Agrifood Sector Studies South Africa: Restructuring Food Markets South Africa - dynamics within the tomato subsector

by Andre Louw, Davison Chikazunga, Danie Jordaan, Estelle Bienabe, Department of Agricultural Economics, Extension and Rural Development, University of Pretoria, Pretoria, South Africa

Summary

The agricultural sector plays an important role in the South African economy and the annual gross domestic product for South African agriculture in 2004 was R67.68 billion. While primary agriculture only accounts for 2.6 per cent of the South African GDP it has upstream or backward linkages on the supply side and downstream or forward linkages on the manufacturing side that account for a further 9 per cent contribution to GDP bringing the contribution of the South African agricultural economy to GDP to around 12 per cent. South Africa is not only self-sufficient in virtually all major agricultural products, but is also a net food exporter. Important sectors of the South African agricultural economy include broilers, beef, maize, milk deciduous fruit, vegetables, citrus fruit, eggs, sugar cane and potatoes.

South Africa's national food market, like much in South Africa, is characterised by dualism with a very well developed, highly sophisticated food marketing system on the one hand and a well-organized informal food marketing system on the other hand. The highly sophisticated food marketing system is dominated by a small number of retail groups who distribute food through a variety of supermarket formats located in the major cities and towns of South Africa. Conversely, the informal food marketing system distributes food through general dealers, cafes, spaza shops, street vendors, hawkers and tuck shops and street corner stalls in areas like townships and former homelands where supermarket retail outlets are absent or have been until now.

The restructuring of the South African food markets is observed through consolidation, trans-nationalization and the emergence and disappearance of supply chain actors. Advanced stages of consolidation are observable in most sectors of the South African food supply chain. They are evident from relatively high levels of concentration observable in food production, processing, wholesale and retailing. Despite reasonably high and rising levels of foreign direct investment in South Africa, inward trans-nationalization into the South African food sector is limited to a few small multinationals. This is, arguably, due to the country's remote geographical position away from industrialised regions. Outward trans-nationalization of South African firms investing outside of South Africa is growing, with many food retailers embarking on regional expansion strategies, primarily into Africa. In terms of emerging and disappearing market agents, fresh produce markets' share in fresh fruit and vegetable wholesaling is declining and being replaced by category managers or category management functions performed by food retails. Retailers also continue to expand into non-traditional areas, which include townships and former homeland areas that have in the past been served by traditional independent stores. The continued expansion of retailers is spearheaded by growth through franchise format stores and forecourt stores. It has also been observed that the encroachment of supermarkets into areas traditionally occupied by the informal markets is displacing these informal markets and the traditional vegetable shops or so-called greengrocers historically found in suburban South Africa.

The determinants of this restructuring are not different from other developing countries with these drivers being mainly related to income growth, population growth and urbanization. In the South African context these include increasing disposable incomes, population growth, urbanization and changes in consumer dynamics.

The restructuring brought about by these changes includes the evolution of procurement systems. The different retail ownership formats have shown different and also similar approaches to procurement. Corporate stores that are wholly owned by the retailer group are compelled to procure solely from the retailer's regional distribution centres. The phenomenon where corporate stores only procure fresh produce through their distribution centres that in turn only procure from a few select suppliers is a well established procurement practice that has been in use for over a decade in South Africa.

Wholesalers, independent retailers trading within voluntary trading groups and franchise stores function on very much the same principles as corporate stores and their distribution centres in terms of their procurement practices and the provision of growing contracts to a few selected producers. The only difference is that the retail stores and wholesalers are independently owned and they are allowed to procure products outside the distribution centres directly from producers at their own discretion after the specific producer has been approved as a suitable supplier.

The trends in the evolution of procurement systems towards large central procuring systems receiving fresh produce from a limited number of preferred suppliers are creating barriers for smaller scale producers that do not have grower's programme contracts with retailers. The general findings are that in order for smaller scale farmers to supply supermarkets or wholesalers they need a certain size of production, high quality products, certain size and type of product and consistency in quality and supply, requirements they find difficult to meet consistently. Smaller scale farmers can only have market power if they form cooperatives, which should be established through the help of the government.

Generally the restructuring of food chains in South Africa is being driven by similar determinants as in other developing countries. The impact of this restructuring is consolidation and concentration in the food supply chain where larger stakeholders across the chain are displacing the smaller ones. Smaller scale growers, independent wholesalers, corner vegetable shops and a vibrant informal market are being displaced by groups of preferred supplier producers; large regional distribution centres are spread across the country to supply a rapidly growing network of corporate, franchise and voluntary trading group retailers with fresh produce.