Marketing French Fries in Southeast Asia: The Devil's in the Infrastructure Details.

Study by Texas A&M University team suggests need for more coldstores in the Philippines and more transportation in Thailand. Vietnam looms as a potential market.

How do you boost consumption of frozen french fries in Southeast Asia? The first thing you have to do is improve the cold storage distribution system, according to a study by Texas A&M University commissioned by the US Foreign Agricultural Service (FAS).

The study, prepared by the university's Department of Agricultural Economics in cooperation with the American Potato Trade Alliance with support from the FAS and the US Department of Agriculture, addresses cold chain infrastructure in the Philippines and Thailand, and includes a preliminary study of Vietnam.

Project team members included Catherine L. Viator, Wu-yi "Dennis" Fang, Jennifer Hadley and Wipon "Marty" Aiew, working under the direction of Dr. Victoria Salin and Dr. Rodolfo Nayga. Objectives of the project were to:

* Develop pilot projects illustrating business opportunities with commercial potential in the infrastructure needed for transportation and handling of frozen foods to secondary cities in the Philippines and Thailand.

* Draw conclusions about feasibility of projects, using risk analysis based on economic conditions and institutional constraints.

A research team visited capitals and other cities in the Philippines and Thailand during May and June 2000. They interviewed representatives of about 80 companies, including cold storage operators, transportation service companies (shipping lines and trucking and railway cargo service companies), port authorities, frozen food processors, quick service restaurants, banks, and government officials. Conclusions follow.

Philippines

Insufficient quality cold storage is the main issue facing companies that distribute frozen processed potato products in the Philippines, especially in secondary cities such as Bacolod and Cebu. Cold storage business is seasonal, with monthly utilization rates ranging from 60% to 100%.

Expensive inter-island shipping from Manila to secondary cities on the southern islands is another bottleneck. Freight rates for interisland shipping are higher than international shipping charges. For example, the cost from Hong Kong or Japan to Manila is about $1,500 per 40-foot container, while that from Manila to Cebu is $1,800 to $2,000.

Furthermore, although Manila and Cebu have modern seaports, the port in Bacolod is incapable of handling 40-foot containers. Because the seafood industry in Bacolod is declining, cold storage and port facilities have not been developed. It was also evident that traffic congestion in Manila makes inter-city deliveries more difficult.

The proposed pilot project for the Philippines was to build medium-sized cold storage warehouses in designated secondary cities. Two scenarios were used to assess commercial feasibility of the proposed facilities.

The first was a "worst-case" scenario assuming that the new warehouse wouldn't be used at full capacity. The project would break even if filled to 63% capacity, on average. This scenario further assumed a 15% discount rate, 300 pesos per cubic meter per month in storage charges, and a 15,000 cubic meter facility.

These and other baseline assumptions were based on information provided in interviews conducted in the Philippines. Annual net income was projected at 4.5 million pesos and the Net Present Value (NPV) of the 10-year project at 340,550 pesos, discounted at 15% -- a modestly attractive investment opportunity given these pessimistic assumptions.

Most cold storage facilities in the Philippines described a seasonal pattern of demand for their services. A model based on usage patterns described by cold storage operators projected an average utilization rate of 78%. The expected NPV for the project was positive, at 22.3 million pesos, discounted at 15%. Thus, a new cold storage facility that experiences variation in its business similar to existing warehouses appears to be an attractive investment. If an investor has a higher discount rate, the simulated project was found to break even at 27%.

The project team concluded that the market for frozen french fries is well developed and will continue to expand in the Philippines. Investment in cold storage warehouses in Cebu City and Cagayan de Oro should be feasible, given declining tariffs, the favorable market situation, and the absence of competition at the moment. But recent political unrest could impact economic growth and the capital market.

Thailand

Compared to the Philippines, Thailand has less severe problems in distributing frozen processed potato products from ports to secondary cities. Ports in Bangkok and Laem Chabang have good facilities to handle imports and exports of frozen food products. Thailand has a good highway system connecting the Bangkok ports to secondary cities.

Private cold storage facilities (owned by frozen food exporters and importers, including a french flies importer) are modern and meet strict quality standards. Moreover, capacity is great enough to meet current demand. However, there is only one public cold storage facility available in the Bangkok area and none in the other cities. Thus, if the market for frozen and chilled foods were to grow rapidly, the limited amount of cold storage space could present a barrier in the future.

Cold chain infrastructure in Thailand is basically sufficient to meet the current distribution needs of frozen processed potato suppliers. Thai consumer acceptance of Western-style quick service restaurant foods is lower than that observed in the Philippines. Nevertheless, it is possible that trucking fleets near ports could help improve the efficiency of distribution if the demand increases in the near future.

The proposed pilot project in Thailand was to establish a refrigerated trucking company to help move frozen food products between Bangkok and secondary cities. The trucking fleet would consist of 20 refrigerated vans. The initial scenario reported reflected conditions as of October 2000, with fuel costs relatively high (14.58 baht per liter).

Based on this "worst-case" scenario, the trucking fleet was still an attractive investment. The NPV of the five year project was 8.7 million baht using a 15% discount rate. Variation in fuel costs could have a significant impact. Annual profits were projected at 9.9 million baht under the stochastic model, but the anticipated fuel cost in the simulation reflected 18 months of historical data and was more favorable to the investment than the most recently observed oil prices. Given the market demand for trucking services, current competitiveness in the industry, operational and financial risks, and profitability of the proposed pilot project, the research team concluded that it is commercially viable.

Vietnam

Operating a business in Vietnam can be difficult; however, infrastructure improvements and increasing demand for frozen potato products make investing more feasible. Current infrastructure is limited and consumer demand for frozen foods is modest. Only 10 quick service restaurants were operating in Vietnam as of summer 2000, and total imports of frozen potatoes were approximately a container load per year. The possibility of normalized trade relations between Vietnam and the U.S. could help to improve the economy and enhance the prospects for investing in the cold chain infrastructure.