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Wholesale markets are considered an essential component of any

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Wholesale markets are considered an essential component of any

    Wholesale markets in the era of supermarkets and hypermarkets

    Developments in Central and Eastern Europe

    by

    Andrew W. Shepherd

    Agricultural Marketing Group, FAO, Rome th 2004) (Presented at the World Union of Wholesale Markets Membership Meeting, May 27

Introduction

Wholesale markets have for a long time been considered an essential component of any

    agricultural marketing system and FAO has been addressing wholesale market development

    issues throughout the world for the past forty years. There is, however, currently much

    discussion over their future. Are wholesale markets needed these days? In many countries we

    are witnessing rapid changes in food marketing systems, involving an expansion in direct

    marketing between increasingly large farmers, either in groups or as individuals, and the

    integrated food marketing chains represented by hypermarkets, supermarkets and chain stores.

Wholesale markets in Central and Eastern Europe

Following political changes in Central and Eastern Europe and the former Soviet Union, there

    was great interest in constructing wholesale markets to serve the needs of the newly privatised

    farm sector. Farmers found that the former marketing arrangements had disappeared and that

    they were now responsible for marketing their own produce. The low level of development of

    the wholesale trading sector in many countries in Eastern Europe meant that if local farmers

    were to be able to sell their produce their only option, in many cases, was to take their

    produce to the markets themselves. Hence, we witnessed the development of numerous

    privately organised “truck markets”, which continue to play an important role in many

    countries. The World Bank and the European Bank for Reconstruction and Development

    (EBRD), together with bilateral donors such as Switzerland and Germany, saw the need for

    wholesale market development in Eastern Europe and provided financing for the construction

    of many new markets.

Problems have arisen with wholesale market projects in this region. These have stemmed

    from the terms of the markets‟ financing, the time between the original decision to plan a

    market and its subsequent entry into operation, the growth of informal private markets, the

    overambitious projections of likely throughput and, more recently, the growth of

    supermarkets. The problems were accentuated by the lack of involvement and commitment of

    the relevant municipalities and governments in the success of the markets. Failure to enforce

    applicable laws and regulations relating to land allocation and failure to enforce market

    regulating laws, even when these were in place, has contributed to the problems confronting

    some of the new markets. Informal private markets, whilst not providing the facilities of the

    new official markets, nevertheless were in full operation, and meeting the needs of retailers,

    when the new markets, after planning and construction delays, finally came into operation.

    When the new markets opened they faced the problem of competing with the existing markets

    whose rentals were usually lower. In addition, there seemed to be inadequate attention paid at

    the planning stage to getting „core‟ importers and wholesalers into the new markets in order to

    ensure a volume of trading sufficient to make the market attractive to other, smaller, traders.

    Many larger traders preferred to operate outside the market. Another issue was the general

    insistence by EBRD and the World Bank on full-cost recovery from the newly created market

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companies. Although subsidies can promote overbuilding, some of the funds could have been

    provided by the municipal or central government, which is very much the practice here in

    Italy, for example.

Central European Initiative Wholesale Markets Foundation

To address some of the problems I have identified above, and to assist markets in the region

    to improve their management skills, the Central European Initiative Wholesale Markets

    Foundation was formed with the assistance of the Central European Initiative (CEI), EBRD,

    FAO and the United Nations Economic Commission for Europe (UNECE). An FAO project,

    with considerable help from wholesale markets in Italy, has been assisting the Foundation

    with a series of workshops and study tours, with the improvement of members‟ capacity to 1deliver reliable market information and with the development of a web site.

    The Foundation‟s first workshop was held in Bologna and examined the development of full-

    service centres, or logistics platforms, within major wholesale markets. Markets considered

    that if they were to survive in the era of supermarkets they needed to adapt to provide

    facilities for those companies that were primarily involved in supplying supermarkets and

    other large buyers. Participants felt that such an adaptation involved the development of

    relationships with modern domestic distribution systems, the promotion of quality

    enhancement (standardisation and hygiene/health controls), the broadening of the range of

    products handled by markets to include fish and livestock products, flowers and ornamental

    plants, and the promotion of value-addition activities, such as preparation of pre-packed

    salads. A second workshop, held in Croatia, addressed regulatory issues, in particular, quality

    control of products, hygiene and health controls, HACCP, quality certification, and

    environmental issues. Regulations regarding commercial activities related to the trading of

    food products, fiscal regulations, customs regulations, transport regulations, municipal

    regulations, and the provision of statistical information on prices and quantities were also

    discussed.

    A third workshop, held in Budapest, looked at the diversification of wholesale market

    commercial activities. As noted in the Bologna workshop, participants felt that wholesale

    markets could offer space to supermarket chains to facilitate their operations. This, in turn

    could increase procurement through the market. Wholesale markets in Eastern and Central

    Europe and the former Soviet Union could, in theory, also attract wholesalers into the market

    by offering services such as customs clearance facilities, banana ripening rooms and cold

    storage facilities. Better utilization of available market space could include: provision of cash

    and carry stores, to provide “one-stop shopping” for caterers and small retailers; facilities for

    handling of empty crates and containers; food testing laboratories; and training facilities. A

    fourth workshop, held in Verona, looked in more detail at the quality control issues

    highlighted in the Croatian workshop.

The growth of supermarkets and hypermarkets

We are all aware how rapidly supermarkets and hypermarkets have become such dominant

    forces in food marketing in Western Europe and the United States. In the past decade this 2trend has been noted elsewhere, particularly in Latin America, and there is now growing

     1 http://www.ceiwmfoundation.org/ 2 Reardon, T. and Berdegué, J. A., The Rapid Rise of Supermarkets in Latin America: Challenges and

    Opportunities for Development, Development Policy Review (4), September 2002.

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evidence that a similar revolution is occurring in Central and Eastern Europe. This started in

    Poland, Hungary and the Czech Republic and is now rapidly spreading East and South. The

    trade press has in the past few years been reporting intense activity by major international retailers in the region.

Recent trends have seen several developments in common over the countries. These have 3recently been well-analyzed by Driess, Reardon and Swinnen (2004) and the following

    discussion owes much to their work. These trends are:

    ? extensive investments by foreign retail chains and the rapid rise of the modern retail

    sector;

    ? a dramatic rise in the retail sector share of supermarkets;

    ? inter-country as well as intra-country supermarket diffusion;

    ? growing concentration in the supermarket sector; and

    ? changes in procurement systems that affect farmers and also wholesale markets.

Global multinationals have moved into the region in a significant way. This was initially into

    countries that have now joined the EU, with Ahold, then Carrefour, then Tesco starting

    operations in Poland, the Czech Republic and Hungary. Subsequently, multinationals moved

    into other Central and Eastern European countries (recently, for example, Metro into Croatia)

    and, finally (in the last couple of years), they have established footholds in Russia (e.g.

    Metro). In the first years of operations in Eastern Europe supermarket multinationals

    concentrated on the larger cities. However, given the strong competition in major urban areas,

    companies started to look at developing supermarkets in much smaller towns, with Ahold in

    Poland, in 2001, indicating that it was then targeting towns in the 50 000 to 70 000 population

    range. At present only ten percent of the Russian retail sector is accounted for by

    supermarkets. However, there is likely to be rapid future growth, with the entry of the global

    multinational retailer, Metro, and regional multinationals such as Ramenka of Turkey.

    Domestic chains are also making major investments.

Supermarket and hypermarket chains moved into the region because the companies, facing

    considerable competition in Western Europe, identified untapped potential in the East. In

    making such a move, the supermarket chains have been helped by increased demand for the

    services they can provide, resulting from:

    ? rapid urbanization;

    ? per capita income growth increasing the demand for processed foods;

    ? increasing employment of women, with a consequent increase in the opportunity cost

    of their time, leading to a demand for meals that are easier to prepare and for retail

    outlets that offer a wider range of products;

    ? reduction of effective food prices for consumers because of supermarkets‟ greater

    ability to control costs;

    ? growing access to refrigerators, allowing larger quantities of food to be stored, and to

    cars, allowing larger quantities to be purchased at any one time;

     3 Dries, L, Reardon, T. and Swinnen, J. F. M., The Rapid Rise of Supermarkets in Central and Eastern Europe:

    Implications for the Agrifood Sector and Rural Development, Development Policy Review, 2004 (forthcoming)

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    ? increased travel to Western Europe and elsewhere, exposing the populations to

    modern retailing techniques, to a wider range of products and, particularly for fresh

    fruits and vegetables, to the possibility of being able to consume many products “out

    of season.”

Wholesale markets in Eastern and Central Europe or, indeed, in many developing countries of

    the world may not yet be fully noticing the growth of supermarkets. This is because

    supermarkets tend to penetrate fresh fruit and vegetable retail markets and make changes in

    their procurement systems more slowly than they do for processed or packaged products.

    Also, fresh produce marketing systems that developed immediately after the end of the

    centrally planned era are changing. Declines in wholesale sales off the back of the truck and a

    decline in retailing by farmers may actually, in the short run, lead to an increased flow of

    produce through wholesale markets. It would be an interesting exercise to analyze throughput

    figures over the last few years for the region‟s leading wholesale markets to try to identify any

    trends in response to supermarket development. FAO is planning such a study in Latin

    America.

Procurement and distribution by supermarkets

    If wholesale markets have not yet noticed the impact of supermarkets they almost certainly 4will in the near future. That is because both multinational and national supermarket chains are following the practices of the West in many ways, including:

    ? shifting towards centralized procurement systems;

    ? shifting toward cross-border procurement systems;

    ? shifting toward specialized/dedicated wholesalers;

    ? shifting toward preferred supplier systems;

    ? shifting toward private standards for fresh produce that are usually more demanding

    than national standards and which invariably include a requirement for “traceability.”

You will note that none of the above trends appears to involve wholesale markets! There has

    been a marked tendency to shift from procurement by individual supermarkets, which may

    have involved purchasing from wholesale markets, to a centralized system involving a central

    buying office for fresh fruit and vegetables with distribution to stores through several

    distribution centers over a country. This is done in order to reduce coordination costs,

    generate economies of scale by buying larger volumes and working with fewer wholesalers

    and suppliers per unit merchandized, and to have tighter control over product quality and 5freshness. Some examples of developments follow. They do not necessarily refer to

    distribution arrangements for fresh fruits and vegetable but are indicative of developments

    likely to take place in the coming years:

    ? Ahold in Poland operates over 180 outlets, all of which are supplied via five

    distribution centres. 2 ? Tesco opened a 40,000 mdistribution centre on January 6, 2004 for the distribution of

    all processed/packaged food for all its stores in Poland. It is now building a second,

    for fresh food.

     4 It is interesting that EBRD, having financed wholesale market development, has ceased such finance and is

    now supporting retail chain development. 5 based on material presented in Dries, Reardon and Swinnen, op cit.

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    ? In the Czech Republic, Ahold opened its first distribution centre for fresh fruit and

    vegetables in 2001 and a second one in 2002.

    ? Delvita in the Czech Republic was operating a distribution centre as early as 1995, and

    recently opened a second.

    ? Tesco is building its first distribution centre in the Czech Republic.

    ? Tesco opened its first distribution centre in Slovakia at the end of 2003, as will

    Kaufland in 2004.

    ? In Croatia in 2000, Konzum opened the largest distribution centre in the former

    Yugoslavia region, and has since rapidly left behind its system of small warehouses

    and individual store deliveries to use a set of distribution centres with coordinated,

    centralized procurement from Zagreb.

    ? Also in Croatia, Metro completed a large distribution centre in October 2003.

    ? In Russia, Pyatyorochka, Russia‟s largest supermarket chain, with 150 stores in St

    Petersburg and Moscow has developed a distribution centre in St Petersburg to

    compete with foreign competition from Turkish, German and French chains.

The various chains in the Central and Eastern European region are also beginning to use

    national distribution centres for cross-border sourcing. This allows the procurement of the

    best value products from various countries and also, in the case of fruits and vegetables,

    enables seasonal supply constraints to be more easily addressed. It extends the set of suppliers

    available to the chain. This process is also related to EU accession, which increases

    opportunities for post-accession, cross-border procurement.

Together with these changes in distribution methods have come changes in procurement

    methods and it is these that present the greatest threats to the region‟s wholesale markets. The

    types of changes taking place are:

    ? chains are shifting from traditional wholesalers to “specialized/dedicated wholesalers”

    that are specialized in a product category and dedicated to supplying supermarkets.

    The wholesaler is more responsive to quality, safety, and consistency requirements of

    supermarkets than are traditional wholesalers who aggregate produce from many

    producers and may also be unable to supply the quantities required;

    ? the new wholesalers move from mainly buying at wholesale markets or from a list of

    customary suppliers, to contracting production that meets the specific grades and

    standards of the retail chain. The leading chains are shifting toward “direct” purchase

    from growers under the “preferred supplier” system. This is done in order to select

    producers capable of meeting quality and safety standards of the supermarkets and

    thus to lower transaction costs for the chain both through lower search costs and by

    reducing the number of suppliers per unit sold. Additionally, such linkages permit

    more rapid movement of produce from farm to store, enabling supermarkets to sell

    much fresher produce;

    ? in some cases it has been noted that the retail chain eventually acquires or enters into a

    joint venture with the wholesale firm.

How do wholesale markets respond?

In such a retailing environment, how do wholesale markets react? As noted above, some

    options have already been discussed by the CEI Wholesale Markets Foundation. These, and

    other approaches, include:

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    ? being pro-active. Wholesale markets that sit back and wait for business to come to them will rapidly cease to be relevant. They have to explore ways to attract business

    by surveying their customers and identifying their needs. Retailers, for example, may

    feel the need for improved retail markets, the development of which could provide a

    measure of competition for supermarkets. Market logistics may need to be re-

    examined, together with trading hours, in order to maximize the convenience for

    customers and minimize the delay between harvest and sale. Wholesale markets need

    to look to their strengths. In many cases, for example, they should be able to supply

    locally produced produce more freshly than supermarkets that operate just one

    distribution centre per country. Exchange of ideas and experiences between markets in

    the region will be beneficial and much can be learnt from the experiences of wholesale

    markets in Western Europe;

    ? identifying new services. The Foundation has examined a range of services that can

    be provided. Although supermarket chains in one or two countries may be prepared to

    site their distribution centres and other facilities in wholesale markets, in most cases

    this is unlikely to happen and there is little evidence that it has happened to date. Some

    of the other services identified by Foundation members as being suitable for inclusion

    on the land of existing markets, such as banana ripening facilities, may also find it

    difficult to gain acceptance. Thus markets need to be aware of their real potential for

    capturing business from supermarket chains. If such potential is limited than they need

    to explore ways of maximizing business from non-supermarket customers;

    ? serving non-supermarket retailers and caterers. Small retailers will continue to

    play an important role in Central and Eastern Europe and increasing affluence will

    mean that, as in the West, people will eat out more. If supermarkets do not use the

    services of wholesale markets then the markets need to look at how they can best

    serve these other categories of customer. Both retailers and caterers would be attracted

    by the provision of commercial wholesale cash-and-carry facilities. Such a store in a

    wholesale market compound would enable traditional fruit and vegetable retailers to

    diversify into selling new products. It may also encourage dry-goods retailers who

    have not previously sold fruits and vegetables to start doing so. Many retailers, but

    particularly larger stores and independent chains that are not large enough to justify

    having their own distribution centres, could benefit from the one-stop-shop concept,

    i.e. by being able to buy fruits and vegetables, fish, meat and dairy products and dry

    goods at one wholesale market location. Caterers could similarly benefit from such a

    facility and would also welcome services such as pre-packed salad preparation;

    ? improving procurement arrangements. I have already noted that supermarkets are

    rapidly moving to direct procurement arrangements, either themselves working

    directly with farmers or farmer groups or working through dedicated wholesalers.

    They do this because they need to guarantee both the quantity and quality supplied and

    because, by linking with farmers in this way, they can reduce the costs involved in

    searching for produce and organizing the logistics of moving that produce to the

    consumer. Some would argue that such arrangements also enable the retailers to

    squeeze the farmers‟ margins, but that is another discussion. Wholesalers working in

    traditional wholesale markets cannot dismiss these trends as a supermarket fad of little

    relevance to them. If they see caterers as potential customers they will also in the

    future have to be in a position to offer “traceability.” Some British travel agents, for

    example, are now demanding assurances from hotels regarding the reliability of their

    food supplies before agreeing to include the hotels in their brochures, thus forcing the

    hotels to introduce preferred supplier and traceability arrangements. Wholesalers in

    markets will therefore need to strengthen linkages with farmers in the same way as

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supermarkets are doing; this will probably lead to reduced opportunities for small

    farmers and much consolidation of farms, as it is virtually impossible for supermarkets

    or wholesalers to work with individual small farms. Farmers will be increasingly

    called upon to specialize. Small wholesalers are unlikely to be able to take such

    initiatives without support, and this seems to be a role for the market management;

    ? promoting increased fruit and vegetable consumption. Faced by a declining share of the market, wholesale markets can try to increase their share again but, as we have

    seen, this may be difficult. An alternative approach is to work to increase the total size

    of the market. Several countries have adopted “five a day” promotions, to encourage

    people to have five servings of fruits and vegetables a day. In FAO, we are now

    working closely with the World Health Organization (WHO) on the WHO/FAO Fruit

    and Vegetable Initiative and collaboration of wholesale markets would be welcome;

    ? planning of new wholesale markets. After reading this paper it might be queried why new wholesale markets should be suggested when existing markets are struggling

    to obtain adequate throughput. However, in parts of the former Soviet Union, in

    particular, there may still be scope for such markets. For example, Tbilisi in Georgia,

    which I visited recently, has no organized wholesaling for domestic produce. An

    earlier feasibility study was not followed up. Any such new developments will need to

    recognize that there will be competition from supermarkets and thus realistic

    appraisals of throughput potential will need to be made. Lavish constructions will

    need to be avoided and the emphasis will have to be on providing basic facilities at

    minimum cost.

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