baseline assessment of fruit and vegetable value …

BASELINE ASSESSMENT OF FRUIT AND VEGETABLE VALUE CHAINS IN SERBIA COMPETITIVENESS SYSTEMS STRENGTHENING (CSS) ACTIVITY

January 16, 2018 This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Cardno Emerging Markets USA, Ltd. and do not necessarily reflect the views of USAID or the United States Government.

BASELINE ASSESSMENT OF FRUIT AND VEGETABLE VALUE CHAINS IN SERBIA COMPETITIVENESS SYSTEMS STRENGTHENING (CSS) ACTIVITY Submitted by: Cardno Emerging Markets USA, Ltd. Submitted to: USAID/Serbia Contract No.: AID-169-C-17-00003 Competitiveness Systems Strengthening (CSS) Activity DISCLAIMER

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

Competitiveness Systems Strengthening (CSS) Activity

Baseline Assessment of Fruit and Vegetable Value Chains in Serbia Page i

Table of Contents ACRONYMS ........................................................................................................................................................ II

INTRODUCTION .................................................................................................................................................. 1

METHODOLOGY ................................................................................................................................................. 1

METHODOLOGY FOR DESK RESEARCH .............................................................................................................. 1 Preparation of databases ........................................................................................................................... 1 Estimation of total production and sales of F&V ..................................................................................... 3

METHODOLOGY FOR FIELD RESEARCH (F&V EXPORTING FIRMS SURVEY) .................................................... 5 I. Sample design .......................................................................................................................................... 5 II. Questionnaire ........................................................................................................................................... 6 III. Field procedures ..................................................................................................................................... 7 IV. Study limitations and issues encountered .......................................................................................... 8

FINDINGS ........................................................................................................................................................... 10

STRUCTURE AND CHARACTERISTICS OF THE F&V SECTOR ........................................................................... 10 Crop and Destination Structure of Fruit and Vegetable Export .......................................................... 10 Value Added in Output .............................................................................................................................. 12 Sector Fragmentation ................................................................................................................................ 15 Survey Sales Data ..................................................................................................................................... 17

SURVEY FINDINGS ............................................................................................................................................... 18 Access to Market ....................................................................................................................................... 18 Access to Finance ..................................................................................................................................... 21 Access to Information ................................................................................................................................ 23 Domestic market: Retail Chain Characteristics ..................................................................................... 24

CONCLUSION AND ACTIVITY RECOMMENDATIONS ............................................................................................ 26 TARGETS TABLE ............................................................................................................................................... 30


Baseline Assessment of Fruit and Vegetable Value Chains in Serbia Page ii

Acronyms ADS Automated Directives System AMELP Activity Monitoring Evaluation and Learning Plan AOFI Serbian Export Credit and Insurance Agency BSO Business Support Organization CDCS Country Development Cooperation Strategy CLA Collaborating, learning, and adapting COP Chief of Party COR Contract Officer Representative CSS Competitiveness Systems Strengthening Activity DF Development Fund DO Development Objective F&V Fruits and vegetables GOS Government of Serbia ICT Information and Communications Technology IPs Implementing Partners IPARD Instrument for Pre-Accession Assistance in Rural Development IR Intermediate Result LF Logical Framework M&E Monitoring & Evaluation MEL Monitoring, Evaluation, and Learning MIS Management Information System MOA Ministry of Agriculture MOE Ministry of Economy PIRS Performance Indicator Reference Sheet PKS Serbian Chamber of Commerce and Industry PMP Performance Management Plan RAS Development Agency of Serbia RF Results Framework SME Small and medium sized enterprise SOW Statement of Work ToT Training of Trainers USAID United States Agency for International Development USG United States Government


Baseline Assessment of Fruit and Vegetable Value Chains in Serbia Page 1

Introduction The USAID/Serbia Competitiveness Systems Strengthening Activity (CSS/Project), is a four-year, 11.95 million USD initiative whose purpose is to enable Serbian SMEs to upgrade and become more competitive in local, regional, and international markets. The Project is implemented by Cardno Emerging Markets USA, Ltd. (Cardno), DNA Communications, and Souktel. The CSS aims to strengthen the food processing sector, while focusing on the growth of sales as the key benchmark for evaluating performance. The CSS Activity takes a market systems perspective, and focuses on addressing competitiveness issues that are systemic—rather than particular—thereby testing and proving the collaborative methodologies required to resolve these gaps.

Methodology This Baseline Study provides measurements of Serbian Fruit and Vegetables (F&V) Value Chains to inform:

a) Target setting of CSS indicators, and provide source data (baseline) against which impacts can be measured in the future, and;

b) Inform development of activity plan and subsequent work plans c) Inform development of AMELP

Fruit and Vegetables were selected as a target sub-sector of the food processing industry based on the findings in the Value Chain Selection Analysis document. The baseline effort was conducted between August and October 2017 by the Center for Advanced Economic Studies (CEVES) in Belgrade, Serbia utilizing a two-phase approach including:

a) desk research to collect information on the overall profile and performance of the industry, and;

b) activity and firm specific survey effort

Methodology for Desk Research Desk research was conducted against a number of the Government of Serbia (GoS) managed databases. This exercise informed the survey effort that followed. The analysis covered 2014 and 2015 calendar years and included 2016 data if available. The research first focused on which F&V products were the most significant in Serbia’s exports and imports. It further shed a light on specific types of products and types of processing, exports destinations and seasonality of exports. The analysis that followed focused on exporting companies and differentiation by the type of their exporting products and their buyers. The analysis revealed which companies were predominantly exporting bulk/industrial processed vs. retail-packed vs. fresh F&V products. The researchers also focused on the types of foreign buyers these companies were selling to.

Preparation of databases To distinguish the sector’s performance from both the product and firm aspect, different kinds of databases were prepared and updated. Fortunately for CSS, CEVES already had the majority of this data available. There are five sources of data that could potentially be used for the assessment of production/sales of F&V value chain:



i. Statistical Office of The Republic of Serbia (SORS) official statistics on production - allows for separate assessment of agricultural and industrial produce at aggregate level when it comes to specific industrial sectors. It also allows for analysis at the product level. For example, for the food industry, it is possible to obtain only aggregate information on production, sales and value added from Structural Business Statistics. Value added can also be obtained from the National Accounts, also at a sector level only. While more disaggregated data could be purchased from SORS, it was not necessary for this baseline. The fact that these numbers are not published reflects the assessment of the official stats that the figures are not sufficiently reliable.

ii. SORS official statistics on exports - offers official data on Serbia’s exports broken down to NACE 2 and SITC 3 codes. Further disaggregation would have to be purchased from SORS. While the data is available on a monthly basis, the numbers lag and do not provide anything close to real time status. The initial data are provided with two months delay. It is then substantially revised in the subsequent months, so it can be reliably used only with a 6-month delay.

iii. UN Comtrade International Trade Statistics Database - allows for identification of trade on a more disaggregated level. It is a product-level database that goes down to 6-digit HS codes. It also suffers from a certain lag, but shorter than the SORS on exports. It allows exports and imports to be traced down to destination countries. The database suffers from certain data losses, which is clearly indicated on the UN Comtrade website. Disaggregation on every level (HS 4 code → HS 6 code; year → month; world → country) leads to some data losses, so sums of disaggregated categories are smaller than totals. CEVES used this database to create a database of F&V products Serbia traded with within the last three years (2014, 2015, and 2016). The biggest advantage of this data source was that its 6-digit HS codes could be matched with Serbian 10-digit Customs Tariffs, as the HS codes represent the first 6 digits of the Customs Tariffs. This allowed data from the two databases to be cross-sectioned. The starting point was selection of F&V products. In order to conduct a comprehensive analysis that includes all the major Serbian F&V export products, the initial product list was expanded. The final product list included raspberries, blackberries blueberries, apples, peaches, apricots, peppers, strawberries, plums, cherries and sour cherries, legumes, potatoes, mushrooms, pears, tomatoes, cucumbers, onions, root vegetables, cranberries, as well as mixes of the F&V mentioned above.

iv. Customs Bureau database - contains monthly-level data on exports and imports of all tradable products by all firms operating in Serbia, tracked on the most disaggregated level. The Customs Bureau, an institution under the Ministry of Finance, is in charge of tracking all trading activities on the Serbian border, both exports and imports. The database export and import values are allocated by firms, products (10-digit Customs Tariffs) and destination countries. This database was used for identifying firms that were creating the F&V exports in 2015 observed in the UN Comtrade database. Years after 2016 are not available due to more restricted regulation protecting access to individual information. The researchers created specific classification aggregates based on 10-digit Customs Tariffs: – Level 0 - Sector – the entire group of F&V products – Level 1 - Sector major division - fruits, vegetables – Level 2 – Basic type of processing – fresh, cold-processed, warm-processed



– Level 3 - Detailed type of processing - fresh vegetables frozen vegetables, canned vegetables, dried vegetables, fresh fruits, frozen fruits, canned fruits, dried fruits, jams, purees, pastes and juices.

– Level 4 – Products – potatoes, tomatoes, onions, root vegetables, cucumbers, legumes, mushrooms, paprika, other vegetables, apples, pears, peaches, apricots, cherries and sour cherries, plums, strawberries, raspberries, blackberries, blueberries, cranberries, other fruits, currants, nuts, cabbage and salads.

v. Serbian Business Registers Agency (SBRA) database - operates under the Business Registers Agency Law as a single institution in charge of running a centralized public business registry. All firms registered in Serbia, with some exceptions, have to submit the documentation to the SBRA. The documentation includes the balance sheet, income statement, statement of other comprehensive income, cash flow statement and statement of changes in equity. For some companies identified relevant for CSS, the researchers supplemented SBRA data with information CEVES already had. Data included in this database are the following: – Status data: firm identification number, firm name, registered activity, please of

registration, region, year of registration. – Financial data: long-term liabilities, short-term liabilities, long-term credit, short-

term financial liabilities, obligations, total assets, EBIT, EBITDA, financial expenses, financial stability coefficient, coefficient of indebtedness, current assets, operating income, operating expenses, purchase costs of sold goods, property, plant, equipment and biological assets, net result, general liquidity ratio, rigorous liquidity ratio.

The Customs Bureau database served as a basis for the selection of relevant exporting firms. For the selected firms, data were extracted from both the SBRA and the Customs Bureau database, but since both data sources contain firm-level data, the extracted data were merged to create one integrated firm-level database. This is a complex database offering cross-sectioning of firms’ financial data, status data and exports data. The cross-sectioning was performed only for the 2015 data.

Estimation of total production and sales of F&V The closest concept that is comparable to industry “sales” is the operational revenues reported by companies in SBRA. Companies registered as producers of F&V may produce other products, and even not produce F&V at all. Similarly, companies that are not registered as producers of F&V are actually producing F&V. To estimate likely lower and upper bounds of the operational revenues of F&V, the research intersects the universe of companies that export F&V and the universe of companies registered as producers of F&V, connected as described in the data section. This provided an estimated range of possible overall sales of between 950 and 1.350 million EUR. Both of these numbers are larger than would have been obtained by using the SBRA registry or export data-base alone. First, in 2015, only 20% of companies exporting F&V were registered as producers of F&V, accounting for only 48% of total exports of F&V. Of the remainder, 0.6% of the value of total exports was by companies registered as wholesale and 31% as retail trade. Table 1 provides further breakdown. While this breakdown is not available for the years after 2015, analysis of past trends suggests the breakdown is sufficiently stable to be applied in this analysis. Companies registered as producers of F&V accounting for only 12% of their total revenue do not appear in the export data base. It is possible that they export but most likely through intermediaries.



A likely lower bound of total sales would be obtained by: 1) assuming that all exporters registered as intermediaries indeed do not produce their own goods (excluding them); 2) including the entire sales revenues of all the companies registered as F&V producers that export; 3) adding only the exports of all companies that export and are registered as something other than F&V; 4) and adding the revenues of the F&V registered companies that do not export. This lower-bound estimate assumes that trade companies only export parts of what F&V registered companies present as domestic sales, while it is likely that they also include some producers, and that they also export produce from non-F&V registered companies. Therefore, a probable upper bound of total revenues and sales is obtained by adding the exports of trade companies to the previous figure, as well as estimated revenues of all companies that are registered as something other than F&V, by assuming that ratio between their export of F&V and total revenues from F&V is the same as that ratio of companies registered as F&V producers that export. Both these estimates do not take into account the likelihood that some companies not registered as F&V producers do produce F&V but only for the domestic market.

Table 1. Firms exporting F&V vs. Firms registered on F&V

The survey conducted was based on the universe of companies that export F&V. The cost of reliably assessing the behavior of the companies that do not export would outstrip any possible benefits. While the estimation of total sales of F&V is as unreliable as just described, exports are very well and reliably recorded and are likely to account for 40-45% of the total. Only the relatively small non-exporting companies registered as F&V producers could be sampled in the first place, and it would require a large sample to get a reliable assessment of their structure. The companies that export are by far more likely to be companies with potential for growth than the rest. In this case, if specific interventions are desired, then specific, targeted, surveys will needed. By far, the most comprehensive and roughly correct way to obtain an estimate, likely to be a slight underestimate, of total sales is to rely primarily on information about producers’ export data. As mentioned above and exhibited in Table 1, companies registered for the production of a certain group of products could be, and often do, producing and selling other products. Therefore, we have to assume that at least a portion of the revenues of companies registered as producers of F&V is not comprised, in fact of F&V. Similarly, we can assume that some other food sector companies not registered as F&V producers, and do not export F&V, do produce F&V for the domestic market. We have no basis to assume anything other than that these two quantities cancel out.

2015 (mil EUR)Export (F&V)

Operating revenues

(F&V)

Estimation of total sales of F&V producers

Lower UpperExporters registered as F&V firms 320 710 710 710Exporters registered as trade 215 - 215Exporters registered in other sectors 137 305 137 305Non exporters registered as F&V firms 101 101 101

Total 948 1.331



Methodology for Field Research (F&V Exporting Firms Survey)

I. Sample design In order to identify a sample, research included the following steps:

> Identification of all firms that were exporting selected F&V products; > Determination of the universe of firms that will be used for sampling; > Determination of the sample size; > Determination of the sampling method.

a. Identification of all firms that exported selected F&V products This step implied identification of all firms that were exporting relevant fruits or vegetables in 2015. Since this could not be performed from one single database, CEVES used its integrated firm-level database created from the Customs Bureau database and the SBRA database. The Customs Bureau data enabled identification of all firms with exports of F&V larger than zero1. There were 941 such firms in 2015. The SBRA database was used to extract exporting firms’ status and financial data. The status data uncovered that only 196 of the exporting firms were registered on F&V production or processing (Table 2). A registered activity of a company should be its dominant one, but the company can also perform other activities. It is not unusual for firms in the agribusiness sector to deal with more than one activity. It is often the case that the F&V production or processing is firms’ secondary activity. For example, Delta Agrar’s primary products are wheat and corn, but it also produces soybean, sunflower, rapeseed, sugar beet, and fruit and vegetables. In addition, firms’ dominant activities sometimes differ from their registered ones. For example, Tehno-Božići is registered for machine production, but it predominantly deals with F&V production.

Table 2. All exporters of F&V divided by their formal registered activity

Export of F&V in 2015 # of firms

Export sales (000 €)

Share in total sales (%)

Average sales (000 €)

Standard deviation (000 €)

All firms that exported F&V in 2015 941 672.316 100,0 714 2.185

Agribusiness 390 419.964 62,5 1.077 2.836

o/w F&V producers and processors 196 319.800 47,6 1.632 3.525

Trade* 444 215.317 32,0 485 1.624

Other 107 37.035 5,5 346 986

* Firms registered in Trade include wholesale firms and retailers.

b. Determination of the universe of firms that will be used for sampling Since not all F&V exporting firms are relevant for CSS, the main criteria for selection of a relevant universe of the firms was the share of F&V exports in firms’ total exports. The final universe was created containing all firms whose exports of F&V represented 25%-100% of

1 The limitation of the Customs Bureau database is that it does not allow for identification of F&V producers selling exclusively on domestic market.



their total exports. There were 726 such firms. Table 3 shows the differentiation of F&V exporters according to the share of F&V exports in their total export sales.

Table 3. The differentiation of F&V exporters according to the share of F&V exports in their total exports

Export of F&V in 2015 # of firms

Export sales (000 €)

Share in total export sales (%)

Average export sales (000 €)

Standard deviation (000 €)

All firms that exported F&V in 2015 941 672,316 100,0 714 2,185

0% - 5% 124 1,915 0,3 15 43

5% - 25% 91 17,687 2,6 194 733

25% - 50% 58 50,568 7,5 872 2,710

50%- 75% 56 24,.980 3,7 446 1,321

75% - 95% 74 35,242 5,2 476 1,034

95% - 100% 538 541,924 80,6 1.007 2,621

c. Determination of the sampling method Due to the size of the universe, sampling was not random. A systematic sampling approach was used in order to select exporting firms that would be interviewed during the second phase. The aim was to sample around 20% of the universe, meaning 145 firms. The universe was first broken down into four bundles (by F&V exports share) in which firms were listed by the size of share. Second, a random firm was selected in the lowest percentile bundle. Third, every third firm was picked in the first bundle (lowest percentile bundle), and every fifth in the second, third, and fourth bundle.

Table 4. Sample structure

Export of F&V in 2015 # of firms in total # of firms sampled

25% - 49% 58 19 (33%)

50%- 74% 56 11 (20%)

75% - 94% 74 15 (20%)

95% - 100% 538 100 (19%)

TOTALS 726 145 (20%)

II. Questionnaire The main survey tool was a Questionnaire developed by the CSS team. The first draft version of the questionnaire was checked via 10 pilot interviews in order to assess its clarity. The final Questionnaire was created according to the results of pilot interviews. In particular, certain questions were restructured or made close-ended. The Questionnaire covered modules on the following topics:

> Module B: Basic info > Module F: Finances > Module M: Market linkages



> Module N: Networks All questions were asked directly, apart from two numerical data questions - the amount of sales and the amount of exports in 2015. The answers to these two numerical data questions could be obtained from CEVES’ databases.

III. Field procedures In order to ensure full reliability and transparency of the field research, all field procedures were conducted in the presence of selected monitoring staff. This included one technical staff member from CSS and one senior and one junior staff from CEVES. The main part of the field research – the interview process – was conducted by four enumerators.

a. Training and pretesting All enumerators completed a comprehensive training prior to the actual start of the interviewing process. During the one day training, the enumerators were acquainted with the Questionnaire and were informed of all potential misunderstandings and issues that could arise during interviews. The training was led by the CSS technical staff member. Upon the completion of the training, each enumerator conducted test interviews in the presence of one monitoring staff member. The purpose of the test interviews was to ensure that enumerators were ready for data collection. The data collected from these test interviews was not used for the analysis.

b. Data collection (interviews) All interviews were conducted by phone. In order to conduct 116 interviews, enumerators had to contact and/or search for as many as 496 firms, which is 68% of the universe. Enumerators faced several issues during the surveying process, two being the most frequent: (1) unanswered calls; and (2) inability to find valid contact details of a firm. Each enumerator kept records of the attempted calls or searches and wrote down precise reasons for not being able to contact a specific firm. Table 5 shows the breakdown of firms contacted or searched for.

Table 5. Interviewing process summary

Status of firms # firms Share in total number of firms (%)

Share in contact acted number of firms (%)

Total number of firms 726 100 -

Not contacted 230 31.7 -

Contacted or searched for 496 68.3 100

Nobody answers the phone 130 17.9 26.2

There is no (valid) contact details of the firm 131 18 26.4

Interviewed 116 16 23.4

On hold (waiting for response) 53 7.3 10.7

Refused to take part in this survey 50 6.9 10.1

They do not produce or sell F&V 11 1.5 2.2

Bankruptcy 3 0.4 0.6



Status of firms # firms Share in total number of firms (%)

Share in contact acted number of firms (%)

Refused because already participated (in the previous round)

2 0.3 0.4

Regarding the percentile bundles, interviewed firms are allocated in the following way presented in Table 6.

Table 6. Allocation of firms interviewed in the percentile bundles

Export of F&V in 2015 # of firms in universe # of firms sampled # of firms interviewed

25% - 49% 58 19 18

50%- 74% 56 11 8

75% - 94% 74 15 10

95% - 100% 538 100 80

TOTALS 726 145 116

c. Data entry and processing The process of data entry was organized systematically. After each successfully conducted interview, an enumerator would have a completed questionnaire form (in hardcopy) checked by the CSS technical staff member (quality control) and registered by the CEVES junior monitoring staff (encoding). Quality control was conducted after each interview in order to ensure that every single interview was properly conducted and documented, while encoding was performed in order to have all interviews systematically registered in a centralized document in an electronic form. Each interview would be registered in excel file by its code (i.e. serial number, by sequence of completion), name of enumerator, name and registration number of a firm interviewed, a bundle where the firm belongs, name and post of a correspondent, and telephone number. After the two described processes, the enumerator would take the filled questionnaire form back and put it in a folder. Each enumerator had their own folder. Upon the completion of the whole interview process, the CEVES junior member of the monitoring team, together with one of the enumerators, filed all the interviews into an excel template that was created by CEVES and approved by CSS. This implied documenting each and every answer in a manner that was clear, transparent and agreed upon by both parties. The process was assisted by the CSS technical staff member. In order to make sure that interviews were correctly documented, CEVES staff randomly picked five interviews of each enumerator and checked whether all answers in paper and electronic forms were the same.

IV. Study limitations and issues encountered CEVES encountered several limitations during the overall process, with the following ones being the most important: Unavailability of (valid) contact details of firms: Many of the firms either did not have valid contact details easily obtainable or did not have them at all. A lot of firms did not have a website, so the only way to find their contact details was through the SBRA database. However, the phone numbers provided to the SBRA are no longer in service.



Unanswered calls: It was quite common not to get a call answered. The enumerators would try to call the same firm several times, but it was often still impossible to reach some firms. Overlap of the interviewing period with the Anuga Trade Show in Cologne: During the interview process, a trade show Anuga in Cologne, Germany was taking place, October 7-11, 2017. As this trade show is one of the most important ones for F&V firms, it was hard to reach some firms. Around 15 of them refused to answer the Questionnaire because they were in Cologne and therefore roaming. CEVES assumes that this was also the reason why some firms did not take calls at all, but cannot assess to which extent. General response rate: Apart from the mentioned issues, some firms just did not want to answer the Questionnaire. Some of them refused to answer it because they had already been contacted in the previous round and some of them did not want to say why. Issues with obtaining answers on the finance section in the Questionnaire: Some firms provided all the answers asked by the Questionnaire apart from the finance section answers. The reason was related either to the fact that the interlocutor was not able to provide the answers (and the relevant person in the firm could not be reached); or they refused to provide answers to those questions. Most of these interviews had to be discarded, except for a couple of them which were validated by the CSS technical staff member.



Findings

Structure and Characteristics of the F&V Sector As described in USAID’s Value Chain Development Wiki and CSS, value chains cover the full range of activities and services required to bring a product or service from its conception to sale in its final markets – whether local, national, regional, or global. Value chains include input suppliers, producers, processors, and buyers, as well as the support services and enabling environments that form a dynamic market system.

Crop and Destination Structure of Fruit and Vegetable Export Serbia is a significant net exporter of F&V products. This includes 575 million EUR, or more than 700 million EUR on a gross basis. As it can be seen in table 7, both export and net export of these products have been increasing in past years, reaching maximum levels in 2016. Liberalization of trade, access to EU and Russian markets, favourable climate conditions, low energy prices, as well as low marginal costs of primary production determined Serbia’s positive competitive position.

Table 7 – Foreign Trade in F&V Products, by Crop and Destination (2014-2016)

Source: CEVES’ calculations based on UN Comtrade

Fruit products are the dominant category and represent more than 80% of the export. Raspberries and apples represent the two most important exporting crops. These two crops make up more than half of total export of F&V products. Although these two crops have shaped export growth, it is important to note that export of the vast majority of other crops has also dynamically increased. Serbia is a net exporter of all crops that are observed in this analysis, except tomato and cucumber, where net deficit has decreased in the past three years.

mil EUR Export Import Net Export2014 2015 2016 2014 2015 2016 2014 2015 2016

Total 543,4 666,9 703,1 112,4 136,6 128,3 431,0 530,3 574,8

Fruits 454,0 568,9 588,8 43,3 59,0 67,7 410,7 510,0 521,1Raspberries and blackberries 219,4 292,9 259,4 11,6 15,8 13,9 207,8 277,1 245,4Apples 68,8 103,8 123,9 7,7 18,6 22,3 61,0 85,2 101,7Other fruits (mix) 93,3 95,2 98,1 12,8 12,7 11,5 80,5 82,5 86,6Peaches and apricots 13,5 20,2 30,1 2,9 4,5 9,5 10,6 15,7 20,7Strawberries 13,9 15,3 25,1 4,2 4,1 4,6 9,7 11,1 20,5Plums 25,8 21,6 20,3 1,2 0,7 0,5 24,6 20,9 19,8Cherries and sour cherries 13,2 13,7 20,2 0,9 1,3 2,8 12,4 12,3 17,3Pears 4,8 5,2 9,7 1,4 0,9 2,6 3,4 4,2 7,2Blueberries 1,2 0,8 1,8 0,7 0,2 0,0 0,5 0,7 1,8

Vegetables 89,4 98,0 114,3 69,1 77,7 60,6 20,3 20,3 53,7Pepper 19,8 24,6 27,3 6,4 8,4 6,5 13,4 16,2 20,8Legumes 15,6 16,2 19,5 11,7 13,7 8,1 3,9 2,5 11,4Potato 14,6 13,3 17,1 15,5 15,5 12,7 -0,9 -2,3 4,4Mushrooms 15,9 14,7 15,2 2,0 2,8 2,4 13,9 11,9 12,9Other vegetables (mix) 11,8 12,2 14,7 4,1 4,0 3,6 7,8 8,2 11,1Tomato 4,0 5,5 7,2 18,8 21,4 18,0 -14,8 -15,9 -10,8Cucumber 2,7 4,2 5,4 5,4 6,6 5,6 -2,8 -2,4 -0,2Onion 2,7 4,2 4,0 4,7 4,1 3,3 -2,0 0,2 0,7Root vegetables 2,2 3,1 3,8 0,5 1,3 0,4 1,7 1,8 3,4



Three more products should be specially emphasized as both currently (relatively) important and with potential to further grow and be competitive – plums, sour cherries, and peppers. For example, Serbia exports only 5% of its plum production, due to unorganized purchasing activities. Export of products made from these 3 crops reached almost 100 million EUR in 2016. Serbia is a significant producer of these crops at EU level, with autochthonous varieties that can be promoted and processed as protected geographical indication products. The Russian Federation is the single most important export destination, followed by Germany and other EU countries. Table 8 presents foreign trade in F&V products for previous three years, by crops, destination and most important types of processing.

> Russia is a main destination for the majority of fruit crops (except raspberries) - apples, peaches and apricots, strawberries, plums, sour cherries. Raspberries are exported to Germany, France and Belgium. The large and, compared to EU, unsaturated North American market is becoming more and more attractive for Serbian exporters.

> Regarding vegetable crops, export is more diversified. A greater portion of export is directed towards CEFTA and neighbouring markets, primarily because of perishability of these products. Still, some crops, like peppers, mushrooms and cucumber, are increasingly exported to Germany, Italy and Austria.

> Berries and mushrooms are the most profitable crops with the highest unit value of export. Price is closely related to export destinations of those products, because high-value products are usually exported to high-developed markets with wealthy consumers.



Table 8 – Foreign Trade in F&V Products, by Destination (2014-2016)


Value Added in Output Key features of the F&V value chain in Serbia is that, considering the relatively high level of agricultural production, it adds relatively little value to products and it lacks diversification of exports. It is not an exclusive problem of the F&V industry, but a general problem of the entire Serbian food industry. Serbia is among the five largest exporters of agriculture products in the entire EU. At the same time, Serbia has one of the lowest ratios between export of products of the food industry and agricultural raw products (below 2) since it exports a relatively high proportion of raw products or lower value-added products (industrial processed products). For example, in the case of raspberry export, the share of farm gate price in price of final exported product can reach even up to 70-80%. Three features of the value chain contribute to this:

> A dominant proportion of fruit products are exported frozen, which is their least valuable form. As it can be seen in Table 9, more than 50% of total export of F&V products is exported frozen. More than 40% of companies stated that frozen products are their primary product. Export of higher value-added products such as canned fruit or vegetables, dried fruit or vegetables, juices, and retail ready products among frozen and fresh category is no more than 15% of total export of F&V products.

Export(2016, mil EUR) Total RussiaGerman

yFrance

New member

statesCEFTA

Rest of EU

Rest of World

Fruit and vegetables 703 202 139 65 62 41 144 50Fruits 589 189 123 65 32 10 124 46

Raspberries and blackberries 259 3 86 53 11 1 81 25o/w Frozen 252 3 84 53 11 1 76 25

Apples 124 108 3 0 3 2 4 3o/w Fresh 115 108 0 0 2 1 2 2

Other fruits (mix) 98 6 29 7 8 3 32 13Peaches and apricots 30 27 0 0 1 1 0 1

o/w Fresh 30 27 0 0 0 1 0 1Strawberries 25 16 1 2 3 0 3 1

o/w Fresh 17 15 0 0 1 0 0 0Plums 20 7 1 1 5 2 2 3

o/w Fresh fruits 11 6 1 0 1 1 1 0o/w Dried fruits 10 1 0 1 3 1 1 2

Cherries and sour cherries 20 12 3 1 2 0 1 0o/w Fresh fruits 16 12 2 0 1 0 1 0

Pears 10 9 0 0 0 0 0 0Blueberries 2 0 0 0 0 0 1 0Cranberries 0 0 0 0 0 0 0 0

Vegetables 114 13 16 1 30 31 19 4Pepper 27 3 6 0 9 3 6 0

o/w Frozen 16 2 5 0 3 0 5 0Legumes 19 6 0 0 8 4 1 1

o/w Frozen 16 6 0 0 7 3 1 0Potato 17 0 0 0 3 12 2 0

o/w Canned 15 0 0 0 3 10 2 0Mushrooms 15 0 3 0 1 2 7 1Other vegetables (mix) 15 2 4 0 4 1 1 2Tomato 7 1 0 0 2 3 1 0Cucumber 5 0 2 0 1 1 1 0Onion 4 0 0 0 2 2 0 0Root vegetables 4 0 0 0 1 2 0 0



> Even that relatively small number of higher value-added products is not diversified. Export of majority of those products refers to a single crop or comes from a few exporters. A similar problem also exists in export of frozen and fresh products. According to key sources of industry information, even in frozen form, fruits are not exported as retail-ready, which is the highest value addition that can be achieved for frozen products. Products are rather exported in bulk to industry or intermediaries, with a similar unit value achieved by the majority of companies. Some of the products, like apples and sour cherries, are dominantly exported to a single market - Russia. This is mostly an opportune trend corresponding with Russia’s sanctions on EU food import. With Russia’s plan of becoming more food independent in coming years, through import substitution, the question of sustainability of Serbia’s export also arises. Russia’s food import has almost halved in the previous three years, while import of F&V products decreased by 40%, from 10 to 6 billion USD.



Box 1. High value segment of Serbia’s Export

At each stage of F&V processing, value can be added with an appealing and well-presented product. In general, higher levels of processing will carry a higher value added, but value can also be added through a sophisticated logistic and distribution chain able to deliver F&V of highly appealing flavor and appearance characteristics very fresh, especially out of season. As the latter is a rarity still in most Serbian exports, we can assume that higher levels of processing in general add more value than lower ones. In that case, we observe four groups of products as high value segments of Serbia’s F&V export – dried fruits, dried vegetables, canned vegetables, and juices. Total export of these groups of products reached 85 million EUR in 2015, representing 13% of total export. The average unit value is above 3 EUR/kg of products. › Dried fruits (≈18 million EUR) – the key firm producing dried fruit products is Van Drunen, with export of 6 mil

EUR and unit value of almost 30 EUR/kg. Beside Van Drunen, couple of firms that produce shelf-ready dried plum stand out in this group – Agranela and Tehno-Bozici. Export of these two firms is around 4 mil EUR, while average unit value is around 4 EUR per/kg. These locally-owned firms even offer sliced dried plums and chocolate covered dried plums. Russia, France, Turkey, Poland and Croatia are the most important destinations for dried plums, while the USA is a top export destination for other dried fruit.

› Dried vegetables (≈20 million EUR) – mushrooms are a key exporting crop. Twenty companies together export more than 6 million EUR of dried mushrooms, with an average unit value of more than 10 EUR/kg. Top companies in this sector (Inter-funghi, Interfood, BMD) sell their products for more than 30 EUR/kg. Key export destinations are the USA, Germany, France and Italy. Peppers are another notable crop in this group. Companies like AD Aleva and Telek export vegetable (pepper)–based spices to Germany and neighboring countries.

› Canned vegetables (≈25 million EUR) – key firm in this group is Marbo which exports more than 10 million EUR of potato chips and sliced potato to neighboring countries. In addition, there are around 10 firms that export canned mushrooms to EU countries.

› Juices (≈23 million EUR) – Nectar and Podgorina Frucht, as well as Rauch and Vulic-Vulic, are the most important exporters of fruit juices. The greatest unit value is achieved with sour-cherry based juices, exported by these companies to Germany, Austria, USA, Italy and the Russian Federation. Together with apple juice, these companies export around 20 million EUR.

Among frozen products, particularly raspberries, there are companies that were able to differentiate themselves through shelf-ready packaging, but no more than 10 of them (no more than 5% of value of exports of frozen raspberries). Together with Crop S and Mondi Lamex, that are part of larger multinational systems, the most notable example is the domestically owned Sirogojno, which exports to more than 30 destinations worldwide, including Japan. Pamin, ITN, and Midi export more than 10 million EUR and they should be mentioned as good examples of producing shelf-ready products. These companies sell raspberries in click-lock boxes, carton boxes, and plastic trays, all weighing 100-500g and also offer organic raspberries. Average price these firms have achieved in 2015 was 3.5-4 EUR/kg, compared to 2.5-2.8 EUR/kg achieved by other exporters of frozen raspberries. There are many small companies that produce and sell niche products. They cannot be identified within statistical data and as they are typically very small, often micro companies. CSS would need to employ a very powerful survey to identify them and assess the size of their contribution. Nevertheless, information gathered from key respondents suggests they still form a very small part of the overall production portfolio. Little blue pot is one of these micro companies. Company was founded in 2015 and it exported more than 15,000 jars of jams (approx. value 200,000 USD) to USA and United Kingdom within last year. Firm is focused on recipe, design, and logistics. Firm found reliable logistics/retail partners in those two countries -- Magaza Wholesale is an exclusive importer for the UK, while Fast-Pak Trading is exclusive importer for the USA. Firm’s plan is to expand its export to 100,000 jars during upcoming years. This and other fast-growing micro firms are still not statistically important, but possess potential for growth.



> Exports of all of these higher value added products have been relatively stagnant over the previous three years. The entire export growth of F&V products in the previous three years is achieved by growth of frozen and fresh products – apples specifically. The share of deep processing products has fallen, while their export value remain stagnant. This refers to all categories of higher value-added products.

Table 9 – Foreign Trade in F&V Products, by Type of Processing (2014-2016)


Sector Fragmentation Before the options and constraints in improving these factors and raising the value chain’s value added and sales are discussed in the next section, we here first discuss the sector fragmentation. This is a fundamental feature of most of Serbia’s agro-food industry, especially the F&V value chain that has to be taken into account when devising of any remedial strategies. On the one hand, it is a constraint on raising value added as it raises the costs and obstacles to enhancing almost any of the factors that can contribute to higher value added. On the other hand, given good development strategies, it presents an opportunity to develop a more equitable income distribution and higher employment through the development of a vibrant SME-based agro-food sector.

> Small firms contribute to total export more than medium and large ones. This analysis identified 941 exporters of F&V products in 2015. Structure of this sector is very specific, with hundreds of firms operating and exporting, while none of them has dominant or major share on domestic or on foreign market. That is different from majority of other sectors, where a couple of firms dominate sector’s performance. Concentration in export of this sector is extremely low (HHI of only 109), with largest exporter contributing with less than 5% to total export, and the top 50 firms determine only 60% of total export.

More than 140 firms were able to export more than one 1 million EUR. The highest concentration of both the number of firms and their exports is in segments of fresh apples and frozen raspberries. More than 180 firms export those two types of products, with total value of

mil EUR Export Import Net Export2014 2015 2016 2014 2015 2016 2014 2015 2016

Total 543,4 666,9 703,1 112,4 136,6 128,3 431,0 530,3 574,8

Fruits 454,0 568,9 588,8 43,3 59,0 67,7 410,7 510,0 521,1Frozen fruits 273,5 341,9 318,2 20,2 25,6 19,9 253,3 316,3 298,3Fresh fruits 119,0 162,1 207,8 13,0 23,0 38,1 106,1 139,1 169,7Warm processed fruits 61,5 64,9 62,8 10,1 10,4 9,8 51,3 54,5 53,0

Juices 25,0 27,9 22,6 3,2 4,0 3,1 21,8 23,9 19,5Dried fruits 19,2 17,7 17,9 2,1 1,3 1,1 17,1 16,4 16,8Jams, purees and pastes 10,1 11,8 15,7 1,8 1,9 2,3 8,3 9,9 13,4Canned fruits 6,8 6,7 5,8 2,3 2,7 2,7 4,5 4,0 3,1Canned fruits and vegetable 0,4 0,8 0,8 0,7 0,5 0,5 -0,3 0,3 0,3

Vegetables 89,4 98,0 114,3 69,1 77,7 60,6 20,3 20,3 53,7Frozen vegetables 24,1 31,8 39,1 8,6 13,5 9,5 15,5 18,3 29,5Fresh vegetables 19,3 23,8 30,1 32,9 31,7 29,1 -13,5 -7,9 0,9Warm processed fruits 46,0 42,4 45,1 27,6 32,5 21,9 18,4 9,9 23,2

Canned vegetables 24,9 22,9 24,6 10,1 14,1 8,9 14,8 8,8 15,6Dried vegetables 20,9 19,3 20,3 17,5 18,4 12,9 3,4 0,9 7,4Juices 0,2 0,2 0,2 0,0 0,0 0,0 0,1 0,2 0,2



export reaching 165 million EUR. Other notable products, exported by small firms primarily as fresh or dried, are mushrooms, sour cherries, peppers and plums.

> Such fragmentation and heavy presence of small firms can be explained by fragmented primary production and specifics of transformation of processing sector. Serbian farmers grow F&V at very low marginal cost on small land-plots. For example, average area size of raspberry production is 0.2 ha, and there is 80,000 households registered as raspberry growers. The products are typically harvested directly by farmers and their families, with few seasonal workers. This is possible because F&V production is frequently considered as additional income, not a primary activity for a household that thus earns a significant income compared to average incomes and pensions currently prevailing in Serbia. In the case of raspberries, it is possible to make EBITDA of 1,200 – 1,500 with land size of 0.2 ha. This production for the time being requires relatively low investment and it can be highly competitive assuming that costs of commercial aggregation of such produce do not become too high.

> The processing sector is also fragmented. Thus far, buyers’ side is not systematically organized, and it is happening without participation of large intermediaries, with a dominant role of local processors. The industrial structure of the F&V industry is also intimately linked to the general de-industrialization and, in particular, the implosion of the large agro-industrial complex companies of the 1990s. Most privatizations other than the large complexes were completed already in the 1990s and while few of the larger privatizations were at first successful, most of the assets have, through sales and liquidations, functionally ended up in the hands of relatively small domestic capital. Those firms have been able to operate successfully thanks to comparative advantages in the primary sector, and low energy and labour costs. They are exposed to the challenges of any SME sector in the effort to grow.

> While it may be desirable to preserve the SME structure of the F&V value chain, its high fragmentation presents serious challenges for increasing value added. Development of MSMEs and high fragmentation of the sector can contribute to equitable distribution of income, which is of particular importance in Serbia, because the majority of firms are located in less developed regions. The benefits of raising value added may be more evenly spread than with large industries.

SMEs face a number of constraints, including lack of market intelligence and access to information, production quality, quantity and continuity, inadequate support from business service organizations (BSOs) and lack of adequate technical expertise. The majority of SMEs also have inadequate technology and limited opportunities for innovation. While orientation towards differentiation and branding of products through creation of niche products is an option for some firms, it cannot be a systemic answer for such a large population of firms with traditional, industrial processing orientation. There are three possible ways to overcome fragmentation of the market including the consolidation of the sector, cooperation between firms, and/or increasing the efficiency of trade intermediation.

a) Consolidation of the sector takes place through entrance of large foreign companies or acquisitions and mergers between already existing SME companies. In the last two decades there are not any significant processes moving in that direction. Considering the current state of affairs and possible effects of such activities, such an option does not look feasible due to a very complex political economy in the agribusiness-sector.



b) Cooperation between firms would lead to consolidation and standardization of supply volume, and therefore bargaining power and visibility of companies. However, efforts to promote clustering and cooperation among SMEs need to be carefully designed, driven by the firms, and informed by previous development efforts in Serbia. Sector associations were mostly constructed by the donor community and relatively few succeeded. As the survey results suggest, among all other activities, building cooperation between firms would also require a serious approach to awareness-raising since trust in associations is low.

c) Increasing efficiency of trade intermediation is probably the most desirable and feasible

option. It would aggregate supply, push firms towards higher quality and safety standards, and enable easier access to markets. For this to happen, traders and distributors, domestic and international, with capacity to aggregate many SMEs will need to be engaged and supported. Also, lead firms that have access to high-value markets will have to integrate other SMEs into their supply chains, which would also lead to sector standardization and consolidation.

Survey Sales Data The Baseline Survey effort complimented the secondary data collection to capture data across a representative sample of F&V firms, including sales data. For the purposes of analysis, the survey data is disaggregated by four regions in Serbia including Belgrade, Vojvodina, Southeast Serbia, and Sumadija and West Serbia. Firms were selected based on their engagement with exports of F&V and include processors, traders and transportation services actors. Table 10 details the total sales and production volumes for the surveyed firms by region, in Serbian dinars (RSD) and metric tons, respectively. It is important to note that the total sales figure does not represent the entire value chain. Rather, the total sales figure should provide relative weight to the number of firms sampled by region. On average, firms in Belgrade experienced the highest annual average sales, while firms in Southeast Serbia averaged the lowest. Vojvodina yielded the highest production volume by region, producing 107,000 metric tons of processed produce, while Belgrade produced the least amount at 41,000 metric tons.

Table 10: Sales and volume figures, 2016

Belgrade Vojvodina SE Serbia Sumadija and West Serbia

Totals

Total Sales (RSD) 26,345,320,000 18,776,472,000 4,357,453,000 19,964,157,000 69,443,402,000 Average Sales (RSD)

1,386,595,789 605,692,645 207,497,761 486,930,658 620,030,375

Standard Deviation

(4,809,813,546) (1,531,820,159) (274,314,941) (744,133,247) (2,176,734,958)

Median Sales (RSD)

141,409,000 86,751,000 124,982,000 171,027,000 137,304,000

Volume processed (metric tons)

40,960 91,901 44,490 63,039 256,026

Total Observations

19 31 21 41 112



Table 10 illustrates the distribution of sales by primary production process type. As the previous section noted, Serbian firms focus their efforts on cold process (frozen) production. These findings are not consistent when disaggregated by region. Belgrade and Sumadija/West Serbia share similar ratios of fresh to frozen processing. In these two regions, fresh produce accounts for nearly a third of sales while frozen produce accounts for half of sales figures. Vojvodina has a more diverse production, with 50% of sales from fresh produce (large scale professional apple orchards have been established mostly in this region), 16% of sales from liquid processing. Southeast Serbia sales are generated primarily through frozen F&V.

Table 11: Distribution of sales, by primary process type

Belgrade Vojvodina Southeast Serbia Sumadija and West Serbia

Fresh 32% 50% 5% 32% Frozen 53% 9% 57% 48% Dry 5% 9% 10% 7%

Liquid 0% 16% 5% 5%

Total Observations 19 32 21 44

Survey findings As already indicated, survey instrument was designed to collect data on SMEs and critical market support systems in which they function. These include financial systems, markets, and networks that SMEs are utilizing (for improving operations and workforce profile) as those have been identified as the most as key areas for upgrading the competitiveness of the F&V value chain. The survey, combined with secondary data, was to inform the strategy and activities designed to enable Serbian SMEs to upgrade and become more competitive in local, regional and international markets, which will be reflected primarily through increased sales. According to CSS Theory of Change, this will be achieved if CSS strengthens relationships between stakeholders in selected VCs, supported by effective communication, monitoring systems and capacity building, then we will stimulate investment in VC upgrading, elevating the competitiveness of the entire VC, leading to increased sales and replication of the approach in other sectors. This theory of change rests on working through and strengthening capacities of local partners, and they must be selected based on market driven, self-interest in order to sustain and grow networks.

Access to Market Although most of companies in this sector have access to foreign markets, they are primarily focused on lower value-added products and lack quality standards. Furthermore, their bargaining power is weak, as cooperation between firms is non-existent, systematic promotional activities are missing, and there are very few functional BSOs dedicated to this sector, some that have been created by previous USAID initiatives – “Unija hladnjacara Srbije”, Dried Plums Association, and Serbia Organica. Most firms stated that exporting is their primary sales channel and that frozen products are their primary product. More than 71% of firms (Graph 2) indicated that export is their primary sales option, while 22% of firms selected domestic market as their primary sales channel. Less than 5% of firms stated that cooperation with national retail chains and trade intermediaries is their



primary sales channel. Frozen or fresh products are the two most important groups for three out of four firms. Products like dried fruits and vegetable and juices are the most important category for 15% of firms. Almost all companies are interested to expand their activities in the international market. What’s more, half of them indicate that new buyers are the most critical factor of potential growth in the export market. Majority of firms also does not have a dedicated sales department, export manager with English (or other) language speaking skills, nor markets itself internationally – not even through internet platforms, which are free, and quickly growing as a medium for international trade. This is a major workforce development obstacle for firms that are planning to expand exports. Other than that, 30% of firms think that investments in technology or access to finance are binding barriers for growth.

Graph 2 – Primary Products and Sales Channels

Source: CSS Survey data

Improvements in quality and standards of products must be significantly supported – both through financial incentives and training. Every fourth company does not own any quality standard, while 45% possess only one standard. Only 49% are in possession of a HACCP certificate, which is sine qua non for foreign buyers or developed retailers.

Less than 25% of companies have obtained some standards specialized strictly for food industry (IFS, BRC, Kosher), while majority of companies do not have ISO (9000, 14000, 22000) standards. Many of these standards are only a starting point in negotiations with credible buyers. Without these standards, companies cannot expect to build long-term partnerships with customers, and this is an operations area which must be improved.

Cooperation between F&V processing firms is weak. With only 9% of firms that jointly sell their products in the foreign market, Serbian firms do not try to increase their size and bargaining power through mutual cooperation. According to key respondents, the vast majority of companies exporting fresh or frozen products sell these products in bulk to large foreign intermediaries. Those intermediaries are responsible for communication and negotiations with final buyers and for packaging and delivery of products. In that process, intermediaries are those that add more value to the product that is delivered to the final buyer. It is not rare that a couple of smaller companies mutually compete to sell their products to the same intermediary. This is a market discovery/knowledge problem, which needs to be addressed through a variety of interventions, and some of them might include making information available through export/import desks or MIS systems, building a strong distributor/trader sector, to setting up workforce development programs specifically targeting sales/export.

33%

8%

41%

7%10%

Primary product

Fresh Dried Frozen

Juices Other

22%

71%

1% 4%Primary sales channel

Farm/Factory gate Local marketExport market Local traderNational/export trader



Functioning BSO could also play a very important role in this segment. As already indicated, there are very few that are fully functional. 46% of firms are members of any association. 55% of them consider that the costs of membership are higher than benefits, while 35% of members consider that there are not any benefits of membership regardless of costs. The most important benefits of membership, according to firm-members, refer to provision of market information (37% of firm-members stated that it had some benefit in this area) and share of knowledge and experience among members (30% of firms). A very low number of members stated that they had any benefits in terms of organization of fairs (11% of firms), formal training and education (7%), advocacy (4%), access to finance (2%) and cooperative marketing (2%). The largest number of processors with cold storages is a member of “Unija hladnjačara Srbije”. According to key informants, although they see a benefit from mutual communication and some market information, the most important benefit for them is mutual appearance in front of GoS.

Graph 3 – Membership in Associations and Cost/Benefit of Membership

Source: CSS Survey data

Systematic promotional activities toward differentiation of products from Serbia are non-existing. However, this is a reflection of the profile of Serbian exports – primarily industrially processed crops where promotion and branding is not necessary. Those that do have capacity to export high-value, finished products could benefit from improvement in design and labelling, guarantees of quality, increasing quantity, etc. It is commendable that almost 80% of firms had a chance to visit some type of international fairs. Unfortunately, the follow-up activities are frequently missing. Less than 15% of firms had any training about exporting activities.

To support the creation of sustainable exporters, a full range of activities is needed, especially in areas of information sharing (MIS systems), development of trading sector, B2Bs/buyers/technology missions, trade fairs with more strategic approach, training firms on how to export etc. As of now, trade fairs are one element that is being regularly utilized in Serbia, however, expenditures that should be covered by firms for trade shows are perceived as high. Firms contribution amounts up to 3,000-5,000 EUR, in addition to RAS cost-share and PKS logistics management. That is the reason why international fairs are usually visited by medium and large firms, while small ones participate maybe once every couple of years. In

20%

24%

2%

54%

Member of some association (consider that benefits are higher than costs)

Member of some association (consider that costs are higher than benefits)

Member of some association (not declared in terms of cost/benefit)

Not members of any association



order to properly present products and make firms visible, participation should be repetitive and more frequent, but with clear follow up strategy and with new/niche trade shows added to the mix. The most important fairs, as recognized by PKS and firms, are Anuga (Cologne), SIAL (Paris), Prod Expo and World Food (Moscow). Innovation among fairs are PLMA (Amsterdam), a high-growing fair that gathers producers that produce under private labels, and Fancy Food Shows, where Serbia has registered minimal presence in past years.

Access to Finance As discussed earlier, fragmentation of the sector is a constraint on raising value added, as it raises the costs and obstacles to enhancing almost any of the factors that can contribute to higher value added. This is especially the case with financing of growth and development, since the majority of small companies are credit constrained. The situation in the F&V sector is a bit different, since companies are able, due to attractiveness of the sector in Serbia, to obtain loans. However, these loans are almost exclusively short-term loans intended for financing working capital, while long-term loans intended for investments and growth are rarely used. Since government support to the F&V processing sector is very limited, importance of access to bank finance is even more emphasized.

> Ministry of Agriculture (MoA) supports processing firms primarily through subsidies, but the total amount spent in 2016 was only around 720,000 EUR, which is 0.4% of total subsidies in the agro sector. In addition, these resources covered two more massive sectors, besides F&V – meat and milk processing. Subsidies are intended for investments in machinery and equipment and can cover up to 50% of total investment. Subsidies refer only to investments in new machinery and equipment and cover machines such as dryers, freezers, cleaning and sorting machines, lab machines, and packing machines. Maximum annual amount of a subsidy per firm is only up to 40,000 EUR. Since total expenditures were so low, it is clear that the average subsidy was far below its maximum limit. In 2017, subsidies for investments in processing equipment were planned at a level of 1.4 million EUR. MoA, for example, provides no incentives for sector associations to do product promotion in foreign and domestic markets, or control supply chains, which is standard practice in the EU and USA, and would sustain some of the associations established by the donors.

> Support of Ministry of Economy (MoE) is higher in terms of value and wider in terms of activities covered, but it is neither prioritized nor targeted. MoE supports firms through Development Agency of Serbia (RAS). RAS supports firms through grants, intended for purchasing of new machinery and equipment, creation of new jobs, innovations, and reaching higher quality standards. Although majority of these activities are binding obstacles for domestic firms, there are no specific programs oriented towards F&V sector. RAS programs are not sector-specific. Firms from this sector have same starting position as companies from other sectors. Extent to which these firms have benefitted from RAS’ programs cannot be assessed, since RAS does not have up-to-date sector-level statistics.

> In addition, IPARD resources will be made available soon, and those resources are intended for investments in processing capacities and machinery. Since GoS support is well below the sector’s requirements, it is important to enable use of IPARD resources as soon as possible. Total resources projected by the IPARD program for investments in physical assets concerning processing and marketing of agricultural and fishery products are around 83 million EUR. Industry awareness about IPARD remains extremely low.



Unlike other sectors, firms in F&V have easier access to bank loans. Turnover is relatively quick and demand for products is strong. Therefore banks and other credit institutions are relatively more willing to cooperate with firms from this sector. As much as 70% of respondents stated that they have active loans or have used loans during 2016 (Graph 1). The majority of them still have active loans and almost two-thirds of them have more than one loan. The vast majority of companies took a loan from a bank and did not use other sources of financing. Out of firms that did not apply for loans during 2016, almost 75% of them claim they do not need a bank loan, while only 13% did not apply due to unfavourable loan conditions. These companies are operating without support from a bank and are not interested in it. Only 7% of them applied for bank loans and were refused by the bank.

Graph 1 – Number of Loans among Firms

Source: Survey data

The vast majority of firms used bank loans to finance purchase of primary products, not for investments. In this sector, processing firms are purchasing primary products during the season, which usually lasts for one or a couple of months, when they often need a financial injection. That is a key reason why 83% of firms that used loans have used one intended for current assets. Only 21% of loan-users used loans intended for investments in machinery and other fixed assets.

Firms lack modern technology, especially for sorting, since they still rely on low-cost labour, and packaging of products as well as production of some niche products (e.g. freeze drying). It is important for CSS to conduct further research on access to long-term financing intended for investments in capital assets and why more companies do not use those resources. CSS needs to understand whether companies are not willing to take such risk or if such financial resources are not available to them.

The most feasible intervention for the Project would be to partner with financial institutions to educate the industry on all available sources of finance. This includes credit sources but also public sources which seem to be underutilized by the industry to stimulate borrowing interest for investments, or creation of new financial products in the market. A public private dialogue (PPD) also needs to be aggressively promoted and facilitated to stimulate more support/subsidies for the industry, and specifically greater utilization of IPARD program. If

No, 30%

0, 3%

1, 23%2, 16%

3, 13%

4, 7%

Yes; 70%

Does company have an active loan or has it used loans during 2016?

No 0 1 2 3 4 5 6 7 12 N/A

% of firms with # of

active loans

# f ti l



more financial products are offered or a new system of subsidies or credit guarantees is created, replication and scale up of these efforts would most likely spread across the industry.

Although less than half of firms from this sector consider that financial resources are a primary constraint to growth, it is clear from other answers that additional financial resources are required for competitiveness enhancement. For example, more than a half of companies that do not possess any standard of quality of products, also do not consider that financing is a binding constraint. Although firms have not been asked to provide their opinion on what constitutes a primary constraint, investments in quality of products is a primary condition in order to add value to products, find new buyers and competitively penetrate foreign markets.

Access to Information A critical element to decisions made by the firms about markets, financial sources, operations, and workforce development is information, or more precisely, source and quality of it. This is important for policymakers as well. Official data is not completely reliable, not even in terms of basic macro data. For example, official statistics often significantly underestimate production levels. This is the case with raspberries, where official data stated that annual production in the last five years was 330,000 tons, while export in same period was 400,000 tons, similar to unofficial field data. Since there is no official data on storage and processing capacities, the question that arises is how policymakers can design interventions and subsidies, if they do not know what to support – primary production or processing capacities. There are no export-import info desks, or MIS systems, where companies could gather data and information about the most important country-level buyers and intermediaries, their contacts, requirements in terms of food safety, quantity and quality, as well as data on key product-level standards. In addition, there is even a lack of knowledge about domestic firms, especially micro and small ones – their product portfolio, achieved standards, and management capacities are unknown to policymakers. This is a crucial piece of information missing, as small firms contribute the most to Serbia’s exports. Majority of companies, 41% of them, stated that they inform themselves about market conditions through their buyers. If buyers are key source of information for majority of companies, it is hard for firms to be proactive in the market, to increase its bargaining power, and to diversify a portfolio of buyers.

Active education on markets, new buyers, trends and targeted capacity building for companies must be ensured, and at the very least, an educational MIS/export-import portal should exist in the market, resembling practices of other F&V export powerhouses such as Chile, Holland, Spain, Poland and others. International sources of information are being utilized by few companies with English speaking capacity and sufficient knowledge to analyse and use them.

Workforce Development

Workforce development issues have been highlighted in previous sections, however, the survey provided statistical insight into specific needs. Development of skills and knowledge of managers and workers, as well as investments in innovation and development can be assessed as insufficient:

> Only 20% of firms have received some technical or export training from anyone in 2016. Trainings were dominantly held by other companies, while none of the firms have received training from government extension agencies or educational system. There is an apparent gap in specialized export training programs in the market.



> Only 35% of firms cooperate with research and education institutions. The primary field of cooperation refers to research and development (13% of firms) and internships (15% of firms). These numbers are extremely low by any international standards.

> Management representatives of only 27% of companies participated in any programs/courses/ classes to develop business skills in 2016. 32% of companies consider that they have access to any type of business skills development training, but 38% of them did not attend any training during 2016.

> Training and internship programs, along with involvement of experts, universities and technology institutes in training sessions for the firms could also be organized in partnership with a selected BSO. It is important that these trainings are targeted and conducted with the goal of increasing sales to stimulate long-term interest from the companies for these efforts. Short certification programs for key gap areas in the industry, such as sales and export education, management, and new technologies could be a possible solution to this problem.

Domestic market: Retail Chain Characteristics It should be noted that the secondary data collected information solely on exports because official data on domestic markets is not available. Survey confirmed that this is not a limiting factor for the baseline as overwhelming majority of firms view export market as their expansion strategy. However, domestic market and specifically retail-chain sector also needed to be analyzed since retail chains became key downstream partners in F&V value chain, requiring processing sector’s transformation and orientation towards higher value-added and better-quality products. Firms that are able to respond to retail chains requirements are likely to be more competitive and resilient to market change, however there is still a significant gap between first tier retailers requirement and ability of Serbian companies to meet them.

> The retail sector is increasing, both in the international and Serbian markets. In the early 2000s, turnover of the wholesale sector was several times higher than turnover of the retail sector. However, the increasing concentration of retailers, accompanied by consumers’ expectations, started to reshape marketing channels in favour of the retail sector. Retail sector increased its share and became dominant player in total sale of F&V while participation of wholesalers decreased.

A key reason for that is F&V became destination products for retailers. These two categories were strategically focused to be the reason to choose the store over wholesale market. That is also why big retailers changed their paradigm towards buying fresh F&V directly from producers, to ensure quality and safety of products, thus pushing out wholesalers.

Table 12 – Share in Sales of F&V Products, by Type of Trade (2012-2015)

Source: SORS

> Serbian retail market is moderately concentrated. Market potential of the Serbian retail market is low. Retail turnover per capita is low, explaining the relatively small

2012 2013 2014 2015mil RSD % mil RSD % mil RSD % mil RSD %

Total turnover (F&V) 84,5 100,00% 89,498 100,00% 86,853 100,00% 93,814 100,00%Green market 14,1 16,60% 16,054 17,90% 16,459 19,00% 18,358 19,60%Retail 26,6 31,40% 27,598 30,80% 37,019 42,60% 42,662 45,50%Wholesale 43,9 51,90% 45,846 51,20% 33,375 38,40% 32,794 35,00%



number of global players (Ahold Delhaize, Metro) and a small number of regional players (Agrokor and Veropoulos). In the period after the last financial crisis, the concentration is slowly increasing, particularly in the retail sector. According to a study published by the University of Belgrade Economics Faculty2 Delhaize Serbia and Agrokor (including Merkator) both had 25% of total retail market in Serbia in 2012. These two retail chains had constantly growing market shares up to 2012 and according to key respondents, one third of retail stores, belonging mainly to individual entrepreneurs, was closed since then. Thus, concentration in the retail sector is increasing and the market share of the two largest retailers will very likely continue to grow.

> Small number of big foreign retailers are introducing a new focus, standards and requirements, and concentrating on what consumers prefer. Big retailers, particularly international ones, take the minimum locally accepted requirements as a starting point, but request additional quality standards. HACCP is a basic, usually fulfilled, standard, but it is not enough. Global Good Agricultural Practices G.A.P.) has been implemented gradually in Serbia, starting with the lower level of requirements fulfilment (e.g. 40%) with a plan to achieve full requirements in coming years. Quality requirements in international chains are defined by contract and are non-negotiable in the segments concerning food safety standards and packaging. Audit is performed for all fresh food suppliers before their products are listed on the shelves.

> Small local retailers are still completely supplier-driven. They outsource F&V stock replenishment, having no obligation to invest in storage, cooling chambers and vehicles with temperature regime. Small local retailers have only the basic logistics and quality requirements when it comes to fresh F&V. First class products (standards are not developed or recognized), quality control on reception, legally prescribed declaration and frequent shipment to the stores is expected in order to avoid stocks and losses.

> Food producers and suppliers in Serbia are struggling to meet requirements of big retailers. The majority of small firms are still product-driven, trying to sell what they produce and not what is demanded. The first barrier relates to new standards that are required: IFS, defined by GFIS – Global Food Safety Initiative, for auditing food manufacturers and BRC (British Retail Council standard on food safety, recognized in more than 90 countries as global). The second barrier relates to an old-fashioned assortment of products – use of traditional seeds that do not meet requirements of modern consumers. The third barrier concerns treatment and packaging of products, which is also very old fashioned. There is a lack of washed potatoes, calibrated products, packed in different packs of 100 grams as snacks or packages for households, ready-to- use or take-away products. Big retailers seem also to lack interest to buy in Serbia and distribute in other markets. This is mostly due to quality, branding and presentation of products, but also due to unreliable supply.

> By closing the gap that exists between requirements of retailers and products of processors, domestic firms would become more competitive in international markets. This can be accomplished through improvement of capacities of domestic companies because meeting the standards of first tier retailers is a first step in meeting requirements for internalization. Big retailers have programs to promote inclusion of domestic suppliers in their supply chain. These programs focus on contracted

2 “Efekti koncentracije na ispoljavanje tržišne moći u maloprodaji visoko obrtnih proizvoda, University of Belgrade, Economic faculty” (Pešić Saša, PhD thesis, (2015)



production so that producers have guaranteed placement of products, ordered sorts, education and support, regular payments, contracts with commercial banks for early collection of receivables, and private label production. These programs are not enough, as small companies are still not able to adapt and transform. The incentive structures in organization of large international retailers are such that they are not interested or oriented to invest in small companies. Hence, systemic support from other stakeholders, particularly state authorities, is needed for small companies to adapt to global trends and demands.

It is obvious that partnership with big retailers in Serbia is very important for enhancement of SME competitiveness. A pilot project with 2-3 retailers and 60+% of market share in retail sector as partners could be developed to raise the awareness of selected firms. This could enhance selected firms’ quality standards as well as quality of their products. It would substantially impact their business operation and prepare them for the international market. One of the key problems for the companies is that they do not want to take a risk without guarantees that their product will finish in a retail store, while retailers do not have the incentive to give such guarantees. As indicated above, engagement of reliable distributors that can work with SMEs to respond to retail requirements could lead to partnership development that could be replicable and built upon in the future to access more domestic products. Simultaneously, innovation and entrepreneurship promotion in this segment should be utilized to attract creative forces to drive more diverse, high-value offer to modern retail.

Conclusion and activity recommendations The guiding strategic rationale for CSS, which expands USAID’s CSS theory of change with strong emphasis on systemic competitive capabilities, assumes that if CSS can strengthen relationships between stakeholders in selected VCs, supported by effective communication, monitoring systems and capacity building, then CSS will stimulate investment in VC upgrading, elevating the competitiveness of the entire VC, leading to increased sales and replication of the approach in other sectors. This is reflected in Figure 1 below.

Figure 1: CSS Theory of Change

While VC analysis provided strong justification for selecting F&V as a sub-sector of a food processing industry to target initially, the complexity and diversity of this sub-sector requires that interventions are guided by a good understanding of general problems impacting it, and specific obstacles for individual value chains and products, including a diagnosis of the symptoms and causes of underperformance.



The baseline process, which was conducted at the same time with activity plans, covered mostly general sub-sector level analysis, while specific VC/product issues were not covered in extensive detail and will have to be addressed in activity plan and subsequent work plans. While a number of conclusions can be drawn from this document, one in particular stands out - low value of output of Serbian processing industry, stemming from low integration with high-value markets and lack of systemic support for the industry restricts investments and growth of industry competitiveness. It is important that CSS focuses from the beginning on addressing underlying causes of weak performance by the industry rather than symptoms, as reflected in table 13. Root causes of underperformance can be found in any element of the market system. For example, the baseline is focused on assessing the core function of processing industry in Serbia, i.e. the firms and markets which are key actors in transactions of goods or services. To a lesser extent, rules (laws, regulations, informal values) and supporting functions (skill enhancement, product development, R&D) guiding the core functions are analyzed as well through the survey. Each one of these market system functions as a market system in itself. For a market system project that does not recognize high leverage points early on, implementation focus could become wide spread with minimal impact.

Table 13 – Symptoms and Root Causes of Sector Underperformance

Symptom Initial Cause Underlying Cause

Low value of Serbian export Poor product differentiation, productivity and professionalism among exporting companies

Weak provision and low use of specialised consulting, education and communication services (in turn a result of demand side hesitancy and supply-side capacity weakness).

Minor presence in high value markets

Lack of standards and modern promotion/branding/marketing practices

Minimal understanding of high value export markets, weak connections with distributors and buyers, low recognition of Serbian products

Low investments in food processing industry

Lack of resources, poor utilization of existing resources, lack of information about available resources, lack of innovative financial products

Lack of education about investments and capital management

Thus, the purpose of the CSS should be focused on eliminating key obstacles to generating export-led growth, particularly for the high value segment, to set a replicable example for the rest of the food processing industry. The main challenge in this process will be building the market access and market readiness for firms, while ensuring that the functional business support system is capacitated to support this process, with proper resources for expansion raised. CSS Activity Plan should further build on key root causes of sub-sector competitiveness and clearly outline:

a) Intervention design and action plan, which reflects the complexity of markets in the real world.

b) Developing a transparent and realistic picture of sustainability, which recognizes that ownership within market systems is vital to achieving enduring change.

c) Guidance for facilitating systemic change, which permit flexible, multifaceted interventions aimed at stimulating market players and functions.

CSS team will remain aware that while the entire sub-sector has high potential, for CSS to reach its goal of increasing value (sales) of Serbian products in a relatively short period of time while improving competitiveness of the industry, the Project should focus on the highest impact and



leverage activities. As highlighted earlier, the F&V sector/value chains have been split into three distinct categories due to differences supply chain need, stakeholders, and target markets. These include:

> Fresh produce, with apples having a major market share, and limited vegetable trade in CEFTA market.

> Industrial processed products or intermediate processed products, which include those that have been partially processed but are not necessarily ready for consumers and are rather used for further processing and final-product development. This is an industry (especially frozen fruits) that will need consolidation, diversification and higher-value markets if it is to stay competitive.

> High-value or shelf-ready products, which also includes specialty organic or bio products which are in a very high demand, usually sold directly to retail and are consumer ready. This is a segment where Serbia needs the biggest improvement.

In terms of export performance, which is the target growth market, sector is dominated by intermediary/industrial processing. Other than apples, fresh trade is mostly focused on the domestic and regional CEFTA market, and they are not registering noticeable growth. Finally, if Serbian industry is to become competitive, the high-value segment will need to be aggressively promoted and developed. Since the systemic approach cuts across all segments of the F&V industry, the project should consider focusing its efforts on:

1. Improving market access is the most critical impact area for the industry, and will be the key CSS interventions focus. More than 90% of interviewed ccompanies, from all segments of the industry are interested in capacity building for exporting their products and CSS should primarily focus on those that are considered strategic crops for Serbian industry. These activities should cover promotion/increased visibility of Serbian products, and improved connections to markets: Under promotional efforts, activities for consideration could include: a) Trade shows, while already being supported by PKS and RAS, should be organized

in a strategic manner with strong, standardized branding, preparation and follow up procedures. CSS should focus on high-value events:

− Organic (Biofach and others) – this is a fast-growing segment of the industry in EU with exceptional market demand

− Fancy food shows – Serbia is generally not present in these events where high-value products and innovative industry trends are promoted

− Private label show (PLs) – most of the firms working in industrial processing require stable buyers that provide long-term markets and dictate standards, and some of the more successful ones in the industry are those with PL accounts

− Processing technologies events – exposure to new technologies and ideas in the industry is critical for diversifying Serbian production

b) An establishment of an export-import/MIS system that will serve as a face of Serbian industry, and a connecting point for Serbian firms and buyers, as well as provide a window into export markets and their demands (possible partners PKS or RAS) to improve SME knowledge and awareness about needed improvements



c) Raise food industry profile in domestic and international markets through a series of promotional events, which could include guest international bloggers, cooking shows, and organizing intentional food events in Serbia. This should result in increased visibility, product diversity, innovation and entrepreneurship

d) As a conditionality for support, require firms, associations and other partners to maintain professional websites and promote membership in important international organizations

Under improved market linkages support: e) Build capacity of a distributor/trader segment of the industry i.e. specialized firms

that understand the markets and can provide services to many SMEs operating in the sector. This intervention should target both domestic and international distributors/segments, and should primarily target higher-value products. Emerging online trade segment should be considered as well.

f) Export academy/boot camp program should be established for firms as a key workforce development effort, either in cooperation with PKS and RAS, or one of the universities in Serbia. The program has to be reflective of tangible industry needs, and updated on annual basis.

g) Strengthen capacity of PKS and RAS to provide marketing services to SMEs h) Organize buyer visits. New buyers demanding high-value products should visit

Serbia’s SMEs, in coordination with industry associations or individual firms. These visits should focus on high-value segment. Apples, which need market diversification should also receive attention.

Market access initiatives have high feasibility for success as these are the most in demand services within the sector. All have sector wide application – i.e., other components of food processing industry could benefit from the, and are thus replicable and scalable. It is likely that at some point after Year 2, some of these interventions would have shown sufficient result to include additional value chains.

2. Improving access to resources should be increased and awareness about opportunities raised: a) System of support for IPARD applicants should be established through info sessions

for the firms or through capacity building of the consulting sector. IPARD will be the key driver for investments in the industry in Serbia for the foreseeable future. The Project should consider specifically focusing these efforts on SE and SW Serbia where investments are low and industries are not diversified.

b) SMEs should be regularly informed about resources available within the public and credit systems in Serbia, including various credit guarantees available. A partner for this activity could be a financial institution with interest in educating industry to stimulate demand for financial products.

c) If opportunities arise, VC/equity options for the sector should be considered, to drive innovation in financial sector and raise profile of the sector.

d) A credit guarantee line supporting investments in target regions, for target crops or specific technologies (if targeting is possible) should be considered.

All interventions targeting financial resources available to the firms are feasible as financial stakeholders tend to be aggressive in promoting their products. A profile of financial products will determine how replicable and scalable they are, but in addition



to market access, this is one of the program aspects that has the highest chance of success for driving change within the industry.

3. Expand collaborative networks for improving business support services. This includes two suggested approaches: a) Working with lead firms who have access to high value export markets on

developing new models for inclusion of supplier SMEs and organizing producers – this approach should result in new certifications, improved/consolidated supply chain management and standardised product offer. PKS could play a facilitative role in this process, or individual lead firms could be targeted. This activity is especially important for the key export crops – berries, apples, cherries, plums and peppers (as well as other vegetables). While this effort is certainly feasible, the replication and scale up will depend on the will and effort of PKS and associations to implement interventions. Individual firms with strong focus on consolidating supply chains, implementation of standards and networking could also be considered for this effort. Lead firms should have special focus on SE and SW Serbia where most of the micro and small processors are located, with low-diversification and production value.

b) Support existing or new sector associations. As indicated above, several sector associations already exist, and should be supported to provide better services to their members. Primarily, this should be focused on market discovery services, buyers’ missions, product promotion, technology exposure and PPP dialog. Requirements for membership should include certifications and transparent operational practices. Reflective of industry practices elsewhere in EU, state support for associations should be secured. While activity is certainly feasible, the later element (state support) is critical to sustain the model and make it replicable and scalable to other sectors of the industry.

c) Promote innovation in product development, set up accelerator programs for creative entrepreneurs with regional development units, hubs or university centres. Accelerators should provide an ecosystem of learning with guaranteed market access and access to finance for start-ups and early stage business.

d) Promote technology-days and input supplier days (for processing technologies), preferably organized with functional industry associations.

Targets Table This baseline document is tied to and submitted concurrently with the AMELP, which contains Results Framework, the CSS targets table (Annex A) and Activity Performance Indicator Reference Sheets (Annex B). Suggested activities are compatible with CDCS Results Framework, and CSS should thus consider following the same RF structure. Along with the standard set of project indicators, the Sector Performance Index (Annex C) is also recommended as a learning and context reference for project targets. Annex D provides further clarification on the sales targets and ambitiousness of the same.

baseline assessment of fruit and vegetable value …

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