Canning Industry

CANNING INDUSTRY by Dr. Diana Kopeva

Industry Background Canning industry is one of the most important and attractive sectors of Bulgarian Food industry. The favourable climate and natural resources have underpinned the sector’s development. During last three years (1996-1999) unfavorable influence of different exogenous and endogenous factors, specific for the canning industry is observed. Some of these factors are: • Severe drop in raw materials production (vegetables and fruits) as an outcome of the slow progress of agrarian reform. • Low quality and low yields of produced vegetables and fruits. • Increased requirements for quality and hygiene conditions for canning production set by importers. • High competition on traditional international markets. • Decreased purchasing power of the population and increased prices of food products. • Limited range of goods (various imported goods of canning industry and semi-manufactured articles can be found on the market and they create highly competitive environment). • Higher quality competitiveness of imported goods and lower price have negative impact on demand of Bulgarian products of canning industry. Positive is the impact of the following two factors: (i) privatization (more than 75 % of enterprises in canning industry are privatized); and (ii) structural reform (more than 94 % of established new private enterprises are small and medium sized). Significant drop in production and export is observed in canning industry last three years (19961998). The figures in table 1 illustrate drop in production of canned vegetables and fruits. Table 1. Canning Industry: Output of main products, 1998-1999 Month/Year 1998 I II III IV V VI VII VIII IX X XI XII 1999*

(Tons)

Canned Vegetables Canned Fruit Vegetable Oils (edible) Tobacco 55467 28064 202598 33181 704 460 7808 2560 986 792 20792 3259 572 459 18030 2763 892 664 12991 2600 975 1666 13964 3100 2502 4269 13280 2847 7622 5027 9448 2880 14675 6841 10652 2634 12875 3507 16516 2600 8565 1287 27392 2718 3538 1384 27196 2502 1561 1708 24529 2718 14040 18120 174491 25657

I 529 II 319 III 153 IV 180 V 204 VI 1214 VII 562 VIII 2751 IX 2894 X 3272 XI 1236 XII 726 Source: NSI * The data are based on sample of enterprises

235 275 653 529 649 1678 2112 4956 4883 1249 607 294

1

18843 14210 12863 9309 8034 11424 7973 4600 16623 26125 23227 21260

1807 1785 2000 2233 2261 2310 2272 2204 2284 2399 1872 2230

The amount of processed and preserved fruit and vegetables decline rapidly. It is shown on Figure 1. Figure 1. Production Indices for processing and preserving of fruit and vegetables, 1995=100

160 140 120

%

100 80 60 40 20 0 1995

1996

1997

1998

Years

Source: National Statistical Institute

The trend of production is negative. In 1998 were produced 99.9 thousand tons of cans, of which 71 % was vegetable and 29 % fruit. The industry produced 71.2 thousand tons of vegetable cans against 127.2 thousand tons in 1996 and 136.1 thousand tons in 1997; 28.7 thousand tons (1998) of canned fruit versus 46.6 thousand tons (1996). Figures indicate drop of 61 % in canned fruit (not including pulpes) and drop of 45 % in canned vegetables (not including pickles). Canning industry will not be able to supply for domestic market and for export, and became more and more domestic oriented sub-sector of food industry. The main reasons for the drastic drop in production are high prices/low quality of vegetables and fruits, and collapse of the former COMECON market. During the socialist period all enterprises in canning industry were state-owned. Ten years after 1989 the outcome of the privatization in canning industry is 85 % privatized enterprises. At time being the total number of companies in this subsector of Food industry is 200, in that number: 11 are managed by privatization funds; 6 are with prevailed state share; 34 are privatized under the cash privatization; 149 are privately owned (100 of them are new small enterprises). More than 80 % of enterprises are specialised in canning production (vegetables &fruits) and the rest 20% in cooled fruits and vegetables. Most of the enterprises (70%) in canning industry are small and medium (ranged by number of employees and average turnover) (Figure 2) Figure 2. Bulgaria: Types of companies in canning industry, 1999

9% 14%

Source: Ministry of Economy 77%

2 Small Enterprises

Medium Enterprises

Large Enterprises

Factor conditions Seasonality A major factor that affects the canning industry is the seasonal nature of the country itself. The canning industry is very dependent on weather and environment conditions. Fruit and vegetable production is dependent on the climate. As a result, the operations of canning factories are also highly seasonal. The factories work almost with full capacity no more than 5-6 months annually (July-December). They need working capital for a season and then follows period of selling production. Seasonality creates problems with loan repayments. Cash flow is not positive every month and during the death season part of companies face significant problems in repayment. Infrastructure Transport plays important role for delivery of inputs and production. Within the country processors prefer to use auto-transport. Increasing fuel prices influence the cost of production. Financial Issues Obtaining loans is one of the main obstacles that this industry faces. Credit security requirements render the supplying of fresh money almost impossible. Often, one who needs a credit falls into a vicious circle - in order to obtain a loan the subject must guarantee his solvency, depositing an amount of money equivalent or even higher with reference to the loan. This fact arouses a lot of “timidity” in the individual who has a good idea with which to start or continue a business. However, seldom does the individual asking for a loan present a convincing business plan, either because of inability to express the good idea or because the idea is not good. Thus, not only part of supply, but also part of demand is rendered ineffective. Interest rates are hopeless. The mortgage mechanism has not yet started to function; thus, land ownership can’t serve as a guarantee. Market Issues The marketing of the Bulgarian canning industry is at a very low level. There are a lot of obstacles in front of it. Almost nothing from the former foreign trade representative offices of “Bulgarplodexport” remains, and it is logical, given the need of big investment, to run these offices within the power only of centralized or developed economies. Moreover, information about foreign markets, technologies, related industries etc. doesn’t circulate within the country. On the other hand, the marketing preparation of the Bulgarian managers is not so high and, in an international context, it is a serious problem. They rely on the exploitation of international contacts established in the past. Furthermore, the exploring of new markets and establishing new contacts is rendered difficult by visa problems. Technology and Human Resource Capacity Most of the factories or buildings used by new established factories were built under the centrally planned economy. The technology at these factories is obsolete and highly inefficient. Some of the small and medium canning producers used created and built by themselves machines and equipment, but in general is far behind innovative processing technologies that would allow them to operate at more optimal levels. Raw materials Canning industry processed mainly domestic vegetables and fruits. The biggest is the share of raw materials in the production costs (around 70%) and this determines their important position in price determination of processed vegetables and fruits. During last three years (1996-1998) it is observed 32 % increased in planted area with vegetables (tomatoes, peppers, cucumbers, peas, green bean), but the average yield is relatively stable. (Table 2) Table 2. Planted area and average yield of vegetables, 1996-1998 Year Total area Average yield (decares) Kg/ha 1996 8 387 450 102 1997 9 071 440 91.3 1998 12 387 810 106.1 3

Production Tons 855 566 829 124 1 341 912

Source: NSI

The quality of vegetables and fruits as main raw materials for canning industry is not on a necessary high level. Main reasons, except financial, are not satisfied organization of seed production and low technology level of agricultural production. Demand Conditions Existing Markets Bulgarian canning industry exports canned vegetables to Russia, Kazakhstan, Ukraine, Belarus; Germanys; frozen vegetables - mostly to Greece -72.5%, France - 7.4%, Germany - 3.2% and Italy 3.1%; jams and jellies to Russia - 38.1%, Germany - 23%, Jordan - 14.1%, the Czech Republic 3.7% and Austria - 2.6%; frozen fruits - mostly to Germany - 50.4%, Holland - 13.3%, Greece 10.9 %, Russia - 5.1%, France - 4.8% and Austria - 4.4%. After May 2000 negotiations with EU agreement for canning industry was achieved in following areas: • Export quota was committed for export of 16,500 tons processed tomatoes with zero duty. It is anticipated increasing of quotas annually. • Additional export concession in EU countries was negotiated for 4,000 tons frozen vegetables, 1,000 tons cherries, 9,375 tons plums, with zero duty. • Bulgaria commits import quotas with zero duty from EU for 1,000 processed vegetables without undertaking commitment to subsidy. • Achieved agreements entered into power since July 1, 2000. Domestic market The marketing of the Bulgarian canning industry is at a very low level. There are a lot of obstacles in front of it. Almost nothing from the former foreign trade representative offices of “Bulgarplodexport” remains, and it is logical, given the need of big investment, to run these offices within the power only of centralized or developed economies. Moreover, information about foreign markets, technologies, related industries etc. doesn’t circulate within the country. On the other hand, the marketing preparation of the Bulgarian managers is not so high and, in an international context, it is a serious problem. They rely on the exploitation of international contacts established in the past. Furthermore, the exploring of new markets and establishing new contacts is rendered difficult by visa problems. According to some research, the share of private enterprises is about 1/4. What is certain is that state enterprises are destined either to be privatized or to disappear. To state and private enterprises there could be added the channel of dealers. It is a question of organizers with skills in marketing and information on the markets (above all foreign ones). They stipulate contracts with the producers (private and state enterprises) and supply markets or stipulate different contracts with the whole chain (from agriculture to packaging of final products), thus organizing and controlling the entire process (included transport), and supplying the final markets. Firm Strategy, Structure and Rivalry Firm Strategy The elaboration of special firm strategies is an almost impossible undertaking. This is because of the lack of steady parameters for making production and investment programs. Firstly, the supply of row materials doesn’t give steady parameters as regularity, prices and quality. Almost always the transactions are not based on contracts and are sporadic. The supply of jars and caps presents the same kind of problems. Contracting is not a widespread practice. Often the producers are constrained to turn to the foreign markets. Secondly, there are not yet steady macroeconomical parameters. Foreign trade policy, taxation and crediting are still in the stage of fermentation. Thirdly, as mentioned above, the margins of profit of the canning industry are rather low and thus a technological innovation without further investments is unachievable. Firm Structures and Privatisation 4

There are two channels by which the processing of fruit and vegetables are provided. The first one is what remains of state enterprises. The second one is the private canning enterprises. Given that the process of privatization is an ongoing process, it is impossible to specify the share of state production and the share of private production. Ongoing structural reform is characterised with restructuring of state ownership. In the table 3 below are given some figures for the level of privatisation in canning industry in comparison with other sectors of Food industry. Table 3.Pace of Privatization in Canning Industry by 31 December 1998 State share %

Dairy Industry

100 67-99 51-66 34-50 1-33 0 Liquidated In liquidation Insolvent Total

2 1 33 9 2 3 4 54

Meat Industr y 4 27 7 9 9 56

Fisher y 1 1 2 2 6

Wine Indust ry 4 2 1 30 8 1 45

Brewe ry

Canning Industry

Oil Industry

Sugar Industry

Total number

16 2 1 19

6 35 9 2 1 53

1 1 11 1 1 15

1 3 7 1 12

19 5 4 161 37 2 18 15 261

Source: Ministry of Industry and Privatisation Agency

Regional Allocation In southern Bulgaria the concentration of this sub-branch of food industry is higher compared to that of northern Bulgaria. The highest number of means of production are concentrated in the Plovdiv and Pazardjik regions, followed by the Stara Zagora and Jambol regions. In the outlying south regions (the Rhodope Mountains) there are no canning industry manufacturing facilities. In northern Bulgaria the highest concentration is in the Pleven and Veliko Tarnovo regions. The Rousse and Montana regions follow. The firms situated in Dobritch and the mountain and semimountain northern regions have a commercial activity as well. Government policy. Undoubtedly, a policy for market economy and competitiveness is performed. The problem is that currently there is still a lot to do and the changes are introduced slowly. Nevertheless, that land was restituted to its owners1, the outcome of prolonged ten years land reform still hinders the development of agriculture, which provides raw materials to the food industry. Parallel, the process of privatisation is slow and ineffective. The reasons are bureaucracy, the lack of concept, and the clash of interests. Because of price liberalisation in 1991 input prices have risen more than farm prices and thus subjected agriculture to cost price squeeze. As a result the application of fertilisers and pesticides was restricted and this affected the yields of many crops. The new corporate tax law is similar to the ones of the industrialised countries, but, applied to one underdeveloped economy, it turns into a high obstacle. There is not tax facilitation for the firms that reinvest the profit or invest in new productive assets. The fiscal mechanism does not function and this, together with the high quotas, is a kind of catalyser for fiscal evasion. The state administration is ineffective and bureaucratic (in the negative meaning of the word). There is a lack of dialog between administration and economic operators. Irresponsibility and fear to take a position or to take a personal decision deposited during the socialist period are still circulating within the institutions. On one hand, business is rendered hard to carry on; on the other hand, it makes the process of introducing the new laws or directions for development very difficult. In Bulgaria exists 1

According to the NSI and Ministry of Agriculture and Forests, until the end of June 2000 – 96 per cent of agricultural land was restituted. 5

the phenomenon of duplication of the functions between the institutions. An example is the control on and the licensing of the wine and products of canning industry. A high rate of scepticism is the consequence of this, which removes the returning of the confidence in the state administration. It’s going to be hard to revitalise economics, confidence being absent. The Bulgarian canning industry is still in the factor-driven stage. It works below 50 % of its existing capacities. BFI possess the potential to “jump” into the investment-driven stage, but it must find the spiral to come out from the vicious circle: the banks don’t give loans to the producers and the producers don’t offer good guarantees and convincing business plans. The main problem is the lack of reciprocal confidence. In the investment-driven stage the competitive advantages are drown from two determinants - factor conditions as well as firm strategy, structure and rivalry. The factor conditions will remain an important element, but as a function of the market requirements. The most developed industries are the ones that are able to create competitive advantages based on the local resources. It is a governmental task to find the exit from the vicious circle. For example, it could create funds to guarantee the loans and the funds for loans for Bulgarian exporters. Having capital resources, the firms will invest and will try to achieve the market requirements. Moreover, there is a lot to do towards creating of a good information infrastructure. Following the Porter’s theory two subsectors fulfill almost all requirements to be competitive canning industry and wine industry. In the next years, the industries that are most likely to outperform are those where Bulgaria has cost advantage or particular niche, and where the industry directs a substantial proportion of sales to export markets. Focus sub-sectors are: • Food - a large fruit and vegetable canning industry which is highly export oriented; • Wine and Tobacco - a major export earners; The main question is - does the profitability of those sub-sectors of food industry actually correlate with its export potential? The evidence suggests that while exports may guarantee growth in revenues, they do not necessarily enable a company to make a satisfactory profit on those revenues. Why? Because another major impact on profitability has the level of input costs, and it does not help if those costs are imported - currency exposure, together with artificially high prices make it difficult to break even. Additional “negative “ influence has seasonality of production.

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