1. Copyrighted by Abt Associates, Inc. December, 2005 All Rights Reserved
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, All Rights Reserved

2. 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. Drivers and governors of change on the demand side…
Demographics: growth rate; age distribution; ethnicity; race; geographic distribution; extent of travel; exposure to food-related information and retailer promotion
Consumer preferences: price vs. quality/condition; convenience; year-round availability; variety; nutritional content; safety; greenness; fair trade; luxury goods
Buyer specifications: volumes; presentation; labeling; private standards; certification; price point; service
Technology: marketing information systems; category management methods; progress in supply chain management; transport and handling advances

4. …Drivers and governors of change on the demand side
Regulatory change: official standards and associated certification; labeling (nutrition, COOL, allergens); market access; environmental protection; OSHA; labor rights; animal rights
Market access: tariffs; quarantine restrictions; other non- tariff trade barriers (NTBs)
Factor costs in distribution and retailing: energy; transport; labor
Economic growth trends: GDP; disposable income; levels and use of consumer credit; inequality of wealth

5. Drivers and governors of change on the supply side…
Product/market conditions: effective demand; prices; competition
Procurement practices: value chain integration; compliance with private standards; preferred supplier arrangements; new terms of sale
Factor prices and availability for production and shipping: land; capital; labor; energy; transport
Producer preferences: overall investment per crop area; price levels and their variability; production risk

6. …Drivers and governors of change on the supply side
Technology: marketing information systems; supply chain management; quality assurance regimes; transport and handling technologies; post-harvest and production technologies
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
Demographics: availability of seasonal labor; existence of a local market for seconds and an urban market for export-quality product

7. 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. 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. Produce business model since late 90s: category and partner-based strategy
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
Source: Adapted from Roberta Cook and The Perishables Group

10. Grower/Shipper-Controlled,
The emergence of value chains
in the fresh produce industry
Streamlined
Distribution,
Acct-oriented
marketing,
Category
Management
Fresh-Cut
Processing,
Service-oriented
Suppliers
Production
Yr-Rd Sourcing
Multi-regional,
-international
Differentiated
Produce
Emerging
Branding and
Private Labels
Grower/Shipper-Controlled,
Cost Driven
Retailer-controlled,
Revenue Driven
The simplified business system will be used as a reference throughout the presentation
The business strategies derive from chosen end-consumer targets and choices, the analysis of alternative strategies will likewise be looked at going upstream, i.e from end product or consumer to raw materials or inputs
In broad terms, all upstream activities (and animal processing to a certain degree) are cost driven activities where the top players in the market are also those that have the highest cost control level.
Downstream activities, i.e processing and distribution, are mainly revenue driven. The choice of market strategy, product mix, branding, etc..... differs significantly from one player to another and all aim at maximizing achievable revenues and or profit margins.
bananas, pineapples
Branded packaged freshcut salads and fruit
salad bars, consumer packs
Source: Adapted from Roberta Cook and Rabobank Mexico 5 5 6 5 7 6

11. The “value/supply chain” approach to agricultural marketing
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)

12. 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. Best practices in value/supply chain approach
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 Don’t Add Value
Intertwined Logistics Management and Traceability

14. 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

15. Multi-year Collaborative Relationship
How high-value export/import deals have been evolving in the fresh produce industry
e.g season-long program between grower/shipper and chain, special packaging, stepped or fixed price, delivered basis
Going Direct
e.g. exclusive marketing deal between grower/shipper and importer/distributor, with 50/50 split of profits after costs
Multi-year Collaborative Relationship
Season-long Programs
e.g. one half of total production, from grower-shipper to importer/distributor, with minimum price guarantee
Volume-bound Deals
e.g. 250,000 boxes of mangos from exporter to receiver, price for each load set FOB port of exit
Spot Transactions
e.g. single load of mangos from exporter to commercial sales agent, shipped on consignment,

16. 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. 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. 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. 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. The need to handle large volumes at arms length increases the importance of standards
Service Standards
EnvironmentalStandards
Social Standards
Sanitary and Phytosanitary Standards
Quality and Condition Standards

21. 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. 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. 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. 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. Basic question: How do we move from this… to this …?

26. 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. Implications for development action (1)
Take a long view, and recognize that there are crescendo and cumulative effects in terms of learning, investment, market access, sales, and exports
Make sure the policy environment as favorable as possible, but don’t assume that will be enough
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. 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. Principal links in agricultural supply chains
Assembly/Utilization
of Production Factors*
Production (crops,
livestock, aquaculture)
Post-harvest Handling
and Storage (raw products)
Manufacture
(intermediate products)**
Transformation
(processed food products)
Manufacture
(finished products)***
Marketing and Sales
*e.g. land, labor, water, energy, seed, agrochemicals, financing, technology
**e.g. food ingredients
**e.g. packaged foods
Transport and Distribution

30. “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. Moving up within value chains
Long-term
Value
Chain
Partnership
Preferred
Supplier
Arrangement
Recurring
Seasonal/Annual
Program
Increasing Volume, Value and Value-added
Deal with
Multiple
Transactions
Short-term
Discrete
Transaction
Opportunistic
Strategic

32. Implications for development action (2)
Take a cluster approach only as the starting point for value chains, not as an end in itself.
Use deals as the building blocks.
Concentrate on competitiveness and productivity
Look for and exploit multiple ways to add value once initial success has been attained with a single deal

33. How clusters and value chains combine
Markets X Y Z
Value Chains 1 2 3 B D A C
Clusters

34. 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. Limitations of the deal-based approach
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

36. 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. 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. Ways to build a bigger, more profitable agricultural enterprise
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

39. More ways to build a better agricultural enterprise
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
                   

40. In fresh produce, a common strategy is to specialize in a given category, then diversify via horizontal and vertical “line extension”
Honeydew
Watermelon
Cantaloupe
Galia Melon
IQF Melon Balls
Seedless Watermelon
Charentais
Gift melons
Index

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

42. 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. Adding value through product innovations
Credence attributes
Information about origin and producers
Ingredients
Mixes and blends
Palletizing
Cartons
Packaging
Presentation
Healthfulness
Quality
Product form
GMO vs conventional
Variety
Timing
Consistency
Volumes
Prices

44. Implications for action (3)
Seek sustainability within value chains, not in the development programs or projects
Recognize that some keys to success require mainly public sector intervention, others only private, and some a mixture of the two
Seek private sector alliances at all stages of supply and value chains
But please remember….

45. There are no silver bullets!