Europe prepares for economic storm

The international marketing magazine for fresh produce buyers in Europe
Mike Knowles

BY MIKE KNOWLES

@mikefruitnet

Europe prepares for economic storm

The current global economic environment represents both an opportunity and a threat to different facets of the region's fresh produce industry

Europe prepares for economic storm

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Expansion projects currently underway at two of northern Europe’s largest fresh produce shipping hubs, Antwerp and Rotterdam, say a great deal about the journey which the region’s fruit and vegetable market has been on during the past few decades and where it might be heading during the next decade. As the European appetite for year-round supply has increased, the need to widen river entrances to these Belgian and Dutch ports gives an idea of just how voracious we have become as consumers not just of fruit and vegetables from overseas but of a range of imported products and commodities from aircraft to zinc.

But for fresh produce importers in northern Europe, the signs are not all positive. For a start, consumption among the EU-27 appears at best to be stagnant, with recent decreases seemingly part of a broader downward trend. In 2006, according to Eurostat figures presented by Freshfel Europe’s Consumption Monitor 2007, total gross supply of fresh fruit in the European Union stood at 107.22kg per capita, compared with an average of 108kg for the previous six years. For vegetables, the decline is even more apparent, with total gross supply slipping to 98.27kg per capita in 2006 against 103kg for 2000-2005. Although a recent study published by the FAO suggests obesity is becoming a bigger cause for concern in Mediterranean countries, particularly Greece, Italy, Spain and Portugal, it is in northern Europe where the battle to improve public health by boosting fresh produce consumption is in the gravest danger of being lost. Of the 21 EU countries monitored by a recent Eurostat study into per-capita supply of fresh fruit and vegetables, the UK had the lowest availability, while Belgium and Germany were also in the bottom five. The arrival of various EU-sponsored promotions, such as the proposed school fruit and vegetable scheme, cannot come quickly enough.

Northern Europe’s overseas fresh fruit and vegetable supply is also being stretched by increasing demand in other parts of the world. As recent shortages have shown, the Russian market in particular has the potential to place added pressure on Europe’s already scarce resources, resulting in rising prices. The UK’s largest supermarket operator Tesco recently put its banana price up for the first time in over a decade, while UK consumers are currently having to choose between paying €0.60 for a lemon or finding something else to put in their gin and tonic. This year, for the first time, China has become a net food importer; rather than being seen by European producers as a competing supplier, the Asian giant is increasingly being viewed as a competing market in its own right. Alongside India and Brazil, a rise in China’s consumer spending power over the next couple of decades has the potential to divert more and more of the products we have assumed were ours away from northern European shores.

Crunch time

With the EU economy slipping into recession, reaction across northern Europe to what is in fact a global credit crunch may perhaps come to be seen as this year’s most important consumer trend. Some see it as a threat to fresh produce sales, but for others it will be an opportunity to develop new niches and build market share. The biggest winners, at least in the next couple of years, are likely to be the retailers who pursue a discount model that for so long has been associated closely with the German market. The discount phenomenon is now spreading across northern Europe, albeit from a small base, with growing concern among consumers about the struggling economy prompting them to rein in their spending and be more careful about what they buy.

Germany’s two largest discount chains, Aldi and Lidl, achieved significant growth during the first half of 2008, according to GfK figures, with Aldi registering a 7.2 per cent rise in sales and rival Lidl enjoying a 13.2 per cent upturn compared with the same period of last year. The reaction of Edeka, Germany’s largest food retailer, has been telling: at the beginning of July the company was given the go-ahead to take over the Plus chain of stores owned by Tengelmann, enabling it to develop and extend its Netto chain to become a major discount retailer of fresh foods across the country.

In the UK, meanwhile, Aldi and Lidl are enjoying their best ever period of growth as previously carefree consumers begin to adopt a more cautious approach to spending. According to market research group TNS, Aldi increased its share of the UK market by 0.4 per cent to 3 per cent overall for the 12 weeks ended 10 August, with Lidl’s market share growing 0.1 per cent to 2.4 per cent overall during the same period. Despite a series of price cuts, notably on organic produce, Tesco saw its share fall 0.2 per cent to 31 per cent for the three months, while Sainsbury’s slipped 0.3 per cent to 15.8 per cent. Asda and Morrisons, backed by strongly price-driven campaigns, both saw a 0.2 per cent increase in market share, to 17 per cent and 11 per cent respectively.

One notable casualty of the UK’s spending slowdown has been Whole Foods, which at the beginning of August announced it had made a loss of €11.9m during its first year operating a full-size store in the market. Analysts suggested that consumers living in the vicinity of Whole Foods’ solitary outlet in west London were turning to cheaper retailers such as nearby Tesco, Marks & Spencer and Waitrose. Of course, Whole Foods represents the absolute top end of the food retail market – the fact that Marks & Spencer and Waitrose should ever be referred to as “cheaper” says a lot about how expensive its offer really is – and if it were not for the credit crunch stirring concerns over the economy, then perhaps it wouldn’t have fared so badly.

For some observers, the economic gloom could actually provoke increased spending on foods such as fruit and vegetables as consumers cut back on bigger, luxury items like holidays, televisions and so on. During the last recession in the UK during the early 1990s, Marks & Spencer’s premium food offer fared well because British consumers felt more inclined to treat themselves. For some people, cutting down from two holidays per year to just one enables them to free up more money and spend it on special ‘treat’ items like champagne, asparagus and strawberries.

Brand resilience

So where does this leave the fresh produce industry’s major brands? Judging by Del Monte’s recent decision to scale back its banana operations in the UK after refusing to keep lowering its price when re-tendering for a contract with Asda, the market for branded fruits and vegetables is under more pressure than ever. But in Germany, wholesale markets association GFI has signed new partnership deals with leading marketers to promote brands such as Pink Lady, Zespri and South Tyrolean apples, suggesting brands can still derive added value from certain areas of the market.

In the case of Zespri, the decision by several UK retailers to begin stocking its branded kiwifruit once again following a number of years out in the cold also suggests there is still a great deal of value for the big supermarket customers to gain by selling fresh produce that carries a brand. The company unveiled a new television advertisement in Germany this summer, alongside promotional activities in a number of northern European countries such as Belgium, Holland and Sweden, and with sales of Zespri Green and Zespri Gold up by 30 per cent and 11 per cent respectively up until mid-August, the results of its marketing investment have been extremely positive.

Fairtrade is another brand that appears strong enough to weather the economic storm. According to a recent report by research and consulting group Organic Monitor, demand among northern European shoppers for ethically sourced and environmentally friendly fresh produce has boomed significantly, with over 5 per cent of all fruit and vegetables sold in countries such as the UK, Germany and Finland during 2007 certified either as Fairtrade or organic.

Despite the difficult trading conditions faced by those who market fresh fruit and vegetables in northern Europe, there is still much to gain from a sector where opportunities to grow market share are by no means disappearing completely. But as pressures on supply from food safety and availability increase and as spending power grows over the next few months, companies will need to convince consumers and retailers alike that the amount they pay for their fruit and vegetables can be rewarded with better quality and value. The ultimate challenge will then be to deliver on that promise.

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