1. Economic and Transitional Impact of Food Retail Investments: Evidence from the Czech Republic Liesbeth DRIES & Vlaho Kojakovic WB-CEI-FAO Workshop on Agriculture, Agri- business and the Retail Sector in South-East Europe, Sarajevo, 24-26 May 2004

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

3. Recent developments in other regions (L-Am; Asia; Africa) Dramatic rise in market share of supermarkets and modern retail sector Multinationalization Inter-country as well as intra-country supermarket diffusion Concentration Important changes in procurement systems

4. Rise of modern retail sector 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

5. Rise of modern retail sector

7. Multinationalization

8. Multinationalization

9. Multinationalization

10. Multinationalization

11. Dynamic diffusion of FDI over 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

12. Spread to secondary 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)

13. Consolidation - emerging Expect acquisitions and mergers that will concentrate supermarket sectors. ‘Weapons’ of competition: – Organizational change in procurement – Format diversification

14. Format diversification

16. Format 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)

17. What drove the “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

18. What drove the “supermarket revolution”?

20. The future: convergence? CEE: Catching-up of lagging first wave and second wave countries

21. The future: convergence?

22. Change of procurement system – under Communism

23. Change of procurement system – during transition Dismantlement of the state-run and collectivized components of the retail procurement system Private general-line wholesalers Imports

24. Change of procurement system – globalization period Initially: retailers buy from local wholesalers and importers Shift 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)

25. Change of procurement system – globalization period Shift 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

26. Change of procurement system – globalization period Shift 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

27. Change of procurement system – globalization period Shift 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

28. Impact on farmers - evidence from the Czech Republic Data: – 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

29. The development of producer marketing organisations: PMO Developments 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

30. Importance 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

31. Potential benefits of PMO to 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)...

32. BUT 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

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

34. Marketing 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%

35. Contracts 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

36. Public versus private standards

37. Impact 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

38. Impact on Quality

39. 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

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

41. Concluding comments Implications 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 ?