FOOD MARKET IN POLAND (current state and trends)

2009 Creativity, Innovation and Management Proceedings of the 10th International Conference Sousse, Tunisia, 25 28 November FOOD MARKET IN POLAND (current state and trends) Prof. Szwacka-Mokrzycka Joanna Warsaw Agricultural University, Poland szwacka_j@wp.pl ABSTRACT The paper presents the nature, direction and scope of the changes the entire food marketing system is undergoing in 2000 yers. The recent changes in farms, processing, distribution and consumption and the determinants of increasing the level of food market competitiveness are discussed. It is hoped that the general picture of the food market in Poland will help better understand the challenges and opportunities created in this sphere in 2000., especially after EU association. Key words: food market, econometric research, demand for food. 1301

INTRODUCTION Important changes in the food sector in Poland started in 1990. and were manifested in deconcentration, demonopolization, and privatization on all levels of the food market. The process of integration and concentration of production and capital within food chain was started in 90. and during the period of the transformation of the Polish economy, have been increasing. The aim of this article is to present the nature, direction and scope of the changes the food marketing system is undergoing currently. The changes in Polish food chain, including farmers, industry companies, distributors and consumers in 2000., especially after EU association, are discussed. Because of increasing level of competition on Polish food market the crucial question is to discuss what are the most important determinants increasing the level of food market competitiveness? The next question concerns possibility of market penetration in the conditions of high saturation of the demand. Can it be recognised that the slow levelling of disproportions in the level of socio-economic development in countries favour the unification of food consumption models in the EU market? SUPPLIERS The first link in the food chain is the farm. Small and medium private farms with an average size of 2-11 hectars dominate in the agrarian structure of the country (26%, 64% respectively). It is worth to mention that during 2000. the process of structural changes in agriculture has been intensified. It follows the increase of big farms in Polish agrarian structure (by about 2% in 2006 in comparison with 2004). When in the beginning of 90. Polish farming was fragmented and deconcentrated, we can observed the intensification of integration and concentration processes in agriculture in the last ten years. It is the consequence of the process of privatization of state sector and adjustment farms to market rules. As it was said the farm in Poland characterized by small and medium size farms. It precludes effective utilization of modern technology and besides, it is impossible to assure an appropriate factor-mix on such the farms. This situation implies high costs of agricultural production and hence, low agricultural income. High costs of production cause an ineffective sale of agricultural products. Accordingly, low incomes, do not allow for improvement of technology or for modernization of production whatever. It is worth to add that after EU association this situation has been slowly improving and technological gap is decreasing. When we follow movements in price relation there is observed a big discrepancy between prices received by farmers and prices paid for production and consumption commodities. This process of a rapid deterioration of the price relation against farmers was started in 1990. It was connected with the process of freeing prices at all levels of food market initiated in 1989. Before this period, the food policy in Poland was sustained by subsidies to agriculture, to the industries producing agricultural inputs, to food processing and to foodstuffs 1302

themselves. On the other hand cheap imported food from EU countries dictated low purchase prices for Polish produce. Food imports caused the prices received by Polish farmers rosed, during analysed period, far more slowly than prices paid by farmers for production and consumption commodities. It resulted in widening price spread at the farm level. When we follow the price relation in 2000., the gap between prices received by farmers and prices paid for production and consumption commodities is still wide. This situation is caused by relatively low level of agriculture integration and lower bargaining power of farmers than the food industry companies and retailers in Poland. It is worth to mention that after EU association we can noticed improving the price relation in agriculture. Producers benefit from direct payments to crop production. When we follow movements in price relation in 2004-2007,there is observed increase of prices received by farmers and decline of price paid by farmers in 2006 in comparison with 2005 (by 2,6% and by 0,6% respectively). It has been resulted in decreasing of price gap in agriculture (see Table 1). The bargaining force of farmers on Polish food industry sector is still rather low. Suppliers consist of farmers, producers of components for food, etc. This market is dispersinable, consists of medium and small firms, in contrast with food industry that is dominated by a few companies, [5]. In addition the food industry is an important customer of the farmers, their profits are closely tied to the industry, and they can't influence prices. Table 1. Price indices in agriculture in 2004-2006. Source: [6]. Specification 2004 (%) 2005 (%) 2006 (%) 2003=100 2004=100 2005=100 Sold agricultural products 111,4 97,9 102,6 Purchased goods and services 108,6 102,0 100,6 Index of price relations 102,6 96,0 102,0 ( price gap ) FOOD PROCESSING INDUSTRY An essential link of food economy is food processing industry. In the wake of the transformation of the Polish food market important changes have taken in food industry. When in 90. the food industry was underinvested and inefficient and strived to keep its profits-earning capacity by shifting the high costs of production on its partners, especially to farmers and consumers, since 2000 this situation has been changed. When in 1991 97% of the organizational units of the food industry were in the private sector, about ten years later near 100%. Food industry companies are adopting new technologies and improving efficiency, 1303

increasing process of manufactured goods. These processes have been intensified after EU association and enforce the adjustment of Polish food industry to European standards. In studied period, 2004 2006, the value of production of food industry as a percentage of value sold production of industrial products total stabilized. When we follow the structure of sold food products in 2004-2006, there is observed the relatively highest share of fresh meat and meat products, beverages and dairy products (4,7%, 3,6% and 2,7% respectively) - Table 2. Table 2. Value of sold production of food industry in 2004-2006 sold production of industrial products total). Source: [7]. (% of value of Specification 2004 (%) 2005 (%) 2006 (%) Food products & 19,7 19,4 18,9 beverages Fresh meat & meat 4,7 4,7 4,6 products Processed & 1,4 1,3 1,3 preserved fruit & vegetables Dairy products 2,7 2,8 2,6 Beverages 3,7 3,6 3,6 It is worth to mention that meat, fruit and dairy industry companies play important role on EU market, exporting about 21%, 20% and 11% respectively [3]. Taking into consideration the competitive behaviour of the various food industry companies in Polish market it can be observed essential differentiation of market share. The results of the research show that brewery, spirit, fruit and vegetable, oil, new-generation dairy market, macaroni and oil industries are characterized with relatively high level of concentration, where about 70% of market is controlled by five greatest firms. The results for meat, traditional dairy products, sugar and bakery industry show low level of production and capital concentration, but sudden increase was observed at the end of the 90's. Nowadays market leaders reached about 20-56% market share. This tendency is connected with consolidation and capital concentration at rising participation of foreign investors. This situation undoubtedly favours the development of investment, to accelerating the rate of productive potential modernization and in consequence new technology introduction. These 1304

processes influence intensification of food products innovation, dynamic development of high-processed food and convenient food or production of multiple food, etc., [4]. FOOD DISTRIBUTION The most tangible changes have taken place in the wake of the adjustment Polish food chain to the market economy. In studied period we can noticed the growing importance of private sector in wholesale and retail trade in Poland. During the period 1991-2007 a revolution took place in the ownership structure of wholesale and retail trade. In 1991 the share of the public sector in total wholesale sale constituted 52% while in 2007 only 2,5%. In 1991 the share of public sector in total retail sale constituted 14%, while in 2007 only 1,4%. In 2000. the process of intensyfing of wholesale and retail sales was observed (see Tables 4 and 5). The increasing trends in food trade sales is noticed, resulting in increasing of wholesale sales and retail sales in 2007 in comparison with 2005 (by 16% and by 18% respectively). The super and hiper-markets are capturing an ever large share of food sales. The process of concentration in wholesale and retail chain in Poland started in 90. and resulted in the next ten years in operating big size enterprises with high potential. New supermarkets were opened up that met EU standards, and the number of fast food chains were still increasing. Changes in the sale of wholesale trade are pictured in Table 3. Table 3. Indices of food wholesale sales in 2005-2007 (previous year = 100) Source: Own calculation based on: [7]. Specification 2005 (%) 2006 (%) 2007 (%) Indices of food wholesale sales (constant prices) 102,0 113,0 116,0 As it was mentioned above, the process of concentration in retail chain in Poland has been intensified in 2000. So that it can be observed that retailers influence prices, require better quality of products and services. The research has provided two insights on this question. The first one is related to the big retail-net, who can earn attractive returns by concentrating on mass market segments; their bargaining power is relatively high. They make profits thanks to powerful retails brands. The second situation is closed to the medium and small retailers which serve narrow segments and their bargaining power is relatively low. In addition it is worth to say that most of the sources of buyer power can be attributed to consumers as a 1305

group as well to commercial buyers. Consumers tend to be more price sensitive, especially on the market of cheap, standard food products. The buying power of retailers is determined by the same rules. Big retail-nets in Poland can gain significant bargaining power over food industry companies because they can influence consumer purchasing decision. Changes in the sale of retail trade are pictured in Table 4. Table 4. Indices of food retail sales in 2005-2007 (previous year = 100). Source: Own calculation based on: [7]. Specification 2005 (%) 2006 (%) 2007 (%) Indices of food retail sales (constant prices) 98,5 114,0 118,0 CUSTOMERS The final link in the food chain are the direct consumers. The level of country development and purchasing power is a significant factor differentianting food consumer behaviours. In countries of relatively low level of economic development, to which Poland can be still included, leading importance belongs to economic circumstances, especially consumer s income and prices of food products. This situation explains to a large extent significantly higher demand in Poland than in other EU countries for food with substantially lower level of needs saturation in this area. The position of the consumer on the food market is determined by the relation between income and prices, which in turn determine demand for food. In the beginning of 90. the prices of consumer goods, including food, rose dramatically. The rapid increase of prices was accompanied by a much slower rose of nominal incomes. As a consequence, the real incomes of all major groups of the population rose more slowly than prices. This process was already initiated in 1989, and the next years followed it. In the beginning of 2000., we can observed the tendency of increasing the level of Global Product in Poland (from 5% in 2003 to 6,1% in 2007). It followed the real incomes increase in studied period. The data completed for 2005-2007, show that in comparison with 2004, in 2007, real incomes of all types of households increased. The greatest increase (22%) was recorded in the incomes of farmers households, the smallest one (8% ) in the incomes of retirees and pensioners households (see Table 5). 1306

Table 5 Average per capita real income by household type in 2005-2007 Households of Income in 2005 in relation to 2004 (%) Income in 2006 in relation to 2005 (%) Income in 2007 in relation to 2006 (%) Employess 98,4 107,6 114,0 Farmers 112,0 113,0 122,0 Self-employed 103,8 111,0 114,0 Retirees and pensioners 103,0 109,0 108,0 Source: Own calculation based on: Own calculation based on: [1]. The increase of incomes was followed by a clear decline of expenditures for food both in absolute terms, and in the percentage of total expenditures of households. During the period studied (2005-2007) there was a constant decline in the share of expenditures for food in the total expenditures of households. The scale of the decline differed depending on the type of household. The greatest relative decline in expenditures for food (7,3 %) in 2007 in comparison with 2005 was noted in households of employees. The smallest relative decline of expenditures for food in 2007 took place in retirees and pensioners households ( 2,3%) - see Table 6. This situation hardly changed at all in 2008. The share of expenditures for food in the total expenses of all types of households continued to decline. Table 6. Average per capita expenditure for food as a percentage of total expenditure in 2005-2007. Source: Own calculation based on: [1]. xxx data not available. Households of 2005 (%) 2006 (%) 2007 (%) Employees 27,3 26,5 20,0 Farmers 38,0 38,0 xxx Self-employed 23,3 23,6 xxx Retirees and pensioners 32,3 31,5 30,0 The cross-section analysis of four groups of households with different levels of incomes showed: 1) Over time 2004-2007 the quantity of food consumed and the level of the rationalization in food consumption in low-income households was decreased; 1307

2) High-income households were more successful in protecting their previous consumption patterns in period studied. In diet of low income households dominated necessities: as cereals products, potatoes, animal fats, dairy products and eggs. On the contrary in high-income households the process of substitution of necessities for luxuries was observed in period studied. There were noted the quality changes in food consumption in these families. In the diet of high-income households important role played fish and fish-based products, meat and meat-based products, fruit and vegetables. However, the increase of real incomes in 2005-2007 did not cause a significant decline in demand for food in the four basic types of households. Today, even in 2009, the potential demand for food in Poland is still high, which is due to the relatively high income and priceelasticity of demand and consumption of food products. Quantitative econometric methods are the base to estimate income elasticity for food. The demand models were constructed on the basis of information selected from the data about household budgets from Central Statistical Office. Income elasticity was estimated on the base of log-hip function. Presented coefficients represent the average level of income elasticity, accounted by five income groups, for each type of household [2,4]. In the framework of the data four types of households were analysed: em- ployees, farmers, retirees and pensioners and self-employed. The analysis embraced the period 2001-2006, which allowed to establish the dynamics of changes in nutritional needs, the degree to which they can be satisfied, as well as the scale of the qualitative changes in food consumption. Income elasticity of consumption factors for 2001-2006 for the four main types of social and economic groups are presented in Table 7. The results of estimation show the tendency of declining of these factors in analysed period, but they are still higher than in other developed EU countries. Higher demand for food in Poland than in other EU countries is supported by relatively high coefficients of demand elasticity, especially for new generation processed food products. The highest coefficients have been estimated for processed food products luxuries (fish and products, fruit and vegetables juices, milk desserts and beef meat) of average income elasticity from 1.47 in 2001 to 0.82 in 2006 (see Table 7). At the same time it should be noticed that general tendencies in the developed EU countries are mapped onto the Polish consumption model. They refer mainly to: Increase of demand for convenience food, Increase of demand for catering services, Relatively small interest in GMO and food containing various additions, Increase of trust in ecological food. 1308

Table 7. Income elasticity of demand in 2001-2006. Source: [4, 2]. xxx data not available. Foodstuffs 2001 2004 2005 2006 Bread 0.11-0.03-0.03 0.02 Wheat flour 0.11-0.01-0.02 0.01 Rice 0,41 0,12 0,18 0,17 Potatoes 0.11-0.02-0.01 0.00 Pulses, vegetables, 0.50 0.18 0.21 0.22 mushrooms Fruit and products 0.73 0.38 0.42 0.44 Fish and products 0.78 0.41 0.42 0.44 Milk 0.18 0.16 0.18 0.16 Yoghurts 0.85 0.68 0.72 0.64 Animal fats exluding 0.13 0.00 0.02 xxx butter Vegetable fats 0.12-0.07-0.07-0.08 Butter 0.62 0.47 0.54 0.47 Cheese 0.70 0.38 0.39 0.35 Eggs 0.26 0.13 0.12 0.12 Sugar 0.10 0.05 0.05 0.05 Vegetable juices 1.47 1.45 1.23 xxx Fruit juices 1.24 1.10 0.94 0.82 Meat, offals and products 0.52 0.14 0.14 0.14 Pork meat 0.51 0.13 0.14 0.15 Beef meat 0.65 0.65 0.54 0.75 Poultrymeat 0.53 0.11 0.11 0.11 Arguments presented above indicate unambiguously that the main causative factor of the diversification of the models of consumer behaviours in Poland and other developed countries are still fundamental in differences in income, which constitutes main rationale for satisfying the needs and aspirations of consumers. Therefore, it can be recognised that the slow levelling of disproportions in the level of socio-economic development in countries will favour the unification of behavioural models on the market of food products. CONCLUSION 1. In the analysed period, changes were taking place in the entire marketing system, but their scale varied. The most tangible changes have taken place in food distribution. 2. There is still a fuge gap in prices of food products between Poland and other developed EU countries due to lower level of costs of agricultural production. It 1309

favours the creating of competitive advantage of Polish food industry companies on European market. 3. During the studied period the increase of incomes was followed by a clear decline in expenditures for food. The scale of the decline differed depending on the type of household. 4. The cross-section analysis of four groups of households showed that over time 2001-2007 the quantity of food consumed and the level of the rationalization in food consumption in low- income households had decreased. On the contrary the highincome households, protected their consumption patterns. 5. Today, the potential demand for luxuries in Poland is still high, which is due to the relatively high income elasticity of demand. 6. There are still differences connected with the level of economic development, despite the progressive tendencies to assimilate consumer behaviours models in Poland to other developed EU countries. REFERENCES 1. Household budget surveys in 2005, 2006, 2007. (2008). Central Statistical Office. Warsaw. 2. Kwasek M. (2008). Income elasticity for food in Poland. Statistical news, Warsaw. 3. Mroczek R., Urban R. (2007). Polish food industry after EU association. IER igż, Warsaw. 4. Szwacka J.(2003). Changes in patterns of consumer behaviour as a determinant of segmentation strategy of food industry companies in Poland. SGGW, Warsaw 5. Szwacka J.(2006). Determinants of differentiation marketing strategies of food industry companies in Poland. 2nd International Conference, Izmir. 6. Statistical Yearbook of Agriculture and Rural Areas. (2007). Central Statistical Office, Warsaw. 7. Statistacal Yearbook. (2008). Central Statistical Office, Warsaw. 1310