Evolution of Food Marketing Systems Implications for 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

Main topics 1. Drivers and governors of change 2. Trends in the structure, conduct, and performance of food marketing systems in developed country markets 3. Similarities and differences between systems in developed and developing countries 4. Challenges for developing country suppliers in general, and small-scale producers in particular 5. Opportunities for developing countries and small-scale producers 6. 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 nontariff 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 ØConcentration of ownership and control in virtually all choke points in the marketing system: importing, logistics and distribution, food manufacture and processing; food service; retailing ØMarket shares for hotel, restaurant and institutional (HRI) channels rising in response to eating out ØFood service rising in response to HRI growth ØProliferation and blurring of food marketing channels ØChange 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 ØRelentless competition, driven by competition between major players in a given channel, as well as across channels ØCompetition occurs not just from store to store, region to region, and country to country, but between value and supply chains ØIn 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 ØHowever, 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 90 s: 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 December 15, 2005 Source: Adapted from Roberta Cook and The Perishables Group

The emergence of value chains in the fresh produce industry Production Fresh-Cut Yr-Rd Sourcing Processing, Multi-regional, Service-oriented -international Suppliers Grower/Shipper-Controlled, Cost Driven bananas, pineapples December 15, 2005 Differentiated Produce Streamlined Distribution, Emerging Acct-oriented Branding and marketing, Private Labels Category Management Retailer-controlled, Revenue Driven Branded packaged freshcut salads and fruit salad bars, consumer packs Source: Adapted from Roberta Cook and Rabobank Mexico

The “value/supply chain” approach to agricultural marketing Ø Overriding objective is to improve competitiveness Ø Meeting that objective creates value for participants and consumers by removing friction, costs, and time Ø Successful application of the value/supply chain approach results in an efficient, highly competitive “extended enterprise” Ø This is to be accomplished by achieving seamless integration between production, storage, distribution, stocking, selling functions Ø 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) December 15, 2005

In what ways are value/supply chains becoming integrated and coordinated? ØIncreasing use of partnership and preferred supplier agreements ØShared strategic planning processes ØCollaborative product development (new forms, presentations, line extensions) ØJoint production and delivery scheduling (even across suppliers who used to be competitors) ØMore efficient logistics and distribution (chartered carriers, dedicated warehouses, ECR, even in-store replenishment) ØSeamless information flow via electronic data interchange ØJoint marketing, promotional and merchandising efforts (grow the category, promote the brand, shave peaks in supply) December 15, 2005

Best practices in value/supply chain approach ü Shared Responsibility for Category Management ü Heavy Reliance on EDI using Intranet ü Efficient Consumer Response (“Quick Response Systems”) ü Continuous Product Replenishment using Automated Warehouses ü Distribution Requirements Planning ü Contracting with Preferred Suppliers ü Reliance on Codes of Practice ü On-going Effort to Eliminate Middlemen that Don’t Add Value ü Intertwined Logistics Management and Traceability December 15, 2005

How is this new and different? ü Longer-term vision ü More stable relationship between two companies, not based so much on personal relationship between salesman and buyer ü Joint responsibility and accountability ü Bottom line is profitability and growth of the category as a whole—year-end, not weekend results ü Fewer players control more of the volume, cutting out middlemen that don’t add value ü Heavy emphasis on enterprise-wide IT ü Shared staff, dedicated facilities December 15, 2005

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 Multi-year Collaborative between grower/shipper and importer/distributor, with 50/50 split of Relationship profits after costs Season-long Programs Volume-bound Deals Spot Transactions December 15, 2005 e. g. one half of total production, from grower-shipper to importer/distributor, with minimum price guarantee e. g. 250, 000 boxes of mangos from exporter to receiver, price for each load set FOB port of exit e. g. single load of mangos from exporter to commercial sales agent, shipped on consignment,

Performance of food marketing systems in developed countries ØCompetition has kept food prices low, with increases below the rate of inflation ØTrend toward reduction in producer and export subsidies continues to exert pressure on prices ØVariety, quality, condition, safety, and all other discriminating factors continue to improve ØMargins 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 ØSame 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 ØMixture of domestic production and imports ØComplex panorama of actors, enterprises, and institutions ØImportant role of supermarkets in food retailing ØPresence of HRI retailing channels, and therefore some foodservice suppliers ØIncreasing role of regulations and standards December 15, 2005

Differences between food marketing systems in developing versus developed countries ØVastly different scale at system and enterprise level ØPercentage of product handled formally lower in LDCs ØShare of fresh versus processed or manufactured much higher in LDCs than emerging or developed countries ØSupermarket share is rising still and fast in LDCs to detriment of smaller retailers and wholesale markets ØFoodservice share and growth smaller because HRI market less developed due to lower disposable income ØStandards less evolved and less complicated December 15, 2005

Challenges for developing country suppliers in general ØChoosing between commodity and specialty markets ØRetaining and expanding market access ØGaining and holding a position in lucrative value/supply chains ØPenetrating, holding, expanding better markets ØRaising productivity and competitiveness ØIncreasing value added ØDealing effectively with emerging standards December 15, 2005

The need to handle large volumes at arms length increases the importance of standards Service Standards Environmental Standards Social Standards Sanitary and Phytosanitary Standards Quality and Condition 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 2 FER campaigns) § Merchandising Support (e. g. POP displays, banners, in -store samples, recipes, § Volume/Non-Volume Rebates December 15, 2005 § 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 ØUnderstanding changes in the domestic and export food marketing systems and value chains that interest them ØIdentifying and dealing with a buyer of appropriate size, interest, capacity, integrity and patience ØRaising productivity and lowering costs enough to compete with larger grower-shippers at home and abroad ØAchieving the quality, volumes, and consistency of supply necessary ØUnderstanding and complying with SPS standards December 15, 2005

Strengths of small farmers in global supply chains for food and agricultural products ËVocation for agriculture ËLow wage rates, and after training, low cost of labor ËGood growing conditions for some crops ËExtended growing season in tropical and subtropical areas ËIn some cases, low cost of production ËLack of options means often means strong motivation December 15, 2005 ËIn many places, a tradition of working together (e. g. “minga” in Ecuador and Peru) ËNearness 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 December 15, 2005 – 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 …? December 15, 2005

Small farmers can aspire to participate in major value/supply chains but need help to: üImprove comparative advantage through public investment üBetter understand markets and marketing üIdentify value chains worth developing üEliminate friction in chosen supply chains üSelect and deal with export catalysts and channel captains üComply with official and commercial standards of all kinds üGenerate the required volumes and consistency of supply üAssimilate enabling technologies üAdd 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 industryexperienced people December 15, 2005

What exactly is an agricultural supply chain? èEntire 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 Handling and Storage (raw products) Manufacture (intermediate products)** Manufacture (finished products)*** *e. g. land, labor, water, energy, seed, agrochemicals, financing, technology **e. g. food ingredients **e. g. packaged foods December 15, 2005 Transformation (processed food products) Marketing and Sales 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 December 15, 2005

Long-term Moving up within value chains Value Chain Partnership Preferred Supplier Arrangement -a Short-term d Va Recurring Seasonal/Annual Program Deal with Multiple Transactions e lu e dd nd a e um ol V g l Va , n si a e cr n I Discrete Transaction Opportunistic December 15, 2005 Strategic

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 Markets X Value Chains Z Y 1 2 3 B D A C Clusters 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 coinvestment 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

Limitations of the deal-based approach Ø Relationships are usually established between grower and exporter, exporter and receiver, receiver and retailer, in other words between discrete segments of the supply chain Ø The two main players in each segment are mainly concerned with gaining advantage in their particular commercial relationships Ø Loyalties are weak, and all parties shop around from year to year Ø No one feels responsibility for the overall profitability and competitiveness of the supply chain, the category, the product, or the deal Ø This leads to a sub-optimal outcome in terms of both economic efficiency and social welfare December 15, 2005

Gross anatomy of a fresh produce export deal Core elements: • • • December 15, 2005 Product Origin Supplier type Receiver type Market Timeframe ØSnowpeas 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 December 15, 2005 1. 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 Ø Expand own area planted Ø Make outgrower arrangements Ø Apply good agricultural practices, including IPM Ø Change production system (e. g. rainfed to irrigated, or manual to mechanized) Ø Improve exportable yield Ø Lower costs of production Ø Shift to new varieties Ø Advance or prolong the shipping season Ø Vertically integrate December 15, 2005

More ways to build a better agricultural enterprise ØFind a market for the rejects ØTarget new end-markets (inc. regional) ØReach new ports of entry ØUpgrade or expand receivers ØChange presentation or packaging to raise unit value ØDifferentiate by product or process ØCreate a new brand ØGet organic, EUREPGAP or SCF 1000 certification December 15, 2005

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 Hprizontal ine extension Extend line with related products Lengthen shipping season Increase volume in same deal Successfully sell single product and presentation Vertical line extension December 15, 2005 Add new presentations (e. g. cuts, size, package) Add new product forms (e. g. frozen)

Adding value through process innovations • • Green/Clean production • Differentiation • Harvest techniques • Promotion • Cultural practices • Marketing methods • Planting materials • Channels of distribution • Growing season • Transport and logistics • Certification • Storage • Production technology • Cooling/refrigeration • Labor conditions • Quality assurance • December 15, 2005 Service Post-harvest handling

Adding value through product innovations • Credence attributes • Healthfulness • Information about origin and • Quality • Product form • GMO vs conventional • Variety • Timing • Consistency • Volumes • Prices 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! December 15, 2005