1. The Rapid Rise of Supermarkets in Latin America and Asia: Fundamental Effects on Domestic Agrifood Systems and Trade Tom Reardon, Michigan State University 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. Focus on Latin America and Asia. Supermarket diffusion pattern and determinants. Supermarket diffusion pattern and determinants. Effects on agrifood markets Effects on agrifood markets -- procurement -- procurement -- standards -- standards -- convergence -- convergence Challenges and Opportunities 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 Supermarket Share in national food retail U.S. 5-10% (1930) 80% (2000) U.S. 5-10% (1930) 80% (2000) Brazil 30 (1990) 75 (10%/year) Brazil 30 (1990) 75 (10%/year) Argentina 17 (1985) 57 (9%/year) Argentina 17 (1985) 57 (9%/year) Mexico45 Mexico45 Chile 50 Chile 50 Costa Rica 50 Costa Rica 50 Honduras42 Honduras42 Guatemala: 30 (1999) 35 (2001) 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 (a) 1999 (b) 2001 b/a Indonesia 20 25 1.22 Thailand 35431.22 China (urb) 30481.60!! Malaysia 2731 1.16 Philippines 52571.10 Rep.Korea 61651.07 Tom, what are the figures? # of stores, % growth? If % growth, the 3 rd column should be b-a, if # it should be (b-a)/a.

6. Focus on China 3000 supermarkets in China today 3000 supermarkets in China today Investment starting and planned post- WTO: 5-10 TIMES MORE in 5-7 years! Investment starting and planned post- WTO: 5-10 TIMES MORE in 5-7 years! NOWHERE HAVE SUPERMARKETS EVER GROWN THIS FAST NOWHERE HAVE SUPERMARKETS EVER GROWN THIS FAST Mainly in urban, East and Southeast Mainly in urban, East and Southeast But moving fast into North& South-west But moving fast into North& South-west 60% share of food retail in Shanghai! 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 3 of 10 pesos spent by Mexicans on food are spent in… Wal-mart Mexico Chinese supermarkets buy $2 billion F&V! Chinese supermarkets buy $2 billion F&V! Supermarkets in Mexico and Central America buy $3.3 billion in 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! 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 DEMAND: Income growth & urbanization POLICY: Liberalization of FDI in retail 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. 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 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) “Domino effect” – first and fastest in the largest or richest countries ( Brazil, Taiwan, Korea) Then spreads over a region Then spreads over a region - Hong Kong, Taiwan, Japan, Korean chains  China - Hong Kong, Taiwan, Japan, Korean chains  China - Costa Rican chain into Nicaragua - Costa Rican chain into Nicaragua Large cities  in intermediate cities Large cities  in intermediate cities  small cities/towns  small cities/towns Rich neighborhoods  middle class  poor Rich neighborhoods  middle class  poor Changing formats, hypermarkets, Hard discounts, convenience store chains Changing formats, hypermarkets, Hard discounts, convenience store chains

10. - 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 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 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 Reduction in “central markets”, wet markets Rapid disappearance of “mom and pop stores” 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 Procurement System Changes Hypothesis: Procurement Officer will decide world trade patterns over the next decade He/she thinking: “Beat Wal-mart, Beat Wet-market” He/she thinking: “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 SAFETY QUALITY and SAFETY CONSISTENCY CONSISTENCY Differentiate Products Differentiate Products

14. Effect on Agrifood Market Organization CONSOLIDATION PROCUREMENT SYSTEMS CONSOLIDATION PROCUREMENT SYSTEMS By store, distribution center (DC) By store, distribution center (DC) by zone, by country, by region by zone, by country, by region  Global sourcing networks DEFRAGMENTING of systems geographically DEFRAGMENTING of systems geographically larger volume per supplier, fewer suppliers larger volume per supplier, fewer suppliers SHIFT FROM TRADITIONAL TO SPECIALIZED SHIFT FROM TRADITIONAL TO SPECIALIZED wholesalers, brokers, export firms with new domestic functions wholesalers, brokers, export firms with new domestic functions Example: Hortifruti in Central America 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 The SHOCKED tomato producers of Nicaragua – suddenly competing with Costa Rican tomateros IN THEIR OWN BACKYARD … via procurement system of HORTIFRUTI

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

18. Effects on Market Institutions Hypothesis: CONVERGENCE of institutions over regions Gradual Rise of use of contracts Gradual Rise of use of contracts RAPID rise of PRIVATE STANDARDS 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 – 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 ASUMPAL: 330 members in 2000… 30 in 2001 TOPS Thailand: “250 to 50 to 10” vegetable suppliers TOPS Thailand: “250 to 50 to 10” vegetable suppliers Brazil dairy: 61,000 small dairy farmers “DELISTED”, 1996-2000 Brazil dairy: 61,000 small dairy farmers “DELISTED”, 1996-2000 While some others succeed INDAP, small farmer vegetable cooperative, Purranque, Chile INDAP, small farmer vegetable cooperative, Purranque, Chile Melon growers in Brazil Melon growers in Brazil California onions and Michigan apples to Nicaraguan supermarkets California onions and Michigan apples to Nicaraguan supermarkets