Municipio La Sabana

The consequences of concentration and integration throughout the supply chain have been described above. Now we turn to the relationships between retailers and their FFV suppliers and look at what the consequences are on price, especially in developing countries.

Supermarket chains do not use one particular model for sourcing FFV but all use systems of ‘category management’; exotic fruits is one such a category. For example in the UK, each supermarket has a different sourcing strategy. As previously discussed, sourcing mechanisms range from the use of spot markets or traditional wholesale supply chains to preferred suppliers and direct relations with large farmers. The model of preferred and long term relationships is becoming increasingly important. This is causing problems for small farmers to find outlets but also provides opportunities for some farmers in the South to have access to Northern markets when they are part of the preferred relationships. Buyer groups

In many EU countries buyer groups or buying desks are prominent. They buy the majority of products sold by retailers. The buyer group purchases collectively on behalf of

members who remain independent retailers. During the research for this report, it was not clear whether they buy fresh fruit and vegetables for retailers.

Buyer groups can insist on receiving low prices because of their scale. Buyer groups tend to have two structures. They either represent many small retailers, or two or more large retailers. A number of significant cross-border buying groups and alliances have emerged in recent years. Buying price information is shared and there is collaboration over the sourcing of private label products. Further mergers and acquisitions amongst buyer groups continue. It should be noted that the existence of buyer groups means that the concentration level of the food retail industry is even higher (see

figure 12).

Critical issue

The fact that buyer groups are able to squeeze the price of processed food from their suppliers might have an indirect effect on FFV producers.

Exclusive suppliers and long term supply agreements

Large-scale retailers increasingly operate through exclusive supplier or preferred supplier relationships and long-term contracts. Such relationship can cover the whole range of FFV or only one category (e.g. exotic fruits, citrus fruits, mushrooms). In addition they are

increasingly “seeking (if not demanding) regional and global agreements with their suppliers” especially for manufactured and processed products. Such global supply agreements are “extremely contentious” because suppliers prefer to deal with customers on a more local basis. "

In some countries like the Netherlands, the two largest food retailers have had an exclusive relationship with one large distributor who is responsible for delivery of all FFV produce. The advantage for retailers is that they have better control over the quality and volumes. Their distributor ensures low stocks and provides logistical support. These guaranteed sales mean that the distributor can invest in quality management, which extends to their producers.

In the UK, fresh fruit and vegetable production and packing has a trend towards narrow specialisation. This is in response to supermarket requirements for category management and traceablility. It is a way of staying profitable and reliable to consumers. Examples of specialist grower-packers include United Vegetables (Brassicas), Lanmead Farms (lettuce), and Rustler Produce (onions).

Some European retailers work with long-term contracts. This is particularly the case for exclusive or specialised suppliers. For instance, banana multinationals have long-term contracts with retailers.&

Approximately 80% of Dole’s retail volume in North America is under contract. These exclusive supplier contracts mean that there is fierce competition between suppliers to obtain contracts as they offer major sales outlets.

Most contracts are for one year which allows the retailer to renegotiate price and quality requirements or opt for a new (cheaper or better) supplier. Asda/Wal-Mart has recently signed a three year contract, at rock bottom prices, which might indicate a change in supply policy by large retail chains. Banana multinationals are currently large enough not to be dependent on one contract. This puts them in a stronger bargaining position than suppliers dependent on one food retailer.

Direct links with producers

Supermarket chains avoid the wholesale market or distributors and increasingly seek to ensure their supplies through direct contact with producers and producer associations, especially for bulk tropical fruit and vegetables. As explained above, some producer associations in developing countries are part of an integrated export or wholesale business. Interestingly, Carrefour, the second largest retailer in the world, signed a contract in 2004 with APEX, the Brazilian export promotion agency, to export fresh fruit, including bananas. Within a year the fruit was to be supplied to Carrefour stores in 16 of the 26 countries where it operates. In this way, the supermarket is becoming a wholesaler itself and even an exporter via its global sourcing system. This provides secured export opportunities for Brazilian FFV producers.

Some food retailers have direct relationships with farming businesses in developing countries. One example is Homegrown in Kenya, which produces green beans. According to the managing director, "rarely does Homegrown grow anything unless a supermarket

has programmed it". The relationship is so direct that UK supermarkets will email at midday the volumes of produce they want put on the plane that night, depending on the previous days’ sales. The orders can go up and down dramatically. At Christmas it can be a three or four ton increase in one day for sliced or topped and tailed beans. The suppliers know that they just have to get the job done or they lose the business with hardly any other outlet left. A flexible workforce working longer hours or workers without long term contracts are essential to supply the additional orders.

Research by OXFAM International103 also indicates that supermarkets’ sourcing practices put farming businesses under pressure and that owners pass this pressure on to their workers who are often women. This includes a deterioration in working conditions, very low pay, not paying for protective clothing, and casual employment without the labour rights associated with longer term employment.

Many farm suppliers have no written contracts with supermarkets and thus have nothing to specify quantities or guarantee good prices from the supermarkets.

In the case study in Senegal, it was found that FFV sector exporting parties mostly send products in consignment. This means that the exporter/producer pays for all the costs (shipping, insurance, commission etc) to get the product to the market destination and does not know how much he will get for his merchandise on arrival. The price received can be below production costs, which means that the producer/ exporter will lose money. As a consequence of this practice, several exporters of FFV go bankrupt every year in Senegal. Consignment sales are typical of the FFV sector.

Critical issue

The system of no written contracts and consignments places the financial risks solely with the producers/exporters. The buying parties, such as supermarkets, do not run any financial risk.

The advantage for supermarkets of such direct relationships with farmers is that they can eliminate nearly all financial risks from their end of the chain. They have no stocks, no price risks and no commitments to buy. Other advantages are:

more control over, and traceability of, FFV production

reduced risks of bad or over-ripened produce, through the right storage and a direct cold chain

more possibilities to impose standards and production requirements, including short-term market trends, and ensure that they are being implemented more possibilities for sufficient supplies in large quantities at the right time direct negotiations with the producers and by-passing intermediaries, which provides more possibilities to cut prices.

The advantages for FFV farmers, depending on the relationship and (contractual) agreements, are:

attractive prices in comparison with domestic outlets possible financial or technical assistance

access to export markets and possibilities to export new products

With these direct relationships, it is no wonder that some supermarkets have started to take over the specialised wholesale trade for fruit and vegetables and have established their own distribution centres in order to collect the products and supply their own stores. Some supermarkets even own the land where the produce is farmed.

Critical issues

Many of the European supermarket requirements are difficult for small farmers to meet. The very high costs of technology, management techniques and auditing can only be met by large farms through their economies of scale.

In the case of large farms, when prices are good and outlets are guaranteed, payments and working conditions can be better than those available for farmers producing for the local market. There are however many examples where this is not the case. The case study in chapter 3 looked at whether export production on large farms supports or undermines poverty eradication, or has impact on local markets.