Impact of Food Retail Impact of Food Retail InvestmentsInvestments

Evidence from Czech Republic, Evidence from Czech Republic, Slovakia, Poland and RussiaSlovakia, Poland and Russia

Liesbeth Dries – K.U.LeuvenLiesbeth Dries – K.U.Leuven

EastAgri 2005 Annual Meeting, Rome, EastAgri 2005 Annual Meeting, Rome, 28 February 200528 February 2005

Goal & methodologyGoal & methodology Goal: tot analyse the impact of food retail Goal: tot analyse the impact of food retail

investments on food systems in CEE investments on food systems in CEE countriescountries

Methodology:Methodology:• Countries: Czech Republic, Slovakia, Poland Countries: Czech Republic, Slovakia, Poland

and Russian Federationand Russian Federation• Food chains: FFV & DairyFood chains: FFV & Dairy• Interviews with retail chains; wholesalers; Interviews with retail chains; wholesalers;

processors & farm survey (Czech Republic)processors & farm survey (Czech Republic)

Retail Transformation in CEE:Retail Transformation in CEE:Supermarket growthSupermarket growth

0%

10%

20%

30%

40%

50%

60%

CZ HU PL SK BG UKR RO RUSupe

rmar

ket s

hare

in p

acka

ged

food

sa

les

(%)

Retail Transformation in CEE:Retail Transformation in CEE:Supermarket growthSupermarket growth

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1998 1999 2000 2001 2002 2003

Mar

ket s

hare

of m

oder

n re

tail

Czech Rep.SlovakiaCroatia

Retail Transformation in CEERetail Transformation in CEE Dramatic Dramatic riserise in market share of in market share of

supermarkets and modern retail sectorsupermarkets and modern retail sector MultinationalizationMultinationalization ConcentrationConcentration Inter-country as well as intra-country Inter-country as well as intra-country

supermarket supermarket diffusiondiffusion Important changes in Important changes in procurementprocurement

systemssystems

Implications for supply chain: Implications for supply chain: procurement system changesprocurement system changes

InitiallyInitially: retailers buy from local : retailers buy from local wholesalers and importerswholesalers and importers

Shift to centralised procurement systemsShift to centralised procurement systems: : Build distribution centresBuild distribution centres

Change of procurement systemChange of procurement system

Shift toward cross-border systemsShift toward cross-border systems::• Coordinate procurement over Distribution Coordinate procurement over Distribution

Centres in different countries of operation:Centres in different countries of operation: Ahold Central EuropeAhold Central Europe Tesco ‘International Purchasing Dept.’Tesco ‘International Purchasing Dept.’

• To what extent? E.g. Tesco/Metro – CEE To what extent? E.g. Tesco/Metro – CEE products for UK/German supermarketsproducts for UK/German supermarkets

Change of procurement systemChange of procurement system

Shift toward specialized/dedicated Shift toward specialized/dedicated wholesalerswholesalers (specialized in product (specialized in product category, dedicated to supermarkets)category, dedicated to supermarkets)

Shift toward preferred supplier systemsShift toward preferred supplier systems to to select producers meeting quality and select producers meeting quality and safety standards and lower transaction safety standards and lower transaction costscosts• Evidence survey Czech Republic: 30% suppliers Evidence survey Czech Republic: 30% suppliers

WS & 60% suppliers SM have contracts WS & 60% suppliers SM have contracts (preferred suppliers)(preferred suppliers)

Change of procurement systemChange of procurement system

Shift toward private safety and quality Shift toward private safety and quality standardsstandards• E.g SISPO Czech RepblicE.g SISPO Czech Repblic• E.g. Eurep-gap (international chains – E.g. Eurep-gap (international chains –

international standards)international standards)

Public versus private standards - Public versus private standards - traceabilitytraceability

0

10

20

30

40

50

60

70

80

90

Diary Residu ID Packaging

Shar

e of

gro

wer

s (%

)

TotalPublicPrivate

Private standards - qualityPrivate standards - quality

0

5

10

15

20

25

30

35

40

45

Local Industry WS SM PMOShar

e Ex

tra q

ualit

y cl

ass

prod

uce

(%)

Private standards - qualityPrivate standards - quality

Significant higher quality delivered to SMSignificant higher quality delivered to SM Growth in high quality production 2000-Growth in high quality production 2000-

2003 for growers supplying SM since 20002003 for growers supplying SM since 2000 Decline in high quality production 2000-Decline in high quality production 2000-

2003 for growers delivering to local 2003 for growers delivering to local market in 2000market in 2000

So:So:

Increased demands on:Increased demands on:• QUALITY (and safety)QUALITY (and safety)• VOLUMEVOLUME• And: COORDINATIONAnd: COORDINATION

The development of producer The development of producer marketing organisations: CZmarketing organisations: CZ

Developments in Food Retail sector are Developments in Food Retail sector are main driving force behind organisation of main driving force behind organisation of farmers:farmers:• 4 out of 5 interviewed Producer Marketing 4 out of 5 interviewed Producer Marketing

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

Potential benefits of PMO to Potential benefits of PMO to growersgrowers

Bargaining powerBargaining power ServicesServices

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

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

(repayment certainty)(repayment certainty) ......

Retailers & vertical coordination may Retailers & vertical coordination may be positive for key weaknessesbe positive for key weaknesses

Key weaknesses of farm sector :Key weaknesses of farm sector :• Shortage of finance for investmentsShortage of finance for investments• Quality Quality • Access to high value marketsAccess to high value markets

Retail investments and coordination with Retail investments and coordination with supply chains may assist farms in these supply chains may assist farms in these areasareas

Retail assistance to farms ? Retail assistance to farms ?

Direct effectDirect effect: available evidence indicates that : available evidence indicates that modern retailers introduce assistance modern retailers introduce assistance packages “if they have to” to secure quality packages “if they have to” to secure quality supplies. E.g.supplies. E.g.• Berdegue et al (Central America)Berdegue et al (Central America)• Reardon et al (Croatia)Reardon et al (Croatia)• Dries & Reardon (Russia)Dries & Reardon (Russia)

Indirect effectIndirect effect: : Eg. Poland: Dairy companies Eg. Poland: Dairy companies focusing on high-quality markets (incl. EU focusing on high-quality markets (incl. EU export markets and the modern retail sector) export markets and the modern retail sector) are frontrunners in offering assistance to small are frontrunners in offering assistance to small farms; market channels targeted to informal farms; market channels targeted to informal markets and low quality sales copy programs markets and low quality sales copy programs later or not at all.later or not at all.