Reducing Kosovo’s trade deficit – one bite/sip at the time

In 2012, Kosovo imported products for approximately €2.5 billion.  The import of foodstuff alone is approximately €300 million per year, second only to mineral products (gasoline, oil). This is a very sizable market. Unfortunately, Kosovo’s food-processing companies are still struggling to carve out a greater share of the domestic food and beverage market. As a result, Kosovo’s trade deficit continues to expand (over €2 billion in 2013).

Moving quickly from statistics to practice, let me illustrate the effects of this one-way (almost) trade flow in foodstuff by taking a peek inside our family’s refrigerator here in Pristina. The photo below is dated 2012:

Fridge 2012

What is the most striking in this photo is the fact that there is not one single food item or beverage produced in Kosovo in the refrigerator. Why not? At this point in time, I would say, it was mainly a quation of quality or rather a lack of consistency in the quality of food products. We would simply not risk buying the product again having been dissappointed about its quality.

Fast forward to 2014, and the composition of products in our refrigerator has not changed much (I guess our eating habits stay the same), but the products’ national origins have changed.

Fridge 2014

The fresh milk from Slovenia is still there (no surprise, it’s tasty!), together with the fruits and vegetables from other Southern European countries, and the Bulgarian white cheese and my Swedish lingonberry jam, but Kosovo produced yogurt and white cheese now have a permanent presence. There is also a noticeable increase in foodstuff from Turkey, while products made in Macedonia have fallen off the shelf. (Results of a free trade agreement and trade dispute respectively?)

The success of the Kosovo brand VITA and its yogurt in breaking into our family’s refrigerators may seem like a small step, but it represents a potentially giant leap for Kosovo’s food-processing sector. VITA has shown that Kosovo companies can compete successfully in a very competitive market, such as the dairy product market.

But be of no illusion, winning the battle for Kosovo’s refrigerators will demand much more than an import-substitution policy or a fancy “Buy-Kosovo-made-products” promotion campaign. To change the buying habits of customers, each new product must be equal in quality, price, packaging and distribution to the ones we buy today, or perceived as better even! Few people will compromise on any of these product characteristics, just because the product happens to be produced in the homeland.

This is what VITA understood and managed to do, and it is a strategy that other food producers in Kosovo could learn from (and other stakeholders supporting the economic development processes in Kosovo).

‘Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products.’ (Wikipedia.org)

Exchanging imports with locally produced goods is clearly a good thing, as long as the value for the customer remains unchanged. Logically, an increase in local production of foodstuff would benefit the economy and society as a whole. An increase in locally produced foodstuff would increase demand for locally grown crops and bred animals, creating a boost for farming in Kosovo. Employment would rise as demand for labour in agriculture and in the food-processing factories increases. Kosovo families will end up with more disposable income in the pockets, part of which will be spent on Kosovo made foodstuff. A virtuous cycle will start to spin, imports will fall, and with time perhaps export of foodstuff will intensify. Good things all around!

So, why has import-substitution not taken place on a larger scale yet in Kosovo? The devastating trade deficit is a statistic that is reported upon year in and year out by Kosovo institutions and international organisations. It must be obvious to everybody that the negative trade balance is draining the country of scarce financial resources.

If we review the flow of foodstuff, from the agricultural field to the dinner table, we can identify three key actors in the supply-chain – the producers (farmers and food-processors), the retailers and the consumers (you and me). Starting with the consumer, we can conclude that a demand for foodstuff exists and the purchasing power is there to create a substantial market.

Producer to Customer

Moving across to the other side of the supply-chain, to the farmers and food processors, we find the first bottleneck in the supply chain. It is clear that, at this point in time, the Kosovo based agricultural producers and food processors cannot satisfy domestic demand by a mile. There is simply not enough local output of fruits, vegetables, meat, poultry, dairy, etc. Hence the current need for imports.

Looking ahead, we enter a ‘Chicken or Egg’ situation. What comes first, the local food producers offering a wider variety of products and in larger volumes to the retailers or the retailers/customers demanding more locally produced foodstuff?

Enter bottleneck number two in supply chain – the current relationship between local food producers and the retailers is heavily lopsided in favour of the retailers. The retailers hold the ‘ace’ card in controlling access to the customers (demand) and by sourcing products from a well-established network of international suppliers. Within this business model there is no perceived need for the retailers to change the way they do business – it’s working just fine. The local food producers, on the other hand, need access to more customers in order to grow. To do this they need to make a deal with the retailers. Consequently, the key to unlocking import substitution for foodstuff in Kosovo is firstly, but not solely with the retailers.

One possible way forward

Before anything, there is a need to raise awareness among the food retailers in Kosovo about the precarious situation of the economy, and its negative effects on the overall socio-economic situation in the country. Of equal importance is to highlight how they, as the dominant retailers of foodstuff in Kosovo, through their individual and collective actions can contribute to improving the wellbeing of thousands of people in Kosovo. The message to the retailers must be clear and targeted. For every €100 (euro) that stays in Kosovo, as a result of them buying Kosovo made products rather than imports, a specific number of families will benefit directly through employment, while the overall economy of Kosovo will benefit with a specific sum through direct and indirect taxation.

Establish a small working group consisting of key retailers and a selection of food producers in various product areas to further explore the current situation in a structured way. The situation refers to the socio-economic situation in Kosovo, and the status and characteristics of the Kosovo economy in particular. The working group should be moderated and facilitated by an external body, such as a local Business Support Organisation (preferably supported by external experts on business and economic development)

The initial task of the working group should be to attempt to make sense of the situation that the Kosovo’s economy is in and the current relationship between producers and retailers. This will happen by exploring contributing contexts, such as history, culture, social, politics, economics, international trade, etc. International good practices will be introduced to the working group members as means of triggering new ideas applicable to the Kosovo context. The logic here is this, that in order for any desirable systemic change to materialize, such as import substitution, it must be culturally feasible. In other words, the involved retailers and food producers must value the proposed change in order to act on it.

As a next step in the process of improving the business relationship between local food producers and retailers, the working group facilitators will work to identify and explore possible accommodation between the producers and the retailers. This is the moment when the producers present their available products, while the retailers present their product requirements. For example, the retailers will insist on the products having the ‘right’ price and packaging. HACCP certification is compulsory and so is adhering to Kosovo legislation on food security and safety. To make business with the retailers, the producers must be registered with the Tax Administration, offering proper invoices and paying VAT.

To assist the producers to present the best possible offers, the retailers, based on their extensive and detailed knowledge in many product areas, can share essential market and product information with the producers. The retailers know the exact prices paid for imported products, and how much they sell of each product per year. Based on this real market knowledge, the retailers can indicate a price range and expected sales volume per product. Based on this product price and volume information, the food producers can then make the required business models and calculations in order to decide whether or not there is a viable business in front of them to invest in.

Hopefully, the process of dialogue discussed above will contribute to building trust between the producers and retailers, which is essential for them doing business of mutual beneficial. Both the producers and retailers are in business to make a profit. For the retailers it makes no difference if they buy the products locally or import them, as long as they fulfill the basic criteria of satisfying the needs of the customers. Based on this new, more informed relationship, the working group, with the support of external facilitators, will move to define possible actions to change the current situation – to decrease imports by retailers purchasing an increasing number of products from local producers.

However, for the retailers’ purchasing patterns to change, the producers must dramatically boost their business operations. To accomplish this, they are in need of a combination of technical assistance and financial support. Generically this could include interventions to optimize production outputs, the introduction of food safety and food security standards, strengthening the human capital throughout the organization and introduce modern management methods and quality control systems. It could also include investments in new machinery, equipment and tools. Some producers may need to re-build their production units to accommodate HACCP requirements. To finance these performance-enhancing interventions, the producers must be able to obtain financial support from banks (loans) and/or other funding sources, on terms that are viable.

However, before any public and/or donor funded support interventions are instigated, the potential future business relationship between the producers and retailers must be put on paper. Far too often company investments and business support schemes are based on the assumption that if only the companies can increase outputs, then automatically the market (in this case the retailers) will absorb their products. Producing and selling a product that customers are willing to pay for is more complicated than that. If there is no substantiated demand for a specific product, market sense tells you that there is no business to be made.

Consequently, the key action to change and in creating a whole new situation on the food market in Kosovo will include the retailers signing letter of intents or even contracts beforehand with respective producers. The agreements should stipulate a purchasing price for each product (plus recommended sales price to end customer), and be linked to standards and requirements that the product must fulfill. Based on these agreements, public authorities and donor agencies should support the process by offering tailored technical assistance and financial support to the producers, as well as support to the Working Group’ s continuous explorations and change actions.

As a result, easily verifiable to all of us, the product composition in our refrigerators will never be the same again!

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About Jakob Modéer

22 years of corporate and international investor experience as well as private sector development project management, consultancy in private sector policy and business advisory services, and direct consultancy to companies in South East Europe (and now a blogger on socio-economic issues)
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