The relationship between retail chains, the consumer, the food value chain and producers

The vast majority of food in South Africa is sold by a handful of large retail chains. Its impact on the consumer, the food value chain and the producers was the theme of this week’s agricultural discussion programme, Nation in Conversation, which is broadcast on Soweto TV and Business Day TV. With Theo Vorster, Chief Executive of Galileo Capital hosting and leading the discussion, Nation in Conversation aims to foster a better understanding of the agricultural sector and demonstrate its importance for South Africa’s food security and continued existence.

 

Taking part in this week’s discussion were Thabi Nkosi, Senior Economist at Agri SA, Kobus Pienaar, Technical Manager Farming for the Future at Woolworths, and Prof Johann Kirsten, Head of the Department of Agricultural Economics at Pretoria University. 

 

Prof Johann Kirsten says it is a concern for many people that large retail chains are dominating the food system and having an impact on suppliers, which include farmers, manufacturers and other input suppliers. Many people would ask if this is conducive to social cohesion, if it provides us with cheaper food and the best food, and if this process and the competition between the large retailers place additional pressure on the suppliers and producers. It has to be understood that margins are a key issue to retailers, but the retail business is mainly a volume business. Sometimes the margin will be small, but then you need turnover, a good, substantive supply of products and you have to line up larger processes. This has an impact on the entry ability of smaller suppliers. It is very difficult for small companies to supply large retailers because sometimes you are required to supply all of them. Looking at the system on the whole, one has to understand the entry barriers, the impact on pricing, and the impact on the profitability of suppliers to the retail system. 

 

Consumers, says Kobus Pienaar, are driving the demands that filter through to the producer. “Woolworths is not known to be the cheapest in the country but price is only one of the many elements that our consumers take into account." There is increasing focus on the issue of transparency and traceability, he adds. The consumer wants to feel a connection with where and how the food is grown. In this era of urbanization we still long for that connection with the soil. There are examples of consumers who know the farmers who produce the apples or potatoes they buy, and they put a high value to that connection. “Food quality is a vital requirement. It is the Woolworths ethos and pride. Safety, health and the human and social factor in the whole chain are high on the agenda of our consumers and they are very cautious about the food they eat.”

 

Thabi Nkosi mentions that South Africa is two economies in one. There is space for the larger retailers that are focused on volume, but there is also room for smaller, more specialist stores. For the lower income consumer, price will remain a big concern. One still needs economies of scale and volume, which will still continue for some time. Then there is the rapid move into the middle class where people want to get closer to the producer as is the case in Europe. There will still be room for both kinds of shops until we have a more even society.

 

In the history of South Africa, spaza shops have always been the backbone of the township industries, she adds. Nowadays there is big influx of larger retail shops into the townships. Spazas must now look at ways in which they can differentiate themselves and add more value for the consumer. Spaza shops will not be able to compete with big retailers in shopping malls. Retailers have to comply with many standards such as food safety and ethical practices, which does make it much more difficult for the smaller shops. As enterprises they should ask themselves if it is still the right business for them, but as long as the consumer benefits it is a win-win for everyone. There are many specialist needs for which the big retailers and producers will find it very difficult to cater. For example, one will find the elderly lady who sells vetkoek on the corner because that is where the demand is. There are small pockets of excellence that people have identified but it needs to be escalated to a much bigger scale. There is a lot of potential in small businesses and they are part of the future, also in terms of creating job opportunities.

 

Kobus Pienaar agrees that there is still room for the smaller, more specialist retailer. “For those of us living in Cape Town, we see the weekend small-farm shops and organic markets that are absolutely flooded with people, yet the big retailers survive and they still make good business. We definitely have a dual economy and there is space for both of them.”

 

Pienaar continues that the retailer has to provide proof to the consumer of food safety and ethical sourcing, that social standards are being maintained on the producers’ farms and in the factories. “Because it is difficult to go through multiple stages in the food chain” he says, “Woolworths prefers to go directly to the producer on the farm to make the chain as short as possible. The product goes directly from the farm to our pack-stores. Woolworths has instituted a negotiation process with the producer before the start of the season to agree on volume and delivery period estimates. Price is one of the factors. It is not the biggest issue, but there is obviously a price ceiling. If the price is too high, customers will not buy. We would prefer having a kind of joint venture with the supplier, rather than trying to tell them what to do.”

 

To Thabi Nkosi the role of government is to make sure that there is sound competitiveness within the retail space so that everyone benefits in the value chain. The smaller players must also be protected to ensure their sustainability. “What we have seen is that the smaller farmers seem to be almost left out in the value chain because big retailers do not want to incur the high transaction costs of dealing with small bits of farmland. Government support would be very helpful in enabling smaller farmers to group together, take advantage of economies of scale and obtain better bargaining power.”

 

Kobus Pienaar adds that the government should reinstate the Agricultural Research Council, from where expertise and extension services can flow to the smaller farmers to make them more lucrative for the retailers. Smaller growers are not necessarily excluded, but it is difficult for them to meet the requirements of the retailers. In the new IT age, small transactions are not such a big problem but it is a matter of getting the product at the right place, time and quality. South Africa has excellent legislation in this regard. It only needs to be enforced.

 

Pienaar and Kirsten agree that in terms of inspections and audits it would be very helpful to have one standard and one audit for the producers and all the retailers that purchase from the suppliers. It will not only save cost that will not have to be added to the consumer price, but also save a lot of time. Many suppliers have to comply with auditing, environmental and labour practice standards. Auditing fees account for a big chunk of the cost of the chain. Regulation and the competition system are the key roles of government in the food value chain. Many aspects are regulated by the Consumer Protection Act and the Agricultural Product Standards Act. Enforcement of those regulations are important to bring order into the chain, but the cost of implementing them is passed on to the role players in the chain. The government is not taking responsibility for those costs, whereas many governments in other parts of the world are taking responsibility for auditing and costing.

 

The current status is that every retailer is pretty much setting its own standard. The legislation is in place, but the consumer wants more than just minimal compliance. Government can play a much bigger role in making sure that there is only one standard in South Africa. The US Department of Agricultural approach is an exemplary one, where they take charge and set the benchmark. Our government, they say, is pretty much absent in seeing to it that the standard is enforced, and doing it in such a way that there is growth and stability, and that people are happy.

 

Prof Kirsten remarks that consumers want to experience more of the emotional element of connection with the producer. The food product on the shelf has lost identity. Although the middleman still has to be there, the connection can be established through cloud technology and IT systems. That will be the trend in the future, which will require retailers to invest more in smart scanning technology. In certain new stores in Europe one can click on a screen at the shelf and it will show a picture of the farm where the product is grown, together with all the quality dimensions. The story of food production is not only about ethics and the environment. It is also a story of emotion and culture. There are many local products that can tell a very nice story to the retail customer that can add a lot of value and pride to the product, for example rooibos, Karoo lamb and waterblommetjies. Retailers could do more to educate consumers about availability and seasonality. Pricing, quality, seasonal availability and transparency will all be essential elements of the retail business.

 

The customer will say: “I want a specific farm’s beef or lamb or apricots, because I’ve eaten those apricots before and I know they are the best apricots.” 

Kobus Pienaar agrees that in future transparency and technology will be the key. Customers, whether at the large retailers or the spaza shops, will want to know if it is safe to eat this food, are the people working in the chain treated well, is the product environment friendly, is the process energy efficient, is the nutritional value of the food at the level where it should be. The retailer who is going to be the first to have full transparency is the one that will come out on top. The technology is available today to display full information on the label, such as the QR code, or quick response code, where you can use your smartphone to scan it and all the information will be there. That will be the standard in a couple of years from now.

 

Regarding the future, Pienaar says that what he sees is a small town with the local baker buying wheat from the local farmer, but there is also space for the bigger retail shop that gives the customer the choice of where and what to shop. There will always be room for the smaller shop to find a niche market and sell specialist goods to the local community, because the big retailer will not be able to provide everything for everybody.