As retailers merge, their buying power has put suppliers and exporters under intense pressure. Aaron Priel explains how the recent wave of global retail M&A has changed life for producer organisations – and describes one way in which they might best protect their interests.
The recent mergers of supermarket giants pose an enormous challenge to fresh produce suppliers and food producers in general. The challenge, in fact, involves both producers and export/marketing companies. Whereas for many years exporters were able to shop around for the best deal they could get, in view of the relatively large number of food chains, the present concentration of buying power changes the mode of trade all the way down to producer level.
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Globalisation of our food supply infrastructure that started years ago but intensified in 2000. The globalisation process is a two-phase phenomenon: a) the acquisition of food chains by major multinationals, as is the case with Wal-Mart‘s purchasing offensive in Britain and Germany; and b) the merger of national supermarket chains, as exemplified by the merger of France’s Carrefour and Promodès, which created the world’s second largest food retailer. According to Shaul Licht, deputy director of Israeli agricultural exporter Agrexco‘s marketing division, “the second phase, when chains merge, represents a strategic move aimed at protecting medium-to-large supermarkets from being swallowed up by the conglomerates.”
Retail M&A has a “decisive impact”
Licht maintains that the merger and acquisition of supermarkets “has a direct and decisive impact on the behaviour and performance of the retail and wholesale food trade,” and has become a major factor influencing the production policy of fresh produce. The large chains, after their worldwide acquisitions, have become stronger still. Those that were not acquired or merged have a challenge to compete against the conglomerates. In either situation, suppliers face a tough challenge on foreign markets.
“The giant multinationals are acquiring chains in other countries, as can be exemplified by purchases of chains in Poland, the Czech Republic, Hungary, Latin America and in South East Asia; and the Dutch retail chain Ahold‘s acquisition of supermarket chains in the USA, making it the fifth largest food chain in the USA, to the point where 55% of Ahold’s total sales returns are generated in the USA,” Mr Licht remarked.
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By GlobalDataWhile the consumer benefits from lower retail prices, exporters and marketing organisations are first pressured to slash prices, to enable the retailers to compete.
Centralisation of exports the way forward?
In a symposium held in Tel Aviv early March, Ministry of Agriculture officials and representatives of farmers organisations and private exporters of fresh and processed food voiced their opinion that one way to challenge this situation is by centralising the export and marketing supply infrastructure. A big supplier with a wide range of products that can be supplied year-round has a better chance of withstanding the price pressures exerted by the large chains.
In Israel and other countries, where privatisation and liberalisation replaced a statutory centralised system, unfettered competition among private exporters on foreign markets weakens their bargaining power, as well as reducing their revenues. But liberalisation and a market economy system are here to stay, and players on the market have to adjust themselves to this new reality. The result is lower revenues for growers, as the export companies do not assume any financial risks in their overseas marketing activities.
They all agreed that “something has to be done,” but in reality no steps have been taken – except in the citrus sector. “Private citrus exporters voluntarily agreed to centralise their marketing in Japan, Korea, Italy, and combine marketing efforts in Scandinavia,” reported Mena Davidson, Director General of the Citrus Marketing Board of Israel.
As a partial solution, Licht suggests that Agrexco, Israel’s leading agricultural export company with annual sales returns of US$650m, increase the marketing volume of produce from other sources. This can be done by taking advantage of the company’s reputation and sophisticated distribution infrastructure throughout Europe and in the Eastern Coast in the USA. “This will place Agrexco, and other companies that adopt a similar strategy, in a better bargaining position,” he said.
Farmer organisations discussing voluntary centralisation
just-food.com learned farmer organisations in Israel recently initiated high-level discussions aimed at “voluntary change of the structure of exporting produce from Israel”, without cancelling the principles of market economy and the aspect of competition. The suggestion is that the private export companies compete within the country to contract suppliers, but with a centralised export and marketing structure. This will diminish competition among exporters on foreign markets and enable them to deal with big chains from a position of strength.”
Wal-Mart is by far the number one global expansionist, but recent reports carried on just-food.com show time and again that it is far from alone in its attempt to dominate the global retail arena. A key goal for the retailers involved is improved purchasing power – putting the squeeze on suppliers is the inevitable result. A centralised marketing structure, as described above, may be the best way for suppliers to challenge the extraordinary powers of the retail superleague.
By Aaron Priel, just-food.com correspondent
