\ Research Cond ucted by:Michigan State UniversiLatin American Studies cen:te~_.~.., r- -01111111!!~'''-University of Puerto RicoSocial Science Research

Il' •...~-

Permission to Reprint Must be Given in Writing by theLatin American Studies Center

Michigan State UniversityEast Lansing, Michigan

.,

Copyright © 1966By the Board of Trustees of Michigan State University

East Lansing, Michigan

TABLE OF CONTENTS

1. INTRODUCTION. 52. DEVELOPMENT OF THE PUERTO RICAN ECONOMY. 93. CONSUMPTION AND DEMAND CHANGES. 16

The Consumer: Some Comments . .Changing Patterns of Consumption and

Demand. ..Concluding Observations

1 6

1 823244. DISTRIBUTION SYSTEM

Wholesale and Retail Food Distributionin 1950

Retail SystemWholesale SystemRegulation Environment of Food Marketing

Channels in Puerto Rico

243344

48

5 . AGRICULTURAL PRODUCTION AND MARKETINGSYSTEM 50The Changing System of Agricultural

Production and Marketing.. 50Vertical Coordination in Selected Product

Markets 1950~1965 556. ATTITUDES AND COMMUNICATION BEHAVIOR 67

Attitudes and Communication Behavior:An Overview . 67

Attitudes, Preliminary Results. . 70Communication Behavior and the Latin

American Food Marketing Process:Some Preliminary Findings. 77

7. MODELING AND SIMULATION 81

Input-Output Model of Puerto Rico 81Systems Analysis in Food Marketing

Planning and Development . 86Systems Analysis and Economic Modeling 92Application of Simulation 97

8. APPRAISAL AND APPLICATION OF RESEARC~FINDINGS .9. DISTRIBUTION COSTS IN LESS DEVELOPED

COUNTRIES

1 00 ,1 1 0

LATIN AMERICAN FOOD MARKETING STUDYADVISORY COMMITTEE

Dr. Richard HoltonUniversity of California

Dr. Malcolm S. MacLean. Jr~University of Iowa

Dr. Dale Wo AdamsUniversity of Wisconsin

Dr. Everett M. RogersMichigan State University

Dro Garland WoodMichigan State University

Dr. Harold F. BreimyerU. S. Department of Agriculture

Mr. Martin StollerAgency for International Development

iii

SEMINAR PARTICIPANTS, STAFFLATIN AMERICAN FOOD MARKETING STUDY

MICHIGAN STATE UNIVERSITYDr. Charles Co SlaterDr. Harold M. RileyDr. R. Vincent FaraceDr. James D. ShafferDr. Herman E. KoenigMro Kelly M. HarrisonMr. John R. WishMr. John Eo Griggs

DEPARTMENT OF COMMERCECOMMONWEALTH OF PUERTO RICO

Mr. Jose SantiagoMrs. Idalia Rodriguez

UNIVERSITY OF PUERTO RICOMr. Jose A. HerreroMr. Perfecto SantanaMr. Luis Davis

,

iv

FOREWORD

This seminar has been a part of research effortsto understand more fully the role of marketing in theprocess of development 0 Sponsored by the United StatesAgency for International Development, th~s researchstudy ("The Role of Food Marketing in the Developmentof Selected Latin American AreasH) represents adeparture from the more traditional approaches. Itexamines first the experience in Puerto Rico, where aLatin culture has experienced a rapid development inclose association with the VaSa economy. A secondphase of this research assignment will be conducted ina rather large metropolitan area of Latin America; itwill examine the market structure and consequences ofchanges in marketing systemso

The approach to this problem has been interdis-ciplinary, bringing together marketing, agriculturaleconomics, communications and systems engineeringskills. The study has been the product of cooper-ation between universities from the United Statesand Puerto Rico. While Michigan State Universityhas been the contractor for the United States Agencyfor International Development sponsored research,the Social Science Research Center of the Universityof Puerto Rico has received the active, technicaland financial support of the Department of Commerce,Commonwealth of Puerto Ricoo Both of these sourcesof support and the research institutio~s have mergedtheir efforts to conduct the studyo The Social ScienceResearch Center at the University of Puerto Ricohad, however, previously been the focus of researchinto the problems of marketing, leading to thepublication of Marketing Efficiency in Puerto Ricoby Kenneth J. Galbraith and Richard Holton~ avaluable benchmark for this researchc

The research was in the field from June !65to June '660 Reports are being prepared, includingthree doctoral dissertations and an equal number ofmaster's theses. A research report of this phase ofthe work will be prepared this fall,

v

The seminar proved to be a valuable testing groundfor ideas being worked out for the research reports. ,

Dr. Charles C. SlaterCo-Director of ResearchDr. Harold Mo RileyCo-Director of Research

vi

PREFACE

At the culmination of the field research inPuerto Rico a three day seminar was held to gain thecritical review and suggestions of those who had sofreely supported the Latin American Food MarketingStudy effort. The widely based group that met atthe La Concha Hotel in San Juan on June 8, 9, and10, 1966, included scholars, businessmen, governmentofficials, and representatives of related researchprojects from Puerto Rico, the United States, anda number of other Latin American countrieso

Because of the number of participants in theseminar (80) the length of the material presented,and the diversity of the presentation, it becameevident that a summary of the proceedings was neededaThus, this publication has been developed for theuse of the seminar participants who will be ableto view th~s material in the broader context of theseminar itself.

No attempt has been made to add new materialto that given at the seminar but only to summarizethe basic points presentedc The organization ofthis publication, then, follows directly that of theseminara

The editor is indebted to the conferencecontributors who spent many hours condensing theseminar material from transcribed tapes of theirpresentationsc

Also much credit is due Joellyn Risch andMarilou Peterson who willingly shouldered much ofthe extra burden of preparing this publicationc

Finally, a special thanks goes to Mrs CharlesSlater who transcribed from often difficult tapesthe full proceedings of the seminar; Jos€ Santiagoand Frank Doane who aided in the preparation ofthis publication; and Marilyn Pretzer, Linda Stanleyand Suzanne Ludwig whose editorial help wasinvaluablE 0

viiRobert Wo NasonEditor

SEMINAR PARTICIPANTS, GENERAL

The seminar meetings were open and public, thusonly a partial list of the participants can bepresented,though there were many more who madesignificant contributions.

Dr. Dale Wo AdamsUniversity of Wisconsin

Mr. Manuel ApodacaGrand UnionCommonwealth of Puerto Rico

Mrs. Margarita AyalaEconomic Development AdministrationCommonwealth of Puerto Rico

Mr. Frank BallesterBallester Hermanos, Inc.

Honorable Jenaro BaqueroSecretary of CommerceCommonwealth of Puerto Rico

Ruben A. BerriosDominican Republic ProjectTexas A. & M. University

Dr. Ray BillingsleyDominican Republic ProjectTexas Ao & Mo University

Mr. Pedro BonillaDepartment of CommerceCommonwealth of Puerto Rico

Dr. Harold F. BreimyerU. S. Department of Agriculture

Mr. Leonard D. BrooksAgriculture-Economic AdvisorRural Development MissionUSAIDPanama

ix

Dro Richard T. CherryDominican Republic ProjectTexas A. & M. University ,Mr. Ralph H. ChewA. E. Chew and Co., New York

Mr. Milo L. CoxChief Rural Development DivisionOffice of Institutional DevelopmentBureau for Latin AmericaAgency for International DevelopmentWash~ngton, Do C.

Dr. Bradford CrossmonAgricultural Experimental StationUniversity of Puerto Rico ,Mr. Julio Cruz RodriguezDepartment of LaborCommonwealth of Puerto Rico

Mr. Eric CumpianoOffice of Economic CounselHouse of RepresentativesCommonwealth of Puerto Rico

Mro Lauchlin CurrieBogota, Colombia

Mr. Luis DavisGraduate Student of EconomicsUniversity of Puerto Rico

Mr. Zaid DiazCSI Processing Corpo Puerto Rico

Dr. Edmond W. Jo FaisonUo S. EmbassyLa Paz, Bolivia

Dr. R. Vincent FaraceDepartment of CommunicationsMichigan State University

Mr. Jack T. FarleyEducational Program for Coop. Leaders, Ext. ServiceCommonwealth of Puerto Rico

x

Mro Eo Lee FellerFellman Associates, Inc, Coldwater, Michigan

Dr. Vicente FernandezSpecial Assistant to the Secretary

of Domestic CommerceGovernment of ArgentinaBuenos Aires, Argentina

Mr. Persio FrancoDominican Republic ProjectSanto Domingo

Mrs. Judith Frias de RamirezAgricultural Experimental StationUniversity of Puerto Rico

Mro John Eo GriggsDepartment of Marketing and TransportationMichigan State University

Mr. Kelly M. HarrisonDepartment of Agricultural EconomicsMichigan State University

Mro Donald HenleyDepartment of Marketing and TransportationMichigan State University

Dr. Nicolas Hernandez RiveraDepartment of CommerceCommonwealth of Puerto Rico

Dr. Richard HoltonUniversity of California

Mr. James Wo HoweMember of the Policy Planning CouncilDepartment of StateWashington, Do C.

Mro John To HowleyAssistant Program Officer-Operations,Program Branch-Office of Development PlanningUSAIDBuenos Aires, Argentina

xi

Mr. Robin KirwainDominican Republic ProjectTexas Ao & Ma University •Mr. Stanford KlapperS. Klapper and AssociatesCommonwealth of Puerto Rico

Dr. Herman Eo KoenigDepartment of EngineeringMichigan State University

Mr. Charles Kenneth LaurentLatin American Marketing Institute (ILMA)Bogota, Colombia

Mr. Roberto LefebreAgricultural Extension ServiceUniversity of Puerto Rico

Mr. Don LemonsDepartment of CommerceCommonwealth of Puerto Rico

Dr. Malcolm So MacLean, Jr.University of Iowa

Mr~ Jose MartiSupermarkets Coop.University of Puerto Rico

Mr. Frank MatternAgricultural Experiment StationUniversity of Puerto Rico

Mro Luis Mejia MatteiP. Ro Agricultural CouncilCommonwealth of Puerto Rico

Mr. Gene McCannLouisiana State University

Dr. Jerome McCarthyDepartment of Marketing and TransportationMichigan State University

xii

Mro Robert W. NasonDepartment of Marketing and TransportationMichigan State University

Mro Pedro Negron RamosDepartment of AgricultureCommonwealth of Puerto Rico

Mr. CaIson An DeOliveira MendesTechnical Director-SUDENERecife, Brazil

Mro Modesto OrtizPe R. Federation of Consumer CoopoCommonwealth of Puerto Rico

Dr. John Eo PearsonDominican Republic ProjectTexas A. & M. University

Mro Norman PiersonWashington, D. Co

Mr. Eo Mo PopeInt. Division of General FoodsWhite Plains, New York

Dr. Harold Mo RileyDepartment of Agricultural EconomicsMichigan State University

Mro Carlos RocaCommonwealth of Puerto Rico

Mrs. Idalia RodriguezDepartment of CommerceCommonwealth of Puerto Rico

Dr. Everett M. RogersDepartment of CommunicationsMichigan State University

Dr. William RossDominican Republic ProjectTexas A. & Mo University

xiii

Mro Perfecto SantanaGraduate Student of Econom~csUniversity of Puerto Rico

Mr. Jose SantiagoDepartment of CommerceCommonwealth of Puerto Rico

Dr. James Do ShafferDepartment of Agricultural EconomicsMichigan State University

Mr. John H. ShoafU. So Department of Commerce

Dr. Charles C. SlaterDepartment of MarketingMichigan State University

Mro Philip D. SmithAssistant Development OfficerRural Development DivisionUSAID MissionRecife, Brazil

Dr. Harold B. SorensonDominican Republic ProjectTexas A. & M. University

Mr. Martin StollerMarketing Advisor, Private Sector Development

DivisionOffice of Institutional DevelopmentBureau for Latin AmericaAgency for International DevelopmentWashingto~ D. Co

Mr. Alan Me StroutActing Chief of the Policy Planning DivisionOffice of Program CoordinationAgency for International DevelopmentWashington, D. C.

Dr. Donald Ae TaylorDepartment of Marketing and TransportationMichigan State University

Dr. He Go ThompsonDominican Republic ProjectTexas AD & Me University

Mrc Fernando Valls RodilDepartment of AgricultureCommonwealth of Puerto Rico

Mr. Thomas WallIBEC, Puerto RicoCommonwealth of Puerto Rico

Mr. Thomas WebbDepartment of Marketing and TransportationMichigan State University

Mro John Ro WishDepartment of Marketing and TransportationMichigan State University

Dro Garland P. WoodMichigan State University

Dr. John To WynDominican Republic ProjectTexas Ao & M. University

Mr. Montague YudelmanInter-American Development BankWashington, Do C~

Mrso Lillian ZapataAgricultural Experimental StationUniversity of Puerto Rico

Mro Pedro ZorrillaJo Gus Lallande IncoCommonwealth of Puerto Rico

xv

CHAPTEr{ 1

IfJTkODUCT IOHPresented and Summarized by

Charles C. Slater

Chapter 1

This three-day seminar assembles agroup of people concerned with the role offood marketing and economic development,and includes representatives from LatinAmerican countries, the U. S. Agency forInternational Development, scholars andgovernment representatives concerned withthe development, industrialists andagricultural specialists from the U. S.mainland, Latin America and Puerto Rico.The researchers from Michigan StateUniversity, the University of PuertoRico, and the Department of Commerce ofthe Commonwealth of Puerto Rico who haveconducted this year-long study programwelcome the opportunity to convey thepreliminary findings and to hear commentsand questions of the highly qualified groupassembled. The diversity of talents andinterests here at this seminar reflect thecomplexities of the role of marketing ineconomic development.

The study reported in this seminaris the first phase of the research projectdesigned to explore and evaluate the roleof food marketing in economic development.The research will continue in another majormetropolitan area in Latin America toassess how reforms in food marketing canimprove the efficiency of the system andfavorably affect development. The

5

Research Division of the United StatesAgency for International Development andthe Department of Commerce of Puerto Ricohave jointly sponsored the first phaseof the year-long study here in Puerto Rico.

The marketing of food may seem amundane element of the process of develop-ment where efforts have been focused on thebuilding of roads, dams, bridges, powerplants, and other major capital infrastruc-tural requirements of the technicallyadvanced society. Interest in developmentplanning has only recently shifted to theproblems of marketing, from theprior emphasis on infrastructural build-up, agriculture productivity improvement,education and health.

Dr. Walter W. Rostow has probablybeen the most articulate and innovativestudent of the problems of internalmarket development. His work has shownthe need to study in detail the process ofmarket operations as a system, vital toboth urban development and improvement ofagricultural incomes.

It has been observed that a good manyfarm operators in underdeveloped areas arewilling to risk market farming because ofuncertainties of the market. Pricefluctuation or demand changes can seriouslyaffect them, if they depend fully uponmarket sales for their income. The rewardsof market farming can be great; the risk,however, is often so high that price changesmight mean starvation to some members oftheir family. This is still true forcertain areas of Latin America today. Asa result, there is a need to understand marketinstitutions and the way people feel aboutmarket processess in order to understand howmarketing institutions can be changed andimproved.

Lower income peoples spend half ormore of their income for food, particularly

6

in urban areas of underdeveloped parts ofthe world. Since much of this expendituregoes for marketing services, it isimportant to understand the role of market-ing services and how they might be made moreefficient to increase the real income ofthe low-income urban people. Becauserisks seem to impede food reaching cities,inflation amid want exists in many citiesof the world. A coordination processappears lacking.

Puerto Rico has tackled the problemof marketing development, stimulating newhopes rather than maintaining the check andbalance of a static system designed merelyto maintain the structure of the presentinstitutions and present distribution ofresources. Puerto Ricans have willingly creatednew insti~utions and modified older organiza-tions to adapt to changing needs. AlthoughPuerto Rico has a close relationship withthe United States, its economic developmentproblems are different in many respects.Puerto Rico has experienced rapid changeand growth of income. At the same time, thestory of changes in institutions which haveaccompanied this growth have been welldocumented. Thus, it is important todevelop research instruments for measuringthe attitudes in a Latin community, particularlywhen the other changes have been occurringand have been well documented.

Analysis of this problem involves aninterdisciplinary approach. We have broughttogether marketing, agricultural economics,communications, and systems engineersspecialists. This study covers the historicchanges in marketing activities and theattitudes of market operators, farmers,assembly operators, processors, importers,wholesalers, retailers, on through toconsumers. Finally, the impact of governmentand other public change agents has beenappraised.

In the conduct of this study it was7

assumed that market institutions could besubjected to study by institutional andbehavioral and systems methods andthat market institution reform could reducerisk, cut costs and better coordinate marketprocesses. Our study is not as yet complete.Not all of the data has been fully analyzedfrom our several surveys, and thus, theresearchers here ask the other seminarparticipants to comment and suggest actionswhich will improve the final report andthe recommendations which will arise fromthis study.

8

CHAPTER 2

o EVE LOP n E N T 0 F THE P U E R TOR I CAN E CON 0 r~yPresented and Summarized by Harold Mo Riley

Introduction

The purpose of this chapter is to provide anoverview of selected aspects of the Puerto Ricaneconomy. It is largely descriptive of the conditionsand the events which have been associated with arapid rate of economic growth. This information isuseful in understanding the environmental conditionswithin which significant changes in the food industryhave occurred,

Geographic Characteristics

Puerto Rico is the eastern-most island of theGreater Antilles. Since its discovery by the Spanishin 1493 it has continued to have strategic importancein the protection of commerce routes serving theCaribbean area.

The island is about 35 miles wide and 100 mileslong. The terrain is mountainous with an irregularband of fertile coastal plains. The climate istropical although temperatures are modified bynortheasterly trade winds, The rainfall pattern isextremely variabl~ ranging from 60 to 80 inches alongthe north coast to 30 inches or less in the south-western part of the island.

Until recently agriculture has been the majorindustry in Puerto Rico with sugar cane, tobacco,coffee, fruits and vegetables being the principalcultivated cropso Milk, poultry and egg productionhas increased rapidly in the past 15 yearso

9

!

Puerto Rico has a high population density ofapproximately 700 persons per square mile. Aboutone-half of the populati on is urban. The largestcities are San Juan with a population of 700,000in the metropolitan area, Ponce with 150,000 andMayaguez with 85,000. The total population ofthe island was 2.6 million in 1964.

Political History

Between 1493 and 1898, Puerto Rico was governedas a Spanish colony. During that time the San Juanharbor played an important role in the protection ofSpanish trade routes. Efforts were also made tocolonize the island with emphasis on sugar and cattleproduction. Negro slaves were imported during the18th and 19th centuries to work in the sugar industry.

As a consequence of the Spanish-American War,Puerto Rico became a protectorate of the United Statesin 18980 This opened free trade relationships withthe U. S. mainland and stimulated the flow of invest-"ment capital in the Puerto Rican sugar and tobaccoindustries.

In 1917 the United States extended citizenshipprivileges to Puerto Ricans, thus removing anypolitical barriers to emigration and travel betweenthe island and the mainland.

Between 1898 and 1948 the governors of theisland were appointed by the President of the UnitedStates. Although the Puerto Ricans had their ownlocal legislative body, the public administration ofthe island was dominated by the policies of theUnited States government as interpreted by the appointedgovernors.

A political, social and economic revolution beganto get underway in Puerto Rico around 1940. Thismovement grew out of the human misery and widespreadpoverty of the 1930's. Luis Munoz Marin, whose lifehas been detailed by Thomas Aitken, Jrn in a recentbook, Poet in the Fortress, emerged as an outstandingpolitical leader to establish the Popular DemocraticParty in 1938. The slogan of the party was "Pan,Tierra y Libertad" (Bread, Land and Liber·ty). In

10

his campaigning Munoz attempted to convince thepeople in all walks of life that they held within theirhands the power to change their living conditions.After his election to the legislature in 1940, Munozworked closely with Governor Rexford Tugwell to initiateand carry forth a number of politi.cal and economicreform programs. This marked the beginning of anactive program to foment the development of Puerto Ricoand to improve the level of living for the masses.

In 1948, Munoz became the first elected governorof Puerto Rico. By 1952 he had laid the groundworkfor a change in political status of the island whichwas institutionalized as the Commonwealth of PuertoRico CEstado Libre Associado;. This status extendedto the island nearly all the privileges of statehood.A notable exception is that the island '.selectedrepresentatives to the United States Congress do nothave voting privileges in the legislative body.Because of this Puerto Ricans are not required to payfederal income taxes. Nevertheless, Puerto Ricoparticipates in and receives substantial benefitsfrom federal programs in health, education, housing,credit and other areas.

Without a doubt the close association with theUnited States has fostered the development of thePuerto Rican economy. In addition to the directcommercial ties, the political and fiscal stabilityhas provided a favorable environment for economicgrowth. The effects of education and the culturalinterchange with the mainland have no doubt had asignificant influence on the attitudes and aspirationsof Puerto Ricans regarding social and economic change.

Economic Take-off

During the 1940'-s various economic reformprograms were initiated in Puerto Rico. Thesereforms included the creation of several "authorities,"among which was a Land Authority to carry out a landreform, and authorities for transportation, communica-tions and water resource development. There was alsoestablished a government development bank and anindustrial development company. A central planningagency was created to coordinate development planningactivities.

11

In the staffing of these agencies an effortwas made to attract young, well-trained individualsdedicated to the development tasko This contributedto creation of public trust and confidence in thegovernment as a means to bring about improved levelsof Iiving.

During the early phase of the development effortthe Puerto Rican government entered into the owner-ship and operation of some manufacturing plants. Theresults were not encouraginge By 1947 it beganselling off these plants and shifted the emphasis ofits industrial development program toward thesupport of private enterprise. A Department of Fomentowas established to coordinate the expansion of industryand tourism; Mr$ William Stead describes this depart-ment in a National Planning Association pamphlet calledFomento-The Economic Development of Puerto Rico.

The entlre range of development programs becameknown as "Operation Bootstrapnlf By 1965 the industriali-zation program had helped promote the establishment of1,211 manufacturing plants providing a total employmentfor 82,175 personso

Measures of Growth

Puerto Rico has experienced a high rate of economicgrowth over the past 25 yearsc In 1940 per capitaincomes and levels of living were similar to those inother Caribbean Islands and in many other Latin Americancommunities. Between 1940 and 1965 real income percapita nearly tripled. During the 1950's the averagerate of growth in per capita income was 5.1 percentper year, one of the highest in the worldc

There has been a noticeable shift in the relativeimportance of different sectors of the Puerto Ricaneconomy when measured in terms of output and employment

1es2.2. and 2.3). Between 1950 and 1964 agriculturedeclined sharply while manufacturing, construction andother services made substantial gains,

Unemployment decreased only slightly over thepast 15 years and was estimated to be 11 percent ofthe labor force in 1964.

12

TABLE 201Gross Domestic Product, Population and Per Capita

Income, Puerto Rico (1954 dollars)

G D P Population Gross ProductYear Mil. Dollars Thousands Per Capita Dol.

1940 499 1,869 2691950 879 2,211 3991960 1482 2,350 6381965 2083 2,626 807Source: Planning Board, Commonwealtb of Puerto Rico.

The growth in human population averaged 1.2percent per year between 1950 and 1964. This isconsiderably less than tbe rates of growth in manyLatin American countrieso It is interesting to notethat the crude birth rate declined from 40 per thousandto 30 per thousand between 1950 and 1964. Duringthe corresponding period death rates dropped from 10.5per thousand to 6.5 per thousand. The net migrationof Puerto Ricans to the United States mainland hasbeen an important factor in holding down populationgrowth rates. Over the past 15 years the net outmigration was 1 ~ percent of the population per year.Without this migration population growth rates wouldhave been more than doubled and about equal to therates in many of the less developed countries~

Puerto Rico is highly dependent upon externaltrade with more than 90 percent being with mainlandUnited States. In 1964 imports were equal to 36percent of total gross domestic product while exportswere equal to 54 percent of gross domestic product.

There has been a high rate of investmentsupporting the rapid growth of the Puerto Rican economy.Investment rates increased from 8 percent of G D Pin 1940 to 15 percent in 1948-1952 and 25 percent in1961-19650 Between 1943 and 1960, 43 percent of thecapital came from external sourcesc Only 7 percentof investment came from savings in the private sector.Depreciation and public savings provided the balance

13

Percent of Net Product by Industry Sectors, Puerto Rico,1950 and 1964

Percent of total domestic productIndustry 1950 1964

Agriculture 24 10Manufacturing 14 23Construction 4 7Trade 17 17Government 19 19Other 22 24

TOTAL 100 100

Source: Planning Board, Commonwealth of Puerto Rico.

TABLE 2.3Employment by Major Industries, Puerto Rico

1950 and 1964

IndustryNumber of Persons

1950 1964

TOTAL employedTOTAL unemployed

21655

32559688

14010640865482

AgricultureManufacturingOther

Source: Planning Board, Commonwealth of Puerto Rico.

14

of investment funds 0

Conclusion

Puerto Rico has undergone rapid economic changeover the past two decades. This was triggered by thesocial and political ferment of the late 1930ts.Much credit for this transformation goes to thepolitical leaders and the public servants who havedevised effective reform programs and have carriedthem out with dedication and responsibility.Undoubtedly Puerto Rico is different from many otherdeveloping countries with regard to political andeconomic stability and its close commercial ties withmainland United Stateso Nevertheless the changeshave been striking and some of the approaches tofomenting development seem relevant to the problemsin other Latin American communities.

15

CHAPTER 3

CONSUMPTION AND DEMAND CHANGES

The Consumer: Some CommentsPresentation by Dr. James D. ShafferSummarized by Robert W. Nason

The purpose of this section is to state brieflythree considerations regarding consumer analysis andthen to outline the several uses of the consumersurvey research which was performed this past year.

The first consideration deals with consumerchange. It is easy for marketers to concentrate onthe technical problems of coordinating the marketingsystem and neglect the really essential problems andrequirements of the consumer. It is only within cer-tain limits that the marketing system can be changedwithout violating the basic social and economic habitsof the consumer.

On the other hand, there are many possible mar-ket system changes that the consumer does not believepossible. If one had asked consumers at the time ofthe Galbraith-Holton study if they would be willingto shift to supermarkets, the answer would probablyhave been no. Yet, the extent to which many PuertoRicans have shifted to supermarkets indicate theirwillingness to change.

Thus, though consumers may be more adaptablethan they perceive themselves, careful attentionmust be paid to their basic habitso This is to saythat systems from other societies should not bedirectly imposed on developing areas. In this light,it seems desirable to have a marketing system inPuerto Rico that provides retail facilities whichare close to the consumer.

16

The second consideration deals with the notionof underconsumption. One of the hypotheses whichhas been mentioned is the thesis that there is a ---lack of effective demand in underdeveloped economies,however, the statistics concerning Puerto Rico donot indicate such a lack" In fact, the personalsavings in this economy have been negative or zerofor the past fifteen years. The savings and invest-ments have come from other sources. Consequently,the emphasis of savings as a means of economicdevelopment needs to be carefully evaluated.

The third consideration deals with the signif-i.cance of the government free food program; theimpact of this program on economic development hasbeen extensive.

The uses for the consumer research performedthis past year are three-fold. First, it is impor-tant to understand the effect of development on theconsumer and, further, the effect of the consumer oneconomic progresso Through economic and attitudemeasurement the nature of the consumer in Puerto Ricohas been determined. Secondly, the consumer dataprovides an input for the systems model which isbeing developed for Puerto Rico. This model will bedescribed later in this publication. Finally, itshould be pointed out that the survey data providesa background to help social scientists conceive ofnew institutions that can be adopted to the societyunder consideration.

17

Changing Patterns of Consumption and DemandPresented by Idalia RodriguezSummarized by Robert We Nason

Introduction

This section is devoted to the presentation ofselected statistics which give a partial picture ofthe consumer and consumer demand in Puerto RicooFirst, demand will be analyzed as a function ofpopulation size, spending power, and willingness tospend. Second, some consumer characteristics willbe noted. Third, the place of food purchase will beexplored. Finally, consumer attitudes concerningfood distribution will be reviewed.

Demand

Population. In 1960, 44 percent of the 2,349,000Puerto Ricans were urban dweJlers. During this periodof 1940-1960, the rural population remained constantwhile the urban population doubled,

Income. From 1940 to 1965 per capita incomeincreased from $118 to $905 lcurrent dollars) or from$213 to $748 (1954 dollars) 0 The median family in-come in 1953 was $1,287 and by 1963 had increased to$2,308. Table 3.1 presents the distribution offamilies by income for 1953 and 1963.

Consumptiono The willingness of consumers tospend is evidenced by the fact that during the y~ars1950 to 1965 personal expenditures have equaled 6rexceeded disposable income. Changes in foodconsumption are characterized by rapidly increasingper capita consumption of dairy products, meat, eggs,fish, and green and leafy vegetables,while percapita consumption of coffee, starchy vegetables andsugar has dropped. It should be noted also that thegovernment free food program has been increasing thedistribution of free food and in 1964 representedabout 4.3 percent of the total food expendituren

Summary. Hence, the exis~ence of effectivedemand is well established.

18

TABLE 3.1Distribution of Families by Income Levels

Level Percent of Familiesin Dollars 1953 1963

1,000 39 171,000-1,999 39 272,000-4,999 18 385,000- D 18

TOTAL 100 100MEDIAN $1,287 $2,308

Selected Consumer Characteristics

The surveys of consumers were carried on inSan Juan and Mayaguez to contrast a modern urbanarea with a more traditional one. The averagefamily size was 4.89 persons in San Juan and 4.18in Mayaguez. In both cities nearly all familiesowned refrigerators, about half owned cars, veryfew had maids who purchased the food, and 20 percentin San Juan and 15 percent in Mayaguez had wiveswho worked outside of the home,

The purchasing decisions for food buying werelargely made by the female head in both cities;however, San Juan had a higher percent of female-head decision makers (83%) than did Mayaguez (75%).The person who actually purchased the food was a~ainpredominately the female head in both c~ties, but thepercentage of female head purchasers was lower (SanJuan 77%, Mayaguez 55%) than the percentage fordecision makers. Joint female and male decisionmaking and purchasing accounted for about 10percent of the families in both San Juan andMayaguezo

19

Food Retailers Used

Table 3.2 depicts the major differences in thedistribution of food retailers used between SanJuan and Mayaguezo In summary, a higher percentage ofhouseholders in San Juan use supermarkets than dothose in Mayaguezo

TABLE 302

Principal Food Retailers Used

Percent of HouseholdsType of Outlet San Juan Mayaguez

Supermarkets 61 38Colmados & Cafetin 34 57Market Plaza a 3Other .3 2No Answer 2 a

100 100

Considering briefly only San Juan respondents,35 percent of the families using supermarkets walkto supermarkets, 46 percent ride in private cars,and 18 percent use public transportation, while 87percent of the families who use colmados walk to thestoreo Only 8 percent of the supermarket usersobtained credit while 48 percent of the colmado usersobtained credit" About one-fourth of the supermarketusers and the colmado users had their purchasesdeliveredo The supermarket users shopped on theaverage of 101 times per week while the colmado usersshopped on the average 202 times per weeko

It was found that generally supermarket shopperswere younger and more educated than shoppers usingother food retailers. Further, it was found that ahigher percentage of supermarket shoppers versusshoppers using other food stores had family incomesof $2,000 or more, had been outside of Puerto Rico,and owned carso

20

Finally, the reasons given for using varioustypes of food stores by the respondents offer clues asto the nature of both the retail system and theconsumers themselves. San Juan supermarket userscited convenience (closeness) and variety as important,while Mayaguez supermarket users viewed fresh qualityand low prices as most significant 0 Colmado,carniceria, granja, and panaderia users in both citiessaw convenience (closeness) and fresh quality as vital.Finally, the plaza de mercado users in both citiescited fresh quality and variety as the main reasonsfor shopping at this type of food outleto

Consumer Attitudes Toward Supermarkets

The following statistics are based on the SanJuan and Mayaguez surveys 0 The comparisons were madeon the basis of place of buying (supermarket VSo non-supermarket): Age (under 35 years vs. 35-54 years vSoover 54 years): Education (under 7 years VB. 7-12years vSo over 12 years): Income (low VB. medium vs.high): and modernity (modern versus traditional) 0

The modernity for each respondent was calculated fromseven attitude questions which dealt with therespondent's perceived view of his influence on hisfuture. Those who felt they could influence theirfuture were defined as modern while those who feltthey could not were defined as traditional"

In About 70 per cent of all consumers inter-viewed felt that large supermarkets should begovernment regulated before they drive the small foodstores out of business.

20 Yet, 80 per cent of the respondents felt thatit was more enjoyable to buy in large supermarketsthan in small storeso However, only 73 per cent ofthe non-supermarket shoppers and 73 per cent of thelow-income consumers agreed on this pointe

30 Of those interviewed, 77 per cent felt thatthe quality and variety of food is better now thanten years agoe This view was held more often bysupermarket rather than by Don-supermarket buyers,modern rather than traditional consumers, youngerrather than older consumers, more educated rather thanless educated consumers, and higher rather than lowerincome Gonsumersc 21

40 About 50 percent of the consumers sampleddid not trust supermarket advertisements for specials,with the traditional and the less educated consumersbeing the most apprehensive 0

50 About 60 percent of the respondents feltprepackaged fruits and vegetables to be risky; SanJuan consumers, traditional consumers, and lesseducated consumers hold this view most frequently 0

60 Roughly 26 percent of the consumers sampledfelt that food scales were fixed to favor the re-tailer. The traditional consumers, older consumers,less educated consumers, and lower income consumerspredominated in the group who held this viewo

70 Approximately 84 percent of the respondentsfelt the need for regulation of meat processing andgo percent felt the need for more and better informationon price and product qualityo

22

Concluding ObservationsPresentation by John Re WishSummari.zed by Robert W. Nason

The surveys taken this past year show that re-frigerator and car ownership has increased markedlysince the 1960 census This five-year growth ofownership can be attributed in large part to thewillingness of Puerto Rican banks to make personalloans for such durable goods. Further, thefurniture stores themselves extend a great deal ofcredit. In one sense these purchases ought to beconsidered consumer investments 0 Certainly, theyhave spurred additional business and thereby causedincreased investment.

Related to the above point, the low level ofpersonal savings or, put another way, the high levelof demand, has created employment. However, becauseinvestment has not been forthcoming from the popula-tion it has had to come from business, the government,and external sources.

It should be pointed out that the past year'ssurveys indicated that in general, servants offamilies in Puerto Rico did not do the shopping forthe family, This point counters a commonly held view.

Finally, it was maintained earlier thatMayaguez consumers made less of their purchases insupermarkets, It should be noted that in San Juanthere is about one supermarket for 2,000 persons,while in Mayaguez there is about one supermarketfor every 10,000 persons"

23

CHAPTER 4DISTRIBUTION SYSTEM

Wholesale and Retail FoodDistribution in 1950

Presented and Summarized by Jose Santiago

Introduction

The purpose of this section is to picture ina general way the channels of sales and the distri-bution situation of food products as it existed in1950. Some information on transportation will alsobe given in this section. The information for thissection was obtained from the boo~ Marketing Ef-ficiency in Puerto Rico by John K. Galbraith andRichard H. Holton, annual reports from governmentand private agencies, and some personal interviews.

Channels of Food Distribution in 1950

Chart 4.1 portrays the channels for food in1950. It shows the flow from producer to importer,to broker, to trucker, to wholesaler, to retailer,to ultimate consumer and the interrelationships ofsome of these processes. This is a complex system.There is heavy credit activity at all levels ofdistribution. Dependence on credit had a detri-mental effect on competition because some business-men were forced to buy only from suppliers whowould give them credit. There was a tendency forsmall retailers and those in rural areas to dependon few wholesalers (Here, less than 12 wholesalersare considered to be few while more than 12 areconsidered to be many). Purchases were made inthree ways: (1) direct to the mainland, (2) throughan agent, and (3) through another wholesaler.

24

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i-0<

cL Z~

w \..)~(_J c(Lu I-

CL

25

~I---:? Z

/) I

JJ

ou

aLr\0\rlI

c::=:l00

r-i ~~ 0::::

0:=--1 ~;....'-'-I< (/)

x ~0 W

ZZc:r:::r:::0

Food Wholesaling in 1950In food wholesaling (other than plaza sales)

there were 434 wholesalers in 1950, with averageyearly sales of $414,000 for all firms. Most firmswere much smaller. A large number of firms had lowsales volumes" Seventy percent of sales were staples(rice, sugar, codfish, etc"), while 19 percent werecanned goods. In comparison, in 1963 there were 539wholesalers with an average yearly sales of $755,000.About 50 percent of the food consumed in 1950 was im-ported,

Table 401 shows the degree of importation ofsome of the imported products 0 The highest percentagesshown are fats and oils, 9503 percent, cereals, 8805

(TABLE 401

Food Products Imported Into Puerto Rico1950-1951

ProductDollars

(thousands)Percent

Imported

Dairy Products 541Eggs 21 3303

48 6Meat, Poultry, Fish 109Cereals 428

Green Vegetables

64566

Starchy Vegetables

Fruits and Tomatoes 118

Legumes and Nuts 8664Fats and Oils

$2,078

26

percent, and legumes and nuts, 7404 percent. Therewas limited production of these items in Puerto Ricoand dependence on their import was heavy. On theother hand, where food was locally produced, importswere low: e go starchy vegetables, 15.3 percent;fruits and tomatoes, 29.6 percent; and eggs, 33.3percent.

Wholesale gross margins averaged 14 percentin 1950. By 1963 the wholesale gross margin haddropped to an average of 8 percent.

Wholesale stock turns were around two peryear in 1950. Today there is an average of eightturns per year (In the U. S. the average is 13turns per year.). Inventories in 1950 variedwidely and in many cases had no relationship tosales volume. There was no apparent desire toexpand in 1950.

Food Retailing in 1950

Store Size and Characteristics. There were16,746 food stores in 1950 which together sold ovcr$109,112,000. Of all grocery stores, 87 percent,or 14,500 stores, sold less than $10,000 per year each.In comparison, in 1963 there were 22,526 foodstores selling over $411 million. Sixty-fivepercent of the grocery stores, or 13,000 stores,sold less than $10,000 in 1963. It is estimatedthat yearly sales of $12,000 was the minimumamount of sales needed to support one employee.In 1950 many stores had two employees, and the averagesales per employee was low; the number of custo-mers served and the dollar amounts involved werealso small. Competition was not an issue in 1950.The average transaction for stores with monthlysales below $10,000 was about $2.00. This wasdue to the low income per family and the family'slack of refrigeration and storage space. Moststores carried a limited line and were combinedgrocery store, bar, and restaurant. Individualownership was the main type of organization,

Credit and Delivery. Credit was offered bymost retailers in 1950. Ninety-four percent of thestores made some credit sales, and more than half

27

of the stores sold over 60 percent of theirvolume on credit.

Also, delivery was made of the products pur-chased in 83 percent of the total sales in counterservice stores and 70 percent in self-service stores.

Retailing or operating costs were high. Grossmargins in 1950 were 23 percent of sales in average,but the net return to the retailer was very low.

Stores with Yearly Sales Over $500,000. In1949 six stores-had yearly sales of at least$500,000 each and together sold $4,500,000. In1958, thirty-six stores had yearly sales of atleast $500,000 each and together sold $49,000,000.Finally, in 1963, fifty-two stores had individualyearly sales of at least $500,000 and together sold$84,621,000 that year. The increase from 4 percentof total sales in 1949 to approximately 40 percentin 1963 suggests that the trend is toward big stores.

Summary of Food Retailing andWholesaling in 1950

10 Both wholesaling and retailing were charac-terized by a large number of stores with small salesvolume.

2. Providing credit was common.

3. Corporations or formal partnerships wererare in 19500

4. It was easy to enter the wholesale orretail business since working capital was obtainedthrough credit from the suppliers.

5, Going into business (mostly in retail)was an alternative to unemployment or working inthe sugar cane fieldso Owner-managers kept com-plete control of the operations of the businessand were unwilling to delegate authority except toother members of the family. There was no willingnessto expand.

6. Competition was not an issue in 1950.28

There was a "live and let live" policy among busi-ness people. There was no advertising. The onlycompetition was through personal service, friend-ship, credit and delivery services.

7~ Credit sales locked out competition.The channels were complicated by many wholesalersoThere was heavy reliance on imports and importswere often lower priced than locally produceditemse

Transportation Developments AffectingWholesaling and Retailing

Today we have paved roads to the farms andthere are more improved urban roads. Table 4?2shows how new road construction has increased overthe years.

TABLE 4.2

Progress in Road Construction

Years Kilometers Constructed

1900-1910 6881910-1920 3671920-19.30 5841930-1940 5711940-1950 10661950-1960 11381960-1970 estn 1575

Transportation studies are now being evaluatedby various government agencies for the programmingof roads and transportation. Alternative plans for

29

the growth of San Juan and other metropolitan areasare also under consideration. The road network im-provements cut time and costs in shipment to retailerand consumer.

Table 4.3 shows the development of roads from1920 to 1965 and the number of vehicles that usethese roads. In 1965 there was one vehicle pereight persons; in 1945 there were 75 persons pervehicle. In 1963 there were 59 vehicles per mileof road; in 1965 there were 87 per mile of road.

TABLE 4.3Road Network Improvements

Year Km's ofroads

Vehicles per1 mi< road

192019401946195919631965

126324692944436649805450

5987

To draw Chart 4.2 truckers were interviewed,They were asked to evaluate two types of road (theSan Juan-Fajardo Road, a good road, and the San Juan-Guayama Road, a bad road). On the good road(Fajardo) the small and big trucks make the roundtrip in the same amount of time--about 2 1/2 hours.On the bad road (Guayama) the small trucks make thetrip in about 3 1/2 hours, medium trucks in about5 hours and big trucks and trailers in about 6 hours.The angle-shaped gap between the two lines is whatwe have called the cost of bad roads.

30

Time in Hours76

5

4

3

2

1

o2,500 10,000 20,000

CHART 402The Time Cost of Bad Roads

GuayamaRoad-48 Mi.Cost of BadRoadIf Roadswere "Good"FajardoRoad-33 Mia

Size ofTruck-GoC. W.

Some of the benefits of good roads are:

10 Reduced operating expenses

20 Lower maintenance costs

3. Fewer accidents

4. Savings in time

5. Increased comfort and convenience fordrivers and passengers

60 Stimulation of economic developments

Other benefits that might be mentioned are thatgood roads unify territories politically and realignmany communities' personal relationships 0

31

Significant Changes in Food Transportation

The most significant development in foodtransportation has been "containerization" withgreat benefits evidenced by better quality pro-ducts, less damages, lower insurance costs, andeasier and faster mechanized handling methods.

The central market area with dock facilitiesfor trailer ships has been a key development. Suchfacilities have been built as a result of govern-mental development and planning.

Some companies have developed programs forthe transportation of dry and reefer cargo frommainland mixing warehouses directly to specificstores.

32

Reta i 1 Sys ternPresented and Summarized by John R. Wish

IntroductionThis section consists of an overview of some

of the key changes in food retailing and wholesalingsince 1950"

De f Ln Lt.Loris

In order to better communicate there may besome advantage in defining certain often used terms.

The most prevalent retail food store is calleda colmado. A colmado is primarily a grocery store;a store where food products are sold to take home.But at the small end of size continuum, these tendto be stores where beverages and some sandwiches aresold on the premises. Thus small colmados are verysimilar to cafetins, which are primarily smallrestaurants, but sell a few goods to take home.It is frequently difficult to distinguish cafetinsfrom colmados. In the last two Censuses of Businessthe Commonwealth and the U.S. Government have seenfit to combine food stores and eating and drinkingestablishments in one category, because of thisdifficulty of dlfferentiationo Then too, wi.th largecolmados, there is difficulty in distinguishingthem from supermarkets. A substantial portion ofthe dollar sales here in the metropolitan area nowgoes through supermarkets. A supermarket we defineas a self-service store of at least 3,000 squarefeet.

In the wholesaling business there are brokers,limited line wholesalers, wholesaler-retailers andfull line wholesalers. Brokers are business firmswho represent specific manufacturers or processors.They aid sales by bringing potential buyers andsellers together Brokers do not usually take titleto the merchandise For various reasons, many ofthe brokers have also become wholesalers in one way

33

or another. Therefore, a limited line wholesaler isa merchant who takes title to the merchandise he handles,but is limited in the items he carries as a wholesaler.He is limited because he is also a broker, and as abroker he is prevented by contract from handlingcompeting lines. He may be limited line because as awholesaler he is an exclusive agent in Puerto Rico forcertain processed products. He may be limited linebecause he is a division of some food processor,Thus, by definition, a limited line wholesaler willbe prevented from serving the entire needs of hisretail customers.

Also in Puerto Rico there is a diminishingnumber of wholesaler-retailers 0 As the name implies,these establishments have not specialized as far asclass of customer is concerned. The wholesaling theydo is primarily to other small retailers. Finally,there are less than five full line wholesalers. Thefull line wholesaler is one that handles most, if notall, items sold by the retailer" Thus, the fullline warehouse is the retai ler' s supermarket and, incontrast to the limited line, provides somethingapproaching one-stop shopping fo~ the retailer. In1956 the Consumer Food Retailing Cooperatives formeda Federaci~n with the express purpose of loweringwholesaling costs. The result was the first fullline wholesaler, a warehouse where the wholesaler wasnot limited to what line he would handle.

BackgroundThe dilemma of food mark.eting was evident I.nthe

slogan of the Popular Democratic Party in 1940. Theslogan ttpan-·-·Tierra--Libertad"impli.ed low foodprices, a high return to the farmer, and both goalsbrought about in a framework of freedom and libertyfor all. A major plank in the party's platform wasthe reduction of food prices The Popu Lar DemocraticParty, which has been in power sin e 1940 and stillis today, has made attempts and frequently succeededin making good on its promises, It js well to brlngout here, and it will be stressed again, that thegovernment of Puerto Rico is and has been honest.It has fullfi1led its promiseso The people trustthe governmentc

3~

In the late forties, one of the early actionsof the first elected governor, Don Luis Munoz Marin,was to commission various studies of food distribu-tion. The study of food retailing and wholesaling,which resulted in the book, Marketing Efficiencyin Puerto Rico by Galbraith and Holton, has beenmentioned. There were two related studies whichproved to be quite important: Marketing Facilitiesfor Farm and Related Products in San Juan, PuertoRico, authored by Otten in conjunction with thePuerto Rican government, and the ComprehensiveAgricultural Program for Puerto Rico by Nathan Koenigand various government officials. These studiesare both basic documents along with the MarketingEfficiency Study. The interesting thing about thesestudies is that action was taken as a result of themoIn addition they are available in libraries forstudy of how the recommendations were followedo

Certainly these studies were adapted by thedecision makers. This is a tribute both to thecomprehensiveness of the studies and to the govern-ment officials who were willing to take a risk andchange the situation. After the three studiesmentioned above were published, the governor appointeda Food Commission which was a brilliant politicalmove. At about the same time, the governor publiclyannounced that food prices were too high, just as hehad done in 1940.

In April, 1954, the Governor's Food Commissionanalyzed the Galbraith and Holton report and agreedwith most of the suggestions made in that report aswell as the basic ideas behind the study, The make-up of the commission was such that it brought theaffected parties togethero Some of those peoplewho might have objected to reform were on the FoodCommission and thus as parties to the commission re-port.were public~y committed to support any governmentsponsored reform program which was based upon theirrecommendations.

Food Commission Recommendations

The Commission suggested the establishment ofsupermarkets in urban areas. There were those whoreally questioned this recommendation. Their objections

35

were that people buy food on credit. Consumers donot have cars. Consumers do not like to shop inlarge stores. They send their maids to the storeshopping, and maids cannot shop in supermarkets 0

(In retrospect, Puerto Rico was ready for super-markets) 0

Co-ops were recommended for rural areas, buthave not been much of a force in urban areas likeSan Juan.

Government assistance in building and siteselection was recommended to help local businessmenwho wanted to establish new stores. The emphasisthroughout this report was to help local Puerto Ricanbusinessmen.

There was suggested a tax incentive for foodprocessors.

Agricultural production was to be expanded anda stress was to be put on import subst Ltut.Lon , (Thissuggestion was not as effectively implemented as theothers. Puerto Rico still imports about 50 percentof its total food supply just as it did in 1950,however, there is more variety).

An intensive training program for food storeemployees was started by Fomento; later the Departmentof Commerce took over this function which in amodified form continues today. These and otherrecommendations were agreed upon by the Food Commission.

Government Efforts to Change Retailing

Fomento created a specific department toencourage food distribution improvements after the FoodCommission made its report. Mr. Lee Feller was head ofthat department for a time in the mid-1950's. TheFomento group was involved in promotion, training,and loans as well as attempting to create voluntarychains 0 All of the efforts worked reasonably well,except for the creation of voluntary chains, Probablythe most successful government-helped private enter-prise development was the growth of privately ownedsupe rmarkets e

Fomento took the responsibility of encouragingsupermarketstdevelopment and in 1954 approached certain

36

San Juan food wholesalers about the possibility ofestab shing supermarkets 0 The government was willingto match private businessmen dollar for dollar inestablishing their supermarkets 0 Certa~n wholesalersin Ponce, the second major city of Puerto Rico,were to participate in the establishment of thesesupermarkets 0 Of the San Juan retailers who wereoffered Fomento cooperation, only one retailer did

ooperate but not in the way the government wantedoThus, representatives of all segments of the fooddistribution system community were offered helpoHowever, they did not accept the help at that timeon the terms it was offeredo Today there are somegen~lemen w~o wish they had accepted the government

fferso There are also government officials whowish more effort had been put into these effortsto encourage local retailers to change their waysof doing business). In any case chain supermarketsare now very much in evidence and are charging lowerprices than clmados for basic food itemso

Another agency that has had much to sayabou~ changes in Puerto Rico is the uJunta dePlanificac>2onH--or Planning Boar d . P'Lanni ng Boardapproval s necessary before any construction cantake place. The planning board has established~-3pec.·Lfj.c r-equ.i.reme nt s as to what type and what sizetares shal be constructed in new housing develop-

ments. I has decreed that every Dew urbanizationmust have a shopping center" In addition, alltuilding plans must be approved when stores are

onstrJ cd o~tside shopping centerso There is thePQSE~bl ity, hough, hat the Planning Board storei e requirements might harm more than help local

Puerto Rican bU51nessmenD Further, size regulationshave sometimes been inappropriate resulting in clandestinemerchants and Lar-ge supermarkets bracketing the"appr-oved" s t or-e s Lz e,

Pue 0 Rico has changed and will continue tochange rapldlyo The items that need to be carried inorder to malnt.ar.n a "p r-of'Lt.ab Le mix" are on theincreasED Today, most supermarkets are selling basicommodi ies like rice, beans and bacalao (dried co~

fish at or near osto In order to make up for thelosses on these goods, there must be widening assortmentof other products which have a higher proflto According

o some operators, this requires a minimum of 8,000quare feet of selling space or a minimum of

$750,000 0 $~JOOO,OOO a year in sales to have aprafi able supermarket, Yet, many stores inshopping enters contain only 3,000 to 7,000 square

37. !

feet as the Planning Board dictatesc There are somealternatives which will be discussed.

Significant Retailing Changes

Harold Toppel, a continental, came here inDecember, 1955, and during the following springstarted the Pueblo supermarkets" Harold Toppelopened his first store without initial financialassistance from Fomento, or any other governmentagency. It is interesting that this man who did notreceive financial assistance when he first started,although it had been offered to others, today isthe head of the largest retail food distributionorganization in Puerto Rico. Even though Pueblolater obtained government loans, no one outside thecompany would have predicted its rapid growth in sucha short time. There was, in fact, an inter-officememorandum that originated in Fomento during the late1950~s which discussed the possible growth of Pueblo.The brash writer predicted that Pueblo would havesales of $48 million by 19650 The projection wasrejected at that time by the writer's supervisorsas impossible for any supermarket chaine. ActualPueblo sales surpassed this with over $55 millionsales last year. Credit must also go to Pueblo forthe heavy reinvestment of most of their profits backinto the Puerto Rican economy_

1956 saw a reorganization of consumer coopera-tives with the help of Fomento and the AgriculturalExtension Service. Cooperatives formed a new organi-zation which established a full line warehouse. In1958 Grand Union purchased Todas supermarkets at therequest of certain government officialso Grand Unionwas supposed to provide effective competition forPueblo. Todas was an operation of the InternationalBasic Economy Corporation which had not beenfinancially successful. Since 1958, retail fooddistribution has changed as a result of improvementsand expansions of previous ideas. Chart 4.3 showshow the rate of corporation for supermarket saleschange has been greater than the rate of total foodconsumption. Sales of the largest food chain hadincreased rapidly in Puerto Ricoo However, PuertoRican retail food sales of this food chain have begunto flatten out. There are private competitive forces

38

.$(000)1000

750

500

250

1007550

25

Total FoodConsumption

Corporation FoodSales

--------------------'--...,.-,",---- Total

Retail Sales

~argest Pu~rto Rican Food Chain10

6jo<~ ~~~~~~~

1956 57 58 59 60 61 62 63 64 65

CHART 4.3SHARES OF PUERTO RICAN FOOD CONSUMPTION

39

which are tending to hold down the growth of thiscompany. One should not project any of these trendlines with any assurancec The rate of profits andthe rate of sales growth of this largest companyhave helped foster counter forces from both govern-ment and some private business. The sales growthof this largest Puerto Rican retail food chain hasenticed competitors into the field. One of thosemore recent competitors is growing rapidly at thepresent time.

One example of government response is that theDepartment of Commerce was specifically set up in theearly 1960's to help small local businessmen moreeffectively compete with the corporations. TheDepartment provides training programs and loans, Inaddition this Department and Fomento have sponsoredstudies of profitable investment opportunities infood distribution.

However, as was previously pointed out, thenumber of small stores in Puerto Rico has notincreased much since 19500 Dr. Holton was worriedabout the employment effects of changes in foodretailing in 1950. There have been employment effectsbecause of the greater productivity of labor insupermarkets 0 The dollar sales per employee forsupermarkets is about $40,000, but the dollar sale inthe small stores is less than $5,000 per employee.What does that mean to employment? Suppose therewere only supermarkets in Puerto Rico which all hadthe productivity of the present stores, then employ-ment could be as low as 9,000 people in food distri-bution instead of over 40,000 that the 1963 Censusof Business notes. The other extreme is what mightbe without supermarkets--then employment could beas high as 57,000 today. But, the small stores arenot dead; the Department of Commerce, the beer andrum companies, and some private initiative are helpingthem survive. It was mentioned earlier that smallstores are becoming beverage parlors today. Asmall survey of about forty small stores was conductedin May; a main finding was that the only thingincreasing in sales in these small stores were beerand beverages. Food sales were not increasing insmall stores. There is a place for these stores,though, because they are open longer hours. Theydo sell canned goods,rice, beans, and bacalao, but

40

at higher prices. The brilliance of certain govern-ment market regulations shows through (the governmenthas said that all stores must abide by certain closinghour-s ) , except those stores that are operated by theowner. This leaves a place for the small stores.The large store must close every day at 6;00 exceptone day a week; on that day it is permitted to remainopen until 9:00. The little stores are permittedto remain open any hours, seven days a weekn

Now, though, the small stores find it moredifficult to get credit from wholesalers. The smallstore finds it more difficult to get their customersto payoff their bills. (rllhereseems to be someindication that when a consumer shifts from a smallstore to a supermarket he tends to forget about hisbill at the small store where he has gotten credit).But the small retailer has found that his beer or rumdistributors, each of whom has its own distributionsystem and company trucks, are willing to put inrefrigerators and signs, and in addition are willingto give him heer and rum on a weekly supply basis.This has been a very convenient thing for the smallretailers. Still there is a need to foster sometype of convenience store that could be a bit morecompetitive with the supermarkets.

The Effects of Retailing Changes

According to the Galbrai h and Holton study(which was disputed by some participants in themarketing system at the t. Lrne) , retail margins in 1950 1:'.Terearound ~)LI percent, According to the Department ofLabor survey, which is done bi-annually to determineminimum wages, those retail margins are averagingabout 18 percent as of 1964. Thus, gross margins appear tohave fallen, Consumer incomes have increased as notedpreviously and a lower percentage is being spent on food 0

Keys to Success in Retailing

Cert a j_ n supermo. I' kets were successf11121m 0 S t fromthe start. Effective management seems to have beencritical. Successful operators have a novel blend ofbeing sufficiently Puerto Rican, which means having agreat faith in the people as customers and as

Lil

employees, and at the same time having guts. enough todo something differentlyo

Variety in the stores has increasedo Consumersare buying more meat, more milk and higher proteinfoodso Also, the best supermarkets in Puerto Ricohave a better inventory turnover than many supermarketsin the United Stateso Direct shipment of mainlandmerchandise is another point that has made for rapidgrowtho The major supermarkets have 50 percent oftheir total floor space devoted to storageo Onetrailer load of merchandise, 40,000 pounds, is takenoff the ship and frequently taken directly to the storeand unloaded at the store, So local wholesalers arefrequently bypassed and merchandise moves directlyfrom mainland warehouses into the stores.

The option of mainland buying has been important.New York price lists have been available and when localimporter or wholesaler prices were too high for qualityand/or variety and dependability, as perceived by themanagement of supermarkets, the manager had the optionof picking up the phone and placing the order in NewYork, Philadelphia or other United States ports. Thedirect shipment thus bypassed the wholesaler. Somesupermarket operators are buying over 75 percent oftheir merchandise directly from the U. So mainlandoOperators did not have to worry about foreign exchangeor balance of payment problems 0 Thus margins werelower. (One of the more traditional wholesalersmentioned that he was quite unhappy because his opera-tions were compared to operations in another Spanish-speaking country where profits on sales were fivetimes greater than his. In that other country themanager could get together with his associates andtalk to the person who regulated imports of thisparticular group of commodities. In addition, he coulddiscuss prices and business conditions with thecompetitors. My respondent implied it might have beenthat way in Puerto Rico several years ago but now itwas very tlnastyttbecause anybody could buy and couldcompete)e

Another key to success in retailing is thenumber of suppliers serving retailers. Over the yearsthis has dropped. According to our survey in 1965,the small retailers average six suppliers coming totheir store, medium 25 and large stores 50 suppliers.

42

This is still more than would seem. r-e ascnab Le , butit is less than the average in 1950.

The la.ck of consumer credit and pilferagehave not proved to be serious barriers to supermarketgrowth, (There are certain managements today infood distribution firms who believe that customerpilferage is a great problem and thus might tendto hold back on investment. Yet, there are otherswho believe that pilferage here is less of a problemthan is on the mainland and they feel that what somepeople call pilferage is really a problem ofinternal control in terms of mis-marking and of otherinternal problems in store operations. Thus, thereis a great difference of opinion about this ttpilferageproblem") 0

43

Wholesale SystemPresented and Summarized by John Rc Wish

Introduction

As mentioned previously, some supermarkets havefound it advantageous to import directly the majorityof their purchases. Smaller colmados on the otherhand are buying from many of the same suppliers tbathave always supplied them.

The 1956 introduction of the full line warehouseby the co-op, and the Department of Commerce effortto help some retailers establish their own warehouseas "comerciantes unidos: in the early sixties, weretwo major attempts to change wholesaling.

In 1963 the Central Market was established inSan Juan. It was a modification of one that was firstrecommended in 1950. One of the main purposes of theCentral Market was to help the food wholesalersrelocate out of the crowded downtown streets of oldSan Juan. The idea was to move out of the multi-story 18th and 19th century buildings in order to:I. Increase handling efficiencies and; 20 Providean easier route to urban renewal of old San JuanaIn 1963 Dr. Lastra~ then Secretary of Commerce,established the CDC (Commercial Development Corpora-tion). CDC made the development of the CentralMarket a realityo It has plenty of dock space forthe trailer ships, and modern, one story warehousesfor handling food products. Space was rented in thatfacility to various private businessmen at a slidingscale beginning at 90 cents per square foot per yearo

The Present and Future

The above changes of the last 15 years werereally layi.ng the groundwork for what might be.Frankly, wholesaling methods have just not changedthat much in t~e last 15 years.

The traditional importer-wholesaler has limitedline. There are still many of them located in oldSan Juan9 although some have moved to the newfacilities mentioned above. Since the limited line

44

wholesaler predominates, a retailer must have severalsupplierso Yet, a consultant found that one of thelimited line wholesalers was losing money because ofthe small size of an average order. At the presenttime most of these limited line wholesalers havesalesmen calling on the stores as ~hey did fifteenyears ago, and taking orders for his individual,limited line merchandise.

It is to the credit of the government thatit has fostered and encouraged, through trainingprograms, investments and loans, the full linewarehouse here in Puerto Rico as was suggested byvarious studies during the fifties. However, fullline wholesalers have not yet caught on. There arein San Juan only three significant full linewholesalers which, as of 1965, sold only 8 percentof the food going through wholesalers.

There seem to be three primary reasons forthis. The limited line wholesaler, because he hasa contract with a manufacturer, is sometimes theonly person who can buy merchandise from thatmanufacturero A warehouse then must buy throughthis limited line wholesaler who may also becompeting with the full line warehouse. Secondly,there is a direct import option for the largestores. We asked the question "Do yeu have accessto buying prices on the mainland?" Almost all ofthe large stores did. In addition, all of thelarge stores bought at least some of theirmerchand~se direct from the mainland.

There is some indication among smalleroperators that the retailer likes to think of

rhimself as a shrewd buyer. In many instances theinteraction between these salesmen coming in,treating him like a real man and one that he hasknown for years, is something that the retailerlikes. He feels he can manipulate the salesman andmake wise purchases"

An announcement was made the latter part ofMay concerning the new Pueblo warehouseo Thiswarehouse will cost something over $4 million andhave over 200,000 square feet. Thus, a new fullline warehouse is to be established. The warehouseshould lower Pueblo costs significantly. When this

45

happens, other retailers and wholesalers could findthemselves in a significantly different position.

The plaza de mercado which has figuredimportantly in government plans and which figuresimportantly in many Latin American countries, is ofdeclining importance in Puerto Ricoo The Plaza todayis an important place for wholesaling fruits andvegetables, but lacks grading, sorting and priceinformation. A survey found that on a given day atthree different markets, one each in Santurce, RioPiedras and Mayaguez, there were frequently widevariations in prices on a number of specificcommodi ties. There was lack of information. Be caus eof uncertainties, many supermarket buyers wouldprefer to go to the mainland to buy produce becausethey know the price level and the qualityo

Conclusions

A high level concern for the tlhigh price offood" was evi.denced by Don Luis Munoz Marin, theleader of the victorious political party of PuertoRico, as far back as 1940. When this dynamic manbecame governor in 1948, his reformist governmentrequested several studies of food distribution.Out of these studies came unanimous recommendationswhich were argued over by parties of interest onthe governor's appointed Food Commission.

Fomento, which was primarily responsible forindustrial develcpment, set up a department forfostering food retailing changes. However, thegreatest success story in retailing was producedby an outsider who at first received no financialhelp. As this gentleman and other retailers becameestablished, they found it advantageous to buy someproducts directly from suppliers on the U. S. mainland.They were able to bypass local wholesalers.

There have been few changes in wholesaling, otherthan the establishment of the excellent Central Market.Further changes appear to be in the immediate futureas the result of recently announced plans for a ware-house to be built by Pueblo. From this new ventureone would expect more intense competition at thewholesale level.

46

Puerto Rico has a history of government andbusiness working together closely. For instance,the "hours lawn which permits owner operated storesto operate at whatever hours they wish, gives thesmall businessman a time competitive advantage, Onthe other hand, the Planning Board regulation onstore size in new urbanizations will need closescrutiny as Puerto Rico continues to changeo Inaddition, the limited line wholesaler may presentsome legal complications to the process of rapidchange.

47

Regulatory Environment of Food Marketing Channelsin Puerto Rico

Presented and Summarized by Charles Co Slater

The business law or regulator environment of PuertoRico provides some instructive insights into marketingdevelopment problems. The new Puerto Rican anti-trustlaws are starting to be applied, but they are not asyet a force in the market place. However, Puerto Rico'sunique broker law is a special law of vested interestthat may deserve some reconsiderationo In substance,the law provides that a principal may not change hisagent without giving the agent a share of rewards forthe future revenue that would have accrued to theagent as a result of prior work benefiting theprincipalo Perhaps because the law has not really beentested yet, it stands as a structural constraint whichmay prevent certain reforms in the marketing processes,Another unusual legal situation is precipitated by thecommonwealth status of Puerto Rico. At present, thereis an opportunity to buy either from the local wholesaledistributor located on the island or to buy from themainlando Sometimes this results in differences inmainland prices (plus freight) as opposed to localprices which are set by an importer who assumes titleto the goodso

Another business regulation that seems to bevery important is the co-op law whic.h essentiallyfavors the producer or the consumer but not thebusinessmen in the middle. Consumer cooperatives canbe formed by twelve or more consumers just as producerscan form farm coopera tiyes 0 The di lemma, howeve r , isthat retailers cannot form cooperatives, such as theAssociated Grocer Group, or the Certified Grocer Groupin the United States. These cooperat~ve arrangementspermit retailers to own their own warehouse as a jointventure. Retail cooperatives have been one of the mostdynamic forces in the United States food distributionsystem. The question is, should the present consumers~cooperative also try to be the cooperative for retailers?Can the same institution serve both consumer and retailer?

The wholesale market is a critical turn point forthe whole structure of the market. It represents a largeaggregation of capital that is still very strongly

48

consumer-oriented through the retailers. In the caseof a retail-owned cooperative the wholesale market wouldbe the retailer's representative as a buyer. This kindof mixing warehouse operation, or full-line warehouse,has a very important role in many market structures,both in the United States and in Europe.

In the past, Puerto Rican retailers were deniedfreedom in buying because of credit ties to the older,limited-line wholesalers. There are ways aroundvestiges of this type by collecting sufficient capitalto consolidate the retailerts present multiple debtsto many small wholesalers. This kind of finan-cial plan has worked out rather well if the programof the wholesale operation attempts to help theretailers better satisfy the final buyer, rather thanmerely overloading the retailer. This overloadingsometimes occurs with limited-line wholesalers who try toget as much display space as they can in competitionwith other wholesalers.

Puerto Rico faces an agonizing test of thestructure of present co-op federation. If one looksat this in a historical context, it was a sufficientlydifficult task to get the basic cooperative federationgoing. A somewhat different environment has nowpresented itself in which a voluntary arrangement ofretailers might be suggested as a result of thenature of retail competition that is emerging.

49

The Changing System of Agricultural Productionand Marketing

Presented and Summarized by Harold M. Riley

Introduction

The purpose of this chapter is to provide abrief overall view of Puerto Rican agriculture andto describe in some detail the changes in theproduction and marketing of three major commodities:milk, eggs,and fruits and vegetables. Institutionalreforms have contributed to significant improvementsin the coordination of production and marketing ofmilk and eggs. Similar improvements are yet to berealized in the marketing of most fruits and vegetables.

Puerto Rican Agriculture

Three major crops-sugar, coffee and tobacco-make up about one-half of the total agriculturaloutput with sugar alone providing 36 percent of thetotal (See Table 5.1). Animal products are 36 percentof total output with milk being most important withinthe product group.

Sugar is a dominant agricultural industryoperating under the quota system of the United StatesSugar Act. The best lands of the coastal plains aredevoted to sugar production. Most of the sugar isexported to the United States mainland in exchangefor other food commodities, including grain, meat,dairy and poultry products, fats and oils andfrtiits and vegetables.

There have been significant changes in thepattern of agricultural output over the past severalyears, (See Table 5.2). There have been moderate

50

TABLE 501

Composition of Agricultural Output, Puerto Rico1963-1964

ProductPercent of Total

Output

SugarCoffeeTobaccoFruits and VegetablesMilkPoultry and EggsBeef and PorkOther

3675

1320

88

_3

TOTAL 100

Source: Office of Agricultural Statistics, Departmentof Agriculture, Commonwealth of Puerto Rico.

TABLE 5.2

Percentage Change in Output of Selected AgriculturalProducts, Puerto Rico, 1951 to 1963

ProductPercent change in

Output

SugarStarchy vegetablesFruitsOther vegetablesAnimal products

.....4-12+20+52

+101

Total agricultural output +30

Source: Office of Agricultural Statistics, Departmentof Agriculture, Commonwealth of Puerto Ricory

51

declines in the production of sugar and starchyvegetables. Substantial increases in output havebeen realized in milk, eggs, poultry, and selectedfruits and vegetables. On the price weighted basis,aggregate agricultural output increased 30 percentbetween 1951 and 1963.

According to the 1959 Census of Agriculture thereis very unequal distribution of land among farms(See Table 5.3). Sixty-nine percent of the farmshad annual sales of farm products of less than $5000Sixteen percent were classified as sUbsistence farms 0

At the time of the Census, 20 percent of the personsliving on farms were unemployedo These data indicatethat low levels of income, unemployment and minifundiaconditions are still serious problems in the ruralareas of Puerto Rico.

Efforts to Change Agricultural Production and Marketing

The United States Department of Agriculture-LandGrant College system operates in Puerto Rico much asit does on the mainland. This has been a major factorin bringing about changes in agricultural productionand marketing.

There have been several special task force studieson agricultural production marketing problems. Twostudies in particular, however, merit special mention.The first was a 1950 study headed by Ca1.eb Otten, MarketingFacilities for Farm and Related Products at ~an Juan~Puerto Rico, published as Uo S" Department of AgricultureInformation Bulletin No. 60. This study pointed up theneed for a central wholesale food marketing facilityin San Juan, improved grain handling port facilitiesand a meat plant. The second study by Nathan Koenigresulted in "A Comprehensive Agricultural Program forPuerto Rico." This was a. thorough description of theagricultural industry with specific recommendationsfor improvements. A section of the report was devotedto marketing of agricultural productsc It appears thatboth reports had significant influences on subsequentagricultural programs 0

During the late 1950~s efforts were initiated tobring about greater coordination of the activities ofthe various agricultural agencies. An AgriculturalCouncil was established to facilitate coordination.

52

TABLE 5.3Percentage of Farms of Specified Sizes and Percentage

of Land Area in Farms by Size Groups, 1959

Size of farm Percent of farm Percent ofin cuerdas /a units land area in farms

3 - 9 50 710 49 38 2250 - 99 6 1.0

100 or more 6 61TOTAL 100 100

/a one cuerda = 097 acresSource: Census of Agriculture, 1959, Bureau of Census.

This has led to an attempt to devise and carry out arationalized development plan for agriculture. Theisland has been divided into five regions. Specificdevelopment plans are being worked out for each regionwith attention to both market opportunities andproduction possibilities. Some of the specific activitiesunder this program are described later in this report.

The Approach for This Study

In this study we have attempted to view theagricultural production and marketing system as a setof vertically related, interdependent activitieswhich relate consumers, retailers, wholesalers,processors, assemblers and farmerse The productionand sale of agricultural inputs should also beconsidered a part of this overall system.

The study has focused on the vertical coordinationof production-marketing systems for milk, eggs andfruits and vegetables. The objectives have been toexamine the conditions which have fostered and/orretarded effective market organization. This will enableus to assess the transferability of successful

53

institutional arrangements to other Latin Americancommunities and to identify ways of making furtherimprovements in the Puerto Rican production-marketingsystems.

54

Vertical Coordination in Selected Product Markets1950-1965

Presented and Summarized by Kelly M. Harrison

Introduction

The following discussion is concerned withmarket coordination in Puerto Rico. Before proceeding,however, the meaning of that term should be made moreexplicit. Market Coordination may be defined as thecomplex and dynamic process by which producers,distributors, and consumers interact: (1) to exchangerelevant market information, (2) to establish conditionsof exchange, and (3) to accomplish physical and legalexchange of the economic goods in question. Alterna-tively we might choose to think of market coordinationas the process of matching supply with demand in adynamic economy.

All market systems are coordinated-some moreeffectively than others. Marketing costs in develop-ing economies are often quite high as a result ofpoor coordination. Ineffective market coordinationand resulting high costs may be characterized by(1) ineffective market communication, (2) wide pricefluctuations, (3) unstable supply conditions, (4) ahigh degree of waste and spoilage, and (5) excessivehandling.

There are at least three ways in which moreeffective market coordination for food productsmay bolster the growing economy: (1) by reducingfood costs to consumers; (2) by increasing profitsto efficient distributors who may then re-investin cost reducing innovations; and (3) by bolsteringfarm profits which can be invested in new, moreefficient production techniques 0

In the following section the recent develop-ments in the production and marketing of three foodcommodities in Puerto Rico will be summarized. Thecommodities are milk, eggs, and fruits and vegetablesoThe discussion is designed to illustrate (1) themeaning of market coordination, (2) the methods ofmarket coordination, and (3) the merits of marketcoordination.

55

Production and Marketing Conditions 1950-1957Perhaps the best term for describing the 1950

production structure for milk, eggs, and fruits andvegetables is atomistic competition. The bulk ofproduction for all three commodities was accomplishedon a very large number of extremely small farm unitsoIn most cases, these were sUbsistence-type farms wherea wide variety of commodities were produced primarilyfor on-farm consumption, with excess supplies beingexchanged for cash in the market 0 In the case ofeggs, 88 percent of all farms in Puerto Rico had hensfor egg productiono A similar situation existed forproduction of milk and of fruits and vegetablesoThese numerous small producers operated with a verylow degree of market intelligence or technicalproduction knowledge. This lack of informationregarding production and marketing alternatives tendedto keep production and sales costs high. It alsocontributed to a high degree of risk and uncertainty.

Partly as a result of the above situation,imports provided a significant proportion of thetotal supply for the islando In 1950, importsaccounted for 38 percent of the total supply of eggsabout 48 percent of the total supply of fruits andvegetables. Although, due to its perishability,very little fresh milk was imported, large quantitiesof canned and powdered milk were brought intoPuerto Rico and served as substitutes for wholemilk produced on the island. Obviously it was diffi-cult for the small unorganized Puerto Ricanproducers to cope with the competition from the well-coordinated import market 0

This brings up a third major production anddistribution condition of these three commodities 0

Poor market coordination and handling methodsprevailedo The lack of production and marketinformation has already been cjted as a factor inthese industries. Its main effect was to lower thecoordination of the system. That is, it preventedthe producer from finding out when, where, what, andhow much was desired by consumers 0 This generallack of knowledge by producers and middlemen alsoresulted in the use of handling methods that wereoften inefficient, unsanitary and wasteful.

56

Production and Distribution Development, 1957-1965Rapidly rising incomes since 1950, noted earlier

in this publication have had a significant impact onconsumer demand. Charts 501 and 5 c.2 show the trendsin per capita consumption of milk and of eggs,respectivelyo In both cases it can be seen thatconsumption has expanded rapidly since 1950. Percapita consumption figures are not available forfruits and vegetables as a group but indicationsare that per capita consumption of certain starchyproducts has declined and per capita consumption ofthe green and leafy vegetables and certain fruits haveincreased. The most significant fact is that percapita consumption is either stable or declining forthose fruits and vegetables traditionally suppliedby local producers and rising for those productsthat are most frequently imported.

The rapidly rising demand for milk and eggshas been met largely by local producersc Certainbasic technological changes have been made by a largenumber of producers of those two commodities in orderto meet the market demando There is very littleindication that such changes have taken place to anygreat extent among fruit and vegetable producers.There are isolated examples of adoption of technolo-gical innovations in the production of a few products,but these generally apply only to one or a fewproducers of a specific commodity.

Examples of the kinds of development which havepermitted expansion of egg production in Puerto Ricoare the extended use of commercially mixed feedrations, larger production units, greater use ofmedicines, improved housing facilities and in generalbetter management.

Dairymen in Puerto Rico have generally been themost progressive of all farmers on the island. Since1950 they too have rapidly expanded their use ofmixed feed rations and medicines. The Department ofAgriculture has received excellent cooperation ineradicating or controlling a number of diseases andinsect pests in the past fifteen years. Milkproducers have widely adopted mechanical milkers,bulk tank storage, and artificial inseminationoMilk pasteurization has become much more prevalent

57

216

200212

185

150

B 115~cd 100~G'

150142

50

o1951 1957 1963 1964

ImportedU LOCal~

CHART 501Per Capita Milk Consumption in Puert 0 Rico

Selected Years 1951-1964

160

14

146

8

.--to- 130

115 ,-110 r---

101 -88 r--

r---

j

120inao 100eo

rLl

1954 1956 1958 1960 1964

CHART 502Per Capita Egg Consumption in Puerto Rico

Selected Years 1954-1964

Source: Puerto Rico Department of Agriculture, Divisionof Agricultural Statistics.

58

since 1950 when about 60 percent of all milk wasconsum.ed raw. The number of Class I dairies is shownfor various years in Table 5.4

TABLE 5.4Number of Class I Dairies in Puerto Rico

In Selected Years

YearsNumber of

Class IDairies

1951-19521957-19581961-19621964-1965

298465639747

Class I producers are those dairymen who havemet all the requirements deemed necessary by theDepartment of Health for obtaining a license to sellto pasteurizing plants. Class II producers are thosewho meet less stringent health requirements; theseproducers are permitted under certain circumstancesto sell raw milk directly to consumers or to dairyfood manufacturing plants. The figures in Table 5.4illustrate the rapid shift toward Class I productionin the past fifteen years as consumers have demandedbetter sanitation and pasteurization.

The following discussion summarizes specificchanges in market coordination for the individualcommodities.

Market Coordination Development and Their Effects

~. The rapid expansion of supermarkets inPuerto Rico since 1956 has had a significant impact onproduction and distribution of all food products.The special needs of such large scale retailingoperations are such that a greater degree of coordina-tion is required. The effect has been particularlyevident in egg production and distributiono It is

59

a virtual necessity that modern supermarkets haveeggs that have been cleaned, graded and packed inconsumer-sized cartons. It is also important thatsupermarkets have a steady supply throughout theyear. Such retail organizations tend to seek outand encourage those producers who can meet theserequirements in large quantities. Transaction andexchange costs of supermarkets can be reduced bydealing with fewer and fewer suppliersc

Certain government regulations can be helpfulin establishing rules of exchange, grading andhandling. Puerto Rican producers have been benefitedby three recent egg marketing regulations. The firstwas passed in 1956 and established egg gradingstandards. The second came in 1958 and provided aset of rules for labeling, transporting, and handlingeggs. Finally, in 1964 a regulation was approvedrequiring the labeling of eggs to identify theirplace of origin, i.e." "del paLs ;" United States orforeign import.

Supermarket requirements for large quantitiesof cleaned, graded, and packaged eggs have encouragedthe development of several types of coordinatedproducer-distributors. The most common have beenintegrated individual producers, ioeo, individualproducers who can achieve sufficient size to makegrading, packaging, and distribution feasible.Cooperatives are a second way by which individualproducers have achieved market coordination.Through cooperatives small producers can pool theirproduction in order to have sufficient volume forgrading and packing. They may also share the costof collecting market information and in general makecoordination with buyers simpler. A third approachin Puerto Rico has been the non-profit corporationoThe purposes and advantages of these associations arebasically the same as those listed above for coopera-tives. They are mentioned and discussed at somelength below because of the unique conditions whichpreceded the organization of the first such associa-tion and because they may hold some promise ascoordinative institutions in developing nationsc

The Lajas Valley Egg Producers Association wasthe first of three such non-profit corporations tobe organized. It grew out of a plan by the Lajas

60

Valley Development Office to encourage egg productionin the Lajas Valley~ That office hi~ed a full timeindividual and gave him the responsibility ofinteresting farmers in egg production and then help-ing them to obtain loans and start production.He was fairly successful and soon had several farmersproducing and marketing eggs in Lajas and surroundingt0wns. As these commercial producers graduallyexpanded their flocks, they experienced greaterdifficulties in finding market outlets. The govern-ment worker began to consider a marketing cooperative.At that time the owner of the largest supermarketchain on the island made a $5,000 grant available tothe experiment station for the purpose of encouragingagricultural production. The Lajas Valley Develop-ment Office requested that the money be loaned tolocal egg producers for the purpose of organizingan egg marketing cooperative and buying neccessarygrading equipment. The request was granted andPueblo Supermarkets agreed to purchase eggs from theassociation to be marketed under Pueblo's own label.At this point two other government agencies steppedin to provide assistance. Fomento provided a building,rent free for six months, and the agriculturalextension service provided management training andguidance to the members 0 The association has beenquite successful. Production has almost doubled intwo years of operation. Through the association,producers have achieved a degree of market coordina-tion they could not attain alone. Moreover, productioncosts have been reduced by purchasing supplies asa groupo Average flock size per member increasedfrom 2,000 birds in 1963 to 2,857 birds in 19650 Theunique feature of this association is the degree ofcooperation which occurred between the farmers, theLajas Valley Development Office, the ExtensionService, Pueblo Supermarkets, and Fomentoo Eachplayed a vital role in this market coordination effort.

Milk. The importance of government marketregulations was mentioned with relation to eggs. Adifferent kind of market regulation has had tremendousimpact on milk production and distribution in PuertoRico, Prior to 1957 milk producers were perfectlyfree to produce and sell milk as they pleased withincertain sanitary regulations 0 Production of aperishable commodity with seasonal production peaksled to a great deal of instability in the industryo

61

In the flush season, producers often found themselvesfacing very low prices or with no market at all fortheir product. On the other hand, in the slack season,processors and distributors were often obliged to payextemely high prices for their milk suppliese Thissituation led to unethical and often destructivecompetitive practices and generated a great deal ofanimosity between producers and processorso

In 1956, a representative group of dairymen,processors and distributors petitioned the governmentfor a legislative hearing on competitive conditionsin the industry. After hearing almost unanimousagreement among producers, distributors, andprocessors regarding the need for regulations, thelegislature passed an enabling law in 19560 The lawcreated and gave regulatory power to the Officeof Milk Regulation which was instructed to preparea specific market regulation.

The Milk Regulation had four major provisionsand is applied only to Class I producers and milkpasteurizing plants, It provided for: (1) theestablishment of a minimum farm price and maximumprices at all other levels of distribution; (2) aclassified pricing plan whereby a producer wouldreceive an equitable price for all his milk regardlessof its final use; (3) a milk promotion fund supportedby the mandatory contributions of producers andprocessors; and (4) certain specific regulationsgoverning producer, processor and distributorrelationships.

There is little doubt in the industry todaythat the regulation has given stability to producer-processor relationships and contributed to orderlyand rapid expansion in the industryo The guaranteedprice and stable processor agreements have beeninstrumental in encouraging sugar cane producers toswitch crop land to pasture for milk productionoFinally, consumers have benefited by receivingadequate supplies of fresh milk at prices reflectingthe narrow margins granted to producers, processorsand distributors.

Fruits and Vesetables. The two commodities dis-cussed previously provide good examples of variousmarket coordination alternatives in the face of

62

rapidly changing demand and distribution patternsoThe fruit and vegetable industry in Puerto Rico,by and large, has not had the same successc Theproduction and distribution system today is basicallythe same as it was in 1950. The bulk of the produc-tion still comes from large numbers of small ill-informed producers who insist on clinging totraditional crops rather than shifting to productswith greater consumer demand~ Market coordinationis largely left to merchant truckers who makepurchases at the farm, transport the product to amarket plaza, and peddle the produce in relativelysmall lots to retailers in the plaza or to storeowners who come to the plaza for supplies. Thereis little grading, washing, or packaging and poorhandling methods prevail. Purchases are made onlyon the basis of personal inspection. The maindifficulty with such a system is that it makestransaction costs high and fosters uncertaintiesfor all people in the system. As a resultproducers do not receive the information indicatingwhat consumers and retailers really want.

Such ineffective market coordination by localproducers in the face of rapid changes in foodretailing have caused supermarkets and other largeretailers to look elsewhere for stable supplies ofmany fruits and vegetables. A lack of processingfacilities has also hampered local producers. Chart5.3 shows total wholesale value of fruit andvegetables divided between imports and local produc-tion. It shows that even though sales of localproduction have increased substantially since 1950,local production as a percent of total sales hasdeclined by 10 percent.

In spite of the fact that fruit and vegetableproducers in general have been slow in making marketcoordination improvements, there are certain isolatedexamples indicating some progress in coordinationarrangements. One of the more successful of theseis a banana marketing cooperative which assembles,ripens, packages and distributes for its members.An orange association (organized along the samelines as the Lajas Valley Egg Producers Association)is now purchasing and processing oranges and exportingjuice to the States. It plans in the near futureto begin sorting out the higher quality oranges for

63

rn 40HcOr1rl 30oq

20

10

42%

41%

1964

Imports I_~ ~Domestic~

CHART 5,,3

Wholesale Values ofFr-u.i.t s and Vegetab les,Imported and Domestic,for Puerto Rico SelectedYea.rs0

64

fresh market sales. A private processing firm iscontracting with farmers for the production oftomatoes which are used largely for canning, and,recently, quality tomatoes for fresh marketdistribution. In addition, a few wholesalers haveestablished direct relations with producers for thepurpose of obtaining stable supplies of consistentquality produce 0 Mos t supermarket cha l.ns in Puert 0Rico now have their own local buyers who dealdirectly with farmers and wholesalers in order tostabilize relations, lower costs, improve productquality, and in general expand local supplies offresh producec The success of these isolatedefforts indicate the need for more effectivecoordination between producers, processors anddistributors of fruits and vegetables in PuertoRicoe

Summary

The Puerto Rican economy has undergonerapid changes in the past fifteen years. Thesechanges have had a significant impact on productionand distribution of food products in Puerto Rico.They have also pointed up the need for effectivecommunication and coordinatlon between producers,processors, distributors and consumers" A basicprerequisite for an efficient food supply systemis adequate participant knowledge regardingcurrent market situations as well as technical know-ledge about his own businessc The latter kind ofknowledge is a function of several things includingeducation, practical experience, and willingnessto learn; but the former is largely a function ofthe individual's willingness and ability to discoverthe proper sources and proceed to gather the relevantinformation. Sometimes this search operation ismore effectively done through a group and in othercases institutional arrangements can alleviate theneed for detailed information" We have shown thatsome Puerto Rican producers have proceeded to obtainthe information necessary for more effective coordina-tion in egg markets through cooperative organization,as well as through individual actionc We have notedthe coordination of milk markets in Puerto Ricothrough government regulations. Finally we haveobserved the relative lack of information and

65

coordination in the fruit and vegetable markets andthe resulting stagnation, except in isolated cases,of production and distribution of these commodities a

Hence we conclude that individual attitudes,institutional arrangements and government regulationhave played a vital role in improving the coordinationand economic performance of the food productionand marketing system during the past fifteen yearsof rapid economic development in Puerto Ricoo

66

CHAPTER 6ATTITUDES AND COMMUNICATION BEHAVIOR

Attitudes and Communication Behavior: An OverviewPresented and Summarized by John Ro Wish

Introduction

This section has 3 parts: (1) the centralargument with respect to attitudes; (2) other studieswhich support the argument on att~tudes; and (3)some general summary comments.

Before continuing with the above mentionedsubjects, it is necessary to point out the definitionsof attitudes and communications that will be used in thefollowing, Attitudes are predispositions for actionnCommunications are the ways and the frequency thatvarious bits of information pass between and amongpeople.

The Central Argument

The first part of the argument pertains toattitudes. In general, food marketers or for thatmatter businessmen operate with~n a specificenvironment where the society provides rules, regula-tions, social mores and roles. These rules,regulations, social mores and roles which changeover time influence what is done and what is thoughtpossible in that business system. A second factorin the argument is that changes in market institutionsare often a necessary but not sufficient conditionfor rapid economic growtho Changes in marketinstitutions seem to depend upon changes in theattitude of the participants who are already in thesocia-economic system, or upon new participants withdifferent attitudeso

A pertinent question is how do these changescur? It is assumed that most of the changes are

67

made by the people rather than just happeningo Morespecifically, it is hypothesized that in Puerto Ricosome individuals made the changes-occuro The surveysare now being analyzed in order to determine, amongother things, who are the people who make the change 0

On the basis of our interviews, there will be betterindications of those who bring about the change 0

Previous Findings

Illustrative of previous findings are the similarconclusions of two anthropologists, Banfield and Tax,writing different books in different parts of theworldo First of all, they both felt that economicdevelopment is impossible if pervasive distrust andunwillingness to cooperate existo In southern Italy,Banfield found that very poor people saw the worldas what the mathematicians call a zero sum game" Itwas a world of given endowment in which one personmust lose when another benefitsc In sharp contrast,the majority of Puerto Ricans see the world in termsof a positive sum game; both-parties must benefit inan exchange. The world view is that persons believethat increasing goods are available, and when oneperson gains, others will tooo

Secondly, Banfield and Tax both find that atomis-tic competition may be a negative force in development,Thus~ numbers of firms or concentration ratios de notseem as important as some other variables. Accordingto this view then, there is bad or"good in the growingsize of food retailing establishments and the correspond-ing decrease in number, (Apparently the economies ofscale are such that we believe larger stores performat lower costs) 0

Everett Hagen, an economist, and Eric Hoffer,the longshoreman philosopher, both suggest that aperson who is well accepted and secure is the leastlikely to change. Yet, some development programshave tiep~nded upon the cooperation of those personswho are well accepted and secure in their business

68

or in their relative position in societyo

Katona, in his research at the Survey ResearchCenter at the University of Mich~gan, has found thatpeople are, at one and the same time, both creaturesof habit and that they are rationale Dro Rogers hasfound in his studies of diffusion and innovation,in both the United States and elsewhere, thatinnovators (those persons who are among the first totry to adopt new ideas in their business or in theirfirm) have what are called modern world views andvalue education.

Such literature suggests that there are someimportant attitudes which are precursors of develop-ment and change. We believe that attitudes such asworld view, attitude toward education, trust inothers, trust in government, cooperativeness,hoarding versus a tendency not to hoard, attitudestoward new institutions and attitudes toward businesspractices are important preconditions in economicdevelopment. An attempt was made to get at eachof these in the Puerto Rican survey_

Conclusion

Today, we are in the exploratory phasee Althougha well-developed theory does not yet exist, we aregoing beyond a static model. Through a systemsapproach, we are examining a proces~ not looking foran equilibrium stateo FinallY,we think thatattitudes and economic factors are interrelated.

Attitudes, Preliminary Results

Presented and Summarized by Kelly Harrison

Introduction

The basic rationale for studying attitudevariables in a marketing research project has beenpreviously reviewed. This section will summarizesome of the preliminary results of the attitude phaseof the research in Puerto Rico.

The discussion will draw on the data collectedin six separate surveys administered in Puerto Ricobetween November, 1965, and March, 19660 Table 601shows the six survey groups and the sample sizedivided between San Juan and Mayaguezo Only farmerswithin the Mayaguez agricultural region were sampledoFood manufacturers from allover the island wereincluded in the processor sample. Unfortunately,the sample size of processors is too low to permitextensive statistical analysis$

The questionnaires administered to the differentgroups were quite similar in most respectso Eachcontained four different sections. One sectionsolicited information on the business operation, farmunit or consuming unit in addition to relevant marketchannel information. A second section tapped aseries of demographic variables such as age, education,and family incomeo A third section dealt with thecommunication habits of the individual; the fourthcontained questions designed to indicate attitudestoward modernization and change, marketing practices,market institutions and government 0 The followingdiscussion summarizes some of the results obtai.nedin the attitude section from the six survey groups 0

It should be noted that in the case of wholesalersand retailers the population was stratified on thebasis of total yearly sales of the firms and adisproportionate random sample was t akcn , That is,the percentage of large firms sampled was higherthan the percentage of small firms sampled. Asomewhat similar situation exists in the farmersample. In this case the population of foodproducers in the Mayaguez region was divided

70

between all farmers who were members of one or moreassociations and those who was not members 0 Ahigher percentage of members were included in thesampleo

TABLE 601Survey Groups and Size of Sample

in Each City or Region

City and Sample SizeSurvey Group San Juan Mayaguez

Farmer 172Trucker 40 25Processor 32Wholesaler 46 18Retailer 89 51Consumer 246 141

The frequencies and percentages summarized inthis section, however, have been appropriately weightedto correct for the disproportionate samples. Thefigures reported herein can therefore, with the usualstatistical limitations, be generalized to the popula-tions from which the various samples were drawn.

Preliminary Attitude Results

One factor which has been accorded a great dealof attention by development economists ha~ been thedegree to which people in developing economies arewilling to save. We included in our farmer, truckerand consumer surveys a question designed to yield anindication of the individual's attitude or predisposi-tion toward saving, consuming and investing. Weasked each person to assume he had been given $500cHe was asked to tell us how much he would spend oneach of several alternatives. We compiled the informa-tion for the three surveys and computed the averageamount of money out of each additional dollar which

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each group would spend for the various reasonsc

We found that generally there was littleinclination to hoard money by putting it in a safeplace. One of the items with a larger response was"put it in a savings accounto!'! The range amongthe various groups was from 13 cents to 27 centsout of each additional dollar. That is surprisinglyhigh when compared to aggregate data which indicatedissaving in Puerto Rico. Other important itemswere "spend on necessities," ranging from 13 centsto 28 cents per dollar; "invest in a business,"ranging from 4 cents (for consumers in San Juan)to 44 cents (for farmers); and "education for thefamily," ranging from 12 cents to 19 centso Whilethis method has definite limitations, it representsone way of obtaining estimates of the ways in whichconsumers in developing economies are likely tospend additional income.

Another important factor, indicati.ng bothcapacity and desire for improvement in developingnations, is the level of educational achievementmotivationo We asked each respondent on all surveyswhat level of education he desired for his oldestsono Or if he had no son what level would he desireif he did have one. Then we asked whether he thoughtthat level of education would be possible. Arelatively high percentage of the respondents on allsurveys indicated a desire for at least one year ofcollege for their sons. Moreover, they generallyindicated a belief that it would somehow be possible.Hence, educational aspirations are quite high inP uert0 Ri coo

To obtain information on attitudes toward avariety of items, we presented to each respondenta series of statements 0 We asked them to indicatetheir agreement or disagreement with the statementon a five point scaleo The answer could be completedisagreement, disagreement, indifferent, agreementor complete agreement 0

The first series of attitude statements dealtwith basic world views. It included such statementsas; "Children should be instructed to follow theways of the past to the letter," and "We would bebetter off if scientists would leave things alone."

72

An index of modernity has been constructed using thosestatements. Each individual respondent has a modernityscore based on his response to these "world view"statements. That score is being compared to severalother variables in the questionnaire to indicateimportant factors related to a modern "world view,"At this stage in the data analysis the most interestingresults are: (1) that responses to the nine "worldview" statements generally indicate a consistentranking across the surveys with wholesalers mostmodern while farmers, consumers, retailers and truckersfollow in that general order (processors were notincluded in this analysis), and (2) when we dichot-omized on the basis of age, education, and innovative-ness, in most cases the younger, better educated, andmore innovative individuals appear also to hold modernworld views. Innovativeness was indicated by anindex based on the percentage of a specific list ofmarketing innovations which had been adopted by theindividual farmer, wholesaler or retailero Weshould point out that these generalizations arebased on preliminary percentage figures withoutspecific statistical tests of significance.

A second group of attitude statements wasincluded in all surveys 0 These statements dealtwith attitudes toward market institutions, marketuncertainty, and government programs, The percentageagreeing with the statement "Supermarkets have allthe business they are going to get ," ranged acrosssurveys from 17 percent of the wholesalers to 46.4percent of the retailers. Hence the majority ofrespondents across surveys seem to think thatsupermarkets will continue to make inroads in retailfood sales in Puerto Ricon

There was general agreement among all surveygroups except truckers that the uncertainty in fruitand vegetable market channels has been reduced in thepast ten years. It is significant that a majority oftruckers disagreed, since basic market coordinationdevelopments have placed the greatest pressures onthat group.

Response to two statements dealing with the milkand egg regulations in Puerto Rico indicate thatparticipants throughout the marketing system as wellas consumers believe that the milk and egg marketing

73

regulations have been beneficial to all. The percentageagreeing with the two statements was almost 80 percentplus or minus 5 percent. This is an interestingendorsement of government efforts to help coordinateagricultural markets.

Finally, farmers, wholesalers and consumers inthe majority disagreed with the statement: "Governmentprograms usually end up benefiting only a selectgroup of politically influential businessmen." On theother hand, retailers appeared to be nearly evenlydivided in agreement and disagreement with the state-ment, while only a slight majority (54.5%) of truckersindicated agreement with the statement. Hence, thereis an indication that government programs are believedto be equitable by all groups except those groups ofmiddlemen having the greatest concentration of smallindependent businessmen. The smaller retailers andtruckers may feel that they do not get their shareof the benefits of government programs.

The second group of attitude statements to beconsidered in this summary is a series of statementsrelating specifically to the marketing attitudes offarmers, truckers and processors. There were fourstatements on the questionnaires dealing with basicbeliefs toward cooperative marketing and forwardcontracting. There was general agreement across thethree surveys that marketing cooperatives and forwardcontracting would be beneficial and useful in thefuture. For example, 83 pereent of the farmers, 74percent of the truckers, and 67 percent of theprocessors agreed that farmers should organize coopera-tive groups to deal more effectively with wholesalersand retailers. This general opinion seems to suggestthat there is some dissatisfaction with presentcoordination arrangements between farmers and theirbuyers. It should be pointed out that about 64percent of the farmers are already members of somekind of cooperative association, which partiallyexplains their high percentage of agreement.

There were two statements dealing withgovernment regulation and services. In general therewas agreement that agricultural production and marketreports were accurate and that farmers (or truckersor processors) could count on government help insolving marketing problems. The single exception to

74

the above generalization occurred where only 46percent of the truckers agreed that they couldcount on government help. This reflects reality,since in fact little government help is providedfor truckers 0

The third group of attitude statementsadministered specifically to farmers, truckers,and processors dealt with the bargaining powerof supermarkets and processorso Again therewas general agreement across surveys thatsupermarkets and processors possess and utilizethe power to determine agricultural pricesoCooperative marketing associations appear to beregarded, even by processors, as a possible wayfor farmers to overcome that bargaining p owe r-and improve the coordination of the marketingsystemc In addition, on a similar statement,retailers and wholesalers agreed (94 percent and85 percent respectively) that the organizationof cooperative groups might be beneficial ingeneralo

Finally, a series of statements wasadministered to retailers and wholesalers wh~chwere designed to indicate prevailing attitudestoward the elasticity of the demand curve facingindividual food retailerso The results indicatethat at the present time retailers and wholesalersas a group do not believe that reductions inretail food prices must necessarily reduce thereta.ilers' profito It appears that the ltlive andlet live" attitude observed by Galbraith andHolton in 1950 in their study Marketing Efficiencyin Puerto Rico is not so prevalent amon~ £ooddistributors today.

Future Analysis

As noted earlier, the analysis summarized above,in addition to some chi_square contingency analysisrelating an assortment of variables in the surveys,is only the first stage of the analysis planned forthe survey data. Additional analysis will includecorrelations, factor analysis, partial correlationsand additional chi-square analysis 0

75

Our aim is to analyze completely the data wehave collected in an effort to determine the kindsand nature of relationships existing between suchvariables as economic actions, market attitudes,world view, innovation, communication, income,age, education, travel, and a number of othervariables studied in this survey. We believe thatcertain dynamic relationships do exist and that tounderstand such relationships will put us one stepcloser to an explanation of the process of marketdevelopment as a vital part of the greater processof economic development.

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Communication Behavior and the Latin AmericanFood Marketing Process~ Some Preliminary Findings

Presented and Summarized by Ro Vi.ncent Farace

Scholars in the fields of economics andcommunication are beginning to fuse their theoryand research into a joint study of the relationshipbetween the economic behavior and the communicationbehavior of participants in economic systemso TheLatin American Food Marketing Study represents oneof the first major attempts to explore the ways inwhich communication behavior affects economicbehavior, as well as to explore the effects ofeconomic activities on communication activitiescClearly, much remains to be done in order to con-ceptualize and integrate communication and economicvariables within the framework of general economicsystemso Considerable effort has been devoted toboth the i.nitial conceptualization of the economicscommunication relationship, and to the gatheringof basic data to evaluate our conceptualizationo

From the viewpoint of communication theoryand research we are concerned with the effects ofvarious message sources, which transmit their messagesthrough some combination of mass and interpersonalchannels, to the receivers of these messages. Themessages, of course, deal more with economic ratherthan other concerns, although political, religious,social, and other aspects of life may generatecommuni.cations related to economic actso It appearsthat the major role of communication is to aid infacilitating the coordination of the production andconsumption sectors of an economy" Along with flowsin goods and services, or labor, capital, rawmaterials and supplies, there exists a concomitantflow of communications about these things and theirinter-relationships. Thus, the message system of aneconomy acts to inform participants throughout theeconomic system of the tfresources" or outputs oneparticipant has (this could be an Ln d.i.vf.du aL, a firm,or an entire industry) and the needs and wants(desired inputs) other participants are requested tofulfi 110

7T

For example, we can study the messages aboutproducts available in the market pla~e to which consumerscan responde These messages might refer to theavailabiltty of goods and services, t.he prices of thesegoods and services, their non-price features (such as"attractivenessl:f in the advertlsing sense), etco Wecan also examine the message produced by these consumers,such as the requests of laborers for changes in workingpractices, or the comments to store operators about themerchandise he carries"

It is important tore cogni ze here that thefunctioning of an economy!s communication system is notincidental to the operation of the economic systemoFor one thing, the behavior of individuals--whether theyare "pr-oduce r-s tt or "cons umers tI--can be shown t a beregularly and reliably affected by the nature of themessage inputs they receiveo These effects can be notedindependently of the effects produced by inputs in themore traditional economic sense of the t.erm , Whosays what to someone is often as important a determinantof his reception of a message and his action upon itas is the actual content of the messageQ The way thesemessages shape the individual's view of the physicalinputs he receives may be as influential on his use ofthem as their actual characteristics"

Second, at the level of an entire economy, we canshow that t~communication system and the economic systemare interdependent, each in turn setting the bounds orlimit on activity of the othero Consider for a momentthe elaborate television network in many western worldcountries. This network enables the dissemination ofmany messages about economic activities to vast audiences,on an immediate, multi-sensory basis, It can potentiallyreach a far greater audience far more quickly, witha more uiconic" representation of the goods and services,etc., referred to in its message than can any othercommuni cati.on sys tern" Yet, eq uall.y clear, theavailability of capital and various labor skills, plusother technical and social requisites, limits the develop-ment of such a coordinating mechanism, and hencelimits its usefulness as a coordinator of the marketplace. It is on such bases as this that attention todevelopment of a communication system should be integralin plans for fostering economic growth in less developedeconomies,

78

With this brief introduction, the remainder ofthis section outlines the kinds of communicationquestions which were asked in the Puerto Rican phaseof this project, and discusses some of the analysisof communication and economic variables now underway 0

10 The Kinds of Communication Questions Asked

Each group of respondents--farmers, truckers,processors, wholesalers, retailers and consumers--was asked a common set of questions about their useof mass communication, their exposure to the massmedia, their sources of local news, and theirknowledge of some of the major political figuresdiscussed in the mass mediao

The questions dealing with mass communicationuse asked the respondent to indicate his attentionto radio, television, newspapers, and magazines.Mass media exposure was indexed by asking thoserespondents, who said they used a medium, to reporthow much of it they did in fact use (i.eo, hoursspent watching TV). To obtain a guide to theirnews-seeking behavior, respondents were asked tonote where they obtained most of their local newsoFinally, respondents' level of political informa-tion was evaluated by asking them to name the officeholders of seven prominent political positions, suchas the Director of Fomento Cooperative in PuertoRicoo This set of questions on mass media use andexposure, and knowledge about political figures,then, formed the common core of items asked acrossall six groups.

In addition, a set of items was tailored foreach group to probe further certain of its potentiallyunique communication characteristics. These itemsinclude estimates of respondents' propensity to adoptinnovations, to be viewed as opinion leaders inbusiness circles, and to use special kinds of informa-tion sources (such as technical magazines or prices forthe crops they handle)**These questions were devised by John To McNelly, associateprofessor of communication and journalism at MSU: the itemshad been tested in previous researcho Dr. McNelly directedthe communication phase of the LAFMS project until recentlyo

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110 Analysis in Progress

Mass communication has long been viewed as botha "causeR and ~effect~ variable in social phenomena.In some instances, the researcher would expect masscommunication exposure to precede,or force, suchthings as knowledge of information conveyed by themediao In other instances, certain kinds of masscommunication behavior would be considered the resultof other Ln f Luen ces . For example, it Ls frequentlyshown that personal income is associated with mediause, since the wealthier are more likely to haveincome disposable for this purposeo

Analysis now in progress is exploring therelationships of mass communication use and exposureto the kinds of attitudinal, marketing, and othereconomic behaviors which have been discussed duringthe seminara We are concerned with such questionsas whether mass communication behavior is relatedto use of supermarkets, to a modernizing outlook,to readiness to adopt innovations, to knowledge andattitudes toward the market place, to success inbusiness, to interpersonal economic trust, topropensity to hoard, etco We are particularlyconcerned with the differences between respondentgroups in these relationshipso Locating thesedifferences may make it possible to understand whycertain kinds of respondents behave as they do, andmay suggest the kinds of research needed to developstrategies to cope with these behaviors 0

Each group of respondents in this study canbe classified on such bases as age, personal income,education, business accomplishments, etc. A quitedifferent kind of analysis is underway to develop anaudience typological system based on respondents'attitudinal, economic and communication characteristics,instead of the usual demographic variables aloneoWe will examine patterns of responses across thevariables from each discipline and isolate person"t ype s atl Then we will turn to the problem of relatinginputs and outputs to the specific characteristicsof each type. In this way we hope to yield fruitfuland informative findings to the problem under st udy ,

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CHAPTER 7MODELING AND SIMULATION

Input-Output Ho de l of Puerto RicoPresented by Jose Ao HerreroSummarized by John Eo Griggs

The Planning Board of Puerto Rico has designeda model describing economic behavior based upon ananalysis of the inputs and outputs of theprincipal sectors of the economyo This model hasproven to be a practical and reliable tool for projec-tion of the most important economic variables of thePuerto Rican economyo

As with all models, input-output analysis isbased on certain assumptions. The more nearly theseassumptions match reality, the more accurate the modelas a reliable predictor of economic behavioro Thereare two basic assumptions of the input-output model!(1) final. demand is ass umed to be known and (2) theinter-industry flows required to satisfy that demandare determinable and fixed over a period of timec

The assumption of known final demand is a verylimiting one in that no expl.anation of the level offinal demand is giveno The prediction of final demandis of itself a very important factor in the studyof economic growtho The assumption usually referredto as the assumption of fixed technical coefficientsis believed to be less limiting especially for short-run proj ections.

The mathematical formulation based upon these'assumptions can best be explained by means of anexampleo Assume the existence of a hypotheticaleconomy that has three different sectors! agriculture,industry and services. The final demand, grossoutput and the inter-sector flows are given inTable 7010

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TABLE 701

Transactions of a hypothetical economy

1j pOJ C :::!H ro o,

in :::s s +-'OJ ..p ~ tn ill ;;jrf) rl H (]) 0 0cd ;:j .p orn...c: o ifJ. or-i ri W

OJ C) .r! ;:::I :> (,u Wrl H H 'd H ~ 0cd ;:j bO ~ OJ 'ri HWP-! ~ H U) ~ 0-

Agriculture 2 4 2 8 16Industry 4 8 1 '7 20Services 1 3 L 4 10Value Added 2. 5 ,--

';--.Gross output 16 20 10 9 46

The inter-sector flow portion of Table 701 andthe gross output values are used to determine the technicalcoefficients which are then used to descr-Lbe the requiredinter-sector flows necessary to satlsfy specifted levelsof demand, For example, suppose that the agriculturalsector sells four units of output to the industrials ect.or, and that the gross output of the industrialsector is 20 units. This implies that 20 percent ofthe industrial gross output orginates in the agriculturalsector, ioeo 4 t 20 = 20%0 In this hypothetical economythere are ni.ne such determinable coefficientso Theseare called the technical coefficients of input~outputand they describe the internal production relationshipof the e con omy , (see Table 702)

Technical coefficients

SalesPurchase Agriculture Jndustry Services

AgricultureIndustriesServices,

0012500,,2500000625

0020000,,4000001500

002000001000002000

2

The assumed behavior of this economy can beexpressed in simple mathematical form using only thetechnical coefficients and the level of final demand 0

Let the gross production of the three sectorsby symbolized as:

XA where XA, XI' Xs are the gross productionXI levels of agriculture, industry andXs services, respectively.

If the final demand for the output of thesesectors is given as the following:

where YA, YI, Ys are the levels of finaldemand for the agricultural, industrialand service sector outputs, then thefollowing relationship is known~

= U •...· A

The values in the matrix A are the technicalcoefficients and U is a unit matrix. The exactmathematical derivation is not of direct interestsince it results from~he assumptions stated. Theusefulness of this model lies in the ability to adjustlevels of final demand and technical coefficients inorder to study changes in the total outputs of specificeconomic sectors as a result of those changes.

One goal of the Latin American Food MarketingStudy was to analyze the importance of distributionor marketing in a growing economy, Unfortunately,the input-output model did not, as structured, providea method of analyzing the distribution sector. Inorder to use the basic model, it was necessary toestablish the actual flow of goods from producer to

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consumero This required an almost complete adjustmentof the input-output model to introduce the distributionsector into an input-output framework 0

Drawing upon numerous secondary data sources,the new input-output model was obtainedo As should beexpected, a great deal of consumption was given in termsof final demand at the retail lev~lo Prior to this,all final demand was stated as direct demand of theproducing sector thus ignoring the existence of thedistribution sectoro

By changing the input-output structure in thismanner, a number of important relationships could bestUdied. The most important for this particular projectwas to study the relationship between structuralchange in the distribution sector and the effect (directand indirect) of these changes on final demando Bycombining information on consumption behavior wlthchanges in the technical coefficients of the distribu-tion sector of the input-output model, changes in thedistribution of expenditures between food and non-food items could be studied, This change in the natureof final demand has a direct effect on industrialproduction which may also be studied via the input-output mode 10

Changes in industrial production affect theflow of goods through specific distribution channels 0

Information concerning the absolute level of productionco~pled with knowledge of the channels these goods useyields information useful ~n avoiding distributionbottlenecks c

The problem of complementing input-outputanalysis with a study of distribution and finaldemand behavior is a very difficult task, but onesorely needed to aid economic planningo

Summary

The input-output analysis is today one of themost capable instruments for studying the complexinteraction of the industrial sectors of an econ omy ,Yet, this method in itself is not sufficient toexplain economic growtho

84

The changes made in the standard input-outputmodel to allow a preliminary study of marketing ordistribution channels hopefully provide someadditional insights which will be helpful in the studyof the role of distribution in economic development 0

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Systems Analysis in Food MarketingPlanning and Development

Presented and Summarized by Herman Eo Koenig

The Food Marketing Problem

In the final analysis the marketing system--the food distribution system including the transporta-tion networks--exists for the purpose of movinggoods from the sources of production to the points ofconsumptiono In this respect, the marketing systemis a critical component of the regional or nationaleconomyo It plays a critical role in the economicdevelopment of geographic regions and it is an integralpart of urban development. It touches almost everyaspect of any society.

Consequently, all policies and decisionsrelating to the promotion, development, and planningof national and regional food marketing facilitiesshould be viewed in the context of the socio-economic system to be served and the research effortsin the area of food marketing must be closelycoordinated with research groups concerned withregional and national economic development and urbanand regional planningo

Flow Demands 0 To promote effective developmentand planning in marketing, it is necessary to definethe needs and the characteristics of the socio-economic complex to be served by the marketing systemoWhat are the inter-regional flow demands in terms ofthe various types of goods, acceptable time delays,and consumption rates? These needs must be knownboth as a function of geographic coordinate systemand as a function of timeo It is necessary to beable to ascertain the extent to which proposed changesand developments in the marketing system will alterthe economic growth of geographic regions and theshift in population density and consumption rates e

Finally, it is desirable to be able to determine,in a quantitative sense3 the effect on the overalleconomic system of various types of contingenciesoHow sensitive, for example, is the behavior of theeconomy served by the marketing system to failures

86

caused by strikes, climatic conditions, revolts,riots and war? Will the interruption of a particularlyvulnerable component of the marketing system causea failure of a major portion of the national orregional economy and endanger the welfare of asignificantly large group of people?

Facilities Development, In addition toestablishing the flow demands among various geographicregions in terms of the types of foods and goods tobe transmitted, there remains the problem of actuallypromoting the development of the facilities themselves.This is, decisions must be made on whether the govern-ment should promote the development and growth ofadditional transportation facilities, of more efficientwholesale and retail facilities or of more extensiveproduction facilitieso The capacities and limitationsof the existing marketing facilities must be known;also their effectiveness in meeting the flow demandsnow and in the future must be evaluated againstalternate marketing facilities of various designsand forms, some of which are still in conceptualstageso

The marketing facilities, whatever they are, mustbe integrated with the social habits and needs of thepopulace they serve. For example, if high volume andefficient supermarket-type retail outlets are deemednecessary, the transition of them must be smooth andhave positive public reactiono The many technicalproblems of developing efficient, reliable, andeffective marketing facilities must receive coordinatedsupport as part of both a short-range and long-rangeefforto

Facilities Operation. The various components ofthe marketing system are provided by thousands ofindividual city, state, cooperative, and privatelyowned and operated firms and businesses. Therefore,effective operation of both the present and anyfuture marketing facilities as an integrated systemrequires extensive communication and cooperativeeffortQ Techniques and procedures must be developedfor acquiring data from which advanced flow demandscan be determinedo Informational and technicalservices must be made availableo

Fundamental technical research is necessary inthe area of marketing techniques and practices so as

81'

to effectively use the developed facilities andminimize risko

Objectives of Systems Analysis and Simulation

It is the specific objective of systems analysisto provide tools that will help to solve the problemsdetailed above-~to provide instruments for experimentingwith the relative merits of alternate policies andprograms of development in the field of marketingin the face of changes in the socio-economic complexit serves. The tools take the form of sets ofsimultaneous equations called mathematical models;and the experiments, called simulations, are usuallycarried out on a computing machinea

It is not an overstatement to say thatultimately the only quantitative way of evaluating,for example, the cost-effectiveness of the existingor any proposed marketing system in meeting thepresent and future demands placed upon it is todevelop a mathematical simulation of the marketingsystem as an integral part of the regional economyand social processeso Such models are necessarilytechnically very complex and to be completely

,successful require a data base that is usable bymodern computing machines and which can be up-datedcontinually. The spectrum of research and develop-ment efforts necessary to achieve such a simulationis vast and cannot be looked upon as a total sourceof solution to immediate problemso Rather, thiskind of research must be promoted and developedfrom the point of view of long-range planningo Thisresearch can be looked upon as an attempt toincrease the professional competence and capabilityof the scientific community and keep it abreast ofthe ever-expanding technical complexity of themarketing system in an expanding societyo

Mathematical models that simulate both thedemands that must be met by marketing systems asa function of a changing economy, and the influencethe marketing systems have in shaping economicdevelopments, can be viewed as an evolutionary processoIn the course of development, perhaps three generationsof models are identifiedo The first generationmodel identifies the basic structure of the system,

88

establishes the general form of the model, and definesthe data requirements. Before a second generationmodel can be develope~a data acquisition and processingsystem must be developed to provide this required database, hopefully in a form that is usable by a computingmachine. If the model is to serve as an effectivedecision tool, the data acquisition system must includeprovision for periodically updating the parameters inthe modela

The second generation model builds upon the database defined by the first generation model, but mayrequire additional refinements 0 Such refinements,both in the model and the manner in which theparameters are evaluated, combined with the resultsof experiments conducted on the computing machine,lead finally to a third generation model in whichthere is sufficient confidence and reliability tojustify its use as a formal instrument of decisionmaking 0

A first generation model of reasonablesophistication might take from one to three years todevelop and should provide immediate and significantpayoff in the form of new understanding and quaIi tati veor semi~quantitative insight into the problem. Itcannot help but contribute significantly to new insightinto the food marketing problem and is a necessarystep in the direction of applying modern system theoryto domestic problemsu

Second and third generation models are perhaps5 to 15 years in the futureo But again it must beemphasized that research efforts in the pursuit of theideal simulation model are accumulative in that one isalways in a better technical position today thanyesterdayo In this respect the mathematical modelsin system simulations can and must be ever-increasingin sophistication and application--they serve as theguide in systematic development.

Finally, it must be emphasized that the cost andeffectiveness of a formal simulation effort in the areaof food marketing depends upon the extent to which theeffort is coordinated with the research efforts ofother groups concerned with developing simulationmodels for population growth and economies ofgeographic areaso Only if all groups concerned with

89

such research are apprised of the overall picturewill it be possible to merge their efforts into asimulation model of the food marketing system asan integral part of the economyo Mathematicalmodels of the economy must, for example, go beyondpresent input-output studies to include the dynamicchanges created by the accumulation of productioncapital and inventories and by the delays associatedwith the growth and decline of industries. The modelsmust be definitive to the point of identifyingspecific industries and specific geographic regionsso that the spatial aspects of the food marketingproblem can be included.

Mathematical models of population growth,development, and migration must be coupled with andrelated to variables which take into considerationchanges in the geographic distributions of industrialactivities and other changes in land useo Attemptsmust be made to develop automatic data acquisitionand processing procedures in order to provide thevast dat~ base necessary to develop the varioussub-models required in the simulationo The almosttotal lack of an adequate data base usable bycomputing machines is without question the mostserious limitation or deterrent to immediate or short-range simulations of economic, efficient marketingsystems.

The theoretical basis for establishing anddeveloping simUlation models characterizing theinteractions between the food market system and thesocio-economic complex it serves is well established.The mathematical concepts and techniques arefundamentally the same as those developed in theelectronic and aerospace industries for the analysis,simulation, and design of complex and intricatephysical processes.

In general. it can be said that systemsanalysis is concerned with the quantitative simula-tion, design and control of processes that can beviewed as collections of interacting components orpartso The extreme flexibility and unique capabilitiesprovided through systems analysis stem frommathematical models that are developed from a detailedstudy of the behavioral characteristics of the com-ponents of the system and the constraints imposed by

90

their interconnections. It is the only methodologythat provides a systematic capability for experimentingwith alternate system structures and controlling ourmanagement policies. It is the backbone of theunprecedented success in automation, electronics, andthe aerospace industriesQ Although the applicationsof these techniques to socio-economic processes arelimited at this time, it is nevertheless evident thatthe applications do carryover into these areas.Evidence of this carry-over is given, in part, byrecent efforts of our aerospace industries in the Stateof California and contemporary efforts of many otherpracticing engineers and educatorse

The report entitled'~ Systems Approach to HigherEducation" represents the results of very recentefforts to apply systems theory to the analysis andsimulation of institutions of higher education. Ascompared to the food marketing problem, the systemsimulated in this report is relatively small andwell defined and a data base from which to work isreadily available. But earlier sections of thisreport indicate specifically how systems analysisapplies to socio-economic processeso

91

Systems Analysis and Economic ModelingPresented and Summarized by John Eo Griggs

The basic objective of the model building portionof this project is to translate what can be empiricallydetermined concerning the actual functioning of aneconomy into mathematical formo Since an economyis an extremely complex system, the tool which is usedto describe it must be able to handle complex relation-ships. Since we are still in the novice stage ofunderstanding how economies actually operate, the toolmust be flexible in order to allow for numerous changesin the structure of the modele

As Dre Koenig has pointed out, systemsanalysis has flexibility and has already beenapplied to extremely complex systemso Perhaps the mostuseful comments at this time should be directed atdescribing what approach we have been using to constructthe economic modelso

The basic assumption underlying systems analysisis that a complex system is best modeled by firstbreaking the system down into components 0 Thecomponents are then modeled in the manner which bestdescribes the functioning of that particular component.While there are certain restrictions placed on thecharacteristics of the variables which are relatedmathematically, the form of the r-eLat.Lons h.Lp is anempiricaloneo Given the models of the components, thebehavior of the system can then be described in termsof the component modelo This approach is exactlyanalogous to describing the functioning of a missileguidance system in terms of models of the eLe ct.r-Lca Lcomponents which make up the guidance systemo

Three types of relationships are sought in thedevelopment of models of socio-economic systems. Thefirst type deals with relating together fairlyhomogeneous groups of things. Homogeneity in thissense is referring to similarities in response patternswith respect to specified variables 0 If one were toattempt to model each identifiable component in asocio-economic system, the model would rapidly becomecompletely intractable with even the most adva.ncedcomputer facilities. The use of demographic andattitudinal variables in order to group consumers intofairly homogeneous groups, in terms of consumption

92

behavior, is an example of this type of relationshipaThe grouping of supermarkets and colmados for modelingpurposes as opposed to dealing with a single foodretail component is another example.

The second type of relationship deals withquantifying the behavior of defined components" Therelationship between the output flows and prices offood items to input flows and prices is an exampleof the second type of relationship sought Thpspare complex functions of both technOlogical and behavioralcharacteristics. The task of the researcher at thisstage is to determine the important variables whichthe component reacts to and approximate that component'sresponse to the values of certain variables withquantitative expressions. This is undoubtedly themost difficult task and it also relates to the abilityof the researcher to define components in such amanner as to make the task as simple as possiblec

The third type of relationship is that whichdescribes the pattern of interconnections betweencomponentsn For the present, we will deal withinterconnection describing the flow of goods, labor,and money botwcen components as opposed to say theflow of information or ideas between components 0

Each of these relational problems is intertwinedin that changes in anyone type of relationship willcause the others to change.

A comparison between systems modeling and thestandard input-output approach may be useful ingrasping the task we are attempting" As ProfessorHerrero pointed out, the input-output analysis hascertain restrictions which impair its usefulnessfor our project's purposes. It has historicallyignored both the distribution sector and determi.nantsof the level and type of final demand as an integralpart of its framework. In the systems models, weare attempting to describe not only the productionsector but also the distribution sector and theconsumption/labor sectoro We are also attempting torelate these sectors to each othero

Without becoming involved in the mathematics,it is helpful to discuss the structure of the modelwith the aid of a diagram or graph of the systemoChart 7.1 shows a highly simplified and aggregatedgraph of the systema

93

•. INDUSTRIAL 4...•.•.. SECTOR~

...•....• <,~....•

/~....•~r

WHO LESALE ~,SECTOR~....•

.~~....•....•

• ~Ir

RETAIL .....•SECTOR

~...•

t ~,.~ 4 ~ 4~

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CHART 701The Economic System

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There are basically three components identifiedin this graph; the industrial sector, the distributionor trade sector (composed of the wholesale and retailsectors), and the consumption/labor sect or-, The importand export flows, the governmental sector and othershave been ignored in order to focus on the basicstructureo These other sectors must obviously beincluded in the economic models.

Each of these "black boxes" are properly viewedas components of the system and thus must be modeledoThe methodology of systems requires that each of theedges or connecting lines in Chart 701 have two typesof variables; a flow variable and its complementaryvariable, a price. The modeling task is to relatethe two variables for each edge of a component to thevariables of the other component edges. As alreadystated, this is a most difficult task and one whichrequires a series of successive approximated relation-ships before reliable ones are obtainedo

As diagrammed, the components appear to be highlyaggregated. This is not necessarily true in that eachof the identified components may Se treated as a systemwith a number of sUbcomponents. This, in fact, i.show they are being treated in the modeling process,We are attempting to build pieces of the model basedupon a number of smaller pieces which are moreamenable to analysis.

Although this discussion seems highly theoreticalor perhaps a better term is vague, it is a highlypractical and empiri cal way of approaching the problem,It requires that the physical flow of goods be tracedthrough the economic system and that the flow bemeasured not only in physical units but also i.n termsof the price per unit 0 It requires one to attemptto relate consumption behavior to the output of theindustrial and distribution sector via labor inputsand thus wage income. It focuses attention on waysto break down a complex problem into a number ofsmaller problems,which hopefully increases the chancesof obtaining empirically valid relationships. Theuse of such a model will hopefully provide a meansfor predicting the effect of changes in a component uponthe operation of the entire economic systemc Changesin the structure of the food marketing sector forexample have resultant effects which are more than

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simply changes in the component. If structuralchanges affect food prices, one expects some changesin the level and nature of demand. Given a fairlyaccurate model of the consumption behavior, it maybe possible to predict what these changes will beoAny changes in demand will affect the output ofspecific sectors of the industrial sector and thuspossibly affect labor input~ which also has an effecton consumption behavioro This complex interactionbetween components is what we are attempting to study.

The problems of building such models areobvious and acutely recognized by our group. Whatwe are seeking at the moment is a better understandingof how, in fact, the system is functioning at agiven point in time. Much of the data needed is notpresently available and thus there is much to begained and little to be lost in attempting to applythis rather complex method of analysis? Based onthe knowledge we are obtaining about the economicsyste~we are attempting to build predictive toolsto aid economic planners and the social scientistoWe know of no other way to approach such a complexproblem than to apply empirical gained knowledgeto the process of model buildingo

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Application of SimulationPresented and Summarized by Charles Co Slater

Broadly, modeling is useful to assess the costsand benefits of particular courses of action, investment,and institutional reformo Part of this evaluationprocess is the identification of reactions to theinitial actions taken in anyone sector in the economyoFor example, the employment question remains animportant problem in marketing development 0 Presently,underdeveloped economies are characterized by labor-intensive marketing systemso Improvements bysubstituting capital for labor displaces some of thosewho have previously been partially employed in themarketing system. This displacement is a cost associatedwith reform. The initial unemployment compensation ofthese people and later their retraining are costswhich must be accepted as part of the price of obtainingefficiencies in marketing. The benefits which offsetcosts are the reduced costs or improved quality and/or the increased variety of products made availableto the general public. The question then is whetherthe general gain as a result of reduced costs ofbasic consumption goods has offset the costs ofdisplaced people who ar~ presently involved in themarketing system. The only way to deal with theproblem is to look at it in terms of general andsubsequent effects or rounds of change over time whichresult from various strategies applied to alternativelevels of employment change.

In Puerto Rico two such employment effectshave been seen in the market development that hasoccurred to date. First there has been displacement,to some extent, of the old line wholesaler-importersby chains and cooperative organizations and directmainland purchasing. Roughly 40 percent of theproduct sold on the island is purchased direct.Another important market reform which produces dis-placement is the impact of large retailersc Thecolmados have changed from small grocery stores thatalso sell alcoholic beverages to b~verage storesthat sell some foodo This changed product mix hasenabled the retailers to survive 0 This illustratesin general the pature of the problem with whichmodeling attempts to grapple"

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Let us turn to the more general question of whatis meant by costs and benefits. Costs involveemployment levels that might be changed as a resultof displacement of labor by capital; income distribu-tion changes which might be disadvantageous; the directcosts of retiring old institutions with institutionalizedpositions; and finally the direct dollar costs of theconstructing of new facilities and new institutionso

Benefits can be measured in terms of grossincome, income distribution changes which favor greaterdemand, and capital changes 0 Using these kinds ofcriteria it is necessary, ultimately, to create a modelto assess the "valuelt of options, using scarce resourcesto demonstrate the overall benefits to the economyof the developed tasks being fostered by the commercialagencyo

If modeling and simUlation as applied tomarketing development are to be positioned into thecost benefits approach, the question of how togenerate useful data for the simulation so that theprogram can become truly operational must be facedQA great deal of effort this past year has beenexpended to establish the relationship between whatcan be thought of as "soft data," relatively easy datato pick up by cross-sectional research and Hhard data,ttrelatively difficult time series data generally lackingin underdeveloped areaso The attempt will be made torelate attitude and demographic attributes of varioussubsectors of the population of consumers, retailers,wholesalers, and processors on through the productionsector, in order to relate those factors of attitudeto the hard or historic time series data. To theextent that this effort is successful, the modelcan be applied in areas where access to traditionalhard economic information is limitedQ Thus, ingeneral the relationships that are being sought tostructure in the model will depend upon the attitudinalinformation and other data of a sort nor requiringextensive time series information~ The systemsmodeling approach holds great promise as a means ofunderstanding the development tasks and developmentprocess. The approach as a general tool is animportant breakthrough but there remain serious

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and perhaps continuing limitations on its applicabilityto the development process. However, the investmentnow seems worthwhile.

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CHAPTER 8APPRAISAL AND APPLICATION OF RESEARCH FINDINGS

Presented and Summarized byCharles C. Slater and Harold 000 Riley

Introduction

This chapter has three partso The first is aconcise restatement of the overall approach of thisstudyo The second part is a preliminary evaluation ofthe performance of selected aspects of the Puerto Ricanfood marketing systemo The third lists recommendationsfor further changes in the Puerto Rican food marketings y s t e m,

The Approach of this Study

This study focuses on the improvement of foodmarketing systems as a means of accelerating economicgrowth. We have been concerned with both theefficiencies of physical handling and the social andeconomic effects of the marketing processo Themarketing process has been viewed as a set of inter-dependent activities which link consumers, retailers,wholesalers, processors, truckers and farmers 0

Three sets of assumptions conditioned ourapproach to this studyo We assumed first of allthat most of the less developed Latin Americancountries have idle or underemployed labor; have lowrates of utilization of existing industrial capacity;and have capital hoardingo A second a.ssumption wasthat risks and uncertainties involved in the marketingprocess can be described and means for reducing perceivedrisks can be devisedo A third assumption was thatsystems analysis can be applied to the marketing processas a means of better understanding the functioning ofthe process, both qualitatively and quantitativelyo

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Several hypotheses are being examined. Some ofthe more interesting and crucial are as follows:

1. The demand for food in low income communitiesis responsive to both price and incomechanges.

2. Reductions in market risk lower costs andstimulate output.

3. There are significant differences in riskperceptions among market participants.

40 Market risks can be reduced by reforms inmarket institutions.

50 Market institutions can be changed by creditpolicy, organizational innovations and rulechanges 0

Central to the study has been the belief thatmarketing reforms can contribute significantly torising levels of real income. Furthermore, it is ourcontention that the role of marketing institutions hasbeen neglected by development plannerso We are,therefore, attempting to identify more clearly therole of marketing in economic development and some ofthe practical ways that marketing reforms canstimulate both the demand and supply of food products.We view the marketing system as an importantcoordinator of economic activity whose role can bemade more effective through careful study andpurposeful reform.

Performance of the Puerto Rican Food Marketing System

It is difficult to evaluate the performance ofa marketing system. In the first place there isdifficulty in arriving at a list of appropriatecriteria for gauging performance 0 Secondly, there isthe problem of obtaining adequate evidence to useas a basis of judging the level of performance.

Four performance criteria have been selectedfor emphasis in our overall evaluation of the PuertoRican food marketing system. These are as follows:

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10 Efficient resource use

20 Progressiveness

30 Product variety and quality

40 Profit rates

Efficient Resource Useo In a macro sense resourcesare being~~ed efricie~tly when there is no way toalter the pattern of use so as to increase the levelof incomeo In relative terms any shift in the use ofa given set of resources that increases output improvesefficiencyo When aggregative measures of efficiencyare impractical, partial measures are sometimes usefuloOne such measure is output per workero

There have been significant increases in theoutput of workers engaged in food wholesaling andretailing in Puerto Rico. Between 1958 and 1963 thenumber of workers in the food dl.st r-LbutLng field inPuerto Rico increased from 37,000 to 4230000 However,if there had been no change in dollar sales perworker there would have been approximately 60,000employed in food distribution in 19630 Other evidenceof improvement i.nefficiency is the decline in retailmargins 0 A decade ago margins in food retailingaveraged about 24 percent on saleso In 1964-65 marginshave declined to around 18 to 20 percento

In the retail-wholesale area of the foodmarketing system there appear to be significantopportunities for further reduction in operationalcosts, especially in the wholesaling functiono Thedirection of change will be toward full-line3 largescale mixing warehouses and away from small, limitedline broker-wholesaler operations. The wholesalingfunction should be more closely coordinated withretailing through arrangements such as voluntarygroups of retailers 0

Turning to agricultural production, we observethat output per farm worker nearly doubled between1951 and 19630 However, in 1963 output perworker was only $1,400 in agriculture compared toabout $5,000 per worker in Puerto Rican industryoThese are rather crude comparisons because differentamounts of capital have been associated with each

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worker. Nevertheless, one might conclude that therehas been a significant increase in labor productivityin agricultural production but output per worker isstill very low when compared with industry.

The overall farm to retail gross margin isanother measure of marketing efficiency. Marketingmargins for fluid milk are somewhat narrower inPuerto Rico than in mainland U.S. The margin betweenfarm and home delivery is 10 cents per quart inPuerto Rico, while it is about 15 1/2 cents in theUoSo The margin between farm and store sales is11 cents per quart in Puerto Rico and approximately12 1/2 cents in the UoS. mainland. The farm toretail margin on eggs is about 26 cents per dozenin Puerto Rico versus 21 cents in the mainlande

Gross margins on locally produced fruits andvegetables tend to be relatively high with manyitems having markups of 100 percent or more fromwholesale to retail.

Progressiveness. Industries which generate andrapidly adopt improved technologies and which haveprograms to improve employee performance are progressive.The supermarket sector of food retailing in PuertoRico has been progressive in adopting modern methodsof operation copied largely from mainland UoSo Inthe largest retail food chain, Pueblo, one observesa very high rating on personnel development. In-service training and personnel policies whichstimulate performance have been successfully introduced.Publicly supported personnel training programs havebeen made available to the food retailing industrythrough the Agricultural Extension Service and TheDepartment of Commerce 0 Much less progress isevident in the wholesale sector of the food businessand among the many small retailers.

product Variety and Quality. These performancecriteria are concerned with the satisfaction ofconsumer demands. Over the past 10 to 15 years therehas been a sharp increase in the variety of foodproducts available to Puerto Rican consumers. Thisis due mainly to the introduction of supermarkets whichhave imported most of their supplies from the mainland.However, an expanding food proceSSing industry on theisland is being encouraged by a program which includesthe support of a food technology laboratory operated

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by the University of Puerto Ricoa

The quality of locally produced milk and eggs hasbeen greatly improved over the past 15 years throughpublic regulation which encourages improved handlingpracticeso Much progress remains to be accomplishedfor meat and fresh fruits and vegetableso

Profit rateso Profit rates are an index of theeffectiveness' of competition i.n an industry 0 In theshort run, high rates of return on invested capitalcan be justified as a reward for risk taking associatedwith innovationo In developing countries profitrates need to be relatively high to attract capital,particularly foreign capitalo Also the risks instarting new business ventures tend to be greater inunderdeveloped versus developed economieso It isinteresting to note that the Puerto Rican agencyattempting to attract new i.ndustries used a five-year pay-off period as a preliminary basis forscreening feasibility studies on new industrialopportunities 0

The net earnings before taxes of the largestretail food chain in Puerto Rico (Pueblo) comparesfavorably with the earnings of the most profitablemainland food chainso This firm has experiencedsimilar rates of return since it was establishedin the mid-1950'so Much to its credit is itspolicy of reinvesting in the business to expandand improve operationso

There is very limited data on profits in otherareas of food marketing in Puerto Ricoo The Departmentof Labor's Minimum Wage Board has assembled operatingcosts and returns data for selected industriesoTheir reports show that milk processors (bottlingplants) had an average return on theLr- investment of16 percent in 19630 There were wide variations inprofit levels around this average, with several firmsreporting profits in excess of 20 percent on theirinvestment 0 Under the Puerto Rican Milk RegulationProgram the margin between the farm price andwholesale price of milk is fixed by administrativeactiono Hence, processorstprbfits are not subjectto the pressures of unrestricted competitiono

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Recommendations for Further Improvements in the PuertoRican··Food Marketing· Sy-stem

This study has emphasized the rapid changes thathave been taking place in the Puerto Rican foodmarketing system. These changes are occurring aspart of a broader process of rapid social and economicdevelopment. On the basis of the information andimpressions we have gained through our researcheffort we are now ready to advance some recommendationsfor the further improvement of the food marketingsystem. These recommendations, which have been discussedwith responsible individuals in government~ industryand the university, are presented at this seminar tofurther test their validity and feasibility prior tothe prepa.ration of our final report. The recommendationsare as follows:

Consumer Information and Protection. The consumerinformation program-bf the Agricultural ExtensionService should be continued with greater emphasis focusedupon the food buying problems of low-income families.Public action is needed to better protect consumersagainst unsanitary practices in the handling of locallyslaughtered meat. Improved supervision of scales forweighing foods is also recommendedo

Convenience Storeso Public policy and privateeffort should be directed toward the development ofconvenience stores to supplement the supermarketsystem that has emergedo Existing colmados faceserious problems due to their dependence upon a largenumber of wholesalers and their lack of technical andbusiness management skills. The convenience storeprogram could be patterned after similar operations onthe mainland and in western Europe. These storesare often small, family operated units wich carry alimited line of high traffic itemso - Through closecoordination with a full-line wholesale warehouse theymaintain low inventories and high turnover. Theyreceive technical assistance from the wholesalingorganizationo Through a franchise program or avoluntary chain organization, many of the presentcolmados could be transformed into more efficientconvenience stores.

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Supermarkets and Discount Centers. The introduc-tion of supermarkets has' benefited the Puerto Ricancommunity through lower retail margins, increasedvariety, and improved quality of food productso It isrecommended that the Puerto Rican government resistefforts to place unnecessary restrictions on thegrowth of supermarkets and discount centers. Whenproblems of this nature arise, adequate attentionshould be given to the benefits and costs affectingconsumers 0

Wholesaling. The problems of food wholesalingcontinue to p Lague the island of Puerto Ri.c o , In asense the wholesaling revolution has not yet occurredoA new central market area is making it possible forfood wholesalers located in the crowded area of "oldSan Juan" to move to adequate facilities. However,as yet there is only one large full-line mixingwarehouse on the island, operated by the CooperativeFederation. A second is now under construction toserve the Pueblo supermarkets 0 We have been told thatthis new warehouse will also provide wholesalingservices for independent retailers. In addition tothe two full-line warehouses mentioned above, supportshould be given to a third somewhat more specializedwarehouse to serve the convenience store programrecommended previously.

The improvement of performance in foodwholesaling is critically dependent upon changes inexisting regulations and business practiceso Twoconditions seem to hamper modernization of foodwholesaling. One is the local law which requiresfood processors to reimburse brokers for the expectedfuture income stream if the contractual arrangementis broken. The other condition is the "exc LusLveproduct line" whereby local wholesalers maintain atight control over branded products imported fromthe mainland, making it necessary for a localretailer to buy from many small wholesalerso Bothof these conditions are significant barriers to theestablishment and operation of full-line wholesalewarehouses that can handle direct shipments of foodproducts from the mainlando

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Coordination in Fruit and Vegetable Marketingo Thepresent ~y§tem of marketing fresh, locally producedfruits and vegetables is not well adjusted to the needsof the supermarketse The situation is especially acutein the San Juan areao Several adjustments are neededand some of them are now getting underway 0 Backwardvertical coordination by large supermarket operatorscan be improved through full~time produce buyers,purchase agreements with growers and truckers3 and moreadequate produce handling practices in centralwarehouses and in storeso In general, horizontal andvertical integration of production and marketingprocesses would also improve market performance 0

This could be accomplished through producer associationsmarketing through a central agency or by theestablishment of large-scale commercial producing andTarketing unitso These larger scale organizations mayneed processing facilities to stabilize market pricesoAdditional government rules and regulations areneeded to facilitate the organization and orderlyfunctioning of fruit and vegetable markets 0 Improvedgrading, weights and measures, market information andtrade practice regulation are suggested as means toreduce risks in buying and selling.

Expanded Caribbean Trade" Steps should be takento encourage trade with other Caribbean islandsoPuerto Rican industrial products and processed foodscould be exported in exchange for food products whichcan be grown advantageously in neighboring islands,such as the Dominican Republico These food importscould replace some of the imports from the mainlandand contribute to a general expansion of Puerto Ricanindustry and inter-island tradeo

The Planned Fomenting of Marketing Development

The efforts to stimulate economic development inPuerto Rico ranged from tax incentive and vocationaltraining to the actual government operation of businessenterpriseo Some of these efforts, as we have noted,were aimed at marketing institution development 0

The history of Puerto Rico's efforts reveal a patternof actions and plans that seem to be effective inmarket developmentn

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The first conditi.on was the task orientation thatbrought the various interested parties to a commonmeeting ground. The Governorts Food Commission was sucha forum, where the special interest groups dealt withcommon problems. Although this seems elementary, few ofthe monolithic structures which serve the special interestof farmer, assembler, processor or distributor havea common cause and forum in mos t areas, deve loped orotherwise!)

It is interesting that the need for reform anddevelopment led the Governor to ask for studies ofagriculture and food marketing, which were completedwhen the Commission was formedo Thus, the diverseinterests of the Commission on Food were faced withwell ordered facts. A consensus was reached and planswere then put in order to foment food marketinginstitution changes along with another industry whichwas designed for export or import substitutionQ

This concept of coordination to deal with atask across special interest groups contrasts with thecheck and balance form of most government cabinetsoMi,nisters of Commerce, Agriculture, Central Barik Lngand Planning are the general rule. A similar structurein Puerto Ricots Commonwealth Government was precededby institutional reforme From this experience itis possible to imagine the kind of structure thatwould foster marketing institution development andreform.

The ideal structure draws its power from thecentral government and is ruled by a ministerialgroup responsible for specific sectors of theeconomy, as well as for fomenting development thatreaches across the sectorso

The ideal internal national market developmentprogram would provide a means of identifying needs ininstitutions and actions which could be translated intoactive programs by the fomenting agenciest sustainedapproach (see Chart 801)0

The benefit of such a coordinated, task-oriented approach would be the sustained attack uponprograming the fomenting of changes 0 It would notprevent errors in judgment or in program actions, butit would encourage continued reviewQ

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CHAPTER 9

DISTRIBUTION COSTS IN LESS DEVELOPED COUNTRIESPresented by Richard Ho HoltonSummarized by Robert Wo Nason

Looking at the whole question of distribution costsin less developed countries, it would seem that reductionof these costs is a primary goalo But, lower distribu-tion costs do not in themselves necessarily indicatethat the whole process of distribution is more efficient;they might mean higher rather than lower per unitcosts.

Hence, it is important to present a number ofpropositions about the principal factors that help todetermine the unit costs of distributiono During thefollowing discussion the various distribution serviceswill be assumed to be constant.

The first proposition is that the greater thedistance to the market, the greater the unit cost ofdistribution is likely to beo This is especiallyimportant for agricultural products.

The second proposition is that the higher theprices of production factors, the higher the distribu-tion unit costo For example, even though wage costsare presumably lower in less developed countries,en~repreneurirutalent and credit costs are higheroConcerning credit, the decision of development banksto support, in essence, only manufacturing enterpriseshas virtually shut off credit for the development ofthe distribution sector. The argument is that thereis already too much capital in distribution in lessdeveloped countries, so more capital would be justsending good money after bad. However, stimulationfrom new capital may create the competition neededto improve the efficiency with which existing capitalis used ,

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The third proposition is that the greater theexternal economies, the lower the per unit distributioncostso This proposition raises the whole que~tion ofinfra-structure; that is, the transportat~on, banking,and communication systems, etco Here again, the lessdeveloped economies are generally in poorer shape.

The fourth proposition is that lower unit costof distribution is likely with a greater annual volumeof goods that move through a particular channel ofdistributiono For example, a farm produce area withenough volume to command daily pickup by a wholesalergreatly reduces risk and per unit costs~ Lessdeveloped countries again suffer for lack of such highvolume production centers.

The fifth proposition is that unit costs aresurely lower the larger the average transaction size,because of relatively constant negotiating and billingcosts, etco Less developed countries tend to havesmaller average transaction sizes~

The sixth proposition is that, the better thestate of information the lower the unit costs ofdistributiono Less developed countries have fewerchannels of communication and thus engender higherrisko

The seventh proposition is that the longer anindividual distribution channel has been in use, thelower will be its unit costo Greater understanding,which develops with time, will reduce transactioncosts and cooperative frictiono

The eighth proposition is that the denser themarket geographically, the lower will be the unitcost of distributiono This proposit~on follows fromthe cost of distribution of goods to geographicallydivergent markets. Again, less deveioped nations havetypically less dense markets~

The ninth proposition is that the greater theconcentration of producers, the lower will be the unitcost of distributiono This proposition follows fromthe costs associated with assembly of goods fromgeographically divergent producers rather than fromconcentrated producers.

III

rThe tenth and final proposition is that the unit ,

cost of distribution is adversely affected by the degree \of distrust between participants in the distributionsystem. Trust reduces the need for various signalsand thus reduces the negotiation process to a minimumQ

In summary, less developed countries have goodreasons why distribution costs are particularly highe

It is possible that in trying to modernizedistribution channels, much more attent~on should bepaid to the prospects for vertical integration. Asimple example will illustrate this point. Ifretailers, wholesalers, and producers are independent,then an investment in the market by some channelmembers would depend on the marginal costs of thatchannel unit and the marginal revenue that can bederived from the expenditure. The shift in demandresulting from the investment affects other channelmembers' demand but not their costs. Hence, if thechannel was integrated, the marginal cost would bethe combined marginal cost of all members.

Under common circumstances, this integration wouldlead to a lower equilibrium price on the common marketand/or it would lead to more inputs'of distributionservices on the part of all parties in-the channeleIt should be noted that such integration does notnecessarily mean common ownership but perhaps acontracting arrangement.

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