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CANNING INDUSTRYby Dr. Diana Kopeva

Industry BackgroundCanning industry is one of the most important and attractive sectors of Bulgarian Food industry.The favourable climate and natural resources have underpinned the sector’s development.During last three years (1996-1999) unfavorable influence of different exogenous and endogenousfactors, specific for the canning industry is observed. Some of these factors are:• Severe drop in raw materials production (vegetables and fruits) as an outcome of the slow

progress of agrarian reform.• Low quality and low yields of produced vegetables and fruits.• Increased requirements for quality and hygiene conditions for canning production set by importers.• High competition on traditional international markets.• Decreased purchasing power of the population and increased prices of food products.• Limited range of goods (various imported goods of canning industry and semi-manufactured

articles can be found on the market and they create highly competitive environment).• Higher quality competitiveness of imported goods and lower price have negative impact on

demand of Bulgarian products of canning industry.

Positive is the impact of the following two factors: (i) privatization (more than 75 % of enterprisesin canning industry are privatized); and (ii) structural reform (more than 94 % of established newprivate enterprises are small and medium sized).

Significant drop in production and export is observed in canning industry last three years (1996-1998). The figures in table 1 illustrate drop in production of canned vegetables and fruits.Table 1. Canning Industry: Output of main products, 1998-1999 (Tons)

Month/Year Canned Vegetables Canned Fruit Vegetable Oils (edible) Tobacco1998 55467 28064 202598 33181

I 704 460 7808 2560II 986 792 20792 3259III 572 459 18030 2763IV 892 664 12991 2600V 975 1666 13964 3100VI 2502 4269 13280 2847VII 7622 5027 9448 2880VIII 14675 6841 10652 2634IX 12875 3507 16516 2600X 8565 1287 27392 2718XI 3538 1384 27196 2502XII 1561 1708 24529 2718

1999* 14040 18120 174491 25657I 529 235 18843 1807II 319 275 14210 1785III 153 653 12863 2000IV 180 529 9309 2233V 204 649 8034 2261VI 1214 1678 11424 2310VII 562 2112 7973 2272VIII 2751 4956 4600 2204IX 2894 4883 16623 2284X 3272 1249 26125 2399XI 1236 607 23227 1872XII 726 294 21260 2230Source: NSI* The data are based on sample of enterprises

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The amount of processed and preserved fruit and vegetables decline rapidly. It is shown on Figure 1.Figure 1.

Source: National Statistical Institute

The trend of production is negative. In 1998 were produced 99.9 thousand tons of cans, of which 71% was vegetable and 29 % fruit. The industry produced 71.2 thousand tons of vegetable cansagainst 127.2 thousand tons in 1996 and 136.1 thousand tons in 1997; 28.7 thousand tons (1998) ofcanned fruit versus 46.6 thousand tons (1996). Figures indicate drop of 61 % in canned fruit (notincluding pulpes) and drop of 45 % in canned vegetables (not including pickles). Canning industrywill not be able to supply for domestic market and for export, and became more and more domesticoriented sub-sector of food industry. The main reasons for the drastic drop in production are highprices/low quality of vegetables and fruits, and collapse of the former COMECON market.During the socialist period all enterprises in canning industry were state-owned. Ten years after1989 the outcome of the privatization in canning industry is 85 % privatized enterprises. At timebeing the total number of companies in this subsector of Food industry is 200, in that number: 11are managed by privatization funds; 6 are with prevailed state share; 34 are privatized under thecash privatization; 149 are privately owned (100 of them are new small enterprises). More than 80% of enterprises are specialised in canning production (vegetables &fruits) and the rest 20% incooled fruits and vegetables. Most of the enterprises (70%) in canning industry are small andmedium (ranged by number of employees and average turnover) (Figure 2)

Figure 2.

Source: Ministry of Economy

Production Indices for processing and preserving of fruit and vegetables, 1995=100

0

20

40

60

80

100

120

140

160

1995 1996 1997 1998

Years

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Bulgaria: Types of companies in canning industry, 1999

77%

14%

9%

Small Enterprises

��������Medium Enterprises

��������Large Enterprises

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Factor conditionsSeasonalityA major factor that affects the canning industry is the seasonal nature of the country itself. Thecanning industry is very dependent on weather and environment conditions. Fruit and vegetableproduction is dependent on the climate. As a result, the operations of canning factories are alsohighly seasonal. The factories work almost with full capacity no more than 5-6 months annually(July-December). They need working capital for a season and then follows period of sellingproduction. Seasonality creates problems with loan repayments. Cash flow is not positive everymonth and during the death season part of companies face significant problems in repayment.

InfrastructureTransport plays important role for delivery of inputs and production. Within the country processorsprefer to use auto-transport. Increasing fuel prices influence the cost of production.

Financial IssuesObtaining loans is one of the main obstacles that this industry faces. Credit security requirementsrender the supplying of fresh money almost impossible. Often, one who needs a credit falls into avicious circle - in order to obtain a loan the subject must guarantee his solvency, depositing anamount of money equivalent or even higher with reference to the loan. This fact arouses a lot of“timidity” in the individual who has a good idea with which to start or continue a business.However, seldom does the individual asking for a loan present a convincing business plan, eitherbecause of inability to express the good idea or because the idea is not good. Thus, not only part ofsupply, but also part of demand is rendered ineffective. Interest rates are hopeless. The mortgagemechanism has not yet started to function; thus, land ownership can’t serve as a guarantee.

Market IssuesThe marketing of the Bulgarian canning industry is at a very low level. There are a lot of obstaclesin front of it. Almost nothing from the former foreign trade representative offices of“Bulgarplodexport” remains, and it is logical, given the need of big investment, to run these officeswithin the power only of centralized or developed economies. Moreover, information about foreignmarkets, technologies, related industries etc. doesn’t circulate within the country. On the other hand, themarketing preparation of the Bulgarian managers is not so high and, in an international context, it is a seriousproblem. They rely on the exploitation of international contacts established in the past. Furthermore, theexploring of new markets and establishing new contacts is rendered difficult by visa problems.

Technology and Human Resource CapacityMost of the factories or buildings used by new established factories were built under the centrallyplanned economy. The technology at these factories is obsolete and highly inefficient. Some of thesmall and medium canning producers used created and built by themselves machines andequipment, but in general is far behind innovative processing technologies that would allow them tooperate at more optimal levels.

Raw materialsCanning industry processed mainly domestic vegetables and fruits. The biggest is the share of rawmaterials in the production costs (around 70%) and this determines their important position in pricedetermination of processed vegetables and fruits. During last three years (1996-1998) it is observed32 % increased in planted area with vegetables (tomatoes, peppers, cucumbers, peas, green bean),but the average yield is relatively stable. (Table 2)

Table 2. Planted area and average yield of vegetables, 1996-1998Year Total area

(decares)Average yield

Kg/haProduction

Tons1996 8 387 450 102 855 5661997 9 071 440 91.3 829 1241998 12 387 810 106.1 1 341 912

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Source: NSI

The quality of vegetables and fruits as main raw materials for canning industry is not on a necessaryhigh level. Main reasons, except financial, are not satisfied organization of seed production and lowtechnology level of agricultural production.

Demand ConditionsExisting MarketsBulgarian canning industry exports canned vegetables to Russia, Kazakhstan, Ukraine, Belarus;Germanys; frozen vegetables - mostly to Greece -72.5%, France - 7.4%, Germany - 3.2% and Italy -3.1%; jams and jellies to Russia - 38.1%, Germany - 23%, Jordan - 14.1%, the Czech Republic -3.7% and Austria - 2.6%; frozen fruits - mostly to Germany - 50.4%, Holland - 13.3%, Greece -10.9 %, Russia - 5.1%, France - 4.8% and Austria - 4.4%.After May 2000 negotiations with EU agreement for canning industry was achieved in following areas:• Export quota was committed for export of 16,500 tons processed tomatoes with zero duty. It is

anticipated increasing of quotas annually.• Additional export concession in EU countries was negotiated for 4,000 tons frozen vegetables,

1,000 tons cherries, 9,375 tons plums, with zero duty.• Bulgaria commits import quotas with zero duty from EU for 1,000 processed vegetables without

undertaking commitment to subsidy.• Achieved agreements entered into power since July 1, 2000.Domestic marketThe marketing of the Bulgarian canning industry is at a very low level. There are a lot of obstaclesin front of it. Almost nothing from the former foreign trade representative offices of“Bulgarplodexport” remains, and it is logical, given the need of big investment, to run these officeswithin the power only of centralized or developed economies. Moreover, information about foreignmarkets, technologies, related industries etc. doesn’t circulate within the country. On the other hand, themarketing preparation of the Bulgarian managers is not so high and, in an international context, it is a seriousproblem. They rely on the exploitation of international contacts established in the past. Furthermore, theexploring of new markets and establishing new contacts is rendered difficult by visa problems.According to some research, the share of private enterprises is about 1/4. What is certain is thatstate enterprises are destined either to be privatized or to disappear. To state and private enterprisesthere could be added the channel of dealers. It is a question of organizers with skills in marketingand information on the markets (above all foreign ones). They stipulate contracts with the producers(private and state enterprises) and supply markets or stipulate different contracts with the whole chain(from agriculture to packaging of final products), thus organizing and controlling the entire process (includedtransport), and supplying the final markets.

Firm Strategy, Structure and RivalryFirm StrategyThe elaboration of special firm strategies is an almost impossible undertaking. This is because ofthe lack of steady parameters for making production and investment programs. Firstly, the supply ofrow materials doesn’t give steady parameters as regularity, prices and quality. Almost always thetransactions are not based on contracts and are sporadic. The supply of jars and caps presents thesame kind of problems. Contracting is not a widespread practice. Often the producers areconstrained to turn to the foreign markets. Secondly, there are not yet steady macroeconomicalparameters. Foreign trade policy, taxation and crediting are still in the stage of fermentation.Thirdly, as mentioned above, the margins of profit of the canning industry are rather low and thus atechnological innovation without further investments is unachievable.

Firm Structures and Privatisation

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There are two channels by which the processing of fruit and vegetables are provided. The first oneis what remains of state enterprises. The second one is the private canning enterprises. Given thatthe process of privatization is an ongoing process, it is impossible to specify the share of stateproduction and the share of private production. Ongoing structural reform is characterised withrestructuring of state ownership. In the table 3 below are given some figures for the level ofprivatisation in canning industry in comparison with other sectors of Food industry.

Table 3.Pace of Privatization in Canning Industry by 31 December 1998State share

%Dairy

IndustryMeat

Industry

Fishery

WineIndust

ry

Brewery

CanningIndustry

OilIndustry

SugarIndustry

Total -number

100 2 4 1 4 - 6 1 1 1967-99 - - - 2 - - - 3 551-66 - - - - - - - - -34-50 1 - 1 1 - - 1 - 41-33 33 27 2 30 16 35 11 7 161

0 9 7 - 8 2 9 1 1 37Liquidated 2 - - - - - - - 2

In liquidation 3 9 2 - 1 2 1 - 18Insolvent 4 9 - 1 - 1 - - 15

Total 54 56 6 45 19 53 15 12 261Source: Ministry of Industry and Privatisation Agency

Regional AllocationIn southern Bulgaria the concentration of this sub-branch of food industry is higher compared tothat of northern Bulgaria. The highest number of means of production are concentrated in thePlovdiv and Pazardjik regions, followed by the Stara Zagora and Jambol regions. In the outlyingsouth regions (the Rhodope Mountains) there are no canning industry manufacturing facilities. Innorthern Bulgaria the highest concentration is in the Pleven and Veliko Tarnovo regions. TheRousse and Montana regions follow. The firms situated in Dobritch and the mountain and semi-mountain northern regions have a commercial activity as well.

Government policy.

Undoubtedly, a policy for market economy and competitiveness is performed. The problem is thatcurrently there is still a lot to do and the changes are introduced slowly. Nevertheless, that land wasrestituted to its owners1, the outcome of prolonged ten years land reform still hinders thedevelopment of agriculture, which provides raw materials to the food industry. Parallel, the processof privatisation is slow and ineffective. The reasons are bureaucracy, the lack of concept, and theclash of interests.

Because of price liberalisation in 1991 input prices have risen more than farm prices and thussubjected agriculture to cost price squeeze. As a result the application of fertilisers and pesticideswas restricted and this affected the yields of many crops.

The new corporate tax law is similar to the ones of the industrialised countries, but, applied to oneunderdeveloped economy, it turns into a high obstacle. There is not tax facilitation for the firms thatreinvest the profit or invest in new productive assets. The fiscal mechanism does not function andthis, together with the high quotas, is a kind of catalyser for fiscal evasion. The state administrationis ineffective and bureaucratic (in the negative meaning of the word). There is a lack of dialogbetween administration and economic operators. Irresponsibility and fear to take a position or totake a personal decision deposited during the socialist period are still circulating within theinstitutions. On one hand, business is rendered hard to carry on; on the other hand, it makes theprocess of introducing the new laws or directions for development very difficult. In Bulgaria exists

1 According to the NSI and Ministry of Agriculture and Forests, until the end of June 2000 – 96 per cent of agriculturalland was restituted.

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the phenomenon of duplication of the functions between the institutions. An example is the controlon and the licensing of the wine and products of canning industry. A high rate of scepticism is theconsequence of this, which removes the returning of the confidence in the state administration. It’sgoing to be hard to revitalise economics, confidence being absent.

The Bulgarian canning industry is still in the factor-driven stage. It works below 50 % of itsexisting capacities. BFI possess the potential to “jump” into the investment-driven stage, but itmust find the spiral to come out from the vicious circle: the banks don’t give loans to the producersand the producers don’t offer good guarantees and convincing business plans. The main problem isthe lack of reciprocal confidence. In the investment-driven stage the competitive advantages aredrown from two determinants - factor conditions as well as firm strategy, structure and rivalry. Thefactor conditions will remain an important element, but as a function of the market requirements.The most developed industries are the ones that are able to create competitive advantages based onthe local resources. It is a governmental task to find the exit from the vicious circle. For example, itcould create funds to guarantee the loans and the funds for loans for Bulgarian exporters. Havingcapital resources, the firms will invest and will try to achieve the market requirements. Moreover,there is a lot to do towards creating of a good information infrastructure.

Following the Porter’s theory two subsectors fulfill almost all requirements to be competitive -canning industry and wine industry. In the next years, the industries that are most likely tooutperform are those where Bulgaria has cost advantage or particular niche, and where the industrydirects a substantial proportion of sales to export markets. Focus sub-sectors are:

• Food - a large fruit and vegetable canning industry which is highly export oriented;• Wine and Tobacco - a major export earners;

The main question is - does the profitability of those sub-sectors of food industry actually correlatewith its export potential? The evidence suggests that while exports may guarantee growth inrevenues, they do not necessarily enable a company to make a satisfactory profit on those revenues.Why? Because another major impact on profitability has the level of input costs, and it does nothelp if those costs are imported - currency exposure, together with artificially high prices make itdifficult to break even. Additional “negative “ influence has seasonality of production.