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The Rapid Rise of Supermarkets in Latin America and Asia:

The Rapid Rise of Supermarkets in Latin America and Asia:. Tom Reardon, Michigan State University. Fundamental Effects on Domestic Agrifood Systems and Trade. Paper presented at the Global Market for High-Value Food Workshop ERS/USDA, Washington D.C., February 14, 2003. Presentation outline.

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The Rapid Rise of Supermarkets in Latin America and Asia:

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  1. The Rapid Rise of Supermarkets in Latin America and Asia: Tom Reardon, Michigan State University Fundamental Effects on Domestic Agrifood Systems and Trade Paper presented at the Global Market for High-Value Food Workshop ERS/USDA, Washington D.C., February 14, 2003

  2. Presentation outline • Focus on Latin America and Asia. • Supermarket diffusion pattern and determinants. • Effects on agrifood markets -- procurement -- standards -- convergence • Challenges and Opportunities

  3. Patterns and Determinants of Supermarket Diffusion in Latin America and Asia

  4. In 1 Decade Latin American Super Market Diffusion Achieves the U.S. Level Achieved in 5 Decades Supermarket Share in national food retail U.S. 5-10% (1930) 80% (2000) Brazil 30 (1990) 75 (10%/year) Argentina 17 (1985) 57 (9%/year) Mexico 45 Chile 50 Costa Rica 50 Honduras 42 Guatemala: 30 (1999) 35 (2001)

  5. Supermarkets In E/SE Asia: 5 years behind Latin America but grow faster (a) 1999 (b) 2001 b/a Indonesia 20 25 1.22 Thailand 35 43 1.22 China (urb) 30 48 1.60!! Malaysia 27 31 1.16 Philippines 52 57 1.10 Rep.Korea 61 65 1.07 Tom, what are the figures? # of stores, % growth? If % growth, the 3rd column should be b-a, if # it should be (b-a)/a.

  6. Focus on China • 3000 supermarkets in China today • Investment starting and planned post-WTO: 5-10 TIMES MORE in 5-7 years! • NOWHERE HAVE SUPERMARKETS EVER GROWN THIS FAST • Mainly in urban, East and Southeast • But moving fast into North& South-west • 60% share of food retail in Shanghai!

  7. Procurement VOLUMES are Impressive • 3 of 10 pesos spent by Mexicans on food are spent in… Wal-mart Mexico • Chinese supermarkets buy $2 billion F&V! • Supermarkets in Mexico and Central America buy $3.3 billion in F&V • Supermarkets IN Latin America buy 2.5 times more F&V to sell to local consumers than Latin America exports to the world!

  8. Determinants of supermarket growth in the two regions • DEMAND: Income growth & urbanization • POLICY: Liberalization of FDI in retail - Mexico, Argentina, Brazil: 1994 - China 1992 -- Indonesia, 1998 - India, 2000… • SUPPLY: TIDAL WAVE of FDI: Europe and U.S. - pushed by saturated markets - pulled by growing markets & profit • new retail management and logistics systems and technologies

  9. Spatial & socioeconomic path of expansion • “Domino effect” – first and fastest in the largest or richest countries (Brazil, Taiwan, Korea) • Then spreads over a region - Hong Kong, Taiwan, Japan, Korean chains  China - Costa Rican chain into Nicaragua • Large citiesin intermediate cities  small cities/towns • Rich neighborhoods  middle class  poor • Changing formats, hypermarkets, Hard discounts, convenience store chains

  10. Regional multinational chains emerge - December 1999: Ahold and Paiz form a JV in Guatemala - January 2002: CARHCO: Paiz-Ahold and CSU (Costa Rica) form JV 253 stores in 5 countries annual sales of 1.3 billion dollars! buy $100 million of F&V… Leads to rapid Consolidation LAC: Top 5 chains average 65% of the sector vs 40% in US 70-80% global multinational owned by Walmart, Carrefour, Ahold

  11. Losers in the retail sector • Reduction in “central markets”, wet markets • Rapid disappearance of “mom and pop stores” - Argentina: 1984-93, 64,000 small stores close

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

  13. Procurement System Changes Hypothesis: Procurement Officer will decide world trade patterns over the next decade • He/she thinking: “Beat Wal-mart, Beat Wet-market” • VOLUME procured and sold • COST (of product and transaction) • QUALITY and SAFETY • CONSISTENCY • Differentiate Products

  14. Effect on Agrifood Market Organization • CONSOLIDATION PROCUREMENT SYSTEMS By store, distribution center (DC) by zone, by country, by region • Global sourcing networks • DEFRAGMENTING of systems geographically larger volume per supplier, fewer suppliers • SHIFT FROM TRADITIONAL TO SPECIALIZED wholesalers, brokers, export firms with new domestic functions Example: Hortifruti in Central America

  15. Examples of procurement consolidation > Carrefour in Brazil – JV with Penske Logistics > Carrefour: same in China 2003 > Lianhua in China – JV with Tibbett and Britten Logistics, 2002/3 • East Coast US: AHOLD, April 2002 … Michigan farmers’ reactions…

  16. Winners 3 melon producers in North-east Brazil, Dec 2001 … TRACTOR-BEAMED into the Carrefour Global Sourcing System … 67 Carrefour HYPERMARKETS in Brazil … and to 21 Countries! … move from local market to global trade success… Losers • The SHOCKED tomato producers of Nicaragua – suddenly competing with Costa Rican tomateros IN THEIR OWN BACKYARD … via procurement system of HORTIFRUTI

  17. Michigan, Chilean, Washington, Oregon apples: HORTIFRUTI, Nicaragua Traditional Wholesale Market in Nicaragua

  18. Effects on Market Institutions Hypothesis: CONVERGENCE of institutions over regions • Gradual Rise of use of contracts • RAPID rise of PRIVATE STANDARDS … HYPOTHESIS: more important than public standards in non-commodity trade - agribusiness/retail strategic tools in global markets - differentiate products - coordinate supply chains - missing or inadequate public standards

  19. Use of standards by firms Carrefour applies same Carrefour Quality Certificate to 200 items around the globe Hortifruti has CARHCO-specific private standards Collective private standards EUREPGAP for produce Pick ‘n Pay in South Africa applies EUREPGAP to local suppliers  prefers exporters

  20. CIES food safety initiative 200 largest supermarket chains, 200 largest suppliers CIES: 2.8 TRILLION DOLLARS Do they have the clout to affect markets? … same players as now are dominating retail in Latin America and Asia

  21. Challenges and Opportunities for Local and Global Suppliers The distinction between the export market and local market is disappearing … GLOBAL MARKET BECOMES THE LOCAL MARKET! Markets are defragmenting and integrating Intraregional and interregional changes: trade implications Regional markets are easier (transaction costs), and harder (standards) target for suppliers

  22. Small producers have big problems • Big problems adapting to the institutional and organizational changes – … and their technology and management requirements Example: Cooperativa ASUMPAL, tomatoes contract for McDonalds, Guatemala - demands stringent private standards - implied investments: drip irrigation, greenhouses, hygienic services… $$$$

  23. Stringent standards discourage some small farmers • ASUMPAL: 330 members in 2000… 30 in 2001 • TOPS Thailand: “250 to 50 to 10” vegetable suppliers • Brazil dairy: 61,000 small dairy farmers “DELISTED”, 1996-2000 While some others succeed • INDAP, small farmer vegetable cooperative, Purranque, Chile • Melon growers in Brazil • California onions and Michigan apples to Nicaraguan supermarkets

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