In the construction of wholesale markets, wholesale distribution centers, or whatever they are called, there are no dogmas. The market is dynamic and everything changes quickly, so you need to always keep your eyes open.
More precisely, there is one dogma – before you start planning investments in such objects, you should very carefully analyze the commodity flows and the structure of consumption of FRESH products (vegetables, fruits, meat, fish, dairy products, perhaps even fresh flowers) and understand whether you can dramatically and radically improve the business of people who are already buying and selling these products.
“Cardinally” means not by 5-10-15%, but at least twice. And here we are not talking about profit but about the possibility of increasing sales volumes, or increasing the speed of product sales, turnover, reducing the loss of time by customers, etc. Then the chances of success could theoretically be.
I wrote this blog following my speech at the first international online business forum “Infrastructure of Agrology” on August 4, 2020. Given the limited time, within the framework of my speech, I was not able to fully disclose all these issues, which has already led to a considerable number of questions. I will try to answer them in a more detailed format.
The errors that I want to talk about now, are errors in the vast majority of cases. However, what I will write now is also not a dogma. There are undoubtedly different conditions and there are exceptions to these rules.
– Copying wholesale markets from other countries or cities – it is not the market that needs to be copied but approaches to planning and market management. Yes, this is the case when the bicycle has to be reinvented every time in order for it to ride. Even in different cities of the same country, which are comparable in size and population, it is likely that different market models and different approaches to their planning and functioning will be needed.
– Construction of the wholesale market “in a better place” than the existing one – the best place is where, even in unorganized and poor conditions, but traditionally, trade was and is carried out. The only way to move the market to a new location is to close the old site. If possible, it is best to create a more convenient and modern market in the old place without interrupting trade.
The task of every investor planning to launch a wholesale market is to ensure that on the first day of work, a lot of sellers and a lot of buyers come to the market. If this does not happen, then inviting them a second time will be many times more difficult and much more expensive. Therefore, we do not forget that professional work with specialized media from the moment of the start of construction is also the most important and completely non-trivial task.
I saw many more markets that never took off than those that did. And the conditions, infrastructure had nothing to do with why the market did not start.
– Creation of a wholesale market where it does not significantly improve anything. Where everything works well without a new market, the market may not be needed. The wholesale market investor tries to look into his or her business plan, but you need to start by studying the business plan of those for whom the wholesale market is being created, that is, wholesalers, representatives of the HoReCa segment and, of course, manufacturers. If the availability of the site being created does not allow them to earn significantly more, does not create new prospects and opportunities for them, then no one will need it, and the money will be wasted.
– Creating an export-oriented wholesale market is a bad idea in most cases. Especially if you are building a market outside the European Union, where “export” is a purely technical category and there are no borders, and the distance between countries is less than in Kazakhstan between cities of the same region. Export-oriented markets have two key disadvantages:
1) Seasonality. You have built a property that only operates 3-6 months a year. And it needs to be kept for 12 months a year. The return, in this case, will be 2-4 times lower than that of year-round markets, which means you cannot afford the same quality management, etc.
2) Narrow assortment. The wholesale market should be the “king of the assortment”. There should be more product names in each group than in all supermarket chains combined. The wholesale market selling 10 or even 50 positions, as a rule, will not be interesting to trade. Of course, there are exceptions, such as specialized wholesale markets in specific regions. But that’s another story.
– The inattention of the management to the main wealth of the market – market information, which is literally underfoot. Markets often do not monitor prices, assortment, and trade volumes, or do it formally, carelessly. If information is collected, not everyone knows how to use it correctly. But this is a real treasure because such information allows you to create a uniqueness that no one else can repeat. Those who know how to use such tools get clients who never leave and the capitalization of investments is growing at a record pace. Therefore, I am pleased to see how the market information systems that I created many years ago still work and help to make market infrastructure objects not only sustainable but also economically successful and absolutely unique.
– The participation of the state or city in the authorized capital and management of the wholesale market dramatically worsens the prospects for creating a quality facility with quality services. Such a market becomes clumsy, the motive for making a profit is lost, and the attitude to the market and strategy changes with the change of political courses and elites that govern the country, city, or region.
If the market is created as an initially unprofitable object, then it, most likely, will not be able to be aggressive enough in attracting operators, will not improve the conditions for them, and, over time, will become a burden on the budget. Therefore, any partnership with the state or municipal authorities is best avoided at all costs.
– Creation of wholesale markets near small towns and cities with an undeveloped HoReCa segment. Wholesale markets are tied to consumption, not production! In addition, it is a mistake to think that every city, even a relatively large one, needs its own wholesale market. And to understand this is quite simple – you just need to study the trade flows of the entire region. As a rule, a successful market serves the entire region with a pronounced consumer center and it should be as close to this center as possible.
Also, if even in a fairly large city there is no culture of food consumption outside the home (tourism, hotels, restaurants, cafes, etc.), the market’s chances of success will be much lower.
– The creation of a specialized fruit and vegetable market is usually a bad idea because the largest segment of buyers who represent the HoReCa segment is immediately lost. It will be more profitable for them to pay more for products in the supermarket, where they can buy fish and meat and other fresh products. After all, the restaurant needs not only vegetables and fruits. Therefore, I repeat, the wholesale market should be the “king of assortment” so that no supermarket could offer such a choice for HoReCa.
– Creation of expensive infrastructure in the wholesale market, where there is no need for it. As a rule, this error is caused by the fact that an investor listens to a solution provider who is directly interested in over-budgeting and selling many things that are unnecessary for the market. Therefore, an investor should focus, first of all, on the needs of a potential client – a buyer (i.e. HoReCa and representatives of small retail), as well as a potential market seller, but not a supplier of equipment and technologies.
By the way, this is what often becomes the reason that the market “does not take off”. After all, the prices for market services are, in fact, too high, and the range of services includes things that are not needed by real market operators.
– Creation of a wholesale market “for cooling, finishing, processing, and packaging products”. This is a common mistake that costs investors a lot. These operations should be carried out as close as possible to the field where vegetables and fruits are grown. There is no point in cooling, for example, of an apricot that was not cooled immediately after harvesting and then transported 300-500 km or even 50 km. The cold chain does not like such temperature fluctuations, so it is better not to touch such an apricot. It is advisable to cool the product as quickly as possible after cleaning, literally within minutes.
In addition, compare the feasibility of placing sorting or cooling of fruits and vegetables right next to the field in a production region where land costs a penny and labor is also inexpensive and the location of the same processes in the capital, where land is hundreds of times more expensive and labor is also. The conclusions are clear here.
The market must engage in trade, that is why it is called the “market”. If there is a revision service there, it must first of all be based on the real needs of the trade, if any. However, revision can in no way be the main idea of creating a wholesale market.
By the way, many have probably already noticed that the mistakes I have listed like to accumulate in one investment project. For example, an export-oriented market, with expensive infrastructure, is a very good example of a failed business idea.
– Long-term storage or processing on the wholesale market is an even worse idea than the actual completion of fruit and vegetable products placed on the market. The market should give the maximum turnover per meter, and long-term storage should always be as close to the field as possible. For example, every hour of delay in laying an apple for storage after harvest is minus a week of the shelf life of this fruit.
And again, back to the cost of land and real estate – what is the point of storing cheap potatoes in the capital of the country for 8 months a year? How much does this storage cost compared to using the same area for retail? Obviously, this is complete nonsense from an economic point of view.
Immediately, an ideal example of a hopeless wholesale market is obtained – an export-oriented wholesale market for fruit and vegetable products, with modern storage facilities with controlled atmosphere (CA) storage technology for long-term storage of products, expensive processing infrastructure, located in the center of production and far from consumption centers, without a market information monitoring system, and even with the state as the main shareholder!
Therefore, any storage on the wholesale market should be short-term – 1-3 days, maximum a week. By the way, the lack of infrastructure for long-term storage immediately reduces the investment in 1 m2 of the wholesale market and therefore increases the return on investment.
By the way, investments in modern expensive storage facilities, without changing other aspects of the business (growing technologies, varieties, protection systems, etc.), can be a complete failure. I included this item for those who really want to put a storage facility at a retail facility – there are a lot of such people. So, if a variety of vegetables or fruits is not intended for storage, if it was grown without protection focused on long-term storage, it was not harvested correctly, it was not loaded correctly, it did not provide proper nutrition during the growing season, then the product will not be stored even in ideal conditions and in the most modern storage facilities. The store is not a sanatorium – it cannot improve the quality of the product, but it can help to preserve it.
– Since we are talking about storage, I will repeat the thesis that I have been repeating for about 15 years many times and every year, but there are still those willing to take the risk – “Investments in storage as a separate business are completely unpromising.”
Long-term storage of vegetables and fruits is an integral part of the fruit and vegetable growing business. After all, we cannot eat all the cabbage, potatoes, or all the apples in a week – we want to consume them all year round. So, they need to be stored. It is very interesting to watch how people plant 40 hectares of the apple orchard, but they are not going to build a storage facility with CA storage, for example. Usually, they simply do not understand what 2 thousand tons of apple is and who can buy and ship it even in a month of round-the-clock work.
By the way, storage as a business can still be earned in countries with a really huge shortage of storage capacities and only when building cheap and not very high-quality storage facilities. It is also desirable for this country to be highly closed and high import duties on goods. But even so, the storage business is still a lottery. And once every three to four years, even in such countries, you have to lose up to 100% of the purchased products, because they are not sold at all at any price.
By the way, if the manufacturers are too small, then each of them should not build their own storage, because there is an economically viable storage size, given their high cost. Indeed, in addition to the actual storage chambers, you need to provide the required number of containers, purchase equipment for loading and unloading operations, make all the necessary connections to networks, etc. Moreover, it is best to place the sorting, finishing, and packing lines right there. If you build a storage facility with a capacity of 10 tons or even 100 tons, all these costs per 1 ton will be too high.
Therefore, according to my calculations, depending on the product category, storage facilities for fresh vegetables and fruits should be at least 1,000 tons in size, but better than 1,500 tons.
So what about small producers who can’t build their own storage? The answer will be cooperation, of course, provided that the country has appropriate legislation and business traditions. Otherwise, if the storage facilities are in the hands of third parties, the efficiency of the entire system will be significantly lower than in the case of farmers’ cooperation.
– Participation in trade and creation of own trading companies by the management or owners of the market. It is a very common practice, which usually leads to losses on all sides. In such a case, trading does not work out normally, and operators’ confidence in the market decreases. So, the temptation to create special conditions for themselves, worsening them for others, always grows. Thus, this is a classic conflict of interest. As with any business, only the right strategy and reputation will ensure sustainable development. And so, creating their own trade, the owners or managers of the market are losing the reputation of the main business.
It turned out a little more than 10 errors, but this list is certainly not exhaustive. I hope that he will help at least one investor avoid multi-million dollar losses.
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