Professor Thomas Reardon

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Supermarkets and Their Role in Emerging Markets

• Professor Thomas Reardon
• Agricultural, Food, and Resource Economics
• Michigan State University
• Co-Director IFPRI / MSU Joint Program
• Markets in Asia (based in New Delhi)
• SA-AARES
• 27 March, 2008

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• Thomas Reardon (Michigan State University)

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Overview of Talk

• 1) Spread of supermarkets in emerging markets
  (Asia outside Japan, Latin America, Eastern
  Europe)
• 2) Modernization of supermarket procurement
  systems
• 3) Implications for and strategic responses of
  suppliers

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Why Emerging Markets? Center stage of global
market growth

• 1) Food markets growing 5-7 x faster
• than traditional export markets (US and
  Western Europe and Japan)!
• 2) Income growth rates examples 10/year China,
  9.5/year India
• 3) Nearly 1 billion MIDDLE CLASS consumers (among
  4 billion people)
• same as US Japan Western Europe

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Why Emerging Markets? Markets Modernizing at
Lightning Speed

• 1) Rapid rise of supermarkets since early 1990s
• 2) Modernizing and knitting together formerly
  fragmented traditional markets
• 3) ? more accessible to exporters
• and local suppliers ready for modern markets

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1. The Rapid Spread of Supermarkets in Emerging
Markets

• Food industry (retail, wholesale, processing,
  food service) all transforming rapidly
• I will focus on retail
• on the supermarket revolution in emerging
  markets
• (supermarkets my shorthand for all modern
  retail formats)

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Share of supermarkets in Food Retail in US and
Western Europe

• Before supermarkets wetmarkets mompop shops
  daily purchase
• . same tradition as that of Emerging Market
  regions
• Take-off of supermarkets
• Today Time from start
• USA 80 80 years
• France 75 60 years

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The first wave (of supermarket spread) in
Emerging Markets

• Much of South America
• East Asia outside China (and Japan)
• Parts of Southeast Asia (e.g. Thailand)
• North-central Europe (e.g. Poland)
• South Africa
• supermarkets 10-20 food retail 1990
• to 50-60 today
• TAKE-OFF in the early 1990s

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• ? First Wave did in 10 years what the US did in
  50 years!

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The second wave

• Mexico Central America
• Parts of Southeast Asia (e.g. Indonesia)
• South-central Europe
• from 5-10 in 1990
• to 30-50 today
• TAKE-OFF in mid-late 1990s

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Example Supermarket Boom in Mexico

• 1990 supermarkets had 5
• today55 overall food, 25-30 of produce
  retail
• 2002-2006 top 7 chains sales up 200 (5 x
  faster than GDP growth)

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The third (and fastest) wave

• Transition East Asia China, Vietnam
• India
• Eastern Europe
• 1990 supemarkets near ZERO
• Today 1-20 of food retail
• TAKE-OFF in the early 2000s
• Most rapid spread of supermarkets in history!

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China STUNNING

• China 200 million middle class, GDP/capita
  growing at 10
• Chinas supermarket sector
• 1990 zero
• .2006 100 billion dollars
• 2002-2006 Top 10 chains sales grow 300
• ? 2.5 x faster than GDP growth!

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Russia AMAZING

• Russias supermarket sector
• end 1990s tiny
• 2006 19 billion dollars
• 2002-2006 900 growth in sales!
• ? 7 times faster than GDP growth!

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India INCREDIBLE

• India 250 million middle class incomes growing
  at 9.5
• Indias supermarkets at take-off
• less than 5 overall, 1-2 in food
• projected 20 in 10 years
• sales growing at 40-50/year
• just DOMESTIC chains plan to invest 20 billion
  dollars over 5 years!

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Supermarkets into fresh produce retail

• Supermarkets penetration of food markets in
  emerging markets
• first in processed foods
• then semi-processed like dairy
• last in fresh produce mainly past 5-7 years
• Myth debunked above is same as over time in US
  and Western Europe

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New studies from China (early) and Hong Kong
(advanced)

• China Urban consumers 35 of their fruit from
  supermarkets
• Hong Kong 59 of fruit bought in supermarkets
• Hong Kong now is the future of Chinese cities

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What drives supermarket spread in Emerging
Markets?
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From the demand side

• Same as in US or Western Europe
• ? Growing incomes
• Urbanization
• Women working outside home

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From the policy side

• Incentives for supermarkets and disincentives for
  traditional retail
• supermarkets ex tax incentives
• wetmarkets ex hygiene regulation, relocation
  due to congestion

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Turborocket-charged from the retail supply side

• AVALANCHE of retail foreign direct investment
  (FDI) after FDI liberalization in many countries
  in 1990s
• by regional and global chains
• competitive investment by domestic chains

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Common trends in supermarket sectors in Emerging
Markets

• Rapid consolidation via mergers acquisitions
• Multinationalization (by regional and global
  chains)
• ? Same retail trends as in US, Western Europe,
  Japan

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Implication of Spread of Supermarkets
Consolidation and Multinationalization to
Suppliers

• Huge opportunities as supermarkets are market
  development motors
• Big challenges because consolidation of the
  sector means volume
• Big challenges because multinationalization means
  quality and safety requirements converge
  internationally

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FDI drives regional food market integration

• Examples
• Asia example Tesco in China, Japan,
  Malaysia,S.Korea,Thailand
• KEY Chains increasingly have regional
  strategies and seek regional supply solutions

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2. Modernization of Supermarkets Produce
Procurement Systems in Emerging Markets
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2.1. The OBJECTIVES of the chains produce buyer

• a) Low costs (of products and transactions)
• b) Items available all year
• c) quality
• d) food safety
• e) product diversity
• f) More volume fast

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2.2. Procurement CHALLENGES in Emerging Markets

• Traditional supply chains
• a) Low quality
• b) High wastage
• c) Inconsistent volumes
• d) High transaction costs
• e) Low public-system support for farmers (poor
  roads, credit, extension, cold chain, etc.)

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2.3. The Procurement Modernization Strategy of
the supermarket chains

• a) Started in the past 5-7 years
• b) Mainly by leading chains
• c) 3 main trends

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Procurement Trend 1 shift to national,
regional, and global sourcing networks

• Traditional local sourcing
• Modern
• a) National networks (using Distribution Centers)
• b) Regional networks (with regional hubs like
  Makros in Thailand)
• c) Global networks (with global hubs such as
  Carrefours in Hong Kong)

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Why the shift?

• Reduce coordination costs
• Broader area to find lowest-cost or highest
  quality
• Iron out seasonal swings
• Increase product diversity

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Distribution Center in Shanghai
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Supermarkets source a lot more imports than
traditional retailers and networks help that
trend

• 40 of Indian supermarkets apples are imported
  (vs 3 country level)
• 60 of Indonesian supers produce is imported (vs
  3 country level)
• 30-40 of supers fruit in China and Mexico (vs
  2 country level)

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Why do supermarkets in Emerging Markets sell a
lot of imports?

• 1) Better quality or cheaper or easier to source
  than local produce
• As a Mexican retailer told me
• As an Indonesian retailer told me
• But an Indian retailer told me

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• 2) Gives supermarket advantage over wetmarkets
• specialty fruit supermarkets cold chain and
  advertising advantage
• ... Commodity fruit volume sales draw crowds
• 3) Product diversity from imports

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Example Chinese buy much more imported fruit
from supermarkets than wetmarkets/shops

• New Beijing study consumers buy from
  supermarkets
• 26 of their common fruit (banana, apple)
• 66 of their specialty fruit (orange, guava,
  strawberries, mangoes)
• Much of specialty fruit imported

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Implications of Procurement trend 1 Pictures
tell a striking story

• 1) Regional and global sourcing intensify
  competition
• suppliers from many countries (including the
  local suppliers) competing for new huge prize
• 2) those with needed quality but lower costs win
  over those with higher costs or no big brand

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toward the future

• 3) Examples of Emerging Market suppliers
  increasing role in those regions
• Indonesian and Indian retailers more Chinese
  fewer US apples
• Central American retailers more Chilean less US
  fruit
• Vietnam retailers more Chinese less Australian
  grapes

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How I see N.American, Western European, Antipodes
staying competitive in Emerging Markets

• If Big brand name
• If Low transaction costs good in-country
  marketing agencies
• If counter-seasonal niches
• If new varieties and TASTE niches
• If Joint ventures with local suppliers
• Sorry, no-go Standard commodities competing on
  cost and cosmetic quality

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Procurement Trend 2 shift toward PRIVATE
standards of quality and safety

• Traditional few or very basic public standards
  in domestic markets
• 2) Modern rise of private standards of quality
  (and emerging standards of safety)
• often both set and enforced by supermarkets

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Why the rise of private standards in Emerging
Markets?

• 1) Public standards inadequate or missing
• 2) Harmonize suppliers over regional and global
  network Carrefour QL
• 3) Coordination of supply chains and reduction of
  wastage
• 4) compete with wetmarkets
• 5) Traceability before/after food safety crises
  Metro in China

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Implications of Procurement trend 2

• Trend convergence internationally of private
  standards of retailers
• Investment in quality and safety increasingly
  required
• to sell to supermarkets in emerging markets

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Procurement Trend 3 shift from traditional
wholesale/spot markets to direct buying
and/or sourcing from specialized wholesalers

• Speed of shift varies
• by country
• by product
• by size/efficiency of suppliers
• by condition of wholesale markets

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Subtrend 3.a) Sourcing direct from suppliers

• General trend Supermarkets strive to cut out
  wholesaler margins and buy or import direct
• a) if transaction costs are low
• b) If supplier provides variety
  one-stop-shopping (seasons, varieties)
• c) if product is big-volume commodity
• d) if big brand name
• e) If important specialty item

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Implications of subtrend 3.a (direct buying)

• 1) scale
• 2) brand and/or proprietary varieities
• 3) Vertical integration to control transaction
  costs
• 4) Joint ventures for season product
  one-stop-shopping by retailer

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Subtrend 3.b) Sourcing from Specialized/Dedicated
Wholesaler

• 1) Specialized in product lines (so low product
  cost with high volume and product innovator for
  retailer)
• 2) One-stop shop (so low transaction cost)
• 3) Dedicated to modern retail and export segments
  (so high quality)

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Subtrend 3.c) New Follow Sourcing

• The retailer recommends supplier or dedicated
  wholesaler follow them to new location
• Ex Tesco enters China, its European
  wholesaler/supplier Bakkavör invited by it to
  enter China

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Implications of subtrends 3.bc

• Importance of identifying specialized/dedicated
  wholesalers in Emerging Markets
• Willingness to follow!
• Supplying to follow sourcing wholesalers

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3. Conclusions

• Rapid transformation of Emerging Markets retail
  sectors
• Important opportunities as well as challenges for
  exporters
• Value of investing in relationships with
  supermarket chains and their agents
• Wrestling with strategies of low-cost commodity
  vs quality-niche