We launched The Global Trade Symposium, co-located with The New York Produce Show and Conference, with an announcement that The Wall Street Journal’s Mary Anastasia O’Grady would Keynote the inaugural event. It was heady stuff, and we spent all year ruminating on who we could get this year who might provide a comparably broad grasp of global trends, but more specifically targeted around retail and the produce industry.
It wasn’t a tough decision.
Tom Reardon is an academic, but of a most unusual kind. One of the joys of Punditry is we get to interact with great centers of learning across the country and around the world. There are many great scholars, many brilliant minds, and interacting with them all is a great privilege. However, there is not a scholar in America who actually does what Tom Reardon does. No heavy reliance on secondary sources here, we have called Tom many times over the past two decades and, rare indeed, is the occasion when he answers his phone in the United States. He is the archetypal researcher and professor, and those who wish to understand the global future for this business ignore him at their peril.
Of course, Tom is no stranger to Pundit readers, he has often contributed to the industry conversations we conduct in these pages, including pieces such as these:
One of the great honors that this Pundit has received is that Professor Reardon has selected us to guest lecture before his classes at Michigan State University. Indeed, at his behest, we were given the opportunity to deliver the John (Jake) and Maxine Ferris Global Agribusiness Lecture at Michigan State.
So we knew that bringing Tom to New York was a guarantee that we could deliver on our commitment to run world-class programming and deliver on our promise to help industry members to think bigger than they had before. We were thrilled that he was able to accommodate us in light of his frantic schedule.
We asked Pundit Investigator and Special Projects Editor, Mira Slott, to give us a sneak preview of what this gentleman and scholar would unveil at The Global Trade Symposium on December 4, 2012, in New York:
Q: Your reputation precedes you and so the whole industry will doubtless be enthused by word that you will be the keynote speaker at the Global Trade Symposium, co-located at The New York Produce Show and Conference. Your international experience and expertise is far-reaching, intriguing and complex. What are the key points you will make during your keynote address in the headquarters city for the United Nations?
A: I have four sets of points; the general theme of the talk is the rapid transformation of produce markets in emerging countries, especially Asia, Latin America and Eastern Europe. The key point will be that there’s been a supermarket revolution that has transformed or is beginning to transform the produce market as modern retailers are spreading around the globe, gradually knocking on all sectors along the supply chain.
This is inducing a range of effects, which I will discuss. The third point addresses the wholesale and logistics revolution. Finally, this has implications that open great opportunity in produce markets for exporters and investors in partnerships and changing structures if they are able to adapt.
Q: Could you elaborate on the scope and speed in which this revolution is occurring? What are the drivers upending the structure of the industry and supply chain?
A: This is what excites me — the fast tracking of change. In some places, it’s still crawling along, but in others it’s not. It’s the unexpected. In short hand, the phenomenon is impacting all various forms of retailing – supermarkets, hypermarkets, convenience stores, neighborhood stores, in addition to the exponential rise of the fast food segment, another story in and of itself.
The whole retail sector is growing extremely rapidly — four or five times faster than in the U.S., and it is growing the total sales volume rate three to four times faster than GDP growth rates of these countries. For example, the Chinese modern retail sector is growing three times faster than its 10 percent GDP rate, which is the fastest in the world, far outpacing income.
India’s retail growth has been on the fast track, even before the recent direct investment rules took affect. Until a few weeks ago, there were regulations against multi-national brand investments in retail. Wal-Mart couldn’t set up its own stores in India except for partnering with an Indian entity. Foreign direct investment had been limited and is now liberalized, but even before that liberalization, the sales of the modern retail sector were growing about four times as fast as the country’s very fast rate of income growth.
What’s happening also, as a lot of activity starts with the middle classes, which are expanding rapidly, the movement is now spilling over to the poor as well. That’s a big news story. It is not just limited to the luxury market.
Q: Does this surprise people?
A: I’m often told this is cultural that we have supermarkets in the U.S. and push carts selling produce in Asia. In fact, push carts were traditional in the U.S. I have pictures of my mother’s neighborhood in Chicago in the 1920’s and 1930s, with scenes of street vendors selling produce and push carts filled with butter and eggs.
We had exactly the same traditional retail and produce buying habits, going to the corner shop and to push carts down the street. That situation is certainly the tradition in the developing countries and emerging markets we’re talking about. The people I deal with in those countries, my colleagues, say produce is only beginning to penetrate supermarkets.
Produce dominance in U.S. supermarkets took decades to develop. In my experience, I see in Asia and Latin America at a much earlier starting point. Supermarkets are pushing fresh produce utilizing knowledge of produce operations in the U.S. and Western Europe, and modern tools to expand. In my estimation the growth is precocious. It has taken off.
Some of the growth is occurring not in a continuous, steady course, but abruptly. In Mexico, around 2000, the share of fresh produce in supermarkets was zero to one percent. We did a study in 2006, which showed fresh produce accounted for 15 percent to 16 percent. There was this huge jump up.
Q: Would you attribute that spike to Wal-Mart moving in?
A: Part of it was related to the big entrance of Wal-Mart, which had been there since the 1990’s, but the company started putting a huge emphasis on prices and getting quality up, investing in cold chain distribution centers. This was coupled with a large presence of domestic retailers following suit. It started a domino affect of different retailers copying Wal-Mart to stay alive.
This highlights a general point of how these things happen. The produce industry in supermarkets in Mexico was extremely minor until essentially Wal-Mart moved in, building cold chains and large distribution in the 2000’s. When you throw a big stone into the pond, how does everyone adjust to that? Suddenly, everyone has to get their act together really fast. In the U.S., it took 40 years for the produce industry to establish a major role in chain retail supermarkets.
Q: Do you see this competitive dynamic duplicated in other countries? What is the current pace of fresh produce infiltration and its role in this transformative global retail expansion?
A: In many places, there has been small growth for awhile. We see it happening in Hong Kong, where suddenly all eyes will put emphasis on produce. We’re seeing the change in waves. An early entrance in Taiwan, Korea and Brazil already experienced a lot of changes in sales and produce procurement like in the U.S.
Other countries are in the middle of transition. And then there is the third wave more recently taking off, in China and India, where growth of the produce sector is happening fast. It tends to start with fruit. In 2006, our research showed 35 percent of the fruit market penetrated and only 26 percent of vegetables in China, similar to France in the 1970’s, or the U.S. in the 1950s and 1960s.
The countries are changing at different paces and are at different parts along the track of a train, but all are going in the same direction and a lot are moving very fast. A lot of students of retail in the 1970’s couldn’t imagine this retail revolution taking off in Delhi.
Q: Why was this so unfathomable? What are some of the misperceptions people have within the industry and outside of the industry regarding these issues?
A: A lot of times, because of high transport costs and traditional structures, people expect to find very slow change in these regions, but often the change has been expedited, linked to leap frogging and fast tracking.
For instance, a company takes over fresh-cut operations of retailers in China, buying small chains there and forming a retail network where retailers were fragmented before. Chains are trying to set up regional hubs where they have sourcing that works across Asia and Central America. Wholesale markets in China are setting up retail chains. Governments are subsidizing investments to make those corridors. There are also changes at the producer level. Cooperatives are forming to handle contract arrangements. A good example of this can be found in the Czech Republic.
Q: How does this effect product development and variety of offerings?
A: Product cycles are impacted. You see little niche products, like kiwi fruit in China, become commodities and spur other products. Alternatively, a cactus leaf in Mexico was important but sidelined by Chilean companies coming in and supplying better alternative products.
Supply chain superiority and fast tracking both improves opportunity and opens doors for new competition, while it shuts doors for traditional players. The change is sweeping, occurring downstream at retail, midstream with logistics, and upstream with producers.
Q: Are new forms of retailing taking root to coincide with cultural shifts?
A: Success doesn’t mean coming in with a cookie cutter big box retailer. There’s an astounding case in Hong Kong. Hypermarkets realized how to take share away from wet markets. They mimicked a wet market inside the hypermarket with freshness and bargains. They simulated the wet market atmosphere. After appealing to the big middle and upper middle class with improved quality and diversity, at the same time they offered cheap, fresh produce for the masses. So consumers coming in for processed food items can pick up cheap melon, or buy golden kiwis from New Zealand, or fancy apples from New York. There’s a dual strategy with room for everyone.
Q: Does the supermarket revolution trigger burgeoning demand for U.S. produce?
A: Often, there is a disproportionate supply of imported fruit in the supermarkets. In Mexico, three percent is foreign, mainly from Chile and the U.S. In places like Indonesia, where there is not good supply, chains carry a lot of Chinese and Thai produce; as much as 70 percent of the fruit aisle and 20 percent of the vegetable aisle are imported.
These countries are getting produce from abroad — we’re not just talking the U.S. and Western Europe for the high end market, but south to south trade. Mexican markets are depending on Chilean fruit. Supermarkets in China are depending on Thai and Philippine fruit. Indonesia is bringing in beautiful carrots and garlic from China. Orange juice is better quality coming in from China than from their local oranges.
Q: What does this mean for U.S. exporters?
A: There is a story I can relay that gave me pause and may be scary from an American standpoint. In Indonesia, I was in the cold chain room of the largest retailer. I explained to a produce executive that I was a researcher of retail chains. As we walked through the aisles, I noted a recurring theme, Chinese apples, Chinese apples, Chinese apples, Chinese apples, and asked, ‘where are the American apples here? I’m curious.’ Searching them out, he said, ‘here they are,’ and added, ‘we hope overtime to eliminate these.’ He continued, ‘what we found four or five years ago was that Chinese apples were cheaper and lower quality. But now they are cheaper and the same quality as the American apples. What we hold onto are American red globe grapes.’
Q: Should American red globe grape producers be concerned?
A: Let me point to another story in Australia, where I was giving a talk. The metro procurement officer said to the audience after I finished my presentation, ‘you might think Tom Reardon is uninteresting because he’s a professor, but here I am a procurement officer for the whole metro area, and I can concur with his assessment and what this new market share means. It is bringing a lot of competition.’ Then, the procurement officer turned to the red globe grape producers in the room and said, “I take this opportunity to delist you.”
Q: He certainly didn’t hold any punches!
A: In front of the audience he continued, ‘all I see are only two people I can’t delist, among the few New Zealanders that have come to this meeting, because the brand is important and they have established a consumer following. But Australian red globe grape producers have no major brand or volume presence. The Chinese undercut you by 40 percent. At first the quality and packaging wasn’t up to par, but they fixed it.’
It’s a beautiful market expanding so fast, but at the same time, there is competition. It’s not locked up for a luxury niche. Companies are trying to break into new markets.
Q: What are the best strategies to do that?
A: This brings me to the second part of my talk, changing the procurement systems. More and more companies are quickly expanding produce selling to defeat seasonality, just like in the U.S. system, and rapidly building distribution networks. It started with processed goods and then Wal-Mart taking the first steps with cold chain distribution centers being set up, so produce could be shipped directly through the cold chain to win over margins and eliminate the middlemen.
Then there are regional hubs of buying. In Thailand, for example, a company takes bids from buyers around the region. Wal-Mart can use buying facilities in China and coordinate other buying from Asia and bring that product to distribution centers in China.
The fastest trade is growing in Asian countries. A number of produce companies are thinking of joint ventures in Asia to gain leverage into those markets and take advantage of this fast track trade.
In the case of Mexico, Wal-Mart and, separately, Soriana, set up their own fresh retail distribution centers only in the second half of the 2000’s. I also can give examples like this in Asia, but it is a relatively new trend. Before, retailers were just requiring wholesalers to deliver to individual stores, or to bring product to one dry distribution center. Before, they weren’t investing in their own cold chain distribution centers.
Also, there is a rise of specialized dedicated wholesalers of the type of Melissa’s and Frieda’s that have significant cold chain distribution centers working for supermarket chains, or outside of the cold chain they might be doing a lot of repacking. There are operations in Indonesia where they bring in greens or melons and wash and pack them, acting as channel captains for these retailers.
In addition, there are companies that follow sourcing within these procurement systems. Basically you have companies, either in packing or processing, such as a fresh-cut supplier operating in the UK with Tesco that comes into Asia at the chain’s behest and sets up the supply chain for them in Asia.
A beautiful example, while not produce-related, is a European retailer operating in Bangkok and Thailand that feels the supply port is inadequate and that it needs to clean up logistics, so they call their wholesaler from Europe to come there and set up facilities to handle all that is needed, and fast-track their supply chain.
Q: Isn’t what you describe as happening with fresh produce a familiar scenario in other industries?
A: Many in the industry thought the transition would be slow. They didn’t count on the fact you can transplant facilities and suppliers. The automobile industry just did the same thing. Some thought they’d flounder around, try out the locals for a while. Then the strategy became, let’s get our own suppliers, set up our own multinational operation to supply what we need, and get our U.S. operation to buy in, strong arm them a little.
The tire industry had everyone relocating instead of shipping from the U.S.
You see this in the logistics sector as well, where companies relocated with retailers to manage and run new network distribution centers for them. And in India, cold chain logistics firms from Japan offer distribution logistics solutions for India. Or even joint ventures where a Wal-Mart or Tesco depends on its partners to set up logistics operations.
Carrefour comes in and wants a specific melon, so it partners with Syngenta to coordinate with farmer cooperatives. Others go into partnerships with cooperatives and get help from the government.
Q: How prevalent is government subsidization? Does this impact competition and market strategies?
A: Most of this is not government financed. You have exceptions. In the case of China and Vietnam, state-owned enterprises are among the leading retailers. These firms are acting like profit-making private enterprises but getting government help and opening in stock markets. These companies are owned or partially owned by governments.
The government of China has a program to help subsidize farmer to supermarket relations. It provides financing to produce growers in cooperatives selling to Carrefour or Wal-Mart or one of the other metros, such as Star Farm, a wholly owned subsidiary of Metro Group. There are selected supplier groups where the government is stepping in to help subsidize greenhouses and other initiatives.
The third form of government help is tax exoneration like in Korea. The role of government is extremely interesting and bazaar. People have often felt there is some kick against the rise of supermarkets in Thailand, restrictions on hypermarket locations.
Q: Is this comparable to the fights against Wal-Mart supercenters opening in certain U.S. communities?
A: We’ve done studies on laws and regulations in the U.S. of expansion of supermarkets. It turns out that in developing and emerging countries, there are many more pro-modern retail laws against wet markets establishing in various cities. And then with the bird flu, legal restrictions clamped down on selling birds. Governments have taken actions to rapidly increase supermarkets for food safety, and in China, there is an understanding that modernizing the food chain lowers prices and makes it more competitive.
My third set of points addressing wholesalers and logistics are spurred by these government actions. In the 1990s, in China the wholesale market capacity growth skyrocketed by a factor of 10,000 percent. There also has been massive investment in independents in India. In 1946 or so, India had about 50 wholesale markets, and now it has 5,000.
Tremendous rapid modernization in Chinese wholesale markets privatized and liberalized firms very early. They are acting in very dynamic, multinational capacity, forming trade networks.
Q: Did India follow the same pattern?
A: India is sharply different than China. There is still a lot of regulation on the wholesale markets and they are quite limited. I can say the same for Indonesia. It is very far behind the situation in China.
China leads the way in very rapid wholesale modernization. The wholesale market sector has changed a lot, and also finds third-party logistics growing rapidly, with a lot of multinational activity. The same can be said for the fast food chains.
Also, there is large scale investment in small and medium firms, including massive cold chain investment. Nearly all potatoes eaten in Delhi now come from a cold chain. This is not linked to multinational investments in cold chains but to national company investments.
Q: How can industry executives capitalize on all these developments?
A: I will conclude my talk with the implications. A lot of people look askance at getting into emerging markets, or think it is only for the most equipped companies. In some ways this is true but changing rapidly as the produce sector modernizes. With food markets growing seven times faster overall, and four or five times faster for produce, there is huge opportunity.
If you tap into these markets, you can be a national player, not just a local player. A lot of suppliers are jumping in and creating intense competition. The right combination of moves is essential but comes with a clearly high pay off.
Q: Thank you for giving our readers such an extensive and thought-provoking preview of your presentation at The Global Trade Symposium, co-located with The New York Produce Show and Conference. On a personal note, what lead to your in-depth exploration of this retail revolution? Did you begin your research from a certain vantage point?
A: Originally, I was working from the angle of small dairy farms in Latin America, thinking about what was happening to them. A lot of these companies were finding the new situation challenging and being driven out of business. There were a lot of obstacles in a new economy for small farms and other players in the farm and processing sectors back in the 1990s. I had not been focusing on developments in processing and the supermarket industry.
I began to realize a lot of these changes offered opportunity for big firms and multinational firms. In the U.S., the dairy sector was undergoing a transformation. As the procurement sector was adopting private standards like Global GAP and other standards to increase sourcing into global operations, little by little the bar was being raised for local players. I saw changes down stream and midstream, noting the first pains upstream in the farming sector.
I witnessed this happening in Asia and Latin American and my work changed. I did a lot of studies in different areas including Mexico, Asia and Eastern Europe, researching the supermarket industry, and obtaining a reputation for looking at links within the supermarket revolution. In the process of deepening my knowledge in supermarket wholesale and logistics revolutions, I could point to changes in business-direct investment and joint venture partners. I developed contacts and links with American businesses seeing potential to enter emerging markets.
Often I’m confronted with a real set of questions about the markets. People didn’t think there was opportunity because it wasn’t clear what changes were going on, or how to enter, what is the playing field, what are the best strategies… Perhaps least clear is the next wave, how to approach joint ventures with local firms.
You see a lot of partnerships with berry companies developing between the north south corridors to vanquish seasonality in Europe with Serbian partners and South African partners among others. The same attempt to get partner networks is occurring in Asia and already happening and picking up speed in the Americas. Should you be buying land, forming direct partnerships… there are many questions, and I’ll discuss more on this in the procurement section of my talk.
I’m of Irish background, so there is no question I can talk, but there’s a fear of sitting in front of all these experienced, high-level executives and industry experts, and I’ll say something they already know.
Q: Of course, with the wealth of knowledge and esteemed perspectives enveloping the Global Trade Symposium, you will be in good company and that possibility may very well occur. However, rest assured your presence and keynote address will be warmly welcomed and revered and surely guarantee a stimulating and invaluable discussion.
All too often we attend workshops and conventions and think that we are supposed to come back with actionable ideas. Indeed, all too often, employers insist on it.
Yet, very often, the most valuable lessons are not about techniques; they are about opening one’s mind in a way that makes opportunities visible that others fail to see.
What greater benefit can one draw from a conference than gaining an understanding of how the world is going to be? What a win it is to have settled assumptions challenged, to see the industry and the future through a new prism.
One look at this preview of the keynote address, and many of the sharpest executives in the country will know they need a member of their team present at this event.
Fortunately, they can register for The Global Trade Symposium and the broader New York Produce Show and Conference right here.
And travel discounts can be found here.
The Spouse/Companion program can be registered for right here.
Tours of retail, wholesale and urban agriculture can be signed up for right here.
And the separate “Ideation Fresh” Foodservice Forum can be registered for right here.
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New York is sometimes referred to as the Capital of the World, because the United Nations is headquartered here. Now it is clear that Tom Reardon’s keynote will make The Global Trade Symposium and The New York Produce Show and Conference the capital of the produce world the first week in December, 2012. Make sure you are at the center of things. Make sure you are in New York. Once again, you can register here.