Recently, the question of how to bring the Ukrainian economy out of the shadow has been increasingly raised. Authorities are coming up with new methods of struggle and incentives to get the business out of the shadows. However, almost every government is more interested in repressive methods, rather than incentives for removing them from the shadows.
In addition, the fruit and vegetable industry is too small in the eyes of officials to seriously delve into its problems. In addition, it seems like this precisely because the production and trade in vegetables, fruits, potatoes, and berries is almost completely in the shadow.
Together with the Ukrainian Fruit and Vegetable Association, we have repeatedly proposed several very simple approaches to introducing incentives for removing a significant part of the fruit and vegetable industry from the shadows. These approaches can be beneficial to both the state and business.
In this blog, I want to offer detailed information about the six main indicators that characterize the maturity of the fruit and vegetable industry of any country. Based on these indicators or KPI, specific incentives can be developed for the development of the industry.
Indicator No. 1 – Percentage of retail chains in sales of fruits and vegetables. For the fruit and vegetable business of Ukraine, the domestic market is the foundation of the entire industry, since manufacturers earn much more money from domestic sales than from exports.
The domestic market for vegetables, potatoes, fruits, and berries forms production trends for most producers and wholesale companies. However, the shadow domestic market for different cultures, depending on the season, is, according to my estimates, from 60 to 80%. Therefore, retail chains do not yet have such a market share, which will quickly and significantly change the structure of fruit and vegetable production.
As soon as the market share of retail chains in sales in any country exceeds 50%, sharp changes begin to occur in the entire supply chain. I believe that in the next three years, the share of retail chains in Ukraine can exceed 50% only if the population’s income growth continues at a rapid pace, and also if the rural population continues to migrate to large cities. This will lead to increased competition and higher quality standards for the entire legal produce business.
In order to achieve a 50% of sales through supermarket chains, which means taking several billion hryvnias out of the shadows into the legal field and, therefore, getting significantly more taxes from it, the Ukrainian government needs to do two simple things that have nothing to do with repression:
- a) reduce the VAT on fruits and vegetables by half – this will make working with cash unprofitable, and legal payment of taxes profitable. In addition, this will stimulate consumption, as products in networks will become more accessible to consumers and will increase its safety and traceability. By the way, in most EU countries, VAT on products, or at least vegetables and fruits, is lower than on other goods, and even Russia reduced VAT on fruits and vegetables in 2020;
- b) support Bill No. 0856 on agricultural cooperation, developed by industry associations with the support of the FAO and the EBRD, which will allow small and medium-sized professional producers to legally work together and increase direct deliveries to such large buyers as supermarket chains.
Indicator No. 2 – Export Development. Currently, the export of fresh fruit and vegetable products is the least developed segment of the fruit and vegetable industry, with the exception of apples, blueberries, and greenhouse products. I do not mention nuts, as this is a completely separate segment and a separate topic, and most of the nuts exported from Ukraine are not grown industrially.
Ukrainian farmers produce a much wider range of fresh food products that have good export potential, but actually export only large quantities of blueberries and apples. Therefore, as the saturation of the domestic market increases, significant funds will need to be invested in promoting fruit and vegetable exports. The development of trade through retail chains will also stimulate exports, as it will help to raise quality and safety standards. On the contrary, export development allows you to increase sales in the network. As in the previous case, it would be logical to stimulate exports by creating modern civilized conditions for the cooperation of gardeners, vegetable growers, and potato growers.
Indicator No. 3 – Import Development. You should not be afraid of import, because not all vegetables and fruits can be grown in Ukraine due to climatic restrictions. The growth of population incomes, as well as the constant growth in the consumption of fruits and vegetables, always stimulate the development of imports of fruits and vegetables.
Every year, new companies enter the Ukrainian market, but the largest world and European companies are still afraid to invest even in the opening of Ukrainian representative offices, not to mention direct investments.
The development of imports and the involvement of importers in the domestic market can also contribute to the development of exports. Indeed, importers are often also exporters, and they will find new opportunities within the country, if, of course, we can interest them to work in the Ukrainian market.
Indicator No. 4 – Unified quality standards. The Ukrainian fruit and vegetable business needs to introduce uniform quality standards. This is an important aspect of the development of a civilized domestic market, as well as export. The main problem that impedes the implementation of common standards is corruption in the entire supply chain. Corruption can be overcome with the help of technologies and incentives such as reducing VAT and developing cooperation. Therefore, the active use of decision-making automation, when accepting or sorting fruits and vegetables by quality, will remove the human factor and significantly reduce corruption risks.
Indicator No. 5. Market infrastructure development. In recent years, an increasing number of Ukrainian fruit and vegetable companies have been investing in their own development and creation of modern market infrastructure, which is already radically changing the image of the fruit and vegetable industry. However, significant problems related to acceptable quality roads, the sea, rail, aviation, and river logistics, the quality of storage facilities, the shortage of sorting lines and their technological level continue to exist throughout the country. The solution to these issues will create the basis for the long-term development of business in Ukraine, and to solve these problems, the state does not have to pay for the development of infrastructure. There is a need to create opportunities for its development.
An example is the formation of conditions for cooperation between farmers which will make investments in the creation of storage facilities and the purchase of sorting lines more accessible for each individual farmer since many of them cannot afford this themselves.
Market infrastructure also includes such important elements as access to market information and the development of wholesale markets. In this regard, Ukraine has a good position in comparison with many other countries.
Indicator No. 6 – Quality packaging. A developed market for modern and safe packaging, which preserves the product well and helps to sell it, is very important for the development of all participants in the existing supply chain in the fruit and vegetable industry, from a small producer to an end consumer.
At the same time, in Ukraine over the past 25 years, a used banana box has been used as a market “standard” for packaging. In such boxes, almost all products sold to markets and even part of products are sold to supermarket chains. That is about 80% of all fruits and vegetables.
Naturally, the greater the percentage of product sales through supermarket chains, the less demand will be for a used banana box. If we look at the world packaging market, then now it is even moving away from disposable plastic, to which the Ukrainian market is just beginning to come. The trend for packaging fruit and vegetable products in biodegradable and ecological types of containers, as well as the use of reusable returnable containers (pulling), is relevant. In Ukraine, several supermarket chains also use the pulling system successfully. However, all its advantages are not used because it can work not only in networks, but also in markets, and even in international trade.
If we bring a small intermediate result, we can note the average level of maturity of the Ukrainian market and huge prospects for its development. A reduction in VAT on fruits and vegetables and the development of cooperation in the country will give an incentive to legalize the turnover of fruits and vegetables, increase safety and quality standards, sales in networks, and consumption of products by the population of Ukraine, and develop exports, infrastructure and modernize approaches to growing, packaging, and marketing.
These principles are universal and can be used not only in Ukraine but also in other countries. I think that this can be very relevant for Uzbekistan, Tajikistan, Moldova, and other countries that aim to develop vegetable, fruit, and berry industries.
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