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, 2005 All Rights Reserved

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

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

…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

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

…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

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

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

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

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

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)

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)

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

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

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,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“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

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

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

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

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

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

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)

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

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

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                    

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

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

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

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

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….

There are no silver bullets!