For many up-and-coming farmers, gaining access to retailers is a critical step in transitioning to commercial farming. However, Duncan Masiwa reports that many are subjected to “unfair bully tactics” that leave them vulnerable and exploited.
While gaining access to retail markets may be fundamental to the growth of promising small-scale farmers, a multi-award-winning producer in Gauteng admits that working with retailers are becoming a major headache.
The farmer supplies high value vegetable crops to leading retailers, food processors and fresh produce markets across South Africa and has the courage to say what many farmers have been whispering for years. Some retailers exploit farmers through their selfish tendencies and unfair demands.
Speaking to Food For Mzansi, the farmer asked the publication not to use her real name, as she fears victimisation for speaking out, so we are referring to her as Mirriam Sithole.
“Retailers can play bullying tactics, like asking you to supply exclusively to them and no other retailers. But that’s unfair,’ says Sithole.
Practically speaking, this means that such retailers would only buy a portion of harvested produce, leaving the farmer stuck with the rest.
A farmer who has, for example, harvested ten tonnes, would be left with six tonnes if a retailer seeking exclusivity only takes four tonnes.
“What happens to the remaining tonnes when I’m forced into a exclusivity contract?” she asks.
Another issue raised by Sithole is that food producers are often restricted on who they can purchase packaging material from. This is due to existing relationships that retailers may have with packaging manufacturers.
“As a farmer, you can’t shop around for better prices. You are obligated to buy from them.”
This does not help farmers like Sithole at all. Even when manufacturers increase their prices, she would be stuck with them. This is due to the agreement with retailers who call the shots.
She tells Food For Mzansi, “You are bullied into buying from the more expensive supplier. This is regardless of what the retailer is offering you per kilogram or tonne for a specific product. When packaging companies increase their prices, it automatically increases the farmer’s production cost.”
Furthermore, many retailers have been known to run promotions on a whim. When this happens, Sithole says farmers are bullied into dropping their prices too. This, even though the farmer already budgeted their income.
She also highlights the fact that farmers always have to go via retailers’ preferred processing company, instead of supplying directly to the distribution centre. This, Sithole says, lengthens the process in which a farmer can supply their goods or services to a retailer.
Meanwhile Marlese von Broembsen, a lawyer specialising in global supply chains, says retailers use two legal mechanisms to exercise control over small and medium-sized suppliers.
These are supply contracts, and production and hygiene standards.
The typical supply contract between supermarkets and their suppliers outlines the basis on which the retail market places orders. The retailer and the supplier agree on a supply price and the retailer’s mark-up for each product.
However, some suppliers take issue with this.
“The complicating factor,” says Von Broembsen, is that ”whilst the supplier nominally receives payment based on the agreed supply price, most supermarkets charge suppliers a rebate commission.”
Rebate commissions range between 6% and 16% per order. It comprises different fee components, including incentives, advertising, settlement and swell allowance for which food producers are liable. A swell allowance covers the cost of spoiled foods.
Von Broembsen believes that opportunities for small and medium-sized suppliers to grow are even further constrained by their bargaining power compared to retailers. The majority, she says, are without a powerful brand and have little to no bargaining power.
Furthermore, “suppliers generally report that they are unable to contest their contract terms, as they will simply be ‘blacklisted’ and their products ‘de-listed’ and no longer stocked by a retailer,” Von Broembsen states.
She also believes that the rise of private production and hygiene standards, and the costs of compliance have a negative impact on smallholder producers.
A need for policy intervention is evident. Some retailers abuse their market power, and undermine the growth and job creation potential of suppliers, Von Broembsen says.
She therefore argues for policy intervention in three areas. “First, the state should regulate the contracts between supermarkets and small suppliers as it does other relationships marked by unequal power relations,” says Von Broembsen.
Secondly, government must regulate how private standards may be enforced. Thirdly, the practice of rebate commissions has to be scrutinised.
Complaints platform needed?
“Finally, small and medium-sized suppliers should enjoy representation, as supermarkets do, on the South African Bureau of Standards, the retail committee of the National Empowerment Fund, and the National Economic Development and Labour Council, which make policy decisions.”
Meanwhile, in the United Kingdom suppliers can now use a confidential platform to report bad and questionable retailer behaviour. The “Tell the GCA” platform, launched earlier this year, was set up by the Groceries Code Adjudicator (GCA).
Suppliers can report issues via a secure third-party platform.