J.6_End_Market_Analysis_Report_August_8_2017.pdf

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 1

CTJ ASSESSMENT SERIES - PART 1:

END MARKET ANALYSIS FOR SELECTED

MARKETS FOR CENTRAL ASIAN

FRESH AND DRIED FRUIT PRODUCTS

August, 2017

RFP 72011518R00001

Attachment J.6

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 2

ABOUT THE ACTIVY

USAID Competitiveness, Trade, and Jobs in Central Asia activity aims to facilitate exports and employment in horticulture and strengthen transport and logistics services across the five Central

Asian economies. By incentivizing firms to become more regionally competitive and by addressing cross-border impediments to trade, USAID helps to develop a more diverse and competitive private sector and generate export-driven growth.

Five-Year Project: October 2016 to September 2021

Goals: Expand regional trade and employment in the horticulture, transport and logistics sectors in Central Asia

Approach: Market Systems Development – facilitating market actors to implement activities and achieve goals

The views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 3

CONTENTS

INTRODUCTION 5

BACKGROUND AND OBJECTIVES 5

STUDY FOCUS AND LIMITATIONS 5

REPORT STRUCTURE 6

CHAPTER ONE:

OVERVIEW OF END MARKETS AND REQUIREMENTS 7

KEY END MARKETS FOR TARGETED PRODUCTS 7

TRADITIONAL MARKETS – UNCERTAINTY AND SOME DECLINE: 9

DEVELOPING MARKETS – STABLE AND POTENTIALLY HIGH GROWTH 9

ASPIRATIONAL MARKETS – SMALLER VOLUMES,

YET POTENTIALLY HIGH GROWTH 9

KEY GLOBAL MARKET TRENDS AND WHAT THEY MEAN FOR CENTRAL ASIA

ECONOMIC AND GEOPOLITICAL TRENDS 10

CONSUMER PREFERENCE TRENDS 10

DISTRIBUTION CHANNEL TRENDS 11

KEY MARKET REQUIREMENTS /

CRITICAL SUCCESS FACTORS FROM BUYERS’ PERSPECTIVE 12

CHAPTER TWO: END MARKET STUDIES 14

GERMANY

MARKET SIZE, GROWTH TRENDS, AND CENTRAL ASIA’S EXPORTS 14

CONSUMER TRENDS AND MARKET CHARACTERISTICS 14

DISTRIBUTION CHANNELS AND MARKET SEGMENTS 14

KEY COMPETITORS 17

CRITICAL SUCCESS FACTORS AND CENTRAL ASIA’S PERFORMANCE 18

POTENTIAL MARKET OPPORTUNITIES 21

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 4

LATVIA

MARKET SIZE, GROWTH TRENDS, AND CENTRAL ASIA’S EXPORTS 22

CONSUMER TRENDS AND MARKET CHARACTERISTICS 22

DISTRIBUTION CHANNELS AND MARKET SEGMENTS 22

KEY COMPETITORS 24

CRITICAL SUCCESS FACTORS AND CENTRAL ASIA’S PERFORMANCE 25

POTENTIAL MARKET OPPORTUNITIES 27

RUSSIA

MARKET SIZE, GROWTH TRENDS, AND CENTRAL ASIA’S EXPORTS 28

CONSUMER TRENDS AND MARKET CHARACTERISTICS 28

DISTRIBUTION CHANNELS AND MARKET SEGMENTS 29

KEY COMPETITORS 30

CRITICAL SUCCESS FACTORS AND CENTRAL ASIA’S PERFORMANCE 31

POTENTIAL MARKET OPPORTUNITIES 33

KAZAKHSTAN

MARKET SIZE, GROWTH TRENDS, AND CENTRAL ASIA’S EXPORTS 34

CONSUMER TRENDS AND MARKET CHARACTERISTICS 34

DISTRIBUTION CHANNELS AND MARKET SEGMENTS 34

KEY COMPETITORS 36

CRITICAL SUCCESS FACTORS AND CENTRAL ASIA’S PERFORMANCE 37

POTENTIAL MARKET OPPORTUNITIES 38

ANNEX A 39

TOP WORLD IMPORT MARKETS FOR TARGET PRODUCTS AND THEIR GROWTH TRENDS

ANNEX B 40

GROWTH TRENDS IN KEY IMPORT MARKETS (BY PRODUCT, IN USD)

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 5

1. INTRODUCTION

BACKGROUND AND OBJECTIVES

USAID Competitiveness, Trade, and Jobs in Central Asia (CTJ) activity is a five-year (2016 – 2021) project aimed at increasing the competitiveness of the economies of Central Asia in order to expand trade within the region and to markets beyond and to create jobs. The CTJ project is conducting an assessment to examine the competitiveness of its targeted sectors in order to prioritize project interventions and focus on those having the greatest impact. Every demand-led assessment starts with the end market. This end market analysis is the first step of the broader assessment and focuses on the requirements of key end markets for fresh and dried fruit from Uzbekistan, Tajikistan and Kazakhstan. Specifically, the analysis identifies the critical success factors as defined by international buyers and assesses the competitive position of products from Central Asia in these markets.

The study provides a framework for the CTJ team to be used in identifying, organizing and prioritizing the key value chain constraints and potential project interventions as part of forthcoming assessments. The analysis points to areas of improvement needed to meet the key market requirements, while an in-depth analysis of value chain constraints is the focus of a separate assessment.

STUDY FOCUS AND LIMITATIONS

This analysis focuses on the selected top five (in terms of export value) most common fruit export products from Uzbekistan and Tajikistan. Kazakhstan is not a significant producer of fruit and imports fruit from Uzbekistan and other countries in the region for both local consumption and re-exports. The study takes a product-level view defined at the 6-digit level of the Harmonized System (HS) of tariffs and focuses on the following products within the “edible fruit and nuts” category (HS code 08).

Fresh grapes (HS code: 080610)

Fresh apricots (HS code: 080910)

Fresh cherries (HS code: 080929)

Dried grapes (HS code: 080620)

Dried apricots (HS code 081310)

This study does not cover processed (preserved, canned, juiced) and frozen products. In Uzbekistan and

Tajikistan only approximately 20% of fruit harvest is processed and sold primarily in local markets. Most fruit is exported either fresh or dried.

Mirror trade data from the Global Trade Atlas database1 are used. Unless otherwise noted, the 2016 data are used throughout the report. Where 2016 data are not available or not complete, the 2015 data are used. The analysis focuses on the current key markets - Germany, Latvia, Russia, and Kazakhstan – and was informed by secondary research and remote interviews with selected buyers and industry experts in these markets. Additional markets of interest that merit further study are China, South Korea, India, UAE and Scandinavian countries.

1https://www.gtis.com/gta/

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 6

As these markets are either new or yet unexplored for Central Asia, the end market analysis requires market visits and in-person conversations with buyers2.

Lastly, the study objective is to identify critical success factors in end markets from the perspective of buyers – in other words, most important requirements, formal and informal, for products from Central

Asia to be competitive in each market. The study therefore does not cover the formal market entry requirements, such as export procedures and documentation, requirements for product labeling, and obligatory marketing standards set by each market (product grades, standards, etc.).

REPORT STRUCTURE

This report is organized as follows:

• Chapter One: provides the overview of key end markets for Central Asia and global market trends.

It includes a list of critical success factors for Central Asian producers across key end markets, a summary of buyer feedback and a preliminary list of key value chain constraints to meeting market requirements.

• Chapter Two: includes individual end market studies for Germany, Latvia, Russia, and Kazakhstan.

Each study discusses the critical success factors and competitive positioning of Central Asian products in the market.

• Annex: includes selected trade data.

2“Buyers” include a range of distribution channel actors located in end markets of interest, such as importers, wholesalers, distributors and retailers, who are closely familiar with the latest consumer trends and market requirements.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 7

CHAPTER ONE:

OVERVIEW OF END MARKETS AND REQUIREMENTS

KEY END MARKETS FOR TARGETED PRODUCTS

In 2016, the total world imports of “edible fruit and nuts” (HS code 08) from Uzbekistan amounted to

$378 million, out of which $227 million went to Kazakhstan and $60 million to Russia. Total world imports from Tajikistan in the same category equaled $25 million in 2015 with $20 million going to

Kazakhstan and $1.5 million to Russia. Presented below are the data for the most significant markets and trade flows for Uzbekistan, Tajikistan and Kazakhstan in each of the product categories subject of this analysis.

Uzbekistan has the largest and most diversified product portfolio with significant exports of both fresh and dried fruit. Key markets for fresh fruit are Kazakhstan and Russia, while the markets for dried fruit are more diverse and include Germany, China, and Latvia.

Tajikistan’s exports are significantly smaller with the key focus on dried apricots and mixtures of dried fruit and nuts mainly exported to Kazakhstan, Russia, Ukraine and Belarus. Some very small volumes also go to Germany.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 8

Kazakhstan has limited production of fruit due to climatic conditions, and is an importer of all studied products. Kazakhstan’s main export markets for fruit and nuts are China and Russia. The most significant categories are nuts to China ($20.7 million in 2015) and melons to Russia ($885,757) and Latvia

($746,099). For the targeted product categories there are significant re-exports predominantly to Russia.

In 2016 Russia’s reported imports from Kazakhstan included $2.3 million of dried grapes, $1.4 million of fresh grapes and small amounts of fresh cherries ($150,445), fresh apricots ($113,335) and dried apricots

($20,701).3 However, due to large illegal cross border trade, the actual unrecorded re-exports are likely to be significantly higher.

Presented in Annex A, are the top ten import markets globally for each of the five products and their growth trends. For Central Asia, the current and potential markets of interest can be grouped into traditional markets (Russia, Kazakhstan), developing markets (Germany, Latvia, China, South Korea) and aspirational markets (India, UAE, Scandinavian countries). Market growth trends are discussed below with the supporting data included in Annex B.

3China and Latvia did not report any imports from Kazakhstan in the targeted product categories.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 9

TRADITIONAL MARKETS – UNCERTAINTY AND SOME DECLINE:

- Russia is showing a decline in imports of almost all categories, ranging from 14-30%. This is mainly due to the import ban imposed on fruit from the EU in 2014. The market was showing stable growth rates between 2011 and 2013, prior to the ban. This created a market opening for Central Asian producers to increase their share of the Russian fruit market. At the same time, however, the sharp drop in the exchange rate of the Russian Ruble against the US Dollar in 2014-2015 also led to the decline of consumer purchasing power and reduced consumer demand for imported fruits.

- Kazakhstan shows some decline in imports of fresh grapes (-9%) and dried apricots (-12%), while imports have grown significantly for dried grapes (32%), fresh apricots (2%), and fresh cherries (51%).

Similarly to the Russian market, the local consumer purchasing power has declined due to the drop in the exchange rate of the Kazakh Tenge to the US Dollar, while the increased imports are likely due to re-exports.

DEVELOPING MARKETS – STABLE AND POTENTIALLY HIGH GROWTH:

- Germany - key market of interest in the EU - is showing slow, but stable growth in the fresh category

(2% for grapes, 4% for cherries, and 1% for apricots) and slight growth of 2% in dried apricots.

However, the market for dried grapes, which currently constitutes the largest portion of Central Asia’s exports to Germany, has been declining at 3%.

- China is the fastest growing market for all product categories with growth rates of 15-30%. The fastest growth was in fresh grapes, fresh cherries and dried apricots.

- Latvia, while not among the world’s top ten importers of targeted products, is a growing market.

Imports of dried grapes have been growing at a rate of 18%, while imports of dried apricots and fresh grapes have been steady and imports of fresh cherries and apricots have grown at 5-6%.

- South Korea is showing high growth of 11% in imports of fresh cherries, while the fresh grapes market is stable. Imports of dried apricots are stable, while dried grapes are showing a slight decline of

3%. (Uzbekistan has been successfully exporting small amounts of fresh cherries to South Korea since

2012, otherwise this market remains unexplored).

ASPIRATIONAL MARKETS – SMALLER VOLUMES, YET POTENTIALLY HIGH GROWTH:

- India is showing a 30% growth in imports of dried grapes, while dried apricots are showing a 16% decline. Imports of fresh cherries have grown at 34%, albeit in very small volumes. (Uzbekistan delivered a small shipment of sweet cherries to India in 2014. Otherwise Central Asia is currently not exporting any fruit to the Indian market).

- United Arab Emirates, while not on the list of top ten importers, have been increasing imports of fresh grapes at 13%. Imports of fresh cherries, fresh apricots and dried apricots have been growing as well, although in smaller volumes. (Central Asian fruit is currently not present in the UAE market).

- Scandinavian countries, while not among top ten importers globally, represent a market of interest due to high discretionary incomes, consumer health consciousness and the highest levels in Europe of fruit consumption per day in Norway and Sweden. (Uzbekistan exported small shipments of fresh cherries to Norway in 2012 and 2013. Small volumes of dried grapes are currently sold to Sweden and of dried apricots to both Norway and Sweden. Otherwise these markets are unexplored).

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 10

KEY GLOBAL MARKET TRENDS AND WHAT THEY MEAN FOR

CENTRAL ASIA

The following global market trends, current and emerging, will shape the export market opportunities and requirements for Central Asian producers in the medium to long term.

ECONOMIC AND GEOPOLITICAL TRENDS:

- Uncertainty in Russia: In August 2014, Russia announced an import ban on fruits and vegetables from the EU. This resulted in an increased demand on the Russian market for fruit, opening up a significant portion of the market for Central Asian producers. This demand could however be affected by the decline in consumer purchasing power due to the overall economic situation.

- Increased competition in the EU: Russia’s ban led to increased competition in EU markets from

EU fruit producers that have lost their markets in Russia. Prices for fresh grapes and cherries in the

EU markets have dropped and it became more difficult for non-European suppliers to compete in the

EU markets during the local production season.

- Russia’s strive for self-sufficiency: Reportedly, Russian government has been offering subsidies for investments in local fruit production. Over the long-term this may lead to increased competition in the Russian market from local producers. However, experts do not believe this will have a significant impact on the positioning of fruit from Central Asia in the Russian market, due to different climatic conditions in Russia and high demand for fruit from Central Asia due to its taste.

CONSUMER PREFERENCE TRENDS:

- Healthy: Globally, consumption of fresh fruit is growing due to increase in consumer health consciousness. Demand for dried fruit has also been increasing due to popularity of healthy snacks.

Dried fruit are used as an ingredient and a natural substitute for sugar in many baked good, snacks, breakfast cereals and by the confectionary industry.

- Organic: Demand for organic products in the EU markets grew by almost 30% between 2009 and

2013, and by additional 7% in 2014 and 10% in 2015. European consumers are increasingly focused on reduced use of chemicals. Germany and France together represent over half of the EU organic market.

- Sustainable: Consumers worldwide are concerned about sustainability and increased attention is paid to local seasons and locally produced fruit. This increases the pressure on exporters to supply products off-season or in early season, to avoid competition with local producers.

- Convenient: As lifestyles are becoming more fast-paced, consumers are looking for ready-to-eat, convenient, yet healthy foods. This trend is especially strong in Northwestern Europe. Retailers are offering freshly cut fruit, snack vegetables, seedless fruit and prolonged shelf life. For Central Asia, this means increased demand for ready-to-eat dried fruit and nut snacks.

- Unique: Along with increased volumes of discount retail sales, the higher-end market for specialty niche products is also growing with a particular focus on unique and exotic taste. Consumers are willing to pay premium prices for products that have consistently good taste. Dried apricots are considered an exotic product by the European consumer.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 11

- Safe: Increase in food safety concerns requires strict compliance with Maximum Residue Levels (MRLs) and prevention of microbiological contamination. Certification schemes such as GlobalGAP and British

Retail Consortium (BRC) are required, especially in the EU markets.

- Responsible: Supply chain transparency is becoming a market requirement as consumers demand more socially and environmentally responsible foods from retailers. For example, some of the large European traders are sourcing dried grapes only from partners which are members of SEDEX - an organization dedicated to improvement of responsible and ethical business practices in global supply chains.

DISTRIBUTION CHANNEL TRENDS:

- Growth in supermarkets: Retail sales of fresh fruit and vegetables are increasingly dominated by supermarkets which drive the market requirements. Traditional fruit and vegetable stores and street markets have seen their market shares decrease in most countries. Retail chains usually buy from big importers and focus on quality, volumes and low price. As a result of increasing competition, importers and wholesalers are becoming more specialized and are looking to establish a unique market position.

Wholesalers that supply large retailers prefer to work with a middleman who sources from large producers in large quantities. As a result, smaller importers specialize in niche products, for example exotic or organic.

- Growth in specialty products: While the mainstream middle market segment is losing market share, luxury or specialized stores have been expanding and servicing niche markets, such as exotic, ethnic or organic. This may be an opportunity for exporters that supply differentiated products in smaller volumes.

- Emergence of new channels: With consumers looking for convenience, there has been an increase in home delivery and online purchases of fresh produce, and even some supermarket chains are promoting their home delivery services. This trend is evident not only in EU markets, but also in Russia and other emerging markets.

- End market segments determine the price margins: Price margins in fruit value chain vary by market, product and market segment within each market. To price their products producers usually work backwards from retail prices in the targeted end market segment and then look at the different margins expected by the various actors along the supply chain in order to determine their ability to compete in the market. The leading producer countries tend to control the prices in end markets. In general, however, the following breakdown of how the cost is shared throughout the supply chain can be applied to fresh and dried fruit, with variations across markets. Margins for organic compared to conventional products are usually not different - the higher price for organic products is determined by the additional costs involved in certification. For producers in Central Asia, the critical factor will be the cost effectiveness of transporting products to market, as some of the highly perishable products, for example cherries, can only be shipped by air.

Price margins4 Producer Exporter Transport Importer Retailer

Dried fruit 5-15% 10-15% 5-10% 20-30% 25-40%

Fresh fruit 25-35% 10-15% 10-12% 8-20% 15-25%

4 Price margins are estimated based on market reports by CBI - Centre for the Promotion of Imports from

Developing Countries (https://www.cbi.eu/) and buyer interviews.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 12

KEY MARKET REQUIREMENTS/CRITICAL SUCCESS FACTORS FROM BUYERS’ PERSPECTIVE

To successfully export to end markets, producers need to understand the critical product-level success factors in these markets and how they relate to their own competitive advantage and performance in these markets.

The table below summarizes the critical success factors that have been identified for Central Asian fruit through buyer interviews and rates their importance for each market. (The chart on the right summarizes the ratings across all markets).

The relative importance of each critical success factor is determined by the specifics of individual markets and sometimes market segments within those markets. For example, taste and variety will be less of a consideration for the Russian market, where consumers like the sweet taste for fruit from Central Asia and the market distinguishes the product by taste and size, rather than variety. In the German market, on the other hand, consumer preference for seedless grape varieties and need for impeccable cosmetic appeal will place critical importance on offering the right varieties and quality. In addition, in premium market segments in each market, quality will be most important; for the discount retail chains - price, cosmetic appeal and packaging will be critical; while the open air market segment may place the emphasis on the combination of price and quality. To develop market entry strategies, it is important to understand the structure and requirements of each individual market, based on market visits and conversations with buyers. Market analyses that follow in Chapter

Two discuss in more detail each success factor requirements and how producers from Central Asia are currently positioned.

Critical Success Factor Germany Latvia Russia Kazakhstan

Price competitiveness Critical Critical Critical High

Seasonality/timing on the market Critical/High High Medium Low

Food safety standards and certifications

Critical Critical Medium Medium

Quality Critical High High/Medium Medium

Shelf life Critical/High Medium High/Medium Medium

Cosmetic appeal High Medium Medium Low

Varieties/color High Medium Low Low

Taste Medium Medium Low Low

Size and weight of the fruit High Medium Medium Medium

Delivery time/volumes Critical Critical High Medium

Payment terms Medium Low Medium Medium

The table shown below summarizes the current performance of Central Asia’s producers for each critical success factor across all markets based on buyer feedback and points to potential constraints along the value chain that contribute to poor performance. This table provides a framework for the CTJ project team to further identify, analyze and prioritize the key value chain constraints as part of field assessment.

Constraints may be related to production, marketing, workforce, technologies, policy and other areas.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 13

Critical Success Factors – What does it mean for producers?

Buyer feedback – How is Central Asia currently positioned?

Which value chain constraints likely impact performance?

(To be analyzed as part of field assessment.5)

Price competitiveness

Provide highest quality at the lowest price - reduce costs of getting product to markets and eliminate risks to importers which increase costs.

High price of products from Central Asia, relative to quality, is a key issue identified by buyers both in

EU and Russia.

In Latvia Uzbek dried grapes are 10-15% more expensive and fresh grapes 50% more expensive than Turkish ones.

Turkey is able to get cherries to the Russian market in the Far East much cheaper than Uzbekistan, despite the added transportation costs.

Importers consider sourcing from Uzbekistan highly risky and potentially very costly, due to:

1) unpredictable and frequently changing export regulations and procedures;

2) product food safety and quality risks;

3) instability in supply;

4) Uzbekistan’s 100% pre-payment requirement for exports. (It has been reduced to 25% in February 2017).

Higher cost/price is an impediment to exporting to markets further away, as opposed to the traditional markets next door.

Small volumes of supply/fragmented land plots and lack of effective consolidation for export.

Mixed quality requires importers/wholesalers to sort, clean, re-pack product in end markets, adding to costs.

Poor exporter understanding of how the price margins are formed in end markets.

High competition from informal exports.

Unpredictable government policies and frequently chaining customs regulations.

In Uzbekistan, monopoly on exports and price setting by

Uzagroexport, a publicly owned company, increases the price.

(Abolished as of July 1, 2017).

In Uzbekistan, mandatory requirement for exporters, not involved in production, to convert 50% of export earnings into local currency at a set exchange rate which is 2.5-3 times higher than the market rate.

Exporters sell through intermediaries with a formal status of a producer, where the conversion requirement is only 0-25%. Experts estimate this raises the price by 5-20%.

In Uzbekistan, pre-payment requirement for exports adds to the number of intermediaries that carry pre-payment.

Timing on the market/seasonality

Get product to market before competitors in early season

“window” to capture higher price.

Uzbekistan and Tajikistan have 2-4 week early season advantage in Russia and Kazakhstan.

To compete in the EU, need to get products to market earlier than European suppliers. For grapes, before June and for cherries, in early May.

Lack of cold storages shortens the production season.

Need well organized logistics, cost effective transportation and reliable cold chain, including pre-cooling, as the product is highly perishable.

Extending production season takes time and investment.

Food safety standards and certifications

Ensure food safety and obtain all quality and food safety certifications required by buyers. Minimum MRLs

(Maximum Residue Limits) for fresh and allowed levels of SO2 for dried.

Significant variations in food safety test results within the same shipment. Uncertainty over the quality and food safety of delivered product.

Often high levels of SO2 and occurrence of

Ochratoxin A in dried fruit.

Unreliable local food safety test results, as certificates are often fake and test methods differ from EU labs.

Only 2-3 producers in Uzbekistan have GlobalGAP certification required by EU retail chains.

No HACCP, BRC or IFS certifications available.

Poor drying and storage practices and conditions. Need technologies to prevent mold and HACCP standards.

Producers use too much Sulphur in dried apricots and lack information on the allowed amounts.

Due to small and fragmented land plots, GlobalGAP certification is challenging for individual producers.

Production practices need to meet the minimum MRL requirements.

However, local market food safety standard requirements are low, slowing adoption.

Poor capacity of local phytosanitary testing lab.

Quality; Shelf life; Cosmetic appeal

Deliver product that is consistently clean, with no visual defects, with required shelf life and cosmetic

Quality is not consistent, mixed quality in one shipment. Good quality on top of the box, poor at the bottom. Up to half of the truck load can be spoiled.

Fresh spoils fast, perishes 2 - 5 days after removal from cold storage, and gets damaged in transport.

Small, fragmented land plots. One truck is filled from 2-3 farms. No quality control in the process.

At collection/loading points seasonal workers are paid by volume, little attention is paid to quality.

Lack of modern cleaning, sorting, grading, and packing technologies.

Manual sorting of dried fruit leads to added elements (stones, sticks, USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 14 appeal. The contents of each package must be uniform and contain fruits of the same origin, variety, and quality.

Dried fruit frequently exceeds the maximum moisture content requirements.

Dried fruit is dirty (stems, stones), dried plums spoil fast due to high oil content.

Fresh product is shipped unsorted and not palletized in boxes. Requires sorting, cleaning, re-packing upon arrival in end markets.

Actual shipments differ from samples.

Due to overall poor quality and high degree of damage during transport, cosmetic appeal suffers.

Quality and shelf life are not sufficient to meet requirements of supermarkets even in Russia, where standards are lower.

sand). Need new sorting equipment (laser sorting, metal detectors, calibration).

Lack of knowledge of exporters and intermediaries about how to preserve the product quality.

An estimated 15-20% of product is lost in post-harvest.

Limited cold storages, some are of poor quality, don’t have the required temperatures. Lack of pre-cooling (hydro coolers for cherries) and proper cold chain management and logistics.

No quality control and temperature check done in trucks.

Requirement for pre-payment in Uzbekistan takes away all the responsibility for quality from exporters.

Varieties (color); Taste; Size and Weight of the fruit

Understand and meet market-specific consumer preferences for varieties, taste, size and weight of the fruit.

Grape varieties are not known to consumers in Western Europe. Preference is for white grapes followed by red and smaller quantities of dark ones.

In general producers are meeting the requirements for weight and size in fresh grapes and cherries.

Taste is a competitive advantage in Russia, Kazakhstan and Latvia. However, in the EU, consumers may not like sweet tasting fruit.

Need improved production technologies and orchard management to increase yields.

Need to maintain production practices and varieties that yield the product in the size (berry) and weight (fruit bunch) required by buyers.

No seedless grape varieties produced that are in demand in EU markets.

Delivery time/volumes;

consistency of supply

Organize production, collection and logistics to consistently supply the required volumes and deliver on time, and often be able to plan deliveries 6-12 months ahead.

Exporters do not deliver product on time, sometimes with several days or a week of delay.

Buyers are not able to get the required and consistent volumes of supply.

Frequently changing export regulations and requirements make delivery unstable.

Lack of adequate supply volumes and cold storages limit export possibilities for fresh fruit.

Small volumes of supply/fragmented land plots and lack of effective consolidation for export.

Lack of cold storages.

Frequent and unpredictable customs delays and bolder closures.

Foreign investment is low. Earning repatriation is difficult in

Uzbekistan due to limited currency available. Investors can wait up to 5 years to get their profits back.

Payment terms

Accept delayed payment terms of 14-

45 days from retail chains.

Delayed payment terms of 14-45 days are critical when working with retail chains in the EU and

Russia or importers who serve retail chains.

At the moment most products in traditional markets go to open air markets.

Most producers lack the cash flow to be able to accept delayed payment. Need to increase access to finance options for traders.

Pre-payment requirement for exports in Uzbekistan (besides quality) limits supply to retail chains in Russia.

Packaging

Provide the type of packaging required by buyers that will withstand the transportation and protect the product from damage.

Singled out as number one issue. Producers use cardboard boxes for fresh fruit, which break down upon arrival. Need to use wooden boxes.

Poor labeling practices, sometimes wrong information is listed (e.g. claims to organic, etc.)

Higher value markets require clam shell packaging.

Plastic packaging materials and clam shell packaging are not available locally.

Producers choose to use cheaper carton instead of wooden boxes.

Poor transportation capacity and stability of trucks.

5 Constraints were identified through interviews with buyers. In depth analysis of value chain constraints was not the focus of this study and issues will be further vetted and analyzed by the CTJ team as part of forthcoming field assessment.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 15

CHAPTER TWO: END MARKET STUDIES

GERMANY

MARKET SIZE, GROWTH TRENDS, AND CENTRAL ASIA’S EXPORTS

In 2016 Germany imported $10 billion worth of “edible fruits and nuts” and imports have grown steadily at the rate of 3% over the past five years. With a population of 82 million and high discretionary income, Germany is the leading target market for all European and many international fruit producers. In 2016

Germany imported $682 million worth of fresh grapes, $162 million of fresh cherries, $110 million of fresh apricots, $165 million of dried grapes, and $31 million of dried apricots. The imports for fresh fruit have grown at 2-4% over the past five years, while the imports of dried apricots remained stable, and dried grapes have shown a slight decline at 3% over the same period.

Neither Uzbekistan nor Tajikistan are currently represented in the German market for fresh grapes, cherries or apricots. Uzbekistan, however, holds a significant position in the dried fruit market accounting for 4% of dried grape imports ($7 million in 2016) and 3% of dried apricot imports ($2 million in 2015).

Uzbekistan’s exports to Germany have experienced a 50-60% growth over the past five years. (In 2016, however, they dropped to $920,000 which is likely related to food safety concerns, discussed further below). Tajikistan supplies very small amounts of dried apricots ($24,000 in 2016), which have however grown at 17% over the past five years.

CONSUMER TRENDS AND MARKET CHARACTERISTICS

Focus on price: Despite high average discretionary income, German market is very price sensitive.

Consumers and retailers are looking for top quality at a discount price.

Health conscious: German consumers, especially the ageing population, are increasingly health conscious, which increases demand for both fresh and dried fruit.

Demand for exotic: Global food market trends towards convenience and demand for ready-to-eat products are strongly visible in Germany. In addition, consumers are looking for ethnic and exotic foods. (Dried apricots are considered exotic.)

Growth in organic: Germany’s organic food market is the second biggest in the world and, along with France, accounts for over half of all EU organic market sales. 4% of total food sales in Germany are organic. However, since the German market overall is price conscious, even organic consumers are considered to be price sensitive. This increases competition and places even higher emphasis on quality and uniqueness of products offered in the premium/organic market segment.

Stringent requirements: German market tends to have higher product quality and food safety requirements than most of the EU countries. Buyer requirements for maximum pesticide residue levels and moisture content, for example, are usually even lower than the EU standard allowed ones.

Environmental concerns: German consumers are particularly environmentally conscious when it comes to recycling and disposal of packaging. Suppliers shipping products in retail packaging must comply with the Green Dot system requirements and pay fees for packaging recycling.

Seasonal: There is an increased trend to buy locally grown, seasonal products.

DISTRIBUTION CHANNELS AND MARKET SEGMENTS

The German market is dominated by retail chains that account for more than 87% of all sales of fresh fruits and vegetables. Roughly 50% of them are discounters that pursue low pricing strategy. Open street markets account for 4% of fruit sales, while small independent grocery stores, HORECA sector and direct farm gate sales account for 3% each. The figure below presents the flow of fresh produce through the

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 16 main distribution channels in Germany. The distribution channels are similar for dried fruit, except that around 70% of dried fruit in the market is used as the ingredient for further processing and 30% is re-packed and sold by the retailers or used in the HORECA sector. Processing industry uses dried grapes and apricots as an ingredient in chocolate production, baked goods and breakfast cereals. Smaller quantities are used for production of jams, compotes, yogurt and juices.

Supermarkets are characterized by very stringent quality and food safety requirements and are also focused on price. This puts a lot of emphasis on producer cost effectiveness and ensuring consistent supply of large enough volumes and transparency of the supply chain.

Retail chains purchase most of their fresh produce via big importers/distributors, although sometimes they may establish direct supply programs with producers.

Open air green markets, small independent shops and HORECA are mostly supplied by average size wholesalers. Generally, the wholesale distribution channel is in decline, as individual shops - their main clients - are under pressure from the larger retail chains.

Local farmers often sell produce directly at the farm gate or online.

Consumer market segments for fruit sales in the German market are organized as follows:

Market segment Product characteristics

Price range Main sales channel Market share

Premium, convenience

Organic; ready to eat;

off-season exotic.

Premium quality;

additional quality and packaging standards

$13-19/kg for dried

Premium, varies for fresh

Organic, specialized stores, some supermarkets

20%

Mid-market

(Mainstream retail)

Good quality, standard retail requirements, uniform product quality, increased competition.

$5-13/kg for dried

Mid-range, varies for

Supermarkets and small independent stores

30%

Lower segment

Bulk sales, lower quality, often for use as food ingredient

Significantly lower Discount supermarkets, street markets

50%

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Many consumers in the premium market segment are also price sensitive. From suppliers this requires the highest quality and unique product differentiation.

Mid-market fresh and dried fruits are of higher class and standard and are usually sold in the retail segments under manufacturer’s brand or private labels. They have some added value characteristics, such as innovative packaging, making it possible to obtain relatively higher margins. Large retailers require large volumes and consistent supply.

Fresh and dried fruit in the lower segment is sold in high volumes and at relatively low margins.

Quality aspects such as sorting and color are less demanding. For dried fruit, smaller size raisins are the most common choice for processors.

Organic sales are split 50/50 between traditional retail and specialist organic stores. However, specialist organic stores are expanding.

Uzbekistan has been mainly supplying dried fruit to processors. However, there are examples of sales to the organic channel. Demand from buyers of organic dried fruit is growing and presents a market opportunity for producers who are able to obtain organic certification.

KEY COMPETITORS

FRESH GRAPES:

Italy dominates the market for fresh grapes especially in the high production season with a total market share of 34% in 2016. Netherlands held 35% of the market mainly with re-exports from the Southern

Hemisphere. Other key EU suppliers are Spain and Greece with market shares of 11% and 6% respectively. The most important overseas fresh grape suppliers are South Arica, Egypt, India, Chile, Argentina and Turkey.

Italian grape suppliers set the price in the market and are difficult to compete with. The high season is

August through November when 80% of all grapes are imported into Germany. In 2016, right before the start of the reason, the highest price for grapes was $5/kg. At the start of the season it ranged from $2 –

3/kg and in mid-season dropped to $1-1.8/kg.

FRESH CHERRIES:

The top sweet cherry suppliers to the German market in 2016 and their respective import market shares were Austria (44%), Turkey (17%), Netherlands (14%) (re-exports from the Southern Hemisphere), Italy

(7%), Greece (6%), and Spain (5%). Sweet cherries are highly seasonal with almost 80% of all imports taking place within the two months of June and July. Significantly smaller volumes are imported in the months of May and August – October. Imports in November - April account for less than 1% of total imports for the year. Germany is also a producer of sweet cherries with local cherries appearing in the market from late June and continuing through August.

The highest price is in May when the first Italian, Spanish and French cherries appear in the market. In

2016 the highest price was $11-12/kg, $6-10 per kg in mid-season, with the lowest prices registered in

August at $2.5-4/kg.

FRESH APRICOTS:

The largest suppliers are Spain, France and Italy, which together account for 85% of all imports. Other notable suppliers include Greece, Austria and Turkey. With the exception of Spain, production volumes in

Europe have decreased since 2012 due to unfavorable weather conditions. This offered new opportunities for exporters from developing countries. The season for apricots is from May to September. In June 2016 the retail price for apricots in European supermarkets was $6.7-8.4/kg.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 18

DRIED GRAPES:

Top suppliers in Germany are Turkey (33%), South Africa (20%) and the United States (12%). Other notable importers, with much smaller market shares, include China, Austria, Iran, Greece and Uzbekistan

(4%). Almost all imports from Uzbekistan are of sultanas variety with a negligible amount of raisins. Prices and opportunities in the market are usually determined by the production of raisins and sultanas in Turkey and the United States. The retail prices tend to be stable year round and in May 2017 were $4-5/kg.

DRIED APRICOTS:

Key competitor is Turkey that dominates the import market with an 84% share. (Although experts believe that significant volumes represent re-exports from Central Asia). Uzbekistan is holding 3% of import market. This share grew at 53% between 2011 and 2016. Tajikistan supplies a negligible amount but has also been growing its imports since 2012. The retail prices are usually stable year round and in May 2017 were $15-17/kg.

Critical success factors and Central Asia’s performance

The table below summarizes the key buyer requirements/critical success factors and assesses how producers from Central Asia currently preform against these factors in view of importers. Each CSF is rated in terms of importance for the competitiveness of Central Asian products in Germany.

CSFs Specific requirements and buyer feedback

Price competitiveness

Critical

German market is very price competitive. 50% of the market is held by discount stores with low pricing strategy. In addition, retail chains require that the price is fixed for six months ahead.

Even premium market segment consumers are considered to be price sensitive.

Timing on the market/seasonali ty

Critical for fresh;

High for dried

For dried fruit seasonality is not an issue as the supply is year round.

For fresh grapes, to compete on the market Central Asian suppliers would need to get their product to market earlier than European grapes which arrive in June from Spain, followed by Italy and Greece.

For cherries the window to be competitive is short – in early May before first Italian, Spanish and French sweet cherries appear.

Food safety standards and

Critical

Product safety requirements are very stringent, due to market dominance by the retail chains.

Need to meet MRLs (Maximum Residue Limits) established by retail chains which are much lower than those permitted by EU regulations, sometimes

30% of the maximum EU permitted ones.

Producers have to test for MRL’s while receiving the sanitary certification in the country of origin. Supermarkets demand that importers verify each product batch in laboratories. German buyers usually only trust their national certification bodies. Therefore the laboratories in other countries even within the EU should be accredited by a certified German laboratory.

Table grapes are considered one of the most dangerous products from the pesticide residuals point of view and importers check carefully for MRL’s.

GlobalGAP certification is required for all suppliers of fresh produce.

HACCP certification is also required, but in practice many German buyers insist on higher standards, such as the International Food Standard.

Retail chains also require their private label suppliers to have BRC certification.

Suppliers shipping pre-packed products must comply with the Green Dot system requirements and pay fees for packaging recycling.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 19

In 2014 and 2015 dried grapes from Uzbekistan were subject to increased levels of controls and frequency of laboratory checks (50% of imports) due to frequent occurrence of Ochratoxin A in export shipments.

Each load of dried apricots imported to EU is checked strictly for SO2.

Producers in Uzbekistan do not know how to apply SO2 treatment properly and the allowed limits. This makes dealing with apricots from Uzbekistan very risky for importers and may explain the sudden drop of imports of dried apricots in 2016.

Quality

For dried fruit, although the EU marketing standard defines maximum moisture content, it is a common requirement by the industry that moisture content is lower (usually 14-17% at the time of packing).

Dried grapes: the basic quality requirement is that the fruit is whole and sound, free from insects, mold, and pieces of stem. Needs to meet moisture content requirements - not less than 13% and not more than 31% for the

Malaga/muscatel type; maximum 23% for seed-bearing varieties and maximum

18% for seedless varieties and currants. Needs to meet the maximum additives thresholds for sulphur dioxide, oil and sorbitol.

Dried apricots should have no mineral additives, be of uniform color and variety, fruits must be easily separated, intact, clean, not sugary, and free from insects, additional tastes or smells. Test for allergen SO2 and Ochratoxin A must be passed.

Fresh fruit: must be clean, with no visual defects. The contents of each package must be uniform and contain fruits of the same origin, variety, and quality. The visible part of the package must be representative of its entire contents.

Shelf life

Critical for fresh;

High for dried

For dried fruit shelf life requirement is 12 months in proper storage conditions.

For highly perishable fruit the required shelf life at room temperature is one week.

Due to the highly perishable nature of sweet cherries they are considered a very risky product, as the shelf life is short and product may be damaged during transportation.

Most importers prefer to deal with hard sweet cherries that have longer shelf life. Only the first sweet cherries of the season that appear in the market in

May that may be soft.

Cosmetic appeal

High Cosmetic appeal is very important to German consumer.

For dried apricots, despite the perceived health benefits for unsulphured product, many retailers choose to sell sulphured apricots due to their visual appeal.

For fresh fruit, cosmetic appearance is considered more important than taste. The natural taste of product is not the most important factor and is often sacrificed due to retailers’ demands for perfect appearance. Produce treatment applied by producers in order to get rich color and bigger sized product often detracts from the product’s taste.

Varieties (Color)

High For dried grapes: Because dried grapes are often used in mixes together with other fruit, sultanas have a slight advantage over darker colored dried grapes as they mix well with lighter colored fruit. (Uzbekistan mostly exports sultanas to Germany).

Table grapes: consumer preference is for seedless varieties (70% of the market and growing). The preference of table grapes by color is around 70% for white grapes, 15% for red grapes and 15%, and declining, for dark grapes.

USAID COMPETITIVENESS, TRADE, AND JOBS ACTIVITY IN CENTRAL ASIA END MARKET ANALYSIS REPORT 20

The most popular varieties during high season are Italia, Vittoria and

Thompson Seedless.

Fresh cherries: Consumers prefer dark, big, and meaty sweet cherries.

They do not distinguish sweet cherries by variety, rather based on size, darkness and consistency.

Taste

Medium Taste is secondary to appearance for the German consumer. However, is it believed that German consumers do not like very sweet tasting fruit. This will be a disadvantage for Central Asia due to high sugar content of its fruit.

Size and weight of the fruit

High

Dried grapes: The price of dried grapes is determined by the size of fruit.

The common three sizes are jumbo, medium and small. Sizes are calculated according to the number of fruits in 100g of product or according to actual diameter of the fruit. Grapes from Uzbekistan fall into small and medium categories.

Table grapes: German consumers like big grapes, but the overall cosmetic appeal is more important. Buyers prefer grapes with big bunches (over 400 grams) and the size of the berries not less than 20 mm in diameter.

Sweet cherries: Bigger sizes are more popular. Typically importers buy 24-

28 mm sized berries.