Development Policy Review, 2002, 20 (4): 473-485

The Rapid Rise of Supermarkets in : Impact on Horticultural Markets Irene Alvarado and Kiupssy Charmel∗

The supermarket sector in Costa Rica used to be a small retail segment, financed primarily by domestic capital and consisting in the 1980s mainly of supermarket co-operatives in the capital city focused on the upper- income segment of the market. It is now a major segment, dominating half the retail sector, expanded to towns and poorer customers and composed mainly of private firms in joint ventures with foreign capital. Moreover, it has been drawn into the regional economy, with the formation of the giant chain of CSU, La Fragua and Royal Ahold, operating in five countries. This rapid development has affected various agrifood supply chains through innovations in procurement systems, as illustrated by fresh fruit and vegetables.

The rise of supermarkets has been swift and extensive in Costa Rica during the past decade, shifting from a minor retail segment in the 1980s to a 50% share of the national retail sector today. This exceeds the share of the middle class and the capital city in the population, implying that supermarket sales are by no means limited to the well-off, but also include poor consumers and areas. A survey by CACIA, the Costa Rican food industry association, found that 30% of the rural towns with populations of 25,000 or more already have a supermarket (Montero, 2001). Thus, supermarkets are not just a phenomenon of the large cities and the richer consumer market segment but a broad, dominant retailing reality. This article looks at the development of the retail sector in Costa Rica over the past several decades, focusing on the recent rise of supermarkets that has brought the sector to its present importance. It describes the participants, analyses the patterns and determinants of the supermarkets’ expansion, and discusses their strategies in relation to, and impact upon, agrifood marketing systems, in particular on the fresh fruit and vegetables (FFV) sector. It concludes with observations concerning the challenges that this development poses for small farms and firms.

Supermarket development in Costa Rica

The stages

The development of supermarkets in Costa Rica took place in three stages. The first, their establishment, occurred in the early 1960s through the early 1980s. During this period, most trade in agrifood products took place in neighbourhood or central plaza

∗ Irene Alvarado ([email protected]) and Kiupssy Charmel are at Universidad EARTH, Costa Rica.  Overseas Development Institute, 2002. Published by Blackwell Publishers, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA. 474 Irene Alvarado and Kiupssy Charmel markets, and in small shops (known as ‘dispensarios’ or ‘pulperías’). There were seven supermarket chains, all financed with domestic capital, and a few co-operatives. The second stage, between 1980 and 1997, was characterised by the rapid growth and organisational development of the supermarket chains. The number of stores increased by 155%, 33% of it in the 1980s and 87% during 1990–95 (Table 1). Co- operatives represented a full 59% of the supermarkets in the country in this period.

Table 1: Number of stores in supermarket chains, 1980-2002

Chain 1980 1990 1995 1997 2000 2001 2002a CSU 14315277909197 Consucoopb - 2 80 57 57 53 - Periféricos 9 13 18 17 17 15 15 AutoMercado 3455667 PriceSmart - - - - 3 3 3 Rayo Azul n.a. 8 2 3 - - - Tikal 5 9 9 11 - - - Yahoan 1111111 Cecoop/Supercoopb 45 37 37 39 36 36 36 CCM - - - - 6 11 63 Cadena detallista 8 8 7 7 5 5 5 Total 85 113 211 217 221 221 227 % growth rate 32.9 86.7 2.8 1.8 0.0 2.7 Notes: a) Up to June 2002; b) Unión de Cooperativas. Source: Websites and interviews.

The third stage, begun around 1997, is distinguished by the chains’ consolidation and multinationalisation. The number of stores increased by only 4.6% from 1997 to mid-2002 (Table 1). Nevertheless, important changes occurred in the composition of the sector. Co-operative supermarkets lost 60% of their stores and at present constitute only 5-6% of the sector’s sales volume. The number of stores operated by private supermarkets increased by 63%, and two firms (CSU and CSM, discussed below), both with mixed (domestic/foreign) capital, achieved 81% of the sector’s sales. There was also rapid multinationalisation, with foreign firms exploiting strategies of low prices and heavy advertising (Cordero, 2001b).

The leading actors

At present there are seven leading chains, totalling 98% of the country’s supermarket sales (see Table 2). One is struck immediately by the extreme concentration in the sector, with only two chains, Corporación de Supermercados Unidos (CSU) and Corporación Centroamericana de Mercados (CCM), both Costa Rican/foreign joint ventures, taking 81% of all sales. The seven firms are described briefly below. Costa Rica’s Supermarkets and Horticulture Markets 475

Table 2: Main supermarket chains’ shares of sales (%)

Chain Share of sector sales CSU 62 MegaSuper 19 Cecoop/Supercoop 6 AutoMercado 5 PriceSmart 4 Periféricos 2 Others 2 Source: Authors’ interviews with chains.

The absolute leader is CSU, which started in 1960 with domestic capital. Today, it forms part of the Central American Retail Holding (CARHCO) group with mixed domestic/foreign capital. CARHCO is an alliance of CSU, the La Fragua group of , and the multinational retailer Royal Ahold of the Netherlands (Solís, 2002), and is the largest chain in the region (see below). The CSU portion of CARHCO includes the supermarket chains: Palí, focused on low-cost, high-volume marketing to lower-income consumers; Más x Menos (‘More for Less’), focused on middle-class consumers; Hipermás, hypermarkets; and Maxi Mercado, a single store that sells wholesale mainly to small-scale retailers. The CSU chains constitute 42.7% of all supermarket stores in Costa Rica, with 62% of total sales. La Corporación Centroamericana de Mercados (CCM) belongs to the Zeta group (a Central American multinational with a range of activities including retailing and construction, based in Costa Rica) and is the new actor among the frontrunners. Its rapid penetration of the retail market in the late 1990s has brought it to a 28% share of supermarket stores and 19% of total sales in just a few years. The chain includes the supermarket chain MegaSuper, and in early 2002 CCM acquired the Consorcio Cooperativo de Consumo Cartaginés (Consucoop), composed of four national savings and credit co-operatives operating since 1984 in the rural areas. CCM began its regional expansion in late 2001 with the opening of a store in (Table 3). Note that these two giants together control 81% of the supermarket sector in terms of sales. And given that supermarkets make up 50% of overall food retailing, this means that 40% of all Costa Rican food purchases come from these two chains. In third place is Co-operative Cecoop/Supercoop, composed of 23 co-operatives, 3 of them supermarkets and the rest coffee co-ops and small retail shops. It has 16% of the supermarket stores in the country and 6% of sales (O. Murillo, director of Co- operative Cecoop/Supercoop, pers. comm. April 2002). The fourth largest chain is La Corporación de Supermercados Los Periféricos, started in the late 1960s with domestic capital. In 2001, it ran into financial problems and was acquired by Perimercados S.A., owned by domestic capital (Solís, 2002; C. Hernandez, director of the Marketing Department, Corporación Los Periféricos, pers. comm., April 2001). Its market share is 2% and it has 6.6% of the supermarket stores (Table 1). 476 Irene Alvarado and Kiupssy Charmel

Fifth is the Supermercados Alonso y Cía, with the AutoMercado stores financed by domestic capital. It has operated since the 1960s, and has 3% of the supermarket stores and 5% of the sales. But it should be noted that it has 67% of the upper middle-class market, and is thus a niche retailer (J. Bozza, Marketing Director, AutoMercado, pers. comm., April 2002). Sixth is the US multinational retailer PriceSmart, which started in Costa Rica in 1999 and at present has 1.3% of the stores and 4% of supermarket sales. It operates as a ‘warehouse’ for retailers, a membership buyers’ club. The last chain is Detallista, started in 1965 with domestic capital. It acts as a national distributor for small shops, and has five supermarket stores aimed at lower- income consumers (A. Meléndez, General Manager, pers. comm., April 2002).

Formation of regional-multinational chains in Central America1

The above discussion of growth in the Costa Rican supermarket sector is best understood if one looks at it in the Central American context. The expansion at a regional level began circa 1998, as shown in Table 3. It started in the two economic poles, Costa Rica and Guatemala.

Table 3: Chains’ expansion in Central America

Firm CSU Grupo Paíz Mega Super PriceSmart Year started 1960 1928 1999 n.a. Year started in 1998 1998 2001 n.a. C.A. Present in: Costa Rica, Guatemala, Costa Rica, Costa Rica, El Nicaragua and and El Nicaragua Salvador, Honduras Salvador Guatemala and Honduras Original home CSU Paíz, Guatemala Zeta, Costa Rica PriceSmart firm Current home CARHCO CARHCO Zeta PriceSmart firm Notes: na: not available; C.A.: Central America. Source: Authors’ interviews.

First, CSU, at that time financed only with Costa Rican capital, knew how to benefit from its national advantages in the 1990s, including its long-standing stability (Costa Rica was the only country in the region that was not immersed in conflict in the 1980s), its relatively good economic situation, and government policies focused on promoting exports and education. The richer and better educated consumer drove CSU

1. This subsection focuses on CARHCO, but the reader should note that there is another rapidly growing but much smaller regional chain, PriceSmart, based in San Diego, CA. It has low-price ‘warehouse’-type supermarket stores in several Central American countries: 4 in ; 3 each in Costa Rica, , and Guatemala; and 2 each in and Honduras (www.pricesmart.com). Costa Rica’s Supermarkets and Horticulture Markets 477 into meeting demands for quality, diversity, and services which led to its becoming more competitive (Barrantes et al., 1998a). The Costa Rican proving grounds formed CSU into a major retail force in the region and eventually more than half of the new regional chain CARHCO: CSU now has 130 supermarket stores in Costa Rica, Nicaragua, and Honduras, with annual sales of $750 million (Solís, 2002). They include Más x Menos, Hipermás, and Maxi Mercado (in Costa Rica), La Unión (in Nicaragua), Maxi (in Honduras), and Palí (regionally) (Arguedas, 2001, cited by Rojas, 2001a). Second, the La Fragua Group, formerly only with Guatemalan capital, and with annual sales of more than $600 million (Solís, 2002), started expanding regionally at about the same time as its Costa Rican rival. It joined forces with Royal Ahold in 1999, at which time it had 135 supermarket stores, in the chains: Paíz, Despensas Familiares, Hiperpaiz, Clubco, Gala, and Paico – a similar assortment of formats to those of CSU, covering the diverse market segments. The first five are present in Guatemala, and Despensas Familiares is in El Salvador and Paico in Honduras (Canales de Distribución Centroamericana, 2000). In 2001 there were rumours of Wal-Mart possibly entering Central America. Apparently as a pre-emptive response (Solís, 2002), CSU, La Fragua, and Royal Ahold formed the Central American Retail Holding Company (CARHCO) in January 2002. Royal Ahold is a world leader in food retailing with 9000 stores in the US, Europe, Asia, and Latin America, and $60 billion of annual sales. Suddenly – in January 2002 – CARHCO emerged as one of the largest retail chains in Latin America, with 253 supermarkets (181 of them discount stores) and annual sales of $1.3 billion.

Differentiation of formats for market segments

In recent years and in particular in the third phase (since 1997) the Costa Rican consumer has experienced dynamism in the retail sector with the emergence of new store formats and marketing strategies. In particular, chains have added hypermarket formats with their high-volume low-priced products – to win over the poorer consumer and the middle-class consumer hit by recession – to the more traditional supermarket format, which was aimed at middle- and upper-class consumers. The above is illustrated by an analysis of monthly consumer traffic in the Central Valley where the majority of the population lives, and which has the highest urbanisation rate; it contains 1.3 million adults, and the provincial capital cities, San José, Alajuela, Cartargo, and Heredia. The data compare May-June 1999 (sample of 1503 consumers) and October-November 2001 (2049 consumers). Note that the ‘shock’ between the surveys was the recession starting in late 1999. The data analysed come from Urban & Associates, Inc. (1999 and 2001). The term ‘supermarkets’ used throughout this volume for medium-large format stores and very large hypermarkets needs to be broken down into two here. Table 4 shows that hypermarkets and small shops gained ground, while supermarkets lost some ground, among all income groups. 478 Irene Alvarado and Kiupssy Charmel

Table 4: Level of consumer traffic by socio-economic level and type of retail format, comparing 1999 and 2001

Income group Hypermarkets Supermarkets Convenience Small stores stores Lower-income 1999 1 46 59 6 2001 3 32 65 29 % change 200 -30 10 383

Middle-income 1999 3 73 55 5 2001 8 64 52 22 % change 167 -12 -5 340

Upper-income 1999 14 106 31 2 2001 25 93 31 15 % change 79 -13 0 650 Source: Based on analysis of data from Urban & Associates, Inc. (1999 and 2001).

The fact that small stores were more frequented by upper-income consumers is because of the rapid development in the past few years of convenience stores located in combination with gasoline stations mainly in the middle- and upper-income neighbourhoods. By contrast, the increase in the use of smaller stores among the lower- and middle-income households could be because there is some access, although in practice quite limited (see below), to consumer credit in the small shops. A preference is also shown by all income groups for the large-format, low-price hypermarkets such as Palí, perfectly positioned to grow during a recession because of its low prices. But the poorest stratum showed the highest rate of increase in shopping at hypermarkets (15%) – mainly in discount stores such as Palí of CSU and Supercoop. By contrast, middle-income and richer consumers prefer middle-format-type supermarkets – Más x Menos, Hipermás, MegaSuper, PriceSmart and AutoMercado. They are attracted by the convenience (in hours and location) and the variety and quality of the products in these stores, and are less focused on low cost (Urban & Associates, Inc, 2001). The supermarkets compete with the smaller stores by offering longer hours than in the traditional small stores, more services, and access to product promotions with substantial price discounts (Camacho, 2000). An example of a service is the customer loyalty card offered by CSU: the customer accumulates points over his/her purchases that can be exchanged for a wide variety of products – essentially reducing the overall cost for the regular customer. The customer can also pay by cheque or credit card in the supermarket, which is popular because the s/he does not need to carry much cash. The small stores mainly require cash. Of course, they have their own customer services that help them compete with the supermarkets, in particular consumer credit. We undertook a survey of small stores in rural areas in 2001: 73% of them offered consumer credit (without interest and with a payback period geared to the client) to regular customers, who averaged 10-15% of the total. This is not usual in urban small Costa Rica’s Supermarkets and Horticulture Markets 479 shops. Nationally, retail credit has a tiny effect on consumers: a very rough calculation is that a mere 4% of Costa Rican consumers receive retail credit from small shops, based on 50% of the retail sector being dominated by supermarkets and thus 50% by small stores, 73% of which offer credit to 10% of their clients. This figure is probably even twice or three times the actual figure, because urban small shops generally do not offer credit. Finally, a major way that supermarkets are driving down costs to the consumer – especially to win over the middle, lower-middle, and poorer consumer segments – and differentiating their product from that of smaller stores is the use of ‘private label’ products (brand of the supermarket chain). (Note that this is also used as a tool in relations with suppliers, discussed further in the FFV subsection below.) Private-label products help one chain differentiate itself from other supermarket chains as well as from small shops. They also reduce the chain’s costs, as there are lower marketing and advertising costs but similar quality compared with leading brands (Exprua, 1998). The private label is typically priced about 10% below the national brands in Costa Rica (Castillo, 2000; and M. Sáenz, MegaSuper Moravia, Moravia, San José, pers. comm., May 2001). The first private labels were established about 10 years ago by CSU, for cereals and beans, cooking oil, and other dry goods (Castillo, 2000). Other supermarket chains, including PriceSmart, CCM, and Cecoop, have since instituted private labels. Sáenz (pers. comm., May 2001) notes that private labelling started with staples because that is where the Costa Rican consumer is most price-sensitive. And poorer shoppers are, of course, more price-sensitive than richer ones, and this affects the relative importance of private-label products in the shopping trollies of different consumers. On average, among products for which poorer consumers buy private labels, 1 out of 3 items they buy are private label; for middle and richer consumers, it is only 1 out of 5. For FFV in particular, the differences are even more pronounced, as the poor stratum tends to buy only private label where these are available, whereas only 3 out of 5 is the frequency for middle-income and richer consumers – still higher than for staples, but less than the frequency exhibited by the poorer shoppers.

Procurement systems and effects on food marketing systems

To step up efficiency and meet consumer needs, in the ‘third phase’ supermarkets have moved towards new procurement and marketing practices. We begin by discussing general changes in relations with suppliers and marketing strategies, and then focus on the case of fresh fruit and vegetables (FFV). In the first and second phases of supermarket development, say in the 1980s, the supplier went to the supermarket office not to negotiate, but simply to inform the supermarket buyer of the conditions of sale and where and when product exhibitions or promotions would take place (Montero, 2001). The situation started to change in the mid-1990s, as supermarkets began focusing on improving service to the consumer and competing with each other in a consolidating sector. They used new information systems to track consumer purchases and followed new marketing concepts such as optimal use of sales space and product category management, which provided information advantages regarding how best to market products. The marketing information and strategies strengthened the hand of the supermarket as buyer (Montero, 2001). They 480 Irene Alvarado and Kiupssy Charmel

…became the advantage that converted the retailer into a powerful and unbeatable contender at the time of purchase. No one knows better than he what happens to the product on the supermarket shelf. And it is not easy for the supplier to gain this information. The items are handled with the logic of the whole system, in which a product cannot be evaluated outside the context of its family, category, and its sector. The dominion of this context is the chasse gardée of the supermarket manager.

This marketing change not only affected how the supermarkets treated the consumer, but also the organisation of the supermarket chain itself. There was a general move towards decentralisation to bring down costs, make the chain more flexible and responsive, and improve co-ordination along the supply chain. The aim was also to increase the capacity of the supply chains to handle large volumes while maintaining quality standards (Gerencia, 2000). An example is the institution of the private-label system discussed above. The strategy supermarkets employ of creating private-label products and placing them in advantageous positions on the shelves, has created tensions with the suppliers of branded products (Rojas, 2001a). Brand leaders feel that this competition puts them at a disadvantage, as they have invested heavily in advertising and promotion and are unable to compete on price alone. One effect of the rapid development of the private-label system is that many producers (such as grower-shippers and processing firms) have experienced a decline of their brands and have become ‘maquiladoras’ (a term in popular use for the small/medium clothing manufacture firms in Central America and Mexico that assemble products for large global brand companies). This was the case of Café Segura for whom adding the production of private-label products for supermarkets was beneficial, allowing it to use manufacturing capacity and increase sales and profits by eliminating the costs of distribution and advertising (Director of Café Segura, pers. comm., April 2001). The supermarket’s private label also puts pressure on suppliers to reduce costs, as noted by the President of the Food Industry Chamber of Commerce. In 2001 a ‘price war’ between the two largest supermarket chains (CSU and CCM) drove down suppliers’ prices (Ulett, 2000). Rafael Abrue, of Derivados de Maíz, S.A. (Maize Products) notes that the low-price strategy of supermarkets has driven down prices for suppliers and limited their bargaining power. This forces the suppliers to become more efficient (Ulett, 2000). Supermarket chains also use private labels to break the perceived monopoly or oligopoly power of suppliers. For example, Parmalat (a giant dairy products multinational based in Italy) entered a joint venture with a medium-sized dairy products firm in Costa Rica (Prado) to supply a minor share of the dairy products market under private label to CSU, thus competing with the dominant dairy products co-operative ‘2 Pinos’ (‘two pines’, the label and symbol).

Focus on FFV

In the 1990s, the leading chains began to make great efforts to develop their FFV sections as a competitive tool to win consumers, since fresh produce sections are important to the general image of supermarkets and are high-profit centres. Different fruit and vegetables were grouped into categories to follow category management (M. Costa Rica’s Supermarkets and Horticulture Markets 481

Sáenz, pers. comm., 2001). This allowed longer-term, sustainable relations with suppliers, plus the development of a new structure of intermediation, crucial to the change brought about by the supermarkets in the FFV sector in Costa Rica. The main innovation undertaken by the leading two chains over the past few decades, with rapid development over the past decade, has been the move from the use of traditional wholesalers and spot markets to procure FFV to the use of specialised wholesalers. The top two chains (CSU and CCM) have exclusive contracts with these specialised wholesalers, as does AutoMercado, a top-end niche supermarket chain. Excluding CCM and AutoMercado, CSU (to a very limited extent) and the small supermarket chains also use other specialised wholesalers such as Frutica and Frumosa (small independent FFV wholesalers), Dole (US), which sells bananas and lettuce (including fresh-cuts) to CSU, and Fruta Internacional, mainly for imported fruit such as apples. In addition, small supermarket chains (and the small shops) still use the traditional wholesalers and spot markets. These non-traditional wholesalers took over from the traditional wholesalers because they were able to supply in the requisite volumes and quality to the supermarkets. They work closely with supermarkets to assure them a sufficiently diverse, high quality, and consistent supply of FFV. The wholesalers buy produce on behalf of the supermarkets and form a ‘pool’ of suppliers by produce category. The pools include farmers who have contracts with the wholesalers to meet the supermarkets’ private quality standards. Moreover, these non-traditional intermediaries (especially Hortifruti and Interfrutd working with the two dominant chains) are responsible for managing the produce section in the supermarket itself, employing sales staff, maintaining the equipment and shelves, and managing the advertising (Sáenz, 2001). As part of category management, supermarkets in Costa Rica establish quality standards by category, and these are applied on their behalf by the wholesalers. The standards pertain to appearance, degree of development (cleanliness, physical aspect, colour, damage from insects, disease, equipment and so on, water content, odour, texture, firmness, ripeness, as well as size and tolerance to packing (Cordero, 2001). The standards and their implementation contracts have obliged the wholesalers to become more efficient, reducing costs and improving relations with their pools of producers. In some cases, the wholesalers need to take on agricultural extension functions – with field visits, agreements on production schedules and cost control programmes – supply-side actions which assure them of continuity of product delivery and two-way information flows so that they can spot problems that need resolving (C. Rodríguez, FFV sector, in Limón, a horticultural production zone in the east of Costa Rica, pers. comm., May 2001). The innovative relationships between ‘dedicated’ specialised wholesalers and the two leading retailers, and between wholesalers and growers, operate as follows.

Interfrutd and MegaSuper (CCM) Interfrutd has an exclusive contract with MegaSuper, which essentially fully outsources the produce section of its stores to Interfrutd via a management concession under which Interfrutd pays rent for the space. Interfrutd sells under its private label, which then doubles as the ‘private label’ of FFV for MegaSuper. Interfrutd contracts production from a pool of growers in much the 482 Irene Alvarado and Kiupssy Charmel same way as does Hortifruti (see below) and also buys produce from traditional wholesalers and other specialised wholesalers, as discussed above.

Hortifruti and CSU2 CSU has its own ‘dedicated’, specialised wholesaler of FFV. Hortifruti supplies the great majority of the FFV sold in CSU, under its private label ‘Hortifruti,’ which also doubles as the private label of the retailer. CSU (with 62% of the supermarket sector) is one of three firms in a large Costa Rican holding group. A second of the three is Corporación de Compañías Agroindustriales (CCA), which is itself made up of a set of large companies that supply the majority of products sold in CSU in certain categories, mainly perishables: (i) Hortifruti (FFV); (ii) Industrias Cárnicas Integradas (meats); (iii) Granja Avícola Ricura (poultry); (iv) Panificadora el Hornito (bread); (v) Alimentos Naturales (organics); and (vi) Decoinsa. The companies supplying meats, poultry, and bread have their own production capacity. In contrast, Hortifruti contracts growers in Costa Rica to supply the great majority of CSU’s FFV needs, and also buys produce from growers in other countries where CSU operates, both to supply the CSU stores in those countries, such as Honduras – thus becoming a major supplier to the regional chain CARHCO (Director of perishables of the CSU chain, pers. comm., April 2002) – and also to sell to other chains. Moreover, Hortifruti also exports Costa Rican FFV to other Central American countries (such as Honduras). It is thus a fascinating example of a new breed of specialised wholesaler that is at the same time a dedicated wholesaler (with an exclusive contract with one chain in one country), a specialised wholesaler for that chain’s operations in other countries, and an exporter. This is in sharp contrast to the traditional wholesaler that until recently dominated the Costa Rican FFV marketing system. Hortifruti has a pool of growers with whom it works closely. It signs contracts with the growers, guaranteeing purchase. The arrangement includes financing, technical assistance in production and post-harvest handling, and packing materials. The contract specifies the production calendar, the volume required, and the quality characteristics, and assigns a bar code for each farmer’s produce. The best growers are given incentives and prizes (including write-ups in the national press). Hortifruti aims at a low turnover in the pool in order to minimise its risk and transaction costs, but about 40% – apparently the smallest and least capitalised – of the 500 growers still come and go (L. Oleas of Hortifruti, pers. comm., April 2002). Hortifruti also aims at enlisting the help of the pool to assemble produce from other growers who meet the standards. There is thus an emphasis on raising yields and quality within the pool. Farmers not meeting the standards risk being turned out of the pool (C. Rodríguez, pers. comm., 2001). Hortifruti also uses the pool to test and produce new products for the top-end stores where customers expect diversity, innovation and quality. Non-traditional products such as grapefruit and guavas have been introduced in this way. Moreover, Hortifruti uses the grower pool to produce mini-vegetables and fresh-cuts for the food-service sector (especially the fast growing segment of Asian restaurants that cater to a spectrum of socio-economic levels).

2. A similar approach to that of CSU and Hortifruti is taken by AutoMercado, a top-end niche retailer which also has a dedicated specialised wholesaler with mainly private-label FFV; the latter also has contract growers. Costa Rica’s Supermarkets and Horticulture Markets 483

Hortifruti (and the other specialised wholesalers) have their distribution centres in the Central Valley (where 70% of supermarkets are anyway); those outside have to deliver produce to the Central Valley centres from where it is shipped back out to stores outside the valley. In some cases, the supermarkets’ general distribution centres buy direct from farmers in the case of selected products such as potatoes in bulk. This system of wholesalers selecting a pool of producers and then working closely with them to make sure the supermarket chain gets what it wants, benefits the farmer by reducing his market risk. The farmer fortunate enough to be in the pool is sure of a buyer and a price (Hortifruti and AutoMercado pay from 8 to 15 days after delivery, relatively quickly). The farmer can enter a system of procurement programming, in which his product gets a bar code. He can also buy packing material at preferential prices. This system can be contrasted with the traditional system where the intermediary buys from the farmer without a contract or any services supplied, or the farmer sells direct in the spot market. As noted above, CSU sells nearly all of its produce via the Hortifruti label (as do MegaSuper and AutoMercado with their dedicated wholesalers’ labels). CSU does use some non-private-label products as ‘test products’ and, if they are accepted by consumers, they are moved into the Hortifruti line with outsourcing to the original company. This is perhaps the origin of some of the sentiment related to suppliers becoming ‘maquiladoras.’ An example we studied is the Gold Pineapple started by one company and then after six months moved to the Hortifruti brand, still produced by the other company. However, outside the three chains relying primarily on dedicated wholesalers, the other supermarket chains show a wide variety of brands (or lack of branding) in their produce sections (we counted more than 20 brands in one supermarket).

Conclusion: challenges for small farms and firms

The supermarket sector has developed rapidly in Costa Rica, from a small retail segment of domestically financed supermarket-co-operatives in the capital city focused on the upper-income market to a segment dominating half the retail sector, spread to towns and poorer customer segments, and composed mainly of private firms in joint ventures with foreign capital. Moreover, the Costa Rican supermarket sector has been drawn into a regional ecoomy with the formation of the giant regional chain of CSU of Costa Rica, La Fragua of Guatemala, and Royal Ahold of the Netherlands, operating in five countries. This rapid development has affected various agrifood supply chains through innovations in procurement systems, as illustrated here by the impacts on the FFV marketing system. The main change has been a radical shift away from traditional wholesalers and spot markets towards ‘dedicated’ specialised wholesalers such as Hortifruti which, as part of the holding company that owns CSU, supplies most of CSU’s FFV as well as exporting produce and supplying stores in other Central American countries. This is a new breed of wholesalers who have brought the competitiveness, quality and business standards of the international market into the local FFV market in Costa Rica. Such firms have also introduced contract farming – an institution hitherto common only in agroindustry and the export market – into the FFV marketing system for the domestic market. 484 Irene Alvarado and Kiupssy Charmel

There are doubtless substantial benefits in terms of profitability and lower risk for growers involved in the new procurement system encouraged by the supermarkets. This is evident in the growers’ interest in participating in the pool. It can also be inferred from past research showing that traditional wholesalers were and are themselves prone to paying low prices and subjecting producers to greater market risk because of their commercial practices. However, there is also the challenge of being deleted from the list for failing to meet the diverse and strict requirements. That 40% of the farmers move in and out of the pool of 500 growers used by Hortifruti suggests that avoiding being deleted is difficult and costly. Preliminary evidence points to the smallest and least- capitalised growers facing the biggest challenge in meeting the requirements of the system. Three research gaps emerge from the above discussion. The first is the extent to, and manner in, which the above changes have spilled over into the whole agrifood economy, changing commercial practices in the rest of the sector. The extent and nature of these effects will determine how and how much small farmers are affected. The second is to understand more about the effects of the above schemes on the small farms and firms that participate in them, and what role public and private assistance can play in helping them avail themselves of the opportunities afforded by this growing market. The third gap is to understand the way the system is adapting and developing as it regionalises with the substantial involvement of global multinationals.

References

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