Impact of the food retailing on Agriculture

1. Impact of the food retailing on Agriculture Lindie Botha Agricultural Business Chamber AGRI OUTLOOK CONFERENCE 2007 25 & 26 October 2007, CSIR Conference Centre, Pretoria

2. For today… • Who faces a problem? • Business pressures down the value chain • Tough (changing) business environment • The impact… • Concluding: Retailers VS Producers • Holistic solution

3. “Chicken or the Egg” situation • So,… who was first? Producer or Consumer? Consumer or Retailer? Retailer or Producer? • Is it a first come first serve (benefit) basis?

4. Breakfast problem • Producer • Retailer • Consumer The one owes its existence to the other!

5. Business pressures down the value chain • Pressures: • Consumers’ demands • Business positioning • Market shares • Pressure replaced: • Absorbed by retailers • Shifted down the value chain • Placed on the primary producer

6. Value chain

7. Tough to keep business up! Business environment: • Changing consumer trends • Sustainable environment management • Globalizing markets • (Supermarkets) • Competitive business milieu • (Supermarkets in SA)

8. Changing consumer trends

9. Consumer Demand “Totally natural, having zero calories, zero fats and cholesterol, delicious taste, total nutrition, low price, environmentally friendly production and packaging practices…and that guarantees perfect bodies, romance and immortality!” Carole Brookins, WPI

10. CONSUMER DEMANDS Source: Based onDoyer, 2004

11. Development of food demand Income Development Food items Australia Diet food, functional food, organic food North America Japan Western Europe Fresh & convenient segmented meals Eastern Europe Prepared meals, snacks China Eggs, meat, dairy, sugar, processed mass-market food, soft drinks Latin America India Africa (Sub-Sahara) Carbohydrate staples Convenience Foodservice Snacking International Quality Individualized Health Surviving Mass-market High tech Food perception Source: Rabobank 2004

12. Consumer Perception of Risk I wouldn’t eat GMOs

13. Sustainable environment management

14. This graph by Dr Sue Taylor (WWF) shows how humanity has moved from using, in net terms, about half the planet’s biocapacity in 1961 to over 1.25 times the biocapacity of the Earth in 2003 Sustainability: Humanity’s ecological footprint

15. Globalizing markets (Supermarkets)

16. Supermarket diffusion in developing regions

17. Supermarkets in Africa – Demand driven expansion • Mostly driven by Demand incentives • urbanization & westernization • Controlled by Demand and Supply capacity • Policies, political stability, low purchasing power, procurement systems & possibilities

18. Competitive business milieu(Supermarkets in SA)

19. History of the South African supermarket industry Expand into townships & former homeland areas SPAR Pick ‘n Pay Shoprite-Checkers Woolworths food (Grand Supermarkets – 1990) OK Bazaars Hypermarkets Convenience stores (1932) 1963 1951 1967 1979 1990’s 2001

20. Size of the market Retail sales volumes for different outlet types Overview of the SA food retail industry (cont.) Source: Statistics South Africa, Trade Associations and Euromonitor, as cited by Roc Search (2004)

21. So what impact does this have? • Price determination • Small & Traditional retailers • Regional economies • Market access for agri-food producers

22. Impact on prices • Two hypothesis considering the highly concentrated SA supermarkets • Oligopolistic models predicts more concentration to lead to higher prices • Higher concentration is associated with lower prices, if scale economy effects outweigh the effects of collusion • Lower costs made possible through: • Economies of scale in procurement • Vertical coordination with suppliers • Better information technology • Power of retailers influence price stability

23. Impact on traditional retailers • From many small regional retailers to few large multi-national retailers • Supermarkets drive traditional food retailers out of business • Prime retail growth vehicles for the future • Large retail outlets • Convenience stores • Traditional outlets can not compete • Low-price appeal to consumers • Less shoppers patronize traditional retailers • Traditional outlets survived if: • Upscale outlets target high income consumers • Niche market segments • Aware of changing consumer trends, needs and preferences • Reduce prices and change labour utilization

24. Impact on regional economies Possible collusive trend • Franchising operations has included many traditional outlets to large chains • Many outlets in a chain leads to regional distribution centres • Centralisation • Increase procurement efficiency, reduce coordination and transaction costs • Decrease local procurement from and support for regional economies • Supermarkets has dual objectives • Qualitative – increase quality and safety of products • Quantitative – reduce costs and increase procurement volumes

25. Impact on the agrifood sector • Organizational change – procurement systems change • Specialised / dedicated wholesalers • Preferred supplier system • Demanding private quality standards • Requirement / compliance • Incentivising and/or regulating local procurement of fresh/agric products • Cartel-like framework for buyers • Winning farmers • Self select by complying with requirement • Loser farmers • Traditional farmers who cannot meet set requirements and standards • Benefits for winning farmers • Higher prices • Forward integration – direct buying/contracting • Increase farmer’s competition • Securing position of more capable farmers

26. Conclusion:Retailers VS Producers • We say “Supermarkets in SA are to concentrated and powerful” • But remember: The biggest monopoly in our country is also our biggest contributor to our economy – DE BEERS • Today, with globalization and deregulation of international markets, concentration and power of SA Supermarkets is actually low! • It is not just Pick ‘n Pay, Shoprite, Woolworths and SPAR anymore, but also Tesco, Wal-Mart, Carrefour and Ahold… • Our Supermarkets are also not as big as they think they are when they negotiate prices and setting their standards & requirements • Difference between supermarket procurer and a terrorist? • Agriculture should position themselves better • However, producers should take in consideration what risks/costs are being carried by retailers, before attempting to replace the pressure back up the value chain

27. Holistic solution • Positioning of primary producers • Vertical integration of value chain • Sound business relationships • Overall holistic coordination • Effective communication • Sustainability

28. “ In the future, agri-food producers, processors and retailers will no longer compete as individual entities. Rather, they will collaborate as a strategic value chain and compete with other value chains in the market place. “ Jan Van Roekel, Executive Director, Agro-Chain Competence Foundation

29. THANK YOU Lindie Botha Agricultural Business Chamber Tel: 012 300 9502 lindie@agbiz.co.za