Productivity in the confectionery sector is stymied by inefficient practices, overcapacity, and limited competition. One player dominates the sector while three others are substantive. The collapse of the Russian market has left many manufacturers scrambling for a new market. It is a sector ripe for consolidation, but the survival of players who avoid their tax and regulatory obligations as well as the absence of foreign players is slowing the process down.
Sector Hit by Overcapacity
In the early and mid-1990s, Turkish confectionery manufacturers discovered the Russian market and exports boomed. The industry expanded capacity until 1997, when the Russian economic crisis hit. While a few of the small scale, low-automation companies shut down or were bought by the bigger players, the majority have survived by operating informally, i.e. by evading tax and social security obligations. With these barriers to self-correction, the industry has been left with more capacity than it needs.
Industry Domination
The leading confectionery manufacturer accounts for almost half of the domestic market, while the next three share another quarter. The balance of the market is surprisingly fragmented, with some 350 companies producing a range of goods. These tend to be small-scale and traditional players, who operate at productivity levels only 18 percent of the U.S. Helped by informality, these traditional companies do enough to survive but they do not challenge the leaders.
The manufacturing leaders, meanwhile, have a virtual lock on distribution. Some of them have skillfully managed relationships with stores so that it is difficult for all but the one or two largest players to get shelf space.
International Competition
International competition could provide the boost that confectionery manufacturers in Turkey need to improve productivity. However, non-Turkish companies face the distribution lockup. They also deal with indirect tariffs and import-related costs, which drive prices up by as much as 38 percent.
Removing some of these barriers would allow international companies to compete, forcing domestic concerns to focus more on performance. The influx would also expose local companies to global best practices.
Natural Consolidation
In addition to setting the stage for more intense competition, if the government also enforces tax laws and hygiene codes, traditional companies would have to either modernize within the system or go out of business.
The combination of effects would mean that a long-due consolidation would accelerate, helping to solve the major capacity overhang that plagues the industry today. Launch this chapter (PDF - 381 KB)
