3.1 Swinnen Ppt

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Food Retail Growth and Farmers inTransition Countries

Johan Swinnen

University of Leuven

CEI BratislavaCEI Bratislava

November 2005November 2005


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Food Retail Growth in Transition

Part of a broader process ofPart of a broader process of

Globalization of investment andGlobalization of investment andstandardsstandards

Transformation of the agriTransformation of the agri--food supplyfood supplychainschains


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Globalization and transition

dramatically change supply chains TRANSITION :TRANSITION :

disruption of supply chainsdisruption of supply chains

GLOBAL FORCES rapidly change theGLOBAL FORCES rapidly change theenvironment of farmers and agrienvironment of farmers and agri--foodfoodcompaniescompanies

foreign investmentforeign investment in agriin agri--food sectorfood sector

spread of globalspread of global standardsstandards on foodon foodsafety and qualitysafety and quality


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FDI in East European

Agri-food sector Sugar and brewery sectors are mostlySugar and brewery sectors are mostly

foreign ownedforeign owned

Major investments in confectionary,Major investments in confectionary,oilseeds, dairy, etcoilseeds, dairy, etc

.. Most recently, major investments in foodMost recently, major investments in food

retail sectorretail sector


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Nu

mberof

hypermarketsin

Czec

020

40

60

80

100

120

IV 1996

II 1997

IV 1997

II 1998

IV 1998

II 1999

IV 1999

II 2000

IV 2000

Number of outlets


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2004 Top FDI Destinations of

Global Retail Chains1.1. RussiaRussia

2.2. IndiaIndia

3.3.

ChinaChina4.4. SloveniaSlovenia

5.5. LatviaLatvia

6.6. CroatiaCroatia

Central Europe is already matureCentral Europe is already mature

Food retail is top investment areaFood retail is top investment area


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Income and Growth of Supermarkets

0

10

20

30

40

50

60

0 1000 2000 3000 4000 5000 6000 7000

GDP/capita (USD)

Sha

reo

fmodernreta

ilintotal(%)

1998

2002

R Sq. = 0,82


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Reforms and Retail Investments

0

10

20

30

40

50

60

2 2,5 3 3,5 4

EBRD Ref Index

Shareofmodernretailintotal(

)

1998

2002

R Sq. = 0,79


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Policies Matter: Czech vs SlovakShare of foreign retailers

in top 50 retail in Czech and Slovak

0

10

20

30

40

50

60

70

80

90

1993 1994 1995 1996 1997 1998 1999 2000 2001

Foreignshare

Czech

Slovak


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Rise of Global and PrivateSafety and Quality Standards

Rich country quality and safety standardsRich country quality and safety standardshave rapidly increasing impact on transitionhave rapidly increasing impact on transitionand developing countries through trade andand developing countries through trade andinvestmentinvestment

Trade agreements (WTO, etc)Trade agreements (WTO, etc) publicpublicstandardsstandards

Increasingly,Increasingly, privateprivate standards of investorsstandards of investorsplay an important role, both for internationalplay an important role, both for international(exports) and domestic markets (regional(exports) and domestic markets (regionalsourcing, import competition)sourcing, import competition)


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Vertical Coordination in

Supply Chains Rapidly growing in transition (andRapidly growing in transition (and

emerging/developing) countriesemerging/developing) countries

Contracting and vertical coordination toContracting and vertical coordination toovercome obstacles that suppliers andovercome obstacles that suppliers andprocessors face in producing high qualityprocessors face in producing high qualityproductsproducts

Processes have been an engine of growth inProcesses have been an engine of growth inmost countries.most countries.


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The Basic Problem

Processors face lack of supplies, becauseProcessors face lack of supplies, becausesupplierssuppliersDo not want to supply (no trust in payment)Do not want to supply (no trust in payment)Are not able to supply (inputs, workingAre not able to supply (inputs, working

capital, )capital, )Are not able to supply quality (quality inputs,Are not able to supply quality (quality inputs,

technology, management, )technology, management, )

Solution requires some form of contracting :Solution requires some form of contracting : Contract with onContract with on--time paymentstime payments Input assistanceInput assistance Technology and management assistanceTechnology and management assistance


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Supplier assistance by

agribusiness companies Examples :

Input supply programsInput supply programs

Trade creditTrade credit

Investment assistance programInvestment assistance program

Bank loan guarantee programsBank loan guarantee programs Extension services (technology andExtension services (technology and

management)management)

..........


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Impact on farmers ? Recent development. Hence :Recent development. Hence :

Much speculationMuch speculation

Approach in this presentation :Approach in this presentation :

Drawing on experience in other regionsDrawing on experience in other regions

Understanding of transitionUnderstanding of transition specificsspecifics Focus on empirical evidence (what exists)Focus on empirical evidence (what exists)


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The Key Concern

The supermarket revolution will push aThe supermarket revolution will push alarge share of farmers, in particular smalllarge share of farmers, in particular smallfarmers, out of the market as they fail tofarmers, out of the market as they fail tomake the grade to sell to supermarketsmake the grade to sell to supermarkets

Two reasons :Two reasons :

1.1. Fixed component in transaction costs makesFixed component in transaction costs makesit more costly to deal with many smallit more costly to deal with many small

farmers than with a few large farmsfarmers than with a few large farms2.2. Small farms are constrained financiallySmall farms are constrained financially

(internally and/or externally) for making(internally and/or externally) for makingnecessary investmentsnecessary investments


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However

Several factors suggest that the impactSeveral factors suggest that the impactof the supermarket revolution onof the supermarket revolution onfarmers, including small farmers,farmers, including small farmers,

may be less dramatic in some contexts,may be less dramatic in some contexts,andand

may have positive effects in transitionmay have positive effects in transition

countries; and even more so for ruralcountries; and even more so for ruraldevelopmentdevelopment


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Supermarket may not be the

main driver of the changes

FDI and increased standards in East EuropeanFDI and increased standards in East Europeanfood sector is driven mostly by EU integration,food sector is driven mostly by EU integration,not by supermarketsnot by supermarkets

Also elsewhere: eg. in Russia dairy, only outsideAlso elsewhere: eg. in Russia dairy, only outsidemajor cities are supermarkets drivers of change;major cities are supermarkets drivers of change;elsewhere processing sectorelsewhere processing sector


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2. Farms structure is mixed

Share of large farm companies (% land use)Share of large farm companies (% land use)

SlovakiaSlovakia 9090

Czech RepCzech Rep 7474

HungaryHungary 4545

RomaniaRomania 1818

CroatiaCroatia 55PolandPoland 1515

RussiaRussia 8585


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3. Revolution or Evolution ?

Agricultural restructuring in transitionAgricultural restructuring in transition

countries (Output, trade, employment,countries (Output, trade, employment,FDI, food industry restructuring, .)FDI, food industry restructuring, .)has been dramatic over past 15 yearshas been dramatic over past 15 years

Hence, additional pressure fromHence, additional pressure fromsupermarkets may be more evolutionsupermarkets may be more evolutionthan revolutionthan revolution


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Revolution or evolution ?

Change in ag employment 1998Change in ag employment 1998--20012001

0

20

40

60

80

100

120

1989 1991 1993 1995 1997 1999 2001

Cha

nge

in

agr.

labour

Czech Rep

Hungary

Poland

Slovakia


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Revolution or evolution ?EUEU CEEC trade in ag and food productsCEEC trade in ag and food products

19881988--20012001

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Totalagriulturaltra

e

io

Export

Import

Balance


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3. Revolution or Evolution ?

Agricultural restructuring in transitionAgricultural restructuring in transitioncountries has been dramatic over pastcountries has been dramatic over past15 years15 years

Hence, additional pressure fromHence, additional pressure fromsupermarkets may be more evolutionsupermarkets may be more evolution

than revolution, or:than revolution, or:Revolution is The NormRevolution is The Norm


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4. Retailers and vertical coordination may

play positive role for key weaknesses

Key weaknesses of ECA farms :Key weaknesses of ECA farms :

Shortage of finance for investmentsShortage of finance for investmentsQualityQuality

Access to high value marketsAccess to high value markets

Retail investments and coordinationRetail investments and coordinationwith supply chains may assist farms inwith supply chains may assist farms inthese areasthese areas


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Supply chain assistance to

farms Increasing evidence that investments byIncreasing evidence that investments by

agribusiness, food processors and retailersagribusiness, food processors and retailers

induces extensive farm assistance packagesinduces extensive farm assistance packageswhen supply of quality produce is insufficientwhen supply of quality produce is insufficient(which is virtually everywhere)(which is virtually everywhere)

Packages (can) include :Packages (can) include :

PrePre--financefinance Extension servicesExtension services

Investment assistance and loansInvestment assistance and loans


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Supply chain assistance

to farms Impact can be very significant on growth andImpact can be very significant on growth andinvestments of farms, also small farms (seeinvestments of farms, also small farms (seeDries and Swinnen 2003 for Poland)Dries and Swinnen 2003 for Poland)

Significant impact on internationalSignificant impact on internationalcompetitiveness and integration of small farmscompetitiveness and integration of small farmsin quality supply chainsin quality supply chains

Sometimes supply chain assistance is onlySometimes supply chain assistance is onlysource of inputs for (small) farmssource of inputs for (small) farms eg Lithuaniaeg Lithuania

Competition is important : it induces horizontalCompetition is important : it induces horizontaland vertical spillover effectsand vertical spillover effects


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Retailers may drive supply chain

assistance by food processingcompanies (Indirect effect)

Eg. Romania: 95% of dairy farms haveEg. Romania: 95% of dairy farms have11--2 cows. Dairy companies focusing on2 cows. Dairy companies focusing onhighhigh--quality market (incl retail sector)quality market (incl retail sector)tend to assist small farms; compared totend to assist small farms; compared tomarket channels targeted to informalmarket channels targeted to informaland low quality sales which do notand low quality sales which do not


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Concluding comments

No doubt, the supermarket revolutionNo doubt, the supermarket revolutionwill pose some important challengeswill pose some important challengesfor farms, and in particular for smallfor farms, and in particular for small

farmsfarms Possibly more likely to be evolutionPossibly more likely to be evolution

than revolution in transition countriesthan revolution in transition countries

Impact may be complex and importantImpact may be complex and important(potential) beneficial effects should not(potential) beneficial effects should notbe ignoredbe ignored


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Concluding comments

That said, theThat said, the implicationsimplications for policyfor policy--makers and international organizationsmakers and international organizationsareare importantimportant, and the, and the issuesissues areare

complexcomplex How to create a winHow to create a win--win situation ?win situation ?

What role can governments play in thisWhat role can governments play in this

process ?process ? Which actions can internationalWhich actions can international

organizations take ?organizations take ?


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