Evolution of Food Marketing Systems: Implications for Producers in Developing Countries World Bank Workshop – December 15, 2005 Linking Small-Scale Producers.

Evolution of Food Marketing Systems:Implications for Producers in Developing Countries

World Bank Workshop – December 15, 2005“Linking Small-Scale Producers to Markets: Old and New Challenges”

Copyrighted by Abt Associates, Inc.

December, 2005 All Rights Reserved

December 15, 2005

Main topics

Drivers and governors of change

Trends in the structure, conduct, and performance of food marketing systems in developed country markets

Similarities and differences between systems in developed and developing countries

Challenges for developing country suppliers in general, and small-scale producers in particular

Opportunities for developing countries and small-scale producers

Implications for development programming and intervention

December 15, 2005

Drivers and governors of change on the demand side…

1. Demographics: growth rate; age distribution; ethnicity; race; geographic distribution; extent of travel; exposure to food-related information and retailer promotion

2. Consumer preferences: price vs. quality/condition; convenience; year-round availability; variety; nutritional content; safety; greenness; fair trade; luxury goods

3. Buyer specifications: volumes; presentation; labeling; private standards; certification; price point; service

4. Technology: marketing information systems; category management methods; progress in supply chain management; transport and handling advances

December 15, 2005

…Drivers and governors of change on the demand side

5. Regulatory change: official standards and associated certification; labeling (nutrition, COOL, allergens); market access; environmental protection; OSHA; labor rights; animal rights

6. Market access: tariffs; quarantine restrictions; other non-tariff trade barriers (NTBs)

7. Factor costs in distribution and retailing: energy; transport; labor

8. Economic growth trends: GDP; disposable income; levels and use of consumer credit; inequality of wealth

December 15, 2005

Drivers and governors of change on the supply side…

1. Product/market conditions: effective demand; prices; competition

2. Procurement practices: value chain integration; compliance with private standards; preferred supplier arrangements; new terms of sale

3. Factor prices and availability for production and shipping: land; capital; labor; energy; transport

4. Producer preferences: overall investment per crop area; price levels and their variability; production risk

December 15, 2005

…Drivers and governors of change on the supply side

5. Technology: marketing information systems; supply chain management; quality assurance regimes; transport and handling technologies; post-harvest and production technologies

6. Regulatory change: capacity to deal with market access requirements and standards; dealing with local and national restrictions on land use, inputs, labor contracting and treatment

7. Demographics: availability of seasonal labor; existence of a local market for seconds and an urban market for export-quality product

December 15, 2005

Structure of food marketing systems in developed countries

Concentration of ownership and control in virtually all choke points in the marketing system: importing, logistics and distribution, food manufacture and processing; food service; retailing

Market shares for hotel, restaurant and institutional (HRI) channels rising in response to eating out

Food service rising in response to HRI growth

Proliferation and blurring of food marketing channels

Change in role of terminal markets as direct sourcing rises, ethnic diversity grows, and variety is sought

December 15, 2005

Conduct of food marketing systems in developed countries

Relentless competition, driven by competition between major players in a given channel, as well as across channels

Competition occurs not just from store to store, region to region, and country to country, but between value and supply chains

In the name of efficiency, Wal-Mart especially has lowered the bar in terms of labor costs and benefits, forcing other chains to sell out, consolidate, or cut back their own benefits

However, Wal-Mart has also led the pack in terms of innovation in procurement arrangements, supply chain management, and marketing strategy, arguably for the general welfare

December 15, 2005

Produce business model since late 90s: category and partner-based strategy

Source: Adapted from Roberta Cook and The Perishables Group

New Model RetailersPlace a high value on consumer informationConcentrate on category development and possess category expertiseStill know and employ all advertising, promotional and merchandising techniquesRely on select supply partnersTake a more strategic approach than in past

Changed RolesRetailers expect suppliers to know the consumers and therefore deliver the right product, to the right stores, at the right time and price

December 15, 2005

ProductionProductionYr-Rd Sourcing Yr-Rd Sourcing Multi-regional,Multi-regional,-international-international

Fresh-Cut Fresh-Cut Processing,Processing,

Service-orientedService-orientedSuppliers Suppliers

DifferentiatedDifferentiatedProduceProduce

Streamlined Streamlined Distribution,Distribution,Acct-orientedAcct-orientedmarketing, marketing, Category Category ManagementManagement

Grower/Shipper-Controlled, Grower/Shipper-Controlled, Cost DrivenCost Driven

Retailer-controlled, Retailer-controlled, Revenue DrivenRevenue Driven

EmergingEmergingBranding andBranding andPrivate LabelsPrivate Labels

Source: Adapted from Roberta Cook and Rabobank Mexico

The emergence of value chainsin the fresh produce industry

bananas, pineapples

salad bars, consumer packs

Branded packaged freshcut salads and

fruit

December 15, 2005

Overriding objective is to improve competitiveness

Meeting that objective creates value for participants and consumers by removing friction, costs, and time

Successful application of the value/supply chain approach results in an efficient, highly competitive “extended enterprise”

This is to be accomplished by achieving seamless integration between production, storage, distribution, stocking, selling functions

In the food industry the value/supply chain approach evolved in response to emergence of category management, which in turn was made possible by advances in bar coding/scanning technology and electronic data interchange (EDI)

The “value/supply chain” approachto agricultural marketing

December 15, 2005

In what ways are value/supply chains becoming integrated and coordinated?

Increasing use of partnership and preferred supplier agreements

Shared strategic planning processes

Collaborative product development (new forms, presentations, line extensions)

Joint production and delivery scheduling (even across suppliers who used to be competitors)

More efficient logistics and distribution (chartered carriers, dedicated warehouses, ECR, even in-store replenishment)

Seamless information flow via electronic data interchange

Joint marketing, promotional and merchandising efforts (grow the category, promote the brand, shave peaks in supply)

December 15, 2005

Shared Responsibility for Category Management

Heavy Reliance on EDI using Intranet

Efficient Consumer Response (“Quick Response Systems”)

Continuous Product Replenishment using Automated Warehouses

Distribution Requirements Planning

Contracting with Preferred Suppliers

Reliance on Codes of Practice

On-going Effort to EliminateMiddlemen that Don’t Add Value

Intertwined Logistics Management and Traceability

Best practices in value/supply chain approach

December 15, 2005

How is this new and different?

Longer-term vision

More stable relationship between two companies, not based so much on personal relationship between salesman and buyer

Joint responsibility and accountability

Bottom line is profitability and growth of the category as a whole—year-end, not weekend results

Fewer players control more of the volume, cutting out middlemen that don’t add value

Heavy emphasis on enterprise-wide IT

Shared staff, dedicated facilities

December 15, 2005

How high-value export/import deals have been evolving in the fresh produce industry

Spot Transactions

Volume-bound Deals

Season-long Programs

Multi-year Collaborative Relationship

e.g. single load of mangos from exporter to commercial sales agent, shipped on consignment,

e.g. 250,000 boxes of mangos from exporter to receiver, price for each load

set FOB port of exit

e.g. one half of total production, from grower-shipper to importer/distributor,

with minimum price guarantee

e.g. exclusive marketing deal between grower/shipper and

importer/distributor, with 50/50 split of profits after costs

Going Direct

e.g season-long program between grower/shipper and chain, special packaging, stepped or fixed price,

delivered basis

December 15, 2005

Performance of food marketing systems in developed countries

Competition has kept food prices low, with increases below the rate of inflation

Trend toward reduction in producer and export subsidies continues to exert pressure on prices

Variety, quality, condition, safety, and all other discriminating factors continue to improve

Margins are getting tighter, and returns on sales continue to fall, so companies need to expand to continue raising return on equity

December 15, 2005

Similarities between food marketing systems in developing versus developed countries

Same basic challenge of providing safe food of the right type and quality to those who need it at a price they are willing and able to pay

Mixture of domestic production and imports

Complex panorama of actors, enterprises, and institutions

Important role of supermarkets in food retailing

Presence of HRI retailing channels, and therefore some foodservice suppliers

Increasing role of regulations and standards

December 15, 2005

Differences between food marketing systems in developing versus developed countries

Vastly different scale at system and enterprise level

Percentage of product handled formally lower in LDCs

Share of fresh versus processed or manufactured much higher in LDCs than emerging or developed countries

Supermarket share is rising still and fast in LDCs to detriment of smaller retailers and wholesale markets

Foodservice share and growth smaller because HRI market less developed due to lower disposable income

Standards less evolved and less complicated

December 15, 2005

Challenges for developing country suppliers in general

Choosing between commodity and specialty markets

Retaining and expanding market access

Gaining and holding a position in lucrative value/supply chains

Penetrating, holding, expanding better markets

Raising productivity and competitiveness

Increasing value added

Dealing effectively with emerging standards

December 15, 2005

Sanitary and Phytosanitary Standards

Quality and Condition Standards

EnvironmentalStandards

Social Standards

Service Standards

The need to handle large volumes at arms length increases the importance of standards

December 15, 2005

Service standards are becoming the new battleground in global food trade

Slotting Allowances

Special Packs

Private Label Products

Promotional Support (e.g. ad preparation, allowances, advertorials, BOGO and 2FER campaigns)

Merchandising Support(e.g. POP displays, banners, in-store samples, recipes,

Volume/Non-Volume Rebates

Capital Improvements (e.g. processing, distribution facilities)

Timely, Consistent Delivery

Setting up Electronic Data Interchange or Merging Systems

Stock Replenishment by Supplier (Warehouse, Store)

Use of Returnable Containers

Prompt Problem Resolution

Trace-back Systems

December 15, 2005

Particular challenges for small-scale producers in developing countries

Understanding changes in the domestic and export food marketing systems and value chains that interest them

Identifying and dealing with a buyer of appropriate size, interest, capacity, integrity and patience

Raising productivity and lowering costs enough to compete with larger grower-shippers at home and abroad

Achieving the quality, volumes, and consistency of supply necessary

Understanding and complying with SPS standards

December 15, 2005

Strengths of small farmers in global supply chains for food and agricultural products

Vocation for agriculture

Low wage rates, and after training, low cost of labor

Good growing conditions for some crops

Extended growing season in tropical and subtropical areas

In some cases, low cost of production

Lack of options means often means strong motivation

In many places, a tradition of working together (e.g. “minga” in Ecuador and Peru)

Nearness to growth market of the future for food products, which is developing countries in general, and urban markets in particular

December 15, 2005

Weaknesses of small farmers in global supply chains for food and agricultural products

– Shortage of capital and lack of collateral with which to borrow

– Lack of access to technology

– Difficult access to good land

– Environmental degradation, especially soils and water

– High pest/disease pressure in tropical and subtropical areas

– Inputs often not available, or late

– Power usually expensive

– Time, distance and cost to market

– Transport infrastructure and services often inadequate

– Small scale of farm units, difficulty delivering volumes needed

– Inability to speak English

– Lack of know-how and know-who for export markets

– Policy and enabling environment

– HIV/AIDS scourge

December 15, 2005

Basic question: How do we move fromthis… to this …?

December 15, 2005

Small farmers can aspire to participate in major value/supply chains but need help to:

Improve comparative advantage through public investment

Better understand markets and marketing

Identify value chains worth developing

Eliminate friction in chosen supply chains

Select and deal with export catalysts and channel captains

Comply with official and commercial standards of all kinds

Generate the required volumes and consistency of supply

Assimilate enabling technologies

Add value after initial success in a given deal

December 15, 2005

Implications for development action (1)

1. Take a long view, and recognize that there are crescendo and cumulative effects in terms of learning, investment, market access, sales, and exports

2. Make sure the policy environment as favorable as possible, but don’t assume that will be enough

3. Identify and support promising value chains with assistance at key point in the supply chain based on collaborative analysis of challenges, joint definition of priorities, and expert assistance from industry-experienced people

December 15, 2005

What exactly is an agricultural supply chain?

Entire set of processes and activities required to produce a product then deliver it to a target market

• The term “produce” encompasses growing, transforming, or manufacturing

• The entire chain goes from “farm to fork,” but development projects are usually concerned with a subset of links within the chain

• For the chain to work, factors of production and technology are not enough; efficient transport, information systems and management are crucial

December 15, 2005

Principal links in agricultural supply chains

Assembly/Utilization of Production Factors*

Production (crops,livestock, aquaculture)

Post-harvest Handlingand Storage (raw products)

Transformation (processed food products)

Manufacture(finished products)***

Marketing and Sales

Transport and Distribution

Manufacture (intermediate products)**

*e.g. land, labor, water, energy, seed, agrochemicals, financing, technology

**e.g. food ingredients

**e.g. packaged foods

December 15, 2005

“Supply chain” is not synonymous with “value chain”, because…

• Value chains are concerned with what the market will pay for a good offered for sale

• The main objectives of value chain management are to maximize gross revenue and sustain it over time

• Supply chains are concerned with what it costs and how long it takes to present the good for sale

• The main objectives of supply chain management are to reduce the number of links and to reduce friction (bottlenecks, costs incurred, time to market), but

• You need a good supply chain to build a value chain

December 15, 2005

DiscreteTransaction

Deal with Multiple

Transactions

Recurring Seasonal/Annual

Program

Preferred Supplier

Arrangement

Value Chain

Partnership

Moving up within value chains

Opportunistic Strategic

Sh

ort

-term

Lon

g-t

erm

Increasing Volume, Value and Value-added

December 15, 2005

Implications for development action (2)

4. Take a cluster approach only as the starting point for value chains, not as an end in itself.

5. Use deals as the building blocks.

6. Concentrate on competitiveness and productivity

7. Look for and exploit multiple ways to add value once initial success has been attained with a single deal

December 15, 2005

How clusters and value chains combine

X Y Z

Value Chains

1 2 3

Markets

Clusters

A

B

C D

December 15, 2005

Doing deals as a strategy for international agricultural development

Trade is built on transactions

Multiple transactions translate into a program between seller and buyer

Successful export programs in one season lead to a longer-term relationship, with rising confidence on both sides

As the relationship evolves, market know-how, technology transfer, willingness to share risks, and co-investment tend to increase

As the supplier-receiver relationships solidify and replicate, the “deal” gets stronger in eyes of industry

All of the above lead to increased volume, value, and profitability, with economic spillovers

December 15, 2005

Relationships are usually established between grower and exporter, exporter and receiver, receiver and retailer, in other words between discrete segments of the supply chain

The two main players in each segment are mainly concerned with gaining advantage in their particular commercial relationships

Loyalties are weak, and all parties shop around from year to year

No one feels responsibility for the overall profitability and competitiveness of the supply chain, the category, the product, or the deal

This leads to a sub-optimal outcome in terms of both economic efficiency and social welfare

Limitations of the deal-based approach

December 15, 2005

Gross anatomy of a fresh produce export deal

Core elements:

• Product

• Origin

• Supplier type

• Receiver type

• Market

• Timeframe

Snowpeas from a grower/shipper in Guatemala to an importer/distributor in the U.S. from Nov-June)

December 15, 2005

Detailed anatomy of a fresh produce deal

Refinements:

• Volume

• Variety

• Presentation

• Producer

• Exporter

• Mode of transport

• Port of entry

• Importer

• Retailer

• End-market

250,000 10-lb boxes of Oregon Sugar Pod II grown by Cooperativa El Progreso over the November-April timeframe, to be packed in consumer packs by Multiexport, and shipped by air from Guatemala City to Miami Airport for consignment sale by Pan-American Produce Importers to Publix Supermarkets, for distribution in Southern Florida

December 15, 2005

Expand own area planted

Make outgrower arrangements

Apply good agricultural practices,including IPM

Change production system (e.g. rainfed to irrigated, or manual to mechanized)

Improve exportable yield

Lower costs of production

Shift to new varieties

Advance or prolong the shipping season

Vertically integrate

Ways to build a bigger, more profitable agricultural enterprise

December 15, 2005

Find a market for the rejects

Target new end-markets (inc. regional)

Reach new ports of entry

Upgrade or expand receivers

Change presentation or packagingto raise unit value

Differentiate by product or process

Create a new brand

Get organic, EUREPGAP or SCF 1000 certification

More ways to build a better agricultural enterprise

Index

Honeydew Watermelon Cantaloupe Galia Melon

CharentaisSeedless Watermelon

IQF Melon Balls

In fresh produce, a common strategy is to specialize in a given category, then diversify via horizontal and vertical “line extension”

Gift melons

December 15, 2005

Successfully sell single product

and presentation

Increase volume in same deal

Lengthenshipping season

Penetrate newend-markets

Diversify receivers

The line extension strategy can be combined with a diversification strategy

Vertical line extension

Hp

rizon

tal in

e

exte

nsio

n

Add newpresentations (e.g. cuts, size, package)

Add new product forms (e.g. frozen)

Extend line with related

products

Create mixesand blends

December 15, 2005

Adding value through process innovations

• Service

• Differentiation

• Promotion

• Marketing methods

• Channels of distribution

• Transport and logistics

• Storage

• Cooling/refrigeration

• Quality assurance

• Post-harvest handling

• Green/Clean production

• Harvest techniques

• Cultural practices

• Planting materials

• Growing season

• Certification

• Production technology

• Labor conditions

December 15, 2005

Adding value through product innovations

• Healthfulness

• Quality

• Product form

• GMO vs conventional

• Variety

• Timing

• Consistency

• Volumes

• Prices

• Credence attributes

• Information about origin and producers

• Ingredients

• Mixes and blends

• Palletizing

• Cartons

• Packaging

• Presentation

December 15, 2005

Implications for action (3)

8. Seek sustainability within value chains, not in the development programs or projects

9. Recognize that some keys to success require mainly public sector intervention, others only private, and some a mixture of the two

10.Seek private sector alliances at all stages of supply and value chains

But please remember….

December 15, 2005

There are no silver bullets!