The Promotional Strategies Adopted By Super Markets

Analysis The Promotional Strategies Adopted By Super Markets
Introduction Wholesale markets have for a long time been considered an essential component of any agricultural marketing system and FAO has been addressing wholesale market development issues throughout the world for the past forty years. There is, however, currently much discussion over their future. Are wholesale markets needed these days In many countries we are witnessing rapid changes in food marketing systems, involving an expansion in direct marketing between increasingly large farmers, either in groups or as individuals, and the integrated food marketing chains represented by , supermarkets and chain stores. Wholesale markets in Central and Eastern Europe Following political changes in Central and Eastern Europe and the former Soviet Union, there was great interest in constructing wholesale markets to serve the needs of the newly privatized farm sector. Farmers found that the former marketing arrangements had disappeared and that they were now responsible for marketing their own produce. The low level of development of the wholesale trading sector in many countries in Eastern Europe meant that if local farmers were to be able to sell their produce their only option, in many cases, was to take their produce to the markets themselves. Hence, we witnessed the development of numerous privately organized “truck markets”, which continue to play an important role in many countries. The World Bank and the European Bank for Reconstruction and Development (EBRD), together with bilateral donors such as Switzerland and Germany, saw the need for wholesale market development in Eastern Europe and provided financing for the construction of many new markets. Problems have arisen with wholesale market projects in this region. These have stemmed from the terms of the markets’ financing, the time between the original decision to plan a market and its subsequent entry into operation, the growth of informal private markets, the overambitious projections of likely throughput and, more recently, the growth of supermarkets. The problems were accentuated by the lack of involvement and commitment of the relevant municipalities and governments in the success of the markets. Failure to enforce applicable laws and regulations relating to land allocation and failure to enforce market regulating laws, even when these were in place, has contributed to the problems confronting
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some of the new markets. Informal private markets, whilst not providing the facilities of the new official markets, nevertheless were in full operation, and meeting the needs of retailers, when the new markets, after planning and construction delays, finally came into operation. When the new markets opened they faced the problem of competing with the existing markets whose rentals were usually lower. In addition, there seemed to be inadequate attention paid at the planning stage to getting ‘core’ importers and wholesalers into the new markets in order to ensure a volume of trading sufficient to make the market attractive to other, smaller, traders. Many larger traders preferred to operate outside the market. Another issue was the general insistence by EBRD and the World Bank on full-cost recovery from the newly created market companies. Although subsidies can promote overbuilding, some of the funds could have been provided by the municipal or central government, which is very much the practice here in Italy, for example. Central European Initiative Wholesale Markets Foundation The Foundation’s first workshop was held in Bologna and examined the development of full-service centers, or logistics platforms, within major wholesale markets. Markets considered that if they were to survive in the era of supermarkets they needed to adapt to provide facilities for those companies that were primarily involved in supplying supermarkets and other large buyers. Participants felt that such an adaptation involved the development of relationships with modern domestic distribution systems, the promotion of quality enhancement (standardization and hygiene/health controls), the broadening of the range of products handled by markets to include fish and livestock products, flowers and ornamental plants, and the promotion of value-addition activities, such as preparation of pre-packed salads. A second workshop, held in Croatia, addressed regulatory issues, in particular, quality control of products, hygiene and health controls, HACCP, quality certification, and environmental issues. Regulations regarding commercial activities related to the trading of food products, fiscal regulations, customs regulations, transport regulations, municipal regulations, and the provision of statistical information on prices and quantities were also discussed. A third workshop, held in Budapest, looked at the diversification of wholesale market commercial activities. As noted in the Bologna workshop, participants felt that wholesale markets could offer space to supermarket chains to facilitate their operations. This, in turn could increase procurement through the market. Wholesale markets in Eastern and Central Europe and
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the former Soviet Union could, in theory, also attract wholesalers into the market by offering services such as customs clearance facilities, banana ripening rooms and cold storage facilities. Better utilization of available market space could include: provision of cash and carry stores, to provide “one-stop shopping” for caterers and small retailers; facilities for handling of empty crates and containers; food testing laboratories; and training facilities. A fourth workshop, held in Verona, looked in more detail at the quality control issues highlighted in the Croatian workshop. The growth of supermarkets We are all aware how rapidly supermarkets and have become such dominant forces in food marketing in Western Europe and the United States. In the past decade this trend has been noted elsewhere, particularly in Latin America, and there is now growing evidence that a similar revolution is occurring in Central and Eastern Europe. This started in Poland, Hungary and the Czech Republic and is now rapidly spreading East and South. The trade press has in the past few years been reporting intense activity by major international retailers in the region. Recent trends have seen several developments in common over the countries. These have recently been well-analyzed by Dries, Reardon and Swine (2004) and the following discussion owes much to their work. These trends are: extensive investments by foreign retail chains and the rapid rise of the modern retail sector; a dramatic rise in the retail sector share of supermarkets; inter-country as well as intra-country supermarket diffusion; growing concentration in the supermarket sector; and changes in procurement systems that affect farmers and also wholesale markets. Global multinationals have moved into the region in a significant way. This was initially into countries that have now joined the EU, with Hold, then Carrefour, then Tesco starting operations in Poland, the Czech Republic and Hungary. Subsequently, multinationals moved into other Central and Eastern European countries (recently, for example, Metro into Croatia) and, finally (in the last couple of years), they have established footholds in Russia (e.g. Metro). In the first years of operations in Eastern Europe supermarket multinationals concentrated on the larger cities. However, given the strong competition in major urban areas, companies started to look at developing supermarkets in much smaller towns, with A hold in Poland, in 2001,
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The Promotional Strategies Adopted By Super Markets

indicating that it was then targeting towns in the 50 000 to 70 000 population range. At present only ten percent of the Russian retail sector is accounted for by supermarkets. However, there is likely to be rapid future growth, with the entry of the global multinational retailer, Metro, and regional multinationals such as Ramenka of Turkey. Domestic chains are also making major investments. Supermarket and chains moved into the region because the companies, facing considerable competition in Western Europe, identified untapped potential in the East. In making such a move, the supermarket chains have been helped by increased demand for the services they can provide, resulting from: rapid urbanization; per capita income growth increasing the demand for processed foods; increasing employment of women, with a consequent increase in the opportunity cost of their time, leading to a demand for meals that are easier to prepare and for retail outlets that offer a wider range of products; reduction of effective food prices for consumers because of supermarkets’ greater ability to control costs; growing access to refrigerators, allowing larger quantities of food to be stored, and to cars, allowing larger quantities to be purchased at any one time; increased travel to Western Europe and elsewhere, exposing the populations to modern retailing techniques, to a wider range of products and, particularly for fresh fruits and vegetables, to the possibility of being able to consume many products “out of season.” Wholesale markets in Eastern and Central Europe or, indeed, in many developing countries of the world may not yet be fully noticing the growth of supermarkets. This is because supermarkets tend to penetrate fresh fruit and vegetable retail markets and make changes in their procurement systems more slowly than they do for processed or packaged products. Also, fresh produce marketing systems that developed immediately after the end of the centrally planned era are changing. Declines in wholesale sales off the back of the truck and a decline in retailing by farmers may actually, in the short run, lead to an increased flow of produce through wholesale markets. It would be an interesting exercise to analyze throughput figures over the last few years for the region’s leading wholesale markets to try to identify any trends in response to supermarket development. FAO is planning such a study in Latin America.

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If wholesale markets have not yet noticed the impact of supermarkets they almost certainly will in the near future. That is because both multinational and national supermarket chains are following the practices of the West in many ways, including: shifting towards centralized procurement systems; shifting toward cross-border procurement systems; shifting toward specialized/dedicated wholesalers; shifting toward “preferred supplier” systems; shifting toward private standards for fresh produce that are usually more demanding than national standards and which invariably include a requirement for “traceability.” You will note that none of the above trends appears to involve wholesale markets! There has been a marked tendency to shift from procurement by individual supermarkets, which may have involved purchasing from wholesale markets, to a centralized system involving a central buying office for fresh fruit and vegetables with distribution to stores through several distribution centers over a country. This is done in order to reduce coordination costs, generate economies of scale by buying larger volumes and working with fewer wholesalers and suppliers per unit merchandized, and to have tighter control over product quality and freshness. Some examples of developments follow. They do not necessarily refer to distribution arrangements for fresh fruits and vegetable but are indicative of developments likely to take place in the coming years: A hold in Poland operates over 180 outlets, all of which are supplied via five distribution centers. Tesco opened a 40,000 m2 distribution centre on January 6, 2004 for the distribution of all processed/packaged food for all its stores in Poland. It is now building a second, for fresh food. In the Czech Republic, A hold opened its first distribution centre for fresh fruit and vegetables in 2001 and a second one in 2002. Delvita in the Czech Republic was operating a distribution centre as early as 1995, and recently opened a second. Tesco is building its first distribution centre in the Czech Republic. Tesco opened its first distribution centre in Slovakia at the end of 2003, as will Kaufland in 2004. In Croatia in 2000, Konzum opened the largest distribution centre in the former Yugoslavia region, and has since rapidly left behind its system of small warehouses and individual store deliveries to use a set of distribution centers with coordinated, centralized procurement from Zagreb.
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Also in Croatia, Metro completed a large distribution centre in October 2003. In Russia, Pyatyorochka, Russia’s largest supermarket chain, with 150 stores in St Petersburg and Moscow has developed a distribution centre in St Petersburg to compete with foreign competition from Turkish, German and French chains. The various chains in the Central and Eastern European region are also beginning to use national distribution centers for cross-border sourcing. This allows the procurement of the best value products from various countries and also, in the case of fruits and vegetables, enables seasonal supply constraints to be more easily addressed. It extends the set of suppliers available to the chain. This process is also related to EU accession, which increases opportunities for post-accession, cross-border procurement. Together with these changes in distribution methods have come changes in procurement methods and it is these that present the greatest threats to the region’s wholesale markets. The types of changes taking place are: Chains are shifting from traditional wholesalers to “specialized/dedicated wholesalers” that are specialized in a product category and dedicated to supplying supermarkets. The wholesaler is more responsive to quality, safety, and consistency requirements of supermarkets than are traditional wholesalers who aggregate produce from many producers and may also be unable to supply the quantities required; the new wholesalers move from mainly buying at wholesale markets or from a list of customary suppliers, to contracting production that meets the specific grades and standards of the retail chain. The leading chains are shifting toward “direct” purchase from growers under the “preferred supplier” system. This is done in order to select producers capable of meeting quality and safety standards of the supermarkets and thus to lower transaction costs for the chain both through lower search costs and by reducing the number of suppliers per unit sold. Additionally, such linkages permit more rapid movement of produce from farm to store, enabling supermarkets to sell much fresher produce; in some cases it has been noted that the retail chain eventually acquires or enters into a joint venture with the wholesale firm. How do wholesale markets respond? In such a retailing environment, how do wholesale markets react as noted above, some options have already been discussed by the CEI Wholesale Markets Foundation. These, and other approaches, include:
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Being pro-active. Wholesale markets that sit back and wait for business to come to them will rapidly cease to be relevant. They have to explore ways to attract business by surveying their customers and identifying their needs. Retailers, for example, may feel the need for improved retail markets, the development of which could provide a measure of competition for supermarkets. Market logistics may need to be re-examined, together with trading hours, in order to maximize the convenience for customers and minimize the delay between harvest and sale. Wholesale markets need to look to their strengths. In many cases, for example, they should be able to supply locally produced produce more freshly than supermarkets that operate just one distribution centre per country. Exchange of ideas and experiences between markets in the region will be beneficial and much can be learnt from the experiences of wholesale markets in Western Europe; identifying new services. The Foundation has examined a range of services that can be provided. Although supermarket chains in one or two countries may be prepared to site their distribution centers and other facilities in wholesale markets, in most cases this is unlikely to happen and there is little evidence that it has happened to date. Some of the other services identified by Foundation members as being suitable for inclusion on the land of existing markets, such as banana ripening facilities, may also find it difficult to gain acceptance. Thus markets need to be aware of their real potential for capturing business from supermarket chains. If such potential is limited than they need to explore ways of maximizing business from non-supermarket customers; serving non-supermarket retailers and caterers. Small retailers will continue to play an important role in Central and Eastern Europe and increasing affluence will mean that, as in the West, people will eat out more. If supermarkets do not use the services of wholesale markets then the markets need to look at how they can best serve these other categories of customer. Both retailers and caterers would be attracted by the provision of commercial wholesale cash-and-carry facilities. Such a store in a wholesale market compound would enable traditional fruit and vegetable retailers to diversify into selling new products. It may also encourage dry-goods retailers who have not previously sold fruits and vegetables to start doing so. Many retailers, but particularly larger stores and independent chains that are not large enough to justify having their own distribution centers, could benefit from the one-stop-shop concept, i.e. by being able to buy fruits and vegetables, fish, meat and dairy products and dry goods at one wholesale market location. Caterers could similarly benefit from such a facility and would also welcome services such as pre-packed salad preparation;
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improving procurement arrangements. I have already noted that supermarkets are rapidly moving to direct procurement arrangements, either themselves working directly with farmers or farmer groups or working through dedicated wholesalers. They do this because they need to guarantee both the quantity and quality supplied and because, by linking with farmers in this way, they can reduce the costs involved in searching for produce and organizing the logistics of moving that produce to the consumer. Some would argue that such arrangements also enable the retailers to squeeze the farmers’ margins, but that is another discussion. Wholesalers working in traditional wholesale markets cannot dismiss these trends as a supermarket fad of little relevance to them. If they see caterers as potential customers they will also in the future have to be in a position to offer “traceability.” Some British travel agents, for example, are now demanding assurances from hotels regarding the reliability of their food supplies before agreeing to include the hotels in their brochures, thus forcing the hotels to introduce preferred supplier and traceability arrangements. Wholesalers in markets will therefore need to strengthen linkages with farmers in the same way as supermarkets are doing; this will probably lead to reduced opportunities for small farmers and much consolidation of farms, as it is virtually impossible for supermarkets or wholesalers to work with individual small farms. Farmers will be increasingly called upon to specialize. Small wholesalers are unlikely to be able to take such initiatives without support, and this seems to be a role for the market management; promoting increased fruit and vegetable consumption. Faced by a declining share of the market, wholesale markets can try to increase their share again but, as we have seen, this may be difficult. An alternative approach is to work to increase the total size of the market. Several countries have adopted “five a day” promotions, to encourage people to have five servings of fruits and vegetables a day. In FAO, we are now working closely with the World Health Organization (WHO) on the WHO/FAO Fruit and Vegetable Initiative and collaboration of wholesale markets would be welcome; planning of new wholesale markets. After reading this paper it might be queried why new wholesale markets should be suggested when existing markets are struggling to obtain adequate throughput. However, in parts of the former Soviet Union, in particular, there may still be scope for such markets. For example, Tbilisi in Georgia, which I visited recently, has no organized wholesaling for domestic produce. An earlier feasibility study was not followed up. Any such new developments will need to recognize that

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there will be competition from supermarkets and thus realistic appraisals of throughput potential will need to be made. Lavish constructions will need to be avoided and the emphasis will have to be on providing basic facilities at minimum cost.

Andrew Denby took over as the chief executive officer, supermarkets, of Aditya Birla Retail Ltd six months ago. Before joining the Aditya Birla group, he had worked for retail majors like Marks & Spencer, Dairy Farm, A S Watson, et cetera. He has traveled across India studying the Indian market and trying to make the supermarket brand 'more.' a success. 'more.' has 302 supermarkets all over India right now. It includes 251 in the southern part of India after the Birla group acquired the Trinetra retail chain. The target for 'more.' is 600 retail stores by March 2008. The group has earmarked about Rs 8,000 -- 9,000 crore (Rs 80-Rs 90 billion) for its retail operations over the next few years. Andrew Denby was in Chennai as a delegate to participate in the Foodpro conference organized jointly by the Confederation of Indian Industry and the Ministry of Food Processing Industries, Government of India and the Government of Tamil Nadu. He talked on consumers and retail. After his presentation, he spoke to Contributing Editor Shobha Warrier on the growing retail sector in India. At that time, I did not know anything about what happened to Reliance Retail. It is always scary when something like that happens, especially if the target is your key competitor. However, life must go on. India is surging ahead in modernization and the consumer is demanding more day by day. We hope people would understand the 'more.' brand. We hope they keep in mind the Birla reputation. We deal directly with the farmers and give them an opportunity to sell their products at a good price. We are also

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providing employment to many. To the consumers, we are giving good quality products. People, therefore, can trust us. In India, trust is the key word. I look at it as a challenge. I also look at it as the most exciting opportunity. The Indian retail market is untapped. There is so much opportunity here. To me, Indian consumers are smarter than the consumers in countries I have worked in. By smarter, I mean they are much more price-savvy. Same is the case in Indonesia. Indian women like to bargain every time they go to shop. Bargaining does not mean trying to get things cheap. It means getting better value for money. It is interesting to see the level of acceptance of suppliers' promotions in India. For example, if you sell a 1.5 liter of Pepsi with a packet of free potato chips, the volume increase is maximum. People in India like promotions. Indian housewives are different from housewives in the rest of the world except that they spend more time on checking each product they buy. That is because they take a long look at the labels. They don't trust that the retailer will sell fresh products. They want to know whether the shop is selling at the maximum retail price or below the MRP. I think women all over the world prefer watching television or looking after their family to trudging the supermarkets. I want Indian women too to feel the same way. Because if they spend too much time at the supermarkets, it is a waste of energy. I want to gain their trust. I want to tell them that what we sell are quality products and that they need not spend extra time in our stores. If we run modern looking shops run by modern operating systems, right back up, right policies and right procedures, we need not worry. Yes. More than 70 per cent of the people that go to supermarkets early in the morning from Monday to Friday are women. They shop to meet their daily needs -- mainly fruits, vegetables, bread, etc. But of the families that shop in the weekends, the male female ratio is 50:50.

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Yes. Women between 18 and 50, who are looking for a comfortable and convenient shopping ambience, throng the supermarkets. Indian market is complex because the product range here is more focused on staples. The latter again vary from state to state. For example, toor dal soaked in oil cannot be found anywhere but in Gujarat. What is popular in Delhi may not be that popular in Mumbai. The success of a retailer lies in how he gives each shop the local flavor. Needs of the people in Punjab would be different from those living in Tamil Nadu. It is the size of India that makes its retail market so unique. We have tapped just the tip of the iceberg. It is three and a half per cent as we speak. The analysts say it could be 10 per cent in 10 years. I think it is a very realistic target. I am looking to be in the forefront as the industry grows from strength to strength. To me it is a blue ocean strategy. With growth in population and growth in urbanization, there should be very few individuals whose livelihood would be at risk. With more people coming in with an increased disposable income, there will never be dearth of people going to the kirana stores for their daily needs. I would say there is room enough for everybody right now. Do I feel sorry for them Yes, I feel sorry for anybody who is going to end up without a job. But for the next 10 years at least, there should be room for everybody. Let me use the McDonald's phrase, ' I love it!' It is a challenge working in India. It's a wonderful opportunity to travel across the country every week. I have probably been to more cities than most Indians had. The aspiration and optimism that run through the veins of India are stronger than that in any other country.

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