EPI Investment Case Study: Competitiveness of Georgian Agriculture – HIPP Georgia

Hipp Georgia LTD is a subsidiary of Hipp Switzerland, part of a global organic baby food group owned by the Hipp family of Germany. A philanthropist with long-standing ties to Georgia, Klaus Hipp has been looking for an opportunity to do business while at the same time serving Georgia’s needs to enhance the livelihoods of poor smallholders. He identified a supply chain opportunity that remained untapped because of poor infrastructure and unsophisticated competitors, utilized his group’s global market reach for organic apple products, and worked closely with smallholders to maintain tight food safety standards.

The company made a decision to invest in organic apple processing in 2006, following the imposition of Russian embargo on Georgian agricultural exports. With no access to its traditional export market and limited storage capacity, the Georgian apple industry went into a protracted crisis, with supply of fresh apples greatly exceeding demand, particularly at harvest. Hipp also took notice of the dire state of apple growers in many uplands regions, such as Racha-Lechkhumi and Mtskheta-Mtianeti. Due to the high cost of transportation, smallholders in these upland areas could not capture neither the manufacturing nor fresh apple markets in the lowlands. The company attempted to transform these weaknesses of Georgia’s apple growing industry into a strength by sourcing conventional apple from the lowlands, and developing a network of 1000 apple growers complying with a rigorous in-house organic quality assurance program in the upland areas.

Hipp Georgia had initially commissioned organic and conventional apple juice products from other factories. In 2009, however, the company invested in its own plant in Agara, Shida Kartli – an economically depressed area bordering on Russia-occupied South Ossetia region that also happens to be home to a large population of Internally Displaced Persons (IDP’s). By creating 75 permanent positions and hiring additional 180 seasonal workers, the company is thus making a non-negligible contribution to job creation in a region stricken by chronic unemployment problems.

Developing the necessary skills in both labor and management to operate a food factory to the highest international standards of food safety and quality assurance was no easy task, but with assistance from a sister company in Turkey and with rigorous training, the enterprise was certified with ISO22000, HACCP and the in-house Claus Hipp Bio Segel, one of Europe’s most demanding organic certification schemes. The company’s organic products are currently exported to Germany, where they are incorporated in organic baby food production under Hipp’s brand. Its conventional products are supplied to the global market, including Coca Cola factories in Azerbaijan and Kazakhstan.

The study examines Georgia’s business enabling environment and how the enterprise was able to transform major challenges — old orchards, dilapidated infrastructure, loss of an export market for fresh apple, and lack of skills in QA management – from a major liability to a major competitive strength of the enterprise. We analyze the effect of Hipp Georgia on employment and smallholders’ welfare, government revenue and exports, process innovation and new product development.

Our key recommendation for government is about the need to promote Georgia’s fresh apple – both conventional and organic – to new export markets so as to trigger a round of private investment in internationally demanded apple varieties and organic production methods. Achieving access to the lucrative fresh apple markets is indeed critical because, in the long run, apple processors, such as Hipp Georgia, will not be able to secure their supply chain of manufacturing apple other than as a by product of a thriving fresh apple industry. Measures to achieve this may include government-led export promotion, improved communication with the various actors in the apple value chain, improvement of uplands road networks and storage capacity, finance for replanting of smallholders’ orchards, renovation of irrigation systems and finance for on-farm irrigation systems.

Investors are advised to take advantage of Georgia’s access to markets in Europe by targeting organic or other niche products in order to avoid competition with giant Chinese or Turkish producers. If contemplating organic food processing, investors have to conduct detailed market research and supply chain analysis before commencing investment. As far as local supply chain quality and stability are concerned, investors should be aware of the ample opportunities to collaborate with aid donors seeking to build the capacity of smallholder farmers, link them to relevant value chains and service providers. Likewise, investors should consider the opportunities to benefit from the recent changes in Georgia’s legislation and agricultural support policies which prioritize the development of farmer organizations and improve access to finance for agricultural producers and agribusinesses. Finally, given the sorrow state of Georgia’s vocational training systems, investors should be prepared to devote considerable resources to training for Georgian work force.