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Small farmers, big retailers: How to link smallholders to supermarkets

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The last three decades have shown that the rash diffusion of formal modes of retailing into developing countries has threatened the livelihood of many smallholders who fail to adapt to retailers' standards. Although supermarketisation has given rise to a wide range of positive outcomes, the huge number of domestic suppliers who could not adapt to buyers demands of quantity and quality tend to be left behind. However, adequate support from development cooperation and governments could also enablesmall-scale farmers to take advantage of the benefits offered by supermarketisation.
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33Rural 21 – 04/2016
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Small farmers, big retailers
How to link smallholders to supermarkets
The last three decades have shown that the rash diusion of formal modes of retailing
into developing countries has threatened the livelihood of many smallholders who
fail to adapt to retailers’ standards. Although “supermarketisation” has given rise to
a wide range of positive outcomes, the huge number of domestic suppliers who could
not adapt to buyers’ demands of quantity and quality tend to be left behind. However,
adequate support from development co-operation and governments could also enable
small-scale farmers to take advantage of the benefits oered by supermarketisation in
terms of inclusive economic growth.
The modernisation of retailing in
developing economies is a young
phenomenon. Thomas Reardon of
Michigan State University identied
four waves of “supermarketisation”:
beginning in the early 1990s in South
America and East Asia, followed by
a mid-1990s expansion in most of
Southeast Asia and parts of Central
America, followed by a third wave in
the early 2000s in China, eastern Eu-
rope / Russia and, nally, a fourth wave
in the late 2000s in South Asia, sub-
Saharan Africa and poorer countries
of southeast Asia. Reardon identied
several reasons behind this phenom-
enon, including decreasing prots in
home markets of international retail
chains coupled with the economic
boom in emerging economies. Other
authors argued that urbanisation and
improvements in infrastructure in de-
veloping countries, the conglomera-
tion of international tastes and the rise
of a middle class with more spend-
ing power were among the reasons
behind the decision of international
retailers to venture into developing
economies.
Retailing in developing countries
is usually characterised by traditional
“wet” markets commonly supplied
to by small-scale farmers. However,
the nature of traditional retailing and
traditional agricultural value chains
means that consumers are left not
only with limited produce diversity
but also recurring health concerns
over food safety and quality. The lack
of food safety and quality standards
leaves conscious consumers with little
to no information on the practices
involved in crop production, particu-
larly on chemical use, labour and hir-
ing practices, whether the crop was
produced with the least environmen-
tal impact, where the crop was grown
and whether farmers received a fair
price for their produce.
Benefits from retail
modernisation …
Such issues are not uncommon
to modern retailers. In fact, large su-
permarkets usually bring their own
set of private standards and modern
management practices when they
set up business in another country.
As such, the host country tends to
benet from retail modernisation in
a variety of ways. For smallholders,
integration into the supermarkets’
value chain, concentration and tech-
nological learning tend to lead to
higher incomes. Market assurance
will encourage farmers to make farm
investments that lead to higher and
Large supermarkets usually bring
their own set of private standards and
modern management practices when
they set up business in another country.
Photo: FAO/Dan White
Aimée Hampel-Milagrosa
Senior Researcher
German Development Institute (DIE)
Bonn, Germany
Aimee.Hampel@die-gdi.de
Rural21_4_2016_v11.indd 33 01.12.16 07:52
34 Rural 21 – 04/2016
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better outputs. The establishment of
supermarkets themselves offers for-
mal employment to an extra labour
force that could not be absorbed in
on-farm activities. While big retailers
may have their own standards and
management practices in place, what
is usually missing when they expand
into another country is agrifood sup-
ply chains. For this reason, initially,
most of the fresh produce offered by
retailers is imported from the retail-
ers’ home country or from preferred
suppliers world-wide. Over time, lo-
cal sourcing should increase, but until
then, smallholder farmers would have
to be excluded.
… often only come for the big
chains
Large retail chains usually demand
very high minimum volumes of pro-
duce that comply with the supermar-
kets’ private standards, bought for
a pre-agreed price. Many domestic
growers are unlikely to meet these
demands because of small landhold-
ings, lack of inputs, lack of knowledge
on good agricultural practices and
low harvest volumes. Owing to weak
enforcement mechanisms, contract
farming under a pre-agreed price re-
mains risky and unpopular, even for
most high-value crops. Survey results
from a 2014 German Development
Institute (DIE) study on retail liber-
alisation in Andra Pradesh/India show
that large farms were found to be bet-
ter able to supply retail chains as it ap-
pears to be easier for them to change
production practices in order to com-
ply with demands. Large retail chains
were also found to prefer to buy from
large farms because of the reduced
transaction costs involved in negoti-
ating with larger units. However, in
India, large domestic retailers such as
Reliance and Heritage were observed
to relax this policy in order to have ag-
rifood in their portfolio by any means,
as land is highly fragmented in this
country. Both supermarkets had to
lower their fresh produce standards
into simple “size” and “colour” cat-
egorisation in order to be able to pur-
chase fresh produce from local farm-
ers. High transaction costs of dealing
with each grower were unwanted but
could not be avoided.
Upgrading smallholders’
production capacity – a huge
challenge
That smallholders are left behind in
the retail modernisation process is bad
for the host country because it is miss-
ing out on an excellent opportunity
for inclusive economic growth. Retail-
ers also suffer because dependency on
agrifood imports impacts the stability
of supplies, creates insecurity due to
currency risks, and bears negatively on
their local image and credibility. The
logical solution would be to upgrade
traditional smallholder production ca-
pacities such that they could supply
to supermarkets. However, evidence
shows that the upgrading of produc-
tion capacities of large numbers of
traditional smallholders, even if it is as-
sisted, is extremely difcult. For exam-
ple, a couple of years ago, Massmart,
one of South Africa’s biggest whole-
sale and retail companies, together
with Technoserv, a non-prot organ-
isation, attempted to train around 100
poor farmers who had never supplied
supermarkets before. By providing
loans to nance the purchase of seeds,
fertilisers, pesticides, labour, electric-
ity, packaging and transport, the ob-
jective is to transform the farmers into
Massmart’s main suppliers of fresh
produce after a three-year period.
Farmers beneted from the support
they received during the crop growing
trials and from Massmart’s purchase
of their produce. They were taught
nancial recordkeeping that allowed
them to access formal bank loans. The
construction of packhouses meant
easier market access for all participat-
ing smallholders. However, the high
quality of fresh produce standards set
by Massmart meant that most of the
farmers’ produce was rejected. As part
of the agreement, Massmart paid low
prices to farmers, which resulted in
many of them going into debt. Some
farmers resorted to selling the fresh
produce to other buyers, which led to
disputes because the production was
being subsidised by Massmart. At the
end of the project, only four of the
original 100 farmers ended up sup-
plying Massmart, and in addition, the
company had to write off the debts
incurred by most of the participants.
The experience of Massmart shows
For many smallholders it is difcult to comply with the high quality standards of modern retailers. Photos: Aimée Hampel-Milagrosa
Rural21_4_2016_v11.indd 34 01.12.16 07:52
35Rural 21 – 04/2016
F
how huge the challenge is to upgrade
traditional farmers and integrate them
into modern value chains. Post-project
evaluation by Technoserv estimates
that even with intensive coaching, a
minimum of ve years is necessary to
allow farmers to adapt to and comply
with modern retailers’ standards.
What development
co-operation can do
Supermarkets, however, are not in-
clined to wait this long and will con-
tinue with international expansion
whether smallholders are ready or
not. Fortunately, developing country
governments have a lot of freedom
in shaping the supermarketisation
process. What are the policy options
for developing countries? Altenburg
et al. (2016) reviewed several policy
options for developing country gov-
ernments that would allow retail
modernisation to be more inclusive
for domestic suppliers. A sequenced
and assisted approach where retail
sectors gradually open while govern-
ments assist domestic producers in
coping with structural change seems
to be promising. Here, governments
are encouraged to capture the ben-
ets of the entry of retail chains into
the economy while supporting lo-
cal suppliers in adapting to change.
However, since no comprehensive
strategy of this type has been found
anywhere, development agencies are
encouraged to provide support and
guidance in this regard. Three possi-
ble strategies have been identied for
donors and development agencies’
engagement in developing countries.
These strategies could be used inde-
pendently or in combination:
1) Create and implement an inte-
grated impact assessment framework
for retail modernisation that com-
bines market and protability assess-
ments with development criteria. This
framework is best developed through
a multi-stakeholder approach, for
example, involving government, re-
search institutions, donors and retail-
ers. 2) Provide evidence of successful
and failed retail modernisation poli-
cies, specically of policy options for
governments and donors, their im-
pacts, and design of public-private
partnerships between governments
and international retailers, and 3) Act
as facilitators and brokers in multi-
stakeholder processes. Pockets of suc-
cessful examples of donor and private
sector engagement in the upgrading
of the capacity of smallholders to
adapt to and comply with supermar-
kets’ standards are available. In Rus-
sia, for example, the United Nations
Industrial Development Organisation
(UNIDO), in partnership with Metro
Cash and Carry, supported local fresh
produce suppliers to comply with the
requirements of the food safety cer-
tication schemes recognised by the
Food Safety Global Initiative. In South
Africa, USAID, in partnership with
Pick n Pay, trained small producers
of squash and sweet corn in farming,
processing and delivery modes. In
Bangladesh, the UK’s Department for
International Development (DFID), in
partnership with Agora Stores, set up
a supplier development programme
for small and medium-sized fresh pro-
duce suppliers. Evidently, such inter-
ventions are unique, one-off co-op-
eration projects designed for specic
crops, specic farmers, specic value
chain nodes or specic supermarkets.
How governments can help
Although local sourcing is in the
retailers’ interest, retailers are unlikely
to invest towards inclusive value chain
development owing to the threat
of failure, as the Massmart example
shows. Locally, government agen-
cies have a lot of freedom in support-
ing farmers in upgrading production
and being included in modern value
chains through various policies and
mechanisms. For example, encourag-
ing farmers to convert or include high
value crops in their portfolios comple-
ments most labour-intensive tradi-
tional agricultural practices. The rise
in consciousness among consumers
makes it promising for governments
to assist farmers in developing organic
or fair-labelled brands. In both cases,
governments could support farm-
ers by nancing or training schemes
that lead to organic or fair trade or
regional labelling. Since retailers tend
to avoid negotiating with numer-
ous smallholders, organising farmers
into farmer groups and co-operatives
would reduce the number of suppli-
ers involved in the discussions. This
would lower transaction costs and
persuade supermarkets to link up with
smallholders. While compliance with
retailers’ private standards remains
a huge challenge, slowly introduc-
ing the benets of good agricultural
practices is a rst step. Governments
could also provide nancial and tech-
nical support to farmers who are in
the process of certication or assist
farmers’ groups with being jointly cer-
tied. Finally, involving farmers in spe-
cic stages of the post-harvest process
such as washing, sorting, cutting and
packaging may help increase their
share of prots. Governments could
support this by providing necessary
capacity building for farmers and by
subsidising investments in machinery
for communities.
The DIE Discussion paper “Making retail mordernisation in developing countries more
inclusive. A development policy perspective” (Altenburg et al., 2016) is available at:
www.die-gdi.de publications
Government agencies could encourage small
farmers to include high value crops in their
portfolio to enable them to benet from
better prices. Photo: Aimée Hampel-Milagrosa
Rural21_4_2016_v11.indd 35 01.12.16 07:52
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