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Citrus Industry: Competition In Beverage Market Is Growing
Lakeland Ledger – September 6, 2011
HAINES CITY | While Florida citrus growers finished a second consecutive profitable season in 2010-11, the industry must deal with two troubling long-term economic trends — too much competition in the beverage market and not enough competition among supermarket chains.
Facts
“I just have to look at my kids, and they’re drinking isotonic drinks, flavored water and other beverages not available then. There’s been a proliferation of other beverages.”
Bob Norberg, deputy executive director of the Florida Department of Citrus.
“I think the challenges from other beverages is important because we’re losing shelf space,” said Jay Clark, a Wauchula grower and member of the Florida Citrus Commission. “Just walk around the supermarket, and you have to walk around the Sunny Delight to get to the orange juice.”
If both trends continue apace, growers will feel the effects in their pocketbooks, citrus industry economists agreed.
The issue is particularly important for Polk County, which leads the state in citrus production. In the 2009-10 season, Polk groves produced with 27.9 million boxes of all fruit varieties. That’s out of a total 159.3 million boxes statewide. It was also the top orange grower at 24.5 million boxes out of 133.6 million orange boxes statewide.
MORE COMPETITION, LESS CLOUT
Orange juice, Florida’s leading citrus commodity, is losing sales and market share to competing beverages ranging from juice blends, which are mixtures of two or more 100 percent juices, and bottled waters, which include plain spring water, flavored water products and nutritionally fortified waters.
Florida supplies more than 80 percent of the orange juice sold in the U.S. and Canada, and declining OJ demand means less demand from Florida’s juice processors, who buy 95 percent of the state’s annual orange crop, thus lower farm prices to growers.
Meanwhile, consolidation among the major U.S. supermarket chains is making it harder to get the kind of visible shelf space that attracts consumers to a product.
“When the outlets are more concentrated, you get less leverage in selling your product,” said Bob Norberg, deputy executive director of the Florida Department of Citrus in Bartow and an economist.
Consolidation has also given retailers more power to set retail and farm prices, leaving many Florida growers and processing companies to complain they are “price takers, not price makers.”
LESS CONSUMPTION
U.S. households clearly don’t buy as much orange juice as they did even 10 years ago.
During the 2000-01 citrus season, total OJ sales rang up at 888.7 million gallons, according to the Florida Department of Citrus. The season runs from October to September.
Total sales declined in nine of the next 10 seasons, rising only a meager 1 percent in 2008-09. The decline resumed in 2009-10, the last full season for sales figures, to just 608.1 million gallons, or 31.6 percent less than 2000-01.
Through Aug. 6 with less than two months left in 2010-11, total U.S. orange juice sales fell 7 percent from the previous season to 483.5 million gallons.
U.S. orange juice consumption per person during the last 20 years declined from a peak of 5.8 gallons per capita in 1997-98 to just 3.8 gallons in 2009-10, according to Tom Spreen, a University of Florida agricultural economist and leading authority on Florida citrus.
While many other economic factors had a role in declining OJ sales, spikes in retail prices following the crop-destroying hurricanes of 2004 and 2005 played a part, as did the increase in competition in the beverage sector.
“I just have to look at my kids, and they’re drinking isotonic drinks, flavored water and other beverages not available then. There’s been a proliferation of other beverages,” Norberg said.
In a recent five-year period, American beverage companies introduced 3,700 new products in the U.S., or a 29 percent increase, he said. Leading the way were sports drinks, up 112 percent; ready-to-drink iced tea, 107 percent; and bottled water products, up 63 percent.
BIGGER CUSTOMERS, LOWER PRICES
The other key long-term trend making it harder to sell orange juice is consolidation of the supermarket industry into a handful of giant companies.
“The consolidations started in the late 1990s and basically followed the growth of the Wal-Mart supercenters,” Norberg said. “Other supermarket chains, such as Kroger and Safeway, responded.”
In 1998, the top five U.S. food retailers — Kroger, Albertsons, Wal-Mart, Safeway and Ahold USA (including Stop & Shop and Giant) — had a 34.7 percent share of the domestic market, and the top 10 retailers (including Publix and Winn-Dixie) had a 50.4 percent share, said Allen Morris, an economist at the Citrus Research and Education Center in Lake Alfred.
Ten years later, the top five retailers had a 55.7 percent market share, led by Wal-Mart at 29 percent, he said. The top 10 retailers had 68.5 percent of the market.
The consolidation has reversed the traditional power relationship between suppliers and retailers, the economists agreed. That includes not only the power to allocate shelf space but a growing retailer influence over product prices.
“This is bad news for Florida growers,” he said in an unpublished paper Morris provided to The Ledger.
“Competition to lower retail prices is less than it used to be, consequently, price declines in response to lower fruit prices take longer.”
TRY AND DRIVE DEMAND
As an example, Morris cited the years following the 2004 and 2005 hurricanes. Fearing fruit shortages and supply disruptions, Florida citrus juice processors in the 2006-07 season bid up the farm prices for oranges, which account for about 30 percent of the retail price, Morris said.
“Florida’s crop partially recovered in the following season and fruit prices declined, but retail OJ prices remained high. The result during that and the next season was low OJ consumption, high and increasing OJ inventories and low cash market fruit prices, below growers’ break-even costs,” he said.
“Retailers were increasing their profit margins at the expense of Florida citrus growers.”
Retail OJ prices finally came down in 2008-09, leading to the 1 percent increase in sales that year, Morris said. But before industry consolidation, retail prices responded much more quickly to farm prices.
“Given the inherent weather-induced volatility of citrus prices, when (farm) prices go up, so will retail prices. But when fruit prices decline, it could take retail prices as long as two years to decline,” Morris said in his paper.
“There’s nothing the citrus industry can do to shorten the lag time between fruit and retail price declines.”
Instead, Florida citrus needs to respond by increasing consumer demand for orange juice through the Citrus Department, he said. That would include both the traditional OJ television ads and an enhanced marketing push at the supermarket level.
The industry needs “an OJ advertisement that is more effective by showing consumers why OJ is different from other beverages and why that difference has value. And restoring a merchandising effort that covers the majority of the retailers,” he said.
“We can control our destiny.”
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