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

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

1 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

2 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

3 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

4 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

5 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

6 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

7 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

8 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

9 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 Retailers Place a high value on consumer information Concentrate on category development and possess category expertise Still know and employ all advertising, promotional and merchandising techniques Rely on select supply partners Take a more strategic approach than in past Changed Roles Retailers expect suppliers to know the consumers and therefore deliver the right product, to the right stores, at the right time and price

10 December 15, 2005 Production Yr-Rd Sourcing Multi-regional,-international Fresh-CutProcessing,Service-orientedSuppliers DifferentiatedProduce StreamlinedDistribution,Acct-orientedmarketing,CategoryManagement Grower/Shipper-Controlled, Cost Driven Retailer-controlled, Revenue Driven Emerging Branding and Private Labels Source: Adapted from Roberta Cook and Rabobank Mexico The emergence of value chains in the fresh produce industry bananas, pineapples salad bars, consumer packs Branded packaged freshcut salads and fruit

11 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 approach to agricultural marketing

12 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)

13 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 Eliminate Middlemen that Dont Add Value Intertwined Logistics Management and Traceability Best practices in value/supply chain approach

14 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 wholeyear-end, not weekend results Fewer players control more of the volume, cutting out middlemen that dont add value Heavy emphasis on enterprise-wide IT Shared staff, dedicated facilities

15 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

16 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

17 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

18 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

19 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

20 December 15, 2005 Sanitary and Phytosanitary Standards Quality and Condition Standards Environmental Standards Social Standards Service Standards The need to handle large volumes at arms length increases the importance of standards

21 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

22 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

23 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

24 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

25 December 15, 2005 Basic question: How do we move from this… to this …?

26 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

27 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 dont 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

28 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

29 December 15, 2005 Principal links in agricultural supply chains Assembly/Utilization of Production Factors* Production (crops, livestock, aquaculture) Post-harvest Handling and 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

30 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

31 December 15, 2005 Discrete Transaction Deal with Multiple Transactions Recurring Seasonal/Annual Program Preferred Supplier Arrangement Value Chain Partnership Moving up within value chains OpportunisticStrategic Short-term Long-term Increasing Volume, Value and Value-added

32 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

33 December 15, 2005 How clusters and value chains combine X Y Z Value Chains 123 Markets Clusters A B C D

34 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

35 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

36 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)

37 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, 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

38 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

39 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 packaging to 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

40 Index HoneydewWatermelonCantaloupeGalia Melon Charentais Seedless 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

41 December 15, 2005 Successfully sell single product and presentation Increase volume in same deal Lengthen shipping season Penetrate new end-markets Diversify receivers The line extension strategy can be combined with a diversification strategy Vertical line extension Hprizontal ine extension Add new presentations (e.g. cuts, size, package) Add new product forms (e.g. frozen) Extend line with related products Create mixes and blends

42 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

43 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

44 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….

45 December 15, 2005 There are no silver bullets!

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