The Rapid Rise of Supermarkets in Latin America and Asia:

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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
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Presentation outline

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

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Patterns and Determinants of Supermarket
Diffusion in Latin America and Asia

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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)

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Supermarkets In E/SE Asia 5 years behind Latin
America but grow faster
Tom, what are the figures? of stores, growth?
If growth, the 3rd column should be b-a, if
it should be (b-a)/a.

• (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

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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!

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Procurement VOLUMES are Impressive

• 3 of 10 pesos spent by Mexicans on food are spent
  in Wal-mart Mexico
• Chinese supermarkets buy 2 billion FV!
• Supermarkets in Mexico and Central America buy
  3.3 billion in FV
• Supermarkets IN Latin America buy 2.5 times more
  FV to sell to local consumers than Latin America
  exports to the world!

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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

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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

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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 FV

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
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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

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

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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

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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

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Examples of procurement consolidation

• gt Carrefour in Brazil JV with Penske Logistics
• gt Carrefour same in China 2003
• gt Lianhua in China JV with Tibbett and Britten
  Logistics, 2002/3
• East Coast US AHOLD, April 2002
• Michigan farmers reactions

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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

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

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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

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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

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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

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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
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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