Mapping the competitive food chain for fresh produce: The case of retailers in Tshwane Metro, South Africa, H Madevu, A Louw, JF Kirsten

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Content: Mapping the competitive food chain for fresh produce: The case of retailers in Tshwane Metro, South Africa By Hilton Madevu i, Andrй Louw ii & Johann Kirsten iii i. M.Sc. Student: Dpt. of Agricultural Economics, Extension and Rural Development, University of Pretoria & Business Operations: Standard Bank Group Ltd. Head Office, No.5 Simmonds Street, Johannesburg, SOUTH AFRICA. Email: [email protected] Tel: +27 11 636 0637 Fax: +27 86 667 8732 (Corresponding Author) ii. Professor & ABSA Chair in Agribusiness: Dpt. of Agricultural Economics, Extension and Rural Development, University of Pretoria, Pretoria 0002 South Africa. E-Mail: [email protected] Tel: (+27 12) 420 5772 Fax: (+27-12) 420 3247 iii. Professor & Head of Department: Ibid. E-Mail: [email protected] Tel: (+27 12) 420 3248, Fax: (+27-12) 420 3247, For The International Food & Agribusiness Management Association (IFAMA) 17th Annual World Symposium, Parma, Italy June 23-24, 2007
Mapping the competitive food chain for fresh produce: The case of retailers in Tshwane Metro, South Africa Executive Summary A few retail chains increasingly dominate South Africa's agro-food chain. M+M Planet Retail (2004) found the four-firm concentration coefficient among retailers to be as high as 96% and growing. This trend had led to the demise of numerous general dealers in favour of supermarkets. Small fresh fruit and vegetable (FFV) retailers including greengrocers and hawkers have been resilient to this trend. Analysing and explaining this resilience was the subject of this study. The study used `Porter's forces' model and chain analysis (CA) to structure the research method. The objective was to describe and analyse the competitive situation by determining the relative competitive and strategic behaviour of retailers and to map the sector's value flows. The investigation featured key informant interviews and a survey targeting 120 FFV retailers including 15 supermarkets, 30 greengrocers and 75 hawkers. This analysis was limited to the Tshwane metropolitan area (formally Pretoria) of South Africa. The main findings were that tridimensional FFV retail competition (between supermarkets, greengrocers and hawkers) was mostly in the middle-income areas. The low-income areas were dominated by hawkers while large chains dominated the high income areas and greengrocers were confined to middle-income areas. Another interesting find were the differences in the use of marketing strategy (marketing mix) and structures of the three chains as shown in the FEM and value chain maps respectively. 2
Mapping the competitive food chain for fresh produce: The case of retailers in Tshwane Metro, South Africa ABSTRACT Retail chains increasingly dominate South Africa's agro-food chain. M+M Planet Retail (2004) found concentration among retailers to be as high as 96% and growing. This trend had led to the decline of small retailers in favour of supermarkets. However, small fresh fruit and vegetable (FFV) retailers have proven to be resilient to the trend. Analysing this resilience is the subject of this study. The study used `Porter's forces' model and chain analysis (CA) to structure the research. The objective was to describe and analyse the competitive situation by determining the relative competitive and strategic behaviour of retailers and to map the sector's value flows. The investigation featured key informant interviews and a survey of FFV retailers in Tshwane metropolitan area, South Africa. The main findings were that tridimensional competition was mostly in the middle-income areas. The low-income areas were dominated by hawkers while large chains dominated the high income areas and greengrocers were mostly confined to middle-income areas. Another find was the differences in the use of marketing strategy (marketing mix) and structures of the three chains as shown in the FEM and value chain maps respectively. Key Words: Competition analysis, fresh produce retail, chain analysis 3
Mapping the competitive food chain for fresh produce: The case of retailers in Tshwane Metro, South Africa Introduction & Background The fresh produce industry possesses some characteristics that make it a particularly difficult sector to engage. Researchers have identified four important challenges factors in fresh fruit and vegetable (FFV) namely perishability, susceptibility to shocks, seasonality and subjective standardisation (Cook, 2003; Rathogwa et al., 1998; Louw et al., 2004 and Farina & Machado, 1999). Fresh produce markets (FPM) were the most prominent players handling most all the fresh fruit and vegetable (FFV) in South Africa (DoA, nd.; NAMC 2000, NAMC, 2000; and HSRC, 1991). At the second level were wholesaler-retailers sector. Next was FFV retailing and this existed in the formal and informal sectors. The formal FFV retailing was mainly in supermarkets and greengrocers. The informal sector included hawkers trading as well as spazas (tuckshops). Informal traders represent a major force in the fresh produce sector. According to Louw et al. (2004), hawkers at the Tshwane Market (TM) represented 27-29% of monthly turnover and up to 50% at the Johannesburg market. In the face of expanding corporate (chain) supermarkets, most competing forms of food and grocery retailing (such as bakeries and butcheries) tended to be overrun for market share and absorbed by supermarkets both locally and internationally (Brandt, 2004; M+M Planet Retail, 2004; Boudreaux & Macaulay, 1996; and various supermarket Annual Reports). However FFV retailers, informal traders and greengrocers, in South Africa have proven to be resilient. All three FFV retailer formats appeared to attract their own set of consumers and successfully competed for market share. 4
The relatively slow takeover of supermarkets in the fresh produce market is not unique to South Africa. Many researchers found that shifts in the retail trade tended to occur first in dry goods and later in perishables (Braudel, 1979 in Weatherspoon & Reardon 2003, and Dries et al, 2004). Reardon et al. (2003) attributed this lagged penetration to the ability of small shops (greengrocers) and traditional wetmarkets1, to maintain a fresh and convenient shopping option. However this explanation failed to explain why the lag was peculiar to the FFV markets. This study asserts that understanding this competitive behaviour is important in understanding how the FFV retailers coexist. Lessons learnt could then be extended this to other sectors where informal and small businesses are struggling. In analysing the nature of this competition in FFV retail, the study mapped the value chains within the alternate retail channels using Tshwane Metro as a case in point. The chain maps also presented the power dynamics and the degree of chain governance in the FFV retail market. The practical relevance of the study is on multiple plains. Firstly for the FFV entrepreneur, the study provides a map of possible entry points into this food chain, the current management trends and the market niches available. For the government and aid officials it highlights bottlenecks to an efficient FFV marketing system and for small business. For the academics and students it provides insight into a somewhat opaque segment of the South African food chain and thus offers a foothold for future study. The paper is organised so as to first review literature on the sector and results of key informant interviews in the following section. This of followed by the methods in the third section. The fourth section is a presentation of the findings, the fifth section summarises the findings using the performance profiles and chain maps and sixth and final section presents recommendations on how to improve (upgrade) the competitiveness of each of the competing food chains. FFV Retailing in South Africa: A Literature Review & Exploratory Study According to the DoA (2005a) the South African food retail market was worth R 165 billion (US$ 27.5 billion) in 2004. In the same statistical abstract fruit and vegetables retail (including 1 Such as feria libres in Chile or warungs in Indonesia 5
potatoes) was said to have contributed towards at least 16% of this food market. The major players sharing this fresh produce retail market can be classified three broad levels namely wholesalers, wholesaler-retailers and retailers (NAMC, 2000; HSRC, 1991 and DoA, nd.). In practice, there is considerable overlap in the market. None the less, the distinctions serve as a useful tool in giving an overall perspective of the sector. Fresh Produce Markets (FPMs) were the dominant player and wholesaler in the FFV sector (DoA. nd.; DoA 2005b, City of Johannesburg, 2006 and AgriTV, 2006) that had consistently handled over half of all domestic fresh produce over the past ten years. Other fresh produce wholesalers include non-syndicated FFV wholesalers (Asian markets), wholesale subsidiaries of retail chains (buying centres) and farmgate sales (NAMC 2000). Wholesale-retailers primarily specialise in FMCG (Massmart, 2005 and National Brands, 2003). However a relatively new form had emerged that did trade in FFV including Fruit & Veg City chain (established 1993). These acted as both wholesalers and retailers by marketing to the public, smaller retailers as well as some caterers. The top large formal supermarket chains included the listed corporations Pick`n Pay, ShopriteCheckers, Woolworths and Spar. In 2004 these top four supermarket chains held 96% of formal retailers' market share and were growing [Brandt (2004); Various Annual Reports and M+M Planet Retail (2004)]. The spreading dominance of supermarkets could be viewed as progressive for livelihoods and food security because supermarkets brought higher product standards, variety and lower prices (D'Haese & van Huylenbroeck, 2005). On the other hand this expansion was typically at the expense of small local retailers, thus diminishing local entrepreneurship. Researchers warned that supermarkets would eventually take over the FFV markets as in other food sectors. Thus they have implemented programs to mitigate this possibility (DFID RNRA, 2005 and www.regoverningmarkets.org). Greengrocers were classified under the larger population of smaller stores that collectively controlled 30% of turnover (Economist Intelligence Unit, 2004). This share was on a general decline but not necessarily among the greengrocers. Greengrocers showed some versatility in 6
their ability to co-exist with both the hawkers and supermarkets in FFV retail. Greengrocers were able to compete against supermarkets in the upmarket shopping malls where the urban population increasingly shopped. Concurrently greengrocers were holding their own against hawkers in the townships (Van Zyl & Conradie, 1988). Accurately measuring the social and economic impact of the informal sector in South Africa remained a challenge due to its amorphous and none permanent nature, and that its structure and performance was not routinely monitored along with other national economic data. However, in a once off survey Statistics South Africa estimated hawkers' total turnover to be R2.62 billion in February 2002 alone (STATSSA, 2002, p.4). Informal traders represented a major force in Tshwane's fresh produce sector. Censuses conducted in Tshwane (Ligthelm & Van Wyk, 2004 and City of Tshwane, 2005) respectively found a total of 3614 and 3385 informal retailers. Some commentators argued that the informal sector was an important means of reaching the lower income markets, ensured their food security; and was an employer especially for low skills groups. They also found that it had more legitimacy than formal business in low income areas where socio-political forces were quick to destroy businesses that were perceived to be exploitative; was consumer oriented hence demand driven; promoted entrepreneurship and ECONOMIC ACTIVITY in the poor areas as it was cash driven; and was a valuable source of income for the players and their dependents (Karaan, 1993; Van Rooyen, 2002; and Ligthelm & Van Wyk, 2004). On the other hand, antagonists' points included that it was merely a survivalist trade (Rauch, 1991) and thus only generated a subsistence incomes (Morris et. al, 1997). In addition, Hirschowitz (1992) showed a net flow of money from the informal to the formal sector and that the former had low and intermittent returns. Employment in the sector was also insecure, involving long working hours and poor conditions (Devarintert & Watson, 1981). Marius (1987) concluded that an informal economy was an indicator of a general level of poverty and underemployment in an economy. Of note however is that these authors fell short of condemning the informal sector as detrimental to an economy. 7
Interviews & Pilot Survey Expert interviews revealed a number of nuances about structure of the fresh produce industry beyond the descriptions in literature. The first observation was the FPMs were important information hubs in the fresh produce sector due to two factors. Firstly these markets held a key role as the largest wholesaler in the sector handling at least 80% of all fresh produce in the country which was higher than the DoA estimates (Dodds T. 2005, personal communication). Secondly the markets, including the Tshwane Market (TM), routinely recorded all transactions performed on their floors in real time using the Freshmark Computer System. Although the TM possessed this raw data, little analysis was performed. The main data use was for price monitoring. Only four brief market analysis reports had ever been compiled at TM by December 2005. Statistics off these reports are summarised in table 2.2 that presents the percentages of sales off the TM attributed to each of the industry players. The top 10 buyers accounted for 26% (R70 865 784), 25% (R75 058 406) and 26% (R83 345 219) of the market's turnover in January, February and March of 2005 respectively.
Table 1: Distribution of turnover sources for Tshwane Market
Period
Informal trade (%)
Retail (%)
1999
20
28
Jan 2005
28
27
Feb 2005
31
24
March 2005
30
26
Data source: Dodds & Sedutla (2005)
Wholesale (%) 29 23 25 24
Contract Buyer (%) 1 4 3 3
Chain Store (%) 18 14 13 13
Processor (%) 1 2 2 2
Final Consumer (%) 1 2 2 2
Exploratory study interviewees emphasised the importance of produce markets (FPMs). Despite the supermarkets increased direct procurement from farmers (Louw et al., 2004), they were still among the top buyers off the national FPM floors. For instance Shoprite obtained approximately 70% of its fresh produce from FPMs (Du Toit G. 2005, personal communication), chain stores typically accounted for 13% to 18% of the TM's turnover. Direct procurement was reserved for acquiring sensitive and/or specialised product lines (Du Toit G. 2005, personal communication).
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Another interesting find of was that although all three FFV retail formats (supermarkets, greengrocers and hawkers) exist across Tshwane their relative strengths as market competitors vary according to the affluence areas. The tri-dimensional nature of retail competition was most evident in the middle-income areas (LSM2 5, 6 & 7) of Tshwane where all three formats appeared to be virulent. This was less so in other areas. This observation was contrary to comments in Ligthelm (2006) that hawkers only accessed low income areas. The low-income areas (LSM 2, 3 & 4) were dominated by informal traders and there were very few greengrocers present. The few supermarkets present in these areas did not deal in fruits or vegetables. In high-income areas (LSM 8, 9 & 10) the FFV market was held almost exclusively by supermarkets and the wholesale-retail chain Fruit and Veg City. This outcome was facilitated, by local residents' access to private transport, and an observed preference for shopping malls. A few greengrocers were observed in shopping centres within these neighbourhoods and hawkers were confined to transport nodes where they mostly served by non-locals (DOT, 1998) in transit. Research Methods & Procedure Porter's forces competition model (Porter, 1979) was chosen as the overall guide to the investigation over the more empirical modelling techniques because of the lack of availability of comprehensive and reliable financial data and documented marketing strategies among the FFV retailers. This framework was used in conjunction with the marketing mix (Ps) and used chain analysis (CA) as the operationalizing tool. CA was used in unpacking the retail section by identifying role-players; their relationships and interaction. Closely associated to these tools were chain mapping, performance profiling and the factor evaluation matrix (FEM), which helped to quantify this otherwise qualitative evaluation. 2 Living Standards Measure (LSM) is a popular affluence index designed and maintained by the South African Advertising Research Foundation (SAARF, 2004) 9
data collection was conducted in two phases. The first was a pilot and case study conducted during the preparatory and literature review stages (presented in section 2). The second phase included a survey of 120 fresh produce retailers in the City of Tshwane. Phase 2 followed a systematic, although non­probabilistic, sample selection process that paid cognisance of the available marketing data and findings from phase 1 (pilot study). The sampling procedure was a multi-level stratification followed by a random sample of the fresh produce retailers in Tshwane. In total 120 respondents were interviewed after being selected from a six (6) level sampling frame. Stratum 1 was the population of study, the FFV retailers, is found within the 2043 areas (townships, farms, suburbs, business and industrial areas) in the City of Tshwane. Stratum 2 involved dividing Tshwane into market segments using the Living Standards Measure (LSM) and produced nine sample groups. Stratum 3, survey groups, was a further aggregation of the nine into three survey groups according to affluence levels i.e. low (A), medium (B) and high (C). At stratum 4 were a set of randomly selected nodal supermarkets in each of the survey groups. The next stratum (5) featured the purposeful sampling of two greengrocers within the vicinity of each nodal supermarket and at stratum 6 the informal trader sample units. These were identified mainly by means of a rolling sample within the vicinity. 10
Tshwane Metropolitan Area
Stratum 1 Type: Population Total: 2043 Townships, farms & suburbs
Stratum 2 Type: LSM groups Total: 9
Stratum 3 Type: Survey groups (A, B and C) Total: 3
Stratum 5 Type: Greengrocers Total: 30 Stratum 6 Type: Hawkers Total: 75
Stratum 4 Type: Supermarket survey nodes Total: 15
Figure 1: Summary of Sample Design
Figure 1 shows an overview of the sample design. Of note is that the purposeful selection of five hawkers (stratum 6) and two greengrocers (stratum 5) competing with each nodal supermarket (stratum 4) formed a 1:2:5 sampling ratio. The total of 120 respondents was thus composed of 15 supermarkets, 30 greengrocers and 75 hawkers. The data collected was initially entered, verified, coded and cleaned using the Microsoft Excel software. The coded data was subsequently exported into the SPSS 13.0 for Windows. SPSS was then used to calculate all frequency and descriptive statistics as well as some graphical presentations. Other charts and chain mapping were performed in Microsoft Excel and Microsoft Word software packages as they permitted post-production editing.
The Marketing Mix (MM) in Action: Findings & Discussion
The results section begins with an analysis of the competitive and strategic behaviour of players in the three forms of fresh produce retail. That is, how the FFV retailers tweaked their marketing 11
mix (place, price, product, promotion, people and processes); target market segments and how they perceive their competitors. Subsequent sections were on market targeting, as well as the relative perceptions of rivalry and competitiveness. The first set of MM variables (place) revealed that FFV retailers generally sought to locate their businesses at prime/busy areas, which entailed the transport nodes and areas with high population densities. Informal traders were found to operate from a variety of locations that may be classed into three fixed, semi-mobile and roving. Fixed location traders formed the majority, 89.5% of the group. It was also found that the area dedicated to FFV was on average smaller in the supermarkets (135 square meters) than in the greengroceries, (200 square meters). This meant that greengrocers could carry more variety. As expected hawkers were the smallest with a mean of 5 square meters. It was established that informal traders' businesses were relatively young, averaging six years. This reflected the relative ease of entry, exit and recent improved tolerance for the sector by city authorities. The greengroceries were found to generally be old businesses with average of 23.7 years. Combined with the low incidence of new entrants this indicated a business format in atrophy. The supermarkets had a fairly balance set of ages ranging from 3 to 75 years. Partnerships were the most prevalent ownership structure among FFV hawkers, while greengroceries were primarily family run thus confirming their contribution to entrepreneurship. Supermarkets were a mix of corporately owned stores, franchises and family owned businesses. Monthly FFV turnover for informal traders varied from R600 to R63 515 per month and averaged at R15 538 per month while the greengrocers' FFV turnover varied from R21 000 to R400 000 per month, with an average of R165 521. Supermarket FFV turnover ranged from R7 000 to R1.5 million per month and averaged at R480 692 per month. In terms of pricing behaviour, informal traders' charged a mean mark-up of 32.9% for FFV. In greengroceries the average was 44.7%. Supermarkets' pricing data was plagued with non-response errors. Based on the few valid responses supermarkets had mean and modal mark ups of 22.5% and 15.0% respectively. Generally the hawkers charged both the highest and lowest margins for FFV. This is in contrast to assertions by Van Zyl & Conradie (1988) that (for avocados) supermarkets were 12
consistently cheaper followed by greengrocers and hawkers being the most expensive channel. Of note, however, was that the authors were surveying consumer perceptions and did not quantify this perceived pricing hierarchy. The informal sector displayed a cost advantage over the competition because they had few overhead costs and personnel costs that could offset the scale economies enjoyed by supermarkets through corporate buying. Greengrocer owners reduced administrative costs by personally performing these tasks as owner-managers thus leaving more funds for operations. On the other hand the greengrocer overheads and staffing costs were still quite high, constituting at least a 20% of the monthly costs. In addition they had limited scale advantages over the hawkers. Retailers reportedly performed packaging (breaking bulk), washing, cutting, freezing, and ripening at store level. Over 75% of hawkers, 50% of the greengrocers and a 33% of the supermarkets were performing at least one processing activity but this was usually limited to repackaging. Tshwane market (TM) and Marabastad market were the suppliers of choice for both informal traders and greengrocers. All informal traders in the survey stated that they did not enter into any form of contracting verbal or otherwise with suppliers. Greengrocers and independent supermarkets occasionally had informal reservation arrangements with market agents. Supermarket outlets were sourcing from the buying centres (73.3%) and the TM (26.7%). Most corporate supermarkets' store level management were ignorant of most procurement issues and had no choice over supply source but to order from buying centres. Although franchised stores had more freedom over supply source, they found that the buying centres offered the best deals and thus they only used produce markets in cases of stock-outs of key produce lines. Nonsyndicated supermarkets behaved similar to the greengrocers and primarily patronised the TM and Marabastad markets. For the promotion MM variables, hawkers stated that they relied on personal selling as the only activity creating awareness for their businesses. Among the greengroceries, price discounts was the favourite mechanism. This was cited as the primary strategy in 64.5% of the cases. Nonsyndicated supermarkets were similar to greengrocers in FFV promotions while corporate supermarkets were seen to use the full array of promotional tools of mass marketing tools from, 13
television and radio promotion to print advertising and publicity. However this strategy was implemented at corporate level focused on promoting store brands and was rarely product specific. Surprisingly, most hawkers (98.7%) were able to define their target markets than greengrocers and supermarket managers as the latter two typically stated that they targeted `all people' in 48.4% and 46.7% of the cases respectively. The comparatively low amount of market targeting among the supermarkets and greengrocers may be explained by the observation that the two traded in a larger variety of merchandise in store. Another issue to consider, in the case of corporate supermarkets, was that store level respondents were not privy to the strategic marketing decisions involved in targeting and segmentation. Therefore observing the location of stores and differences in varieties of stock were clearer indicators of the intended market targets than the store managers' perceptions. Enumerators observed that greengrocers carefully avoided commenting directly on any racial elements of their typical customer. However enquires into perceived shifts in the industry revealed an implied view that the increasing in black population in a greengrocer's vicinity spelt a decline in patronage. Another overall but expected outcome was that market targeting was a function of location with those in residential areas targeting residents and those in business areas focusing on workers in the vicinity. Results revealed that most retailers in all three channels perceived their top selling point to be low prices. This confirmed that lowest prices were not the reserve of any particular channel. Supermarkets and hawkers found intra-format competition (competition amongst themselves) to be more serious than cross-format competition. On the other hand greengrocers felt that cross format competition, particularly with supermarkets, was the most serious concern. Comparative Use of the Marketing Mix The use of the marketing mix and other competitive variables in the three FFV retail channels is best summarised compared in Annex 1. This summary is derived not only from retailer responses but also from key informant reviews and observations made during the course of the research. It 14
is especially geared towards highlighting differences in approaches to marketing FFV and thus the types of market niches being exploited.
Performance Profiles
A performance profiling of FFV retailers was conducted based on the factor evaluation matrix (table 3). This served the purpose of highlighting the comparative use of the MM in the three channels. Hawkers generally underperformed compared to the industry average. Their marketing performance was rated at 7.6 out of ten or 76.0%. Greengrocers were in an intermediary position with a total average marketing score of 81.2%. Supermarkets' scores were marginally higher and outperform the industry average in their Sourcing and Promotions scores but were lower in terms of Pricing and Product and Place.
Table 3: situation analysis of FFV retailers using the FEM
Strategic Issues Place Price Product Promotion Sourcing Total
Hawker Scores (Importance * Performance) 1.4868 1.5517 1.6252 1.4473 1.4910 7.6020
Greengrocer Scores (Importance * performance) 1.5505 1.8031 1.8530 1.3753 1.5375 8.1195
Supermarket Scores (Importance * performance) 1.3087 1.6750 1.6998 1.6790 1.7648 8.1272
Industry Average (Average Importance * performance) 1.4487 1.6766 1.7260 1.5005 1.5978 7.9496
The radar chart, figure 2, graphically shows and summarises FEM these marketing performance rankings.
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Sourcing
Place 2 .0 1.8 1.6 1.4 1.2 1.0
Price
Promotion
Haw kers'
Greengrocers'
Product
Supermarkets'
Industry Average
Figure 2: FFV retailers' relative performance profiles
Of note though is that the scores were based on a self-assessment process. Thus they are more reflective of how retailers felt about their performance and not necessarily what consumers believed. Another analysis of the retailers was performed and in this case in terms of a SWOT analyses; the risks and problems they faced; how they mitigated or solved them. In the process hawkers highlighted the lack of shelter, wastage, volatile demand and Metro Police Raids as their prime business constraints however they felt powerless and mostly did nothing to ameliorate the problems. Most greengrocers could not site any significant challenges to their trade but others sited shrinkage, wastage and fluctuating demand as key concerns. Over 33% of the sampled greengrocers just carried on despite the problems with a few suggesting solutions. Shoplifting was also a major problem for supermarkets other problems were wastage and fluctuating sales. Their solutions were increased hi-tech security, quality control and improved demand forecasting.
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Generally retailers shared a positive outlook for the FFV retail industry although there were marginally more pessimists among the greengrocers. The main source of this positive outlook was the generally positive macro-economic trend leading to a growing middle class; higher incomes and less crime. Mapping FFV Flows This concluding section presents a mapping of FFV retail thus graphically summarising the findings on what links and market governance relationships prevailed in each of the three retail channels using methods recommended in Humphrey (2005). The following figure 3 traces the overall flow of FFV from producers to the consumers in the city of Tshwane. 17
Producers (Commercial & small-scale farmers countrywide) Less own consumption
Municipal Markets
(Tshwane &
Johannesburg
markets)
Wholesalers and Wholesaler-retailers
Informal Traders
Chain Retailers (e.g. Pick & Pay,
(e.g. F&V City, Marabastad market)
Contract Buyers
SPAR and Freshmark
of Shoprite)
Small formal retailers
(including greengrocers &
convenience stores)
Catering & Hospitality
(restaurants, fast-food &
institutions)
Final Consumers (individuals & households)
Figure 3: Overview of supply route for fresh fruit and vegetables in Tshwane Sources: Own findings, Dodds & Sedutla (2005) and Ligthelm & Van Wyk (2004) A further breakdown of the value chain associated with the informal FFV retail is as in figure 4.
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PRODUCERS WHOLESALE
Fruit & Vegetable Farmers Countrywide Large-scale farmers Small-scale farmers Produce Markets Tshwane Market
Local Farmers Mainly Brits area (North West province)
WHOLESALERETAIL
Chain Wholesale- Retailers Mainly Fruit & Veg City 2-3 outlet stores W-Rs
Independent Wholesale- Retailers `Asian markets' Single outlet W-Rs
Satellite Municipal Markets Marabastad (mainly) & Hammanskraal
INFORMAL RETAIL
Fixed location hawkers Partnerships & family alliances permanently located at: Roadside stands Transport nodes (e.g. bus, taxi & train stations) Tuck-shops
Semi-mobile hawkers Partnerships & family alliances with a fixed base plus: Between stopped traffic Aboard commuter trains
Roving hawkers Partnerships & family alliances using movable displays including: Trolleys Baskets Boxes Bags & Hangings Other
CONSUMERS
Final Consumers
Target individuals & households Commuters Children Shopping mall visitors
Residents in the surrounding area passers-by
Figure 4: Informal trader channel for fresh fruit and vegetables in Tshwane
= arms length market relationship = directed network
= balanced relationship = hierarchy (subsidiary)
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Of note is that most links in this channel are arms length relationships (short term and transaction related). The exception included the directed link between municipal markets and their semiautonomous satellite markets. Another was the balanced relationship with customers who were said to share a kinship and good rapport. The greengroceries channel is shown in figure 5. Similar to the previous flow chart, only links showing FFV that eventually went through the greengroceries were shown.
PRODUCERS
Fruit & Vegetable Farmers Countrywide
Large-scale farmers
Small-scale farmers
WHOLESALE
Municipal Markets Tshwane Market Johannesburg FPM
WHOLESALERETAIL
Marabastad Satellite Municipal Markets
RETAIL
Greengrocers
Mainly single outlet but up to 3 stores owned:
Family alliances
Independently
FURTHER PROCESSING
Catering Restaurants Fast-food Functions & Events
Hospitality Hotels Bed & Breakfasts Lodges
Institutions Corporate Government Hospitals Prisons
CONSUMERS
Final Consumers
Highlighted target individuals & households
All people
Apartment dwellers
Locals and passers-by
LSM 4 and 5
Figure 5: Greengrocer channel for fresh fruit and vegetables in Tshwane
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= arms length market relationship = directed network
= balanced relationship = hierarchy (subsidiary)
Compared to informal traders, the greengrocers enjoyed closer links (balanced relationships) with market agents due to the larger volumes traded per transaction. On the other hand they had weaker links to end consumers than the hawkers.
The supermarket chart (figure 6) featured more organised links than the competition. This illustrated their stronger bargaining power and the higher level of concentration.
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PRODUCERS
Fruit & Vegetable Farmers Countrywide
Large-scale farmers
Small-scale farmers
WHOLESALE
Distribution Centres Including: Freshmark (Shoprite) Pick n'Pay DCs SPAR DCs Other buying alliances
Municipal Markets Mainly: Tshwane Market Johannesburg FPM Also other 14 FPMs when in short supply
RETAIL FURTHER PROCESSING
Corporate Supermarkets Corporate owned Marketing mix controlled at DC
Franchise Supermarkets Partnerships & family owned Loosely allied with DC Preferred FPM buyers
Independent Supermarkets Mainly family owned Preferred FPM buyers
Catering &Hospitality Small functions & Events Bed & Breakfasts Small Lodges
CONSUMERS
Final Consumers
Highlighted target individuals & households
All people
Adults
Surrounding residents
Office workers
Figure 6: Supermarket channel for fresh fruit and vegetables in Tshwane
= arms length market relationship = directed network
= balanced relationship = hierarchy (subsidiary)
Of note in figure 6 is the absence of the wholesale-retailers in the supermarket channel. This was replaced to some extent by the distribution centres (DC). Another highlight in the figure is weaker the link between supermarkets and the catering and hospitality industries than in the case of greengrocers.
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Factors Facilitating Multiple Retailer Formats Fresh fruit and vegetable business leaders were in agreement with the study findings that the FFV sector was peculiar because of its ability to allow the existence of a wide spectrum of types and sizes of business entities. They reported that this was not only true at the retail level but also among the producers, wholesalers, processors and consumers (Roos, 2006; Dodds, 2005 and Du Toit, 2005, personal communication). Their views and analysis in this report highlighted the factors causing this phenomenon to include the existence of multiple niches; the equalising effect of pricing at TM; the general upgrade in product quality offered by all retailers; perishability of FFV and an inability of any single players to satisfy all market segments. Recommendations for Channel Upgrading One of the primary aims of this research was to identify pathways to improve the functioning of each of the three channels. This is channel upgrading in value chain language (Kaplinsky & Morris, 2000). This upgrading can occur at four levels: internal efficiency (process upgrading), improving the offering (product upgrading), improving and shifting productive activities (functional upgrading) or else moving into new value chains (chain upgrading). Thus the following text is suggests market improvements for each of the three FFV retail formats based on opportunities identified in this study. Also highlighted in the text were potential institutional, policy and government intervention points where the relevant authorities could facilitate, initiate and contribute to channel upgrading. 23
Potential upgrades in the informal sector In terms of process upgrades obtaining hawkers' licenses should occupy top priority for the informal traders. This is especially so given the recent regulatory changes enabling informal trade (Motala, 2002). Informal traders are also missing opportunities to band together into business, lobby and advocacy groups such as marketing groups and unions to take advantage the current political dispensation that favours the small business development as guided by White Paper on Small Business Development (Parliament of RSA, 1995), the Black Economic Empowerment (BEE) policies as well as the Department of Trade and Industry (DTI) efforts through Ntsika Enterprise Promotion Agency and Khula Enterprise Finance (http://www.dti.gov.za). As the implementing bodies, municipal authorities have a direct role to play in facilitating the negotiated legalisation of hawking. This negotiation presents an opportunity to identify feasible means of regulating hawking and thus remove the adversarial relationship between municipal (metro) police and hawkers. Many barriers faced by informal traders are also related to their small scale of operation. A key upgrade recommendation for the sector is therefore to grow this unit size. Once again a group approach is the fastest means to do so. Groups have the potential to gain better terms of trade such as better sourcing prices, lower transaction costs access to training and other services (Louw et al., 2004). However, care must be taken to form natural alliances of like minded people because externally imposed groups have proven to be unsustainable. The DoA uses this approach on the supply side to facilitate smallholder production but struggles to access markets the resultant produce (Louw et al., 2004). Thus the DoA could add a market development element to their efforts by facilitating a direct link between producer groups and informal retailer groups. This could be linked to the training in small business management which was being conducted by the TM in collaboration with the University of Pretoria (Dodds T. 2005, personal communication). A key challenge for all FFV retailers including hawkers, in the product upgrade realm, is how to cope with fluctuating demand and wastage costs. To solve this would require better means of 24
accessing market information, say though cellular SMS market updates as well as data on supply and demand trends, all of which would facilitate better FFV demand forecasting. Armed with this, the informal traders could improve the timing of their stocking levels in line with the demand and thus reduce wastage/spoilage loses. This solution may be expensive or beyond the scope of the individual hawker but a viable possibility if a group were to seek such services. A possible source of these services is the municipal markets because they have expertise in the field and have a standing mandated to develop and assist small businesses. Another possible partner in the suggested upgrade is the National Agricultural Marketing Council (NAMC). Finally in terms of chain upgrading, informal traders could look into widening product ranges to take advantage of their convenience appeal. This could include other convenience items such as snacks, cigarettes, confectionary and even more durable convenience items like penlight batteries and toys (chain upgrades). Some hawkers were already successfully diversifying in this manner. Potential upgrades for greengrocers Greengrocers currently hold an advantage over the large supermarkets chains of having more personal service and neighbourly rapport. Entrenching and expanding this service advantage could be an important upgrade opportunity. Operationalizing this strategy could simply include more visible management and service teams in-store and an emphasis on courteous service, say at pay points. Since greengroceries were usually small outlets averaging less than 200 square metres, this could have the additional effect of reducing the shoplifting problem without intimidating potential customers with bag checks and more surveillance. Fluctuating demand and the resultant spoilage costs was highlighted as key `functional' and `process' related challenges for the greengrocers yet there was little evidence of an effort to formally forecast demand and reduce this threat. This is thus an important avenue of upgrading and would only require more detailed record keeping that would feed into generating trends for future use. Statistics of the markets could also serve a valuable indicator of consumption trends. 25
This is therefore a means by which municipal markets could assist greengrocers as part of their promotion of small businesses. Another possible `functional upgrade' for this channel would be to perform the purchasing and delivering services for smaller traders and hawkers in particular. This leverages the fact that greengrocers, who would already be going to the market for their own outlet's purchases, would get better deals for making larger purchases and could therefore form a side wholesaling business. On the Demand side, it would solve the stated hawker problem of failing to reach the markets before stock-outs. The danger of generating competition for greengrocer's outlets is minimal given the finding that 77.4% of greengrocers felt they were not in competition with hawkers and 0.7% found them as minor competition. A final upgrade avenue to consider is that of joining franchised chains whether within FFV retail sector or among the supermarkets. This option could open up access to credit, management support, accessing market information, trend analysis, better terms of trade, advertising under known national brands and an opportunity to diversify into other FMCG items (chain upgrading). A milder version of this would be to associate with or form buying alliances so as to obtain most of these benefits while maintaining the independent identity and retaining control. Potential upgrades for supermarkets Conflict was found between corporate supermarket management and store level managers because of the top down approach used by DC level managers and buyers. The problem indicated that frontline staff were undervalued and underutilised despite being a critical link to the final consumer. Therefore the upward flow of information was compromised. This is a critical loss to the chains particularly in FFV given their problems of wastage and demand fluctuation. Revising this trend through better communication, consultation and training are therefore key `functional upgrade' opportunities for the supermarkets. 26
An innovative solution to the impersonal appearance of supermarkets was witnessed during the survey. This involved placing the supervisory team station on pedestals behind the pay-points, near entrances rather than in the traditional enclosed offices or behind two-way security mirrors. This approach had the synergic effects of having a visible management team monitoring and motivating junior staff, having a senior team easily accessible to customers on their way in and out of the store and being a possible additional deterrent to shrinkage and shoplifting. Although such a change may be unpopular for reducing the managers' privacy, it is an overall gain to the business to which people would eventually adapt. Still on the `process upgrade' front, although queuing is an unfortunate part of labour cost cutting and self service, the queuing times should be carefully optimised as they caused a loss of convenience sales. On the product and chain upgrade front, numerous key informants identified processed fruits and vegetables and especially pre-cut FFV as the fastest growing fresh produce sub-sector. Given their current access to facilities, credit as well as the scale of operation the supermarkets were best positioned to take advantage of this growing market segment. The informal traders at the store fronts are unlikely to disappear in South Africa in the near future. Therefore rather than view them as a threat, supermarkets could see opportunities for coopetition. One potentially replicable model was found where a supermarket began supplying hawkers with their FFV requirements at just below retail price. This was a win-win situation because it removed the need for the hawkers to travel to the FPM while the previously struggling supermarket FFV section made a profit by moving higher volumes of FFV. This also provided an opportunity to negotiate trading in different product ranges to reduce direct competition. The model could also be combined with selling a market information provision and demand forecasting service to the hawkers. Similar to the greengrocers' case this would not cause a conflict of interest given that only a minority (26.7%) saw them as competition and even so, this strategy would constitute turning an adversary into a potential customer. 27
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Cited Key Informants Dodds T. (2005), Deputy Manager, System Information and Development. Tshwane Market (TM), Pretoria West, Tshwane Du Toit G. (2005), Chief Executive Officer, Freshmark Distribution Centre, Centurion, Tshwane Roos B. (2006). Fruit & Veg City Franchiser and Former Freshmark National Fresh Produce Buyer. Value Mart, Whiteriver Road, Nelspruit, Mpumalanga. 31
Annex 1: Comparative use of the marketing-mix across the three channels
Variable Place Price Product Promotion Target market
Informal FFV Retail · A young (6.0 years) set of retailers located at transport nodes with small (4.8 m2) often movable displays · Low with a mean mark-up of 33.0% · Advantage of low to zero overhead costs but little bargaining power with suppliers · Source from FPM & satellite markets · High volume and quality over a limited range of popular FFV · Low if any carry over stock helped keep freshness and quality up to counter lack of shelter and refrigeration · Repackaging is the main processing activity with little else done · Strong personal relations & kinship bonds with customers · Aggressive personal selling is the main promotion route but also keep neat displays and personal rapport with clients · Also run limited monthly credit in residential operations · Uses a mass marketing approach with emphasis on low to lower middle affluence groups
Greengrocers · Relatively old (23.7 years) set of businesses found at neighbourhood centres. · Have the largest average area under FFV retail (188 m2) · Low on high volume ranges with mean mark-up of 41.7% · Relatively low overhead costs with some bargaining power · Source almost exclusively from FPMs but Marabastad satellite used in stockouts · Key in this channel was carrying a wide range of high quality produce. This comes at a cost of high wastage · Most repackaged FFV in store but a few also did some washing, cleaning and pre-cutting · Relatively personal/neighbourly rapport with little queuing · Price discounts (specials) are favoured with some using print media (advertisements, flyers and posters) · An attractive display is also important · The mass market with emphasis on middle affluence areas
Supermarkets FFV retail · A balanced mix of old and new outlets (average 25.3 years) located in shopping malls and centres with a relatively large area under FFV (135 m2) · Low, mark ups are kept secret but estimated at 22.5% · High overhead costs balanced by strong negotiating power · Main source are direct from farmers but also include FPMs and off season imports · Relatively wide product range and quality range. Dependant on store location, brand and accepted balance between wastage losses and quality · Repackaging washing and cleaning performed mainly at DC but some in store · Impersonal service & queues · Marketing corporate brand of one stop shopping using a wide range of mass media · Also run store level price and trail inducing promotions · Also mass marketing but with emphasis on middle to high affluence areas
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