Economic and Transitional Impact of Economic and Transitional Impact of Food Retail Investments:Food Retail Investments:

Evidence from the Czech RepublicEvidence from the Czech Republic

LiesbethLiesbeth DRIES & Vlaho KojakovicDRIES & Vlaho Kojakovic

WB-CEI-FAO Workshop on Agriculture, Agri-business and the Retail Sector in South-East

Europe, Sarajevo, 24-26 May 2004

IntroductionIntroduction

Are CEEC experiencing a similar rapid retail transformation as observed in other developing regions since the start of transition?

Recent developments in Recent developments in other regions (L-Am; Asia; other regions (L-Am; Asia; Africa)Africa)Dramatic rise in market share of

supermarkets and modern retail sector

MultinationalizationInter-country as well as intra-country

supermarket diffusionConcentrationImportant changes in procurement

systems

Rise of modern retail Rise of modern retail sectorsector Three phases:

– Communist period: state owned retail and procurement system

– Transition period: initial privatization and breakdown of highly concentrated system into separate units that soon start to merge and form small private chains. Very limited FDI inflows.

– Globalization period: Extensive investments of foreign retail chains and rapid rise of modern retail sector

Transition and globalization period – difference between countries depends on reforms

Rise of modern retail Rise of modern retail sectorsector

Rise of modern retail Rise of modern retail sectorsector

MultinationalizationMultinationalization

MultinationalizationMultinationalization

MultinationalizationMultinationalization

MultinationalizationMultinationalization

Dynamic diffusion of FDI Dynamic diffusion of FDI over CEE countriesover CEE countries

Before global chains: retailers from neighbouring countries

First wave: Central Europe (CZ, PL, HU), Globalization period started second half 1990s; then Croatia: globalization period started 2000; then Russia: globalization period started 2001/2

Spread to secondary Spread to secondary cities (and small towns)cities (and small towns)

Russian Federation:– Pyaterochka: Sint-Petersburg (1999) –

Moscow (2001) – Regions (2002)– Perekrestok: Moscow (1995) – Moscow region

(1999)– Sedmoi: Moscow (1994) – Moscow region

(2003)– Spar: Moscow (2000) – Regions (2002/3)– Ramenka-Ramstore: Moscow (1997) –

Moscow suburbs (2003) – regions (2003)

Consolidation - emergingConsolidation - emerging

Expect acquisitions and mergers that will concentrate supermarket sectors.

‘Weapons’ of competition:– Organizational change in procurement– Format diversification

Format diversificationFormat diversification

Format diversificationFormat diversification

Format DiversificationFormat Diversification

Russian Federation:– Perekrestok: SM(1995) – Discount (1998) –

HM (2002)– Sedmoi: SM (1994) – HM (2003)– Spar: SM (2000) – HM (2002)– Metro: Cash & Carry (2001) – HM (2004)

What drove the What drove the “supermarket revolution”“supermarket revolution” Demand-side incentives:

– Urbanization– Reduction of effective food prices (mass procurement

& efficient merchandising) Demand-side capacity:

– Per capita income growth– Growing access to refrigerators, cars, ...

Supply-side:– Driven by mainly European retail investments

following FDI liberalization & demand-side changes

What drove the What drove the “supermarket “supermarket revolution”?revolution”?

What drove the What drove the “supermarket “supermarket revolution”?revolution”?

The future: convergence?The future: convergence?

CEE: Catching-up of lagging first wave and second wave countries

The future: convergence?The future: convergence?

Change of procurement Change of procurement system – under system – under CommunismCommunism High CZECH/SLOVAK processed P food R CZECH/SLOVAK O fresh C U R E M E N T CROATIA Processed Food CROATIA fresh Low

Low RETAIL High

Change of procurement Change of procurement system – during transitionsystem – during transition

Dismantlement of the state-run and collectivized components of the retail procurement system

Private general-line wholesalersImports

Change of procurement Change of procurement system – globalization system – globalization periodperiodInitially: retailers buy from local

wholesalers and importersShift to centralised procurement

systems: Build distribution centra:– Czech Republic: Delvita (1995); Ahold

(2001); Tesco (2003)– Russian Federation: Pyaterochka SPB

(2002) & Moscow (2003); Metro (3DC in 2002); Ramenka (DC Moscow & regions)

Change of procurement Change of procurement system – globalization system – globalization periodperiodShift toward cross-border systems:

– Coordinate procurement over DCs in different countries of operation:

Ahold Central Europe Ahold CEE Fresh

– Wholesalers ‘follow’ retail chains over the borders

E.g. Ceroz (CZ) enters Slovakia in 1998

Change of procurement Change of procurement system – globalization system – globalization periodperiodShift toward specialized/dedicated

wholesalers (specialized in product category, dedicated to supermarkets):– First, offer services (packaging, quality

control)– Second, from spot market to list of

preferred suppliers to outgrower schemes– Third, JV retail chain-wholesale firm

Change of procurement Change of procurement system – globalization system – globalization periodperiodShift toward preferred supplier

systems to select producers meeting quality and safety standards and lower transaction costs

Shift toward private safety and quality standards– Differences between countries

Impact on farmers - Impact on farmers - evidence from the Czech evidence from the Czech RepublicRepublicData:

– Focus on FFV sector– Interviews with different actors in the

food retail chain: food retailers, wholesalers, agricultural producers and producer marketing organisations.

– Survey of 250 FFV growers, March-April 2004

The development of The development of producer marketing producer marketing organisations: PMOorganisations: PMODevelopments in Food Retail

sector are main driving force behind organisation of farmers:– 4 out of 5 interviewed Producer

Marketing Organisations for FFV indicate as main reason for their establishment: to gather sufficient quantity and product varieties to satisfy the requirements of big supermarket chains

Importance of PMO in FFVImportance of PMO in FFV

Marketing of vegetables:– 5 PMO– 15% of total sales of vegetables– 85-90% sold to supermarkets

Marketing of fruits:– 3 PMO– 50% of total fruit sales– 60% sold to supermarkets

Potential benefits of PMO Potential benefits of PMO to growersto growers Bargaining power Services

Extension service (55%) Storage, sorting, packaging facilities (60%) Access to information (73%) Facilitated access to inputs through payment

guarantee program with input suppliers Preferred position to apply for bank loans

(repayment certainty) ...

BUTBUT

Not all farmers may be able to become members of PMO:– ZN Fruit: new members are screened:

quality is most important, SISPO label is required

– CZ Fruit; Litozel: varieties/assortment of new members needs to fit requirements

– Members with storage/sorting/packaging equipment preferred

Marketing of FFVMarketing of FFV

Supermarkets buy FFV from(Czech Republic):– 60% wholesalers– 5% direct from growers– 15% PMO– 20% Imports

Marketing of FFVMarketing of FFV

Grower survey:– Local market: 67% - relatively more FF– Industry: 50% - relatively more Ltd.– Wholesalers: 45% - relatively more Ltd.– Supermarkets direct: 8% - relatively

more Ltd.– PMO 19% - relatively more coop/JSC– Other 6%

Contracts with WS / SMContracts with WS / SM

40% Ltd. have contract with SM/WS - other legal structures less than 30%

Types of contracts:– Preferred supplier

SM: quality; payment method; penalties; safety WS: quantity & quality

– Post-harvest SM: quantity; quality; frequency of deliveries; price WS: quantity; quality; frequency of deliveries;

payment

Public versus private Public versus private standardsstandards

Impact on InvestmentsImpact on Investments

A lot of investments – mainly with own resources

No supplier credit Bank loan guarantees limited – mainly

PMO not WS/SM Growers supplying to PMO/WS invest

more Growers supplying local market invest

less

Impact on QualityImpact on Quality

Impact on QualityImpact on Quality

Significant higher quality delivered to SM

Growth in high quality production 2000-2003 for growers supplying SM since 2000

Decline in high quality production 2000-2003 for growers delivering to local market in 2000

Impact on GrowthImpact on Growth

No significant impact on growth in production for growers that supply to WS/SM/PMO

Concluding commentsConcluding commentsImplications for policy-makers

and international organizations are important, and the issues are complex

How to create a “win-win” situation ?

What role can governments play in this process ?

Which actions can international organizations take ?