Public interest in private labelHow new relationships between NGOs and retailers

can help build trade to benefit the developing world’s small scale farmers

�

Contents

1. Introduction 32. Why are retailers the way they are? 5 2.1Consumers and the fight for loyalty 5 2.2Legislation: due diligence and warranties 7 2.3 Price wars: “Pile it high.Sell it low” 8 2.4Emerging economies - new business opportunities 103 How do retailers work? 11 3.1 Private label: the everyday offer of more for less 11 3.3 Ways of buying: from partnership, through auction to direct 15 3.4 Supplier management: long term relationships and shared interests 174 What retailers think of NGOs: Tensions and opportunities 195 Solutions 216 Recommendations to NGOs 22 6.1 Understanding both the retailer’s business and your own role 22 6.2 Senior support: politics versus policy 22 6.3 Managing expectations - timescales, commitment and organisational change 23Footnotes: 25Acknowledgements: 25 FAQ: 26

Foreword:

Food retailers around the world are successfully building their private label offer. Driven by their values of service, convenience and price, they are moving from imitation towards innovation.

The NGOs that are working with small scale farmers in developing countries are representing a surge in public interest from consumers about the provenance of food and the justice of the food industry.

This paper is about private label and how NGOs can build effective new relationships with retailers.

Cover photo by Shannon Jansen, Technoserve, Kenya �010

�

1. Introduction “Not only must we be good, but we must also be good for something”. Henry Thoreau

Many of the world’s poorest people live in rural communities and rely on farming for their income. They are seeing change in their markets as the brand manufacturers and retailers build efficient value chains with new requirements driven by risk management. This represents an opportunity for the small scale farmer, whether for domestic or export markets. This paper is about how new relationships with retailers can help build trade.

Perhaps you work for a non government organisation (NGO) that works with such farmers. Maybe you face the challenge that buyers don’t consider the needs of these farmers but instead focus on the needs of consumers in their own price driven markets. This paper is written for you. Perhaps you work for a retailer and buy products that originated on a small farm in a developing country. You don’t really know who’s in your supply chain. Your business wants to operate in a free market that must have winners at every level to prosper. However, you face the threat that your consumers will perceive that rich companies, just like yours, evade their responsibility for poor farmers and the communities affected by their buying practices. This paper is about you. For both of you, this is your shared issue because current buying models have unintended adverse effects on the world’s small scale farmers. The NGO knows there’s a development case that improvement in small scale farming is directly associated

with a reduction in rural poverty and hence hunger. However, the buyer may not know that there’s a business opportunity based on differentiation, managing reputational risk through engagement and securing new efficient sources of raw materials. The retailers are taking a dominant position in the world’s food industry. They’ve always sold their shelf space to brand manufacturers but increasingly they are also filling them with their own products. For this work, their buyers must deliver margin and profit. They have a big choice on who they buy from. By contrast, when it comes to trading, small farmers must deliver yield and quality whilst hoping for profit. They have a small choice on who they sell to.

“Of the developing world’s three billion rural people, more than two-thirds reside on small farms (less than two hectares), of which there are nearly 500 million.

These small farmers include half of the world’s undernourished people, three-quarters of Africa’s malnourished children, and the majority of people living in absolute poverty”.

International Food Policy Research Institute, May �007, �0�0 Discussion Paper

�

The retailers have developed private label lifestyle ranges (such as ‘Finest’ at Tesco or ‘Pure and Honest’ at Albert Heijn) that now offer a new breadth and depth to consumers. Their low cost structure for new product development, in contrast to the brand manufacturers, supports both innovation and experimentation. This makes them natural partners for NGOs looking to put the case for ‘pro-development’ product opportunities. For an NGO to engage a retailer successfully, the following must be in place:

Retailer awareness of the relevant economic and social issue

Genuine consumer demand

Product proposals

A plan to help the farmers become competitive

This paper is intended to support building successful relationships between NGOs and retailers with benefits for international development and for business. The NGO reader will find out how modern retailing works. There’s a range of commercial models

*

*

*

*

that will be described and recommendations for good practice in relationships. There is also direct advice from four retailers and four NGOs who were interviewed for this paper.

NGOs operate at the tip of change. They create new ideas and aim to mobilise opinion. They get frustrated with retailers because they think they should change their ways.

Retailers wait for signs of behavioural change in their consumers before they act. They follow public opinion. They get frustrated with NGOs because there are countless conflicting views in the world and they must wait for consumer consensus to develop before they change something.

The World Bank said in �006 that global gross domestic production was worth $�8 trillion, of which food and agriculture represented 10%. The reader must consider the scale of this subject. One of the world’s biggest industries is food and it’s expanding quickly to feed more mouths, growing appetites and increased affluence. This paper is dealing with complexity but must describe the story in simple terms.

Retailer transition

Traditional Modern

Local regulation Private standards

Variable investment High investment

Wholesale markets Direct trading

Price driven Quality driven

Fragmented Integrated and exclusive

Uncertain payment Secure payment

�

The relationships of retailers with the brand manufacturers are a separate subject though there is a description of the different business models (�.1).

The relationships of NGOs that engage in confrontation with retailers through campaigning are not covered.

The terminology and spelling is British. For readers in North America, please note that suppliers are vendors and buyers are merchandisers.

*

*

*

“We operate in a number of European countries but the majority of our business is in the USA. Governments see us as the most important communicator to consumers and we are often asked to do things for them about sustainable consumption. The challenge is that the consumer can only process so many messages and for the most part they are not very interested in sustainability, but that does not mean that we do not act upon sustainability. The world is bigger than consumers only.

We have a very close relationship with our primary customers. They are the ones that do most of their grocery shopping at our stores. This trust is very precious to us and they take it for granted that we take care of all of these things for them.

My advice to NGOs that want to build relationships is to decide on your unique selling point and make sure that you can deliver.”

Roland Waardenburg, Vice President Corporate Responsibility, Royal Ahold, Holland

2. Why are retailers the way they are? Food retailers work as part of a rapidly growing global agri-food industry in transformation. From China to Chile, retailers are restructuring their markets. In this section, four key drivers are selected and described. “The ‘pre-globalisation’ stage took place in the 1950s to early 1980s and was a period of government investment in modernisation of the industry.

The ‘globalisation’ stage began in the 1980s and continues today. It is characterised by increased trade liberalisation and improved logistics, and has led to a doubling of food trade in comparison with the previous period.”

Agrifood Industry Transformation and Small Farmers in Developing CountriesReardon, Barrett, Berdegue and Winnen, �009

2.1 Consumers and the fight for loyalty

Consumer confidence is stronger in 2010 as economies are returning to growth. However, it will be a slow, uphill plod over several years before it will be possible to see if spending will ever return to the levels seen before the credit crunch. Consumers everywhere are braced to deal with unemployment, increased taxes and inflation. They also face the dual problems of debt and restricted access to credit. The retailers depend on these consumers, whose recessionary mindset will survive beyond economic recovery.

6

All retailers face insecure futures, particularly in the discretionary categories. The food retailers also face the certainty of inflation and a squeeze on margins against a background of intense competition.

The role of private label is in transition from being a generic alternative to becoming a genuine consumer brand. There’s a big effort underway to improve the private label offer at every level and consumers that have traded down on product choice from national brands have found good quality. Further recessionary opportunities have come from the profitable middle income consumers that are choosing home cooking with premium ingredients ahead of meals out.

The ethical consumer is of great importance to retailers because they show less price sensitivity and help deliver improved margins on niche products such as organic. In the USA there has been intense innovation around providing products and services to a consumer segment described as LOHAS (‘Lifestyles of Health and Sustainability’) representing 1 in � adult Americans. They’re to be found in all markets around the world so the retailers now need a credible sustainability message. The LOHAS experts are the Natural Marketing Institute and in April �010 they valued the US LOHAS market for products and services as a $�90bn opportunity. Critics blame retailers for many social and environmental problems that afflict modern society. For the retailers themselves, their attention is on the consumer rather than these critics. After all, it is the unforgiving consumer that makes and breaks businesses every day.

“The words ‘policy’ and ‘politics’ share a similar root. For the most part ‘politics’ is the inevitable entry point for NGOs because business excels in their own operational and supply chain efficiencies which are not typical core competences of NGOs. For companies it’s more difficult to be approached on political issues rather than by the usual objective, step by step business cases. However, maybe it’s only through politics that NGOs can drive progress.My advice is as follows:

Understand the windows of opportunity.

Understand existing supplier retailer networks and work with them rather than try to replace them.

Identify where the retailer wants to diversify and grow.”

*

*

*

Dave Boselie, Senior Researcher, Sustainable supply chain development, Centre for Development Innovation, Wageningen University, Holland

7

2.2 Legislation: due diligence and warranties

The international framework of legislation for food safety is provided by United Nations agencies such as the World Health Organisation and the Food and Agriculture Organisation. They jointly publish the Codex Alimentarius, a collection of internationally recognized standards, codes of practice, guidelines and other recommendations relating to foods, food production and food safety. The World Trade Organisation works to ensure safe and fair practices.

In the European Union, regulations, are for the most part, mandatory but there are national variances and a useful example can be found in the UK. The Food Safety Act (1990) describes a defence known as ‘due diligence’ that balances consumer protection with the right of food businesses not to be convicted of an offence that they have taken all reasonable care to avoid committing. The law is also clear that size matters and a much more comprehensive defence is expected of large companies. This concept considers that ‘brand owners’ are effectively manufacturers. It has required all concerned to take accountability for their private label products and has driven the larger UK retailers to apply requirements on their supply chains around the world that may exceed local legislation. In other European countries, the principle of warranty may provide adequate legal defence. Warranty is an assurance by another that certain facts or conditions are true or will happen.

Hans-Juergen Matern, Vice President, Strategic Quality Management, Metro Group, Germany

We operate in 30 countries. Because we’re principally a wholesale business it does make sense to bundle volumes of many countries on certain products but for the most part they buy it themselves. Range must make sense for their market and their consumers.

My advice to NGOs that want to have successful relationships with retailers is:

Talk directly to the retailer if you can be really constructive. We are speaking to our customers. If there is an idea about sustainability that is in their interests, we want to know.

Work on the issues on which you have real expertise

Consider the issue from every angle, including that of the retailer. If you concentrate on your own argument without considering other points of view, your contribution will be less effective. Negotiation always requires some compromise.

For our own business model, the private label manufacturer is more like a contract factory. They would not be appropriate starting points.

*

*

*

*

8

In the USA, the Food and Drug Administration (FDA) has had a quite different impact. Critics of the FDA suggest that their safety net of inspection and testing has encouraged complacency on standards. Legislation planned for �01� will look to clarify responsibilities. In all countries there is also the informal court of public opinion. Any defence that relies on blaming somebody else will fail and the penalties can exceed any fines a conventional court may impose.

For the NGO wanting to understand retailers, it is legislation that drives the process of supplier approval at two levels. The formal one set by governments and the informal ones set by markets.

2.3 Price wars: ‘Pile it high. Sell it low’

Imagine a typical supermarket. You walk through the door. You stop for a moment.

Look at the abundance: There’s a lot of food.

Look at the hanging signs, shelf labels and packaging: There are a lot of bargains.

According to the US Food Marketing Institute, a supermarket’s attributes are “self-service, separate product departments, discount pricing, marketing and volume selling.” With the help of the Smithsonian Institute, they identified that the first ever supermarket1

*

*

Target, Discount Superstore, Chicago. Illinois, USA

Planet Retail Ltd - www.planetretail.net

9

Fiona Gooch, Senior Policy Advisor, Traidcraft UK“Businesses are very good at saying how efficiently they have delivered their targets. I don’t see them recognising that there is a really complex social and environmental situation in their supply chains. They can also send out confusing and sometimes conflicting messages that end up with workers and producers. It’s the business case that’s at the heart of this problem. They report success, but the social price in their supply chains isn’t considered. My advice to both retailers and NGOs is to genuinely consider the needs of the beneficiary; in this case that’s the small scale poor farmer and workers on farms everywhere.

I believe that retailers can be grouped as follows:

Leaders – with a real commitment to improve conditions in supply chains

Followers

Laggards

The NGO must understand this categorisation, so talk to people and do your research.

I would also say that there is no point seeking engagement with the laggards. A focus on the incentives around business is needed to change their practices and that is a challenge for public policy. Only some retailers can genuinely transform their business model.”

*

*

*

was opened in New York in 19�0. Founded by Michael Cullen and called ‘King Kullen’ in homage to the fictional ape, its slogan was written above the door: “Pile it high. Sell it low.”

This won’t change for shoppers in future generations because there is a price war that will never end. Battles will be won and lost as efficiencies are found and margins are squeezed. There’s not much choice for the retailer because if they don’t join the war they will be discarded by the consumer. This price war has generated countless negative headlines for the retailers. Here are some selected themes:

Excessive buying power leading to unfair markets.

Setting low retail prices that force smaller rivals out of business and turn town centres into boarded-up ghost towns.

Exploiting small farmers everywhere and hastening their replacement with industrial monoculture where wages are low, labour rights are minimal, animal welfare is not considered and biodiversity is compromised.

The battle for operational efficiency means cost cutting measures can also end up hitting staff which in turn can upset consumers. Retailers have a great dependence on their large numbers of hard working employees. If they don’t enjoy their work, it shows and it will make the difference between consumers just enduring the weekly trip to the supermarket and lead to them actually hating it. A friendly and cheerful checkout worker is worth their pay many times over. Human contact really matters.

*

*

*

10

The fight for price provides the daily backdrop to their business model. The original idea was simple:

Buy food. Sell it for more than you paid. Out of the margin pay your costs, keep some profit and invest in the business.

An important variation was soon introduced and continues to build in importance:

Pay someone to produce food. Put your own brand on it. Sell it for more than you paid but for less than the brands of the manufacturers. Out of the margin pay your costs and keep some profit to invest in your business. This presents a challenge to the NGO seeking to create positive outcomes for small scale farmers in developing countries. Sustainability is not mentioned. The model is operated by a buyer and it’s worth remembering a well known and apt phrase: ‘Old habits die hard’.

2.4 Emerging economies: new business opportunities

Business needs growth and in the global marketplace there are many opportunities for the retailers beyond their saturated home markets. The French retailer Carrefour was the original international pioneer but they have been joined by many others.

The arrival of modern retailing drives change in emerging economies. It’s good news on price for consumers because a new and efficient competitor to the traditional wholesalers will drive down prices and their investment in logistics and stock systems will improve food security�.

For NGOs looking to connect retailers with small farmers, there are also opportunities. Companies tend to source from larger farms. There are exceptions to this such as countries or sectors where small farmers dominate. However, preference will be given to those with the required assets such as farmers’ organisations, capital, irrigation and access to paved roads.

Brazil, China, Egypt, India, Indonesia, Mexico, Turkey and Vietnam are all examples of quickly growing large economies that represent excellent current opportunities for retailers. Tesco in Turkey or Thailand, Wal-Mart in Mexico or Costa Rica and Carrefour in Colombia or Brazil, will all be receptive to well structured procurement opportunities from small farmers. They will want to develop their business with a relevant local context and the opportunity to work with small farmers can be politically compelling. They also get pressure from governments to drive exports to their other markets.

“There’s a negative perception about NGOs that I sometimes hear from our merchandising teams who can be very mistrustful because of their past experiences. Sometimes they hear these things second hand through their peers or from their suppliers.

We know there’s another side to the story of food production and we do need to hear these other points of view. Our consumers expect us to be working on this.”

George Parmenter, Corporate Responsibility Manager, Hannafords (Delhaize Group) USA

11

3 How do retailers work?Retailers face the daily challenge of how to differentiate their offer. If they succeed, their existing consumers will return and they can attract new ones. This section looks at their commercial approach. Private label market shares are growing around the world as range and quality management improves. There is analysis of accountability, ways of buying and relationships with suppliers.

The interviews with the four retailers provided much of the background information for this section.

3.1 Private label: the everyday offer of more for less

New product development for private label used to be straightforward:

Buy the national brand. Copy it. Sell it for 30% less while protecting your margin.

The benefit is that the higher the share of overall sales for private label, the more control the retailer has of its operations. This model has changed away from straightforward imitation and there are now high levels of innovation in product, packaging and range.

Planet Retail, the industry analyst, has predicted private label growth in virtually all markets around the world, with stronger rates in developing markets driven by the transnational retailers like Walmart, Carrefour and Tesco�.

NGOs working on pro-development issues have tended to be more successful in their relationships with brand manufacturers. There is a short and medium term reason for this based on brand development and their ability to buy large quantities in specific supply chains. Looking forward, they also have constraints. For example, the fairtrade movement have invented and built a very successful umbrella brand that is applied across product categories. The brand manufacturers cannot

Note: PL penetration in % of food sales, estimates for �010; Note Estimates based on banner food sales �010f; f = forecastSouce: Planet Retail Ltd - www.planetreail.net

1�

do this but the retailers and their suppliers can. In the longer term, private label provides a natural home for pro-development communication.

Previous recessions have seen private label market share climbing sharply then dropping back. This time, it’s sticking because the retailers are doing such a good job. Here are two key reasons:

�.1.1 Range: the choice of products in a store

If you ask a consumer for their shopping priorities, the order is price, range and then availability. A typical shopping basket will have over �0 items and the challenge is to make each consumer feel they have found all the products they want. The smaller the store, the harder it is to get the range right.

To deliver the right basket, the retailers provide a range as follows:

Compare and contrast Brand Manufacturers Retailers

Relationship with consumers DistantThey invest heavily in qualitative and quantitative research but it still doesn’t really measure consumer behaviour.

What people say isn’t what they do.

CloseThey understand behaviour because they see what people buy every day over their entire range. They will see and understand the behaviour trends earlier and better.

Launching new products High riskThey need to protect their existing brands so need to constantly reinvest to improve perceived value. Sustainability is a good way to incrementally improve their offer without increasing their costs.

Low riskThey can look across ranges and experiment with new ideas in many different product sectors. They can exit from failed launches and move on easily with low losses. Their suppliers innovate for them.

Range Targeted product offerThey carefully position products within specialised categories.

Breadth and depthWell suited to lifestyle options such as health, convenience and fairness that go across food and drink categories. They always looking to reduce duplication and increase differentiation.

1�

Their private label offer at three levels: Good, better, best.

The right mix between their own products and the national brands.

The introduction of umbrella brands based on healthy eating, fairness, organic etc.

Other criteria include breadth before depth, constant market driven innovation and a logical shopping choice with clear shelf layouts.

�.1.� Quality: delivering physical and emotional attributes

Quality isn’t what it used to be. Once, it was a physical description about taste, appearance and safety, with perhaps some production best practice thrown in. For the leaders, there’s now much more to consider. Consumer demand for good, safe and fair food is driving a trend for specifications to include sustainability. This has created a new complexity.

Animal welfare, the environment and the lives of the people working in supply chains all now contribute to the emotional specification for quality. If there are failures for any of these new criteria, the product cannot be sold and there are many examples of withdrawals (from stores) and even recalls (from homes). Looking at it from the aspirant suppliers’ point of view, products must consistently deliver all these criteria, not just to get on a shelf but also to stay there.

The bar has been raised for eating quality as well. The sophistication of product development with extensive use of sensory assessment

*

*

*

techniques and consumer panels means that inferior ingredients, recipes or products will not be accepted. This professional approach to delivering a consistent quality position for private label is emerging because consumers reward excellence.

Bill Vorley, Principal Researcher, International Institute for the Environment and Development, UK

“I believe that NGOs should not set about inserting themselves into the value chain. Down that road lies poor viability once subsidies are removed. Their work is to broker relationships, and improve the ability of the producers to make effective choices for themselves. It is about driving genuine innovation that contributes to resilient livelihoods and ecosystems. NGOs need to recognise that once companies move up to the leading edge and build their own technical expertise, NGOs become less important as practitioners. But they still have an important role of stretching and challenging business -- to take retailers to the edge and show them the view.”

1�

3.2 Accountability: who does what and why

Resilient organisations act, they don’t wait. They understand failure, exercise foresight as a routine and empower those with the most expertise. A slogan that would prove such resilience would be: The buck stops everywhere.

Accountability is a mystery for an outsider and sometimes a source of confusion for an insider because the allocation of accountabilities at a retailer is complex. Their corporate organisation has to deal with both shocks and stress. The shocks may be as slight as currency values changing or as severe as a food safety scandal leading to death. The stresses can be as simple as unexpected competitor activity or as difficult as delivering daily availability to a thousand stores in the middle of winter. The leadership network must make organisational resilience a key priority

where every barrier against failure is treated as if it were the last one. Retailing history is littered with examples of companies that have failed to do this.

There are layers of tensions within each company with extra complexity for retailers that operate in more than one country. There can be policy conflict between departments that face different and uncomplimentary objectives. There can be strain between the people as tradition competes with change. Success and failure provide the backdrop to daily tasks and routines.

Within each department the reporting structures vary. The table below gives a broad heading of the various activities and some examples of job titles. The challenge for the outsider is to understand the allocation of accountability. For example, one organisational model could have Procurement, Technical and Corporate Responsibility in three separate divisions; another model could see them working in one team.

Department Objectives Job title examples

Purchasing Profit, price, margin, range, availability, waste, promotions

Commercial Directors Category ManagersBuyers, Merchandisers (US)

Marketing Communication to consumers, market analysis, design

Marketing ManagerNew Product Development (NPD) Manager

Supply Chain Moving products from suppliers to stores

Supply Chain ManagersStock controllers, Buyers (US)

Technical Quality, safety, legality, reputational risk, supplier management, standards

Technical ManagerTechnologistPackaging TechnologistQuality Manager

Corporate Responsibility Community, NGOs, labour standards, environmental issues

Ethical Trading ManagerEnvironment ManagerSustainability Manager

1�

Different jobs attract different types of people that in turn adopt different behaviours at work. For example and depending on circumstances, a corporate responsibility manager may appear charming, a technologist may appear driven by detail and a buyer may appear ruthless. But what really matters for an NGO looking to influence change will be the actual level of senior support for their particular issue. Retailers feature very direct leadership and a strong team culture that seeks to jointly deliver company targets. The origins for this culture can be seen in the way the stores operate, where lots of interdependent people work to multiple rolling daily deadlines with no room for slackers. There will be low support for any activity that is seen to be outside company targets.

3.3 Ways of buying: from partnership, through auction to direct

There is a perception that there will be a tightening of food supply, driven by population growth and climate change. There are some who believe this will lead to improved pricing at the farm gate and fairer trading. There is a discussion amongst NGOs about a shift in the power structures of the main buying desks and action by governments to enforce competition law, even to break up the biggest companies. There is no such discussion within the retailers. Even in times of acute shortage of a product, retailers expect to secure supply because they can offer guaranteed payment, large volumes and long-term supply relationships. They also believe that trading is already fair. When listening to anecdotes of buying abuse, consider the role of the intermediaries.

They buy from the producers and sell to the retailers. This means they can exercise good control of their margin. If they work on commission, they still have the opportunity to profit from farmers that are losing money. They also control price and cost communication to the farmers.

Example 1There is an oversupply of a simple product such as melons. The buyer can choose a number of sources in different countries. Supplier ‘X’ offers a discount to enable a price promotion that will clear the volume. Supplier ‘Y’ has no surplus of melons but no real choice other than to match the discount. Of course, next year the tables could be turned. Nonetheless, the message to the farmers selling to Supplier ‘Y’ is simplistic. ‘The retailer has dropped the price, it’s their fault’.

Example 2There is no oversupply of melons. The buyer needs money to hit a target and imposes a price reduction on Suppliers ‘X’ and ‘Y’ to increase margin and profit. The message to all the farmers is still simplistic, though the story is actually quite different. ‘The retailer has dropped the price, it’s their fault’.

Buying food of any type is both complex and variable. Commodities are traded in global markets governed by supply and demand and influenced by the economies of scale. Niche products have their own ‘mini’ markets that are governed by the same rules. There are many buying techniques used by retailers that are no different from those used by buyers in any company. Here are some common approaches relevant to private label:

16

Once a buyer’s margin targets have been set, with consideration for inflation and currency changes, the one thing that will provide flexibility is success measured by sales beating targets. The drivers of sales are price, availability and quality. The suppliers that cannot provide these will come under great pressure, as will the buyer.

Responsibility in purchasing has meant different things to different retailers but the prevalent view has been that it can be measured by profit and margin. However, as companies try to understand the intricacies of

sustainability, there is an emerging realisation that the social and environmental outcomes are key elements.

Following work in the UK over many years between an NGO and a trade association for buyers, there are some working definitions of sourcing practices� which lead to positive international development outcomes. In January �010, the development charity Traidcraft and the Chartered Institute of Purchasing and Supply (CIPS) published their latest collaboration. It’s a shared guide to more responsible procurement practices called “Win/Win: Achieving sustainable procurement

Way of buying Comments

Auction No partnership and uncertain governance meaning it’s possible to ‘win’ an auction but not get the deal.

Prices can be used to renegotiate with preferred incumbent suppliers. Often used to buy commodities.

Traditional daily or weekly buying model for fruit and vegetables.

Direct buying Emerging approach to bypass intermediaries and capitalise on the competence of major co-operatives.

Partnership A much abused term. At one end of the scale it may be an open book approach, aiming to ensure profits for all players.

At the other end it may be a high control approach with minimal margins allowed by the buyer.

Sometimes also using the term ‘Category Management.’

Over riders, discounts, marketing funds.

Negotiated annually or as needed by the retailer and quite separate to product negotiations.

These are separate fees paid to the retailer by the supplier. There will be incentives on both sides to sell and supply more.The money raised provides the buyer with flexibility when looking to achieve profit targets but may reduce flexibility in responding to new opportunities. Possible uses for these funds include marketing activity or promotional support.

17

with the developing world.” It provides a useful tool for NGOs and buyers by describing procurement best practice for supply chains that reach from the fields of the poor to the plates of the rich.

3.4 Supplier management: long term relationships and shared interests

Anyone that wants some time from a retail executive will need patience. They’ll be busy doing their job, which is to drive sales. Their working day is long and the commercial teams are small because their suppliers do a great deal of work for them. The people working at a supplier will mirror the responsibilities, from buyers and logistics to technologists and quality controllers. Their job is to supply what’s been agreed in quantity and quality.

Mike Barry, Head of Sustainable Business, Marks and Spencer, UK

“For Marks and Spencer it’s all about our brand. Nearly all our sales are private label and our customer proposition means we must go as far as we can for sustainability, it is what is expected. Our policies aren’t driven by legislation; they are decided by us on behalf of our customers.

Our relationships with NGOs are very good. Without that stakeholder investment we can’t achieve our aims. We need a good quality dialogue so we can do the best things for our business. Our tensions in the past were because they didn’t understand how we operated; it was as if there was a language issue! We also needed to consider their needs better than we used to. In most cases we now have a good common understanding.”

“We launched Plan A in January 2007, setting out 100 commitments to achieve in 5 years. We’ve now extended Plan A to 180 commitments to achieve by 2015, with the ultimate goal of becoming the world’s most sustainable major retailer.

Through Plan A we are working with our customers and our suppliers to combat climate change, reduce waste, use sustainable raw materials, trade ethically, and help our customers to lead healthier lifestyles”. www.plana.marksandspencer.com

18

Relationships between retailers and their suppliers include extremes of harmony and conflict. On the one hand, business is all about making growth and profit targets, so when this happens there is mutual satisfaction and celebration. On the other hand, when things don’t work out as planned, difficult changes involving people’s jobs will happen. With these high personal stakes there is a mutual interdependence to make each other look good. However, there is also an inherent unfairness in the relationship. Any supplier can privately tell incredible stories of retailer arrogance. Their daily reality is that this unfairness means they feel they must accept poor treatment. This inequality can in turn result in behaviour of evasion and deceit towards the retailer that does nothing for good business.

There’s a squeeze that can happen in these relationships as well. Short term profit needs can ‘trump’ long term investment in facilities, equipment and innovation. This situation can be seen on many farms around the world and suggests there will be new challenges of modernisation ahead to do with allocation of financial returns.

However, this ‘dark side’ of the relationship should be considered in context. These kinds of controlling behaviours are dealt with firmly because such unprofessional conduct is not acceptable in modern business. They are also uncommon. In the UK, Tesco introduced an annual anonymous supplier survey in �00�. This provides buyers with objective data on the experience of their own suppliers. In �009, they reported that 4% of their suppliers find them to be disrespectful (8% in �00�) and 1�% say they are unreasonable (�6% in �00�).

The reality is that these relationships work well. It can be tough but, on a day to day basis, there are strong shared interests that result in long term partnerships. In �010, Dutch transnational retailer Royal Ahold celebrated a �0 year partnership with Spanish citrus supplier Martin Navarro, a company that is both well known and highly respected by many European retailers.

Photo by Steve Homer, Kenya, �009

19

4 What retailers think of NGOs: Tensions and opportunitiesThere are two types of NGO relationships with retailers. There is confrontation, based on campaigning for impact through a public exposure of cause and effect. There is also pragmatic engagement on targeted issues. In this second case, there are two further versions. There’s a short term project alliance and more unusually, a true partnership with a medium term understanding.

There were four interviews with NGOs that have helped with this section. By its nature, this paper must deal in generalisation. However, there is variability. Imagine you work for an NGO. You want to make an impact to impress current donors and attract new ones. This will not only help drive change for your particular issue, but it will also help secure your own job. Consider which retailer you should go for. The bigger the retailer, the better the target: Decision made.

This behaviour causes resentment from the retailers but it has inescapable logic. NGOs have limited resources. They know that the bigger companies can deliver change. There is a long list of such confrontations that have influenced change. However, the NGOs concerned would perhaps admit in private that their stories lack balance.

This creates an anomaly. The onlooker would conclude that the bigger companies are the least responsible, but it’s not that simple. In the

“I’ve worked with brand manufacturers and with retailers on smallholder inclusion and it’s different. A retailer’s business model tends to focus on sourcing, managing a vast range of product categories by moving sourcing away from supply chain risks. A brand manufacturer’s business models deal with a smaller set of products or ingredients that are critical to their brands, which means investing or collaborating to develop new opportunities that manage risks at farm level.

In my experience, being clear with retailers on areas of common interest is key and identifying preferred suppliers willing to adapt their practices to work with smallholders, has been critical.

Finally, it takes time to develop a relationship, so be patient.”

David Bright. Global Markets and Enterprise Adviser, Oxfam GB

�0

search for objectivity, the combined evidence of policy and behaviour points to three groups of retailers: leaders, followers and laggards. Ten years ago there were very few retail executives with anything more than a superficial understanding of sustainability issues. Today, there is not only a good understanding but there’s also an extensive network of experts that work on specific issues. There’s an intriguing trend of individuals migrating in both directions. This is blurring the potential value of the NGO whose role has

often been like a modern-day canary in the coalmine. Ignore what NGOs are saying and you may well be closing your eyes to invisible dangers ahead. Governments can make an assumption that the NGOs adopt this role and can be left to get on with it. Retailers can make the assumption that they only need to respond to pressure and not take a proactive approach to sustainability issues. However, the right approach to dealing with the emerging sustainability agenda must be a proactive and collaborative one.

I like... I don’t like...

How they can change things very quickly. Their business model. Price pressures that start with them cause damage to people and the environment. They don’t consider the impact of their buying on communities.

That they can help us get funding. The excessive control that they exercise which leads to unfair markets.

Mutual learning that can help us. They are reactive to emerging issues and always wait for consumers’ opinions to change.

The NGOs view of the retailers:

I like... I don’t like...

Useful and relevant information about risks that I can use to improve my business.

When they build their own brand and become a business yet hide behind ‘not-for-profit.’

New products and new ideas about issues such as poverty or water footprinting.

Their lack of understanding about how business works. They can waste our time and their own.

Special skills and real solutions. Their lack of market knowledge.

The retailers view of the NGOs:

�1

5 SolutionsThe NGOs want to drive positive change for the issues they work on. The retailers want pragmatic support that will provide them with opportunities to improve their business. On these two simple principles there is a straightforward case for engagement. “The only way that has ever been discovered to have a lot of people cooperate together voluntarily is through the free market. ...The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” Milton Friedman, Economist

The challenge is to find a new business model for the future where the NGO can facilitate effective relationships between the informal unstructured market of small farmers and the formal industrial model of the retailer. They can provide tactical support to supply chain intermediaries for commercial, social and environmental dynamics. In return, the retailers can account for the true social and environmental cost of their business model.

Through honest dealing and strict adherence to the view that for the NGO to gain, so must the retailer, there can be successful relationships.

Empathy is the power to identify oneself with and fully understand a person. This statement was put to the interviewees for this paper:

“If you want to increase the chance that a product will work, here’s what you must do…”

The answer from the retailers can be summed up in two words: Understandus

Photo by Shannon Jansen, Technoserve, Kenya �010

El Corte Ingles, Goya department store, Madrd, Spain.

��

6 Recommendations to NGOsThis is not about shouting louder or complaining longer. This is about achieving full understanding that will enable effective influencing. To be successful, NGOs must adopt a businesslike approach on behalf of their stakeholders and ensure that their contribution is both appropriate and relevant.

6.1 Understanding both the retailer’s business and your own role

There are two separate interests involved and there must be a win for them both. Your core competencies will not be in buying, marketing, range management, product quality or logistics. Instead, you’re good at accurately framing risks and solutions, engaging communities and providing specialist local support within supply chains.

The retailers are ruled by their consumers and their business plan. As a result, there will be windows of opportunity that open in response to supply chain failures or reputational issues, so be prepared to respond and adapt.

Also be prepared to answer these questions:

‘Why with you and not with another?’

‘What can you deliver and how much will it cost?’

*

*

Recommendation 1: Research the retailer’s strategy, market position and current arrangements

Recommendation 2: Identify the target outcomes for the retailer of engagement

Recommendation 3: Be clear about your own role and contribution

Recommendation 4: Make sure you can prove your credibility

6.2 Senior support: politics versus policy

Retailers are different in certain ways, such as their corporate culture, consumer segment, buying models and market offer. In other ways they are quite similar, such as their values or their relationship with their staff and consumers. There is one particular similarity that is of great relevance to you. Decision making on policy issues is taken at senior level.

The business case that you might put to a retailer would be based on efficiency gains, consumer demand and moral correctness. On the first two, retailers actually need no advice. For the third, it’s a different matter; it’s about their long term interests. They may have their policies in place about ethical trading and environmental stewardship but they will be concerned with the politics of actually delivering the change.

The senior directors have the authority to assign particular projects to their teams and to their suppliers. This essential support will enable investment in time and money for all involved.

Recommendation 5: The first approach to the retailer should be at senior level, for both sides.

��

6.3 Managing expectations: timescales, commitment and organisational change

Business can be tough. Sometimes things happen quickly. Sometimes projects can be parked.

Lots of things that are tried don’t work.

People succeed and fail.

You must expect there will be demands for your adaptability.

*

*

*

*

Expect to deliver to tight timescales because failure to hit deadlines will erode your credibility.

Expect to communicate assertively and stick up for yourself.

Establish your own type of relationship as a ‘critical friend’.

Success requires empathy from both sides.

Recommendation 6: Adopt a project management approach to provide structure and process.

*

*

*

*

Photo by Shannon Jansen, Technoserve, Kenya �010

��

“I have a few ideas that an NGO might find helpful when approaching retailers:

It’s really important to properly understand a product niche. For example, another fairtrade coffee is pointless. Make sure you are offering something that is really novel.

It takes time to put new ideas into practice. As retailers we can be very quick but with more complex ideas it can become difficult. So be prepared. Sometimes you will need to be patient. At other times you will be really busy.

Timing can be very important. For example, Christmas is planned from January onwards.

Build your own credibility. Think about your reputation and track record because these will be questions you will have to answer.

Genuinely new products and innovative ideas are really valuable. Timing can help as well. For example, a low water product. This could be just the right time to put such a product on the shelf.

Sometimes our people change and that can cause delays. This can be a positive or a negative, but expect it.

Play your best cards at the beginning. Bring your senior people to help sell the relationship.

Make sure you understand us. We can be very different from each other.

If you have other relationships with brand manufacturers ask them for their help. They should explain how they approach their own retailer relationship. They ought to be helpful and can provide you with business training and introductions.

Remember, buying is run by accountants. You need to understand and interact on financial terminology”

*

*

*

*

*

*

*

*

*

*

Chris Brown, Head of Ethical and Sustainable Sourcing, Asda-Walmart, UK

��

Footnotes:The place where supermarketing was born,” Mass Market Retailers 19, no. 9 (17 June �00�): 17�Food Prices and Modern Retail: The Case of Delhi. Minten, Reardon and Sutradhar, �009Private label: The brands of the future, Planet Retail, May �010http://www.traidcraft.co.uk/international_development/policy_work/purchasing_practices/purchasing_practices_reports

Acknowledgements:This paper has been commissioned by the Sustainable Food Laboratory as a part of their project: “New Business Models for Sustainable Trading Relationships in Africa.”

This is a four-year project to innovate new business models that enable smallholders in Africa to participate in trading relationships with international businesses that support the long-term health and prosperity of their environments, farms and communities. Rainforest Alliance, the International Institute for Environment and Development (IIED), Counterpart International, the International Center for Tropical Agriculture, Catholic Relief Services and the Sustainable Food Laboratory have joined together and funding is by the Rainforest Alliance through its grant from the Bill and Melinda Gates Foundation.

The Sustainable Food Lab is a consortium of business, non profit and public organizations working together to accelerate the shift toward sustainability.

Many thanks to the all the people who shared their knowledge to help with this work:

Andrew Batty, Independent Consultant, UK

David Boselie, Senior researcher, Sustainable supply chain development, Centre for Development Innovation, Wageningen University, Holland

David Bright, Global Markets and Enterprise Adviser, Oxfam GB

Chris Brown, Head of Ethical and Sustainable Sourcing, Asda-Walmart, UK

Fiona Gooch, Senior Policy Advisor, Traidcraft, UK

Steve Homer, Independent Consultant, UK

Nick Jacobs, Independent commission agent, UK

Hans-Juergen Matern, Vice President, Strategic Quality Management, Metro Group, Germany

George Parmenter, Corporate Responsibility Manager, Hannaford (Delhaize Group), USA

Bill Vorley, Principal Researcher, International Institute for the Environment and Development, UK

Roland Waardenburg, Vice President Corporate Responsibility, Royal Ahold, Holland

Advice and support from Don Seville of the Sustainable Food Laboratory, USA

Reviewers were Don Seville, Andrew Batty, David Bright, Bill Vorley and Tamsin Anstey

This paper is based on original work by a group of four postgraduate students from the Massachusetts Institute of Technology, the Sloan School of Management and the Harvard Kennedy School of Government.

They are Jo Aylor, Kathrin Bimesdoerfer, Sayaka Hill and Jasmine Park.

Designed by Kevin Taylor at Ark ICT Solutions Ltd www.ark.me.uk

1.�.�.�.

*

*

*

*

*

*

*

*

*

*

*

�6

Frequently asked questions1. Does a retailer want to see products being proposed by an NGO?

No. This is the job of a supplier.

However, a supplier may be accompanied by an NGO.

�. Does a retailer want to see services being proposed by an NGO?

A service that will add value for customers will always be of interest. The NGO needs to apply a customer focus to any proposal.

�. What types of products are most likely to be wanted?

In theory, anything that is on a shelf in a supermarket could have a cheaper and better source. In practice, the suppliers have long term relationships and are managing a number of different products. There are few changes made and new suppliers are unusual. If there is a change, it will be a result of innovation in price or value.

Value could be added by introducing product certification but in general, prices don’t go up.

Value can come from a good story about the product that creates authenticity:

‘This bottle of juice is produced just nearby’. ‘This bunch of flowers was grown by a women’s co-operative in Mexico’.

Value can also come from a story about the ingredients:

‘This chicken pie was made from free-range chickens’. ‘The beans in this can were grown by small scale farmers in Ethiopia’.

*

*

*

�. Would a retailer be prepared to co-invest in the development of a new product?

Retailers are unlikely to co-invest with actual cash. However, with well established suppliers where there are good trust levels, there may be opportunities for ‘in-kind’ contributions through medium term volume commitments or technical support.

�. What information is important and unimportant for a buyer?

The pre-requisites for supply are safety, legality and quality. These must be credibly presented. Retailers and brand manufacturers all work to the same basic standards, both for farming and processing. The Global Food Safety Initiative (www.mygfsi.com) provides a standards benchmarking service for the industry so look at any of their recognised standards.

Price, volumes and timescales will also be required.

Beyond that, there will be considerable variation. Depending on the retailer, there may be questions on every stage of the proposed supply chain.

Some buyers will be uninterested in farming.

Supporting stories that may be used for communication to consumers must be credible and verifiable.

*

*

*

*

6. Which is easier, fresh or ambient?

Ambient foods are more straightforward because the supplier will work from stock and availability is easier to deliver. Fresh supply chains also require significant investment in refrigeration. Quality on fresh foods represents a daily challenge.

7. How long does it take to get a product onto a shelf?

Product development for private label is a relatively straightforward process. Something very simple, such as a new source of mangos with an existing supplier, can be as quick as a phone call. Something very complex, with multiple ingredients, consumer testing, an unapproved factory and new supplier could take many months. Retailers’ requirements also vary greatly and may take time and money to satisfy.

In general, from deal to launch can be 8 - 16 weeks.

8. How useful is product certification, such as organic or fairtrade?

It can be very useful because these labels can drive sales. Sometimes, quality standards may be less exacting for such products. This means consumers pay more for something that’s not so good because they have an emotional attachment to the promise. This also means that there are many quality opportunities in existing ranges.

�7

Frequently asked questions9. Is it easier to get a ‘story’ into a brand or into private label?

Most corporate responsibility stories for brands have been delivered through certification. This is important for the brand manufacturers because they are not well known by the consumer and tend to be mistrusted. By putting ‘Rainforest Alliance’ on a product they can get instant credibility and sales will increase, because the label is trusted.

Private label is also often seen with certification but can be very flexible. As they become more sophisticated, the new private label ranges can provide a good place to position production stories.

10. How does ‘senior support’ work on a day to day basis?

For this to be effective, an agreed reporting process must be in place making senior support implied for those involved. It also helps if the senior person shows real interest and the ‘junior’ person doesn’t show genuine dismay at being made to do something that makes their life difficult.

11. How important are specifications?

Retailers work very closely with their suppliers to agreed rules including the product specification. This will include physical quality attributes, legal requirements, countries of origin, labelling etc. It is not unusual to see named ingredient suppliers included, perhaps with seasonal limitations. Once this is agreed and signed it becomes a formal agreement.

The supplier’s job is to deliver the quantity ordered at the quality specified. The careful shared effort that goes into agreeing the specification, when combined with the technical requirements of quality management systems, mean that a supplier makes many day to day decisions without needing to ask or tell.

The advice for any new supplier is to make sure the specification is achievable on a consistent basis. Once it has been agreed, changes are still possible, but will be viewed negatively.

1�. How will success be measured?

Technically, suppliers to retailers are measured by their failures. The list of indicators includes:

Withdrawals and recalls

Customer complaints

Product testing failures for microbiology or residues

Physical quality failures against specification

Audit performance including non-conformance management

Commercially, suppliers are measured on these indicators:

Sales

Availability (quantity supplied against order)

The advice for any new supplier is to deliver whatever is ordered to the agreed specification. This means planning for demand fluctuations, be they for more or for less. There must be clear contingency options both for procurement and for marketing. Failure on availability is the most common problem for a new supplier.

*

*

*

*

*

*

*

1�. What happens if we are successful?

Anything that works well will quickly result in the buyer asking for more. That will not be for more of the same, instead it will be for innovation around the theme. Experienced suppliers are always actively coming up with new products, sources, packaging etc. They will also be always looking for ways to supply for less as it is better to be offering savings than to be asked for them. The advice for any new supplier is to constantly innovate while ensuring that supply of quantity and quality is secure.

1�. What are primary and secondary suppliers?

The primary supplier will be the one that gets paid. The secondary supplier will supply ingredients to the primary supplier. Depending on the retailer, interest in secondary suppliers will range from strong to non-existent.

Written by: Chris AnsteyIndependent Consultant to the food and retail industry

70, Tannery DriftRoyston

Hertfordshire, UK, SG8 �DEPhone: +�� 176� ��9�8�

www.anstey-ltd.com

The Sustainable Food Laboratory

Don SevilleCo-Director

19�, North Main StreetWhite River Junction

Vermont, 0�001, USAPhone: +1 (80�) ��9 �06� ext 10�

www.sustainablefoodlab.org