Organic Food Sector in Egypt: Industry Analysis
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Organic food sector in Egypt: Industry Analysis Executive summaryPlans for agricultural development require sophisticated high-level equipment that few Egyptian companies are able to supply. The Egyptian agriculture and food market is very promising with estimated growth rates of 15.5% year-over-year till 2017. The organic food production sector is expected to grow more with increasing export to the EU countries as long as it meets the standards set by the EU seizing the competitive advantage of the strategic geographic location; being near enough to maintain the freshness of the sensitive organic vegetables. The Porter five-force model shows that there is a rivalry among competition with the growing growth of the industry with opportunities for new entrants, however the economies of scale is a competitive advantage. The bargaining power of consumers is present and affects profitability. The bargaining power of suppliers is not that influential on SEKEM due to the backward integration policy it follows.Introduction:The agriculture sector contributes about 14% of GDP and it ranks the 3rd among the most important sectors behind manufacturing and energy.  Approximately one- third of Egyptian labour is engaged in farming.  A large number of people are engaged in the fields of processing or trading agricultural product. 37% of the income of Egyptians is spent on food & tobacco. Food consumption is increasing at a steady rate of 10% per year. Egypt’s strategic geographic location enables it to have an excellent access to the states of the Gulf Co-operation Council (GCC), the Common Market for Eastern and Southern Africa (COMESA), and the European Union (EU) member states. This strategic location is one of the reasons that make Egypt as a strong export base.Agricultural production is very wide in Egypt and due to the climate crops harvest up to three times a year. This explains why Egyptian crop yields are among the highest in the world. The government invests heavily in enlarging its cultivable land and there are plans to increase it by 25% over the coming twenty years.Organic agriculture has started in the 30s and 40s of the 20th century only in the developed countries. Over the last ten years organic agricultural production has experienced a substantial growth due to the increasing demand of some countries consuming the local organic products. In 2006 organic foods were consumed commercially in 120 countries representing 31million hectares – 0.7 % of global agricultural lands and an average of 4% in EU-,  and a market of US$40 billion- 2% of food retail in developed countries. In 2010, the lands allocated to organic food production increased about 30 million hectares with an annual growth rate 30%. Moreover, the market value of this sector increased by US$35 billion of which the EU occupies 46% and North America occupies 51%. In Africa, there are about 600.000 hectares of organic agricultural land. Those areas amount to nearly 1% of the world’s agricultural land. Egypt ranks the third in Africa after Tunisia (154,793 hectares) and Uganda (88,439 hectares).SEKEM is a leading company in the organic food industry. As per the ancient Egyptian language, the word SEKEM means vitality from the sun. It was founded by Dr. Ibrahim Abouleish to support a three-element mix; the development of the individual, society and the earth. SEKEM group includes eight companies: Libra for farming, Mizan for organic seedlings, Hator for fresh fruits and vegetables, Lotus for herbs and spices, Isis for organic foods and beverages (such as bread, dairy products, oils, spices and tea), Conytex for organic cotton and textile fabrics, Atos for pharmaceutical products, and Ecoprofit (under establishment) for sustainable management. Hereafter, an analysis of the organic food sector will be run using the Porter five-force model of competition.
Competitive Analysis: Porter’s Five-Forces ModelPotential development of substitute productso[pic 1]Rivalry among competing firmsBargaining power of  consumersBargaining power of suppliers[pic 2][pic 3][pic 4]Potential entry of competitorsRivalry among competing firmsLocally nearly all competitors in this industry are following the same structure and same strategy. However, the intensity of the rivalry among competitors increases in proportion to the number and size of competitors. Internationally, there is a substantially strong competition because importers resort to some other countries to source their needs and at the same time get a better quality and standards. Moreover, the small fragmentation of lands does not allow for economies of scale so new entrants can get into this sector. Yet there are a few large growers who achieve modern irrigation systems, new seeds, and modern facilities for drying and harvesting. Low production costs of organic products in competing countries such as African and Latin countries work as a serious threat of competition.There are about 60.000 hectares committed to organic production in Egypt and this represents about 0.27% of total cultivated lands. The organic agricultural land in Egypt is almost doubling each five years; 4,020 hectares in 1983, 9,342 hectares in 2003, and 19,211 in 2011 till it reached around 60,000 in 2014.  The organic production has a very low market share in the local market because producers prefer the large profits they gain when they meet the standards of the European and the international export markets.The organic agricultural export was increasing tremendously before 2011 revolution with nearly 50% increase from 2009 to 2010. The following chart shows the Egyptian export market trend in US$ mn:[pic 5]Processing industry ofvegetables and fruitscomprises a large part of vegetable and fruit production. The growth rate of this processing subsector is 34 % where jams, juices, concentrates and dehydrated or frozen vegetables are the most popular products. 37% of the investment in this subsector comes from foreign companies. Moreover, 92% of equipment used for processing vegetables is imported.The bargaining power of consumersAlthough Egyptian organic products have a high demand in export markets and in some cases have the leading market share, Egyptian exporters’ customers have a strong bargaining power when it comes to prices to the extent that Exporters report that prices can be as low as one third of those of other competitor countries. This is stems from the following: