New report: Supermarket Buying Power: Global Supply Chains and Smallholder Farmers

by Oli Brown with Christina Sander, March 2007. International Institute for Sustainable Development / Trade Knowledge Network

Summary

In recent years there has been both expansion and consolidation of the global supermarket sector.

Supermarkets now dominate food sales in developed countries and are rapidly expanding their global presence. At the same time, international consolidation and aggressive pricing strategies have concentrated market power in the hands of a few major retailers and strengthened their control over their suppliers.

This paper is about the impact of the supermarkets' increased market power on global supply chains and what this means for smallholder farmers in the developing world trying to sell their produce to the potentially lucrative markets of the developed world.

Supermarkets have become "global sourcing companies." Global sourcing has created new opportunities for labour-intensive and resource-intensive exports from low-cost locations. In sub-Saharan Africa, where smallholder farmers account for both 90 per cent of agricultural production and 73 per cent of Africa's rural poor, access to valuable international markets could play a crucial role in wider poverty reduction.

Developing countries have certain comparative advantages in the production of fresh fruit and vegetables (FFV): low land and labour costs; long growing seasons; and, in the case of sub-Saharan Africa, relative proximity to European markets. But global sourcing also results in a dramatic growth in the number of potential producers-which in turn heightens competition among the world's farms.

World trade in FFV has grown fast-rising more than 30 per cent between 1990 and 2001, when it reached a value of US$71.1 billion. There is still considerable scope for growth in the export horticulture sector-but inclusion in the chain is contingent upon meeting the requirements of the supermarkets.

These requirements have tended to favour the concentration of the export trade into a few large firms.

To stay competitive, farmers have to supply larger volumes per client and transaction. Smallholder farmers, with few economies of scale, poor knowledge of the markets and limited investment in inputs or infrastructure, are often squeezed out. Compounding problems of scale are supermarkets' own stringent private standards and aggressive business practices.

However, given the right support and incentives, smallholders in many countries can produce high quality fruit and vegetables with no reduction in social, environmental and food safety standards. This is particularly so in the FFV sector which is relatively free from economies of scale, which favour large producers of crops like wheat or soy beans.

The right mix of support and policy measures that could help smallholders access potentially valuable supermarket supply chains varies from country to country and from sector to sector. The paper concludes by briefly assessing four of these measures: cooperatives, outgrower schemes, public-private initiatives and regional initiatives.

Full report available at http://www.tradeknowledgenetwork.net/pdf/tkn_supermarket.pdf