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Implications of supermarket

procurement practices for farmers


and traditional marketing systems
Changes in
food retailing in Asia
8
AGRICULTURAL MANAGEMENT,
MARKETING AND FINANCE
OCCASIONAL PAPER

AGRICULTURAL MANAGEMENT,
MARKETING AND FINANCE
OCCASIONAL PAPER
Changes in
food retailing in Asia
FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Rome, 2005
8
by
Kevin Chen
Andrew W. Shepherd
and
Carlos da Silva
Agricultural Management, Marketing and Finance Service
FAO Agricultural Support Systems Division
Implications of supermarket
procurement practices for farmers
and traditional marketing systems
The mention or omission of specific companies, their products or brand names does not
imply any endorsement or judgement by the Food and Agriculture Organization of the
United Nations.
The designations employed and the presentation of material in this information
product do not imply the expression of any opinion whatsoever on the part
of the Food and Agriculture Organization of the United Nations concerning the
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or concerning the delimitation of its frontiers or boundaries.
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or by e-mail to:
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FAO 2005
iii


Contents





PRLIACL v

ACKNOWLLDGLMLN1S AND ACRONYMS vi

CHAP1LR J IN1RODUC1ION J

CHAP1LR 2 CONCLP1UAL AND ANALY1ICAL IRAMLWORK 3

CHAP1LR 3 1HL CHANGING IOOD RL1AIL SLC1OR IN ASIA S

CHAP1LR 4 PROCURLMLN1 AND DIS1RIBU1ION PRAC1ICLS OI JJ
SUPLRMARKL1S

CHAP1LR S PROBLLMS IACLD BY IARMLRS AND 1RADLRS
IN SUPPLYING SUPLRMARKL1S 23

CHAP1LR 6 CONCLUSIONS AND RLCOMMLNDA1IONS 27

RLILRLNCLS, SOURCLS AND IUR1HLR RLADING 33
v
Preface



1his paper inestigates the issue o modern agri-ood systems organization and its eects
on ruit and egetable armers and traditional marketing systems in Asia. A combination o
methodological and analytical approaches was ollowed. Initial work was carried out as a
literature reiew. Complementing the reiew, ield work was undertaken by the senior
author in our Asian countries, namely China, Japan, Malaysia, and 1hailand. 1hey
represent dierent stages o economic deelopment in Asia and much o the discussion on
the supply chains in these countries is likely to be releant to others. lresh ruits and
egetables were chosen because o their importance or small armers and because they are
typically produced under less coordinated systems.

1he ield research inoled interiews with both public and priate sector personnel
and institutions, and drew on releant scientiic and industrial expertise. Interiewees were
drawn rom all leels o the domestic and international agri-ood chains, including
producers, processors, traders, wholesalers, and retailers. 1he study was conducted in
cooperation with the key goernment agencies that deal with the releant problems in
respectie countries.

A third component o the inestigation was the organization and synthesis o the
presentations o a workshop on 1he Growth o Supermarkets as Retailers o lresh
Produce`, held in Kuala Lumpur in October 2004. By bringing together supermarket
representaties, wholesalers, goernment oicials, armer representaties and those who
work with armers, it was hoped to contribute to an increased understanding o the issues
that needed to be addressed. In this eent, 25 presentations coering experiences in eleen
Asian countries were made. 1he workshop is reerred to in the text as the
lAO,AlMA,lAMA workshop`.

1his paper attempts to proide a better understanding o the causes o and challenges
associated with the deelopment o agri-ood supply chains in Asia. It aims to proide
policy recommendations or policymakers, public sector and ciil society organizations to
help them deal with the new challenges, in particular to help small armers adjust to the
procurement arrangements o supermarkets and traditional marketing systems to adjust to
the growth o supermarkets.

Changes in food retailing in Asia
vi
Acknowledgements



1he early sections o this paper draw in part on the work o 1om Reardon o Michigan
State Uniersity and his collaborators, as well as the work being carried out under the
Regoerning Markets initiatie ,www.regoerningmarkets.org,. Documents reerred to are
cited at the end o this paper. 1he assistance o Doyle Baker, Alice Celletti, La Galez
Nogales, Ralph loutman, Madelon Meijer, Alexandra Rottger and Ldward Seidler in the
preparation o this paper is grateully acknowledged.




Acronyms



AFMA ASSOCIATION OF FOOD AND AGRICULTURAL MARKETING AGENCIES
IN ASIA AND THE PACIFIC

EUREPGAP EURO-RETAILER PRODUCE WORKING GROUP GOOD AGRICULTURAL
PRACTICES

FAMA FEDERAL AGRICULTURAL MARKETING AUTHORITY OF MALAYSIA

MRL MAXIMUM RESIDUE LEVEL

1
1 Introduction

During the 1980s and 90s, there were dramatic changes in agri-ood systems in the
deeloped economies around the world. 1he trends included greater concentration in
agricultural input and ood distribution, the increasing role o inormation and logistics
technologies and the growing importance o ood saety, quality, and other technical
requirements. 1hese systems hae become highly organized and linked rom producer
through to consumer, with an increasingly dominant role being played by highly
concentrated agro-industrial irms and retailers. Successul participation in both domestic
and global markets has increasingly required eicient organization o domestic agri-ood
systems based on supply chain management principles.

\ith rapid economic growth, increasing urbanization, and accelerated integration into
the world market, there has been a surge in the number o supermarkets and hypermarkets
in many deeloping countries o Latin America and Asia. 1he rapid expansion o modern
sel-serice stores has started to change the organizations and institutions o agri-ood
systems in these countries ,Cook , 2001, Reardon and Berdegu, 2001,. 1he quest or a
more eicient supply chain organization has been suggested by some to be the driing
orce or uture growth o agri-ood industries in deeloping countries.

\et there is a growing concern that modern organizational arrangements in agri-ood
systems might promote the emergence o power imbalances and unaourable terms o
trade in the transactions between smaller-scale chain actors and the larger players, such as
super,hypermarkets. Small-scale armers and processors are belieed to be particularly
ulnerable in that regard. Indeed, a growing body o literature has been dedicated in the
recent past to the implications o the rapid rise o the supermarket` and its eects in ood
chain organization and perormance, including the repercussions or small-scale armers.
Research and outreach initiaties dedicated to this theme hae also been deeloped in
recent years
1
. Although there is still an ongoing debate on the real threat o the rise o
supermarkets to small-scale armers in the deeloping world, especially or the producers
o resh ruits and egetables ,1schirley ., 2004,, more and more attention is being paid
to the growth o supermarkets in countries outside o North America and Lurope.
Numerous studies hae been carried out, initially in Latin America and, more recently, in
central and eastern Lurope, southern Arica and Asia. loweer, these studies, while
identiying the growth o supermarkets and the changes in supply chains that hae been
caused by this growth, hae made relatiely little progress in identiying steps that need to
be taken to help armers adapt to the new realities o supplying resh ruits and egetables
to large-scale retailers.

1his raises the larger question as to whether or not to encourage deelopment o agri-
ood supply chains as a iable strategy to promote economic growth in deeloping
countries. In Asia, where the trend towards a more market-oriented agriculture, een at
smallholder leel in remote areas, has been strong, the question o whether or not agri-ood
supply chains are emerging becomes particularly releant. Do supply chains in Asia

1
These include, inter alia, the initiatives Regoverning Narkets" (www.regoverningmarkets.org), Partnerships for Food !ndustry
Development" (www.pfid.msu.edu), the Linking Farmers with Narkets programme of the Australian Centre for !nternational Agricultural
Research (AC!AR) - (www.linkingfarmerswithmnarkets.net) and the Global Post-Harvest !nitiative launched by FAO and partners.
Changes in food retailing in Asia

2
measure up against those in the rest o the world \hat are the key driers o the
ormation o the supply chain in Asia \hat are the challenges and opportunities in
deeloping agri-ood supply chains \hat is the role o the public sector in the
deelopment o agri-ood supply chains in these countries \hile there has been increased
interest in supply chain issues o ood and agricultural products in deeloping countries,
little empirical eidence is aailable. 1his paper attempts to proide a better understanding
o the causes o and challenges associated with the deelopment o agri-ood supply chains
in selected Asian countries and to arrie at policy recommendations or public sector and
ciil society organizations to deal with these new challenges. Its three speciic objecties are:

,i, 1o examine the changes that are taking place in the unctioning and organization o
ood distribution systems in selected Asian countries, with a particular ocus on
procurement practices or resh ruits and egetables.

,ii, 1o assess the emerging and likely impacts o the changing procurement practices on
arious chain participants, especially on small-scale producers, processors, wholesalers
and retailers.

,iii, 1o identiy what roles the public sector and ciil society organizations may play in the
deelopment o more eicient agri-ood supply chains in Asian countries.

3
2 Conceptual and analytical
framework

1he terms supply chain`, alue chain`, commodity chain`, and agri-ood system` are
used liberally throughout the literature, but the meaning is oten shaded dierently
depending on the ocus and context. Some authors use these terms as synonyms. Others
use each o them to describe dierent processes. It is not uncommon that these terms are
used or political and promotional reasons as well. It is air to say that the terms are now
oerworked and routinely applied to a wide range o actiities that are dissimilar. As a
result, most existing studies do not use a consistent unit or a detailed empirical
examination o ood and agricultural supply chains. 1his also means that there is the
possibility that policy-makers are moing orward in the supply chain arena with little or no
rigorous exposure to empirical eidence and with insuicient understanding o issues to
make inormed decisions about policies to respond to changes in agri-ood systems. 1he
implication is that policymakers, extension workers, and researchers alike must be careul in
applying the labels supply chain`, alue chain`, or commodity chain`. 1rue supply
chain actiities require a dierent set o resources and managerial skills when compared
with strategies that simply redeploy existing assets.

lor the purpose o this work, the terms agri-ood supply chain and agri-ood alue
chain are used interchangeably to reer to the entire ertical chain o actiities: rom
production on the arm through processing, distribution, and retailing to the consumer. In
other words, the supply chain, or alue chain, coers the entire spectrum, rom arm gate
to plate, regardless how it is organized or how it unctions. 1he supply chain typically deals
with a product-speciic sub-sector o the agri-ood system ,Reardon and Berdegu, 2002,.
Supply chain management reers to the management o the entire set o production,
distribution, and marketing processes that delier competitie products to consumers. In
this context, the term supply chain gains an attached meaning o managing`, in order to
distance itsel rom more usual sub-sector assessments ,Kaplinsky and Morris, 2000,.

Supply chain management ,SCM, usually reers to a strategic collaboration o
organizations or the purpose o meeting speciic market objecties oer the long term and
or the mutual beneit o all links o the chain. \hen transactions in a supply chain take
place within a traditional spot market, business-to-business relationships are decentralized.
A producer supplies seeral wholesalers, wholesalers purchase rom arious producers, and,
likewise, retailers hae arious sources o supply or a gien product. Business entities
oten change their sources o supply and lose some customers and win new ones oer time.
Conersely, a supply chain may be organized in a ormat more closely related to that o
ertical integration. In this hypothesis, in the most streamlined chain one producer would
supply produce to one wholesaler, who would supply to one retailer, though the wholesaler
may be bypassed. Unlike typical spot markets, in managed supply chains the number o
actors - armers, processors, retailers, etc. - inoled in transactions tends to be reduced
and their business-to-business relationships are relatiely permanent and more centralized.
1ransactions are goerned through organizational arrangements that inole contracts,
strategic alliances or other orms o partnerships among chain actors. One chain participant,
oten a processor or a retailer, proides the leadership in organizing and coordinating the
Changes in food retailing in Asia

4
supply chain. lence, the concept o supply chain management, as adopted in this paper,
reers to a pattern o goernance where characteristically one chain member exercises
control or at least leads other actors in the coordination processes that are needed to
harmonize the lows o products, inancial resources and inormation among all
participants.

1he phenomenon o SCM, while relatiely new to the agri-ood industry, has been
well established in other industries or some time. 1he automotie industry was perhaps
one o the irst sectors to deelop sophisticated supply chain management skills. 1he high-
olume manuacturers deeloped supplier relations with such designations as OLM
,Original Lquipment Manuacturers, and PSS ,Preerred Suppliers Status,. 1he retail sector
has been reolutionized by irms such as \al-Mart. 1he use o sophisticated inentory
management systems and on-line ordering and stocking procedures with suppliers has
propelled the company to become one o the most proitable retail organizations in the
world. Supply chain management can use aried organizational ormats to coordinate
transactions among chain actors, including contracting, strategic alliances, quasi-ertical
integration, and complete ertical integration.

Modern supply chain management in the ruit and egetable distribution sector
necessarily calls or improed eiciency in the ways transactions between producers and
their buyers are organized. Supermarkets, increasingly stronger players in ruit and
egetable retailing, are particularly concerned with the need to secure a steady low o
quality products that both meet the attributes required by their more demanding
consumers and can be priced at a competitie leel. 1o oer, at a proit, the wide and
seasonably ariable assortment o products that comprise the ruits and egetables product
category, supermarket managers must ensure that their transactions with suppliers are
closely coordinated. 1he characteristics to be coordinated in these transactions coer
aspects such as olume, requency, price determination, payment conditions, logistics,
deliery schedules, product standards, packaging requirements and policies to deal with
supplies that do not meet pre-deined speciications. In principle, the allowable lexibility
or the indiidual characteristic or each speciic product or product group will inluence
the type o procurement practice a supermarket manager wishes to ollow in order to
minimize transaction costs. 1he procurement practice, or collection o practices,
establishes, in turn, a general ramework or the deelopment o commercial relationships
between supermarkets and their suppliers, including armers.

lrom an operational standpoint, procurement practices constitute the pillar o a
supply chain management strategy. 1heoretically, they are an element o market conduct
and as such they aect and are also aected by market structure. As supermarkets gain
dominance in resh produce distribution, and as their present consolidation trend continues
,DlID, 2004,, it is plausible to hypothesize that unaourable terms o trade or armers
supplying supermarkets might arise within the context o agri-ood systems modernization.
lence, to understand the ways in which modern supply chain organization aect armers,
it becomes releant to identiy and categorize the procurement practices ollowed by
supermarkets. 1his is the approach ollowed by this paper.

5
3 The changing food retail sector in Asia

Introduction

In much o \estern Lurope and in North America, supermarkets and hypermarkets now
account or well oer two-thirds o all ood retailing. 1his dominance is also seen in other
areas o the deeloping world, such as in Latin America and South Arica, where
supermarkets control 50 to 60 percent o the ood retail sector ,DlID, 2004,. 1here has
certainly been a rapid growth in the role o supermarkets in almost all parts o the world
although measuring the exact market shares is complicated by a lack o reliable data and
diiculties in deining exactly what is meant by supermarket`. It is particularly diicult to
obtain inormation on the market share o resh produce being sold by supermarkets.
\hile the quantities sold by supermarkets can be accurately calculated, it is almost
impossible in most countries to know the quantities o ruits and egetables being sold
through traditional marketing channels.

Supermarket growth around the world has, in part, resulted rom the considerable
competition between supermarket chains, particularly in the United States and Lurope. In
the \est this competition has led to increased supermarket share by the squeezing out o
smaller, less eicient retailers. Chains in deeloped countries hae responded to the impact
o ierce domestic competition on margins by seeking opportunities oerseas, a moe that
has been helped by the liberalization in many countries o rules relating to loreign Direct
Inestment.

Reliable inormation on deelopments in Asia is not always easy to obtain. In some
countries this diiculty stems rom the preiously noted problem o deining what is meant
by a supermarket. In other countries there are no agencies to collect accurate data.
Neertheless, it is clear that there has been a signiicant growth both in the number o
supermarkets and conenience stores and in the role o multinational chains such as
Carreour and 1esco. Deelopments hae not been drien only by international companies,
the past decade has also witnessed the emergence o national chains o some signiicance.

Care must be taken in drawing conclusions about the impact o these trends on the
resh produce sector. lirstly, retail sales do not equate to total consumption. Institutions
bypass the retail sector, as do caterers, although in some Asian countries supermarket-style
cash-and-carry wholesale chains, such as Metro and Makro, which handle resh produce
and supply the catering sector, are beginning to deelop.
2
Secondly, the growth in sales by
supermarkets o resh ruits and egetables tends to lag behind the growth in sales o
processed ood products. 1he logistics o resh produce supply are much more
complicated than they are or dry goods and thus take supermarket chains much longer to
organize. 1hirdly, while there has certainly been growth in resh produce marketing by
Asian supermarkets, imported produce accounts or a signiicant proportion o their ruit
and egetable sales. lurthermore, supermarket supply chains or domestically grown
produce may be relatiely easy to deelop or produce that is less perishable, such as
watermelons, but much more diicult or produce that has a limited shel lie and,or
requires cold chains. Indeed, many smaller supermarkets stock only those products that

2
For example, Netro has four stores in viet Nam and 26 in China. Nakro has two in Beijing, 10 in !ndonesia, 17 in Thailand, 7 in the
Philippines and 9 in Nalaysia.
Changes in food retailing in Asia

6
hae a long shel lie. Lacking detailed inormation on the importance o supermarkets or
dierent ruit and egetable categories, it is not yet possible to ully assess the implications
o supermarket growth or domestic producers. 1he ollowing discussion should be
considered with this in mind.


Growth of hypermarkets and convenience stores

Various modern retail outlets, including conentional supermarkets, hypermarkets,
discount stores, conenience stores and department stores, hae been deeloped. Dierent
deinitions are used or the size o arious retail outlets and it is possible that a
hypermarket in one country may be considered as a conentional supermarket in another.
lor example, in Malaysia, which has recently adopted the standards o the OLCD
,Organisation or Lconomic Co-operation and Deelopment,, a conenience store is
considered smaller than 500 m
2
, a conentional supermarket is between 500 and 2 000 m
2
,
a superstore is between 2 000 and 5 000 m
2
, and a hypermarket is aboe 5 000 m
2
. In China,
a size aboe 10 000 m
2
is considered to be a hypermarket.

1hough conentional supermarkets are still ery important in most countries, there
has been a trend toward increased penetration o large hypermarkets and small
conenience stores. In China, 40 percent o urban shoppers already claim to spend more in
hypermarkets than elsewhere. Japan leads the way in the deelopment o conenience
stores. Local conenience stores still hae plenty o room or deelopment and oer a
signiicant threat to the traditional grocery store. lor example, 1ops in 1hailand moed to
counter the impact o giants such as Carreour ,with 21 supermarkets in 1hailand, and
1esco Lotus ,a joint enture o 1esco UK, and the CP Group o 1hailand with around 50
supermarkets and hypermarkets, by inding new niches, such as smaller outlets in inner-city
areas that combine the eatures o conenience stores and supermarkets. 1ops now has 48
stores. 1esco Lotus opened some o its 31 Lxpress stores in partnership with LSSO.


Higher growth for packaged produce

\hen discussing the implications o modern trade or ood, it is, as noted, important to
make a distinction between packaged groceries and resh produce. lresh produce sales in
supermarkets are much lower than packaged produce sales. In the case o packaged grocery
sales, the share o sales by modern sel-serice stores in Asia grew by around 3 percent a
year or the period rom 1999 to 2002 ,ACNielsen, 2003,. It grew by 0.8 percent and 2.2
percent during 2002 in 1hailand and Malaysia, respectiely, while supermarkets in China
led the way, gaining 5 percent. Lxcluding Japan, a typical Asian urban consumer purchases
about 40 percent o his or her packaged groceries rom modern sel-serice stores
,ACNielsen, 2003,. It should be noted that aailable statistics relate mainly to urban
markets and the percentages quoted are higher than those or the countries as a whole. 1he
moe to purchase packaged groceries at modern sel-serice stores is taking place in Asian
urban areas, but the pace at which this is happening aries greatly because o dierent
stages o economic deelopment. lor example, in Viet Nam, traditional stores account or
more than 80 percent o sales een in the main cities, while in long Kong and Singapore,
the share o trade or these outlets is less than 20 percent.

The changing food retail sector in Asia

7
Consumers still prefer traditional outlets for fresh food

Recognizing the importance o selling resh ood in order to attract customers, modern
sel-serice stores hae made signiicant progress in improing their supply and display o
resh produce. 1he results hae been mixed. A large percentage o consumers in Asia still
preers traditional markets or ruits and egetables. ACNielsen ,2003, reports that in most
Asian countries between 80 and 90 percent o urban shoppers use wet markets regularly.
3

Only in Japan and the Republic o Korea do less than 50 percent o urban shoppers use
them on a regular basis. Malaysia is probably the country where the trend is most adanced.
Aailable data suggest that supermarkets and hypermarkets accounted or 60 percent o
ruit sales and 35 percent o egetable sales in 2002, although this may be an exaggeration.
Not ar behind is 1hailand where 40 percent o ruits and 30 percent o egetables were
sold through supermarkets and hypermarkets in the Bangkok area, but a lower percentage
in the context o the country as a whole. In the Philippines 15 percent o egetables are
said to be sold through supermarkets in Metro Manila but a smaller percentage in the
country as a whole ,Digal and Concepcion, 2004,. In the Republic o Korea there has been
a rapid growth in hypermarkets since 1993 but, een so, such stores still account or only
11 percent o resh produce sales. In China, less than 10 percent o ruits and egetables
were sold through supermarkets in 2002. loweer, the rate o supermarket growth
continues to be rapid.

1hus most households continue to buy ruits and egetables rom traditional retailers
een though they may use supermarkets or other products. 1he perception, and possibly
the reality, is that wet market supplies are resher and oten cheaper. 1his is recognized by
one chain in 1hailand that ocuses on resh produce and aims to create stores that
resemble shopping at the wet market near home` ,\iboonponse and Sriboonchitta, 2004,.
Unless a consumer happens to lie close to a supermarket, wet markets are also more
conenient or consumers accustomed to walking to make daily purchases o ruits and
egetables. Supermarkets oten lack a suicient range o horticultural produce to encourage
consumers to switch rom wet markets, particularly outside the major cities ,Digal and
Concepcion, 2004,. Neertheless, they continue to make inroads because o their
competitie prices,
4
more reliable i not better quality and the act that they oer one-
stop` shopping. Supermarkets hae also to some extent beneited rom goernment
regulations attempting to control hygiene and congestion in traditional markets, or
example, in China and Viet Nam.


Supermarkets have started to spread to towns

In general there has been a trend or supermarkets, which until recently occupied only a
small niche in capital cities and sered only the rich and upper middle class, to spread well
beyond cities in order to penetrate into the mass ood markets. 1hey hae spread rom big
cities to intermediate towns and then to small towns. ACNielsen`s recent studies show the
staggering deelopment o modern trade across China`s key cities in 2002. 1here has been
increased penetration o chain store operations and supermarkets in non-metropolitan
areas. In 1hailand, or example, supermarkets were until recently centred in Bangkok but

3
The term wet" market is widely used to refer to purpose-built or street retail markets for fresh produce.
+
Prices may not always be lower. For example prices of fruits and vegetables at Thailand's supermarkets were found to be about 10
percent higher than at wet markets, although this may be due to higher quality. N. Poapongsakorn, presentation at FAOfAFNAfFANA
workshop.
Changes in food retailing in Asia

8
the trend has been to moe to other proinces. \ith more than 100 hypermarkets in
Bangkok, there is little room let or urther expansion. 1he chains are looking up-country
or outlet expansion because proincial outlet sales hae been growing our times aster
than sales in Bangkok. At present, howeer, in the poor states or proinces, and in most
rural areas o 1hailand, Malaysia and China, supermarkets are still rare.

Gien that supermarket growth is drien by urbanization and per caput income leels,
countries with low rates o urbanization and,or low income leels are likely to witness only
slow growth. In Bangladesh, or example, the ew supermarkets in Dhaka and Chittagong
cater primarily to expatriates and the urban elite, this is unlikely to change rapidly gien the
lack o purchasing power and the unaailability o suitable transport or the bulk o the
population. 1ime remains or more traditional marketing chains to adapt and or policy-
makers to ormulate policies to assist armers in working with the supermarket sector. In
these countries, the proision o basic marketing support serices and inrastructure to
improe marketing must be addressed.


Increased consolidation in the retail sector

Consolidation has taken place mainly through oreign acquisition o local chains and by
larger domestic chains absorbing smaller chains and independents. Smaller supermarkets
hae been orced to reposition themseles to ocus on niche markets. Japan-based Seiyu
Supermarkets, or example, sold its business to 1ops in 1hailand, while 1ops sold its
business in Malaysia to Giant. 1he two largest domestic supermarket chains in China
,lualian and Lianlua, merged in 2002 to become the largest retailer in the country with
around 2 00 supermarkets and conenience stores. loweer, while urther consolidation
is ineitable, the retail trade still remains ragmented in most Asian countries. Share o total
sales or the top ie chains is 2 percent, 25 percent and 15 percent or China, 1hailand and
Malaysia respectiely.


Key drivers of the changes

Many actors contribute to the changing ood distribution systems in Asia, both on the
demand and supply sides. 1hese include:

Income grouth uith increusing urbunizution. Lxcept in Japan, real per caput income
growth occurred in many Asian countries during the 1990s, along with the rapid rise o the
middle class. 1his is the main actor behind the growing demand or processed oods. 1he
rapid increase in the number o people owning rerigerators induced a shit rom daily
shopping in traditional retail outlets to weekly shopping in modern sel-serice stores. 1he
increasing number o motor ehicle owners prompted larger olume grocery shopping at
more distant locations.

Chunging consumer prejerences. Consumers are changing. 1he entry o women into the
workorce outside o the home has increased the opportunity cost o women`s time and
their incentie to seek one-stop, ast, conenient, and alue-or-money grocery shopping.
Because o the increased problems with ood saety, consumers hae placed greater
importance on this issue. Quality and saety standards are perceied as being better in
The changing food retail sector in Asia

9
modern stores. 1he importance o ood saety and quality standards and o their
incorporation into marketing strategies is growing in both international and domestic
markets. 1here are also rising concerns about ood wholesomeness. Supermarkets tend to
hae superior product shel lie through the aailability o cold storage and rerigeration.

Chunging consumer euting hubits. \ith more women working and amilies traelling
greater distances between home and work, there is a deinite increase in the demand or
processed oods and easy-to-prepare meals that are ound in modern supermarkets.

IncreuseJ injrustructure Jeuelopment. 1he deelopment o supermarket chains in Asia
has been partially spurred by inrastructure deelopment, such as highways, retail
technology and logistics. Logistics technology and inentory management or retail
procurement ,eicient consumer response, a zero inentory concept, category management,
use o Internet and computers or inentory control and supplier-retailer coordination,
were reolutionized in the 1990s. 1his was led by global chains and is diusing into
deeloping regions o Asia through knowledge transer and imitation and innoation by
domestic supermarket chains. 1he deelopment enabled chain stores to build their own
distribution centres and to accommodate a high olume o direct shipments rom
producers under central inentory control. Importantly, stores should be able to orecast
daily sales with a considerable degree o accuracy, thus reducing wastage leels.

Iou murgins unJ high competition. Multinational chains arried in Asia with many
years o experience and deelopment in the ery competitie enironments o their
respectie countries. 1heir extensie experience included modern technologies and know-
how regarding supply chain management, procurement arrangements, stock optimization,
quality standards control, cold storage maintenance, product handling, shel-lie
preseration, and consumer serices. Consumers enthusiastically receied the
unprecedented serices and quality proided by these new chains. 1he competition orced
local irms to enhance their serices and eiciency, generating a chain reaction o improed
serices and modernization throughout the grocery sector. Competition among retailers is
ierce. Asian agri-ood distribution companies are aiming to lit competitieness, and the
phrase drie costs out o the system` has been used widely in the retail industry.
Supermarket chains are constantly seeking substantial saings through eiciency gains,
economies o scale, and coordinated cost reductions. lurthermore, with the number o
modern trade stores growing aster than total sales, as is the case in China, the share o
trade or an indiidual retailer is actually in decline. At the same time, consumer loyalty to
indiidual stores is low. Shoppers in China continue to switch between outlets, including
the wet markets. As a result, all supermarkets appear to be extremely price conscious.

Demogruphic, culturul unJ sociul chunges. 1he percentage o young people in the
population o Asia is increasing. A westernization o liestyles is also increasing, particularly
among younger people. Changes in amily structure in Asia are being witnessed, with a
growing number o nuclear amilies and one-person households, as opposed to extended
amilies. linally, there has been an upward trend in the use o credit cards, which are rarely
accepted by corner shops or traditional wet markets in deeloping countries. All o these
actors hae contributed to the attractieness o supermarkets to consumers.

IncreuseJ truuel. More trael has exposed people to modern retailing techniques in the
United States and parts o Lurope, to a wider range o products and, particularly or resh
Changes in food retailing in Asia

10
ruits and egetables, to the possibility o being able to consume many out-o-season
products.

11
4 Procurement and distribution
practices of supermarkets



1he retail reolution obsered in Asia has had a signiicant impact on the region`s ood
distribution system. Supermarket expansion has brought a new approach to the ood retail
business and created a number o barriers as well as opportunities or arious participants
in the agri-ood system.

International and national supermarket chains in Asia are planning to or are already
ollowing some o the practices used in the \est and Japan, including:

centralized procurement systems,
specialized,dedicated wholesalers, sometimes acting as sole suppliers,
preerred supplier` systems,
concessionaires who lease ruit and egetable sales space in the stores,
priate standards or resh produce, which are usually more demanding than
national standards and may include a requirement or traceability.

In many countries around the world there has been a marked tendency to shit rom
procurement by indiidual supermarkets, which may inole purchasing rom wholesale
markets, to a centralized system inoling a central buying oice or resh ruits and
egetables, with seeral distribution centres in a country. 1his is done in order to reduce
coordination costs, generate economies o scale by buying larger olumes and working with
ewer wholesalers and suppliers per unit merchandized, and to hae tighter control oer
product quality and reshness. 1o date, relatiely ew chains in Asia hae adopted
centralized buying or ruits and egetables, in part because they presently operate an
insuicient number o stores to make a distribution centre iable. Companies consider that
a network o at least 20 hypermarkets is necessary to justiy a distribution centre. It is also
important to realize that the distance oer which resh produce can be transported is much
less than it is or packaged oods, and thereore it will take a little longer or distribution
centres to play a signiicant role in the marketing o resh produce in Asia. \here
centralized buying has been adopted, the acilities may just be simple warehouses, ar rom
state o the art. lor example, both loodworld, with 50 stores in the south o India and
Saigon Co-op with 13 stores in Viet Nam, mainly around lo Chi Minh City, hae such
centres, but neither presently uses cold chains.

Many smaller chains in Asia continue to use indiidual store purchasing systems. Most
other chains continue to purchase through traditional wholesalers, such that een in the
relatiely sophisticated market o 1hailand the leading wholesale market, 1alad 1hai, near
Bangkok reports no loss o business. Others, howeer, are gradually shiting rom those
traditional wholesalers to specialized,dedicated wholesalers` that are specialized in a ew
products and dedicated to supplying one supermarket chain. In some cases in other parts
o the world it has been noted that the retail chain eentually acquires or enters into a joint
enture with the wholesale irm. 1he specialist wholesalers are usually more responsie to
the quality, saety, and consistency requirements o supermarkets than the traditional
wholesalers who aggregate produce rom many producers and may not be able to supply
Changes in food retailing in Asia

12
the quantities required. 1he experience outside Asia has been that such new wholesalers
gradually moe rom buying mainly at wholesale markets or rom a list o customary
suppliers to contracting production that meets the speciic grades and standards o the
retail chain. In many countries the leading chains are promoting preerred supplier`
systems in order to select producers or wholesalers capable o meeting the quality and
saety standards, which, on the basis o experiences in other regions, are likely to become
stricter as consumers become more aluent. Such linkages permit more rapid moement o
produce rom arm to store, enabling supermarkets, in theory, to sell much resher
produce. 1o achiee this, supermarkets oten require that their suppliers adopt practices
and make inestments that simpliy moement o produce along the supply chain.
Insistence on these good commercial practices` can eentually be expected to become
widespread in Asia.

\hy hae such deelopments been seen as necessary Put simply, the traditional ways
o doing business hae been ound to be unsuitable, both in terms o the management
structure o supermarkets and in terms o the serice supermarkets wish to proide to
consumers. In supermarket jargon, ruits and egetables are considered by many stores to
be a destination category`, i.e. a category o products that attracts people to their stores.
Destination categories are thought to be important because, as noted preiously, consumer
loyalty to an indiidual chain is considered to be weak, at least in China. It is clearly easier
to create an indiidual identity or product groups such as ruits and egetables, ish or
meat than it is or household goods. loweer, in order to do this the stores need to be
assured o a reliable supply o consistent quality.

In many countries supermarket managers hae little indiidual reedom to buy
produce directly rom suppliers. Not only do chains seek to oer a consistent product
range oer all their stores, but also indiidual store purchasing is time consuming and
inoles complex paperwork. It is ar better or a store to receie dependable delieries
rom a ew wholesalers or rom a centralized distribution centre than to hae to worry
about buying rom armers or wholesale markets on a daily basis. Boselie and Buurma note
that 250 suppliers deliered perishable products directly at the backdoor o 1ops
supermarkets at least three times a week in 1hailand. Incidents o out-o-stock were
common and shrinkage in the store was high. 1he lead time between the arms and the
supermarket sheles was up to 60 hours and due to the lack o pre-cooling and cooled
transportation the post-harest losses were high. It was impossible to trace products back
to the arm, there was no insight into arming practices and post-harest practices. 1here
were no clear uniorm product speciications that could be communicated throughout the
supply chain`

,Boselie and Buurma, 2003,. As a consequence o such problems 1ops
centralized its procurement in one distribution centre and then also moed to a system o
preerred suppliers` in response to the high percentage o produce that was rejected on
arrial at the centre.

Most other chains in Asia, or the time being at least, preer to procure through a
limited number o wholesalers, instead o establishing distribution centres. lor example,
each o the hypermarkets in Metro Manila has just one accredited supplier or both
domestic and imported ruits and egetables ,Digal and Concepcion, 2004,. One or two
chains in Asia are not prepared to buy rom suppliers who are unable to supply all stores in
the chain, which clearly indicates the size o supplying companies that will be able to
surie in such an enironment.
Procurement and distribution practices of supermarkets

13

Supermarkets in Asia use a wide ariety o resh ruit and egetable procurement
practices. Indeed, there are presently almost as many channels or produce to reach
supermarket sheles as there are chains. It can be predicted that, in time, there will be some
consolidation o these practices. At present, the ollowing broad types o channels can be
seen:

a, purchases rom armers at indiidual supermarkets,
b, purchases rom armers at distribution centres,
c, purchases rom wholesalers, who work either directly with armers or through
wholesale markets,
d, purchases through independent procurement companies ,dedicated suppliers,
who oten work with those armers approed by the supermarket chains
,preerred suppliers,,
e, purchases through goernment-sponsored distribution centres,
, purchases through inormal armers` groups, armers` associations or
cooperaties,
g, purchases through indiidual large-scale armers, who oten subcontract to
small-scale armers,
h, leasing space in supermarkets to traders, armers and cooperaties on a
commission basis,
i, multiple channels,
j, integrated chains.

Lxamples o these channels are set out below:

(a) Direct purchases from farmers at individual supermarkets

loodland in 1hailand has eight stores, including seen in Bangkok. It does not hae a
distribution centre or a cold chain or resh produce. Lach store does its own sorting and
packaging, relying on multiple sources, including 20 small-scale armers, two priate
companies, and two wholesale markets.

Quality control standards include size, damage leel, and reshness. loodland has its
own laboratory to test or pesticide residues. Visual inspection is used to determine
whether or not to accept the deliery. 1he company pays within 15 days. Problems in
purchasing directly rom armers include: deliery trucks not rerigerated, poor or no
packaging o produce, and inadequate olumes.

(b) Direct purchases from farmers at distribution centres

1he loodworld chain in India has deeloped supply relationships with 100 small-scale
armers.
S
\orking with small-scale armers is necessary because land tenure rules preent
arm consolidation, armers hae an aerage holding o two hectares.

1he chain does not hae contractual relationships. lor the time being loodworld has
agreed to purchase eerything its armers produce, howeer, i quality considerations begin
to oerride quantity requirements this may not last. Prices are set on a daily basis with

5
Based on presentation by K. Radhakrishnan at the FAOfAFNAfFANA workshop.
Changes in food retailing in Asia

14
reerence to the preailing wholesale market price and the method o calculation is ully
transparent. larmers delier rom a distance o up to 50 km to a consolidation centre,
which, in turn, is located at a distance o up to 300 km rom the stores. 1here is no cold
chain so losses are high, although signiicantly less than in the traditional supply chain.

loodworld negotiates with seed and ertilizer companies on behal o the armers or
loans and also ensures that the correct arieties are supplied. At present, loodworld plays
no role in loan repayment although it would cease buying rom armers who ail to pay
back their loans ,this has yet to happen,. Discussions are presently ,end o 2004, under way
with banks to set up a quadripartite arrangement, whereby the banks inance the inputs
supplied to armers and loodworld repays the banks out o the armers` earnings.

In 1998, 1ops in 1hailand established a resh produce distribution centre or the
reasons discussed aboe. 1ops is probably the only supermarket chain that has a supply
chain deelopment manager. Sixty percent o its egetables come rom up-country armers
with two main suppliers, one o which is the King`s Royal Project, 20 percent is rom
contracted armers, while the remaining 20 percent is deliered by armers` groups such as
cooperaties.

1he size o arms in 1hailand is decreasing because o the inheritance law. It is
diicult to obtain reliable, high-quality resh egetables rom small-scale armers. 1esco, a
competitor o 1ops, has set up a distribution centre with a preerred endor system. It
proides extension and education serice to its intermediaries and associated armers, and
is, arguably, the chain in Asia most inoled in helping small-scale armers to gain access to
its supply chain.

(c) Purchases from wholesalers

1here are about 210 egetable wholesalers in Kuala Lumpur. Some years ago, ten o these
were doing business with supermarkets but by 2004 there remained only two or three
specialized wholesalers selling to supermarkets. 1wo major challenges o selling to
supermarkets are low margin pressure and long credit terms ,30 days,. loweer, some o
the supermarkets in Malaysia still source a large percentage o their egetables rom the
wholesale market because o the unaailability o egetables rom direct suppliers.

1alad 1hai market in Bangkok is the largest ruit and egetable wholesale market in
Asia. 1he market is open 24 hours a day and has 25 000 parking spaces. 1alad 1hai claims
no loss o business to supermarkets, and seeral supermarkets hae established distribution
centres in the market. 1here are six specialized wholesalers in the market who delier to
supermarket chains. 1hey source their products rom armers and armers` groups, usually
on the basis o a erbal contract. \holesalers who deal with chain stores tend to be
unhappy with the arrangements, citing unair` practices by the supermarkets, such as
deliery and quality penalties, delayed payments, the need to pay or transportation, and
unilateral change o the contact terms. 1o address the concern o supermarkets or
produce saety, in particular relating to pesticide residues, 1alad 1hai plans to establish a
laboratory or pesticide testing in the market.

Procurement and distribution practices of supermarkets

15
Shou Guang in Shandong Proince is the largest egetable wholesale market in China.
1he daily trading olume is about 3 million kg. 1he market has inested 25 million RMB
6

to establish an auction hall, which has yet to be used because o a lack o uniorm produce
standards. Shou Guang wholesalers claim that the supermarkets hae not aected their
egetable wholesaling much as the olume is still insigniicant compared with the olume
going to the conentional markets. Neertheless, a number o distributors are set up to
supply supermarket chains including Shou Guang Vegetable Distribution Co. Ltd which
was established in 2002. It has temperature-controlled storage with a capacity o 1 500
tonnes and cold storage with a capacity o 1 000 tonnes as well as a 5 000 m
2
modern
distribution centre.

Long Shan \holesale Market in Shanghai has established a distribution centre to
supply egetables to supermarket chains. 1his centre presently accounts or about 8 to 10
percent o the total business. lity percent o egetables sold in Lian lua supermarkets are
supplied by Long Shan. Indiidual stores place orders, the headquarters conirms the order
and inorms both Long Shan and the store. Long Shan then purchases the egetables and
deliers them to the distribution centre o Lian lua or to the indiidual store.

Unlike egetable wholesale markets in 1hailand and China, Japanese wholesale
markets hae increasingly aced tremendous bypassing` pressure rom large supermarket
chains. Approximately 80 percent o egetables still go through wholesale markets but this
is expected to decline. \holesalers beliee that the rate is likely to stabilize at around
0 percent because they are rationalizing and making improements. Some notable changes
hae been as ollows:

\holesalers are more conscious with regard to their social responsibility. 1hey
collect consumer and buyer inormation and pass it on to producers. 1hey also
proide management training to armers and emphasize partnership building with
armers.
\holesalers are merging and restructuring in order to cope with the increasing
size o agricultural cooperaties and supermarket chains.
Considerable thought has been gien to strategic directions in order to it the
changing retail market structure.

Auction used to be the dominant mechanism or price discoery in egetables, but
now it accounts or only ie percent o egetables sold in the Ota wholesale market o
1okyo. Ninety-ie percent o egetables are now traded through contracts. 1he major
change occurred in the late 1980s and early 1990s. One o the reasons or this is that
supermarket chains require deliery at stores beore 10 a.m., which is not considered
possible under the auction system.

(d) Purchases through independent procurement companies

In 2000, a Japanese importer, Nichu 1rade Co., Ltd, established a subsidiary, \inglong
lood Co., Ltd ,\inglong,, in Jinan, Shandong Proince in China. \inglong built up a base
with the surrounding armers or producing onions. 1he total area planted with onions
reached 6 hectares in 2002. \inglong proides onion seed and ertilizer, as well as planting
technology to armers. 1he inputs and technology proided are typically priced higher than

6
8.3 RNB = 1 US$ (January 2005).
Changes in food retailing in Asia

16
the market. In return, the company promises to buy back onions rom the armers at prices
that are suiciently higher than those oered by the open market. 1he contract price was
0.8 RMB per kilogram in 2002 compared with Shandong`s wholesale price o 0.55 RMB
per kilogram. 1he rationale o this approach is to preent the armers rom selling their
onions to other traders. lresh onions with skins stripped are transported to Japan by cooler
container and deliered to restaurants by Nichu. Alternatiely, resh onions with skins are
transported to Japan by dry container and then transerred to either supermarkets or
wholesale markets.

1he Bimandiri company in Indonesia was established in 1994,

and by 1998 it was


supplying our supermarket chains. loweer, in 2000 the company decided to become a
dedicated wholesale supplier only to Carreour, which had ten stores by early 2005. Initially
Bimandiri purchased rom local traders and indiidual armers, but the decision to work
solely with Carreour led to moes to deelop a sustainable procurement system, which
inoled encouraging armers to work in groups and deeloping partnership arrangements
with those groups. Such arrangements now orm around 30 percent o the company`s
purchases. It works with armers` groups on the basis o agreed quantities. Prices are either
ixed in adance or related to returns within a loor,ceiling price range.

Bimandiri supplies a range o products to Carreour. It has created an exclusie
product, the indiidual-sized Baby Black \atermelon, which will be marketed to other
Carreour stores in Asia in the coming years. Bimandiri is working in close collaboration
with Carreour on broccoli and chilli production, aiming to produce standardized products.
Problems aced by the company include the leel o commitment o armers, seasonality o
production and price olatility. Also, at times Carreour is unable to ully absorb the supply,
resulting in sales to traditional markets at a loss. Indicatie o the problems aced in dealing
with small-scale armers is the act that o the 100 members o a armers` group near
\ogyakarta approached by Bimandiri to grow watermelons, only hal were considered
suitable to grow the crop.

JPP is a priately owned distribution company or egetables in 1hailand. It sells 20
tonnes a day o both up-country and imported ,mainly rom China, egetables to seeral
supermarket chains. It also exports to 1aiwan and Japan. JPP has its own production area
and contracted armers and also buys rom intermediaries. Most contracted armers are hill
tribe people. JPP does washing, cutting, and packing and uses rerigerated trucks to
transport and delier egetables to Bangkok and Chiang Mai.

Jihong Vegetable Deliery Centre Co., Ltd in China started to supply egetables to
hotels and restaurants in Shanghai in the early 1990s. Many endors were not willing to
delier to these buyers because o the iteen days o payment credit required by the buyers,
the possibility o produce being rejected, and deliery diiculties. Ater the Asian economic
crisis in 199, Jihong, along with three other egetable suppliers, was chosen to supply the
Metro chain in the Shanghai area. Ater one year it was the only surior, and the olume
o egetables supplied reached our tonnes per day. 1o address this expanding business the
company ranchised its operations. Lach ranchisee supplies one Metro store. Owners o
ranchises are typically husband-wie teams and are required to inest RMB150 000 initially.
1he amount is matched by RMB300 000 rom the company. Proit is shared on a ity-ity
basis. 1he strategy is to initially ocus on olume instead o proit and the ranchisee is

7
Based on a presentation by Sandredo at the FAOfAFNAfFANA workshop and an unpublished report by Tom Reardon.
Procurement and distribution practices of supermarkets

17
asked to spend the irst three months expanding the olume at a loss. 1he company and its
ranchisees now supply egetables to seeral chains. It became a supplier to Metro
nationally in 2001 and now has more than sixty ranchisees to supply sixty supermarket
stores. Seenty percent o its egetables are now supplied by egetable packers, ten percent
by cooperaties and twenty percent by indiidual armers. 1otal sales reached 120 million
RMB in 2002.

(e) Purchases through government-sponsored distribution
centres

Malaysia`s state-run lederal Agricultural Marketing Authority ,lAMA,
8
began supplying
supermarkets and hypermarkets in 2000. It has contract marketing arrangements with 1 362
producers o ruits and egetables, liestock, reshwater ish, coconut and other products.
1he main ruits considered suitable or such arrangements are watermelons, melons,
mangoes and pineapples, while the main egetables are chillies, pumpkin, ginger and ladies`
ingers ,okra,. larmers produce according to strict cropping schedules designed to ensure
consistent supply. \hile supermarkets make no commitments regarding the quantities they
will take, their sales monitoring systems generally enable them to orecast their daily
requirements with considerable precision.

larmers are encouraged to ollow good agricultural practices ,GAPs,. Both contracted
armers and those without contracts can apply to be accredited as Malaysia`s Best`, with
accreditation being based on Luro-Retailer Produce \orking Group Good Agricultural
Practices ,LURLPGAP, standards. In-store promotions in some supermarkets use this
accreditation as a selling point. Contracted armers are required to ollow written product
speciications agreed between lAMA and the chains. Despite the considerable extension
support proided by lAMA, small-scale armers reportedly experience diiculties in
meeting quality standards and the stringent deliery schedules and procedures required.
1here is sti price competition between supermarkets, which use sales slogans such as
cheap gets cheaper` and eeryday low prices`, and this is relected in the prices paid to
armers. Prices are agreed in adance or crops such as banana and pineapple, where
market prices luctuate ery little, while market-based prices are paid or other crops where
price luctuations are requent.

lAMA operates 44 collection centres, which unnel produce into seen distribution
centres or deliery to the stores. 1his is not an exclusie arrangement and supermarkets
also obtain supplies directly rom armers and wholesalers. 1he lAMA operation inoles
an element o subsidy in that inrastructure costs and some sta costs are not charged to
the armers. Problems are encountered because o the payment period o 30 to 60 days
demanded by the chains ,despite a goernment recommendation that payments be made
within seen days,, which is passed on to armers by lAMA.

Chains such as 1esco, presently with ie stores in operation, reportedly preer dealing
with lAMA because it can oer supplies year round and is said to be more ethical in
business dealings. One o the problems aced is the inconsistency o the quality o
egetables supplied. A second problem is related to lAMA`s diiculty in meeting the
deliery time between 6 and 9 a.m. 1esco recently hired a technical consultant to audit the
egetable suppliers, to identiy the deiciencies in the quality o supplied egetables, and to

8
Based in part on a presentation by Nukhtiar Singh at the FAOfAFNAfFANA workshop.
Changes in food retailing in Asia

18
recommend a number o initiaties or lAMA to take in order to meet the requirements.
lor example, 1esco would like to see traceability introduced.

Zhejiang is one o the most deeloped proinces in China and is a neighbouring
proince o Shanghai, the largest urban market in China. 1he Goernment o Zhejiang sets
a strategic goal o integrating resources to ocus on proiding assistance to market
agricultural and ood products produced in Zhejiang. 1he key objectie is to help armers
in Zhejiang to get their products into supermarkets. One o the plans is to establish sixty
marketing centres, twenty agri-ood distribution centres, and ie exhibition centres in the
proince oer the next ie years. 1he inestment or the distribution centres will come
rom both goernment and priate sectors. 1he goernment is planning to inest about
sixty million RMB to establish the distribution centres, which will be run as priate
companies with initial unding support rom the proincial goernment.

(f) Purchases through informal farmers' groups, farmers'
associations or cooperatives

1anan City in China is a traditional region or the production o ginger and other
egetables. 1aian Asia lood Company, established in 1992, is a joint enture with long
Kong Nanhai Co. Ltd. It produces mostly rozen and resh egetables and became the
irst company in China to export organic egetables to Japan. An integrated organic
ecology system was introduced in 1993. 1aian Asia does not sign contracts directly with
armers but through a illage egetable cooperatie ormed by the illage committee and
the leading egetable armers in a illage. 1he company proides ertilizer to armers in
adance and the armers pay or the ertilizer when they sell their egetables to 1aian. 1he
company also sends technical people to proide plant technology adice.

1aian selects producers based on the ollowing criteria: soil structure, quality o
irrigation water, surrounding enironment, education and capability o armers, and
capability o the illage`s leadership. Once the producers are selected, 1aian holds a illage
conerence to discuss organic egetable production and outline the contract. 1aian
establishes armer schools to train armers on organic crop cultiation. Japan has two
experts stationed in 1aian to monitor and proide training together with Chinese sta. 1he
company used to sign a contract with the illage committee but moed to sign a contract
with armers` cooperaties instead. 1he moe was made because o historical problems
associated with illage committees, the many disputes with illage committees, and to
ensure that all armers are willing to participate. loweer, leaders o the coop are typically
the illage leaders who can ensure illage support. 1aian now has 25 armer coops that are
certiied as organic crop producers.

Saigon Coop is a Vietnamese-owned chain that presently has 13 stores, o which 11
are in lo Chi Minh City.
9
lruits and egetables presently account or only 3.5 percent o
total sales, but there are plans to increase this signiicantly. 1he chain buys around seen
tonnes a day rom seen main suppliers consisting o large-scale armers, a armers`
cooperatie and traders. \ritten contracts are used, but these hae erbal components
coering price and supply, which change requently. Vegetables are receied at a central
warehouse on a daily basis, checked, graded and deliered to the stores. Payment is by cash.
In the 1990s there were a number o deaths rom consuming unwholesome resh

9
Based on a presentation by Luong Thi Tuyet Trinh at the FAOfAFNAfFANA workshop.
Procurement and distribution practices of supermarkets

19
egetables in Viet Nam and thereore produce saety is o considerable concern. Saigon
Coop makes periodic and spot-check isits to the arms and also sends samples o produce
or testing by the local Plant Protection Department. 1he department is also inoled in
arm-leel checks.

Problems experienced include: diiculty in oering a wide range o produce, gien
relatiely low daily sales, the limited range o products in which suppliers tend to specialize
and problems caused by sourcing rom others, poor post-harest handling and high losses,
luctuating quality and quantities, and insuicient inrastructure. 1he supermarket chain is
planning to support armers with inance and to purchase all produce oered, thus
enabling the armers to concentrate on arming.

Size is oten the key issue in gaining entry to supermarkets. In 2002, the pear industry
in Zhejiang joined together to orm the Zhejiang Pear Association. On the basis o Green
lood Standards introduced by the Ministry o Agriculture, the association set and enorced
new uniorm standards or pears. It now has orty companies and 130 pear producers as
members. It successully gained entry to supermarkets in langzhou and Shanghai in 2003.

(g) Purchases through individual large-scale farmers, who often
subcontract to small-scale farmers

1he island o Mindanao is a source o much o the ruit and egetable supply in the
Philippines. Until recently, all armers sold their produce either on local markets or through
traditional marketing channels that inoled illage collectors and wholesalers in Mindanao
and wholesalers and retailers in the major buying cities, such as Cebu and Manila. \ith
support rom a USAID project, a new approach was deeloped, inoling clusters` o
armers who supply markets directly. 1he Bukidnon lettuce cluster`
10
inoles ie arms
in northern Mindanao. A market or lettuce was identiied with ast ood companies. A
cash-and-carry chain was identiied as a urther market or up to 10 percent o production,
while the wholesale market in Cagayan de Oro, Mindanao, could be used to sell additional
production, particularly o-sizes.

Marketing actiities are coordinated by the largest o the ie arms, which accounts
or 44 percent o production. Coordination inoles: ,1, contacting each grower to get
conirmation o weekly supply and matching any indiidual shortalls with production by
others in the cluster, ,2, checking the pre-cooling and packing area and the supply o plastic
crates, ,3, transmitting weekly receipts reports and payments to the other growers and
discussing identiied quality problems, and ,4, liasing with the crate supplier, transporters
and input suppliers. Indiidual armers` crates are colour-coded or traceability.
Inormation about each shipment is axed in adance to the cluster`s agent in Manila who
receies the shipment at the buyer`s premises, monitors the weights, identiies any quality
problems and reports back to Bukidnon. 1he agent also arranges bank transers o
payments to growers. 1he ie arms ship a total o ten tonnes weekly. 1he cluster proides
a model o an integrated approach that inoles close liaison with input suppliers,
transporters and buyers, and the coordinating role o the leading armer appears to be the
essential component o its success.

10
Based on the work of Flordeliza Lantican.
Changes in food retailing in Asia

20
Kang is a company in Malaysia with a egetable arm and a packinghouse. It started in
2001 to sell to two domestic supermarket chains as well as one supermarket distribution
centre in Singapore. 1he company has grown quickly and now sells only between 20 and 30
percent o its produce to wholesalers. lal o its egetables come rom its own arm and
the other hal rom contracting armers. 1he minimum size o land o contracted armers is
slightly less than one hectare. 1he company supplies all seeds, ertilizer and pesticides to
the indiidual armers to ensure quality and saety. Monitoring o production by small-scale
armers is problematic, thereore, the company would like to enlarge its own production
area.

(h) Multiple channels



Giant is a supermarket chain based in long Kong and has more than 00 stores worldwide.
It acquired 1ops Malaysia in 2002 and now has 54 stores in Malaysia with 9 hypermarkets
,between 000 and 10 000 m
2
in size,. 1he company has a distribution centre or dried
oods but does not hae one or resh produce. loweer, i more hypermarkets are
opened, it will consider opening a distribution centre or resh produce.

Giant uses a partially centralized system in purchasing egetables. 1he headquarters in
Malaysia is responsible or price, cost, ariety, range and speciications as well as the
selection o suppliers. Indiidual stores are responsible or olume, ordering, and
monitoring quality. 1he company is asking the suppliers more and more to pre-pack
egetables. Giant`s ood saety standard is ery much linked with that o the Goernment
o Malaysia. 1wo years ago, it had about 200 egetable suppliers but now it has only 30.
1hese include specialized wholesalers, general wholesalers, armers with oral contracts, and
suppliers without contracts. 1he credit term is 60 days. Prices are determined once a week.

1he Chinese supermarket company o Lian lua employs ie common linkages to
source its resh produce: ,1, market or market-based purchases, ,2, designated production
areas with speciic requirements on saety and quality standards, ,3, designated production
areas with speciic brands, ,4, ertical integration, and ,5, counter out-leasing. A common
eature is that Lian lua has little control oer armers or processors, and thus ood saety
is a concern. Lian lua is likely to enact its own standards on the resh produce it purchases
and is more likely to source its resh produce rom large companies in the uture.

Lian lua uses many adanced inormation technologies but indiidual stores still use
the ax as the only accepted way o conirming orders. 1here is a low leel o operational
eiciency. Many small-scale suppliers hae no inormation technology or account system
compatible with that o Lian lua. As a result, there is a lack o eedback between the buyer
and suppliers. Lian lua is thereore attempting to simpliy its supply chain and link the
company directly with suppliers through inormation technology.

(i) Leasing space in supermarkets to traders, farmers and
cooperatives on a commission basis

1he 1iao 1ang Shan Company belongs to the Beijing Agricultural Bureau. It has its own
production area o 13 ha and outgrowers with around 50 ha. It is also an oicial
demonstration site or new arieties and cultiation methods or the goernment extension
serice. Since 1998 it has been run like a company. It now sells seen tonnes o egetables
Procurement and distribution practices of supermarkets

21
daily in more than twenty supermarkets, leasing space in the stores and paying a percentage
o sales to the supermarkets ,usually between 12 and 25 percent, and promotion charges as
well as entry ees.

1he company sources egetables rom much o China, including Beijing, lubei,
lainan, and Guangxi. 1he quality o the egetables is not consistent. Deliery is also
problematic. 1hese problems were particularly seere at the beginning but the situation is
now improing. 1wo orms o coordination are used: contracts with associations and
contracts with distribution companies. 1iao 1ang Shan does not deal with armers directly
in order to cut down on transaction costs. loweer, it is responsible or marketing,
training, designating ertilizers and pesticides, and random inspection. 1he company is
planning to: establish a traceability system, modernize its distribution centre so it can link
with supermarkets more easily, look or markets alternatie to the supermarkets, establish a
chain that integrates research, product deelopment, production, and marketing, and moe
to third-party inspection or saety and quality.

(j) Integrated chain

1he only case o a completely ertically integrated egetable chain identiied during the
research was Saha larm lealth loods Co., Ltd. 1his company operates three supermarkets
in 1hailand, with one in Bangkok. It has its own egetable production area. 1he use o
pesticides is not allowed in its egetable production, and 1hai herbs are used to control
insects. It sells its egetable under its own brand, lealth loods. 1he egetable prices,
howeer, are compatible with those in other supermarkets. It appears that the company
sells egetables at a loss but gains a good reputation by ocusing on healthiness.

23
5 Problems faced by farmers and traders
in supplying supermarkets



1he implications o the rise o supermarkets or armers do not come rom the type o
store but rom the methods o procurement and logistics used and the quality standards
applied. larmers experience many problems in supplying supermarkets in Asia. In some
cases this has already been relected in airly rapid declines in the numbers inoled, as
companies tend to delist suppliers who do not meet expectations in terms o olume,
quality and deliery. In Malaysia, the Giant chain had 200 egetable suppliers in 2001 but
by 2003 this was down to just 30, while in 1hailand, similar changes were seen ollowing
the introduction o the 1ops distribution centre. Such trends hae already created a wide
perception that it is diicult to deal with modern supermarkets. Chains apply the branded
good business model to resh produce but it can be questioned whether this is appropriate
and i it will lead to long-term success.
11
As noted aboe, one chain in Malaysia uses cheap
gets cheaper` as its motto. Lerywhere there is considerable price competition between the
chains, which makes them reluctant to raise prices in order to enable armers to pay or on-
arm inestments. 1he squeeze on armers` margins is likely to increase urther as
supermarkets become as concerned with saety and quality as they are now with cost and
begin to insist that suppliers comply with standards similar to those o LURLPGAP. It
seems unlikely that small-scale armers will be able to guarantee a sae water supply,
proide toilets and hand-washing acilities or workers, construct pack houses with cement
loors or carry out the bookkeeping that traceability requires ,Berdegue et al, 2003,. Nor
will they be able to oer the bar codes on pre-packaged produce that are widely required in
Japan and are beginning to be requested by supermarkets in deeloping countries around
the world.
12


1he research proided strong eidence o the diiculties small-scale armers ace een
beore they are required to meet sophisticated saety standards and good commercial
practices. Stores insist on deliery at an early hour o the morning and many armers ace
problems in complying with this. larmers wishing to supply supermarkets must accept that
traditional religious or social obligations, which in the past may hae led to the suspension
o most on-arm operations or a couple o weeks, cannot now stand in the way o a
commitment to supply supermarkets 365 days o the year. Most armers hae diiculties in
doing so. 1hey must accept the act that a percentage o their produce will be ound by the
buyers to be o unacceptable quality and that they will hae to make arrangements to
dispose o it through other channels at lower prices, or een to throw it away. larmers tend,
or ery sound reasons, to be risk aerse but supplying supermarkets successully requires a
willingness to make risky inestments, to plant new crops or arieties and, in the long run,
to concentrate on just a ew crops. Discussions held with armers in 1hailand as part o
this research reealed that prices oered were not considered high enough to coer the
costs and problems that the armers would hae to ace in order to meet the requirements
o the supermarkets.

11
Presentation by N. Poapongsakorn at the FAOfAFNAfFANA workshop.
12
For example, one chain in El Salvador in Central America is already beginning to insist on bar codes; N. Neijer, personal
communication.
Changes in food retailing in Asia

24
1he types o diiculties aced by armers in supplying supermarkets, identiied in this
work, are in many ways similar to the ones pointed out in earlier studies conducted by
lAO within the context o arm-agribusiness linkages. 1hese studies concentrated on how
to deelop and reinorce equitable and eicient interactions between armers and the
agribusiness sector. Related workshops in Asia, Arica and Latin America, which discussed
case studies o linkage experiences or dierent agri-ood products, inoling dierent
organizational arrangements, were summarized in publications by Rottger ,2004, and
Santacoloma and Rieros ,2005,. lrom the armers` perspectie, the lack o or inadequate
access to production or post-harest technology, the lack o or limited market inormation
and intelligence on prices and alternatie buyers and their limited negotiating or bargaining
skills were considered as constraints to initiating linkages. lurthermore, the case studies
indicated that linkage deelopment is obstructed by the diiculties small armers ace to
meet stringent ood saety requirements and inlexible deliery schedules required by
processors and supermarkets, as well as the by the lack o institutional support.

1he indings o the present study corroborate these earlier perceptions and stress the
need or inancing as an additional barrier to linkage ormation. Indeed, in traditional
marketing systems armers oten receie loans rom traders during the production period,
on the understanding that they will sell to those traders at harest time ,Shepherd, 2004a,.
Such loans are used both or production and or amily consumption purposes. 1here is a
general unwillingness on the part o supermarket chains to become inoled in inancing
armers. lurthermore, armers` cash low problems are exacerbated by the act that chains
can delay payment or up to 90 days, although there are a ew examples o cash payments.
1his research has ound one example o where the supermarket chain organizes input
adances rom input suppliers ,loodworld, India,, another where the chain is considering
the proision o armer loans ,Saigon Coop, Viet Nam, and another where a Japanese
company in China supplies inputs on credit ,1inglong,.

lrom the perspectie o the agribusiness irms, the armers` non-conormity to quality
standards, their inability to supply the olume requirements, and the delayed delieries were
considered in the aboe mentioned lAO case studies as the main constraints to initiate
linkages with small armers. Constraints to strengthening linkages were associated with the
armers` tendency to pole ault or renege on their responsibilities to supply the products,
and the companies` inability to proide extension adice ,e.g. crop protection, to armers at
the time they needed these serices. Again, these are perceptions reinorced by the research
results presented in this paper.

Lidence rom the earlier lAO case studies indicated that agribusiness irms hae a
preerence to negotiate with indiidual supply chain partners, including armers. \hile this
research also ound that there is a preerence among supermarkets to deal with indiiduals
rather than groups o armers, single armers seem reluctant to deal directly with
supermarkets because o the diiculties cited aboe and, probably, because they lack
conidence in working in a dierent enironment. 1his need not be an insurmountable
problem, because small-scale armers could work with armer leaders, as described in the
case o the Philippines lettuce cluster, or work in groups, cooperaties or associations with
one ocal point that deals with the buyers. loweer, neither the lAO,AlMA,lAMA
workshop nor the research or this paper identiied many cases o group deelopment to
date. 1he danger remains that by the time small-scale armers become organized to supply
supermarkets, the tightly coordinated supply chains will hae deeloped in such a way that
Problems faced by farmers and traders in supplying supermarkets

25
new entrants will be excluded. 1his seems most likely in those countries where land
regulations present no signiicant barrier to arm consolidation. Other sectors, in particular
dairy, poultry and liestock, may be similarly aected, although there is little reason to
expect that such deelopments will hae any eect on the producers o paddy or other
ield crops.

1he produce distribution system in Asia continues to be characterized by strong
participation rom urban-based intermediaries, mainly because o the absence o well-
deeloped marketing inrastructure in many egetable production areas o these countries.
1his is particularly true in those areas that hae not been inoled in export-oriented
commerce. 1he supermarket chains realize that a relatiely small percentage o the
domestic resh produce destined or the internal market is adequately prepared or retail
sale at the shipping point. Only the large-scale growers routinely sort and classiy produce
by size and maturity at their packing sheds. 1he sorting and classiication o resh produce
or the internal market has been conducted historically at central wholesale markets in
major population centres. 1he inconsistent or nonexistent application o quality product
standards at many rural packing acilities obliges retailers to depend heaily on wholesalers
and other intermediaries or resh produce that more closely meets their speciications or
size, quality, appearance, and maturity.

Supermarket chains hae dual objecties: to increase ood saety and quality and to
reduce costs and increase olumes procured. 1hey hae a diicult time meeting those
objecties when using the traditional wholesale sector to procure their products. Some
notable drawbacks o traditional wholesalers are as ollows: ,1, spotty and inadequate use
o rerigerated storage, such as temperature-controlled chambers, which ew wholesalers
want to inest in, ,2, packaging materials used that undermine preseration o product
quality, ,3, heay reliance on manual labour, which prolongs merchandise exposure to
ambient temperature, ,4, poor handling that contributes to heay losses. Presering
produce quality rom origin to destination thus cannot be ensured. It becomes preerable
to conduct sorting and classiication closer to the store than to the arm. 1o oercome
such obstacles, large initial inestments must be made, which small-scale armers and
traders ace diiculties in doing.

Intermediaries also ace signiicant problems in dealing with supermarkets, which may
stem in part rom a lack o understanding o the working methods o supermarkets.
Purchase prices are oten negotiated or a ixed period, such as a week, but can be
renegotiated down by supermarkets i market prices decline in that period. loweer, no
proision is made or renegotiation upwards i prices rise. Suppliers sometimes hae to pay
transportation charges rom the distribution centre to the indiidual stores and promotion
ees where a product or range o resh produce is eatured in an in-store promotion.
Discounts are required when new stores are opened. Penalties are inariably leied or
ailing to supply agreed quantities. Promotional ees are o particular concern to
wholesalers, as they perceie that they are expected to bear the cost o promotions, while
the store takes no risk.

Supply contracts allow supermarkets to control saety and quality, to ensure desired
supply olumes, and to reduce price uncertainty. 1here has been increased coordination
between supermarket chains and suppliers through more demanding contracts. 1he terms
o these contracts, widely used or other products, cause considerable problems or armers
Changes in food retailing in Asia

26
and intermediaries, and are considered by many to be not so releant or ruits and
egetables. A typical trading agreement between a supermarket chain and a supplier
consists o the ollowing elements:

Payment - usually 30 or 60 days credit or payment.
13

Quality control procedures based on goernment standards, LURLGAP,
lazard Analysis Critical Control Point ,lACCP,, traceability, phyto-
certiication and MRL testing.
Stringent deliery terms, such as minimum olume and deliery time.
Various types o listing ees such as supply listing ee as a supplier and line
listing ee or introducing a new category.
lees or promotional display and adertising.
Requirements or other discounts such as new store opening discount and
olume rebate.
A probation period or the ealuation o initial sale perormance is sometimes
speciied.

As o now there is oten a ery wide gap between retail expectations and the serices
actually being deliered by suppliers in Asia. Only a small percentage o suppliers has
responded to emerging retailers` needs. Neertheless, there has been a signiicant shit in
the weight o agri-ood industry power away rom the agri-ood processors towards the
ood retailers. Chain stores tend to reject delieries o imperect merchandise ar more
requently than traditional wholesalers and brokers do. Seeral retailers, such as 1esco
Lotus and 1ops in 1hailand, adopt a preered supplier scheme. Under the scheme, the
supplier will be delisted i it cannot meet the requirements on olume and quality. Industry
changes hae also altered the priorities that retailers set in ealuating supplier perormance,
creating a wide perception among the suppliers that it is ery diicult to deal with the
modern sel-serice stores.

1here is a lack o commonly agreed grades and standards enorceable or resh
produce, coupled with inadequate quality control in the produce supply chain. Most
standards in 1hailand, Malaysia and China, oten incomplete, are oluntary in nature or not
enorceable. 1his impedes the adoption o modern trading methods or the traders
inoled. 1his situation stands in contrast to the Japanese system, in which compliance
with industry-generated quality grades and standards or egetables are enorced by
goernment authorities.

Presering product quality rom origin to destination cannot be ensured because o
inadequate access to rerigerated transportation, poor roads, and the predominant use o
thinly insulated packaging materials. It would be preerable to conduct product sorting and
classiication unctions urther along in the distribution channels. 1o oercome these
obstacles, large initial inestment is needed, which small-scale armers and traders ace
diiculties in accessing.

13
But, as we have seen on one or two occasions, payment can be in cash or within seven days.

27
6 Conclusions and recommendations



1he supermarket chains ace growing margin pressure in competing against each other in a
highly competitie industry with low margins and thereore constantly seek to lower
product and transaction costs and risk. As supermarkets compete with each other and with
the inormal sector, they will not allow consumer prices to increase in order to pay or the
arm-leel inestments that are needed or small-scale armers to hae a chance to succeed.
O particular concern is the potential risk that many smaller-scale producers hae been, or
eentually will be, marginalized rom the deelopment o the main supply chains. I those
who would lose rom the change would be conined to the non-participants, the policy
implications would be clear: take eery step to be an actie participant in the supply chain.
loweer, the challenge is much more daunting than this, since the losers may include
many o those who hae hitherto participated actiely in the deelopment o the supply
chain.

Response of governments

Gien the deelopments described aboe, how should goernments and their agencies
respond One possible approach would be to do nothing. In this case urther ormation o
supply chains will occur as a natural deelopment o the marketplace. Small-scale
wholesalers, retailers, processors and armers will hae to surie on their own. 1hose able
to adapt will surie, others will not. 1his would probably lead to a more eicient,
consumer-responsie supply chain but many would lose out and this may not be socially or
politically acceptable, particularly i the pace o change is rapid. 1he hands-o approach
has been adopted by seeral goernments in Lurope. In the United Kingdom, most
consumers hae beneited rom lower prices and the aailability o a wider ariety o
products. loweer, consumers who ind it diicult to moe around or who lack access to
reliable transport hae lost out because large numbers o small, local shops hae closed
down and those that remain tend to be more expensie than supermarkets. 1here hae
been numerous complaints about the construction o out-o-town hypermarkets and their
impact on the enironment. larmers are increasingly quoted as saying that they ind it
impossible to supply supermarket chains proitably. As noted, such complaints rom
armers are already being heard in Asia.

I the hands-o approach is not politically acceptable then the option remains to
legislate to control the new supply chain deelopments. 1he problem with proposing
controls through legislation is that this ignores the act that supermarkets could only hae
grown in the way that they hae by meeting the needs o consumers. A large number o
consumers stand to beneit rom urther supermarket expansion in Asia. Almost certainly
more people will beneit than will lose out. So legislation to control supermarket growth
could also be politically unpopular. loweer, some legislation has been introduced. In
Malaysia, oreign inestment in distributie trades is subject to approal o the Committee
on \holesale and Retail 1rade, with the aim o encouraging the air and orderly
deelopment o the industry`. 1he Goernment o Malaysia does not permit hypermarkets
to be established within 3.5 km o housing estates or existing town centres and only one
Changes in food retailing in Asia

28
hypermarket is permitted per 350 000 people. In 1hailand, new zoning regulations require
large retail stores to be located at least 15 km rom the commercial centre o proincial
towns. loweer, much deelopment took place between announcement o the drat
regulations and the time they became eectie in August 2003 ,\iboonponse and
Sriboonchitta, 2004,.

1he third option is or goernments to work with all participants in the supply chain
to acilitate linkages between supermarkets and armers, and to assist traditional marketing
systems and those armers unable to meet supermarket requirements to continue to
operate in a competitie way:

Much could be done to modernize traditional markets through the proision o
better physical inrastructure such as storage, clean water, electricity, oice space
and parking space. 1he major constraint aced by markets is oten poor
organization and management and unless this question is addressed, improement
o inrastructure will yield ew returns.

Incenties to modernize could be created through enorcement o public
regulations regarding ood saety, weights and measures, taxes, competition and
personal saety, thus making traditional markets more attractie places to shop.
loweer, the introduction or enorcement o regulations that are diicult or costly
to apply could in some cases hae the opposite eect to the intended one, in that it
may orce the closure o some markets and market intermediaries, so leading to an
increase in the market share o supermarkets.

Lxisting public serices, such as extension serices, must respond to armers`
needs. 1hey must be able to assist armers who wish to delier top quality, low cost
and sae produce in meeting the needs o supermarkets and the traditional
marketing systems trying to compete with them. Particular attention should be
gien to the capacity o extension serices to adise on marketing issues and also
on the proper use o agrochemicals. Lxisting market inormation serices must be
upgraded and new serices should be introduced to assist growers and their groups
in business management.

1he need or inance should be addressed. Growers must make inestments in
order to meet the standards required by supermarkets and to comply with their
commercial practices. In traditional marketing systems growers oten receie
inance rom traders. Unless contractual arrangements are deeloped between
growers and supermarkets such inance will not be aailable under new supply-
chain modalities. Possible tripartite or quadripartite arrangements between banks,
supermarkets and their preerred suppliers and input companies need to be
inestigated, as is presently being done by loodworld in India.

Attention must also be gien to the legal and regulatory ramework goerning the
horticulture sector. Goernments can adise on contractual arrangements and set
up arbitration schemes. 1hroughout the world quality and saety standards
regulated by goernments hae lagged behind the standards established by
supermarket chains, howeer, that does not mean that oicial standards do not
need to be established. Supermarkets in Asia usually buy on the basis o their own
Conclusions and recommendations

29
standards but where produce may be exported to stores o the same chain in other
countries these standards are oten backed up by third-party certiication. In the
uture, a mix o priate and goernment standards are likely to be used, as is being
done by 1ops in 1hailand. \hile all armers can be encouraged to ollow good
agricultural practices ,GAPs,, it is unlikely that traditional marketing channels will
proide them with suicient economic incentie to do so, other than in countries
such as the Republic o Korea where heay goernment support is being proided
or the introduction o GAPs and traceability.

Laboratories and sampling procedures to meet new saety concerns also need to be
established.

Small-scale armers will ind it diicult, i not impossible, to compete with large-
scale armers to supply supermarkets. \here they are successul in competing this
will probably be achieed through group actiities linked either directly with
supermarkets or through intermediary wholesalers. Small-scale armers will hae to
cooperate in order to compete. It may be questioned whether or not existing orms
o state-promoted armers` organizations are suitable or such cooperation. A new
generation o armers` organizations may need to be deeloped.

New markets and market segments as well as new products and serices can be
best deeloped through partnerships among suppliers, input proiders, marketers
and customers in the chain. loweer, to take adantage o emerging opportunities
inestments are required. 1he challenge is that such inestments exceed the
capacity o most single companies. Various national and regional programmes hae
created policies and programmes to encourage companies and armers to consider
supply chain strategies. China is probably the only country that has a national
strategy. Such eorts merit support by goernment and municipal authorities as
well as by NGOs or international organizations, and could well sere as examples
or other initiaties worldwide.

linally, goernments can play an important role in bringing together supermarkets
and agro-processors with armers who hae the capacity to supply what the buyers
need. Ministries o agriculture are likely to be better inormed than company buyers
about the production potential o dierent areas.

In some countries goernments hae already started to react to the needs o armers.
In 1hailand, the Bureau o Agricultural Lconomics has opened a supply chain unit, and a
goernment-sponsored distribution centre or local retailers has been established. In China
the Oice o Agro-Industrialization has been opened, and Zhejiang Proincial Department
o Agriculture has established a quasi-goernment distribution centre. 1here hae also been
arious ood-saety initiaties aimed at improing armers` access to modern retail and
serice outlets. 1he Goernment o the Republic o Korea has supported the National
Agricultural Cooperatie lederation ,NACl, to deelop modern wholesale ood
distribution centres, which operate together with cooperatie-owned supermarket chain
distribution centres at the same location. 1he lederal Agricultural Marketing Authority in
Malaysia has, as noted, an actie programme o promoting armer-supermarket linkages
and is also working to improe produce distribution channels.

Changes in food retailing in Asia

30

Response of traditional marketing systems

low should traditional horticultural marketing systems respond in this new marketing
enironment Seeral possibilities exist:

Improve facilities. \holesale and retail markets should upgrade acilities to
promote hygiene, reduce post-harest losses, speed up the low o produce and
reduce transaction costs. 1he creation o what are known as logistics platorms` in
the markets to sere the needs o supermarket buyers is worthy o consideration.
Clearly, such deelopments will be easier or markets in some countries than in
others but the countries where improements may be easier to bring about are, by
and large, those where traditional systems are under the most immediate threat
rom supermarkets. 1here is already some eidence o such a response in China,
1hailand, Singapore and Malaysia.

Be pro-active. 1raditional markets that sit back and wait or business to come to
them will rapidly cease to be releant. 1hey hae to explore ways to attract business
by sureying their customers and identiying their needs. Market logistics may need
to be re-examined, together with trading hours, in order to maximize the
conenience or customers and minimize delay between harest and sale.
\holesale markets need to look to their strengths. In some cases, or example, they
should be able to supply resher locally grown produce than supermarkets that
operate just one distribution centre per country.

Identify new services. Large, modern wholesale markets, such as that in
Bangkok, may be able to oer space to smaller supermarket chains that do not
hae the throughput to justiy building their own distribution centres. Some
wholesale markets in Lurope are attempting to do this by proiding logistics
platorms`. 1he potential or obtaining business rom supermarket chains in this
way may be limited although, as noted earlier, many chains in Asia at present
continue to source through traditional wholesalers.

Service small-scale retailers and caterers more efficiently. Small-scale retailers
will continue to play an important role in Asia and increasing aluence will mean
that people will eat out more. Both retailers and caterers would be attracted by the
proision o commercial wholesale cash-and-carry acilities. Such a store in a
wholesale market compound would enable traditional ruit and egetable retailers
to diersiy into selling new products. Many medium-sized retailers and een small
chains could beneit rom the one-stop-shop concept, i.e. being able to buy ruits
and egetables, ish, meat and dairy products and dry goods at one wholesale
market location. \holesale markets will hae to moe quickly i they want to oer
such serices, howeer, gien the arrial in Asia o cash-and-carry chains such as
Metro and Makro.

Improve procurement arrangements. As already noted, supermarkets are
moing to direct procurement arrangements, either working directly with armers
or armers` groups or working through dedicated wholesalers. \holesalers working
in traditional wholesale markets cannot dismiss these trends as a supermarket ad o
Conclusions and recommendations

31
little releance to them. 1hey will need to strengthen linkages with armers and
improe logistical arrangements along the lines o the good commercial practices
that supermarkets are beginning to insist on, which could include deeloping rural
packhouse acilities. In the Republic o Korea, or example, cooperatie wholesale
markets procure rom cooperaties on the basis o contracts. An increased
emphasis on quality will be required, particularly in relation to pesticide residues,
and traditional traders will need to recognize the growing importance o grades and
standards as competitie tools.

Promote increased fruit and vegetable consumption. laced by a declining
share o the market, traditional marketing systems can try to increase their share
again, but this may be diicult. An alternatie approach is to work to increase the
total size o the market. Seeral countries hae adopted ie-a-day` promotions to
encourage people to hae ie serings o ruits and egetables a day. lAO is now
working closely with the \orld lealth Organization ,\lO, on the \lO,lAO
lruit and Vegetable Initiatie. 1hailand has been proposed as one o seeral pilot`
countries to implement this initiatie.

In sum, more open markets, increasing per capita income, growing urbanization, and
acilitation o oreign inestment hae created conditions or signiicant changes in Asian
ood distribution systems. 1he expansion o supermarket chains is altering the traditional
structure o marketing channels and creating new challenges and opportunities or
participating agents. Supermarkets are here to stay, and will gradually become responsible
or an increasing proportion o resh produce sales. 1here are pros and cons associated
with the deelopment o supermarkets. Positie impacts include modernized ood retailing,
innoation and consumer satisaction. Negatie impacts are that local and small-scale
retailers hae suered, the number o suppliers has been shrinking, and there is a potential
aderse distribution eect.

1hese negatie aspects notwithstanding, the aailable eidence indicates that the trend
towards modernization o agri-ood systems in general, and o resh produce distribution
in particular, is irreersible. As such, the tendency towards closer coordinated supply chains
as the preailing mode to organize transactions in this sector will be intensiied. Policy
makers and priate managers, alike, must realize that all chain players must adjust to these
new deelopments.

1o keep pace with the demands o modern buyers, arms can adjust by specializing in
a particular commodity, consolidating ragmented land holdings to achiee scale economies
where this is permitted by law, and orging stronger links with retailers. Closer relationships
between irms at dierent stages o production and marketing will emerge as larger
commercialized arm operations grow produce under contracts or guided by other ormal
ertical coordination instruments. Assemblers, wholesalers and retailers can also adjust, by
paying more attention to managerial requirements and capacity building in areas such as
partner capabilities assessment, contract negotiation, management o operations or
contract compliance and monitoring production perormance, including enironmental
impact. 1he challenge is the creation o co-managed business processes, where participants
hae alignment o ision and high leels o cooperation, trust and commitment

Changes in food retailing in Asia

32
It is important to realize that supply chain opportunities are not all equal and that
public policies should not simply create alse incenties that push producers blindly into
new markets. 1hough the traditional system o agri-ood distribution is starting to be
oertaken by a new network o modern ood retail and ood serice outlets and giant
shopping malls, the traditional outlet is ery much alie and kicking, particularly so in resh
produce. As resh produce is strategically important to small-scale armers in Asia, care is
needed in assessing the pace and scope o retail changes and their implications.

Just as there are signiicant market access issues or agri-ood exports rom deeloping
countries, there are now signiicant entry barriers or armers and other suppliers to access
supermarkets and other modern ood chains. 1his new market could be more signiicant
or small-scale armers than export markets, yet there are no systematic studies aailable on
ways to oercome entry barriers. Many hae suggested a more eicient supply chain to be a
driing orce or the uture growth o agri-ood industries in deeloping countries.

1here is growing anecdotal eidence o both success and ailure. No large-scale study
exists that documents how the supply chain deelopment actiities impact on incomes o
armers. Small-scale armers ace many options about what to do in response to the current
ood market trends and these options need to be ealuated careully. In Asia, policy-makers
hae had little or no rigorous exposure to empirical eidence and are ill-equipped to help
armers make inormed decisions about their eentual ate in the marketplace.

33
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AGRICULTURAL MANAGEMENT, MARKETING AND FINANCE OCCASIONAL PAPER 88


This paper investigates the issue of modern agri-food
systems organization and its effects on fruit and vegetable
farmers and traditional marketing systems in Asia. There has
been a signicant growth in the number of supermarkets
and convenience stores in Asia. While there is evidence that
consumers still prefer to buy fresh produce in traditional
markets, supermarkets are gradually increasing their market
share for fruits and vegetables.
The paper discusses the reasons, or drivers, for this
growth and considers the implications for both small-scale
farmers and the traditional fruit and vegetable marketing
chains. Of particular concern for small farmers is the
difculty they face in conforming to the procurement
practices of supermarkets. The different procurement
channels currently used by supermarkets in Asia are
reviewed and examples of the ways in which small farmers
currently supply the chains are given.
It is noted that individual small farmers cannot compete
with their larger counterparts and that if they are to supply
the supermarket sector they will have to work in groups.
Traditional marketing systems will need to adapt if they are
to compete with the modern systems, and the paper
suggests some ways in which this could be done. Ways in
which governments should respond to the new
developments are also discussed.
Changes in
food retailing in Asia
TC/D/A0006E/1/9.05/1000