And, as this analyst report comments: ‘With Walmart likely to be bearing down on prices it is in the supply chain that we think the winners and losers will be separated’ (BMI 2013).
PROCUREMENT AND POWER: SUPPLY CHAINS, LOCAL PRODUCTION AND SMALLHOLDERS
Formal food retailing through supermarkets implies a distribution system which demands larger volumes and, typically, better standards of quality for food. The system also demands coordination between suppliers and retailers. As Durand and Wrigley (2009) note, the ability of retailers to make use of upstream relations with suppliers within host economies, as well as within their global networks, is a critical factor explaining the success of transnational retail capital in different contexts. Indeed, the concentration and expansion of corporate food retailing in South Africa has relied on efficient logistics systems, which have benefited from trade liberalisation and the deregulation of South Africa’s agro-food economy.
Wal-Mart’s legendary centralised distribution and information technology systems, which record ‘real time’ data from branches, allows the store to cut costs through responding quickly to consumer demand and to reduce stock shortages or over-estimations. Stock is controlled through category managers who are responsible for an entire group of merchandise and who work closely with suppliers, not only to specify products but also to promote the efficiency of distribution (Lichtenstein 2009; Fishman 2006). Logistics technology and inventory management have reduced costs to retailers and outsourced risk to suppliers. This ‘retail revolution’ is what Wal-Mart is known for (Lichtenstein 2009; see also Lichtenstein 2006). It has proved to be an important strategy of operation and comparative advantage to Wal-Mart in its overseas operations (Durand and Wrigley 2009:18). Maintaining contracts or relations becomes competitive business for suppliers, where increasing pressure is brought to bear on them to reduce their costs to the point where some supply for below cost to maintain their market with this retailer (Fishman 2006; Hong 2011). Centralisation gives retailers flexibility, then, through economies of scale and the ability to hedge market fluctuations, in part through global sourcing. Additional costs of transportation and storage are channelled back to suppliers with just-in-time sourcing.
In South Africa, a shift from wholesale distribution to the greater use of centralised warehousing and the use of information technology (IT) systems to coordinate supply has been underway since the 1990s (Weatherspoon and Reardon 2003). The corporate chains tend to use distribution centres and direct contracts with producers for fresh produce, while smaller chains rely on wholesale markets and fresh produce markets (Weatherspoon and Reardon 2003:10).
With Wal-Mart’s entry, South African firms are working to compete with anticipated improvements in Massmart’s supply chain systems. Massmart has recently upgraded its distribution network and benefits from Wal-Mart’s technical knowledge and ‘large purse’ available to assist with logistics (BMI 2013). Thus, between 2011 and 2013 Shoprite upgraded its distribution centres and is building new ones in Cape Town, Durban and Port Elizabeth, all with the ‘latest technological developments’.10 Industry experts acknowledge that Shoprite has the best developed centralised distribution system of South African food retailers, ‘a first-class centralised distribution network’ (BMI 2013).11
The first preferred supplier programmes by retailers appear to have been focused mainly on larger farmers, many of whom were also exporters to European supermarkets, and already meeting food safety standards, volume and consistency expectations and quality measures (Weatherspoon and Reardon 2003:11). Most producers supplying to Freshmark, Shoprite’s wholly-owned distributor, had to ensure that washing, packing, labelling and bar-coding were done before the produce reached the distribution centre (Weatherspoon and Reardon 2003:11). The producers were required to make deliveries daily in refrigerated trucks, which they provided. A preferred suppliers list ensured that producers who remained on the list had to meet all requirements. Pick n Pay ran a similar preferred supplier arrangement with larger and better-capitalised farmers, who could meet the requirements and standards (Weatherspoon and Reardon 2003:12). Retailers squeezed suppliers through regularly negotiated discounts and rebates, charging suppliers extra for promotions, returning unsold products, delaying payment and using own-label branding to undercut processors (Mather 2005; Mather and Kenny 2005). Yet suppliers continued to try to absorb these costs. Being on the list meant supplying these market channels, increasingly dominating access to consumers, as we have just seen.
Weatherspoon and Reardon (2003) suggest that standards for domestic food retailing were driven by retailer procurement from exporting farmers: retailers linked in to existing networks developed through deregulation of agricultural production, which encouraged export to global markets to benefit from private standards. They note that this exacted ‘hefty entry requirements and even barriers to many farmers’ (Weatherspoon and Reardon 2003:13) at the time, including investments in coordination, farming practices, packing-shed facilities, and fleet and cold chain infrastructure. They suggested that retailers would expand to lower market consumer segments and increase price pressure on suppliers to remain competitive while meeting standards (Weatherspoon and Reardon 2003:13). They concluded their seminal article by noting three trends: the use of large, well-resourced farmers; where these were not available, the use of importing; and an ‘eagerness’ to develop programmes to ‘upgrade’ the small farmers to meet the needs of supermarkets’ (Weatherspoon and Reardon 2003: 14). They suggested that this would produce a bifurcation of producers when smaller farmers, unable to cope, faced ‘rapid exclusion’ (Weatherspoon and Reardon 2003: 14).
At the crux of the debate about Wal-Mart’s entry was its ability to source from its global suppliers, understood as far more competitive than South African manufacturers and producers in their ability to meet cost and quality standards (for instance, see Chan 2011). The ultimate resolution was the creation of the Supplier Development Fund to assist small-scale producers to enter Massmart’s supply chain. This model emerged out of Massmart’s own voluntary fund, set up during the Tribunal process, with R100 million over three years to assist small-scale black farmers to meet the requirements to source to them. The focus of the fund, which targeted 1 500 small farmers, was on loans and providing equipment (Visser 2011). Massmart saw its significance in cutting out intermediaries, much as Wal-Mart