Supermarkets should be at the forefront of supply chain efficiency
Digitalisation of food value chains involves creating an electronic footprint of the entire journey of the product and its certifications
SA supermarket chains are not only central to how markets work in Southern Africa — they can help improve supplier capabilities, especially for food products, and take a lead in the roll-out of digital technologies to enable more efficient supply chains critical for competitiveness and employment growth.
As key routes to market for producers, their growing logistics networks are integrating Southern Africa by opening up new and larger markets for producers and other participants in value chains.
Supermarkets are lead firms in value chains and we need to treat them as such. Over and above legal requirements, such as compliance with national standards, food safety, and labeling and packaging regulations, supermarkets have sets of private standards that suppliers have to meet. These involve ensuring quality, consistency, delivery schedules and quantities. Complying to these require significant investments in supplier plants and capabilities.
It is thus critical that supermarkets actively engage in efforts to upgrade local producers to improve their competitiveness, as well as to facilitate the participation of smaller suppliers in local and regional value chains. This has important implications for jobs in the agriculture and manufacturing sectors.
There is substantial employment potential in fruit production and the range of ancillary activities, such as packaging, logistics and cold chain facilities
Research by the Centre for Competition, Regulation and Economic Development at University of Johannesburg, indicates that a development compact or code of conduct is needed urgently to set out a roadmap for the supermarket sector and clear commitments on the part of government and business.
At the centre of such a compact or code must be a shift from adversarial bargaining relationships — in which parties fight to get the largest share of returns in value chains — to how to transform the overall competitiveness of food production and retail. The good news is that there are indications that supermarkets are already moving in this direction. Moreover, there are international experiences from which we can learn. A further spur to action is the Competition Commission’s grocery retail market inquiry and the amendments to the Competition Act, which target buyer power as a specific competition concern.
A code in the interest of all
The lesson from countries such as Australia is that the threat of enforcement need not be pursued if a code with commitments to constructive long-term, investment-supporting relationships is agreed to instead. Supporting suppliers has positive spill-overs for the economy, given the multiple links in supply chains. And, a growing economy is in the interests of supermarkets themselves as dynamic cities and towns drive greater sales and profits.
International initiatives, such as those in the UK and Australia, have in common provisions to move away from imposing extractive terms on suppliers, such as the unjustified charging of listing and slotting fees; delayed supplier payments; and charges for promotions, advertising or better positioning of products on shelves. Some of these initiatives are mandatory, such as the UK’s groceries supply code of practice. But, even if they are voluntary, there needs to be mechanisms to hold parties to their commitments to ensure credibility.
Strategies can benefit supply chains — and jobs
Individually, each supermarket has limited incentives to support supplier capabilities that will also benefit their rival grocery chains. Each supermarket also naturally wants to shift risk and costs to suppliers to improve its own short-term financial performance. Collectively, however, this undermines the healthy linkage required to support investment: a producer needs to know if capital committed to new production equipment will have markets for its output; and the bank providing the finance also wants the comfort of knowing the investment meets the needs of the market.
The strategies of the main supermarket chains can thus set the pace and direction of knowledge flows and upgrading in supply chains. Very substantial employment creation in a whole range of food value chains is at stake. For example, there is substantial employment potential in fruit production and the range of ancillary activities, such as packaging, logistics and cold chain facilities.
Supplier development a win-win case
Our research has shown that, in general, past supplier development programmes of the main supermarket chains in SA were undertaken more for BEE compliance and corporate social responsibility initiatives than as part of long-term commitments to upgrading. The programmes have also been undertaken as part of competition conditions imposed on private-sector players, such as the Massmart supplier development fund created as part of the conditions set by the Competition Appeal Court in the Walmart/Massmart merger.
There have been important lessons from the successes and failures of these programmes and the large supermarket chains are moving to longer-term commitments to increase participation and upgrade supplier capabilities. This requires a project management approach alongside lowering the barriers to participation, such as access to shelf space.
Digitalisation of food value chains, which involves creating an electronic footprint of the entire journey of the product and associated certifications, requires information and knowledge transfer from supermarkets about what customers want. Supermarkets collect big data that is important to analyse for trends in customer-purchasing patterns.
Government as a custodian and enabler
Where is the government in these emerging opportunities? It needs to be a facilitator and problem solver. What can be done to help smaller firms with costs of complying with supermarket standards to change the cost-benefit calculation from the supermarkets? How can the skills acquisition for digitalisation be fast-tracked? What are the lessons from other countries about smart regulation for capabilities development?
Close to home, Namibia adopted a retail sector charter in 2016 that includes both a voluntary code of conduct and supplier development elements. The charter was established by the Namibia trade forum led by the Namibian government with buy-in from key business stakeholders. It aims to incorporate enterprise development programmes with skills development, labeling and packaging support, and upgrading investments for suppliers to conform to retail specifications. The charter has had some positive impacts in the agro-processing and clothing sectors.
The Namibian government has signaled its commitment from the inception and understood that, from its side, it would have to address infrastructure backlogs and the cost of utilities to assist suppliers. Having a “custodian” for the charter in the Namibia trade forum further assists compliance, achieving concrete outcomes and reducing the risk of capture.
The key steps SA urgently needs to take to strengthen the important role of supermarkets in contributing to economic growth are:
- To thrash out the terms of a code of conduct for supermarkets, with key undertakings and independent oversight. The importance of consistent political and institutional commitment from government’s side must be recognised as part of a broad stakeholder compact.
- To pave the way for a regional approach in Southern Africa to support strong regional value chains in food and agro-processing, an agenda that is even more imperative given climate change.
- To address possible unfair exertions of market power through provisions in the code to complement the supplier development programmes led by supermarkets.
- To garner public support for private investments in logistics, distribution and warehouse facilities, and cold chains. The digitalisation of value chains are important investments too.
- To provide co-funding for supplier programmes through fines levied by the competition authorities in abuse of dominance or cartel matters, or from existing pockets of funding, including those for black industrialists and small businesses in SA.
- To open up and create flexible retail spaces in urban planning to ensure a mix of retail formats and diversity through planning policies. Here local governments’ commitment is critical.
Both the Competition Commission in its preliminary retail inquiry recommendations, and the National Treasury in its recently released strategy document on economic transformation, inclusive growth, and competitiveness, have emphasised the importance of a competitive supermarket sector for greater participation and more inclusive supply chains. The time for actioning these steps to achieve positive outcomes is now.
• Prof Roberts is a lead researcher at the Centre for Competition, Regulation and Economic Development (CCRED), University of Johannesburg; Dr das Nair is a senior researcher at CCRED.
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