Agrarwirtschaft 58 (2009), Heft 8 Vertical coordination with growers in the fresh fruit and vegetables supply chain in Vertikale Koordination lokaler Erzeuger in der Supermarkt-Wertschöpfungskette für Frischobst und -gemüse in Kroatien Linde Götz Leibniz Institute for Agricultural Development in Central and Eastern Europe (IAMO), Halle (Saale), Mario Njavro University of , Croatia Jon H. Hanf and Agata Pieniadz Leibniz Institute for Agricultural Development in Central and Eastern Europe (IAMO), Halle (Saale), Germany

Abstract Schlüsselwörter This paper provides further evidence on vertical coordination as a Supermarkt-Wertschöpfungskette; Frischobst und -gemüse; vertikale means of overcoming supply disruptions and improving product Koordination; farm assistance quality. In contrast to previous studies, our findings suggest that the leading model of vertical coordination between fruit and vegeta- bles growers and in Croatia is restricted to loose, 1. Introduction one-year contracts which mainly specify the terms of payment During the transition process in Central and Eastern Europe without providing farm assistance. Wholesalers more often provide (CEE), the sector was privatised and relationships farm assistance to fruit and vegetables growers. We expect that the along the whole food supply chain – from farmers to retail- wholesalers will drop out of the fresh fruit and vegetables (FFV) supermarket supply chain since supermarkets aim to streamline the ers – collapsed, implying serious supply disruptions. As procurement system by increasing local procurement directly from reforms progressed, including market liberalisation and the the farmers. Thus, the amount of farm assistance provided will privatisation of formerly state-owned distribution systems, further decrease. Therefore, for the rather small Croatian growers to new modes of market coordination mechanisms emerged. integrate in the FFV supermarket supply chain, it is even more In addition, international retailers and processors entered important that they organize to meet the supermarkets’ minimum the new markets, introducing their own business models of quantity requirements and obtain access to a distribution facility. superior efficiency. Also, international retailers offered products of western quality standards in the supermarkets, Key words thus, strengthening consumers’ demand for food of high supermarket supply chain; fresh fruits and vegetables; vertical quality (HANF and PIENIADZ, 2007). Domestic retailers coordination; farm assistance were thus forced to quickly adjust to these new develop- ments to stay in the market. To secure produce of high Zusammenfassung quality at competitive costs, this required the adoption of Diese Studie liefert weitere empirische Evidenz für vertikale Koordi- higher quality standards and the restructuring of the whole nation als ein Instrument um sowohl die Produktmenge als auch die supply chain. Further, to overcome problems of insufficient Produktqualität in einer Wertschöpfungskette zu verbessern. Unsere supply and minor quality, international and domestic retail- Ergebnisse zeigen dass sich die vertikale Koordination zwischen ers, as well as processors, upgraded their vertical coordina- den Obst- und Gemüseproduzenten und den Supermarktketten in tion mechanisms. den meisten Fällen auf Ein-Jahres-Kontrakte beschränken, die im Wesentlichen die Zahlungsmodalitäten spezifizieren. Jedoch bieten Empirical studies provide evidence that due to transition- Supermärkte im Unterschied zu Großhändlern den Erzeugern keine specific development and many market failures, highly diver- zusätzliche Unterstützung (farm assistance) an. Es ist zu erwarten, sified modes of vertical coordination exist in CEE countries dass die Großhändler aus der Wertschöpfungskette verdrängt and Central Asia (SWINNEN, 2005; WORLD BANK, 2005). werden, da die Supermärkte Obst und Gemüse in zunehmendem Transactions exhibiting the lowest degree of coordination Umfang direkt von den lokalen Erzeugern beschaffen. Somit wird are conducted via spot markets, where a transaction is sich das Angebot an farm assistance, das insbesondere für die based on a price agreement only. A higher degree of coor- kleineren Erzeuger wichtig ist, um sich in die Wertschöpfungskette zu integrieren, weiter verringern. Daher wird es für die kleinen kroa- dination is achieved through vertical coordination by con- tischen Erzeuger noch wichtiger, dass sie sich organisieren, um so tracting. The highest degree of coordination is achieved by die Mindestanforderungen der Supermärkte an die Liefermenge zu comprehensive vertical coordination, which is called verti- erfüllen und Zugang zu einem Auslieferungslager (distribution cal integration, where one firm controls various levels of centre) zu bekommen. the value chain, implying that market transactions are re-

363 Agrarwirtschaft 58 (2009), Heft 8 placed by intra-firm transactions. This can be achieved by The situation in the FFV supermarket supply chain in either forming a subsidiary, or undertaking a merger or an Croatia is the result of extremely rapid growth in the retail acquisition. sector, which is among the fastest in the world. Not until Relatively strong vertical coordination between farmers and 2001, when foreign retailers first entered the market, did retailers within contract farming in the FFV supermarket supermarkets begin to offer a broad assortment of FFV in supply chain in CEE and Central Asia, and especially in their stores; prior to this, FFV had primarily been sold in Croatia, is observed by REARDON et al. (2003), DRIES et al. the street markets (REARDON et al., 2003). Today, FFV is (2004) and WORLD BANK (2005). sold to Croatian consumers mainly through the stores of large national and international supermarket chains. How- With these previous empirical findings as our background, ever, a large amount of the supply is secured by imported this paper aims to identify the current degree of vertical FFV. coordination in the FFV supermarket supply chain in Croa- tia. We conduct interviews based on a questionnaire with This paper is organised as follows. In the next section we inter alia, the FFV procurement managers of Croatia’s 5 provide an overview on the developments in the FFV retail largest supermarket chains. We especially account for the and wholesale system in Croatia during transition (section role of farm assistance provided within contract farming.1 2). The third section presents the main findings from our empirical analysis on vertical coordination mechanisms in Contract farming can be defined as a formal or informal this market. The paper concludes by summarising our find- contractual agreement between a farmer and a distributor ings, presenting policy implications and outlining sugges- (supermarket) or processor concerning the supply of agri- tions for further research (section 4). cultural products under forward agreements, generally at predetermined prices (EATON and SHEPHERD, 2001). An essential element of contract farming is the provision of 2. The emergence of the FFV supermarket some degree of assistance to the farmers, with the aim of supply chain during transition2 increasing supply quantity or quality, or reducing seasonality. Contracting with farmers may be implemented within a During socialist times (1945-1990), FFV was sold primarily preferred supplier program or an outgrower scheme. In through green markets in towns and urban areas in Croatia general, farmers qualifying for a preferred supplier program (table 1). Municipal governments operated the green mar- have a long-standing successful business relationship with a kets by leasing stands to farmers to sell their own products. supermarket. These farmers are the suppliers from which a Besides a small assortment of FFV, in particular imported supermarket preferably sources its supply and provides lemons, oranges and bananas, along with non-food items, some degree of farm assistance. More comprehensive farm staples and processed food items were sold by socially- assistance is provided within an outgrower scheme in which owned enterprise (SOE) retail chains, e.g. Konzum (see the farmer provides the land and labour, whereas the proc- section 3.2), representing a new retail format which was essor or distributor has considerable control over the pro- created in the 1950s and 1960s. In the early 1980s, some duction process by comprehensively providing inputs and vegetable production “agrokombinats”, i.e. large vegetable extension services. production and marketing SOEs, established shops to sell their vegetables. In general, the aim of farm assistance is to improve farm- ers’ access to basic production factors such as capital and With the breakdown of the socialist system in 1990-91, the specific inputs, know-how and information (knowledge and “de-socialisation” of the system began. From 1990-1995, experience). In particular, farm assistance may include the green markets remained the main selling place for FFV prepayment to finance the harvest, credit, leasing or rental to end consumers. The variety of FFV sold has broadened, of farm machinery, bank loan guarantees, quality control the quantity has increased and the quality improved, all the and inputs (e.g. seedlings), as well as extension and man- result of increasing imports of FFV, particularly from Italy agement advisory services. Farm assistance may be pro- and Spain of tropical fruits originating in Latin America. vided within bilateral contracts and complex contract sys- Still, the privatised SOE retail chains and the numerous, tems. Bilateral contracts are usually agreed upon between newly established and independent small private retail the farmer and a processor, or the farmer and an input pro- shops and locally acting retail chains primarily offered non- vider. In contrast, a triangular agreement includes three food items and only tiny, if any, FFV selections. partners e.g. a farmer, a processor and a bank. In the second half of the 1990s, the supermarket sector Farm assistance is provided within supplier contracting of emerged. The size of local retail chains and retail shops the supermarkets in the FFV sector in CEE and Central gradually increased and started to penetrate the middle and higher income neighbourhoods in the major cities. Also, the Asia (WORLD BANK, 2005). REARDON (2003) provides evi- dence on outgrower schemes in the FFV supermarket supply independent, small retail shops started to exit the market and the Agrokombinat-supported FFV retail sector almost chain in Croatia. DRIES et al. (2004) present evidence on complex contract systems: the two largest supermarket completely disappeared. Still, the amount of FFV sold by chains in Croatia guarantee loans for their outgrowers to the supermarkets was still rather low. acquire greenhouses and irrigation. Further, DRIES et al. In 2001, foreign retailers (e.g. Kaufland, Metro and Merca- (2004) report on the acquisition of dedicated wholesalers by tor) started to enter the Croatian market, thus inducing large supermarket chains in order to have their own pre- extremely rapid growth of the supermarket sector. The ferred supplier program. share of large supermarkets (including supermarkets, hyper-

1 2 The data was collected within a study for the World Bank. This chapter draws heavily on REARDON et al. (2003).

364 Agrarwirtschaft 58 (2009), Heft 8

Table 1. Development of the FFV retail sector and FFV wholesale system during transition FFV retail sector FFV wholesale system Socialist times  green markets  informal truck markets (before 1991)  SOE retail chains  agrokombinats Early post-transition  green markets with broadened assortment  informal truck markets serving green markets, (1991-1995)  small independent retail shops and small retail shops and retail chains  privatised former SOE retail chains  traditional wholesalers with outgrower schemes serving green markets and small Emergence of national  local retail chains supermarket chains supermarkets  small independent retail shops (1996-2000)  few new wholesalers serving regional super-  green markets market chains Multinationalisation  local/national retail chains  dedicated/specialised wholesalers (1. whole- of the retail sector  foreign retail chains salers with outgrower schemes and 2. whole- (2001-2003)  small independent retail shops salers with own production and outgrower schemes) serving national and international  green markets supermarket chains

 traditional wholesalers serving local super- market chains and small retail shops  informal truck market serving green markets and small independent shops

Source: own illustration based on REARDON et al. (2003) markets and cash & carry stores) in food retail increased kets tried to escape from fierce price competition by follow- from about 25% at the beginning of 2001 to 51% at the end ing a product differentiation strategy, which increased the of 2002 (DRIES et al., 2004). This implied that the impor- quality of FFV offered in the supermarkets. However, the tance of small retail shops decreased from about 80% of truck market and the traditional wholesale system were overall retail trade to 45% at the end of 2002. As an exam- characterised by relatively high transaction costs and they ple, 4,500 small retail shops were closed in 2002 alone. could not deliver FFV of the required quality. This induced Also, the importance of green and street markets decreased the emergence of the “specialised/dedicated wholesalers”, to 4%. Concurrently, the size of the retailers’ supermarket which exclusively served the large national and interna- stores increased, and the importance of FFV in the super- tional retail chains. Some specialised/dedicated wholesalers markets’ assortment also strengthened. For example, the sourced the produce within their outgrower schemes and largest retail chain, Konzum, increased its FFV sales 5.5 complemented it with imported FFV to increase volume times from 2001 to 2003. and secure off-season supply. Other specialised/dedicated Currently (beginning of 2009), FFV is sold to Croatian con- wholesalers, e.g. Fragaria, had their own production sup- sumers mainly through the stores of large national and inter- plemented by their outgrower schemes to increase the vol- national supermarket chains. According to experts’ estima- ume supplied to the supermarkets. tion, the share of FFV sold through supermarkets accounts To increase the quantity and quality, and to decrease the for approximately 70% of their sales. Roughly 20-25% of seasonality of local supply, some supermarket chains started FFV is sold on green markets and 5-10% is sold by inde- to directly assist FFV growers within their preferred supplier pendent retail shops. programs. For example, Konzum granted investment sup- This development was accompanied by dramatic changes port by providing loan guarantees or loans for greenhouses in the procurement system of the supermarket chains. In and irrigation systems. the first half of the 1990s, FFV wholesale markets were, as Additionally, some of the large retail chains established their in socialist times, represented by informal truck markets. own systems of distribution, which allowed them to sub- Nevertheless, some specialised FFV wholesalers emerged stantially reduce transaction costs and create a competitive to serve the privatised retail chains, e.g. Konzum. In addi- cost advantage. tion, some regional “traditional wholesalers” with out- grower schemes evolved to supply green markets and small retail store chains. A traditional wholesaler compiles the 3. Empirical findings complete assortment by local and international sourcing, In this section we present the main findings on vertical and organises the delivery of products for an individual coordination in the Croatian FFV market based on inter- retail shop or the supermarket chain’s shops. For example, views conducted in early 2009. We begin by outlining our Fragaria (see section 3.3) started as an apple supplier and methodological approach (section 3.1). The next sub-section became a general wholesaler with outgrower-management presents the models of the FFV supermarket supply chain functions. that were identified in the interviews (section 3.2). Further- The rapid entrance of the foreign retail chains in 2001 ac- more, we describe how the farmers are linked with up- celerated the structural change in the procurement system. stream partners in the FFV supply chain by vertical coordi- Supermarkets increasingly broadened their assortment of nation and explain the role of farm assistance programs that FFV following a cost leadership strategy. Some supermar- are provided by supermarkets and wholesalers (section 3.3).

365 Agrarwirtschaft 58 (2009), Heft 8

Finally, we shed light on the further development of the is usually owned by a WS or a retailer (R). It is possible supermarket FFV supply chain (section 3.4). that a large farmer or cooperative delivers the produce di- rectly to a supermarket’s stores without entering the distri- 3.1 Methodology bution centre. Distribution of the fruit and vegetable as- This analysis is based on a survey that was realized through sortments to the supermarket stores (R/C) is organised by a semi-structured, in-person interviews. We proceeded in the logistic firm, a supermarket which has an own fleet, or the following manner. First we developed a detailed methodol- farmers themselves. ogy and fieldwork schedule based on existing studies on The structure of the FFV supply chain of Kaufland is very supply chains in transition countries, especially in the Croa- similar to (figure 1b). Kaufland is a German super- tian FFV (e.g. REARDON et al., 2004; LEAT and VAN BERKUM, market chain with 22 supermarket stores. Mercator is a 2003; VAN BERKUM, 2005; WORLD BANK, 2005). This Slovenian supermarket with 26 hypermarkets and 11 super- included gathering basic information on the actors involved markets in Croatia. Kaufland, as well as Mercator, organise in the FFV supply chain, as well as on the rules of the not only the domestic FFV procurement but also the pro- game, range of services, and constraints hampering vertical curement in foreign countries. Also, both Kaufland and coordination. This information allowed us to design a draft Mercator possess a distribution centre. For both companies, questionnaire. Based on a pre-test conducted in the field in the wholesaler or the farmer owns the distribution facility. Croatia, we refined our methodological approach and redes- The produce may be delivered directly from a FFV grower igned the questionnaire. or a grower cooperative to the retailer’s distribution centre, Interviews were conducted with the FFV procurement man- if the farmer is able to deliver a minimum quantity and agers of Croatia’s five major national and international quality (Kaufland is working directly with fruit farmers supermarket chains: Kaufland, Konzum, Mercator, Metro possessing at least 10 ha), and has access to a distribution and . Altogether, these chains account for approximately facility. Alternatively, the produce is delivered from the 70% of the FFV supermarket business. Whole- salers, grower cooperatives, individual growers and Figure 1. Structure of the FFV supermarket supply chain the national fruit growers association were also in Croatia interviewed. In addition, representatives from the Croatian Agricultural Extension Institute, the a) Product flow Croatian Bank for Reconstruction and Develop- ment, the Croatian Postal Bank and the Ministry of Agriculture were interviewed. The interviews were regional/ conducted based on a questionnaire composed of national questions regarding 1) the design of the firm’s logistic vertical coordination mechanism with its farm firm suppliers (structure of the firm’s farm suppliers, contract design), 2) the farm assistance program farm distribution facility distribution center supermarket stores (type of assistance provided, eligibility criteria, (owned by F or WS) (owned by R or WS) impact) and 3) the future development of the supermarket FFV supply chain and how this could be fostered by policy measures. The interviews were conducted in January 2009 in both the Croa- b) Kaufland, Mercator tian and English language. The length of the inter- views varied between 1 to 2 hours. FWS R R/C 3.2 The structure of the FFV supermarket R/C supply chain F R Several models of the supermarket supply chain for FFV in Croatia, from the fruit and vegetable one-year marktg. contract growers via supermarkets to the consumers, cur- c) Spar, Metro rently exist (figure 1). In general, the product flow is as follows (figure F WS R/C 1a): the harvested fruit and vegetables enter the distribution facility to be washed, sorted, graded R/C and packed. Next, the packed produce is transported F to a regional distribution centre, where quality con- d) Konzum (Agrocor) trol is generally conducted before the produce is one-year mktg. contract stored in a cooling facility and the individual as- farm assistance sortment for the supermarket stores is undertaken. The fruit and vegetable assortments are then dis- tributed to the supermarket stores. F WS R R/C

The distribution facility may be owned by a large F: farmer; WS: wholesaler: R: retailer; C: consumer farmer or farmers’ cooperative (F) or a dedicated wholesaler (WS). The regional distribution centre Source: own illustration

366 Agrarwirtschaft 58 (2009), Heft 8

FFV grower, possibly from a smaller farm, via a wholesaler gated supermarkets (with the exception of Konzum) do not with a distribution facility, to the supermarket’s distribution engage in any kind of farm assistance, e.g. providing inputs, centre. Thus, smaller farmers deliver to the supermarket’s trade or credit guarantee, machinery rental and technical distribution facility via wholesalers, and larger advice. farmers and cooperatives may deliver to the distribution In contrast, Konzum has loose one-year contracts with 10% facility directly. Kaufland transports the FFV assortments of its suppliers only. Also, Konzum provides farm assistance from the distribution centre to each store by an external of varying degrees and kind, which may include the provi- logistics firm, whereas Mercator owns its own fleet. sion of inputs, machinery rental or technical advice, and Metro is a German retailer/wholesaler with 6 cash & carry credits. Konzum distinguishes between 3 types of suppliers, stores and Spar3 is an Austrian supermarket chain with 6 and has the strongest relationships with “A” suppliers, fol- hypermarkets in Croatia. The FFV supply chains of Metro lowed by “B” suppliers and “C” suppliers, with whom and Spar differ slightly to that described above since they Konzum works only rarely. Konzum provides the most com- do not have their own distribution centres (figure 1c). In- prehensive assistance within outgrower schemes and has stead, Metro utilises one of its wholesalers as its logistical even acquired some farmers. partner, which compiles the assortments for individual stores Besides Konzum, growers are assisted by wholesalers, which in its distribution centre and organises transport to the super- are in fierce competition with supermarkets for the local markets. Alternatively, large suppliers might directly de- farmers’ supply. Mostly, the wholesalers provide inputs to liver to Metro’s stores. Similarly, Spar’s suppliers directly growers, and in exchange the grower delivers produce dur- deliver assortments to the chain’s stores. Metro’s and Spar’s ing the harvest season. respective FFV departments procure FFV domestically only, More comprehensive farm assistance, including the provi- and the FFV imports are completely organised by the whole- sion of credits, technical advice and machinery rental is salers. given by wholesalers, which serve a domestic niche market Konzum is a national chain which is the largest supermar- or an export market with produce of premium quality4. ket chain in Croatia, accounting for about 40% of all FFV For example, Fragaria is a domestic wholesaler with its own sales according to expert estimates. Konzum belongs to FFV production and input production (e.g. seedlings for Agrokor and owns a distribution facility, but also is in con- strawberries), which serves a niche market in Croatia and trol of 5 distribution centres and 650 supermarkets of various also exports produce of premium quality. Fragaria provides sizes all over Croatia. In addition, Konzum owns fruit and comprehensive support to its FFV growers by its own con- vegetable production facilities. Since the beginning of 2009, sultants, which provide advice in plant protection and plant the domestic FFV procurement of Konzum has mainly been technology. Also, apple growers are prepaid 25% of their carried out by Agrofructus, a holding of packing houses and expected harvest to finance machinery rental and workers buying stations which is owned by Agrokor. Prior to this, required for harvesting. Fragaria may also support its farm- Konzum’s domestic procurement was done by dedicated ers in investments. For example, together with a Swedish wholesalers that Konzum had acquired some years before. FFV importer, Fragaria gives financial support to the estab- However, Konzum organises the FFV import and is en- lishment of 100 ha of raspberry production, which will be gaged in FFV export as well. Konzum is also the owner of paid back by the farmers in produce within 5 years. Also, Velpo, a special distributor for hotels and restaurants. the company rents machines required for strawberry pro- Konzum mainly operates in a fully vertically integrated FFV duction to its farmers, who may pay back the rental fee in supply chain, since it has acquired and is still acquiring produce. further individual FFV producers, producer cooperatives and The low importance of farm assistance has several causes. specialised wholesalers which are combined in the holding The managers of the supermarkets point out that they Agrofructus (figure 1d). Any of the FFV supply chain models do not engage in farm assistance, since the margins in the given in figures 1b and 1c can be found within Konzum’s FFV business are low and thus the profitability of such FFV supply chain, since Konzum procures FFV directly investments is also low.5 In addition, fruit and vegetables from large farmers or independent wholesalers, which may production in Croatia bears high risks with regard to directly deliver the distribution centres. drought, hail and frost due to missing protection measures, 3.3 Vertical coordination of retailers with growers e.g. irrigation systems, hail nets and respective insurance schemes. Further, interviewees point out that the commod- Kaufland, Mercator, Metro and Spar have loose, one-year ity price risk is very high for FFV in Croatia. Due to miss- written marketing contracts with 100% of the FFV growers ing market information systems, the quantities of vegeta- who directly supply their produce to the supermarkets (fig- bles supplied, and thus prices, vary substantially between ures 1b and 1c). The main element specified in the contract is the payment scheme. A supermarket orders 24-28 hours 4 ahead of product delivery. A FFV grower under contract is This result is in line with BURMA and SARANARK (2006) on the expected to deliver the quantity demanded by the super- FFV supply chain in Thailand, who found that a supply chain market. However, a supermarket is not committed to pro- around an export company offers better chances for small- curing FFV from the grower under contract, and may holder involvement than the FFV supermarket supply chain. 5 source the produce elsewhere. In general, supermarkets pay One interviewee mentioned that a supermarket makes almost no within 40-60 days, whereas wholesalers’ payment may profits by selling FFV, though the FFV department is the most exceed 100 days after product delivery. Also, the investi- important with regard to supermarkets’ attractiveness. Con- sumers’ choice of supermarket is determined, to a high degree, by their preferences for a supermarket’s assortment and fresh- 3 Spar Croatia is 30% owned by Metro Croatia. ness of FFV.

367 Agrarwirtschaft 58 (2009), Heft 8 seasons.6 A further factor which might explain why super- might have to be stored in cooling facilities for some time, markets do not engage in farm assistance is that supermar- whereas vegetables grown in Croatia may be ordered in kets are not fully reliant on the domestic FFV supply. Su- smaller quantities, do not need to be stored, and therefore permarkets have the option to acquire FFV by imports from the freshness of the products is higher. foreign countries. These developments will lead to a decreased demand for 3.4 Future development of the FFV supermarket the general service provided by wholesalers. Therefore, wholesalers will drop out of the supermarket FFV supply supply chain chain unless they reorganise or specialise in serving a niche The future development of the Croatian FFV supermarket or the export market, e.g. with FFV of premium quality. supply chain is characterised by the increased importance Since primarily wholesalers provide farm assistance to of the supermarkets’ domestic procurement directly from growers, the importance of farm assistance will further the farmers and the decrease of dedicated wholesalers pro- decrease. Outgrower schemes involving comprehensive farm viding general services to supermarkets. assistance will remain important for Konzum, as will whole- All interviewees belonging to the 5 major supermarkets stated salers engaged in the marketing of premium quality FFV. If that they plan to further increase domestic procurement. Konzum is successful in its export business, Konzum might According to interviewees’ estimates7, domestic procurement further extend its outgrower scheme and thus the provision accounted for 50-70% of all FFV sold through supermar- of farm assistance. kets in 2008. For example, the share of imported apples of One of the major factors hindering increased local pro- all apples sold in Croatia amounted about 50% in 2007 curement in the FFV supermarket supply chain is that the (MAFWM, 2007; ROBBRECHT, 2004 and 2007). vast majority of FFV is cultivated on orchards smaller than 9 Mercator, Metro and Spar aim to increase domestic pro- 1 ha . Small farmers do not meet the minimum quantity curement directly from the farmer, which currently ac- requirements of the supermarkets, and investment costs of a counts for between 60-70% of domestic procurement (not distribution facility are prohibitively high. Therefore, small including bananas, citrus and tropical fruits), and to de- farmers remain outside the FFV supermarket supply chain crease domestic procurement through wholesalers. unless they organize themselves. Metro and Spar planned to establish a joint distribution For small farmers to enter the FFV supermarket supply centre in September 2009 and to extend their respective chain, it is essential that they organise and jointly invest in FFV departments, including their engagement in FFV im- a distribution facility which allows them to compile assort- port. Thus, the main functions of the wholesalers will be ments of the required quantity. taken over by Metro and Spar themselves. However, in Croatia the FFV growers’ degree of organisa- Konzum has planned to increase sourcing from its own tion is low. According to the database of the CROATIAN production plants, implying that direct business with other ASSOCIATION OF COOPERATIVES (2009), there are 82 fruit farmers will be reduced. Thus, Konzum aims to mainly pro- cooperatives, 29 vegetable cooperatives, and 41 fruit and cure FFV from its own production and from production vegetable cooperatives in Croatia. Though, according to an under future outgrower schemes, supplemented by the supply expert’s opinion, 98% of the listed cooperatives do not of its own wholesaler Agrofructus. Further, Konzum will professionally participate in the FFV market. 8 increasingly engage in the export of FFV , and has already Past experience with cooperatives in Croatia’s FFV sector started to establish a system of buying stations throughout shows that organising farmers into cooperatives presents the neighbouring countries of former Yugoslavia. particular problems. Cooperatives have a long tradition in The major driving forces of increasing local procurement Croatia, tracing back to the nineteenth century, but many are consumers’ strong preference for freshness, locally farmers have had bad experience with cooperatives during produced FFV, and the higher flexibility of domestic com- the communist era, thus the farmers’ willingness to organ- pared to international procurement. As an example, vegeta- ise in cooperatives is low. There are several examples of bles originating in Spain have to be ordered in trucks, and cooperatives which failed because their members could not reach a consensus on how to manage the cooperative due to 6 For example, an interviewee reported that this just recently high distrust of each other. Also, some farmers consider a happened in the case of cabbage. During the previous harvest, cooperative to be a point of last resort (retreat position) the supply of cabbage was low, and thus cabbage prices were through which they sell when all other marketing channels high. This induced the farmers to grow a lot of cabbage and thus the supply in the subsequent harvest was high and the 9 price was low. There were 304,783 family farms producing fruit in 2003, out 7 of which 13,311 (4.36%) produced fruit with modern technol- The share of domestic procurement varies depending on the ogy on plantations. About 44% of the family farms cultivated product and the season. For example, bananas and oranges are fruit on orchards and plantations smaller than 1 ha, and 23% 100% imported. Apples are imported more in the time period between 1 and 3 ha. (MAFWM, 2007). Also, there are 132 le- lasting from March until the new harvest starts due to missing gal entities, of which about 90% have fruit plantations of over cooled storage facilities for domestically produced apples. In 10 ha under cultivation. In 2003 in the vegetables sector, there general, domestic procurement is higher during summer and were 138,428 family farms, of which 46% cultivated a produc- lower during winter time. Currently, fruit plantations account tion area smaller than 1 ha, and 41% of the size between 1 and for 2.2% and vegetable plantations for 9.3% of total agricul- 5 ha. Further, there were about 300 legal entities, out of which tural land (MAFWM, 2007). 42% cultivated more than 30 ha of production area with vege- 8 There is large potential for FFV production in Croatia, which tables (MAFWM, 2007: 101-102). In the meantime, the size offers excellent opportunities for export to the EU since Croa- of the family farms might have increased to some extent due tia’s harvest season starts earlier than in most EU countries. to a governmental incentive program for investments in orchards.

368 Agrarwirtschaft 58 (2009), Heft 8 are exhausted. There are numerous examples of cooperative and b) have access to a distribution facility. Smaller farmers members who also have individual contracts and business generally do not meet these requirements and, therefore, relationships with wholesalers and retailers, and thus directly have to supply their produce via wholesalers to supermar- weaken the negotiation power of their cooperative. kets, implying that a part of the margin is attributed to the Furthermore, interviewees pointed out that establishing a middleman and reducing the farmer’s revenue. new cooperative under current market conditions is very To foster the further development of the FFV sector in difficult in Croatia. The investment costs of a distribution Croatia, we encourage the Croatian government, the Euro- facility are high, and particularly smaller farmers lack busi- pean Commission and international lenders to promote the ness relationships with retailers and have insufficient man- organisation of farmers and their joint investment in a dis- agement knowledge. tribution facility. Therefore, the Croatian government should create a legal framework for producers to organise not only 4. Conclusions in cooperatives, but also in more hierarchical grower orga- nisations. Previous studies provide evidence that vertical coordination The European Commission could best foster the organisa- is important in the FFV sector and that FFV contracting is tion of FFV growers in Croatia by speeding up the process increasing rapidly with the development of a modern retail for Croatia to become a member of the EU. First, this sector in CEE countries. Studies on the FFV supermarket would put additional pressure on Croatian FFV growers to supply chain in Croatia argue that contracts between overcome their distaste to organise since the EU market suppliers and supermarkets include the provision of farm organisation for FFV allows financial support to be attrib- assistance programs and/or the establishment of outgrower uted to FFV growers only through grower organisations. schemes. Also, since EU legislation allows farmers to organise be- The conclusions of our study are different, however. We yond a cooperative in producer organisations according to find that the degree of vertical coordination is rather low in EU regulation 2200/96, EU accession puts pressure on the this market. In particular, our findings suggest that the lead- Croatian government to create a legal framework for pro- ing model of vertical coordination between FFV growers ducer organisations. and supermarkets is restricted to loose, one-year bilateral If the aim is to keep even smaller farmers in the FFV contracts which mainly specify the terms of payment with- supermarket supply chain, then investments of organised out providing any kind of farm assistance. An exception to FFV growers in a distribution facility, which is the primary this is the largest Croatian supermarket, Konzum/Agrocor, bottleneck, should be supported financially by e.g. credit which has a dominant position in the market and is also guarantees or the provision of investment funds. vertically integrated with some farmers. Since the access of exporters from Italy and Spain to the Our findings reveal that dedicated wholesalers are in gen- Croatian market will improve even more when Croatia eral more vertically integrated with their supplying fruit and becomes a member of the EU, in the interim it is important vegetable growers by granting farm assistance. Some spe- that a competitive local procurement and logistic system be cialised wholesalers targeting a domestic niche or the ex- established to integrate local farmers in the modern supply port market provide even more comprehensive farm assis- chain. tance, thus offering better chances for small farmers to be linked to the modern FFV supply chain. Also, technical assistance should be provided to the FFV growers regarding managing production and commodity Also, our results do not confirm the finding of a previous price risk. The insufficient availability and affordability of study stating that the largest supermarket chains fully verti- efficient risk sharing instruments in Croatia restrict efficient cally integrate with dedicated wholesalers through acquisi- risk management and generate a highly uncertain business tion to have their own preferred supplier programs. Accord- environment. There is a high potential for upgrading the ing to our results, this holds for Konzum only, and other currently offered agricultural insurance in Croatia, particu- large supermarket chains in Croatia have not acquired dedi- larly concerning vegetable production and greenhouse in- cated wholesalers. Instead, large supermarket chains and surance. To tackle this issue, the Croatian Agricultural Exten- the dedicated wholesalers are in fierce competition for sion Service should provide education and advisory support obtaining produce from the FFV growers. Our findings to the fruit and vegetable growers. By lowering production suggest that in the future it can be expected that the whole- risk, FFV growers might become more attractive for super- salers drop out of the FFV supermarket supply chain unless markets that provide farm assistance programs. they specialise in a niche or the export market. Since whole- salers are also supplied by smaller farmers, the displace- In future research it should be more comprehensively inves- ment of wholesalers implies that the share of smaller farm- tigated why farm assistance provided in the FFV sector is ers in the FFV supermarket supply chain will decrease particularly low, and is significantly lower than in other further if smallholder supermarket supply chain participa- sectors, e.g. in the Croatian sugar or grain sectors. This tion is not especially promoted. analysis should also take into account the role of govern- Supermarkets seem to have a strong interest in further in- mental market interventions in the different sectors and the creasing the local procurement of FFV, especially directly importance of production and price risk. from larger farmers. One of the major factors hindering this Our conclusion should be further tested by investigating development is that the vast majority of FFV is cultivated vertical coordination in the FFV supply chain in other for- on orchards and plantations smaller than 1 ha. For FFV mer Yugoslavian countries, especially Serbia and Mace- producers to directly link to the supermarkets, they need to donia, which, like Croatia, have excellent FFV production a) meet the minimum quality and quantity requirements, conditions.

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Also, the features of a suitable model for a FFV producer Agriculture and Rural Development Plan. URL: organisation, which especially accounts for the situation in http://www.strategija.hr/Default.aspx?art=641&sec=2. the FFV sector in Croatia, should be defined in more detail REARDON, T., G. VRABEC, D. KARAKAS and C. FRITSCH (2003): based on the experiences gained in existing cooperatives The Rapid Rise of Supermarkets in Croatia: Implications for and pilot projects. For example, growers could be organised Farm Sector Development and Agribusiness Competitiveness in a producer organisation which has an established, suc- Programs. Report for USAID, DAI and Michigan State Uni- versity, September. URL: http://www.eastagri.org/meetings/ cessful wholesaler as one of its members. This would in- docs/meeting7/supermarkets.pdf. crease the chance of the producer organisation being suc- ROBBRECHT, J. (2007): Improving the Institutional and Commer- cessful since the wholesaler’s existing relationships with cial Strength of the Croatian Fruit Sector. Report on market supermarkets, as well as knowledge of management issues, research 2006 – Croatian fruit production sector, prepared for can be utilised and credibility vis-à-vis bank loans might be the Croatian Ministry of Agriculture, Forestry and Water Mana- higher. gement and the Croatian fruit growers association (HVZ). Mimeo. References – (2004): Croatian Vegetable Sector Project, Report on market research 2004. Report prepared for the Croatian Ministry of BURMA, J. and J. SARANARK (2006): Supply-chain Development Agriculture, Forestry and Water Management and the Croatian for fresh fruits and vegetables in Thailand. In: Ruben, R., M. vegetable growers association (ZUHP). Mimeo. Slingerland and H. Nijhoff (2006): The Agro-Food Chains and SWINNEN, J.F.M. (2005): When the Market Comes to You – Or Networks for Development. Springer, Wageningen: 119-127. Not; The Dynamics of Vertical Coordination in Agri-Food CROATIAN ASSOCIATION OF COOPERATIVES (2009): Register of Chains in Transition. Final report on “Dynamics of Vertical Cooperatives. Zagreb, Croatia. URL: http://www.zadruge.hr/ Coordination in ECA Agri-Food Chains: Implications for Policy evidencija.aspx?t=zadruge (accessed June 2009). and Bank Operations”. World Bank, Washington, DC. DRIES, L., T. REARDON and J. SWINNEN (2004): The Rapid Rise of VAN BERKUM, S. (2005): Restructuring and Vertical Coordination Supermarkets in Central and Eastern Europe: Implications for in the Dairy Sector in . In: Swinnen, J.F.M. (ed.): Case the Agrifood Sector and Rural Development. In: Development Studies: the Dynamics of Vertical Coordination in Agrifood Policy Review 22 (5): 525-556. Chains in Eastern Europe and Central Asia. Working Paper EATON, C. and A. SHEPHERD (2001): Contract Farming: Partner- No. 42, ECSSD, World Bank, Washington, DC: 167-189. ships for Growth. FAO Agricultural Services Bulletin No. 145. WORLD BANK (2005): The Dynamics of Vertical Coordination in Rome, FAO. Agrifood Chains in Eastern Europe and Central Asia: Implica- HANF, J.H. and A. PIENIADZ (2007): Quality Management in Supply tions for Policy and World Bank Operations. ECSSD, World Chain Networks – the case of . In: International Food Bank Publications, Washington, DC: 167-189. and Agribusiness Management Review 10 (4): 102-128. LEAT, P. and S. VAN BERKUM (2003): Dairy sector analysis. In: Contact author: van Berkum, S., S. Davis and S. Popov: The Romanian Agri- LINDE GÖTZ food Chain. On the Road to Accession. Ministry of Agricul- Leibniz Institute for Agricultural Development in Central and Eastern Europe (IAMO) ture, Forests, Water and Environment, . Theodor-Lieser-Straße 2, 06108 Halle (Saale), Germany MAFWM (Ministry of Agriculture, Forestry and Water Manage- phone: 03 45-29 28 327, fax: 03 45-29 28 299 ment of Croatia) (2007): IPARD Programme 2007 – 2013, e-mail: [email protected]

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