Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. Moldova Competitiveness Assessment: Market Architectures Wholesale and Retail Operations MARKET LINKAGES AND SERVICES Overall Deficiencies in Market Architectures Services make up about 75 percent of the total value created in an economy, less in developing countries and particularly in transition economies. Much of that share is included in the final price of tangible goods. On average, one-third of the economic value reflected in the sale price of a consumer good is generated by the transportation, wholesaling, and retailing functions that deliver a good from the producer into the hands of a buyer—the operating elements of a country’s market architectures 1 . When such services in a country do not exist, are inefficient, or are provided by a monopoly, the cost of producing goods increases, consumers pay more, and productivity suffers, as does the competitiveness of companies in that country. As global competition increases, global retailers increasingly make decisions about where to source the production of their goods on the basis of how reliable, efficient, and available are in-country services to support the export of products. Companies in countries with poor services must find ways to provide them or improve them. Export and industry associations and clusters are in a good position to drive efforts to improve the service sector within a country. Weaknesses and gaps in the country’s market architectures, along with difficulties in adapting to the evolving market architectures in global markets, impair the competitiveness of Moldova’s economy. One of the biggest contributions that cluster-oriented interventions could make in Moldova would be to bring together the value chains across industries to help the various actors understand where there are missing links, limited services, and major inefficiencies that could be solved with coordinated actions. There is a shortage of wholesalers, retailers in nonfood products, full-service logistics companies, and trucking companies with international permits. The monopoly railroad service provider is reportedly charging higher rates than its competitors in neighboring countries. Women with small retail operations in the state stores are not getting discounts from wholesale buyers because they travel by bus to department stores in foreign countries and buy at retail prices. Popular supermarkets are so powerful that they sell Moldovan products on consignment because there are no equally powerful Moldovan wholesalers; instead, individual farmers deliver their own goods to food stores. When large foreign-owned supermarkets, department stores and furniture stores enter the Moldovan market, they should do well, given the current lack of large convenient retail space. Even if foreign retailers wanted to source products locally, it would be practically impossible, given the underdevelopment of middleman functions in the value chains. As a result, foreign retailers would need to import foreign goods, because it would be more convenient and more efficient. Moldovan producers would be left out in the cold. The large 1 William W. Lewis, The Power of Productivity, The University of Chicago Press, Chicago, IL, 2004. July 2004 • DRAFT Page 1
Development Alternatives, Inc. Moldova Competitiveness Assessment: Market Architectures supermarket and wholesaler, Metro, which is expanding its presence across Central and Eastern Europe and the former Soviet Union, commissioned a research study on the Moldovan market. It found that 87 percent of hotel, restaurants, grocery stores, mini-markets, and institutional buyers would buy from Metro if they came into the market, dramatically demonstrating the need for wholesalers in the market. A potential Moldovan dairy supplier to Metro reported that Metro decided to delay its entry into the Moldovan market because so little could be sourced efficiently from Moldovan producers; Metro has minimum requirements that Moldova cannot yet meet. Part of the problem in Moldova is that market intermediation functions—wholesale operations, in particular—are viewed with suspicion. The belief that the middleman adds little value relative to cost may be a remnant of Marxist thinking, or may date back to the period following the collapse of the Soviet Union, when wholesalers were few and their markups high. In any case, the Moldovan government often changes the rules for wholesalers, making the business environment unstable and unpredictable. For example, in May the government passed a new regulation requiring wholesalers that handle alcoholic beverages to have a minimum 5,000-ton storage capacity and to obtain a license. This requirement closed down all of the small wholesalers unable to meet it; many of them had relied on revenue from alcoholic beverages to remain profitable. A number of Moldovan producers either do not understand the advantages of outsourcing the distribution function, do not want to give up the margin (by selling to a distributor at a discount), or have margins too low to be able to afford to sell through distributors. The resulting decision limits their efficiency and reach into the market since most producers are not expert in distribution or managing the channels. Small retailers buy through wholesalers because the wholesaler can offer them attractive terms of payment (up to US$10,000 in credit or 30-day payment terms) that producers—Moldovan or foreign—cannot or will not offer. As a result, the only Moldovan products sold in smaller stores are those carried by the wholesalers. Moldovan producers that do not use wholesalers simply do not get their products into many of the smaller stores. Export Channels To export, companies need to understand the evolving market architectures in target markets—the market opportunities, the potential buyers and intermediaries, the purchasing criteria of the buyers (product specifications and standards, price range, quality level, certifications, and so on), and, generally, rules of doing business. Often, to meet the purchasing criteria, major or minor investments are required to change equipment, acquire needed certifications, achieve quality improvements, improve reliability, or effect design changes. The logistics of shipping the goods to the importer has its own set of challenges: packaging, reliable transportation to make on-time deliveries, and correct paperwork to speed customs clearance and delivery to the end buyer. July 2004 • DRAFT Page 2
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