The Rapid Rise of Supermarkets in The Rapid Rise of Supermarkets in Latin America and Asia:Latin America and Asia:

Fundamental Effects on Domestic Fundamental Effects on Domestic Agrifood Systems and TradeAgrifood Systems and Trade

Tom Reardon, Michigan State University

Paper presented at the Global Market for High-Value Food WorkshopERS/USDA, Washington D.C., February 14, 2003

Presentation outlinePresentation outline Focus on Latin America and Asia.Focus on Latin America and Asia.

Supermarket diffusion pattern and Supermarket diffusion pattern and determinants.determinants.

Effects on agrifood marketsEffects on agrifood markets

-- procurement-- procurement

-- standards-- standards

-- convergence-- convergence

Challenges and OpportunitiesChallenges and Opportunities

Patterns and Determinants of Patterns and Determinants of Supermarket Diffusion in Latin America Supermarket Diffusion in Latin America

and Asiaand Asia

In 1 Decade Latin American Super In 1 Decade Latin American Super Market Diffusion Achieves the U.S. Market Diffusion Achieves the U.S.

Level Achieved in 5 DecadesLevel Achieved in 5 Decades

Supermarket Share in national food retailSupermarket Share in national food retail

U.S. U.S. 5-10% (1930) 80% (2000) 5-10% (1930) 80% (2000)

Brazil Brazil 30 (1990) 30 (1990) 75 (10%/year) 75 (10%/year)

Argentina 17 (1985)Argentina 17 (1985) 57 (9%/year) 57 (9%/year)

MexicoMexico 4545

Chile 50Chile 50

Costa RicaCosta Rica 50 50

HondurasHonduras 4242

Guatemala: 30 (1999)Guatemala: 30 (1999) 35 (2001) 35 (2001)

Supermarkets In E/SE Asia: 5 years behind Supermarkets In E/SE Asia: 5 years behind Latin America but grow fasterLatin America but grow faster

(a) 1999(a) 1999 (b) 2001 b/a (b) 2001 b/a

Indonesia 20 Indonesia 20 25 25 1.221.22

Thailand Thailand 35 35 4343 1.221.22

China (urb) 30China (urb) 30 4848 1.60!!1.60!!

Malaysia 27Malaysia 27 31 31 1.161.16

Philippines 52Philippines 52 5757 1.101.10

Rep.Korea 61Rep.Korea 61 6565 1.071.07

Tom, what are the figures? # of stores, % growth? If % growth, the 3rd column should be b-a, if # it should be (b-a)/a.

Focus on ChinaFocus on China

3000 supermarkets in China today3000 supermarkets in China today

Investment starting and planned post-Investment starting and planned post-WTO: 5-10 TIMES MORE in 5-7 years! WTO: 5-10 TIMES MORE in 5-7 years!

NOWHERE HAVE SUPERMARKETS EVER NOWHERE HAVE SUPERMARKETS EVER GROWN THIS FASTGROWN THIS FAST

Mainly in urban, East and Southeast Mainly in urban, East and Southeast

But moving fast into North& South-westBut moving fast into North& South-west

60% share of food retail in Shanghai!60% share of food retail in Shanghai!

Procurement VOLUMES are ImpressiveProcurement VOLUMES are Impressive

3 of 10 pesos spent by Mexicans on food are 3 of 10 pesos spent by Mexicans on food are spent in… Wal-mart Mexicospent in… Wal-mart Mexico

Chinese supermarkets buy $2 billion F&V! Chinese supermarkets buy $2 billion F&V!

Supermarkets in Mexico and Central Supermarkets in Mexico and Central America buy $3.3 billion in F&VAmerica buy $3.3 billion in F&V

Supermarkets IN Latin America buy 2.5 Supermarkets IN Latin America buy 2.5 times more F&V to sell to local consumers times more F&V to sell to local consumers than Latin America exports to the world!than Latin America exports to the world!

Determinants of supermarket growth Determinants of supermarket growth in the two regionsin the two regions

• DEMAND: Income growth & urbanizationDEMAND: Income growth & urbanization

• POLICY: Liberalization of FDI in retailPOLICY: Liberalization of FDI in retail

- Mexico, Argentina, Brazil: 1994- Mexico, Argentina, Brazil: 1994

- China 1992 -- Indonesia, 1998- China 1992 -- Indonesia, 1998

- India, 2000… - India, 2000… • SUPPLY: TIDAL WAVE of FDI: Europe and U.S.SUPPLY: TIDAL WAVE of FDI: Europe and U.S.

- pushed by saturated markets - pushed by saturated markets

- pulled by growing markets & profit- pulled by growing markets & profit• new retail management and logistics systems new retail management and logistics systems

and technologiesand technologies

Spatial & socioeconomic path of expansionSpatial & socioeconomic path of expansion

• ““Domino effect” – first and fastest in the Domino effect” – first and fastest in the largest or richest countries (largest or richest countries (Brazil, Taiwan, Korea)Brazil, Taiwan, Korea)

• Then spreads over a regionThen spreads over a region - - Hong Kong, Taiwan, Japan, Korean chains Hong Kong, Taiwan, Japan, Korean chains China China

- - Costa Rican chain into NicaraguaCosta Rican chain into Nicaragua

• Large citiesLarge cities in intermediate citiesin intermediate cities small cities/townssmall cities/towns

• Rich neighborhoods Rich neighborhoods middle class middle class poor poor

• Changing formatsChanging formats, , hypermarkets, Hard discounts, hypermarkets, Hard discounts, convenience store chainsconvenience store chains

- December 1999: Ahold and Paiz form a JV - December 1999: Ahold and Paiz form a JV in Guatemalain Guatemala

- January 2002: CARHCO: Paiz-Ahold and - January 2002: CARHCO: Paiz-Ahold and CSU (Costa Rica) form JV CSU (Costa Rica) form JV

253 stores in 5 countries 253 stores in 5 countries

annual sales of 1.3 billion dollars!annual sales of 1.3 billion dollars!

buy $100 million of F&V…buy $100 million of F&V…

Regional multinational chains emerge

Leads to rapid ConsolidationLAC: Top 5 chains average 65% of the sector vs 40% in US

70-80% global multinational owned by Walmart, Carrefour, Ahold

Losers in the retail sector Losers in the retail sector

Reduction in “central markets”, wet Reduction in “central markets”, wet marketsmarkets

• Rapid disappearance of “mom and Rapid disappearance of “mom and pop stores” pop stores”

- Argentina: 1984-93, 64,000 small - Argentina: 1984-93, 64,000 small stores closestores close

Effects on agrifood markets Effects on agrifood markets Local, national, regional, global Local, national, regional, global

Procurement System ChangesProcurement System Changes

Hypothesis: Hypothesis: Procurement OfficerProcurement Officer will decide will decide world trade patterns over the next decadeworld trade patterns over the next decade

He/she thinking: He/she thinking: “Beat Wal-mart, Beat Wet-market”“Beat Wal-mart, Beat Wet-market”

VOLUME procured and sold VOLUME procured and sold

COST (of product and transaction)COST (of product and transaction)

QUALITY and SAFETYQUALITY and SAFETY

CONSISTENCYCONSISTENCY

Differentiate ProductsDifferentiate Products

Effect on Agrifood Market Organization Effect on Agrifood Market Organization

CONSOLIDATION PROCUREMENT SYSTEMSCONSOLIDATION PROCUREMENT SYSTEMS By store, distribution center (DC) By store, distribution center (DC) by zone, by country, by regionby zone, by country, by region Global sourcing networksGlobal sourcing networks

DEFRAGMENTING of systems geographicallyDEFRAGMENTING of systems geographically

larger volume per supplier, fewer supplierslarger volume per supplier, fewer suppliers

SHIFT FROM TRADITIONAL TO SPECIALIZEDSHIFT FROM TRADITIONAL TO SPECIALIZED wholesalers, brokers, export firms with new domestic functionswholesalers, brokers, export firms with new domestic functions

Example: Hortifruti in Central AmericaExample: Hortifruti in Central America

Examples of procurement consolidationExamples of procurement consolidation

> Carrefour in Brazil – JV with Penske > Carrefour in Brazil – JV with Penske LogisticsLogistics

> Carrefour: same in China 2003> Carrefour: same in China 2003

> Lianhua in China – JV with Tibbett and > Lianhua in China – JV with Tibbett and Britten Logistics, 2002/3Britten Logistics, 2002/3

East Coast US: AHOLD, April 2002East Coast US: AHOLD, April 2002

… … Michigan farmers’ reactions…Michigan farmers’ reactions…

WinnersWinners3 melon producers in North-east Brazil, Dec 20013 melon producers in North-east Brazil, Dec 2001

… … TRACTOR-BEAMED into the Carrefour Global TRACTOR-BEAMED into the Carrefour Global Sourcing SystemSourcing System

… … 67 Carrefour HYPERMARKETS in Brazil67 Carrefour HYPERMARKETS in Brazil

… … and to 21 Countries!and to 21 Countries!

… … move from local market to global trade success…move from local market to global trade success…

Losers The SHOCKED tomato producers of Nicaragua The SHOCKED tomato producers of Nicaragua

– suddenly competing with Costa Rican – suddenly competing with Costa Rican tomateros IN THEIR OWN BACKYARD tomateros IN THEIR OWN BACKYARD

… … via procurement system of HORTIFRUTIvia procurement system of HORTIFRUTI

Traditional Wholesale Traditional Wholesale Market in NicaraguaMarket in Nicaragua

Michigan, Chilean, Washington, Oregon Michigan, Chilean, Washington, Oregon apples: HORTIFRUTI, Nicaragua apples: HORTIFRUTI, Nicaragua

Effects on Market InstitutionsEffects on Market Institutions

Hypothesis: Hypothesis: CONVERGENCECONVERGENCE of institutions of institutions over regionsover regions

Gradual Rise of use of contractsGradual Rise of use of contracts

RAPID rise of RAPID rise of PRIVATE STANDARDSPRIVATE STANDARDS

… … HYPOTHESIS: more important than public HYPOTHESIS: more important than public standards in non-commodity tradestandards in non-commodity trade- agribusiness/retail strategic tools in global markets- agribusiness/retail strategic tools in global markets

- differentiate products- differentiate products

- coordinate supply chains- coordinate supply chains

- missing or inadequate public standards- missing or inadequate public standards

Use of standards by firmsUse of standards by firms

Carrefour applies same Carrefour Quality Carrefour applies same Carrefour Quality Certificate to 200 items around the globeCertificate to 200 items around the globe

Hortifruti has CARHCO-specific private Hortifruti has CARHCO-specific private standardsstandards

Collective private standards EUREPGAP for Collective private standards EUREPGAP for produceproduce

Pick ‘n Pay in South Africa applies EUREPGAP Pick ‘n Pay in South Africa applies EUREPGAP

to local suppliers to local suppliers prefers exporters prefers exporters

CIES food safety initiativeCIES food safety initiative

200 largest supermarket chains, 200 largest 200 largest supermarket chains, 200 largest supplierssuppliers

CIES: 2.8 TRILLION DOLLARSCIES: 2.8 TRILLION DOLLARS

Do they have the clout to affect markets?Do they have the clout to affect markets?

… … same players as now are dominating retail same players as now are dominating retail in Latin America and Asiain Latin America and Asia

Challenges and Opportunities for Challenges and Opportunities for Local and Global SuppliersLocal and Global Suppliers

The distinction between the export market and The distinction between the export market and local market is disappearinglocal market is disappearing

… … GLOBAL MARKET BECOMES THE LOCAL MARKET!GLOBAL MARKET BECOMES THE LOCAL MARKET!

Markets are defragmenting and integratingMarkets are defragmenting and integrating

Intraregional and interregional changes: trade Intraregional and interregional changes: trade implicationsimplications

Regional markets are easier (transaction costs), Regional markets are easier (transaction costs), and harder (standards) target for suppliersand harder (standards) target for suppliers

Small producers have big problemsSmall producers have big problems

Big problems adapting to the institutional Big problems adapting to the institutional and organizational changes – and organizational changes –

… … and their technology and management and their technology and management requirementsrequirements

Example: Cooperativa ASUMPAL, tomatoes Example: Cooperativa ASUMPAL, tomatoes contract for McDonalds, Guatemalacontract for McDonalds, Guatemala- demands stringent private standards- demands stringent private standards

- implied investments: drip irrigation, greenhouses, hygienic - implied investments: drip irrigation, greenhouses, hygienic services… $$$$services… $$$$

Stringent standards discourage some small farmersStringent standards discourage some small farmers

ASUMPAL: ASUMPAL: 330 members in 2000… 30 in 2001330 members in 2000… 30 in 2001

TOPS Thailand: “250 to 50 to 10” vegetable TOPS Thailand: “250 to 50 to 10” vegetable supplierssuppliers

Brazil dairy: 61,000 small dairy farmers Brazil dairy: 61,000 small dairy farmers “DELISTED”, 1996-2000“DELISTED”, 1996-2000

While some others succeed INDAP, small farmer vegetable cooperative, INDAP, small farmer vegetable cooperative,

Purranque, ChilePurranque, Chile

Melon growers in BrazilMelon growers in Brazil

California onions and Michigan apples to California onions and Michigan apples to Nicaraguan supermarketsNicaraguan supermarkets