In this post, a group of students studying a Master’s in International Business Administration (MaDI) at Carlos III University – Madrid, talk about the Spanish orange industry in regards to exportation. 

The Spanish orange and its popularity

Spain, in addition to being the 17th largest export economy in the world, is furthermore the most important orange exporter in the world with a share of 27% in 2016 which accounted for a value of $1.2 billion. According to the USDA Foreign Agricultural Service, the expected growth in Spain compared to the previous year is 20% in 2017 due to in part by the ideal climatological forecast which will lead to an overall growth of 3,3% for the EU-28 in citrus production.

The primary regions of orange production in Spain are the autonomous communities of Valencia, Andalusia, and Murcia. However, it is Valencia and Andalusia which account for 90% of the total production. The main importers of fresh, Spanish oranges in the European Union are France, Germany and the Netherlands. In addition, the months in which oranges are a very popular fruit are the cold winter months between November and March. This is unsurprising as many countries with colder climates favor fruits with a high concentration of vitamin C in the winter months. On the other hand, the export market has expanded since 2014 to countries with more tepid climates like Canada and China or even desert climates like Saudi Arabia.

Spanish orange: product to sale


Analysing the Spanish orange industry with Porter’s Five Forces

In the following section of this post, we will analyze the Spanish orange industry with the concept of Michael E. Porter’s five forces.

The Spanish orange: what are its Substitutes? The threat of the substitution of orange consumption depends on various factors; although, most importantly on the season of consumption; whether it be the cold months of fall and winter or the warmer months of spring and summer.

As we can see, the health benefits of oranges are traditionally favored during the winter months; they are seen in many cultures as a home-remedy for winter ails. Even though some studies have only confirmed a reduction on the length and severity of the symptoms.

In contrast, the threat of substitution during the spring and summer months in which the weather is warmer and the availability of other fruits with high hydration levels such as watermelons, peaches, and melons, is much higher.

Furthermore, because of the wide variety of oranges produced in Spain, such as sweet, bitter, and seedless, these in themselves can act as substitutes for one another. In addition, even trendy, online diets can threaten the everyday consumption of oranges; many other types of juices such as those with vegetables and leafy greens have become popular amongst bloggers and pinners. Finally, consumers may choose a potential substitute based on the price of oranges at the moment of purchase. Of course, the purchase price is defined by whether if not it is in season and if the production during that season was bountiful or scarce.

The Spanish orange: who are its Suppliers? A saturated market, a non-differentiated product, a long supply chain with many agents, and the dominance of wholesalers translates to a low bargaining power of suppliers.

Firstly, oranges are not a unique or differentiated product, nor do the need a specific technology or expertise in order to grow. Secondly, although the current market is saturated with large scale and small scale producers, there are nine major wholesalers who currently dominate the market and are extremely well positioned and established. Thirdly, the availability of substitute products negatively influences the suppliers already low bargaining power. Most importantly, however, is that because the suppliers are at the bottom end of the chain and the distribution must go through many other agents, suppliers often receive the lowest market price so that the wholesalers can make a healthy profit.

Given that supermarkets are the dominant retailers and 47% of groceries are bought there, the suppliers have little room to negotiate prices with such corporations. Buyers have the ability to orient demand and, therefore, to determine the price productive strategies of the primary production and manufacturing industries, even though it is the cooperatives which play a role in guaranteeing the output and quality of the products. Finally, the fact that orange production is at the mercy of weather conditions makes them a price sensitive commodity.

Spanish orange: chart

*Facturación total de todas sus líneas de productos.
Source: “Análisis del sector citrícola español” 2014. Cátedra Cajamar de economía y agroalimentación, Univ. de Almería.

The Spanish orange: are there new entry threats? The threat of new competitors pose to existing competitors in the orange industry is very low because the barriers of entry are very high for both logistical and financial reasons.

In order to enter this industry, a high capital investment is essential so as to first buy large plots of land (citrus plantations allowed for economies of scale and greater varietal diversification) and then to buy the machinery and technology necessary for the production and quality control. In addition, quality certifications and licenses are also quite costly. On the other hand, the switching costs from one supplier to another are low, due to the high availability of them.

Furthermore, it would be nearly impossible for a new entrant to have an equally favorable and established relationship with buyers and suppliers who provide other resources.

The Spanish orange: does the buyer have the power? In many cases, the bargaining power of buyers and suppliers are two sides of the same coin. Product buyers tend to demand the lowest purchase price possible, and thus putting increased pressure on the producers themselves to keep the price of production low in order to be profitable. Due to the fact that there are many producers, both nationally and internationally, buyers are free to look for the best deals amongst the producers and decided which they are going to buy from. Therefore, the power of producers is low and the power of buyers is extremely high.

The buyer’s power is also characterized by a high pressure on suppliers (prices and payment terms). Therefore, certain buyers such as hypermarkets, discount stores and cash & carries, have opted for the development of white brands with lower prices. The results to date are that neighborhood stores and traditional street markets account for almost 50% of sales.

Spanish orange

Source: “Análisis del sector citrícola español” 2014. Cátedra Cajamar de economía y agroalimentación, Univ. de Almería

The Spanish orange: is there rivalry? The rivalry among existing competitors is absolutely high. There are many existing national and international competitors, especially South Africa, Egypt or Italy. New exporting countries are also coming up with a rapid growth such as Hong Kong (+63%) and China (+31%). This results In new exporters competing with traditional ones. The European market is also the largest importer of oranges and therefore very important to many exporters.

mage 4

The share of countries that export oranges, fresh or dried.
The Observatory of Economic Complexity

The demand is high and the overall industry is increasing; however, the Spanish orange industry was affected by the following factors:

Firstly, the new SATC-EPA trade agreement between the European Union and South Africa in late 2016, which facilitated the citrus trade within Europe and made South Africa an even bigger competitor.

Secondly, the veto from Russia against perishable goods in the context of sanctions by some EU countries against the Russian’s actions in the Ukraine in 2014. This veto mostly affected the citrus exports to Russia and led to losses. Additionally, Spain was forced to open up new export markets like Canada or China to compensate for the loss of the Russian market.

Thirdly, the free trade agreement CETA strengthened Canada as an orange exporter.

The Spanish orange industry: a Conclusion

In conclusion, based on this analysis we can surmise that the orange market is unattractive due to low supplier power, high buyer power, high threat of substitution and competitive rivalry. That being said, oranges are a product whose popularity is growing steadily across all continents and is sure to never be banished from the dinner table of millions of homes worldwide during the winter months. It is a very sweet industry for buyers, but a competitive, bitter one for suppliers.