The pooling market in Ukraine has gone through several stages of its development, but so far it has not achieved the necessary integration with the pooling markets of the EU countries and Turkey.
If environmental solutions in logistics often require higher costs, pooling is a unique “win-win” business solution – all market participants benefit from it, and the impact on the environment is very positive.
Earlier, we talked in detail about what pooling is and how it appeared in the world and in Europe. Today, EastFruit will tell you about pooling in Ukraine – the only country in the region where pooling has been operating quite successfully for a long time, although its prospects are still far from their limits.
The start – better to see something once than hear about it a thousand times
At the end of 2006, the International Finance Corporation (IFC) Technical Assistance Project in Ukraine organized a study tour to Turkey for Ukrainian farmers and horticultural traders who learned about modern packaging and distribution. The participants of the trip saw how pooling works, how it affects retail, production, and wholesale trade, and how many efficient solutions it offers.
After the positive impressions of the participants, the IFC project conducted a study of the potential pooling market in Ukraine in 2007 and presented the results to all participants in the Ukrainian fruit and vegetable market. The study also included a five-year pooling company business plan developed in collaboration with Schoeller Arca Systems, a leading global manufacturer of plastic packaging systems that produced reusable plastic containers for international pooling companies.
At that time in Ukraine, as now in most other countries of the post-Soviet space, fruits, and vegetables were packed in used cardboard boxes from bananas and other imported fruits and vegetables. This did not allow efficient distribution of fruit and vegetables by retail chains to stores.
The first stage: 2007-2011 – the effect of the crisis
The project worked with major retail chains, including Fozzy Group, the largest retail chain in Ukraine and a leader in fruit and vegetable sales. When the findings of the study and possible development plans were presented to local retailers and representatives of European pooling companies, they estimated that the pooling services market in Ukraine would not develop for at least five years. In response, the IFC project organized a follow-up study tour to Turkey in the spring of 2008 for a group of representatives of the Ukrainian horticulture business to study the experience of using returnable boxes in pooling systems.
Suddenly, the financial crisis of 2008-2009 helped. It has led to an increase in the cost of single-use cardboard boxes used for fruits and vegetables in Ukraine. This, in turn, led to higher interest in pooling, and several wholesalers returned to Turkey in the spring of 2009 to do additional research and launch a pilot project in the Ukrainian market.
Schoeller Arca Systems quickly responded to the growing demand by setting up the production of the required volume of plastic boxes in Ukraine in the autumn of 2009.
As a result, the first Ukrainian pooling company had used more than 500 000 boxes by the summer of 2010, having invested several million dollars in the Ukrainian market.
Fozzy Group was the first retail chain to regularly use pooling for the distribution of fresh fruits and vegetables in the country. By the end of 2010, pooling and the use of plastic boxes were fully implemented for Ukrainian products with encouraging results: distribution efficiency was improved, as well as product quality. The company estimates that transport efficiency has increased by 20-30% (depending on the products transported), and losses have decreased by about 15%.
The company has estimated annual savings of around 300 000–350 000 kilometers run by trucks and has reduced 400–500 tonnes of carbon dioxide emissions per year.
The Fozzy Group has estimated annual savings from the introduction of pooling in its horticultural business of more than $3 million.
Based on the positive experience with pooling for fruits and vegetables, the company introduced pooling for other perishable products (milk, meat, bread), resulting in an additional $2 million in savings. For farmers, the value of using reusable boxes and a pooling system is reduced waste of finished products and more efficient logistics from fields to distribution centers.
Several important lessons learned from pooling implementation:
Lesson 1. Better to see something once than hear about it a thousand times when it comes to overcoming the resistance to abandoning old practices. Ukrainian businesses initially rejected the idea of pooling, saying it was too expensive) and it was not the right time for the Ukrainian market. To overcome this resistance, the IFC project team organized a study tour to Turkey along the fruit and vegetable supply chain in 2006 for farmers and traders. This led to a second study tour in 2008 for retailers, focusing on logistics and distribution. As a result of the second trip, the perception of the idea of pooling began to change. Once Ukrainian firms saw the benefits of the system, including hard numbers showing the cost savings, they got excited about upgrading their own fresh fruit and vegetable packaging and distribution system.
Lesson 2. Localization of global practice in accordance with the local context.
Providing industry information and financial models was much of the key data needed to demonstrate the value of implementing pooling. However, it was not enough to just show data from Europe or Turkey. Financial models had to be localized to reflect Ukrainian conditions, for example, the size of Ukrainian farms and trade representatives, the range of products, and the seasonality of production in Ukraine differed significantly from Europe and Turkey. Reflecting local market conditions increased confidence and had a greater impact on the trainees. A high level of industry awareness and access to quality market information is also very important. Market information obtained within the IFC pilot project allowed for a quick assessment of the effectiveness of similar draft projects in other regions, such as Belarus and Georgia.
Lesson 3. Focus on industry leaders.
The pilot project was built on working with a range of clients to show new ways of doing business for the entire horticultural sector. Therefore, the selection of the best clients was extremely important. Some of the key factors were:
1) reputation – you must be sure that others will be guided by the results of the leaders’ work;
2) willingness to share their experience – customers have benefited from being the first to implement new technology, but they need to ensure that they are ready to show the benefits of the new system to other market participants;
3) scale – the client’s operations must be large enough for the market so that the results are evident;
4) technical capabilities – the client must have all the necessary resources to implement the technology and accept the corresponding risks.
Working in the horticultural sector of Ukraine for 10 years, the IFC technical assistance project has gained comprehensive information and knowledge about the industry, horticultural stakeholders, important issues, and gaps. This was of great importance in allowing the project to find a good partner/client to support the implementation of the pilot project and to make it successful.
The second stage: 2011-2021: a sharp growth, a shortage of containers, and another crisis
After the successful implementation of pooling in Fozzy Group, most retail chains in Ukraine started using this service within a year, which led to an increase in demand and even a shortage of boxes, especially in summer, when sales in retail chains increased several times in physical terms.
The current pooling operator could not fulfill all customer requests, so, two new pooling operators entered the Ukrainian market over the next few years, partially reducing the supply shortage. More than 80% of the containers were used by pooling operators for the needs of the Ukrainian horticultural business, which was often subject to seasonal fluctuations since the sales volumes of Ukrainian fruit and vegetables in summer and autumn were several times higher than those in winter and spring.
It should be noted that international pooling companies could not enter the Ukrainian market due to high competition from local operators. Ukrainian pooling companies charged an average of 50% less for their services than companies in the EU countries. In addition, the retail market in Ukraine is controlled by national rather than international retail chains, which were not ready to take on the increased long-term obligations stipulated by the contracts of international pooling companies.
The largest producers of meat and dairy products in Ukraine that have been using reusable plastic containers in their distribution for more than 40 years continue to believe that their own plastic containers are the best solution now, although less efficient in logistics.
In addition, there were other factors hindering the development of pooling services, such as the devaluation of the hryvnia (UAH) in 2014-2015. The devaluation of the national currency affected the finances of most pooling companies as plastic containers or raw materials for their production were imported.
Thus, when the hryvnia devalued from 8 UAH to 25 UAH per 1 USD, pooling companies experienced a sharp increase in the cost of pooling services, and retail chains did not agree to a price increase for their suppliers. The annexation of Crimea and the war unleashed by Russia in the Donbas also had a negative impact, as retail chains and pooling companies lost assets in these regions.
A significant problem was the lack of access to project finance because Ukrainian banks usually required additional collateral and did not accept plastic containers as collateral. There were also no leasing companies on the Ukrainian market that would agree to lease reusable plastic containers. Therefore, only when one of the pooling companies launched its production of reusable plastic containers, minimizing the cost of pooling services, Ukrainian banks provided financing for the production development. The main sources of financing for other pooling companies were their own funds, the investments of the founders, as well as trade credits of plastic container manufacturers, which were linked to foreign currency.
The low cost of pooling services and limited funding did not allow pooling companies to invest in the development of modern IT infrastructure. This caused higher administration and accounting costs, and higher losses, as thanks to modern IT infrastructure, container checks can be done daily. In Ukraine, checks between suppliers of retail chains and pooling companies were done monthly and in case of a shortage, the supplier reimbursed the pooling company for the cost of a lost or broken box. At the same time, it was rather difficult to do a quick check with a retail chain that has several hundred stores in different regions since the staff in the stores often used plastic containers as additional commercial equipment and did not return it to distribution centers. So, when checking, large gaps were always found that affected the finance of pooling companies and created an additional shortage of supply, especially in summer.
The high demand for pooling services in summer and price competition led pooling companies to provide plastic containers without mandatory sanitization. Initially, this allowed for higher margins in the short term, but in the long term, it led to a decrease in investment in washing infrastructure and increased the dependence of pooling companies on the horticultural business.
As noted above, international pooling companies were not particularly interested in entering the Ukrainian market, as, despite the high potential of the Ukrainian market, there were rather high financial and political risks and poor customs legislation. Thus, they focused on developing in the EU market. Meanwhile, Ukrainian pooling companies also failed to systematically enter the market of pooling services in the EU and Turkey. Although there were still some deliveries of imported products from Poland, Greece, and other countries in Ukrainian plastic containers, their share in the total volume of pooling services was minor. This is even though Ukraine imported more than 15 million boxes of bananas in 2021, which continue to be reused by Ukrainian producers of fruits and vegetables, creating competition for Ukrainian pooling companies.
Noteworthy is the situation in the pallet pooling market. Ukrainian pooling companies rent a limited number of wooden and plastic pallets along with plastic containers, but it has not become a well-developed service in Ukraine due to the low cost of secondary wooden pallets.
The third stage: 2022 – a full-scale invasion of Russian troops into Ukraine
At the end of 2021, the Ukrainian market of pooling services grew by more than 20%, and pooling companies planned to continue their active development at the beginning of 2022. They planned to expand the range of plastic containers. However, the beginning of a full-scale war, when Russian troops invaded Ukraine from different directions, radically changed the situation in the market for these services.
Initially, the assets of reusable packaging and customers in the occupied territories were lost, and demand from suppliers of retail chains dropped sharply. Then the Russian aggressors destroyed one of the plants for the production of reusable plastic containers in Chernihiv.
Fuel shortages in the spring and a sharp rise in logistics costs led to a reduction in demand for pooling services. However, the retail market began to adapt when harvesting started in summer, and most pooling companies resumed their work. Moreover, the Council of the European Union assigned Ukraine the status of a candidate for joining the European Union on June 23, 2022, which will allow the Ukrainian pooling business to integrate as much as possible into the EU market soon, and international pooling companies to begin entering the Ukrainian market. Also, the state has created prerequisites for simplifying access to financing and insurance of exports of services from Ukraine.
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