Market segmentation and willingness to pay for organic products in Spain

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Abstract

In recent years, consumer concerns on environmental and health issues related to food products have increased and, as a result, the demand for organically grown production has grown. Higher costs of production and retailer margins generate a gap between real prices and those that consumers are willing to pay for organic food. In this article, consumer willingness to pay for organic food in two Spanish regions is analyzed. Markets in both regions are segmented considering consumers lifestyles. Results indicate that consumers concerned about healthy diet and environmental degradation are the most likely to buy organic food, and are willing to pay a high premium. Organic attributes are easily identified in perishable products as the premium consumers would pay for organic meat, fruits, and vegetables is higher.

Introduction

Food consumption in most developed countries has attained a saturation point in quantity terms, and consumer food choices are broader than in the past. The result is more diversified consumption. In this saturated market environment, distribution channels, marketing activities, diversification strategies, and food quality are increasingly important. In addition, consumers have become more concerned about the nutrition, health, and quality of food they eat. The increasing importance of health and the impact that food production has on the environment and consumer food choice is well documented in the literature Jolly et al 1989, Jordan and Elnaghebb 1991, Oude Ophius 1991, Baker and Crosbie 1993, Grunert and Juhl 1995, Kleijn et al 1996, Viaene and Gellynck 1996, Chumpitaz and Keslemont 1997.

As a consequence, production and consumption of organic products has grown in recent years. The number of papers which have been devoted to the study of organic food markets has increased (Lampkin 1989, Beharrel and Macfie 1991, Mills 1992, Tregear et al 1994, Lin et al 1996, Vetter and Christensen 1996, Thompson and Kidwell 1998; among others). Organic farming refers to a farming system which uses organic manure, and avoids or largely excludes the use of synthetic fertilizers, pesticides, and chemicals. A recent study carried out by FAO (1998) has shown that adequate management of organic farming generates a positive impact on the environment (e.g., reduction of water “contamination,” increased soil fertility because of crop rotation). On the demand side, consumers have positive attitudes towards organic products, since they perceive them as healthier than conventional alternatives (Beharrel and MacFie, 1991).

In the case of Spain, although the production of organic food products has considerably increased during the past decade, demand is still very low, as only 0.5% of food expenditure is allocated to such products. The main obstacle with organic production seems to be the difficulty in selling organic products in retail food markets. Although consumers search for more diverse, higher quality, and healthier food products, organic products face problems related to consumer product acceptability <new product, high price, and deficiencies in distribution channels (Roddy et al., 1994). On the production side, high costs, especially labor costs, and the difficulty of shifting from conventional to organic farming are also limiting factors Vetter and Christensen 1996, Hamiti et al 1996. Furthermore, food availability and seasonality influence marketing activities, and make it difficult to establish appropriate retail outlets. Higher costs of production and retailer margins jointly may result in higher prices than consumers are willing to pay for organic food attributes.

The objective of this study is to estimate the willingness of different consumer segments in Spain to pay for organic products, to assess alternative price strategies carried out by producers. From other studies, it was expected that consumers would be willing to pay a premium for organic products. This expectation is based on the idea that these products are healthier, and may diminish negative environmental effects associated with conventional agricultural production. To expand the scope of our results, in this study we have considered a wide range of food products: (1) vegetables, (2) potatoes, (3) cereals, (4) fruits, (5) eggs, (6) chicken, and (7) red meat.

Among the different methodological alternatives to assess consumers willingness to pay, the contingent valuation (CV) approach was chosen Hanemann 1984, Hanemann 1987. Although CV is a method primarily used for monetary evaluation of consumer preferences for nonmarket goods (e.g., unpriced natural resources), it is also useful in this context because the organic market is still too “thin,” and organic products are not available in all retail outlets.

The paper is organized as follows. In the next section, some descriptive statistics on the evolution of organic farming in the European Union (EU) and, particularly, in Spain are shown. A brief description of the survey instrument used is then provided in the following section. Next, consumer market segments based on consumers’ lifestyles are defined and characterized, taking into consideration both socioeconomic characteristics and attitudes towards organic food products and environmental concerns. This is followed by calculations of the willingness to pay of each segment and by product. A brief outline of the theoretical foundation of the CV method is also included. Finally, some concluding remarks are outlined.

Section snippets

Relative importance of organic agricultural production in the European Union and Spain

Land under organic farming in EU countries has dramatically increased from 425,000 ha in 1992 to 2.9 million ha in 1999 (Table 1). Although the area has grown sevenfold, it still represents only 2.2% of total cultivated agricultural land. The proportion of land devoted to organic production on total cultivated land varies from country to country. The highest values are found in Austria (8.4%), followed by Finland (6.3%), Denmark (5.5%), Sweden (5.5%), and Italy (5.3%). The lowest are found in

Data

The data used here come from a survey conducted in July through August 1997 in two Spanish regions: Navarra and Madrid. Navarra was selected not only because it is one of the most important producing regions in Spain, but also because it produces a wide variety of organic food products. Madrid is one of the most important regions, together with Cataluña, in terms of organic food products consumption.

Samples in both regions were selected using a stratified random sample of food buyers on the

Market segmentation for organic food

As mentioned above, the first step in this study was to group consumers into homogeneous clusters. Consumers were segmented according to their lifestyles because previous research has shown that the willingness to pay for an organic product might be influenced by individual ways of living rather than by the usual socioeconomic variables (Hartman and New Hope, 1997). Once the market segments were obtained, they were characterized, taking into account both consumers’ socioeconomic characteristics

Willingness to pay: the contingent valuation method

Consumers willingness to pay (WTP) for organic food products is measured using a direct valuation method: contingent valuation (CV). A mixed questioning procedure, normally called closed-ended with follow-up, was used. This procedure consists of a dichotomous choice (DC) question and a maximum WTP question. In the DC question, consumers are asked whether or not they are willing to pay a premium, Ai, to buy an organic food product instead of a conventional one. The amount Ai is a percentage over

Conclusions

Organic farming practices are becoming increasingly popular among producers, although they still represent a marginal share of arable land. New possibilities of obtaining subsidies within the Common Agricultural Policy has favored a rapid growth of organic production, although a high percentage is devoted to pastures. On the demand side, increased concerns about health, diet, and environmental deterioration have, at least among some market segments, stimulated the demand for organic food.

In

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