Transcript Document

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
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
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
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
December 15, 2005
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
December 15, 2005
Source: Adapted from Roberta Cook and The Perishables Group
The emergence of value chains
in the fresh produce industry
Production
Yr-Rd Sourcing
Multi-regional,
-international
Fresh-Cut
Processing,
Service-oriented
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
 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)
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)
December 15, 2005
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
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
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
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
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
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
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
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
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
 Capital Improvements (e.g.
processing, distribution facilities)
 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
December 15, 2005
 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
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
December 15, 2005
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
– 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
– Inputs often not available, or
late
– Power usually expensive
December 15, 2005
– 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:
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
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?
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
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
Recurring
Seasonal/Annual
Program
Deal with
Multiple
Transactions
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
 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
December 15, 2005
Gross anatomy of a fresh produce export deal
Core elements:
• Product
• Origin
• Supplier type
• Receiver type
• Market
• Timeframe
December 15, 2005
Snowpeas from a
grower/shipper in
Guatemala to an
importer/distributor in
the U.S. from NovJune)
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
 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
December 15, 2005
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
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
IQF Melon Balls
Seedless
Watermelon
Charentais
Index
Galia Melon
Gift melons
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
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
December 15, 2005
•
Service
• 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
•
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