Food distribution retail technologies: a comparison between countries with different income levels

Tecnologías de distribución de ventas al detal: una comparación entre los países de diversos niveles de ingreso

Dario de Oliveira Lima-Filho y Leidy Diana Souza de Oliveira

5. Food retailing in lower-middle income countries

Among the lower-middle income countries, China has the highest annual growth in Gross Domestic Product (GDP), although the percentage of value aggregated to services in the GDP is less than the average of the countries in the group (Percentagem..., 2007). Yet the expansion of supermarkets in China is faster than in the other countries in the world; sales have grown at 30-40% per year, which represents 2-3 times that of other developing countries, given the liberalization of FDI occurred after the end of the 1990s (Hu et al., 2004).

Some data show the impressive expansion of the supermarkets. In 2003, sales of fresh products (mainly meat, fish and FFV) in supermarket chains reached 25% of the total revenue of the chain. It should be noted that the adoption of private quality standards by the supermarkets is in the initial implementation stage. Food retailing in China is a good business for local and international investors due to: i) the high population, ii) rapid urbanization, iii) rapid growth in income (10% per year), iv) access to goods (refrigerator and automobiles) and essential services (university, middle school), and v) the limited competition (Hu et al., 2004).

Most of the large stores are located in densely populated zones inhabited by relatively well families, mainly in the East Coast region, where the main cities Beijing, Shanghai and Tianjin are located. There is a lack of distribution networks in other places, especially in rural areas and small cities. Two factors may delay the development of food retailing in China: the non-existence of credit cards and the low rate of car ownership per inhabitant, which make the small traditional stores more convenient. The low price charged by restaurants also represents an important obstacle inhibiting people from cooking at home (China…, 2004).

A study by Traill (2006) shows that the vector “urbanization” is more important for the development of supermarkets in China than per capita income, though the action of the two vectors together will have a significant impact, doubling the participation in food sales by 2015. Despite the continuing expansion in the high income segments in the large cities, more recently supermarkets are spreading towards the lower-middle income and poor segments in the large, medium-sized and small cities (Hu et al., 2004).

Goldman (2001), when studying food retailing in China, found no strategic patterns that could be seen as global for all the firms in the sector and considers the transference of modern retailing technology to China a complex issue. It is unusual to find foreign retailers in China. Most retailers that enter China are small sized and their decision is based on experience in neighboring Asian countires with similar cultures; that is why the technological changes introduced by these retailers are limited. Some of the large multinationals retailers use a strategy of adaptation to a determined format based on formats existing in the country. Other retailers have proven reluctant to adapt their formats to the Chinese retailing model for fear of appearing too similar to their local competitors. The only retailers that have made profound adaptations to their format were those firms whose main aim is to immediately exploit opportunities. According to Hu et al. (2004), the FDI in China was slower than in other countries with lower income due to the institutional with high barriers to foreign capital.

According to the AAFC (2006), there are logistics and distribution problems in China due to the highly fragmented nature of the logistics system, which makes it difficult to transport products directly from the Coast to the inland cities. The fragmentation and precariousness of the logistics systems lead to the marketing of locally produced foods and the local distributors dominate the market.

The middle class in China is growing and these consumers are interested in the safety and nutritional value of foods. In these segments of the market, demand tends to be centered on FFV and organic products, considered healthy foods. Western food has expanded (westernization) and Chinese children are already familiar with McDonalds and Pizza Hut, as well as having developed a taste for frozen foods. Although Chinese consumers are extremely sensitive to price, some high aggregated value imported products tend to have a strong presence on supermarket shelves. The most popular imported products include food for babies and children, chocolates, walnuts, Brazil nuts, fresh fruit (oranges and apples), fired potatoes, poultry, red meat, frozen vegetables, seafood, milk products, frozen potatoes, popcorn and canned foods, like soup. On the other hand, the distribution of other imported foods, which have a high market potential is still insignificant, such as: organic products, semi-ready and ready meals and dried fruits (AAFC, 2006; Pingali, 2006).

As in other regions of the world, food retailing in Latin America has developed greatly since the beginning of the 1990s, following the tendency towards economic opening and deregulation in the less developed countries (Morales, 1995). This scenario also applies to Venezuela, though the research of Colmenares and Saavedra (2008) shows that Venezuelan food retailing has not experienced the same technological advance as seen in Brazil, Chile and Columbia, for example. According to Paz (2006) only 30% of food purchases are made in the self-service segment. In small cities, traditional retailing prevails (96%), which distributes low quality products, as Pacheco et al (2003) affirm.

With regard the institutional environment, it is important to examine the role of the State. The slower development of food retailing in Venezuela is a result of the rigid price controls exercised by the State in various governments. This may be one of the reasons for the less intensive activity of the global chains in the country. The five largest supermarket firms in the country control 31% of the food sales, well below the situation in Mexico (86%), Chile (76%), Columbia (71%), Argentina (66%) and Brazil (63%) (Fuenmayor, 2007).

The Venezuelan government has given emphasis to social programs that make it an important player in the distribution of food. As an example, in Venzuelan the government is the main importer of chicken from Brazil, as Lima-Filho et al. (2008) report. In fact, the food security policy adopted by the country at the beginning of the decade has led the Venezuelan government to play an important role in food distribution (Espinoza, 2002). This has been possible because of the position of large oil exporter has led Venezuela to prioritize the importation instead of the production of foodstuffs, sustained in the so-called “Dutch disease” (Colmenares, Saavedra, 2008; Espinoza, 2002).

In Venezuela, the self-service sales area per one thousand people is 34 m², compared with 63 m² in Argentina, 72 m² in Chile and Mexico, 100 m² in Brazil and 400 m² in the USA (Fuenmayor, 2007). Bermudez (2007) suggests 55 m² for Venezuela, given the country’s potential market.

Other characteristics of Venezuelan food retailing are:

1. the presence of international chains like: Casino, Wal-Mart, Carrefour, Ahold and Auchan. However, as Fuenmayor (2007) shows, Wal-Mart and Carrefour are not among the five main chains and no single chain acts throughout the whole country;
2. price is considered the main food purchase decision factor, given that food represents a high portion (40%) of the household budget (Colmenares, Saavedra, 2008). In fact, a study conducted by Segovia-Lopez et al. (2007) in a large city in Venezuela reveals that only 14% of the population considers the quality of beef to be the main attribute of the purchasing decision.
3. strong presence of the State in food distribution with the Mercal chain that operates small traditional discount stores (hard-discount), the “bodegas bolivarianas”. Mercal represents 43.9% of the food retailing in Venezuela (Colmenares, Saavedra, 2008).
4. food warehousing problems (deficient physical facilities and inadequate sanitary conditions) impede better food supplies to consumers (Rincón et al., 1999).

In summary, the adoption of innovation in retailing has impacted on the growth in the consumption of higher aggregated value foods in Venezuela. For this reason, the tendency towards technological development in food retailing in Venezuela requires category management, ICT, the creation or intensification of new formats, such as in hypermarket technology, and diversification of the product mix (Fuenmayor, 2007; Espinoza, 2006).

6. Food retailing in lower-middle income countries

According to the International Finance Corporation (IFC), the majority (80%) of low income countries is located on the African Continent. The transport sector is key to the creation of an FDI dynamic in food retailing in Africa. The transport system in Sub-Saharan Africa is very deficient due to lack of investment, which negatively affects the import of food and the development of modern retail technologies. Private financing for transport infrastructure projects is a new source of investment; the public-private partnerships, where profit is conciliated with public interest, may also contribute. However, private investment occurs at a much lower scale than necessary and is limited to some types of activities and countries; hence, these sources alone are unable to make up for the lack of capital (UNCTAD, 1999).

Supermarkets have rapidly extended their geographical scope in African countries and organized themselves to attend not only the middle class in the large cities, but also the poor areas in small cities. The new tendency in the region is “supermarkets for the poor”, representing the spread and widening of the supermarket industry, in an attempt to reach the masses of workers. For manufacturers, the supply of food to the supermarkets represents a great opportunity and a great challenge. The product procurement process on the part of retailers involves higher quality demands and safety standards, on a daily basis. Most manufacturers, then, need to make investments and adopt new practices, which is more difficult for the small processors, as they run the risk of exclusion from the increasingly dynamic market dominated by the supermarkets (Reardon et al., 2003).

Although the innovations in food retailing are occurring faster in South Africa (an upper-middle income country), Kenya and the larger and relatively richer markets, the poorer African countries are receiving increased amounts of FDI from South Africa, in particular and, more recently, from Kenya (Weatherspoon, Reardon, 2003).

Minten (2007) studied food retailing in Madagascar and concluded that the food marketing policies are similar to those of other African countries, where foods with a high level of quality control are sold by the multinationals at prices 40 to 90% higher than those charged by domestic retailers. Two characteristics typical of poor economies may help explain why prices charged by the global retail chains are much higher. First, the profit margins of the domestic retailers are small because of the low expectations of the business people. Second, the low prices practiced by the local firms appear to be a repercussion of the tax informality adopted by them.

The use of a strategy of quality and excellence in attending the customer in Vietnam and in Madagascar is in agreement with the remarks made by Mersha and Merrick (1997) and Gosen et al. (2005), who claim that quality is a global demand, even in the less developed countries. On the other hand, according to Minten (2007), as the majority of the population is poor, the income-elasticity of demand is high, which means that the call for high quality and high prices of food is limited, since income is an important determinant of the level of quality.

In Vietnam, modernization of food retailing began around a decade ago and is undergoing a period of rapid expansion. As the innovations had already been established in more developed economies, their occurrence in Vietnam and other less developed countries can be seen as a process of knowledge transfer. When the process of economic liberalization and opening up to FDI was begun, in 1986, there was a large scale industrial expansion and the return of expatriates to the country, which resulted in an enlarged middle class. Both the Vietnamese expatriates and the middle class began to demand a wider range of products than those traditionally available, better quality and retail institutions that offered more convenient locations for their stores. However, the innovations only began following the loosening of political control of the sector by the government during the 1990s. The key for the establishment and expansion of new retail stores was the introduction of laws that made it possible to guarantee the right to property and permit the establishment of new stores and the enlargement of existing ones. The new format of the stores offered great innovations in the promotional mix, displays, human resources, food safety, assortment and pricing. The pace of this tendency accelerated in 1995 when the USA normalized commercial relations with Vietnam (Hagen, 2002; Goulven, 2001).

The high rates of smuggling, adulteration and falsification of product trade marks in Vietnam contributed towards winning the support of modern consumers for a “legalized" retail system aimed at ensuring product quality. With emigrant Vietnamese, returning as visitors and Vietnamese citizens having more opportunity to travel abroad, knowledge of the global retailing innovations spread in the country (Hagen, 2002).

A study by Durazzo (2008), in which the degree of attractiveness for retail investment of several countries was measured, put Vietnam at the top of the list. The reasons for this include the economic growth of the country, pushed by the regional progress, with the advance of the Philippines, Thailand and Malaysia. The population of urban areas is growing rapidly and the communist party in the country is trying to replicate the Chinese economic model.

However, according to Durazzo, the modernization of retailing is likely to have negative consequences for some local retailers, producers and distributors. As modernization serves to concentrate a fragmented market structure, it is reasonable to admit the possibility of rising food costs and less choice of retail firms for the customer. In any case, it seems that consumer demand is the main vector of the current tendency towards modernization in Vietnam; while this is the case. there will be important consequences for the economy of the country. Therefore, according to Hagen (2002), the main success factor in food retailing in Vietnam is the attention directed to the spread of new retail technologies and customer service.

In order to maximize profits in low income countries, supermarkets often use a strategy by which prices are adjusted to the inelastic-price demand formed by the middle class, who are interested in stores that offer convenience, cleanliness, and shelter form rain and heat. In low income countries, with small middle classes, modern retailers might be able to obtain benefits from an oligopolic market and, so practice higher prices. It can be seen, then, that the retail strategy depends on the income distribution, urbanization, the participation of women in the workforce and foreign investment (Minten, 2007).

Chart 2 summarizes the characteristics of the food retail distribution systems found in the studied countries.

Chart 2
Characteristics of the food retail distribution systems in countries with different income levels

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