Shingie Chisoro Dube And Mmamoletji Thosago<\/h2><\/div><\/div><\/div>

The growth of South African supermarket groups in southern Africa has not translated into increased participation of small local suppliers in supermarket value chains. Small suppliers refer to organisations with less than 50 employees and an annual total turnover of less than R13 million.^{1<\/sup>\u00a0Building on a previous article in this Review2<\/sup>, this article draws insights from research conducted by CCRED, ZIPAR and ZEPARU on supermarket value chains in South Africa, Botswana, Zambia and Zimbabwe.3<\/sup>\u00a0Based on interviews with suppliers and supermarkets, we focus on supermarkets\u2019 centralised procurement, trading terms and private standards and the implications for local supplier participation in southern Africa.<\/p><\/div><\/div>}

CENTRALISED PROCUREMENT<\/h3><\/div><\/div><\/div>

In order to achieve economies of scale, supermarket groups centralise procurement activities. This shifts decision making rights from regional store managers to the head office level. This has the effect of excluding smaller suppliers from supply chains due to supermarkets contracting a few large suppliers with scale to serve outlets across the region.\u00a0^{4,<\/sup>\u00a0The effects are important for small suppliers and new entrants located outside the head office country who find it challenging to be listed on the supermarket\u2019s supplier database.<\/p>}

Particular to southern Africa, South African-owned supermarkets practise centralised purchasing regarding corporate stores operating in Zambia, Zimbabwe and Botswana. The head office in South Africa is responsible for listing of suppliers for the majority of regional corporate stores. This means that suppliers located outside South Africa are less likely to participate in regional supply chains given their limited scale and difficulties in accessing decision makers. In addition, small suppliers cannot undertake informal negotiations with store managers who have minimal discretion regarding listing of local suppliers, although they can submit potential supplier information to the head office. On the contrary, suppliers find it relatively easy to supply locally-owned supermarkets since they can easily access decision makers and receive prompt responses.<\/p><\/div><\/div>

PRIVATE STANDARDS<\/h3><\/div><\/div><\/div>

Requirements for international accreditations create additional costs to suppliers and make it increasingly costly to supply supermarkets. Although international standards are regarded as voluntary certifications, suppliers are compelled to incur additional costs to acquire higher accreditation standards to have a competitive edge in the market and increase the likelihood of supplying supermarkets. These lump sum upfront fees are burdensome for small and new suppliers who lack the funds and therefore continue to produce without the necessary certifications which results in supermarkets not accepting their products. For example, the Food Safety System Certification (FSSC 2000) and Hazard Analysis and Critical Control Point (HACCP) are international accreditations costing as much as US$13,800 (plus US$6,900 annual fees for renewal) and US$5,500, respectively.^{5<\/sup>\u00a0In addition, retailers are quickly adopting global initiatives such as the Global Agri-cultural Practice (GAP) and sustainability requirements which entail minimum use of chemicals and water harvested as well as organic production systems. Small suppliers often lack the expertise and systems to quantify and track the use of chemicals and water.<\/p><\/div><\/div>}

COSTS ASSOCIATED WITH TRADING TERMS<\/h3><\/div><\/div><\/div>

After a supply contract has been approved, the supplier is required to pay upfront listing and slotting fees to be listed on the supplier database and gain access to supermarket shelves. Slotting fees are generally fixed and independent of the volume of goods sold and hence may not be reflective of costs.\u00a0^{6<\/sup>\u00a0Although listing and slotting fees act as a screening device for retailers to stock quality products with low risks of failure on the market, they create additional costs and pass on the risk of stocking new products to suppliers.\u00a07<\/sup>\u00a0Some suppliers are not able to pay these fees. In addition, the fixed nature of slotting fees favours established large firms that produce large volumes of products and can spread the costs over a greater number of units.<\/p>}

Periodically, retailers carry out special promotions before major holidays where products are sold at discounted prices. In order to participate, suppliers pay promotion fees to cover marketing or advertising costs incurred by the supermarket through television, newspapers and flyers. Retailer initiated promotions, although beneficial in terms of volumes sold, cre-ate unexpected costs for suppliers resulting in less than expected income and pass on increased uncertainty to suppliers.^{8<\/sup>\u00a0In South Africa, suppliers pay promotion fees ranging from US$2,500 to US$7,000 depending on the nature of the promotion in terms of duration and geographical coverage. Suppliers in Zimbabwe pay even higher fees to take part in large scale promotions at US$10,000 for each product line.\u00a09<\/sup><\/p><\/div><\/div>}

LONG PAYMENT PERIODS<\/h3><\/div><\/div><\/div>

Extended payment period terms are a key factor contributing to the non-participation of local suppliers in supermarket supply chains in Zambia and Zimbabwe. This means that supermarkets do not pay suppliers immediately for products already sold and delivered. These payment terms adversely affect suppliers\u2019 cash flow and working capital making it difficult to continue production. This in turn leads to additional finance costs as suppliers find alternative sources of working capital.\u00a0^{10<\/sup>\u00a0The effects are important for small suppliers without additional reserves to carry out day to day operations particularly where they lack quality administration systems that invoice promptly and correctly which results in late payments.\u00a011<\/sup>\u00a0For instance, South African-owned supermarkets operating in Zambia and Zimbabwe practise longer payment periods between 30 and 90 days for products already sold and delivered by suppliers. However, the same supermarkets operating within South Africa have shorter payment periods of 15 to 30 days. As a result, the majority of small suppliers tend to trade in the informal markets with instant cash payments. For example, in Zambia the high level of informal trade at the DRC-Zambian border in Katanga Province provides an easily accessible market for small suppliers who cannot penetrate supermarket supply chains.<\/p><\/div><\/div>}

SUPPORT FROM SUPERMARKETS<\/h3><\/div><\/div><\/div>

Centralised purchasing and trading terms puts considerable pressure on suppliers in terms of additional costs, suppressed profits and uncertainty. To put this in perspective, in South Africa the various fees constitute approximately 16% of the value of the supplier\u2019s product, which is significant.\u00a0^{12<\/sup>\u00a0In order to mitigate the effects of the above fees on suppliers, some supermarkets across the region have introduced measures to increase participation of local suppliers in supply chains. In South Africa, major retail chains offer small suppliers preferential trading terms through shorter payment periods to ease cash flow problems and guarantee access to markets through lenient supermarket procurement policies. In Zambia, supermarkets encourage participation of local suppliers by relaxing private standards for processed goods and developing a database procurement system that includes local suppliers. Similarly in Botswana, local-owned supermarkets provide access to market for small farmers and advance cash to suppliers to ease cash flow challenges.<\/p>}

Such programmes, although they open up the market to small suppliers, fail to address the core financial constraints imposed by the above fees and costs. To participate in supermarket supply chains, suppliers need to pay upfront lump sum costs before a single product is sold. The upfront costs can be prohibitive and are in some cases not product-related, with the effect of constraining the ability of suppliers to sus-tain and grow their businesses.<\/p>

To reduce the cost of supplying supermarkets and promote transparency in procurement procedures and trading terms, southern African countries could adopt retail industry codes as a starting point. Such codes as applied in several other countries regulate the conduct of supermarkets towards suppliers by setting minimum standards and obligations for retailers with regard to drafting of supply agreements and various fees included in the trading terms.\u00a0^{13<\/sup>\u00a0Namibia recently adopted the retail sector charter in March 2016 aimed at increasing participation of local suppliers through transparent procurement procedures, fair payment terms and rebate provisions.\u00a014<\/sup>\u00a0Internationally, the Australian Competition and Consumer Commission forbids supermarkets from directly or indirectly requesting suppliers to pay listing fees, shrinkage fees, wastage fees, promotion fees or payment for better positioning of products on the supermarket shelves. Only certain excep-tions are permitted and any amount paid must be considered reasonable according to certain predefined criteria.\u00a015<\/sup>\u00a0Importantly, the commitment to codes of conduct can help to reduce costs and uncertainty faced by suppliers.<\/p><\/div><\/div>}

NOTES<\/h3>

1. Department of Trade and Industry. (2003). \u2018National Small Business Amendment Act No 26 of 2003<\/a>\u2019. Government Gazette Vol.461.
2. Chisoro Dube, S. \u2018Regional supermarket value chains: is there a role for local suppliers?\u2019 (May 2015). CCRED Quarterly Competition Review.
3. Centre for Competition, Regulation and Economic Development (CCRED). \u2018The expansion of regional supermarket chains: Changing models of retailing and the implications for local supplier capabilities in South Africa, Botswana, Zambia and Zimbabwe.\u2019 (Forthcoming). Zambia Institute for Policy Analysis and Research (ZIPAR). \u2018The Expansion of Regional Supermarket Chains: Implications for Local Suppliers: The Case for Zambia\u2019. (Forthcoming). Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU). \u2018The Expansion of Regional Supermarkets Chains, Changing Models of Retailing and the Implications for Local Supplier Capabilities: A case of Zimbabwe\u2019. (Forthcoming).
4. Karjalainen, K. (2009). \u2018Challenges of purchasing centralization- Empirical evidence from public procurement<\/a>\u2019, Helsinki School of Economics.
5. See note 3.
6. PricewaterhouseCoopers (PwC). (2012). \u2018Issues and solutions for the retail and consumer goods industries<\/a>\u2019 Price-waterhouseCoopers (PwC).
7. Consumers International. (2012). \u2018The relationship be-tween supermarkets and suppliers: What are the implications?<\/a>‘ Consumers International.
8. See note 7.
9. See note 3.
10. See note 7.
11. See note 7.
12. Interview conducted in November 2015. Also see note 3 (CCRED).
13. The Australian Competition & Consumer Commission. (2015). \u2018Competition and Consumer (Industry Codes- Food and grocery) Regulation 2015<\/a>\u2019 Australian Govern-ment.
14. Namibian Trade Forum. (2016). \u2018Namibian retail sector charter\u2019 Namibian Trade Forum.
15. See note 13.<\/p><\/div><\/div><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"

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