Development of Local Suppliers for International Businesses Peter Bracher – Managing Director NSF-CMi Asia Pacific February 2011 Overcoming the Challenges of Local Sourcing

2 Why are we sourcing more food from developing countries? International retailers and branded restaurants moving into developing countries to provide growth Lower cost sourcing opportunities Human population growth billion by 2050 Food sourcing will increasingly move to less developed countries and smaller suppliers

3 The Business Opportunity ….. Rapid growth of retail brands – international brands and investment combined with local knowledge from the regional franchisee results in fast growth KFC – from one restaurant in Kuwait to 450 in 74 cities throughout the Gulf and Middle East The franchisee - American Group - has over 1000 restaurants in 15 countries Starbucks – 300+ restaurants in 8 countries in the region Alshaya – 50 retail brands and over 20 million customers Costa Coffee – 11% growth and the fastest growing Coffee shop chain Tesco – 5% Y on Y growth Local suppliers into the rapidly expanding hypermarkets businesses can experience 1000% growth in the early years

4 The Challenges for the Branded Retailers ……. Under-developed logistics, import controls, short life products, local taste preferences and regional legal requirements drive a need for local sourcing But …… Difficulty in finding local suppliers who can meet the required food safety standards Local suppliers may lack the capacity to supply major retailers New entrant businesses do not have the buyer power they experience in their home markets Local suppliers will have less investment in their brands than the international retailers ……

5 Hierarchy of Business Needs Investment in safety and ethics becomes essential only when the investment in the brand justifies the costs Survival Profit Growth Brand Image Food Safety Ethics Brand equity tipping point Failed SME Path

6 The Challenges for local suppliers……. Supplying an international brand requires more investment and a higher risk than supplying the local retail marketplace The balance of power shifts to the retailer from the supplier Higher standards of design, construction, hygiene and documentation requires more investment Documentation and systems are critical Payment terms can be a challenge!

7 Relative Standards Food Safety Standards by Country U.S.A India U.K China Thailand Middle East StandardsOur auditors have found suppliers with comparable standards to UK and US in all countries within Asia - but the range and the average varies UAE

8 Peanut Butter Supplier – South Asia

9 Drinks company – South Asia

Street food – SE Asia 10

Manufacturing …. 11

12 Summary of Supplier Audit Finding in Developing Markets Top 5 issues found during food safety audits of suppliers in Asia: 1. Traceability and recall systems 2. Understanding of hazard analysis 3. Pest control and proofing 4. Water treatment system maintenance 5. Staff hygiene facilities Lack of effective traceability will limit effective action when something goes wrong, lack of HACCP systems will hamper effective management

13 Some solutions to the top problems ……. Smaller suppliers in developing markets should try to keep their systems simple and practical Traceability – choose a large batch size – day of production rather than each shift rather HACCP – divide your products into groups that have similar characteristics and make sure the CCP’s are really critical to keep the system practical Pest control – concentrate on keeping them out rather than killing them once they are in Working towards a recognized international food safety certification system will help you to manage all of these issues effectively …..

Some comments from buyers and suppliers …. 14 Intensive "paperwork" requirements pull company resources off of the production floor and into the office GFSI is the right direction for food safety in the international supply chain …… However, I feel there is vast room for improvement in rapidly developing markets like China and the Middle East We do not buy ingredients out of China and are hesitant from most of Asia Most concerned about food safety in China, India, Middle East It most likely will come down to an independent third party audit that can be trusted to ensure quality and food safety from these foreign markets We are in the process of implementing SQF and the requirements are difficult due to the size of our operation and our vendor options

15 GFSI Food Safety Certification Schemes New GFSI Global Markets Standards for entry-level

16 International Food Safety Certification BRC – Strong in UK, Asia and US – practical, comprehensive, comparatively simpler documentation SQF – Strong in US and Australia, good for agricultural and primary suppliers, practical and comprehensive FSSC – new so limited use so far, but good for businesses that already have ISO quality systems. IFS – very comprehensive but complex documentation and limited availability due to auditor qualification process Dutch HACCP – process based and practical but limited take up – may be replaced by FSSC in the future ISO Not a GFSI standard. Only covers processes but a good entry level standard to lead onto full GFSI B

Growth of GFSI Certification in Asia …. 17 Example of BRC Certification numbers; 1,170 to 1,438 from ‘09 to ‘10

18 Supplier Development Roadmap Customer’s Sales Programme Costs Benefits

19 Thank you …….