After a tough year, cooking oils are back in volume growth. But amid price and promo wars, with an unstable global economy, the waters are far from smooth, says Chloe Ryan

Over the past 20 or so years, the value and complexity of the cooking oils market has changed dramatically, with new oils, new brands and new consumption patterns emerging, based on health, premiumisation and new manufacturing techniques.

But cooking oil is also a staple, and the past two years have been a reminder of its vulnerability to market forces, with massive spikes in the cost of commodity-traded vegetable oils, in particular. In response, consumers drastically scaled back purchases, pulling volumes down.

Unbowed, the industry has fought back, promoting heavily. The result is a category worth 7% less in value but back in volume growth up 3.6%, more than reversing last year's decline [Kantar Worldpanel 52w/e 16 May 2010].

Crucially, lower prices and promotions have been partly made possible by a fall in the commodity price of vegetable and seed oils.

But suppliers of extra virgin olive oil have not been so lucky. "Olive oil prices have been relatively stable in recent weeks," says Walter Zanré, managing director of Filippo Berio, the UK's largest edible oil brand, "but are still up 20% year-on-year."

And RH Amar, distributor of the Bertolli and Carapelli brands, estimates the olive oil market has faced cost increases of 29% over the past 12 months. "This is due to the unique factors that affect the raw material prices crop fluctuations, only one crop per year, and government selling policies within the manufacturing countries," says a spokeswoman. "At one stage in the past 12 months, olive oil saw a 50% increase in price," she adds.

Olive oil suppliers in the UK have also had to contend with the unfavourable sterling-euro exchange rate. And now the economic crises in the Mediterranean are also starting to interfere with the supply.

"It's only a recent phenomenon but it appears Greek producers are reluctant to sell their oil," Zanré explains. "The instability of the Greek economy means people are keeping their money locked up in more tangible assets rather than as cash. Greek growers consider stocks of olive oil in tanks to be a safer bet than cash in a Greek bank.

"Greece is a source of high-quality extra virgin olive oil and this is putting additional pressure on prices," he adds.

Higher prices mean extra virgin olive oil is the only top-five edible oil sector to have shown value growth over the past year up 2.1% and has reclaimed the top spot as the sector with the largest value share, leapfrogging vegetable oil, which has fallen 20% in value.

A number of big brands have benefited. Filippo Berio, Napolina and Bertolli have all seen value increases over the past year [Nielsen]. Filippo Berio made solid progress with value up 8% to £33.1m. Napolina grew 4.5% to £16.8m. Bertolli, meanwhile, saw huge gains, albeit from a smaller base, as value sales rose 33.2% to £4m [Nielsen].

The fact that olive oil has also grown in volume is significant, however, as it signals the importance promotional activity is playing in supporting growth.

More than 30% of olive oil was sold on promotion in the 12 weeks to 15 May [Nielsen], with some brands shifting the majority of their product at a discount: Napolina sold a whopping 71.1% of sales on promotion in the same period, while for Bertolli it was a staggering 80.1%.

Zanré believes promotions have helped increase consumption. "Strong promotional activity over the past 12 months has resulted in deflation, but increased consumption and improved household penetration have expanded the market."

However, some feel the level of promotional activity has gone too far. "With each brand fighting to maintain and grow its share of the market, a fixture could have four or five different promotions at any one time," says RH Amar. "This does not build customer loyalty in a brand; they will simply switch to the cheapest brand at the time of purchase."

And both Sainsbury's and Asda have reportedly told their entire supply base the percentage of sales on promotion is now counterproductive. Sainsbury's dedicated more space to cooking oil promotions than any of its rivals in the past year, with featured space up 45% to 84. Asda olive oil promotions rose more than threefold to 55.

Inevitably, there have been casualties from the price wars. Carapelli, owned by Grupo SOS the world's largest olive oil bottler is being withdrawn from the UK. Last year it was worth £2.6m but over the past 12 months sales fell 66.5% to £0.9m [Nielsen 52w/e 1 May].

"The investment in promotions was not increasing penetration of the brand or building consumer loyalty," RH Amar admits. While Carapelli is still sold worldwide, and a marketing campaign is ongoing in Europe, there are currently fewer pressures in Europe to use all the investment available to price-promote the brand, the spokeswoman adds, and RH Amar is now putting its weight solely behind Bertolli, which Grupo SOS acquired from Unilever in 2008, as "it's a better-known brand in the UK".

Arguably an even bigger casualty of the price wars is Grupo SOS itself: heavily indebted, partly due to the Bertolli acquisition, its CEO was ousted earlier this year in one of Spain's biggest financial scandals.

But in this country, it's arguably own label that has been the biggest loser of the promotional battle. Accounting for 60.6% of the edible oil market, sales have fallen 11.1% in value [Kantar Worldpanel 52w/e 16 May]. Indeed, own-label sales have fallen for the past three years, claims Zanré, "driven by brands promoting more aggressively so the price differential is reduced.

The retail price of 500ml of extra virgin own label has now moved above £2. This should see shoppers switching out of own label into brands," he adds. The decline is also the result of a price war among the supermarkets on own-label oils, says Neil Brownbill, marketing director of Princes, the UK's largest supplier of own-label oils (it also owns or manufactures under licence brands such as Crisp 'n Dry, Flora, Napolina and Mazola).

"The rsp of own-label seed oils across the multiples is all about £1 as retailers match each other," he says. "That has driven prices down. To supply both brand and own-label product in the current climate and marketplace is tough. You have to make sure the cost of supply is competitive and that your service is better than anyone else's."

While olive oil is still contending with inflation, the picture for the vegetable, sunflower and other seed oil markets is drastically different.

The past 12 months have seen a broad reversal of last year's trend, with volumes up and value down. Consumers have benefited from the easing of pressure on the seed oil price. "Vegetable oil tracks very closely the cost of crude oil," says Zanré.

"Last year, when the price of crude oil was high, vegetable oil was diverted into bio-fuel, driving up cost. We are now coming off this high and so vegetable and sunflower oil prices are stabilising."

As a result, value sales of vegetable oil are down 20% on last year to £65.4m, and sunflower has fallen by a more modest 6% [Kantar]. "That reduction in commodity costs has been passed on to the consumer as a reduction in retail selling prices," says Brownbill.

These broader sub-category patterns were reflected in Crisp 'n Dry declining 4.3% in volume and 14.8% in value to £19.5m, while Flora volumes picked up 15.8% on a modest 6.9% decline in value, as consumers switched back from vegetable oil to healthier but slightly more expensive sunflower oil [Nielsen].

The most impressive performance, albeit from a small base, came from rapeseed oil, with sales up 25.6% to £4.9m [Kantar] as the qualities of the category become better known. Princes launched an organic rapeseed oil this January under the new Pura Organics brand, providing a boost to the category (see p48).

Despite the fall in prices, Brownbill argues deflation has not been damaging for suppliers. "Yes, we've had annualised deflation, but over that period household penetration of seed oils has grown marginally and sits at about 65% of the UK," he says. He also argues that the seed oils market is fairly stable.

"Yes, there is modest volume decline on the back of inflation and there is modest volume growth on the back of deflation, but overall the market has held up through those changes."

Two key questions remain, however: what happens if oil prices spike again, as many now predict. And can the consumer be weaned off a deal, without also jeopardising sales?

Focus On Oils