Streamlining Turkey's Food Retail

Background

Turkey is a well-diversified agricultural powerhouse. The country leads the world in production of hazelnuts and figs and holds the second spot in watermelons and chickpeas. At the same time, Turkey is a major global producer of apples, tomatoes, pulses, grains, olives, and sugar beets among others. Yet Turkey was slow to modernize its food retail sector in the last century. Perhaps Turkey’s reticence was related to its agricultural abundance and the need to maintain employment levels.

Heavy controls on food distribution also hampered the development of modern food retailing. Bakkals—small, traditional storefronts—and open-air bazaars were still the primary retail outlets for consumers well into mid-century. The modern retail food sector essentially came into being following the Encouragement of Foreign Investment Law in 1954. The act aimed to improve the country’s distribution channels and increase domestic competition. Migros, the largest retailer in Switzerland, opened the first of its wildly successful and modern stores shortly afterwards.

Oppressive trade restrictions further hindered retail development, including in the area of food. However, greater privatization and trade liberalization in recent years has lifted foreign investment from $97 million in 1980 to nearly $17 billion in 2015, with much of it going into retail real estate. At the same time, trade has soared from less than 10 percent of Turkey’s gross domestic product (GDP) to nearly 60 percent.

Food retail gets super-sized

After the Grand Bazaar came into being some 550 years ago, the shopping experience in Turkey has come full circle. The country has become a land of shopping malls with over 370 outlets countrywide—and continual introduction of more hypermarkets and supermarkets. Turkey's expanded retail footprint is an important factor behind a projected growth rate of 8 percent for retail sales of food in 2017. Although food price inflation is artificially boosting the headline figure this year, sales are projected to rise by 5 percent, on average, between 2014 and 2018. It’s not clear how much of that increase will be strictly due to inflation, and how much will be volume growth.

Consumers are caught in the middle

Domestic food sales accounted for roughly 62 percent of the the country’s entire retail sales by 2015. Nevertheless, trouble is brewing for the country’s retail sector. Sales of food, drinks and tobacco products fell year-over-year by 4.1 percent in March 2017. The collapse of the lira means owners of shopping malls are facing tougher debt maintenance.

A more pressing challenge is rising food inflation. Despite being largely self-sufficient in basic foodstuffs, the country is contending with steep price increases within some food categories. The growing number of large-scale outlets has given retailers more pricing power, which should enable them to pass on more of the cost to consumers. These efficiencies are limited, however, as bakkals still account for roughly 50 percent of grocery sales. The weaker currency is also encouraging greater exports of raw agricultural products, which is compounding matters for the domestic retail sector.

Marked by a fragmented manufacturing base and multiple distribution layers,the country’s food distribution network is another pressure point. In some cases, consumer prices are 100 to over 400 percent higher than the price charged by manufacturers.

Youth may also be adding fuel to recent inflationary flames. Roughly 50 percent of Turkey’s population is under 30—and pushing food retailers to rely on more than just the country’s natural bounty. The growing variety of food imports exploded in cost when the lira tanked.

With this backdrop, the country has fallen into a state of finger pointing across the supply chain. Farmers blame food inflation on the country’s complex layer of middlemen, while retailers see high costs stemming from poor transportation options and waste as the primary culprits.

The good news is that the government is responding, but the country needs to do much more. Turkey passed laws in 2012 that eliminated a stratum of intermediaries between farmers and retailers. While this step improved transparency at the wholesale level, it hasn’t completely checked price inflation at the retail level. In reality, the country requires more dramatic changes across the food chain.

Turkey has become a major global producer and exporter of agriculture and food products, but its full potential is still limited by its reliance on small-scale and dryland farming. Post-harvest loss at the producer level was the largest contributor, by far, to total food loss and waste, according to the Food Agriculture Organization.

With the production of Turkey’s major crops stagnating in recent years, it appears that past success is giving way to complacency. Despite having less access to freshwater resources, Spain has expanded its percentage of irrigated agricultural area at a faster pace in the past five years than Turkey.

While Turkey has made great strides in embracing irrigation—the Southeast Anatolia Project (GAP) being the most visible project—the percent of irrigated agricultural area in the country has slightly declined in recent years. Reductions in cotton planting and overall agricultural area have played a part, but room for expansion elsewhere remains.

For example,expanded irrigation coverage could help stabilize yield in Turkey’s wheat crop.

Turkey has successfully risen to become the largest global exporter of wheat flour, but risks remain. The country’s flour milling industry is greatly exposed to fluctuating wheat yields. One geopolitical stumble or weather setback could drive the country’s milling industry into the ditch. Although Turkey is hoping to increase irrigated agricultural area by over 50 percent between 2015 and 2023, greater financial incentives for producers may be required to achieve this ambitious target.

Turkey is also greatly in need of farmland consolidation. The country’s agricultural co-ops were fairly successfully in lifting farmer incomes and rural employment after the Turkish Republic was established in 1923. Still, post-harvest losses are high and agronomic cooperation remains below international standards—despite help from the Turkish Grain Board. These problems have played a role in higher food costs for consumers.

The possibility of the government driving wide-scale consolidation is still a stretch, but that hasn’t stopped Turkey from trying. Turkey is attempting to accelerate land consolidation with over $30 billion invested in GAP, although progress has been occasionally stalled, due to conflicts with the Kurdistan Workers’ Party (PKK).

What the country deeply needs are more market-oriented solutions. Incentives for direct partnerships between retailers and producers could introduce greater competition within the distribution channel. In the current state of affairs, the country’s consumers are getting the worst of both worlds—increased retail consolidation without much of the savings that come from cutting out the middleman.

While the government is right to address uncompetitive structures within the country’s food chain, most distributors are simply following the money. There would be fewer middlemen if the government provided greater financial incentives for smaller retailers to pool direct purchasing and develop regional storage capacity outside of government control boards. Streamlining the distribution and storage process between farms and retail—while also weeding out corruption among entrenched cooperatives and government agencies—would go a long ways toward solving the problem. While increased “cold-chain and national logistics” capacity has become a boilerplate recommendation by consultants, Turkish retailers are truly hitting axle-breaking potholes on daily basis.

At the same time, 41,000 food and beverage producers are registered in Turkey, most of whom are small or medium-sized operations. Market share of baby milk formula, and breakfast cereals is concentrated, but these categories are the exceptions rather than the rule in Turkey. The overall industry is sufficiently fragmented that only approximately 20 percent of domestic market share is controlled by the country’s top 10 companies. Furthermore, these food processors are forced to import a significant percentage of their ingredient needs (e.g. citric acid). The lack of economies-of-scale in parts of the country’s food and beverage processing sector adds to inflationary pressures. In response, Turkey is encouraging further investments in fruit and vegetable processing along with food ingredient production capacity.

Conclusion

Turkey’s government is clearly getting the message. Turkey’s Food Committee announced new measures to address uncompetitive supply chain structures, increase oversight of food storage, add new tax incentives for domestic producers, and develop alternative marketing channels. While this all sounds promising on paper, the details are still vague.

The introduction of a mishmash of price controls, sporadic market regulation, and scapegoating of middlemen has been tried in the past with mixed-to-bad results. Turkey has tremendous potential, but the promise is only as real as the country’s willingness to embrace actual food reform.

Turkey would be wise to accelerate market-based approaches that can drive more efficient behavior. Policies should support the development of national third-party logistics networks, renewed investment in modern food processing capacity, progress towards greater farm consolidation, and new farm-to-retail partnerships. Turkey has made great strides in improving its business climate, but future investment in the food sector will only come if the political environment is stable. The country’s consumers are patiently waiting!