One of the most emblematic products in the Spanish gastronomy is olive oil. Spain is responsible for 51,3% of the EU olive oil production followed by Italy with 29,5%, Greece with 17,4%, Portugal with 1,6% and France with 0,2%. In fact, it is one of the most exported food products in the country. Since the financial crisis hit the world, and the domestic consumption decreased, Spanish companies have been forced to internationalize. In the case of the olive oil industry, it has been a great success and more and more entrepreneurs export Spanish olive oil nowadays. An example of this success is the following: in the early years of this century, exports of this product hardly reached 160 tons. In 2015 they exceeded 25,000 tons, 150 times in just three decades.
Although it is one of the most important products in the Mediterranean diet, “the liquid gold” or olive oil is being introduced in China, whose extraordinary economic growth has led to the emergence of a middle class with increasingly more international tastes. In the past decade (2004/05-2014/15) the growth of importation was the 792%. Ninety-six per cent of total imports come from European production with the leadership of Spain as origin country representing 81% of China’s olive oil’s imports.
Sector’s competition analysis : Porter’s five forces
In this post we analyse the level of competition in the olive oil industry, through the Porter’s Five Forces Analysis, which are: supplier power, buyer power, entry threat, substitute threat and rivalry.
1- Supplier power. The bargaining power of suppliers (in this sector farmers and oil producers) is quite weak. This is due to the small size of the companies, which leads to the existence of a large number of them, with high production costs and low competitiveness. The lack of cooperation between them negatively affects their bargaining power against the major distribution chains.
2- Buyer power. Buyers in this case are the large distribution chains. These few companies control a market with a huge demand, being able to influence the price. There is a threat of increasing their power by integrating backwards to form part of the production or packaging chain (especially white-label products).
3- Entry threat. The existence of entry barriers in the sector makes the threat of entry of new competitors low. One of them is the existence of economies of scale that large companies have in this sector. Other entry barriers are the large investment in facilities, machinery and technology to produce; the access to distribution channels, controlled by a few large companies, or the high customer loyalty to existing brands.
The geographical location is another barrier, since specific climate conditions are needed for oil production. In addition, most olive growers are already associated with oil-producing companies.
Finally, other factors that can make the entry difficult are the “Designations of Origin”, which legally protects the oil produced in an area, granting it quality recognition, and the community and national standards.
4- Substitute threat. There is a wide variety of substitute products on the market that threaten the olive oil, such as seed oil, soybean oil, pomace oil, sunflower oil or rapeseed oil. Its price is lower than the price of the olive oil, which implies a greater threat.
Despite this, products such as extra virgin olive oil or organic olive oil are seeing their demand increase due to the awareness of the population for the ecological products of higher quality and the care of the environment.
5- Rivalry. The level of concentration in the olive oil industry is low, ie there are a large number of companies with small market shares. It is a mature and slow growing sector. However, due to the increase in demand in non-traditionally consumer countries, we consider it a profitable export sector.
Prospects of olive oil industry in the world
The EU is the world’s biggest consumer (66% share). Spain, Italy and Greece account for around 80% of EU consumption, 1 900 000 tonnes to be precise. Consumption seems to be stable in the producer countries, whereas it is increasing in France and in the non-producer Member States. Two thirds of EU production is traded internationally (within and outside the EU). Trade within the EU is considerable and continues to rise steadily. From an international point of view, the biggest markets are the USA, Brazil, Japan, Australia, Russia and China. Imports of olive oils between October 2015 and February 2016 grew 22% in China but remained unchanged in the United States, according to the International Olive Council (IOC).
According to the Analysis of supply/demand based on a medium-term view of oil production in the EU, the projection for 2020 shows that production could reach 1.86 million tonnes for a high-yield season. The irrigated land area could increase by 90 000 hectares (from 681 000 hectares in 2011 to 771 000 hectares by 2020). The projection is also encouraging for exports in 2020, due to a further increase in the total exports by more than 180 000 tonnes. For this reason, we consider that olive oil is likely to be one of the most profitable export sectors for Spanish entrepreneurs.
What is the situation in Spain?
As a matter of fact, the cultivated area in Spain is more than a quarter of the world’s olive-growing area, which occupies 2.584.564 ha of the country. The olive oil industry represents 5% of the Spanish agri-food companies and the production of over 260 olive varieties offers many combinations and flavors. The Spanish market is composed by 1.570 olive oil’s companies and the sales are divided 50% between national market and international market. Nowadays, Spain is exporting olive oil to more than 180 countries in the world, both in bulk and packaged. This means that Spanish olive oil is increasingly being considered high quality product. The main destinations of the packaged exports are USA, France, Portugal, United Kingdom, Australia and China.
The above graph shows the production of olive oil in the main regions of Spain. Andalusia, Spain’s southernmost peninsular olive oil producing region, represents about 80 percent of Spain’s total olive oil production, followed by Castile-La Mancha with a 8 percent share of domestic production.
Olive oil is considered a very healthy product. This is also thanks to comprehensive quality controls, which entail higher costs that raise the price of the “liquid gold”. This has been a problem for retailers in recent times, because they could not lower the price of the product without incurring losses. As far as the Spanish production is concerned, barely half of it goes for domestic consumption, which is increasingly being bypassed by exports. However, higher amounts are being exported in bulk than under brands.
If we analyze the Spanish olive oil industry’s internal structure, we will find that it is organized in highly stratified operational levels of activity, which are very specialized and efficient. However, the functional relations between immediate levels are difficult and complex. That is why the large business groups are implementing vertical integration strategies by creating alliances in the subsequent links of the chain or by purchasing companies with well-positioned brands on foreign markets.
Although the olive oil market in Spain is saturated and the consumption is stable in the biggest producer countries there is an increasing demand in emerging countries like Brazil, Russia and China and in USA, Japan and Australia.
Globally, olive oil production and consumption remain balanced. Hence, any potential increases in production must drive equivalent growth in demand through intensified efforts to promote consumption of Spanish olive oil. The projection is also encouraging for exports in 2020, due to a further increase in the total exports by more than 180 000 tonnes. For this reason, we consider that olive oil is likely to be one of the most profitable export sectors for Spanish entrepreneurs.
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