norway, but whether this is implemented or not is up to the market actors. Originally optimistic goals of 85 percent of organic livestock products sold as organic are far from being met. 3
The Marketing of Organic Food
3.1 Theoretical perspectives In a review of the marketing of organic products in Europe, Michelsen et al. [14] show how the choice of marketing strategy and the involvement of different actors in the supply chain varies across products and regions. The importance of conventional market actors has increased with a politically supported growth in organic livestock production. A successful marketing of organic food products as production increases is dependent to some degree on coordination and cooperation among the actors involved in the basic elements of a marketing strategy regarding
278
product, price, place and promotion. If stakeholders have conflicting interests and diverging understandings of what organic products are and what segment of consumers should be targeted, this may impede marketing. 3.1.1
Product
What are the quality attributes of the organic product? In spite of the development of organic standards nationally and internationally, there is still no uniform understanding of what organic production is, or the nature of organic products as compared to conventional counterparts. Are organic products more or less healthy? What are the environmental benefits, if any? The quality attributes of organic products and other credence goods are mainly unobservable [13]. Organic production is often presented as a contradictory contrast to and clarified by reference to weaknesses of "conventional agriculture" [7], creating a potential for conflict between organic and conventional producers. While enforced and harmonized organic food standards can clarify product attributes, there may still be disagreement of their benefits and value.
3.1.2
Price
Organic products are normally sold at a higher price than conventional products. The price premium serves both to cover additional costs in production and distribution, and to signal quality. The size of the price premium is a contested strategic choice, and the distribution of this premium to the different actors may be both a source of conflict and a barrier to cooperation between market actors. 3.1.3
Place
The choice of place or sales channels is primarily a choice between specialized and conventional channels [13]. This choice also affects the types of actors involved and subsequently, the types of consumers that are targeted and the types of promotion that can be used. Sales through specialized channels such as farm shops or specialty stores, in general, allows for a higher price, but also limits the size of the market segment. Placing organic products in conventional retail stores exposes the organic option to less convinced consumers and may require different strategies both regarding price and promotion. Within conventional outlets there is also the choice between placing organics together (the "ghetto" strategy) or placing the organic choice alongside the similar conventional products.
279
3.1.4
Promotion
Several actors can have a role in the promotion of organic products; Producers, producer organizations, consumer organizations, certification bodies, government, processors and retailers. The types of promotion may vary from mass media initiated coverage of organic food, promotion of and information about certification labels and the promotion of specific products, either by producers or retailers. Actors that produce or market both conventional and organic foods may prefer a different promotion strategy than those that limit their interests to the organic segment. Commercial actors have limited interest in promoting the official certification labels and may choose to promote their own labels for organic product lines. 3.2 Methodology Our material for the analyses of organics in the supply chain and the strategies of different stakeholders are derived from a number of recent studies on different aspects of the development of the organic sector in Norway [1,6,14,7,18,21,22,2], official information from central actors and interviews with key informants. Information on producer motivation is derived from a recent survey of attitudes, strategies and motivations among conventional and organic farmers [10].
4
Organics in the Supply Chain - Interests and Strategies
The marketing channels for organic food vary from direct sales by farmers to complex systems where a number of actors are involved. In this section we present examples of the producer, processing, distributor and retail concerns and some of the important conflicts and coordination problems. To understand how production at farm level can exceed market demand we start with an examination of the organic farmer. Specialized channels and conventional channels play different roles and follow different strategies in bringing the products to consumers. They also deal with different product types; vegetables and crops have a long tradition as organic products in specialized channels, while livestock products are more recently certified and predominantly handled through conventional channels. 4.1
Organic farmers motivation
The number of registered organic farmers has increased dramatically since 1990, when conversion grants were introduced. This indicates that there may be variation in the motivation of organic farmers, with economic motives being more prevalent among the late entrants.
280
In winter/spring 2003 NILF sent a postal questionnaire survey to dairy and crop farmers in Norway [10]. The response rate for conventional and organic farmers are 61% and 65%, respectively. Organic farmers were asked to select their three most important motives for conversion from a list of often-expressed motives (Table 1). We have split organic farmers into three groups; 1) early adoption (before 1995); 2) conversion in 1995-1999; and 3) late adoption (after 1999). Table 1. Organic dairy farmers' most important motives for conversion.
Motive
Early adopters (n=26)
Late adopters (n=39)
61.5
Conversion 1995-1999 (n=75) 52.0
Production of high quality food Professional challenges Soil fertility, pollution Ideology, philosophy Health risks (e.g., pesticides) Animal welfare Profitability Organic fanning subsidies
38.5 53.8 53.8 15.4
45.3 37.3 32.0 37.3
53.8 30.8 23.1 33.3
19.2 7.7 0.0
33.3 21.3 10.7
33.3 30.8 30.8
46.2
Among early adopters, soil fertility/pollution and philosophical concerns appear frequently, whereas in particular financial reasons and health risks are relatively more important among late adopters. These results are quite similar to earlier studies reviewed in Padel [16]. She concluded that earlier organic farmers were strongly motivated by farm husbandry and philosophical concerns, whereas environmental and economic reasons and professional challenges have played a greater role for those that have converted the last years. Farmers were asked about their choice of future production system (conventional or organic). Few conventional farmers had plans about complete (1,4%) or partial (2,6%) conversion to organic farming but 18% were uncertain. Almost all organic farmers would continue organic farming but nearly 9% claimed they would go back to conventional farming in 2005 when all feed will have to be of organic origin. Farmers' conversion decisions heavily influence future supplies of organic products. Findings in the survey suggest that organic farmers enjoy their choice of production system. Few conventional farmers seem to be "ready for" organic farming but the uncertain ones indicates a substantial potential. Financial considerations have become more important conversion motives but still "noneconomic" aspects are more widely present in the decision to go organic. This
281 should be noticed when targeting information and policy initiatives to potential converters.
4.2
Farmers' direct marketing strategies
The typical, early organic farmers often relied on selling their surplus production directly to consumers. Through direct contact with the farmer, especially with the farm as point of purchase, consumers may also have some degree of experience of the organic values not observable through the product alone. It may also be the only way to market small and non-standard volumes, especially in the fresh produce sector. A number of new channels have been developed in the last decade [9], some of these especially for the organic producers [22]. Market stalls for organic products with weekly sales have been tried with relative success in a number of towns during the late 1990s, and some producers combine presence in the market with direct deliveries (on order) to consumers. Producers have organized sales through weekly (or more occasional) deliveries and subscription orders [5]. The marketing network for farmshops (Norsk Gardsmat) is open to both conventional farmers, small-scale food processors and organic producers. Organic producers are a minority, but the proportion of certified organic producers is higher than in the fanning population and a large variety of organic products can be found. The farms in the network illustrate the different types of motivations and engagement in organic farming: Some of the farms sell a few organic products like dried herbs from other farms in addition to their own cheese produced from 'conventional' milk, other sell some of their products as organic and others as conventional, while others sell only organic produce, and a wide variety, grown and reared on the farm. An even newer direct marketing channel built on the farmers' market concept [8], is launched as 'Bondens marked' in August 2003. This is also open to organic and conventional fanners alike, but expected to be especially important for organic and specialty producers. 4.3
Specialized channels for organic products
The sales organization Helios was established as early as in 1969, and now has a wholesale business and 20 outlets all over the country. The Helios mission is to 'market bio-dynamic' and other quality products' and the shops have always been given freedom to choose their product assortment according to demand from loyal customers. The shops are also encouraged to sell products from local producers, (even products without organic certification). At a wholesale level 70 percent of the Helios sales are food, and among fresh produce roughly 50 percent is of Norwegian
282
origin while 50 percent (including fruits and vegetables not produced in Norway) are imported. For Helios it is an advantage that the Debio label can be used on accredited imported products. The supply of processed foods (flour, cereals and vegetables) has come mainly from imports, but the conditions for developing such products in Norway has improved, and a few new actors are emerging. Since the philosophy of the biodynamic movement recommends a primarily vegetarian diet, animal products have been marginal in the concept. Biodynamic farming implies stricter rales than organic, and milk cannot be homogenized. Only a few dairy products are distributed through the wholesaler: including the speciality organic 'tettemjolk' from Roros, for which there is no conventional alternative in the market, and imported cheese produced from homogenized milk. Helios is one of the five market actors that are partnering with the government body the Norwegian Agricultural Authority (SLF) to increase consumer knowledge of the Debio label and of the organic products available on the market in different outlets. At Helios they also believe in organics being marketed as an exclusive product, and in continued considerable price premiums relative to conventional products. Helios as a wholesaler will only distribute through specialty shops that can signal a wider set of lifestyle, health and environmental health concerns to consumers. For Helios customer loyalty and trust is more important than rapid growth.
4.4
Organic specialities: The Roros dairy
Standards and certification systems for organic livestock products were developed later than standards for plant production. An early initiative to market organic milk was taken by producers in the mountainous Roros region. In cooperation with local authorities and the local dairy plant they succeeded in launching a regional speciality sourmilk product (tettemelk) based on organic milk in 1995 [11]. The success of this product in the market has stimulated more producers to convert, and the interest in the product has led to more specialty products based on organic milk being developed. 'Tettemjolk from Roros' hasrecentlyapplied for certification as a product of protected geographic origin. The Roros dairy has chosen a strategy where organic is subordinated by other attributes in the sales strategy. 4.5
Organic products in the conventional value chains
The demand for organized channels for animal products is closely connected to the political promotion of organic farming. Since the agricultural cooperatives traditionally have been delegated the role as implementers of the national agricultural policy, these organizations have also been involved in strategies associated with the implementation of organic agriculture. This integration has, however, been characterised by substantial tension.
283
4.5.1
The dairy case: TINE
Since the dairy cooperative was (and is) virtually alone as purchasers of milk from farmers, they experienced a pressure both from their member suppliers and from political actors to process and market the organically produced milk as organic. The first internal dairy cooperative working group to discuss the strategies for organic milk was established in 1994. Political support strengthened organic producers and they organized to be able to improve their terms and were able to negotiate a price premium of 60 ore per litre (almost 20%) on all organic milk. This gave producers an extra incentive to convert and worked to support the political goal. In 1995 Tine launched an organic product line under the label Dalsgarden. Because of limited supply the products were sold in selected local markets, but as supply grew and the logistics were organized Dalsgarden was introduced in the larger Oslo market. Dalsgarden was given an image of natural and perhaps oldfashioned, and was not homogenized. Because of introduction to new markets, the first years are characterized by rapidly increasing sales - and periodic shortages in some of the markets. When the demand for Dalsgarden products stagnated, while supplies continued to grow, TINE had to reconsider their strategy. The political authorities had high expectations regarding the share (85%) of organically produced products to reach the consumers as organic [20]. TINE also experienced quality problems as the regional dairies ability to handle and produce a high and stable quality without homogenisation varied. Small sales made it difficult to exploit scale economies in processing and distribution, and to achieve favourable terms in the shops. The retail chains (and the individual shops) pricing and marketing strategies for organic milk varied, making it difficult for consumers to form new habits. TINE threatened to remove the price premium to producers as the share sold as organic decreased dramatically. The relaunching of organic milk (and other products) as 'TINE okologisk' in 2001 was aresultof the need to find new strategies, and inspired by a similar shift in Swedish Arias marketing of organic milk some years earlier. The new strategy introduced organics as part of the TINE product line, with full geographical distribution. The products are homogenized and almost identical to the conventional products in presentation, but certified as organic. TINE expects the TINE brand to have a positive effect on consumer trust and that the TINE label will encourage more consumers to try organic products. They also see that the organic products can contribute to the value of TINE as a supplier of a wide range of dairy products. TINE is presently trying to make organics economically viable through two major strategies: 1. A differentiation of the producer price premium to encourage organic production in clusters close to dairies with organic production lines. This will both reduce the costs of transportation and increase the share of organic milk that can be processed and sold as organic. Producers within these selected areas get a double price premium relative to those outside the areas.
284
2. Increasing sales at the retail level. After the relaunch TINE has been more active in influencing the price setting at the retail level, and has convinced the shops to use a fixed rather than a per cent mark-up, and on a level similar to conventional products. An ally in this has been the COOP (consumer cooperative) chain that has been more active in promoting organic products than the other three major retail groups. To further increase sales the opinion is that concerted action involvingretailers,TINE and the authorities (responsible for the Debio certification) is necessary. Initiatives are taken to coordinate these actors. It seems problematic for TINE to promote organic products actively, because they compete so directly with conventional products. Promoting organic products could leave the impression that the comparable conventional products are of lower value. This problem of direct comparison was less prevalent in the initial Dalsgarden strategy, where the products differ on more than one attribute, but then again the launching of the Dalsgarden line was admittedly half-hearted. Therelaunchbudget was comparable to, but not larger than the budget used for other new products. TINE is also reluctant about marketing organic products or the Debio label as such and perceives this type of promotion to be a task for the government in cooperation with several marketing actors. The attempts to reduce the consumer price premium on organic dairy products through influencing retail actors can be seen as a way to reduce the superior quality signal, or as a way to influence consumer choice in a way that increases the share of organic products sold as such, without increasing TINEs promotion efforts.
4.6
The meat case
While organically produced milk has been channelled through one dominating actor, the situation for organic meat has been much more complex and will not be covered in detail here. Many of the problems and strategic choices are similar to those found in the dairy sector. One additional barrier to selling all meat as organic is the need to find use for all parts of the animal, and the organic standards that prohibit use of conventional additives to products such as sausages [3]. 5
Future Development
In view of the marginal role of organic products in the consumer market the number of different organizations, actors and marketing strategies is impressive. Will the stated goals for development of the production - and consumption - be met? How will emerging market trends affect the demand for organic food? How will the market actors contribute to or inhibit increased consumption?
285
5.1
Emerging consumer trends
That the demand side has not expanded as fast as production, may be due to a lack of concerted efforts at promoting organic products, a limited range of products, lack of availability and relatively high prices. In a recent study of consumers" buying strategies with respect to organic products Torjussen et.al. [19] argue that a "segment-approach" to the understanding of organic consumers may be a fallacy. Rather, the group of potential consumers should be conceived of as large and labile. Multiple attributes may play a decisive role for consumers; ethical aspects, environmental aspects, animal health, personal health, as well as the identity and experience that may encompass the product. These latent attitudes could be met by a parallel broad spectre of approaches from the marketing side: "There are many ways to the consumers heart". A consumer survey from the Hamar region in Southern Norway [19] showed that while traditional food quality aspects such as freshness and taste ("observation traits") were important to all consumers, those who purchased organic foods were more concerned about ethical, environmental, and health issues ("reflection traits"). Consumers with a "local" orientation in the food market were more likely to buy organic food. The concerns among potential buyers of organic food are complex and include more attributes than those specified in the formal certification rales for organic agriculture. Organic products from Norwegian farmers are exposed to competition not only from conventional products or imported organic products, but also from products that for most practical purposes appear as comparable to the organic products. The interest in what is also called "the safety and process attributes" of food [4] is growing. Animal welfare, integrated production, GMO free products, functional foods and local products is part of the same consumer trend as organics and enhance the potential, but may also represent competition. A comparison of consumer willingness to pay for local, organic and GMO free potatoes in Colorado [12] suggested higher price premiums for local than organic products. Certified organic may in the future not be enough to convince consumers, but may have to be combined with other valued attributes.
5.2 The role ofretail chains Consumers buy their food primarily in retail outlets. The lack of availability of organic products is cited as a much more important reason for non-consumption by consumers in Norway compared to Denmark [1]. The cooperatives and other producers of organic food depend on cooperation with a retail sector that is extremely concentrated. In Norway four retailer chains control the entire flow of products to consumers. Among these large retail chains only COOP has taken an active role in promoting organic products. Vitterso [21] concluded that there are substantial challenges with respect to the further sales boosting of organically produced foodstuffs:
286
• •
Organically produced foodstuffs do not fit very well into the dominating chain concepts The shops lack competence on organically produced foodstuffs
The retailers on their part are reluctant to market organic products because of uncertainty about sales and they hesitate in promoting fresh produce because of limited availability. Local shops have some, but limited scope for deviation from the standard product range. Increased customer demand would be an important influence on retail behaviour towards organics. 5.3
The role of processing cooperatives
The conventional cooperatives are under considerable pressure to expand the organic market share, both as a way to achieve profitability and to fulfil political expectations. The smaller the market, the less scope for differentiation and specialization. A larger market share for organics could make it possible to increase the product range, again boosting the promotional effect. The agricultural cooperatives motivation to engage in organic food may also come from the risk of loosing the 'organic consumers' to imports. 5.4
The role of organic farmers
Organic fanners have widely different motivations and follow different strategies for marketing their produce to consumers. As long as it is possible to make profits from organic farming - in spite of products not reaching the market - a balance between production and demand should not be expected. Farmers taking an active role in promotion of organic production and engaging directly in marketing could have a significant effect through boosting consumer interest. By marketing directly farmers can also avoid the negative mitigating effect of less interested market actors. Farmers have also been an active part of many of the specialized and market based initiatives, such as the marketing of organic milk through the Roros dairy. Through the emerging direct marketing channels organic farmers are in a position to meet the consumer interest for local food and to add additional quality attributes such as information about animal welfare to the organic product. 5.5
The role ofgovernment
While government intervention has succeeded in stimulating production, the challenge for the further development of the organic sector in Norway is to develop and stabilize the domestic market for organic products. To boost production of organic products without keeping an eye on the demand side may lead producers into substantial problems. In a recent interview, a representative of the German
287
organic producers association warned the Norwegian organic stakeholders that increased subsidies to farmers should be modest until a more robust market has been established [15]. Government can promote market development in several ways: • Demand for organic products may be enhanced through government procurement. Following Porter [17], government procurement can be a stimulating force for the upgrading of the suppliers quality both in phases of early demand and as demanding and sophisticated buyers. Government agencies should set stringent product specifications and seek sophisticated product varieties rather than merely accept the conditions that domestic suppliers offer. In Sweden schools have been important buyers of organic milk (for school lunches). In Norway there are so far a few examples of institutions like hospital and schools involved in trial projects as regular buyers of organic products, but more have been suggested. • Government can also have a role in the promotion of and information about national organic standards and labels. Commercial actors may be reluctant both because of the free-rider problem and, in the case of producer cooperatives, the problem of presenting conventional products as 'inferior'. A possible counterargument to government promotion of internationally harmonized organic standards, is that this may stimulate import-based consumption - if national actors fail to develop a profitable supply. 6
Conclusion
The organic sector in Norway is now in a situation where production grows faster than the market. The development of the organic sector takes place in a contested terrain where a number stakeholders with partly conflicting and partly harmonized visions interact. While there is a group of firm believers in the ideological foundation associated with organic products, other actors take a more opportunistic position, creating a deadlock situation where actors avoid risk and demand suffers from poor availability. Government intervention has pushed conventional market actors and especially the processing cooperatives to become involved, but the producer cooperatives have been relatively reluctant in their attitude towards organic products. To move towards a larger market share for organics the government would have to take a more active role in stimulating demand. So far organic food has a niche product character and is therefore of limited interest for a highly concentrated retail sector. Several actors have voiced the need for a coherent and coordinated action by all involved parties to increase the general consumer knowledge of the organic Debio label.
288
Consumer trends towards increased interest in quality farm food in general, and the development of alternative channels for niche products represent both opportunities and competition for 'organic' as a valued attribute. In competition with imports, the Norwegian organic sector and its stakeholders may also have to develop more sophisticated strategies, where organic is one attribute that can be combined with other valued traits. The combination of 'organic' with quality attributes such as local production or regional speciality seems especially relevant. References 1. BFJ, Resultatkontroll av gjennomforing av landbrukspohtikken. Budsjettnemda for jordbruket, NILF:(2003) Oslo. 2. Bjorkhaug, H og Storstad,0. En komparativ studie av okologisk forbruk i Norge og Danmark, R-2/01, Norsk senter for bygdeforskning (2001). Trondheim. 3. Brendehaug, E. 0kologisk kjot i Sverige og Danmark. VF-rapport 13 (2002). Vestlandsforskning. 4. Caswell, Julie A. How Labelling of Safety and Process Attributes Affects Markets for Food in Agricultural and Resources Economics Review, October (1998). Pp. 151-158. 5. Dagligvarehandelen Okosiden. http://www.dagUgvarehandelen.com/okosiden. (1.07.2003). 6. Debio http://www.debio.no/diverse/debhist.htm. (30.07.2003) 7. Flo, B.E. Norsk okologisk landbruk. Fra konfrontasjonar til koalisjonar. In Jacobsen, E. R. Almas & J.P. Johnsen (ed): Den politiserte maten. Abstrakt forlag:Oslo, (2003). pp. 105-135. 8. Jervell, A.M., Farmers Market - direkte kontakt mellom produsent og forbruker. Landbruksokonomiskforum 2 (2001) pp.5-18. 9. Jervell, A. M., Markedskanaler for nisjemat. Okonomiske og organisatoriske utfordringer. Landbruksokonomisk forum 1 (2003) pp.53-62. 10. Lien, G., O. Flaten, M. Ebbesvik, M. Koesling, & P.S. Valle, Risk and risk management in organic farming: empirical results from Norway. Proceedings Part 1, 14th International Farm Management Congress, 10-15 August 2003, Perth, Western Australia, pp. 409-416. 11. Lilleeng, P.O. Okologisk mjolkeproduksjon i fjellregionen. Landbruksokonomisk forum 1 (1998)pp.45-50. 12. Loureiro, M. L. and S. Hine, Discovering Niche Markets: A Comparison of Consumer Willingness to Pay for Local (Colorado Grown), Organic and GMOfree Products, Journal of Agricultural and Applied Economics 34(3). (2003). pp.77-487.
289 13. McCluskey J. 2000. A game theoretic approach to organic foods: An analysis of asymmetric information and policy. Agricultural and Resource Economics Review 29 (2000). pp. 1-9. 14. Michelsen, J., Hamm, U., Wynen, E., and Roth, E., The European Market for Organic Products: Growth and Development. Organic Farming in Europe: Economics and Policy, Vol 7, (1999). University of Hohenheim, Germany. 15. Nationen, November 10th 2002. Interview with Dr.Felix Prinz zu Lowenstein in the Norwegian newspaper Nationen. 16. Padel, S. 2001. Conversion to organic fanning: a typical example of the diffusion of an innovation? Sociologica Ruralis 41 (2001). pp. 40-61. 17. Porter, Michael E, The Competitive Advantage of Nations. MacMillan Press. (1990).London. 18. Statens landbruksforvaltning, Produksjon og omsetning av okologiske landbruksprodukter 2002. Rapportnr: 1 (2003). 19. Torjusen H., G. Lieblein, M. Wandel and C. A. Francis, Food system orientation and quality perception among consumers and producers of organic food in Hedmark County, Norway, Food Quality and Preference, 12.(2001). pp.207-216. 20. Vitterso, G. Forbrukernes rolle i lanseringen av okologisk melk. Arbeidsnotat nr. 5 (2000). SIFO.Oslo. 21. Vitterso, G. Fra Helios til Prix. Begrensninger og muligheter for salg av okologisk mat i dagligvarehandelen. Oppdragsrapport nr. 15 (2001). SIFO.Oslo. 22. Vitterso, H., Direktesalg av okologiske produkter. Oslo: OIKOS - Okologisk Landslag, (2001). Oslo.
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291 TESTING AND VALIDATING THE LOV SCALE OF VALUES IN AN ORGANIC-FOOD-PURCHASE-CONTEXT
GEORGE M. CHRYSSOCHOIDIS Agricultural
University of Athens
E-mail:
[email protected]
The term "value" has been defined as an enduring prescriptive or proscriptive belief. The LOV typology of values has been extensively used in the past and makes a distinction between external (relations-oriented), interpersonal (fun) and internal (self-directed) values. We employ Confirmatory Factor Analysis to test and validate the LOV scale in an organic Greek consumers' context using empirical data. The structure of the LOV scale repeats itself in this context. This happens despite the sample being drawn from Greece which holds a completely different position to that of the US according to Hosftede's dimensions of cultural differences. Nonetheless, the relationship between the value factors reflects these differences.
1
Introduction
The term "value" has been defined as an enduring prescriptive or proscriptive belief that a specific end state of existence or specific mode of conduct is preferred to an opposite end state or mode of conduct for living one's life [5, 13, 14]. The LOV typology notes the importance of interpersonal relations, as well as personal factors (i.e., self-respect, self-fulfillment) and apersonal factors (i.e., fun, security, excitement) in value fulfillment. The LOV is most closely tied to social adaptation theory [8] and many studies suggest that the LOV is related to and/or strongly predictive of consumer behaviour and related activities across a wide array of contexts [4, 5]. This indicates the applicability of the LOV scale in a non-US consumer-behaviour-towards-organic-food-products-context too. The objective of the present is to test and validate the LOV scale and examine its factorial structure in such context. Another, yet very important, element is that the sample employed in this study is drawn from Greece and that specific country is totally different to the US on Hosftede's dimensions of cultural differences. Are these differences reflected somewhere in the structure of the LOV scale?
292 2
Literature Review
Enjoying a history rich in empirical examination, values are evident among many theories and disciplines. Values are central to peoples' lives, and because of their importance, values have been known to influence attitudes and behaviour [10]. Until the research conducted by Rokeach during the 1960s and 1970s, many of the studies that examined values included them as a sub-category of attitudes. Rokeach [13, 14, 15] is credited for operationally defining and investigating values on an individual basis and the mainstream definition: "A value is an organized set of preferential standards that are used in making selections of objections and actions, resolving conflicts, invoking social sanctions, and coping with needs or claims for social and psychological defenses of choice made or proposed" [15, p. 20]. According to the values theory framework, values serve as standards that guide ongoing activities, thus influencing consumers' behaviour when they are making food purchases, especially regarding organic food products. Whereas values represent abstract ideals— positive or negative—that are not tied to any one specific object or situation, attitudes focus on specific objects and situations [13, 14, 15]. Rokeach [14] states that values are more stable over time than attitudes because they are more centrally connected to an individual's cognitive system. As a result, under some circumstances values serve as better predictors of an individual's behaviour over extended periods of time. Past research has explicated how values actually serve as determinants of attitudes and behaviour [e.g., 4, 12, 16]. Other researchers [e.g., 1, 17, 18] have also demonstrated that values represent an efficient, measurable set of variables that are more closely tied to motivation behaviour than are demographic measures. According to Rokeach [13, p. 550] "Once a value is internalised it becomes, unconsciously, a standard or criterion for guiding action, for developing and maintaining attitudes toward relevant objects and situations, for justifying one's own and others' actions and attitudes, for morally judging one's self and others and for comparing one's self with others". Grunert-Beckmann and Askegaard [3, p. 165] point out that "values are commonly regarded as the point of intersection between the individual and society because they help to know and understand the interpersonal world and guide the individual's adaptation to the surrounding conditions." The LOV typology draws a distinction between external and internal values, and it notes the importance of interpersonal relations, as well as personal factors (i.e., self-respect, self-fulfillment) and apersonal factors (i.e., fun, security, excitement) in value fulfillment. The LOV was developed from a theoretical base proposed by Feather [2], Maslow's [11] hierarchy of values, Rokeach's [14] 18 terminal values, and various other contemporaries in values research. The LOV items were derived by culling the values from the above sources from a much larger pool of values down to the nine LOV items. For a more detailed discussion of the sample originally employed and the scale development procedures, see Kahle [5, 7], Kahle, Beatty and Homer [8] and Kahle, Beatty and Mager [9]. The original study
293 found the LOV to be significantly correlated with various measures of adaptation to society and self [5], providing thus evidence of nomological validity. The nine items that the LOV scale consists of are: sense of belonging, excitement, warm relationship with others, self-fulfillment, being well respected, fun and enjoyment of life, security, self-respect and a sense of accomplishment. Some of the above values, namely the group of "belonging" values are relevant to a person's link with the rest of the society, thus they are external/relation-oriented values. A second group of value items represent interpersonal values (fun and enjoyment) whereas a third group related to self-respect and accomplishment corresponds to internal/personal-oriented values. The above distinction is important for the purposes of understanding better the values behind the consumption of organic food products. We would expect that consumers of organic food products are ranked high regarding the importance of external values as these values may subsequently lead to environmental friendliness attitudes- an important precursor to purchases of organic food products. At the same time however, self-respect may relate to high importance of own health for the focus person. As for the production of organic food products no insecticides, pesticides and fertilizers are used. Their consumption is synonymous with a person's wish to consume healthy and safe food. We would simultaneously expect that consumers of organic food products highly rank the importance of self-respect values.
3
Methodology, Sample and Measurement
Our research focuses on a sample of Greek consumers familiar with organic food products. Two hundred and five such consumers were interviewed. It should be stressed that this research is only exploratory in nature and the sample should not be considered as representative. There is not a clear picture of the total population who buy organic food products since relevant statistical information is not available. An effort was made however, to reach people familiar with organic foodstuff by collecting data in locations frequented by organic food consumers (open markets or shops selling only organic food products). The initially developed questionnaire was pre-tested using a set of 20 consumers, so as to identify any necessary modifications due to ambiguous wording. The LOV-statements were evaluated on a 5-point semantic differential Likert type scale. As mentioned also above, respondents were contacted only at organic food outlets or street markets selling organic food. Interviews took place throughout the day to reduce time-of-shopping related bias. Thus, one third of respondents (31%) were interviewed between 911:00 am, one quarter (25%) between 11:00-14:00, another quarter (24%) between 14:00-16:00, and the remaining 20% between 16:00-20:00. Several towns
294 throughout the country (Athens, Piraeus, Salonica, Larissa, Volos, Heraklion) are represented in the sample, the selection criterion being the existence of local outlets or street markets for organic food. According to the theories on the diffusion of innovations, the preceding towns may be considered to be poles of major organic consumer concentrations. In other words, if one considers that the concept of purchasing organic food is spread (diffused) from major towns towards the country side and this diffusion is manifested via the development of 'organic' open markets and outlets, thus limiting the data collection in these towns may be justified. All respondents were aged above 18 with women (60%) outnumbering men (40%). One third of the sample was in the age of 22 to 38 years old, another third in the age of 39 to 49 years old and the rest in the age of 50 to 75 years old (age average: 45 years and standard deviation: 12 years of age). Approximately 40% of the respondents belonged to up to 2-member families (24% was living in 2-member families and 17% was living alone). The remaining 60% concerned 3 up to 6member families. The majority of the sample (62%) had no child, 24% had one child and 14% had two children under the age of 20. One quarter (24%) was bachelors, 63% were married and the remaining 13% were either widowed or divorced. Ten percent of the sample had a nine-year education, 18% had highschool education, 64% had college education and 8% had postgraduate education. Among the respondents, 32% were freelance-professionals, 19% were scientists, 15% were private employees, 14% were public servants, 2% were skilled workers, 2% were unemployed and unskilled workers, 1% were farmers, 2% were students and 3% were house wives. The above show that the majority of respondent are professionals, high-income scientists, married, private employees with a good level of education. Although it is not feasible to check sample representativeness of the total population, its use may still be justified, based on its composition and the criteria explained earlier. Nine questions directly tapping the importance of the 9 LOV items for the sample respondents were asked. These nine items were: sense of belonging, excitement, warm relationship with others, self-fulfillment, being well respected, fun, having an enjoyment for life, security, self-respect and a sense of accomplishment. 4
Analysis
Initially, descriptive statistics were examined compared to available evidence from other studies. Means and standard deviations are available in Table 1 and their comparative profile with past studies is explained.
295 Table 1. Means and standard deviations regarding the 9 LOV scale values Value item Mean Standard deviation Sense of accomplishment 4.68 0.69 Self-respect 4.91 0.41 Security 4.21 1.19 Self-fulfillment 4.73 0.60 4.08 1.20 Excitement 1.60 3.30 Sense of belonging 4.10 0.95 Fun and enjoyment of life Warm relationship with others 4.24 0.98 Being well respected 4.02 1.34 Average 4.25 0.48
These show that the means of responses on the 1 to 5 scale employed in this scale is in the top 20% of the scale with one exception (that for the sense of belonging). This specific value item also exhibited the widest variance - as it is also reflected in the standard deviations (scored the highest among all value items). These values are very close to those available in past literature. In fact, the scores from this study are strongly and significantly correlated (0.84, /K.001) with the averages for the same values available in the Homer and Kahle [4] study. It is also noticeable that the averages of the value items between the present study and the Homer and Kahle [4] study are almost identical. In the present study, the average of mean values is 4.25 and the average of standard deviations is 0.48 compared to an average of mean values of 8.05 and an average of standard deviations of 0.73 in the Homer and Kahle [4] study (which was measured using a 1 to 10 scale). Using EQS, relationships between the 9 values were examined. The assumptions of multivariate normality and linearity were evaluated. Using Mahalanobis distance and cases with largest contribution to Mardia's coefficient 15 multivariate outliers among the sample participants were detected and deleted (p < 0.001). The analysis was performed on 190 participants. There were no missing data. After deletion of outliers, three variables were still significantly skewed (> 2.0; p< 0.001). Therefore, maximum likelihood estimation with the Satorra-Bentler scaled chi-squared was employed. Model 1: The independence model that tests the hypothesis that the variables are uncorrelated with one another yielded: chi-square= 316; dj=36. The Homer and Kahle [4] 3-factor hypothesized model structure with a specific value items and factors prescribed structure was tested first. The 3-factor solution strictly followed Homer and Kahle [4] includes one internal-oriented factor, called "self-respect", one interpersonal factor called "fun and enjoyment" and one external (relations) oriented factor, called "belonging". The "fun and enjoyment" factor comprised the answers to how important respondents considered (a) fun and enjoyment and (b) warm relationships with others. The "belonging" factor comprised the answers to
296 how important respondents considered: (a) sense of belonging; (b) security; and (c) being well-respected. The "self-respect" factor comprised the answers to how important respondents considered: (a) self-fulfillment; (b) self-respect; (c) a sense of accomplishment and (d) excitement. A chi-square difference test indicated a significant improvement in fit between the independence model and the 3-factor hypothesized model but support was marginal for the hypothesized model in terms of the Satorra-Bentler scaled chi-squared test statistics and comparative fit (CFI) index. Scaled chi-square= 60, p< 0.000; df=21; CFI= 0.83; RMSEA= 0.096. Post hoc model modifications were performed in an attempt to develop a better fitting, more parsimonious with the data, model. On the basis of the Lagrange multiplier test, the Wald test and keeping as close as possible to theory, one additional alternative model was developed. Model 2: In this model additional linkages were allowed, both between variables and factors themselves. Two linkages between factors gained significance in terms of the Lagrange multiplier and the Wald test. The most important linkage was between FUN and SELF-RESPECT and the strength of this is strong. Also, the Lagrange Multiplier test suggested the existence of a possible causality link in this case. Specifically the standardized beta coefficient was 0.57 from "fun" to "selfrespect" (ROBUST lvalue = 2.298). The second statistically significant linkage was between FUN and BELONGING, but had about half the importance of the previous link (0.28 compared to 0.57). The Satorra-Bentler scaled chi-squared test statistics and comparative fit (CFI) index were acceptable, namely: Scaled chisquare= 31 (p= 0.14); dj^2A; ROBUST CFI= 0.97; RMSEA= 0.05. This second modified model is presented in Figure 1.
297
R2=0.05-
R2=0.19-
R2=0.34-
R:2=0.25-
R2=0.36'
R2=0.44-
,R2=0.38-
R2=0.62
~-%|giigi
0.47
R2=0J8
-sfe
Figure 1. The modified LOV scale model
The answers regarding the individual variables loading on each factor were subsequently averaged for each factor separately. Table 2 shows the means and standard deviations for the 3 factors. No skewness or kurtosis problems appeared.
Table 2. Means and standard deviations regarding the 3 value factors
Value item
Mean
Factor: FUN Factor: SELF-RESPECT Factor: BELONG
4.17 4.60 3.84
Standard deviation 0.87 0.45 1.04
298
5
Discussion
It has been of increased interest to find that the overall profile of value scores in the Greek sample of organic consumers was almost identical to the value profile reported in the Homer and Kahle [4] study. Even the variance of scores between values as reflected in the standard deviations was almost the same in the two studies. First, this seems to provide further evidence regarding the applicability of the LOV scale across settings, and specifically organic consumers-the focus of this study. The same is evidenced from the confirmation of the 3-factor solution suggested by past literature regarding the structure of the LOV values. The existence of two internal-oriented (one strongly internal-oriented and one interpersonal oriented) and one external-oriented value scheme is also confirmed as valid in our organic consumers sample here. Nonetheless, the results of the confirmatory factor solution possibly suggest the need to allow some contextrelated interpretation. Certainly, we need to remind the reader here that the model statistics and indices indicate how the proposed model structure fit the specific sample data and may not pertain to other cases. Also, that causality is not proven. Is there a need for context-specific interpretation? The answer is probably positive, in the sense that the Greek society is on the extreme in Hofstede's [20] value indices and the original Homer and Kahle [4] study was conducted in a US environment. Greece scores the lowest score world-wide for individualism, which is in marked contrast to the high scoresrecordedfor the USA (in first place overall for this dimension). In nations with a highly collectivistic perspective (like Greece) strong-tie networks are likely to be based extensively upon kinship and friendship ties, or, to use Hofstede's [20] terminology, with members of their in-group. Such networks also probably involve the spending of social time with business contacts, to bring close together the private and public aspects of their lives. Thus, excitement, goal accomplishment and overall self-respect intertwines with warm relationships with others. Personal and business contacts are brought together for entertainment [19], thus fun and enjoyment which turns into a stable long-term social interaction. This is reflected in our case as SELF-RESPECT and FUN as factors have the strongest relationship. It is also interesting to notice that the possible causality suggested by the Lagrange Multiplier test headed from FUN to SELF-RESPECT. At the same time, the factor FUN and the Factor SELFRESPECT are internal- and interpersonal- oriented, whereas the factor BELONG is external/relations-oriented.On the other hand, and equally interesting, there is no statistically significant relationship between BELONG and SELF-RESPECT (see Figure 1) suggesting that the external relations-oriented BELONG construct (in a collectivist society) may not leading to self-respect. This seems to require further work.
299
Structure of values and consumption of organic food products Our findings indicate that the LOV scale is generally suitable for understanding the values at play regarding consumption of food products. The scale is robust, valid and applicable, although cultural context-specific linkages between variables may be at play. We wished to explore however, how the values may relate to consumption of organic food products. To do so, we conducted a Product-moment correlation analysis between the factors and consumption of organic fresh fruits and vegetables that is considered in Greece to be the stronger, and most representative for organics, product category (see Table 3). The phrasing of the question was: I search my fresh fruits and vegetables to be organic before I purchase (scale ranged from: l=fully disagree to 5=fully agree). Table 3. Pearson product-moment correlations between value factors and purchase of fresh fruits and vegetables by Greek consumers Value item Factor: FUN Factor: SELF-RESPECT Factor: BELONG Organic purchases (OP)
FUN 1.00 0.39** 0.20* 0.24**
SELFRESPECT 1.00 0.08 0.29**
BELONG
OP
1.00 0.06
1.00
*/7<0.01;**/><0.001
Our findings show a strong, positive and statistical significance between the two internal-oriented values and consumption of organic fresh fruits and vegetables compared to lack of association between the external/relations-oriented set of values. This is very interesting, as it may indicate that societal (i.e., "belonging") related issues like, for instance, care for nature and the environment, may in some societies not be relevant regarding purchases of organic food products, despite substantial attention by pertinent literature on the issue. On the other hand, the importance of internal and interpersonal values may be explained through the wish of people with such values to exercise as much control as possible over all aspects of their lives [4, p. 645). This control will include decisions regarding what to eat. As a result, they will make the extra effort to purchase what they perceive to be the healthiest choice.
300
References 1. Boote, A.S. (1981). Market segmentation by personal values and salient product attributes. Journal of Advertising Research, 21, 29-35. 2. Feather, N.T. (1984). Protestant ethic, conservatism and values. Journal of Personality and Social Psychology, 46, 1132-1141. 3. Grunert-Beckman, S.C., & Askegaard, S. (1997). Seeing with the mind's eye: On the use of pictorial stimuli in values and lifestyle research. In L.R. Kahle, & L. Chiagouris (Eds.), Values, Lifestyles and Psychographics (pp. 161-181). Mahwah, NJ: Lawrence Earlbaum Associates. 4. Homer, P.M., & Kahle, L.R. (1988). A structural equation test of the valueattitude-behavior hierarchy. Journal of Personality and Social Psychology, 438-646. 5. Kahle, L.R. (1983). Social values and social change: Adaptation to life in America. New York, NY: Praeger Publishers. 6. Kahle, L.R. (1984). Attitudes and social adaptation: A person-situation interaction approach. Oxford, London, UK: Pergamon Press. 7. Kahle, L.R. (1986). The nine nations of North America and the value basis of geographic segmentation. Journal of Marketing, 50, 31-47. 8. Kahle, L.R., Beatty, S.E. and Homer, P. (1986). Alternative measurement approaches to consumer values: The List of Values (LOV) and Values and Lifestyles (VALS). Journal of Consumer Research, 13, 405-409. 9. Kahle, L.R., Beatty, S.E., and Mager A. (1994). Implications of social values for consumer communications: The case of the European community. In B. Englis (Ed.), Global and Multinational Advertising (47-64). Hillsdale, NJ: Lawrence Erlbaum Associates. 10. Kamakura, W.A., and Novak, T.P. (1992). Value-system segmentation: Exploring the meaning of LOV. Journal of Consumer Research, 19, 119-132. 11. Maslow, Abraham H. (1954). Motivation and Personality, New York: Harper. 12. Parsons, T., & Shils, E.A. (1951). Toward a general theory of action. Cambridge, MA: Harvard. 13. Rokeach, M. (1968). Beliefs, attitudes and values: A theory of organization and change. San Francisco, CA: Jossey-Bass. 14. Rokeach, M. (1973). The nature of human values. New York, NY: The Free Press. 15. Rokeach, M. (1979). Understanding human values. New York, NY: The Free Press. 16. Tolman, E.C. (1951). A psychological model. In T. Parsons, & E.A. Shils (Eds.), Toward a General Theory of Action. Cambridge, MA: Harvard. 17. Valette-Florence, P. (1986). Les demarches de styles de vie: concepts, champs d'investigations et problems actuels. Recherche et Applications en Marketing, 1, 94-109.
301 18. Vinson, D.E., Scott, J.E., & Lamont, L.M. (1977, April). The role of personal values in marketing and consumer behavior. Journal of Marketing, 44-50. 19. Hansen, E. (1995) Entrepreneurial networks and new organization growth. Entrepreneurs/tip Theory and Practice Summer, 7-17. 20. Hofstede, G (1991) Cultures and Organisations, London: McGraw-Hill.
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303
MARKETING TRENDS FOR ORGANIC FOOD IN PORTUGAL54 L. COSTA, M. SOTTOMAYOR, A N D A. MENDES Faculdade de Economia e Gestao, Universidade Catolica
Portuguesa,
Rua Diogo Botelho, 1327, 4169-005 Porto, PORTUGAL E-mail: Icostaiaiporto. ucp.pt Organic farming is taking off in Portugal. CAP subsidies are a major factor behind this increased interest. Organic farms are still a small proportion of the country's total farms (0.2% of the number of farms and 1.3% of the farmland). They are mostly extensive (low input) Mediterranean farms located in the mainland interior and less developed regions. Large farms and highly educated farmers are the most representative among those who are converting. Olive oil is the main organic production now reaching about 6% of the total land area in this activity. Twenty-one organic distributors, processors, farmer associations, and certification bodies were interviewed to assess the market barriers for organic food in Portugal. Results show that distribution channels are short. Bottlenecks exist in domestic supply. Most of the organic food consumed in Portugal is imported. Certification has some problems. In general, consumers are not aware enough of organic products or don't have a willingness to pay a high price premium. However, a segment of highly educated urban consumers with above average income does exist and the market potential is growing. Consumers buy organic food for health reasons. The possibility of introducing an in-conversion food market to help farms in conversion to organic was ruled out as it could create noise in the organic food market. The Portuguese government and the EU should concentrate their efforts in promoting the organic food market and in educating consumers.
1
Introduction
In the last decade, the importance of the agricultural sector in Portugal has been dramatically reduced in terms of growth and employment in the economy. In 1999, the year of the last Farm Census, 38361 km2 was farmed area (42% of the Portuguese territory; 3,6% less than in 1989), and 415969 farms were still operating (30,5% less than in 1989) [3]. Agricultural contribution to the Gross Internal Product and employment was, respectively, 2,8% and 10% [2]. However, more than one million people still lived on farms [2], approximately 11% of the country's population. Additionally, agriculture still occupied large portions of the territory. The Common Agricultural Policy's (CAP) direct payments are a major factor behind these developments [1]. As opposed to the evolution described above, in the last decade organic farming has seen significant developments. The CAP second pillar's organic agriThis paper draws on ongoing research for the project "Conversion " financed by the EU 5th Framework Program (QLK5-2000-01112).
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environmental payments are a major factor behind these developments. However, organic farming still represents a very small proportion of the total agricultural area and of the total number of farmers in mainland Portugal: 0,2% of the farms and 1,3% of the agricultural area, according to the 1999 Farm Census [3]. The objective of this research was to explore the nature of the different markets through which organic and in-conversion products are marketed, including forms of distribution system, to identify barriers faced by organic operators and policies to overcome the barriers, to assess the viability of an in-conversion food market, and finally to assess the perspectives for organic food in Portugal in the advent of the 21st Century. The research updates and extends previous research on the subject (see [4], [5], and [6]). 2
Methods
We targeted 21 firms and institutions operating in the organic sector. The interviews were all conducted between November the 14th of 2002 and March the 27th of 2003. They were loosely structured around a common set of questions sent earlier to the respondent (see Appendix I). The length of the interview was about one hour and a half long. All the interviews were tape-recorded, transcribed and analyzed (coded) with the help of the NVtVO software package. The targeted 21 interviewees were mostly purchasing policy decision-makers from firms and institutions as processors and distributors but also were representatives of farmers' associations and of the two official private organic certification bodies. The sample covered most of the companies and institutions currently active in die Portuguese organic sector. Table 1 yields the type of firms and institutions interviewed. 3
3.1
Results
Purchasing policies — organic supplies
The firms involved in the organic sector in Portugal deal mostly or only with organic or "natural" products. There were two exceptions to this focus: the supermarket chains and the processors in the olive oil sector, where the organic supplies have, on the contrary, a very small share of total supplies. Concerning the choice of organic suppliers, several criteria were stated. Purchasers look for national origin first, for good quality standards, for suppliers able to package and present products professionally, and, when importing, some look also for products complying with fair-trade standards. There is a preference to
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buy from assemblers rather than directly from producers, for quantity and diversity, and also for quality and professionalism. Table 2. Interviews Framework
Type of Organic Operator
Merchants
Service providers Total
No. Interviews
Direct sales Farmers Associations-Processors-wholesalers Co-operatives-processors-wholesalers Assemblers-processors-wholesalers Assemblers-wholesalers Supermarket chains
1 1 2 3 1 2
Retailers
4
Specialized shops/restaurants Box schemes Consumers' co-operatives Farmers' associations Organic certification bodies
1 2 2 2 21
National preference is more an issue with larger supermarket representatives and connected specifically to fresh products. The motivation is twofold: first, it is very expensive to import fresh products due to the peripheral location of the country; second, there is the belief that customers value national products more, which is illustrated by the following statements: 'Usually the consumer also prefers national products. There is added value in it' (Appendix II, #2) '(...) Several consumers turned to me and said: 'these are ours. They are better' (Appendix II, #12) The Portuguese organic market relies heavily on imports. According to the interviewees, imports represent about 80% of the fresh products and nearly 100% of the processed ones. Most merchants deal with in-conversion products as if they were conventional. For example, two said: 'Organic for us is organic. It has a seal, a certification body. It is a recognized supplier. If it is not yet organic, then it is conventional' (Appendix II, #12), "They are not sold as in-conversion because nobody wants in-conversion products, nobody is interested in them' (Appendix II, #15).
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However, some small business merchants do consider 2nd year (or later) inconversion products and usually do not distinguishing mem from the organic in terms of prices. The major barrier to imports is their excessive price, which is mainly due to the peripheral position of Portugal in what regards the major European organic markets. Another reason for this high price is the lack of bargaining power of importers, who usually order small quantities. 'When ordering from Holland, Belgium, or Germany, say, the core centre for organic products, (...) it is extremely difficult to get the products into Portugal. On top of this, importing small quantities makes the products very expensive.' (Appendix II, # 6). The above price barrier is more important for the operators that do not have access to international purchasing platforms. Examples of these international purchasing platforms are the BIOOCOOP chain, specialized in organic products, and the AUCHAN supermarket chain, not specialized in organic products. '(...) BIOCOOP for example imports directly from other countries at lower prices. It belongs to the BIOOCOOP chain in Europe, French based mainly, from where come most of the supplies, and therefore they are able to get more regular supplies and at lower prices' (Appendix 2, #3). 'As we have access to a purchasing platform abroad this comes as a solution for most of the barriers and supply problems we face, but what comes from abroad has always the problem of high prices. It is expensive' (Appendix II, #21). Concerning domestic supplies, the major difficulty is still the poor development of the sector. Low diversity of products, small-scaled farmers, and lack of professionalism are the major characteristics provided by the interviewees, the latter having consequences on the quality of products and of packages, they say. A further characteristic is the lack of professionalism also resulting from farmers' lack of experience and technical support and from farmer's 'wrong concept' on what is an organic product. 'A deeply rooted concept that also exists in some minds is that 'natural' or 'organic' means being small, having worms, etc., otherwise it is not 'organic'. This is wrong. This is completely wrong.' (Appendix II, #19). In terms of processed and fresh products, merchants rely heavily on imports, thereby encountering the price problems already mentioned.
3.2
Labeling policies
Interviewees claim that labels should be simple and rely more on symbols rather than text. Some merchants use the EU symbol. Others prefer to use the certifier symbol only, as they think the EU symbol is meaningless or unknown for most consumers.
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Concerning the information delivery through labeling, some interviewees believe organic consumers are keener on information than other consumers. Merchants try to supply extra information to consumers adding booklets. In this way, they are not limited by the label space and they are able to keep labels simple. 'We overcome this [limits on label space] by adding a booklet (...) where we provide further explanations' (Appendix II, #14). In addition to labeling, some supermarket chain groups signalize the organic products. For instance, in the yoghurt shelf, organic yoghurts are signalized. Interviewees pointed out that national organic labeling regulations are inadequate. Several aspects are wrong in the regulation. Producers cannot say they have organic products. They ought to say they have products that come from the organic mode of production. This is inconvenient for two reasons. First, it implies too many words in a limited labeling space. Second, operators believe that not being able to call a product simply organic ('biologico') makes consumers uncertain about the organic nature of the product. 'I don't know why one cannot call the product organic. People like to know exactly what they are buying. If one says that the product comes from the organic mode of production, people remain uncertain about the product nature. Instead, if one says the product is organic they would be certain' (Appendix II, #14). Another inadequacy of the labeling regulation concerns the compulsory use of the same font size for all the words in the label. Particularly, the word organic cannot be emphasized using for instance a larger font size. 'Labels have to use the same font size and type. I cannot in anyway detach the word organic and this brings along some delays, doesn't it?' (Appendix II, #11). All these intricate labeling regulations work for some farmers as an incentive to sell their organic products as conventional instead. 'They sell their organic products in the market as conventional products, with the conventional products, because the labeling regulations to sell the product as organic are too complicated' (Appendix II, #11). Another problem of labeling in Portugal is related with the foreign origin of most of organic products on sale. Products with different foreign origin have different wording in die labels to signify organic. For instance, if the product comes from the UK will have the word 'organic' in the label, while if it comes from Spain will have the word 'ecologico'. This is confusing for consumers, despite imported products being required to have additionally a small Portuguese label. Finally, and according to the interviewees, most consumers do not recognize the EU organic symbol. For this reason, many producers and merchants do not use this symbol. Also, a few merchants are reluctant to use it because it is too similar to other quality European symbols, which might mislead consumers.
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3.3
Market for organic products
Portuguese consumers are not willing to pay a very high price premium for organic products. 'In Portugal, the maximum price premium they are willing to pay [the premia] is 20 to 25% above conventional product prices. (...). I think this is the premium customers are willing to pay. Any more than this and they would not pay. Therefore, I would lose my market and my business would not be viable anymore' (Appendix II, #1). Organic prices faced by final consumers mainly reflect high costs of domestic production and expensive imports. 'I used to buy domestic [organic] almonds ... some time ago I realized that I could buy them in Spain maybe one euro cheaper ... this is money ... to reach the consumer I can not pay more just because the product is national, can I?' (Appendix II, #2). Merchants believe that the organic market is still emerging in Portugal and that prices to final consumers should not to be set too high. 'For the organic products we have in mind that it is a developing market, it is a product that needs to be supported, it is not exactly there that we want to earn our maximum or [even] our average margins' (Appendix II, # 12). 'We think it is very important for price [organic products] to be as low as possible ... because of the prices, are now becoming more interested' (Appendix II, #4). 'Basically the struggle in the organic market is to try to slightly reduce the margins, to be able to market the products' (Appendix II, #2). Merchants bargain in this line with suppliers. 'We tell the supplier that the cheaper he sells the product to us, the cheaper we can sell it to consumers and more of them will buy, thus we place here a [joint] effort'(Appendix II, #12). When compared to conventional prices, organic prices fluctuate considerably less, say the merchants. Merchants agree in advance with organic suppliers on fixed prices for the entire crop season. Thus, organic premia fluctuate significandy and caution should exist in interpreting average or point figures on these. 'Prices are agreed in our meetings with producers every three months, where we discuss, plan, and try to solve existing problems, and the prices are established in this way are fixed for the entire season' (Appendix II, #21). Concerning margins, merchants on one hand seem to practice higher margins on processed products. On the other hand, they claim they need higher margins on fresh products because of higher losses. 'Non-fresh may have a slightly higher margin' (Appendix II, # 6). 'The most sophisticated [organic products] have a higher margin. That is, the most processed products such as marmalade, honey ... For the more basic ones, like potatoes and onions, people are willing to pay less' (Appendix II, #1).
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'With fresh products the margins are higher for a very simple reason: the losses are higher' (Appendix II, #12). In the olive oil sector, processors in the Southern Alentejo region do not pay an organic premium to farmers while processors in the Northeastern region of Tras-osMontes do pay a premium. The former argue that CAP organic agri-environmental payments are the compensation for producers. 'Well, to begin with they already have protection ... the [CAP agrienvironmental] payments they get as organic farmers' (Appendix II, #16). According to interviewees, organic supply is very much dependent on subsidies. 'Organic producers are more dependent on subsidies than on market incentives' (Appendix II, #21). Organic farmers' motivations vary. Some farmers do convert to organic farming strictly because of the subsidies, particularly in the interior extensive farming regions with crops such as traditional olive trees. 'Because through this [organic farming] they were able to get an extra subsidy, extra help' (Appendix II, #16). Many of these producers do not even sell their products to the organic market. The market incentive doesn't compensate for the costs they face when marketing their products as organic. Other organic farmers are driven by ideological or ethical motives. These farms have been established longer, before organic CAP subsidies were available, and many were foreigners. 'Most of them were hippies, only a few were Portuguese. Most of them were foreigners, German, Dutch, and Belgians' (Appendix II, #15). Finally, there is still a group whose motives are essentially driven by the rising market opportunities for organic products. "The first comers were fanatic weren't they? But now other [type of producers] are getting into the market, aren't they? It is starting to be a good business' (Appendix II, #13). Regarding the current certification scheme, some interviewees claim the procedures are too bureaucratic and inadequate, particularly for older and less educated farmers. '(...) We have to slightly change the way the controls are done and facilitate them a little. I am not saying to be more permissive, but certain things only complicate and do not help at all' (Appendix II, #17) 'Our associates, and I think all the Portuguese farmers, are aged, and are people with little education. All these [complicated] requirements confuse them, and they run away from this as quick as they can' (Appendix II, #17). Some interviewees also claim that certifiers have too much discretionary power over producers, given that there are only two certification bodies in Portugal. '(...) They [the private certification bodies] have too much power. They are a few, they are just two' (Appendix II, #17).
310 Other problems faced by farmers are the excessive cost of certification and the lack of technical support. The general sanitary standards of processed products are the same for small farm family businesses and large commercial firms. The former are not able to process and market products that, for instance, do not meet size and shape standards. 'Many countries have softer standards for small farms, and this is what would be convenient for Portugal to make viable the [small family farm business] processing activity, as it is a way to make the farms profitable, as farmers in this way can take advantage of lower quality [raw] products, and this is fundamental' (Appendix II, # 7). Organic olive oil processors claim to have difficulties in marketing the product as organic. Interviewees also refer to the lack of affordable concentrates and the absence of certified slaughterhouses for organic livestock production. Concerning organic exports, some interviewees claim that the Portuguese origin shown in the label makes sales more difficult. For instance, it doesn't help to have the Portuguese wording in the EU organic symbol. Another problem mentioned with exports was the non-recognition of Portuguese organic certification bodies as such by the importing country, when the latter is a non-EIJ country as the United States. Regarding the future of organic domestic supplies, interviewees believe that domestic supplies to the domestic market will increase and will be more regular. However, the narrowness of the organic market the lack of information on organic matters faced by producers, the lack of governmental support to the sector, and the scarcity of organic food processors, are barriers to farmers' conversion. Consumption of organic products in Portugal is very much located in the two major cities of the country: Lisbon and Porto. 'For the countryside consumer organic is what he produces, it is not the other. For the urban consumer, organic is better' (Appendix II, #12). The organic consumers are urban, middle to upper class, wealthy, well informed, college educated, very demanding in quality matters, and many have special dietary regimes, such as vegetarian or macrobiotic. 'Anyway, they are people [the organic consumers] already informed in advance, who really want to consume this kind of product, and who have the economic ability to do so' (Appendix II, #3). 'Many vegetarians come here to get organic products. Vegetarians, macrobiotics, many, many indeed' (Appendix II, #3). According to some interviewees, consumers' perception on the difference between organic and conventional products is increasing. Health issues and food safety are the drivers. Food scandals as BSE help to increase consumers' perception. '[The difference is increasing] as people are getting more concerned with diseases, and all these things' (Appendix II, #15).
311
Consumers associate the ladybird symbol to organic production. 'Consumers are very much attached to the ladybird symbol (...)• I think that the use of the ladybird symbol should be compulsory in [the labels of] all organic products. I think that this is something that calls for consumer attention. It seems it is in the consumer sub-conscience' (Appendix II, #15). 'For consumer identification as organic it is enough, in my particular case, to have the ladybird on the top' (Appendix II, #13). According to the interviewees, the major drivers of consumer organic demand are health issues. They believe consumers associate the word organic to the absence of agrochemical residues and to the product being natural. Interviewees also believe that a few consumers became organic consumers because of health problems and associated dietary requirements. Another driver identified is the keenness of some consumers to experiment with new foods. The better taste of organic products is also refereed as a driver, but not as a key factor to the decision of buying organic. An interesting point mentioned is that the fact of a product being organic makes its geographical origin perceptually irrelevant to consumers. 'When referring to organic products, people don't care too much about the origin. They don't care whether the olive oil comes from Portugal or Spain. They don't care about the origin, while with conventional products there is a certain differentiation in terms of product origin. They just care whether it is organic' (Appendix II, #14). Interviewees believe that presently environmental issues are not a major driver of organic consumption in Portugal, although they might become one in the future. 'People don't care so much whether production is using environmentally damaging substances. They care more about themselves. They want to know whether the products are free of damaging substances for their health. Mankind today is selfish' (Appendix II, #14). Interviewees believe that the organic nature of a product is more appealing and meaningful to consumers with fresh fruit and vegetables, the product category that apparently dominates current sales of organic products in Portugal. 'I have the impression that people look more for vegetables, fruits, and meat amongst organic products' (Appendix II, #17). Interviewees recognize large supermarket chains as the main outlets for organic products, particularly olive oil. Specialist shops are seen as insignificant. 'We sent fifty percent of our volumes directly to the large supermarket chains' (Appendix II, #16). 'Specialist shops sell very little and few people go there ... all the others go to the large supermarket chains' (Appendix II, #15). The presence of organic products in the large supermarket chains is seen as a necessary condition for generalized consumer awareness of organic products. 'People will only be a little more conscious if they see an organic shelve in the supermarket' (Appendix II, #3).
312 Interviewees also recognize a changing attitude of large supermarket chain operators towards organic products, presently more enthusiastic on these products, although some claim the restriction is still imposed by these chains. Tor example, Continente [a large supermarket chain] buys us organic olive oil. In the past we were the ones insisting to sell them, and they imposed us many restrictions because the product stayed too long in the shelves, there was no consumer demand. Now is different. They are the ones that are after us to sell them. The mentality is changing. This indicates that there is consumer demand. Certainly, people are turning up asking [to the Continente] about organic products' (Appendix II, #14). Integrated Protection Management (IPM) seems to be the only competing mode of production the interviewees were able to recall, and only for fresh fruit and vegetables. Opinions about the degree of competition diverge. However, most interviewees see IPM as a menace to the development of the organic market. They see IPM as a response to organic developments by conventional production. 'The IPM was a little like ... I don't know ... kind of answer of conventional producers trying to say: in the end of the day this is not as bad [as you think], we have things [agrochemicals] under control' (Appendix II, #2) Along the same lines, for some, IPM will be the future of conventional production. 'We are convinced, from our talks with our competitors, that in the medium run, conventional producers not under IPM will be out of business' (Appendix II, #12). While others say: 'I would admit a subsidy to IPM as a way to educate farmers but I would forbid IPM sales as such. People should not be fooled. Protection is something that everybody desires while integrated is a word of the twentieth-century. Integrated protection is delicious and is nothing. We are fooling people, besides it competes with organic products' (Appendix II, #13). The IPM competition with organic products seems to be more a domestic market issue. While the organic mode of production has common EU rules the IPM mode has not. It will be difficult to add value to IPM products in the export market. 'But it happens that they are not able to export a single kg of IPM products' (Appendix II, #13). The controversial use of a ladybird symbol by IPM and the mixing up of IMP products and organic products in the same shelves in Continente, one of the largest supermarket chains in Portugal, add to consumer confusion. 'This confuses people ... she arrives and sees in the shelf an apple with the organic symbol and next to it another apple showing the IPM sticker, with the ladybird on it... for her these are all organic' (Appendix II, #12). According to some interviewees, some secondary school science teachers are spreading out the idea that IPM is a better alternative to organic production, arguing that starvation would result from the generalization of the latter.
313 'It is very common to see, mainly among some secondary school biology teachers in certain regions, (...) that IPM is really the solution as with organic farming generalization in the world people would starve' (Appendix II, #19). Others say that IPM is being promoted by agrochemical multinationalcompanies to sell their products. 'Organic farmers (...) don't buy anything. The hate against organic farming in Portugal is very strong. (...). [IMP] is a protection where people [farmers] use the same chemicals. They are nice guys because they buy the agrochemicals' (Appendix II, #13). Interviewees acknowledge that organic demand is still very short, a major reason being the lack of information on organic products amongst the majority of consumers, which is explained by the total absence of promotion of organic products. Interviewees criticize the implementation of product categories and certification schemes in the absence of consumer information on these categories and schemes. 'My colleague competitors and I very often criticize state bodies because they talk about IPM but the general public doesn't know what IPM is, they talk about organic but the general public doesn't know what organic is. Well, it seems to us that we need to tell consumers, to explain to people, what organic and IPM is about'. (Appendix II, #12). About the future of organic domestic demand, interviewees believe that demand will grow. 'Demand has grown and can grow much more' (Appendix II, #2). Domestic supply does not match the growth of demand and therefore imports continue to rise. 'People have an idea that organic is good, there are fairs, etc. Another aspect is all die food scandals as the mad cow disease, the dioxins, the antibiotics residues, and so on, that people ask, I don't know if it happens with you, what should I eat? (...) The organic gives an idea of a greater safeness, I believe so' (Appendix II, #6). However, the Portuguese low income per capita is a limitation to domestic demand and thus to the domestic organic market development. '[In Portugal] the market can grow, there are distribution channels and demand, and there is a market. It will not grow as much [as in France and Germany] because the purchasing power of the Portuguese is not equivalent to the purchasing power of the French and the Germans, but given our restrictions it will grow significantly' (Appendix II, #14).
3.4
Marketfor in-conversion products
According to the interviewees, consumers do not know what an in-conversion product is and there is virtually no such market in Portugal. The establishment of an in-conversion market will bring with it several problems. First, it will be very
314 difficult and expensive to communicate the concept to consumers, even more difficult than it already is to make them aware of fully organic products. 'The organic products themselves are already difficult to promote, much more than in-conversion ones' (Appendix II, #19). Second, it will add to consumer confusion, which will be counterproductive to the development of the organic market. 'We have to be carefully with an additional brand considering the [perceptual] confusion that already exists' (Appendix II, #12). Third, processors would face logistic problems thereby creating extra processing lines to deal with these products. 'It has implications at the level of separating the product because, notice, we already separate by acidity, by ... and then I have to separate organic from conventional and, in this case, I would have to separate the in-conversion one as well. Not only must I separate the in-conversion one, but the first year inconversion, the second year, the third year, all would have to be different lots. This will be complicated in logistic terms' (Appendix II, #14). Considering all these problems, interviewees say it will be more effective to compensate farmers with subsidies during the in-conversion period. 'I think that maybe it would be easier this difference to be paid by the government or any institution that is able to pay it rather than to launch a big marketing for the in-conversion products. Maybe is more worthwhile to promote instead the organic products, that are not yet sufficiently known' (Appendix II, #2). Another aspect is how consumers would perceptually position in-conversion products. The few comments on this issue point that in less developed organic markets, as the Portuguese one, consumers will see in-conversion products as very close to organic ones, while in more developed organic markets, as in Northern and Central European countries, consumers will see in-conversion products as close to conventional ones.
315 3.5
Policy proposals for the organic sector
Most interviewees stressed the need for consumer information and education on organic matters, as a necessary push to a significant development of the market. 'It is necessary to massively promote the existence of these products beyond the existing small fairs of organic products' (Appendix II, #16). 'Another kind of support would be a partnership of the ministries of agriculture, environment, and health, the three of them together doing advertising campaigns' (Appendix II, #15). Most agree on a generalized use of the EU organic symbol, and that consumers should be educated on the meaning of the symbol and on the concept of organic farming. 'There should be more direct aid from the ministries of agriculture and environment defending the EU symbol and educating consumers on organic products' (Appendix II, #11). Interviewees also suggest that VAT should be reduced to the minimum for all categories of organic products, helping in this way the development of the market. 'If there is to be a policy to support the sector it would be interesting to have a [positive] discrimination through VAT, which for some organic products happens to be not five but nineteen percent' (Appendix II, #21). Interviewees claim that only viable business should be supported, to avoid rent seekers, and that farmers should not be the only ones getting subsidies. Concerning the certification scheme, the removal of unnecessary bureaucracy is supported. Some interviewees also support the idea that organic quality controls by certifiers should focus on the end of the food chain (or retailing level), and should be based on physical and chemical analyses instead of the current paper work controls. 'What do we want? We want to produce an organic product. What do we want from an organic product? A product free of this, free of that... [you] check whether it wasn't mixed up, whether it has oil, whether it has whatever, whether it has forbidden chemicals. Hey guys, none of this is done ... ' (Appendix II, #17). However, being free from agrochemical residues is a necessary but not sufficient condition to guarantee that production is being done according to the organic mode. Interviewees stressed the need for farmer information, education, and technical support on the organic mode of production. Finally the setting up of a national action plan for the organic sector in Portugal was advocated. A 'National Action Plan' for the organic sector in Portugal is currently being elaborated under the supervision of the Portuguese Government.
316 'There should be an integrated development plan for organic farming, covering the several components, from production to processing, to marketing, to consumer information, to research, and to education' (Appendix II, #7). 'There should be a development plan for the organic farming in several fronts that could be incentives to consumption and [consumer] education campaigns' (Appendix II, #21). 4
Conclusions
The objective of the research was to characterize the status and assess the perspectives for organic food in Portugal in the advent of the 21st Century. Except for the supermarket chains, firms involved in the organic sector in Portugal deal only with organic or "natural" products. Merchants look for national origin, good quality standards, professionalism of suppliers, and fair-trade products when importing. They prefer to buy from assemblers. Most products are imported. Except for some small business merchants, inconversion products are treated as conventional. The major barrier to imports is their excessive price, due to the peripheral position of Portugal and to the lack of bargaining power of importers. This barrier is more important in the absence of access to international purchasing platforms. Domestic supplies are still poorly developed and characterized by low diversity of products, small-scaled farmers, and lack of professionalism. Labels should be simple and based more on symbols than text. Organic consumers are keener on information than other consumers. Extra information is provided in booklets to keep the labels simple. Some supermarket chains emphasize the organic products on the shelves. Producers cannot claim to have organic products on their label. They ought to claim instead they have products that come from the organic mode of production. This makes consumers uncertain about the organic nature of the product. The compulsory use of the same font size for all the words in the label doesn't allow the word organic to be emphasized. All these are incentives for some farmers to sell their organic products as conventional. Most consumers do not recognize the EU organic symbol. A few operators are reluctant to use this symbol as it is too similar to other quality European symbols and might mislead consumers. Organic prices faced by final consumers reflect high costs of domestic production and expensive imports. Merchants bargain with suppliers to keep prices reasonable. Merchants practice higher margins in processed products but claim they need higher margins in fresh products, where they face much higher losses. Organic prices fluctuate less than conventional prices. Thus, organic premia fluctuate significantly. Some olive oil processors do not pay an organic premium to farmers. Organic supplies are very much dependent on subsidies.
317 Organic farmers' motivations vary. Some fanners do become organic strictly because of the subsidies. Others are driven by ideological or ethical motives. A third group is essentially driven by the rising market opportunities for organic products. The current certification scheme procedures are too bureaucratic and inadequate. The existence of only two private certification bodies gives certifiers too much discretionary power over producers. The cost of certification is excessive. Small farm family businesses face the same sanitary standards as large commercial firms, which makes it unfeasible for the former to process and market raw products that do not meet size or shape standards. Some organic olive oil processors claim difficulties in marketing their products as organic. Organic livestock production faces a lack of affordable concentrates and the absence of certified slaughterhouses. Concerning exports, to show die Portuguese origin of the product doesn't help sales. Another problem is the non-recognition of the Portuguese organic certification bodies as such by non-EU importing countries such as the United States. There is the belief that domestic supplies will increase and will be more regular in the future. The narrowness of the organic market, the lack of information on organic matters faced by producers, the lack of governmental support to the sector, and the scarcity of organic food processors are barriers to this development. Consumption of organic products in Portugal is very much located in the two major cities of the country: Lisbon and Porto. Organic consumers are urban, middle to upper class, wealthy, well informed, college educated, very demanding in quality matters, and many have special dietary regimes such as vegetarian or macrobiotic. Consumers' perception on the difference between organic and conventional products is increasing. Food scandals as BSE help to increase this perception. Health issues and food safety are the major drivers of consumer organic demand. Environmental issues are not major drivers in the present, although they might be in the future. The organic nature of a product is more appealing and meaningful to consumers with fresh fruit and vegetables, which apparently dominate current sales of organic products in Portugal. The organic nature of a product makes its geographic origin perceptually irrelevant to consumers. The presence of organic products in the large supermarket chains is seen as a necessary condition for generalized consumer awareness of organic products. Integrated Protection Management (IPM) is a response to organic developments by conventional production. IPM is only a domestic market menace. It is difficult to add value to IPM production in the export market. The IPM use of a ladybird symbol and the mixing of IMP and organic products in the shelves of some large supermarkets make some consumers mistake IPM for organic production. The idea that IPM is an alternative to organic production quickly spreads. There is the belief that IPM is being promoted by agrochemical multinational-companies.
318 Domestic organic demand is still very low but will grow in the future, although the low per capita income of the Portuguese population is a limitation. Imports also will increase. Consumers do not know what an in-conversion product is. The concept is difficult and expensive to communicate. Processors would face logistic problems in creating extra lines to deal with these products. To promote such a market would add to consumer confusion and would be counterproductive to the putting in of the organic products. Farmers should be subsidized when in-conversion. The generalized use of the EU organic symbol, with consumer education on the meaning of the symbol and on the concept of organic farming, is acknowledged as a way to help the development of the organic market in Portugal. Additionally, VAT should be reduced to the minimum for all categories of organic products. Concerning producers, only viable business should be supported and farmers should not be the only ones getting subsidies. Unnecessary bureaucracy in certification schemes should be removed. Organic guarantee quality controls should focus more on the end of the food chain and should be based more on physical and chemical analyses. The need for farmer information, education, and technical support on the organic mode of production is stressed. Finally, some interviewees advocate the setting up of a national action plan for the organic sector in Portugal, which is currently being elaborated. References 1. Cunha, A., What can we expect from CAP Mid Term Review? Agra Europe Weekly, January 24 (2002) pp. 1-3. 2. Gabinete de Planeamento e Politica Agro-Alimentar - Ministerio da Agricultura, do Desenvolvimento Rural e das Pescas - Portugal, Panorama Agriculture 2000. Lisboa (2001). 3. Instituto Nacional de Estatistica - Portugal, Recenseamento Geral da Agricultura 1999: Analise de Resultados. Lisboa (2001). 4. Lampkin N., Foster C, Padel S., and Midmore P., The policy and regulatory environment for organic farming in Europe. Vol. (1-2), Universitat Hohenheim, Stuttgart (1999). 5. Mendes, A., Sottomayor, M., Cunha, M. R., Ribeiro, R. M., Campos, R., and Costa L., Organic Farming Take Off in Portugal. Proceedings of the 72nd EAAE Seminar, Chania, Crete (2001). 6. Ribeiro, M.M.S.C., Portuguese organic food market and export potential. Working Paper, Porto (2001).
319 Appendix I List of Questions What is your current supply policy for organic and conversion-grade products? [If no policy interview is discontinued] What are the main barriers to introducing and implementing this policy? [Barriers already overcome, currently faced and predicted]. Interviewers should LIST barriers. What is your policy on premiums? Or for Institutions: What premium are you willing to pay now and in the future? [Price ranges should be recorded]. In your opinion is the current EU labeling system for organic food products in Europe working to everyone's advantage. If not, why not? Is there scope for third party labeling? What labeling do you think is appropriate for conversion-grade food products? [i.e., should environmental or social benefits be stressed or is corporate image more important]? Do you feel that organic and conventional products have approached / distanced one another the latter years through standards (environmental etc.), quality and image? Do you fell that the success of in-conversion products in the consumer market could depend on the size of the perceived distance between organic and conventional products? What is your knowledge, understanding or impressions of, and attitudes to, conversion-grade or transitional-grade food products and how do you see these fitting in with the growing 'light green' sector of food products? What is your perception of the future market for organic and conversion-grade food products. Do you think the market is transitory or stable and how do you think the 'light green' / sustainable sector will evolve? What support do you need for marketing organic and conversion-grade food products in terms of public funding and legislation /regulations
Appendix II List of Interviewees 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
14-11-2002 29-11-2002 28-11-2002 28-11-2002 06-12-2002 04-02-2003 04-02-2003 11-02-2003 11-02-2003 18-02-2003 18-02-2003 14-03-2003 20-03-2003 25-03-2003 25-03-2003 27-03-2003 27-03-2003 11-03-2003
Retailer-box-scheme Assembler-processor-wholesaler Retailer-specialist shop-restaurant Assembler- wholesaler Retailer-specialist shop Retailer-specialist shop-restaurant National organic Farmers' association Organic certification body Retailer-specialist shop Organic certification body Regional organic Farmers' association Retailer-supermarket chain Farmer-direct sales Assembler-processor-wholesaler Assembler-processor-wholesaler Farmers' Co-op - processor- wholesaler Farmers' Co-op - processor- wholesaler Retailer-supermarket chain
Owner-manager Marketing director Manager Owner-manager Owner-manager Manager President Manager Owner-manager Director Director Management board Farmer Manager Owner-manager Manager Manager Price policies director
320 19 20 21
11-02-2003 22-11-2002 23-11-2002
Retailer-consumers' co-op Farmers' association-processor-wholesaler Retailer-consumers' co-op
Director Manager Director
321 AN ORDERED PROBIT MODEL FOR THE ANALYSIS OF OVERALL CUSTOMER SATISFACTION (OCS) REGARDING ORGANIC-FOOD COMSUMPTION A. ASCIUTO, F. FIANDACA Dipartimento
di Economia dei Sistemi Agro-Forestali, Faculty of Agriculture, Palermo, viale delle Scienze, 90128, Palermo, Italy
University of
Organic-food consumers and some related issues were investigated in the city of Palermo. Consumers were asked to express their global satisfaction regarding consumption of organic food, as well as some other personal information. A survey was conducted from the main four organic-food specialized retailers by interviewing nearly 200 customers. The data were used to analyse the overall satisfaction of the local organic-food consumer. Furthermore, a "discrete choice" model was run by using the overall customer satisfaction (OCS) derived from the consumption of organic food as a dependent variable and a set of other variables as regressors. Model outputs were used to identify the key determinants of the overall customer satisfaction, providing likewise useful information regarding future actions to be taken in order to improve the quality of organic-food supply on a local scale.
1
Introduction
Organic farming seems to be the answer to some questions consumers ask concerning the health safety of the food products they buy. The ethic problem seems to guide consumers more and more in the choices they make, along with a greater awareness of the environment. Although the system still needs improving (certification, traceability, controlling, etc.) at the moment it is the only viable alternative, or at least, the only alternative which guarantees greater food safety. It is of primary importance to examine in detail the final destination of the organic fanning chain, the consumer, and his/her distinguishing characteristics, compared to the "conventional" consumer. In this paper an analysis of the local organic-food consumer was carried out in the city of Palermo. The main aim was to investigate the factors which influence OCS in order to make some useful suggestions towards improving it. The paper is organized as follows: section 2 describes the survey structure (sample selection and structure of the questionnaire). Section 3 analyses the hierarchical structure of the OCS and the score frequency distribution found within the sample, providing also an appropriate methodology for the analysis of the data along with estimation issues. In section 4, the analysis of the results and discussions are provided while section 5 gives concluding remarks. In section 6 the acknowledgements are reported.
322
2
2.1
Survey Structure
Sample selection
The data was gathered in the city of Palermo through direct interview which we had drawn up and distributed to a sample of 197 consumers. The data was gathered between Autumn 2002 and the beginning of Summer 2003, from a survey carried out in 4 specialized shops, chosen according to the type of products they sell (fresh factory products), to their structural characteristics (size, market position, number of customers, turnover, etc.) and quality care (trustworthiness of the company, willingness to collaborate, commercial history, etc.) Based on the information given to us by the shopkeepers, the total number of customers was estimated at approximately 2,000. The sample survey was carried out using the "reasoned choice" method. To reduce the inevitable error range using this sampling method, and to ensure a sample selection which best represents the population, the interviews were done on different days of the week at various times of the day. The interviewers were also rotated around the shops, in order to reduce any systematic errors due to personal characteristics and/or interview techniques. The interviews were conducted systematically, excluding those customers who did not buy anything or who were unwilling to collaborate with the interviewer in filling out the questionnaire, which took between 10-18 minutes. 2.2 The structure of the questionnaire The questionnaire is divided into 3 parts. After a short introductory explanation of the aims of the survey, the first part asked about the type of product and how often it was consumed, the reasons for buying the product, and any difficulty they had in buying it, the level of knowledge of "organic products", the consumer's opinion on the level of reliability of the certified label, the average difference in price between organic and conventional products, the percentage family food budget spent on organic products and the consumers source of information on organic farming products. In the second part consumers were asked to express their level of overall satisfaction regarding organic products. Finally, the third part looked at the personal characteristics of the person being interviewed, for example age, employment, profession, size of family, family members who consumed organic products, income earners and level of family income.
323
3
3.1
Analysis of the Determinants of Overall Customer Satisfaction
Hierarchical structure of the OCS and score frequency distribution within the sample
During the survey, consumers were asked to state their overall level of satisfaction regarding organic food consumption using the five point Likert-scale as follows: l=extremely dissatisfied, 2=dissatisfied, 3=neither dissatisfied nor satisfied, 4=satisfied, 5=most satisfied. The same scale was used for the levels of satisfaction regarding seven macrocategories considered responsible for the formation of the overall satisfaction. Some of these macro-categories were divided into several sub-categories so that the total score of each of these composite macro-categories was obtained as an average of the scores assigned to the sub-categories forming that specific macrocategory. Moreover, to evaluate the impact that any of these seven macro-categories had on the overall customer satisfaction level, we asked respondents to give a percentage value to each macro-category. Figure 1 shows all the aspects considered important for the consumers and their hierarchical relation with respect to the overall customer's satisfaction.
324 I preservahJKty i-
traceahitity
freshness certification body appearance product characteristics
taste Product characteristics
^
T
/ helpfulness
|
competence
U
Information on label
7
Advertising
i Overall Qistomcr Satisfaction .
Service quality
|
Quality/ Price ratio
i Product Availability
A Packaging
materials
strength home delivery service appearance I convenience
Figure 1. Hierarchical structure of the elements characterizing Overall Customer Satisfaction.
A preliminary analysis of the collected data was done by observing score frequency distribution of the overall customer satisfaction. Within the sample, 23.70% of the respondents were "most satisfied", 48.50% "satisfied", 26.0% "neither unsatisfied nor satisfied"; 1.2% of the respondents indicated "dissatisfied" and only 0.6% "extremely dissatisfied". The frequency distribution of the overall satisfaction is clearly skewed to the right [1]. This score distribution was to be expected as all respondents were intercepted inside a specialized organic-food shop so the chance of finding dissatisfied consumers was unlikely. We did not exclude the possibility of finding dissatisfied customers who have to buy organic food because they suffer from specific food problems (allergies, intolerance, etc.). Figure 2 shows the average overall customer satisfaction assigned to the seven macro-categories presented in the previous figure and relative weights; note that overall satisfaction index assigned to the seven macro-categories were calculated as an average value among all the scores indicated by respondents. Considering that scores were given using a five-point Likert scale, data were previously transformed using a 100 scale.
325
It can be seen that with a total customer satisfaction index of 74/100, the category "Service quality" scored the highest value (87/100) even if the relative weight is one of the lowest, indicating low influence on determining the overall customer satisfaction. The category "Product characteristics" got 69/100 together with the highest weight assigned (34.6/100) clearly indicating how inherent product characteristics (taste, appearance, freshness, preservability) play the most important role on overall satisfaction index formation. Categories "Label Information" and "Packaging" scored a total value of 65/100 and 60/100 respectively regarding the overall satisfaction and a percentage weight of 13.0/100 for the first category and 9.1/100 for the second. We can say that both achieved quite a satisfactory level. Low judgement was attributed to the category "Quality/Price ratio" which scored 50/100 of overall satisfaction. Customers often complained that the "extraprice" paid for organic-food does not always correspond to an increase in quality. This aspect is important when we consider that this category scored quite a high weight level (17.6/100) showing the importance of this category in the overall satisfaction. The lowest scores were in the categories "Market availability" and "Advertising" which obtained 46/100 and 24/100 respectively with a low weight level for both (10.1/100 and 6.2/100). Lack of market availability especially refers to organic-meat; in fact, due to the insufficient supply system, customers had to buy organic-meat on specific days of the week.
326
Overall satisfaction index/ Weights of categories 100 S overall satisfaction index
•weights
80
60
40
20 -
Product characteristics
Quality/Price ratio
Label Infonnation
Packaging
Market availability
Advertising
Service quality
Overall satisfaction
Figure 2. Average overall satisfaction index assigned to the seven macro-categories and relative weights.
Definitely insufficient was the value scored by the category "Advertising"; generally, customers complained that mass-media didn't put enough emphasis on organic-food advertising. Nevertheless, a small weight assigned to this category (6.2/100) showed that organic-food consumers are not greatly influenced by advertising. A greater effort in advertising would mean a positive signal towards increasing consumption. 3.2
Cross-examining scores of Overall Customer Satisfaction
As said at the beginning of section 3.1, respondents were asked to assign a percentage-weight to the seven macro-categories considered important for the formation of overall customer satisfaction. More precisely, respondents were asked to distribute 100 points among these categories keeping in mind that a higher score meant a greater importance to that category. In order to evaluate the consistency OCS, we ran an OLS regression model using all seven macro-categories as regressors: where OCS indicates overall customer satisfaction level deriving from
327
consumption, ftj the regressor coefficient to be estimated for the seven macrocategories and Si a stochastic error term. Regarding the seven macro-categories, they represent the following aspects: PC=product characteristics, gP=quality/price ratio, L/=label information, /^packaging, M4=market availability, ^4.0^advertising, SE=service. For those categories which include other sub-categories, as previously shown in Figure 1, the vector was formed using the average response obtained from the values that each consumer assigned to the sub-categories belonging to the same macro-category. The superscript "w" indicates that all values were weighted using the percentage-weight expressed by every customer. Results of the regression are shown in Table 1. Table 1. OLS regression - Consumer's satisfaction scores consistency Variable
Product characteristics Quality/Price ratio Label information Packaging Market availability Advertising Service quality
Coefficient 1.215 1.206 1.095 0.716 1.318 1.513 0.881
Note: N=169, R2=0.59, Significance level=5%;
Std. Error 0.068 0.158 0.194 0.254 0.262 0.546 0.178
Prob. 0.0000 0.0000 0.0000 0.0053 0.0000 0.0062 0.0000
All the coefficients considered in the model are significantly different from zero. This first result underlines that customers' answers were, on average, coherent with respect to the macro-categories presented, indicating also that these aspects play an important role in determining overall satisfaction. Moreover, a test to check omission of some variables was performed [2]; the null hypothesis H0 that the set of regressors do not belong to the equation was rejected at 1% of significance level (L.R.=276.68, d.f.=6). This indicates that the added variables contribute significantly to explaining the variation of the dependent variable. 3.3 Model Since the dependent variable has a natural ranking-order, it cannot be treated as a continuous variable and so the multiple regression model between OCS and other regressors using ordinary least squares produces inefficient estimates [3]. Considering that OCS has more then two levels, a suitable procedure for our estimation is a natural extension of a standard (binary) probit model. A model with these characteristics is defined as "ordered choice model" [4,5]. According to the theory, an ordered probit model can be generalized as:
328
y\ = P'xi + a
where y\ represents the latent variable, fi' is a vector of unknown parameters, xt a vector of explanatory variables and < is the stochastic error term standard normal distributed with n = o and
if y , */>„<.= <».
y = 2,
if fo &y' srv
y = \
if i\ * y\ *
y = 4,
if M^y'ti
^ = 5,
if ^ , - i s y',
M1
M,
where Ho to /% are unobserved thresholds that the latent variable must cross to change the value of y . In this case the first threshold parameter was normalized to zero. Considering that an ordered model is an extension of the binary model, probabilities that y will take a particular value is computed as follows: Pr(j, = l) = 0>(-A), PKy = 2) =
^
The log-likelihood function for a generic observation / is written as follows:
329
Aid
1
Lt=-^=U
J
7
l2
~\ i
\ e^ dzl
where integral limits are: l0 = -QO, /j = -p'xi ,l2= l^- P'xi J3= ju2- p'xi ,l4= /^ - P'xi and/5 = +oo . Only one of the five possible integrals presented in Equation (5) can be used for a generic customer, according with his/her assigned satisfaction level. If the indicated satisfaction level is equal to /' ei 1,2,3,4,5}- then D/(/=l,2,...,5)=l if j=i, and Dj(J= 1,2,...,5)=0 ifjrt. This way all the observations are treated as single so that the log-likelihood for all the observations will be equal to the product of each individual log-likelihood: N
L = UL 7=1
As written above, we are considering the overall customer satisfaction as a linear function of a certain number of regressors, while probability related to each score is definitely non linear, according to the log-likelihood function for a generic observation /'. 4
Analysis Results and Discussion
The main aim of the present research project was to identify the factors that had most effect on overall satisfaction in the consumption of organic products by the customers of 4 specialised retail outlets in Palermo. In the survey carried out most responses to the questionnaire can be considered as discrete choices and specifically as ordered variables. The overall satisfaction from the consumption of organic food was graded in five categories on a Likert-type scale (1-5), where 1 meant most dissatisfied, 3 neither dissatisfied nor satisfied and 5 extremely satisfied. In a recent paper [6] reporting some preliminary results of this survey on a smaller sample (150 respondents) of organic consumers in the city of Palermo, a Multiple Correspondence Analysis (MCA) was attempted in order to highlight potential patterns between several levels of categorical and ordinal variables. The exploratory analysis pointed out the presence of some possible organic consumer profiles characterised by the association between various levels of several qualitative variables, including overall satisfaction. Since this MCA did not provide any particular clues concerning the statistical associations between other variables and overall satisfaction, we decided in this
330
analysis to take into account only the variables which the respondents were asked to assess in the questionnaire, that is the potential drivers of the "overall satisfaction". Moreover, another variable was chosen for inclusion in the model, "reliability of certification", thought to be somehow related to the degree of overall satisfaction of the organic-food consumer. All the discrete variables had to be transformed into binary variables in order to make the interpretation of the results easier, as reported below: • • • • • • • • • • • • •
TASTE (TAS): 1 if satisfaction is high, 0 otherwise; (APP): is 1 if satisfaction is high, 0 otherwise; FRESHNESS (FRE): 1 if satisfaction is high, 0 otherwise; PRESERVABILITY (PRE): is 1 if satisfaction is high, 0 otherwise; QUALITY-PRICE RATIO (QP): is 1 if satisfaction is high, 0 otherwise; LABEL INFORMATION ON CERTIFICATION BODY (INFC): is 1 if satisfaction is high, 0 otherwise; LABEL INFORMATION ON PRODUCT CHARACTERISTICS (INFP): is 1 if satisfaction is high, 0 otherwise; LABEL INFORMATION ON PRODUCT TRACEABILITY (INFT): is 1 if satisfaction is high, 0 otherwise; PACKAGING (PACK): 1 if satisfaction is high, 0 otherwise; MARKET AVAILABILITY (MA): is 1 if satisfaction is high, 0 otherwise; SERVICE QUALITY (SE): is 1 if satisfaction is high, 0 otherwise; ADVERTISING (ADV): is 1 if satisfaction is high, 0 otherwise; RELIABILITY OF CERTIFICATION (RELC): is 1 if considered reliable, 0 otherwise. APPEARANCE
The criterion followed in the transformation of customer satisfaction-related variables (TAS, APP, FRE, PRES, QP, INFC, INFP, INFT, PACK, MA, SE, ADV) was the need to distinguish between responses showing a high satisfaction of consumers (4-5 ratings in the Likert-type scale) and those with low and sufficient satisfaction (1-2-3 ratings). From the whole sample of 197 customers of the specialised retail outlets, 28 questionnaires were dropped due to incomplete responses in the section related to consumers' satisfaction. The analysis through the ordered probit model was therefore carried out on 169 organic consumers. An ordinal regression with a backward elimination procedure was carried out starting from the model with 13 explanatory variables. This regression procedure ended up with a seven-factor model, producing parameter estimates through the Maximum Likelihood (ML) method. The model specification is linear and it is reported below: OCS=a+ prTAS + prAPP + p3FRE + p4QP + p5RELC + p6 INFC + prINFT + s;
331 The parameter estimates of the model are reported in Table 2. All the parameter estimates are significant at 5% level with the exception of INFC which is however significant at 10% level with a fair margin (its p-value is 0.0537, just slightly over 5% of significance level). The estimates of all the regression coefficients are positive, this indicate that they influence the OCS positively, in accordance with the hypothesis that these explanatory variables represent the key determinants of customer satisfaction regarding organic food. Table 2. Parameter estimates of the order probit model Variable
Coeff.
Taste (TAS) Appearance (APP) Freshness (FRE) Quality/Price Ratio (QP) Reliability of Certification (RELC) Label Information on Certification Body (INFC) Label Information on Product Traceability (INFT) Threshold parameters:
0.917 0.385 0.585 0.497 0.570 0.387 0.432
S.E. 0.262 0.191 0.215 0.209 0.208 0.201 0.213
Prob. 0.0005 0.0436 0.0065 0.0175 0.0061 0.0537 0.0424
0.510 2.576 4.362
0.248 0.155 0.175
0.0394 0.0000 0.0000
Hi V2 ^3
Note: N=169, Log-Likelihood value—150.94, Significance level==5%;
By the magnitude of the coefficients we observe the different impact of each variable on the OCS. We note that taste contributes substantially to the determination of OCS with a 0.917 coefficient, whereas appearance and information on certification body produce a much smaller impact on OCS (P around 0.390). The estimates of the thresholds parameters are significant at the 5% level and are positive; they also satisfy the constraint ^.3>\i2>^>0. The potential presence of multicollinearity was tested, but no real clue to such a problem was found. The only explanatory variables that appear to be dependent on each other from the correlation matrix, INFT and INFC, have a correlation coefficient of 0.44, which does not seem to be sufficiently high to cause any problem. The estimated coefficients show significant t-ratios, correct signs and plausible magnitudes. Besides, stability of the estimated parameters was tested at a 5% level of significance and our estimates remained robust even with a 25% random reduction of the observations. The significance of the variables incorporated in the model was checked by means of an LR test. The LR statistic, calculated by comparing the log-likelihood value for the full model and another log-likelihood value for a restricted model
332
(where all the p are taken as 0), has a %2 distribution with degrees of freedom equal to the number of the independent variables dropped out in the model. In the case of our model, LR was 78.43 and far larger than the critical value for 7 degrees of freedom (14.07), with a p-value<0.0000001; therefore the null hypothesis (H0) that all explanatory variables are not significantly different from zero is strongly rejected. The assessment of the model goodness-of-fit was carried out by means of different pseudo-R2 available for categorical models: McFadden R2 [7], Cragg & Uhler's R2 [8] and Count R2. McFadden's R2 is defined as [1 - (In L m / In Lr)]. It compares the likelihood for a restricted model (LJ to the likelihood for the full model with the explanatory variables (Lm). Its value can be as low as zero, but can never be equal to 1. In the case of our probit model, McFadden's is 0.21, which can still be considered as an acceptable result, considering that R2 values between 0.35 and 0.50 are an expression of high accuracy with which the model approximates the observed data. Cragg & Uhler's R2is a relative index defined as [l-(LI/Lun)2/n]/[l-(Lr/Lmax)2/n]; since it takes into account the limitation of the maximum value for the maximum likelihood R2, it can reach the value of 1. In our specific case, Cragg & Uhler's R2 took the value of 0.42. The Count R2 is the proportion of correctly classified observations and is obtained by comparing observed and predicted frequency distribution as illustrated in Table 3, where the cross tabulations allow one to quantify correct predictions by reading the numbers in the cells on the diagonal. The correct predictions made by our model concern 94 out of 169 observations, corresponding to a hit rate around 56%. Table 3. Cross tabulation of predictions
Actual 1 2 3 4 5 Column Sum
Row Sum 1 2 44 82 10 169
Y=l 0 0 0 0 0 0
Y=2 0 0 0 0 0 0
Y=3 1 2 21 13 0 37
Y=4 0 0 23 56 23 102
Y=5 0 0 0 13 17 30
We tested the model for the presence of heteroskedasticity using the Lagrange Multiplier Test [9]. The calculated LM statistic, ^-distributed with degrees of freedom equal to the number of the explanatory variables, was 12.77. The critical value for 7 degrees of freedom is 14.10, smaller than the LM statistic and therefore the assumption of homoskedasticity cannot be rejected.
333
The estimation of the marginal effects related to changes in the independent variables on the overall satisfaction was carried out aiming to assess the relative importance of each factor. The marginal effect in each level is the probability change of frequency distribution related to the increase of the score of each variable by one level (for binary variables the change from 0 to 1), keeping all other variables at their current levels. The results of data processing are reported in Table 4, from where it emerges that for Y equal to 1, 2 and 3 a unitary increase in one of the factors (explanatory variables) produces a negative variation in the probability of finding responses in that category. Table 4. Marginal effects for Ordered Probability Model
TAS+1
APP+1 FRE+1 QPR+1 RELC+1 INFC+1 INFT+1
Extremely dissatisfied
Dissatisfied
-0.46 -0.06 -0.13 -0.05 -0.01 -0.06 -0.05
-1.29 -0.22 -0.44 -0.21 -0.43 -0.02 -0.02
Neither dissatisfied nor satisfied -30.12 -10.98 -17.68 -12.96 -17.19 -10.97 -11.73
Satisfied
Most satisfied
16.11 1.95 5.40 -0.10 5.20 1.80 0.97
15.76 9.30 12.85 13.33 12.54 9.44 11.06
All thefiguresare in percentage notation (%) For Y equal to 4 and 5 the sign of the marginal effect was positive everywhere, with the exception of QP, for which the sign is negative but very close to zero (0.001). A more detailed description of marginal effects in quantitative terms can be summarised by pointing out the small influence of all the variables in category Y = 1 (extremely dissatisfied) where the largest marginal effect is -0.46% of TAS variable; this means that the probability of finding responses of total dissatisfaction would change insignificantly whatever variation in one of the independent variables. The situation for the segment of customers where Y = 2 (dissatisfied) was just slightly different in numeric terms, but on the whole similar to the previous category.. With regard to Y=3 (neither dissatisfied nor satisfied), we observe relevant marginal effects in the change of probabilities and in particular in relation to a change from 0 to 1 in the TAS variable (-30.12%), by far the most important among the factors included in the model; other factors affecting the OCS are FRE (17.68%) and RELC (-17.19%).
334
In the category of Y = 4 (satisfied), all signs are positive except for QP. The result means that a change from 0 to 1 in each variable would produce a higher probability of finding individuals in this category. Even in this case the largest marginal effect is related to TAS (+16.11%), followed at a distance by FRE (+5.4%) and RELC (+5.2%). In the segment of most satisfied organic-food consumers (Y = 5), all marginal effects are positive. The shifts in the frequency distribution would be upward in all cases; besides, the differences in numeric terms among the factors are reduced here. TAS, however, would produce the largest marginal effect of +15.76%, whereas QP, FRES and RELC would follow it closely with increases in the probabilities of, respectively, +13.33%, +12.85% and +12.54%. 5
Concluding Remarks
The adoption of an ordered probit model allowed us to analyse the overall satisfaction of customers at specialised retail outlets. The main aim was to identify the key factors in the definition of a global assessment of organic food supply in the metropolitan area of Palermo. From the analysis of the results in terms of marginal effects, it emerged that taste is the key lever in shifting organic-food consumers to the highest degree of overall satisfaction. The apparent importance of taste in the contribution to overall satisfaction suggests we should propose a possible path that could hopefully lead to increased satisfaction levels in a medium-term perspective. At present, most organic farms seem to pay less and less attention to consumers' preferences, and their market strategies do not differ significantly from those adopted by conventional farms. It is important that technical advisors make recommendations for management strategies and that economic operators try to convince farmers to adopt new market strategies. Such a strategy could be the implementation of territorial historical investigations aiming to identify the cultivars that over the years have adopted to the environment and have become suitable to the pedo-climatic characteristics of the various areas. Research could be directed towards the identification of production techniques that could lead to improving the taste of products, and therefore to a full appreciation of organic products. Among the other variables of the probit model, freshness and reliability of certification seem to be important in terms of marginal effects, especially in the segment of the extremely satisfied customers (point five on the Likert scale), but also in categories 3 and 4. One way of improving consumer assessment of freshness could be through the reorganization of the network of distribution of organic products which would
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enable customers to always find fresh products on the shelves. At present, supplies arrive once or twice a week with a consequent deterioration of the products. Reliability on Certification Body also shows quite a large influence (-17.19%) on customers from the category of Y=3; the magnitude of the marginal effect decreases when moving from the segment of "neither dissatisfied nor satisfied" to category "most satisfied". Quality-Price Ratio is also a key factor for level 5, but does not seem to play a relevant role in the other levels of satisfaction assessment. Appearance, Label Information on Certification Body and Label Information on Traceability, despite their significant estimates, proved to be rather marginal in shifting the distribution of overall satisfaction. According to these findings it would not be advisable to focus the attention of researchers, technical advisors and market analysts on customer assessment for these three factors, as they would probably not lead to adequate improvements in overall satisfaction. One of the aspects limiting the validity of our findings is the sampling bias that affected our survey. The respondents were limited only to present organic-food consumers and since most dissatisfied individuals are unlikely to remain as customers of organic specialised shops, their under-representation in the data probably led to a positive bias in the evaluation. Another limitation may be due to limited number of people involved in our survey. The skewed frequency distribution of satisfaction ratings on the upper end of the five-point scale also suggested that a seven-point Likert scale would probably have allowed us to collect more accurate assessments from the respondents. A final consideration which should be made, concerns the object of the survey: the overall satisfaction referred to the general consumption of organic products and therefore the responses of the interviewed might have been somehow affected. Ratings might have suffered due to the difficulty in judgement. The above findings are therefore an indication. Further detailed research is essential especially on homogeneous products in order to verify the role each factor plays inside each group and how it influences OCS. Once this information is available, we will be able to suggest ways of improving OCS. Acknowledgement The authors would like to thank all the shop owners for their help and kindness as well as the organic-food consumers interviewed during the survey who devoted part of their time to answer the questions, allowing us building up this paper.
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Note The research was carried out in collaboration by the authors. Individual contributions in writing this paper are identified as follows: A. Asciuto is responsible for section 4; F. Fiandaca is responsible for sections 3. The authors have jointly written the introduction, section 2 and concluding remarks. References 1. Peterson, R.A., Wilson, W.R., (1992), "Measuring Customer Satisfaction: Fact and Artifact", J. Academy of Marketing Science, Vol.20, pp.61-70. 2. Davidson, R., MacKinnon, J.G. (1993), Estimation and Inference in Econometrics, Oxford University Press, UK. 3. Kwenta, J., (1986), Elements of Econometrics, Macmillan Publishing Company, New York, NY. 4. Aitchison, J., Silvey, S., (1957), "The Generalization of Probit Analysis to the Case of Multiple Responses", Biometrika, Vol.44, pp.131-140. 5. Zavoina, T., McKelvey, W. (1975), " A Statistical Model for the Analysis of Ordinal Level Dependent Variables", J. Mathematical Sociology, Summer, 103-120. 6. Asciuto, A., Fiandaca, F., Guccione, G., Schifani, G., (2003), "II consumatore di prodotti biologici: primi risultati di un'indagine diretta nei negozi specializzati della citta di Palermo", Proceedings of 2nd Workshop sull'Agricoltura Biologica (GRAB-IT), Portici ITALY, 9-10May, (in-progress). 7. McFadden, D., (1974), "The measurement of Urban Travel Demand", J. of Public Economics, Vol.3, pp.303-328. 8. Cragg, J. G., Uhler, R., (1970), "The Demand of Canadian Automobiles" Canadian Journal of Economics, pp. 386-406. 9. Davidson, R., MacKinnon, J.G., (1984), "Convenient specification tests for logit and probit models," Journal of Econometrics, Vol.25, pp. 241-262.
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AUTHOR INDEX AL-HAJJM ARVANITOYANNIS 1
257 67
ASCIUTOA
321
BORGENS. 0
275
BRIZT
257
CHRYSSOCHOIDIS G
291
COSTAL
303
EVES A
205
FIANDACAF
321
FLATENO
275
GIRAUDG
191
GREYP
141
HANFJ.H
89
HOLTG
141
JERVELLA
275
JONAS A
157
JONES P
141
KRYSTALLISA
67
KUHLR
89
LINNEBERGM LUMBERS M MATTASK
1 205 37
MCCARTHY M
221
MCNAMARAK
127
MENDES A
303
MORGAN J
205
338
NASPETTIS
239
O'DOVONANP
221
O'REILLYS
221
REVOREDOC.L
51
ROOSENJ
157
SOTTOMAYORM
303
TACKEN G. M. L
105.
TRANTER R
141
TSAKIRIDOUE VESTERGAARDJ
37 1
VLIEGERJ.J
109
WEISS C
127
WITTKOPPA
127
YIANNAKAA
21
ZANOLIR
239
ZIGGERSG. W
173
ZOTOSY
37
Marketing Trends for Organic Food in the 21st Century The marketing of organic products is viewed as a significant link between the production side of the business and the consumers, thereby facilitating the distribution of these relatively new products. It has become obvious that companies can organize organic production and influence consumers' purchasing behaviour through the employment of appropriate marketing strategies. This book explores the marketing trends for organic food products through the analysis of those elements that contribute to the expansion of the organic product market. It will aid marketers in facing the challenges that the organic food sector will encounter in the future.
ISBN 981-238-768-4
World Scientific www.worldscientific.com 5481 he
