Cablegate: Mercal: The Brv's Most Popular Mission

VZCZCXRO9164
RR RUEHAO
DE RUEHCV #1897/01 1741742
ZNR UUUUU ZZH
R 231742Z JUN 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 5229
INFO RUEHBO/AMEMBASSY BOGOTA 6695
RUEHBU/AMEMBASSY BUENOS AIRES 1307
RUEHLP/AMEMBASSY LA PAZ 2137
RUEHPE/AMEMBASSY LIMA 0382
RUEHMU/AMEMBASSY MANAGUA 1315
RUEHQT/AMEMBASSY QUITO 2219
RUEHSG/AMEMBASSY SANTIAGO 3610
RUEHAO/AMCONSUL CURACAO 0878
RUEHGL/AMCONSUL GUAYAQUIL 0527
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RUEHRC/DEPT OF AGRICULTURE USD FAS
RHEHNSC/NSC WASHDC
RUEHUB/USINT HAVANA 0820
RUCNDT/USMISSION USUN NEW YORK 0323

UNCLAS SECTION 01 OF 03 CARACAS 001897

SIPDIS

SIPDIS

TREASURY FOR NGRANT
COMMERCE FOR 4331/MAC/WH/MCAMERON

E.O. 12958: N/A
TAGS: ECON EAGR PGOV VE
SUBJECT: MERCAL: THE BRV'S MOST POPULAR MISSION

REF: A. 2005 CARACAS 578

B. CARACAS 444

This message is sensitive but unclassified, please treat
accordingly.

-------
Summary
-------

1. (U) Since its inception in 2003, the government-owned and
subsidized food chain, Mercal, has grown exponentially. It
now holds nearly half of the market share for domestic food.
At a 92 percent public approval rate, it ranks as the most
popular BRV mission, even penetrating into the upper-middle
classes. CASA, Mercal's purchasing arm, enjoys significant
competitive advantages over commercial counterparts, such as
tax and customs duties exemptions. To account for rise in
demand, the Ministry of Food (MINAL), which administers
Mercal, has plans to expand the network and support
agricultural investments to supply the stores. Mercal
continues to suffer from some shortages and corruption, but
overall the program appears sustainable, given the social
importance and popularity of the stores, a continued
favorable price outlook for oil, and the BRV's focus on food
security. President Chavez has openly embraced Cuban
consultation on the project, and has touted Mercal as one of
his main successes in delivering the "revolution" to the
people. End summary.

-----------------------------------
47 PERCENT MARKET SHARE AND GROWING
-----------------------------------

2. (U) Mercal was born after the 2003 general strike, when
the government sought to replace interrupted food supply
chains. What started with a few convenience store outlets
has now turned into a food distribution network with 47
percent of market share (by volume, 15-20 percent by sales)
for food products (according to Datos Information Resource, a
polling firm), reaching 15.2 million people (over 60% of the
population), with 7,600 direct employees, over 15,000 stores,
and nationwide sales of 6,000 metric tons per day. CASA
(Corporacion de Abastecimiento y Servicios Agricolas),
Mercal's purchasing arm, is responsible for coordinating both
imports and domestic procurements. According to Cavidea (the
Venezuelan Industrial Food Chamber), in December 2005,
CASA-brand products had 45 percent market share for rice, 28
percent for pasta, and 22 percent for flour.

3. (U) Mercal has a variety of stores: from large and medium
"Supermercal" and "Mercal Type II," which carry CASA-brand
items as well as other commercial brand-name products, to
"Mercal Type I" carrying exclusively CASA items, to
"Mercalitos," corner stores operating under a Mercal
"franchise" and selling both CASA and non-CASA products.
Mercalitos, which are generally corner stores with a Mercal
sign in front, make up 90 percent of the network's points of
sale in Venezuela.

4. (SBU) Mercal operates as a not-for-profit organization
(profits are about eight percent, according to Arthur D.
Little, a consulting firm that has studied Mercal since its
inception and advises clients on doing business with
Mercal-CASA). Since 2005, the Mercal-CASA program has been
administered and financed by the Ministry of Food (MINAL),
which allocated USD 166 million to the network in 2005. The
program received USD 114 million in 2004, when it was under
the Ministry of Agriculture. In 2005, the Mercal-CASA
operation represented 55 percent of MINAL's annual budget,
not withstanding any additional credits. Mercal-CASA's
operating budget figures are not publicly available.

5. (U) According to Datanalysis, a local polling firm, 92

CARACAS 00001897 002 OF 003

percent of Mercal users are satisfied with the program.
Demand for food products has increased eight percent in the
first 2006 trimester alone, largely in the low-income D and E
classes (which make up approximately 79 percent of Venezuelan
households). Mercal has even tapped into the A, B and C
classes, with 37 percent of respondents in those classes
admitting to shopping there. Reportedly, Mercal employees
have on occasion denied admittance to "escualidos" (the
pejorative nickname for upper-class Venezuelans). However,
when EconOff and other embassy employees visited three Mercal
stores in Caracas (presumably looking like upper-middle class
Venezuelans), there was no problem entering the premises or
purchasing products. Though the stores were not equipped
with credit card readers, the cashiers didn't ask for
personal information (such as name and identification number)
for the cash transaction, which is customary in
privately-owned grocery stores. Due to increased demand,
Mercal has announced expansion into cold storage (already
present in some stores), acquisition of vehicles for their
transportation fleet, expansion of existing stores and
improvements of service centers.

-------------------------
ECONOMIC IMPACT OF MERCAL
-------------------------

6. (SBU) Mercal, on average, offers a 32 percent discount on
goods that are price-regulated (an extensive list of basic
staples for which the BRV has imposed a sale price ceiling).
Mercal's prices for non-regulated or non-CASA goods are on
par with market value. CASA doesn't pay customs duties on
imported products, which in 2005 made up 37 percent of their
200-product basket (down from 70 percent in 2004). According
to Arthur D. Little, Mercal has made a concerted effort to
favor domestic producers. CASA provides packaging materials
to suppliers (see Para 8), which allows them to cut costs on
packaging and marketing and therefore offer a discounted
wholesale price. CASA is exempt from paying taxes.

7. (SBU) At first glance, it seems like Mercal would be
eating into the market share of large grocery store chains.
However, according to Arthur D. Little, from 2005 to 2006,
large chains have increased their market share from 35 to 37
percent. Other providers, such as warehouse-style stores
(i.e. Sam's Club equivalent), and corner shops have been hurt
the most, shrinking from 25 to 17 percent market share. In
general, Mercal has driven down price margins --
traditionally very high in Venezuela at 30-35 percent -- for
supermarket chains, and many are attempting to become more
competitive by varying product choices and improving
facilities.

8. (U) MINAL has also announced continuation and expansion
of a series of agricultural investment projects destined to
supply the Mercal network. Among these is the now infamous
Ezequiel Zamora sugar complex (CAEZ), which became embroiled
in a corruption scandal in March 2006 after an inquiry
revealed that the USD 2.4 million destined for the project
had gone into the pockets of a few military officers and
reportedly of Antonio Albarran, the ex-minister of
Agriculture. Among this year's new projects are the proposed
re-activation of coffee plants, construction of pasta, corn,
meat and rice processing plants, chicken farms,
slaughterhouses, cooking oil production facilities, packaging
factories, and another sugar mill.

-----------------------------------
POLITICS: PROPAGANDA AND THE CUBANS
-----------------------------------

9. (U) In Mercal, CASA-brand food comes conveniently packaged
with political propaganda. Most basic staples have a comic
book-style cartoon depicting, for example, a devil dressed in
a suit with a dollar-sign tie (representing the profiteering

CARACAS 00001897 003 OF 003

private sector), accompanied by an excerpt from the
constitution or a political statement. (Note: for photos of
products, please contact EconOff at Rioja-ScottIE@state.gov.
End Note). Only CASA products carry this propaganda.

10. (U) The involvement of Cubans in the administration of
Mercal is no secret. In an April Alo Presidente speech to
celebrate Mercal's three-year anniversary, Chavez publicly
introduced Barbarita Castrillo, a Cuban "minister" who serves
as a BRV consultant. Chavez said: "You have no idea how much
these people helped us, and continue to help us." (Note:
Ostensibly through ALIMPORT, the Cuban Food Import Agency.
End Note). That same week, Chavez proposed that Mercal
expand to Nicaragua, and various National Assembly deputies
have picked up on the suggestion and have publicly supported
the idea of taking BRV missions overseas.

---------------------------------------
LINGERING ISSUES: SHORTAGES, CORRUPTION
---------------------------------------

11. (U) Product scarcity is a common occurrence in
Venezuela, and Mercal is not immune. The causes for
shortages are varied, but mostly they occur due to price
controls, which discourage production by leaving low (often
negative) price margins. Erika Farias, the current Food
Minister, stated that shortages are just a symptom of
Mercal's popularity. (Comment: They are more likely a
symptom of retrograde BRV pricing policies (Ref B). End
Comment). During EconOff's visit to three Mercal stores,
none had sugar or sardines.

12. (SBU) According to Arthur D. Little, there are over 101
open corruption cases regarding Mercal in the Venezuelan
legal system. In the state of Tachira, Mercal employees were
reportedly stealing merchandise to sell at a profit over the
Colombian border. Reports abound of Mercal employees
hoarding products affected by shortages to later sell them to
preferred customers or on the black market. The food network
has a very high employee turnover rate, which may be a
contributing factor. These incidents prompted MINAL to
schedule a census of Mercal stores, to be carried out by
Community Councils.

-------
COMMENT
-------

13. (U) Mercal is a high visibility project for the BRV, and
has provided Chavez' voter base with a tangible benefit from
the "revolution." Whether the expansion into the middle
class translates into political support is difficult to
gauge. Though the network is largely successful due to
unfair competition (no taxes or customs duties), it has also
provided a market outlet for many national producers. Mercal
will be sustainable as long as oil revenue and poverty remain
- the former to finance the subsidies, the latter to uphold
demand. To Venezuelans, it will continue to be a place to
buy basic staples at considerably cheaper prices, and the
popularity of savings often supersedes a consumer's political
leanings. End comment.

BROWNFIELD

© Scoop Media