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Memorandum of cooperation

Niyazi Gasymov,
President of the Association of Producers, Importers and Exporters of Fresh Produce

Do we need a marketing intermediary?
(Abstracts from the report at the FruitNews conference on 12th of September, 2017)

To begin with, let’s agree on the terminology.

The distribution channel is, on the one hand, the way in which the goods move from the producer to the final buyer, changing the owner and increasing the consumer value along the way, and on the other hand, it is the chain of firms through which the flow of goods, services and information comes to market.

And what is an intermediary? The mediator exists always and everywhere, only we do not notice it or do not want to notice it.

For example, what is an exporter?

It is an intermediary between a producer and an importer. And a shipping company transporting fruit in refrigerated containers is an intermediary between an exporter and an importer. And so on.

Even retail chains always state that they do not resell the goods to the final buyer, but render the service to suppliers, that is, they are intermediaries.

Strictly speaking, there are no mediators only in the subsistence farming: a peasant family on a private plot has grown potatoes and, having left part of the crop for seeds, ate the rest of tubers itself.

Therefore, intermediaries exist only in commodity production.

In our country, most of the claims (often contrived) are presented to those intermediaries, which are the link between producers and retail chains or small wholesale market.

The term "intermediary" often means at best "engrosser", or even simply "speculator".

Producers (usually small farms) which do not know the basics of marketing complain about retail chains that do not contract with them and do not come to the field to pick up the grown vegetables.

Usually such complaints come from producers which are not able to prepare the grown fresh produce for shipment to the retail chains themselves.

This kind of producers need a mediator which will come to a farmer and buy from him grown produce in bulk or in a transport package, which in its refrigerated truck, equipped with the notorious Plato system, will first take to its warehouse for subsequent cross docking, sorting, packaging in consumer’s package (pre-purchased it in the right amount!), labeling according to the retailer’s requirements.

But for this, the intermediary still has to win an online auction (which is not always possible, sometimes at a loss), at the same time put this product into the retail chain and at the same time avoid fines.

Is it possible to do all this by a small farmer who does not have sufficient volumes of homogenous packaged products? The question is rhetorical.

Big producers have the opportunity to work with retail chains directly. But they do not always "put all the eggs in one basket," that is, big producers do not refuse to work with intermediaries-wholesalers.

That is, large producers understand that intermediaries not only "wind up the price", but also provide services for which it is unprofitable for producers to take.

The intermediaries will sign any bonded contract with the retail chains, which big manufacturers will not do, which is often more convenient and more profitable to work with an intermediary, and not directly with a retailer.

For retail chains it is also much easier and more convenient to work with a couple of dozens of reliable suppliers of large volumes of a particular commodity item, and not with several hundred small producers.

In addition, intermediaries, in contrast to producers, are more compliant in financial matters.

As known, the so-called street and farmer’s markets are universally closed in the cities (probably for the sake of retail chains?) under pressure of other stringent claims.

They say why there are not farmers behind the counters, but all the same "engrossers".

But why a farmer must sell his fresh produce in the market place himself?

He has enough business in his farm throughout the year (preparation for sowing and harvesting campaigns, machinery repair, construction and equipping of storage facilities, irrigation, fertilization, pest control, etc.).

Of course, it's another matter when market traders are under pressure and subject to tribute from organized or unorganized criminal gangs, but this is already a question of the poor performance of state and local power structures (e.g. police).

By the way, it is no difference for gangsters with whom to extort bribes: from producers or from intermediaries.

Populists offer to exclude from the distribution channel an excess (as they see it) chain link, namely an intermediary.

Say, so you can reduce the retail price and please the final buyer.

This is another illusion.

Populists are unaware that price formation will simply change in this case, but the retail price will not decrease in any way.

I will try to show this on the following examples.

At the dawn of the emergence of contemporary fruit and vegetable business in Russia in the early 1990s (immediately after the abolition of the state monopoly on foreign trade), the distribution channel for the imported fresh produce had the main links as follows:

 

Foreign Producer → Foreign Exporter → Russian Importer → Wholesaler → Retail → Final buyer

 

Subsequently, with the development of retail chains, the wholesale link began to decline, as its functions (mainly short-term storage, cross-docking and distribution) were undertaken by importers and retailers which created their own distribution centers.

Did the retail price decrease at the same time? No way!

In recent years, the biggest federal retail chains, mainly X5 Retail, Magnit (Tander), Auchan, Dixy and Metro Cash & Carry, have begun to import fruits and vegetables directly, without intermediaries in the form of traditional importers.

Pros and cons of such a decision for each of the participants in foreign trade of fresh produce can be devoted to a separate report.

But today we will limit ourselves to only one statement: when a retail chain took over the functions of an importer, the retail margin increased, and the retail price did not decrease.

But the number of traditional importers and their turnover in the Russian fruit and vegetable market has significantly decreased.

Our legislators have to think about not so much about restricting the shares of retail chains in the Russian regions, but about limiting their share in the import of fruits and vegetable.

In general, the experience of the West with its highly developed horticultural production, logistics and retail trade has shown that to find compromises and establish a balance between the various links of the distribution channel, it is necessary to organize associations of producers, exporters, transporters, wholesalers, retailers, final buyers, etc. from below (not from above!).

In our country, such associations have just started to be created, but some are already very active.

Among the latter, I also include the Association of Producers, Importers and Exporters of Fresh Produce, whose president I am.

In conclusion, I want to say that the civilized and transparent nature of the Russian fruit and vegetable market will allow us to change our prejudiced attitude towards an intermediary - an important link in the distribution channel.

Thank you for attention. I am ready to answer your questions.