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Agriculture

Supermarkets’ looming threats

by Rudolf Buntzel
Major chains are taking over the food-retail business in developing countries. That will have serious implications for agriculture, because traditional methods of production and sales are put to the test. Small-scale businesses that cannot cope are in danger of being left behind. [ By Rudolf Buntzel ]

Two trends are currently evident in agricultural trade. Both will have a marked impact on the future of peasants in poor countries.

First of all, exports of fresh premium products such as fruit, vegetables, nuts, flowers and spices, as well as seafood and fish are booming. High-quality products are increasingly superseding bulk commodities. At the same time, control procedures are becoming stricter, as supply chains from fields to shop shelves are monitored closely.

Second, food-retail chains are expanding rapidly in disadvantaged countries. The well-to-do upper and middle classes are no longer the only people to shop in supermarkets in developing countries. Supermarkets now have branches even in poor areas, small towns and the countryside. International chains are playing an increasingly important role – they are radically changing the way markets operate.

In poor countries in the past, a large share of the people worked in trade. The exchange of goods was often informally organised. Such schemes are now facing new competition from supermarkets. The smallest merchants have little chance of competing with the attractiveness of the range offered by supermarkets and their comparatively low prices. It is roughly estimated that seven jobs in traditional markets are replaced by one job in a supermarket. However, there are hardly any new jobs for those who are made redundant.

Until now, farmers generally sold their products at very low prices to local intermediaries, who, in turn, supplied open-air markets, merchants and wholesale markets in the towns and cities. This system is time- and labour-intensive. Time and again, the supermarket model wins the battle over domestic supply.

Supermarket branches do not obtain their goods from independent wholesalers, they hire agents to run exclusive supply channels. The retail giants claim that, thanks to maximum efficiency and quality, they can meet all consumer demands. At the same time, they gain control of the entire supply chain.

In its most recent World Development Report, the World Bank emphasises mainly the positive aspects to this change. It mentions increasing marketing efficiency, which, in turn, is said to lead to broad segments of the population being supplied with inexpensive foodstuffs. The World Bank also mentions financial benefits for farmers thanks to market integration, and argues that contract farming allows them access to advice, training and operating equipment – opportunities they did not have before. The World Bank believes that reliable distribution channels offer investment incentives. Moreover, it says, supermarkets generally provide more hygienic settings as well as usefully portioned, easy-to-handle packaging.


Hard times for conventional farmers

In many ways, however, the supermarket model is incompatible with the way in which farmers conventionally work. Education levels, start-up capital and various infrastructures are relevant in this context. While smallholders often can hardly read or write, supermarkets generate a considerable bureaucratic overhead, which plain rural people can hardly cope with. It is not a matter merely of obligatory contracts defining delivery quantities and deadlines.

On top of that, supermarkets insist on a wide range of conditions, delivery terms and documentation. Only well-trained and well-equipped farmers are able to comply – and if there are enough of such supposedly “progressive” entrepreneurs to satisfy supermarket demand in a certain category, there is no more business for local, conventional farmers.

There are ways for farmers to respond to such challenges. For example, they can form more competitive producer cooperatives and then supply supermarkets. However, this option is only likely to work where farmers already have a tradition of teaming up. Moreover, this approach requires the basic infrastructure for rapid communication. Accordingly, the future looks bleak for farmers running individual businesses. The best they can hope for is to work as hired hands for those farmers who successfully integrate into supermarket supply chains.

Two factors will exacerbate this trend: the increasing exchange of digital information between suppliers and purchasers and the growing level of automation in logistics and inventory management in the food-retail sector. Indeed, they imply massive costs savings for the supermarket chains. But the flipside is that they force their suppliers to use digital tools and systems.

Of course, supermarket chains are not all the same. They may operate in centralised or decentral manners. Product lines, a country’s stage of development, the competition situation, marketing laws and business structures all have an impact on the business model – and repercussions for whether the local farming community or the small-scale food industry will be able to integrate. The most critical issue is whether supermarket managers want to include smallholder farmers in their supply chain at all, or whether they may even prefer to rely on imports.

There is still little data on the impact supermarkets have on agriculture in developing countries. So far, analyses are based mainly on findings about the consequences of exporting premium agricultural products to supermarket chains in wealthy nations. However, export and domestic markets are entirely different. Markets in the rich world enforce product standards that do not normally apply in domestic trade in developing countries.

It is therefore of key importance whether supermarkets, which are expanding in developing countries, are outfits of multinational corporations or locally-owned. It is also relevant whether the supermarkets are looking only for suppliers for the domestic market, or also for export. In the latter case, special standards will typically apply – and local farmers are often in no position to meet them.

For example, the EurepGAP standard has been widely accepted in the international trade of fruit and vegetables. It is nothing negotiated by governments, but simply a standard 32 supermarket chains and food companies in Europe and Japan adopted and now require. A number of developing countries have complained about this practice to the WTO, because they consider it discriminatory. The EurepGAP rules, moreover, are not only about food safety. Whether a fruit has spots or not does not matter in terms of nutritional value – but for supermarket purposes it makes a huge difference.


Conclusion

Some farmers will be able to find a place for themselves within the supermarket system. However, most of them do not stand a chance. The same is true of many small food-processing plants and traders. After all, the procurement systems of supermarkets are based on exclusion: purchasers for retail chains prefer to deal with a small number of reliable partners, uniform standards and homogenous goods. It is inconceivable that growth in this sector will be strong enough to cushion off the rampant displacement it is causing.

There are alternatives to supermarket dominance. In India, small traders are modernising, changing the way they operate. It is of crucial relevance, moreover, to improve the performance of wholesale markets that are not in the clutches of corporate retail giants. In Thailand, the government is making efforts in this direction.

In principle, up-to-date wholesale markets are fit to supply supermarket chains without adopting the entire corporate marketing model. At the same time, such wholesale markets could continue to serve small traders – something the agents of supermarket chains will never do. There are approaches to modernising marketing that need not marginalise conventional producers and distribution channels.