New approaches to supermarket supplier development programmes in Southern Africa

ABSTRACT

Supermarkets are strong catalysts to stimulate the growth and development of suppliers of processed food and manufactured products in Southern Africa. This paper assesses the role of supermarkets and governments in developing supplier capabilities through supplier development programmes. In South Africa, a shift is evident in supplier development programmes by supermarkets away from mere compliance as part of black economic empowerment or social responsibility objectives, to more mutually beneficial, commercially oriented and long-term investments. There is still considerable scope to replicate, broaden and deepen these programmes, including extending them to the region. The paper draws lessons from the Namibian Retail Sector Charter as the first and only sector-wide intervention in the region that combines a voluntary code of conduct and supplier development commitments, with complementary support from the government. The paper also highlights interventions in South Africa and internationally on efforts to curb supermarket buyer power which negatively affects suppliers.

KEYWORDS:

• Supermarkets
• supplier development programmes
• upgrading
• buyer power
• regional retail charter

1. Introduction

For many suppliers of food, fast-moving and other consumer goods value chains, supermarket chains in Southern Africa are an important route to market. Growing regional store networks open up larger markets, providing greater opportunities for suppliers to participate in value chains (das Nair & Chisoro, 2017).

Our previous studies highlighted that the modernisation of supermarket procurement systems and trading requirements in the region places pressure on suppliers with regards to their ability to supply required volumes, maintain consistency, meet quality standards and contain costs of supply. This is over and above legal and private standards requirements (das Nair & Chisoro, 2015, 2016, 2017; Ziba & Phiri, 2017; das Nair et al., 2018; das Nair, 2019). Suppliers have to constantly upgrade their capabilities to meet these requirements to remain competitive.

The concentrated nature of many formal retail markets further means that a few large supermarket chains dominate, wielding considerable market power. This extends to buyer or bargaining power with respect to suppliers. Supermarkets are able to exert buyer power by unilaterally determining trading terms, including through controlling listing fees, rebates, advertising allowances, promotion fees, payment period terms, settlement discounts and new store openings fees, amongst others (das Nair et al., 2018). These costs place additional pressure on supplier margins and can be a means by which supermarkets extract rents in value chains.

Supermarket chains therefore play a powerful role in shaping value chains and can be strong catalysts to stimulate supplier upgrading. As the final link to customers, supermarkets collect important information on consumer purchasing patterns which is critical to ensure that suppliers produce what customers want. Through supplier development programmes (SDPs), supermarkets can facilitate the upgrading of supplier capabilities to meet requirements, and through allowing access to shelf space on fair terms, supermarkets can enable participation of suppliers.

The main supermarket chains in South Africa indeed undertake supplier development. This paper provides a preliminary scoping and analysis of the SDPs of the major chains in South Africa. While some programmes have yielded positive results, most of the earlier initiatives from around the mid-2000s involved small-scale farmers and were only for a short duration. The initiatives were approached more as black economic empowerment (BEE) compliance (a key requirement in South Africa) or corporate social responsibility (CSR). However, since around 2018 there has been a positive shift in approaches by supermarket chains in treating supplier development more as part of mutually beneficial, long-term and commercially oriented investments than in the past. While this is encouraging, there is still considerable scope to replicate, broaden and deepen programmes, including extending the initiatives to the Southern African Development Community (SADC) region.

The paper also considers some of the government support available for suppliers of fast moving consumer goods (FMCG) in South Africa. Through the Department of Trade, Industry and Competition (DTIC), and development finance agency, the Industrial Development Corporation (IDC), there has been support for agriculture and agro-processing businesses. We find that these have not been closely aligned with the initiatives of the main supermarket chains.

There have further been regulatory initiatives in the supermarket sector in South Africa. In South Africa, the Competition Commission (CCSA) concluded the Grocery Retail Market Inquiry (GRMI) in 2019. Relevant to this paper, recommendations were made on supermarket buyer power, which was found to have resulted in differential treatment of supermarket chains and independent retailers by FMCG suppliers. The GRMI also recommended that the enterprise development programmes of the national retail chains be formalised and strengthened, with suggested binding industry targets (CCSA, 2019).

Interventions in grocery retail are not unique to South Africa. Governments and competition authorities in the United Kingdom (UK), Australia, Kenya and Namibia have intervened to different degrees to ensure more competitive outcomes in the sector. The Namibian Retail Charter, the first of its kind in Africa, is a voluntary code of conduct that incorporates both behavioural conditions and supplier development commitments. Although still in early stages, there are some positive outcomes from this initiative and lessons can be learnt from it for a possible regional charter. Developing suppliers in the region is in line with the SADC industrialisation strategy, as is promoting value chain participation to extend production possibilities (SADC Industrialisation Strategy and Roadmap, 2015; Action Plan, 2017).

Section 2 of this paper provides a brief conceptual framework which situates supplier development within Global Value Chains (GVC) principles. Section 3 assesses the evolution of SDPs by the main supermarket chains in South Africa and efforts in the region. Section 4 reviews government support for suppliers in South Africa, interventions in the retail sector and the Namibian Retail Charter as a unique form of intervention in Africa. Section 5 concludes, drawing lessons and providing recommendations that could inform a future policy roadmap for effective and sustainable SDPs in the region.

2. Supplier development under a Global Value Chains (GVC) framework

The GVC framework is useful to identify opportunities and bottlenecks for industrial upgrading and the development of capabilities of suppliers. It allows tracing patterns of value creation and exploring linkages amongst economic activities and actors (Gereffi & Fernandez-Stark, 2011). Two relevant concepts are employed in the GVC literature to assess GVCs – governance and upgrading.

Governance refers to authority and power relationships that determine the allocation and flow of resources within a value chain (Gereffi & Fernandez-Stark, 2011; Gereffi & Lee, 2014). The literature defines different types of governance (market, modular, relational, captive and hierarchal) related to different degrees of power asymmetry between players in value chains (Gereffi et al., 2005). The role played by powerful ‘lead’ firms in coordinating production activities and shaping the distribution of profits and risk within an industry is central to understanding governance structures. Lead firms in GVCs control production through setting and enforcing product and process parameters including standards and protocols that must be met by other players in the value chain. This includes controlling decisions about what, how and how much to produce (Humphrey & Schimtz, 2002; Gereffi & Fernandez-Stark, 2011).

The governance aspect of the GVC framework can be extended to include competition economics principles as a tool to evaluate market power and buyer power, as well as to provide a deeper understanding of the forms in which such power affects upgrading in value chains. This can allow for more targeted and effective interventions to remove bottlenecks and facilitate upgrading. In the context of supermarkets, understanding the forms and effects of buyer power has driven interventions by competition authorities, including through regulations or codes of conduct as policy responses to govern relationships between supermarkets and suppliers.

Understanding governance has also moved beyond just assessing buyer-seller relationships. The power exerted by mechanisms of collective action or social movements/conventions by consumers, civil society or institutions are also important in shaping value chains (Davis et al., 2018; Dallas et al., 2019).

Governance is important because it affects upgrading. Upgrading refers to firms or countries improving their positions within GVCs (Gereffi & Fernandez-Stark, 2011; Gereffi & Lee, 2014). Upgrading involves learning that organisations undertake to improve their position in the value chain and moving to higher value activities to increase benefits. Upgrading and the extension of capabilities primarily takes four forms (Gereffi & Lee, 2014):

1. process upgrading: transforming inputs into outputs more efficiently by designing efficient production processes using technology or reorganising production systems;

2. product upgrading: producing more sophisticated products;

3. functional upgrading: acquiring new functions or roles in the chain;

4. inter-chain upgrading: applying skills acquired in a particular value chain to a different sector.

Upgrading is also about deepening specific capabilities required to explore new opportunities offered at the same stage of the value chain in which the firm is currently engaged. This requires greater skills and more complex technological capabilities (Morrison et al., 2008; Ponte & Ewert, 2009).

While lead retailers are becoming increasingly demanding in terms of reducing costs, raising standards and increasing speed of production, if they actively provide support to suppliers, they can transfer skills, knowledge and best practice to them. The strategies of lead supermarket chains set the pace and direction of knowledge flows and upgrading either in favour or against the interest of local producers (Morrison et al., 2008). This has implications for the development of supplier capabilities and is the foundation for encouraging greater participation by supermarkets in SDPs.

Upgrading capabilities also requires effort from other stakeholders, including governments, and can include public and private investments in infrastructure, distribution/warehouse facilities and cold chains. It can also include investments in systems to improve grading, packaging, labelling, tracking, inventory maintenance, skills and managerial systems of suppliers.

Political economy considerations are often relevant to issues of power and governance, and the ability to upgrade. The development trajectory of industries is affected by firms that can lobby and influence outcomes, and the policy context in which the industry operates. Political economy issues and the distribution of power are therefore important in terms of how they shape the structure and development trajectory of value chains.

3. Supplier development programme landscape in South Africa – successes and challenges

Supplying supermarkets require FMCG suppliers to make investments to upgrade products and processes to meet requirement and standards. Capital, technological, managerial, organisational and financial upgrades are needed. South African supermarket chains engage in SDPs to facilitate some of these upgrading needs. Table 1 provides a snapshot of the SDPs of the listed supermarket chains between 2008 and 2017 from publicly available information in annual reports, supermarket websites and stakeholder interviews.¹

Table 1. SDPs of the main South African supermarkets.

Programmes	Target Suppliers	Programme Type		Outcomes		Type of upgrading (where applicable)
		Financing	Capacity Development	Businesses assisted	Employment
Woolworths
Supplier and Enterprise Development (SED) (2009-Ongoing)	Food, non-food, clothing, other	Shorter payment terms, zero-interest loans	Training, mentorship, market access	>61 (with market access)	At least 1892 jobs	Process and product upgrading
Pick ‘n Pay
Enterprise development fund (2008-Ongoing)	Food and clothing	Shorter payment terms, zero-interest loans	Training, mentorship, market access		>600 jobs
Small business incubator (2012-Ongoing)	Food (fruit and veg farmers only)		Training, mentorship, technical assistance	72 (52 gained market access)		Process and product upgrading
BoostYourBiz Competition (2016)	Food (Agro-processing only), non-food, clothing, other		Training, mentorship, technical assistance, access to distribution centres	24
Ackerman Pick ‘n Pay fund (2008-Ongoing)	Food (fruit and veg farmers only)	Shorter payment terms, zero-interest loans	Training, mentorship, irrigation facilities	>94 (64 gained market access)		Process upgrading
Entrepreneur workshops (2010-Ongoing)	Food (plant and livestock farmers), other		Training and mentorship	>350
SPAR
Rural Hub Project and Fresh Assembly Points (2012-Ongoing)	Food (fruit and veg farmers only)	R10m committed	Technical assistance, built pack houses	30		Process upgrading
Massmart
Manufacturing SMMEs (2012-Ongoing)	Food (Agro-processing only), non-food, clothing, other	Grants, zero-interest loans		41 (with market access)	Approximately 1858 jobs since 2012.	Process and product upgrading
Ezemvelo Direct Farming Programme (2012-2016)	Food (fruit and veg farmers only)	Grants, zero-interest loans	Training, mentorship, technical assistance, built pack houses	146, additional >700 received training only	259 jobs since 2012, 15 jobs in retained project	Process upgrading
Services to Suppliers (2012-2016)	Clothing, other	Grants, zero-interest loans	Training, technical assistance	50		Process upgrading
Shoprite/Checkers
Nyama nyama emnadi (2008-2010)	Food (livestock farmers only)	Training and mentorship
Greenfields project (2009-2010)	Food (fruit and veg farmers only)		Training, mentorship and technical assistance	358 farmers assisted, 88 mentored only		Process upgrading
Fresh mark suppliers initiatives (2012-Ongoing)	Food (fruit and veg farmers only)		Mentorship, technical assistance	39 businesses		Process upgrading
Shoprite Checkers Development Trust (2011-Ongoing)	Food		R419.8m in the trust, the trust funds CSI and enterprise development
Homemade SDP (2013-Ongoing)	Food (Agro-processing only)	Training and mentorship		80 businesses (260 product lines given market access)

Sources: Annual reports, websites and interviews. Note: this is not an exhaustive list of initiatives, but ones that have publicly available information.

SDPs in Table 1 were generally limited in scale and scope, mostly involving small-scale farmers for short durations. The initiatives were approached more as CSR obligations rather than commercially viable operations. This results in less commitment to sustained development of supplier capabilities and lower likelihood of long-term commercial sustainability of suppliers.

The SDPs extended to suppliers across food and non-food products. Within food, there has been a stronger focus on small farmers in fruit, vegetables and livestock as seen in Table 1. There has also been some support to agro-processors, like millers and bakers, but this has been limited. In non-food categories, support has extended to clothing and apparel, building and hardware and general merchandise manufacturers, although to a lesser degree than support to farmers.

Interviews with supermarkets and annual reports highlight that the support in Table 1 was given to start-up businesses, existing suppliers and to improve competitiveness of suppliers. The programmes are typically funded through equity, grants or zero-or low-interest loans by the retail chains. Shorter payment periods act as a source of immediate funding and assist in alleviating the serious concern of cash flow for small businesses. The South African government, through the IDC and the former Department of Agriculture, Forestry and Fisheries, have also assisted in co-funding certain SDPs. This has however been limited, supporting only two programmes in Table 1 as far as we are aware. Other private sector actors, such as commercial banks and training academies have also collaborated in some programmes.

In terms of building capabilities to upgrade under the GVC framework, the support in the programmes in Table 1 generally included technical assistance to facilitate product and/or product upgrading, mainly to fruit and vegetable farmers. Farmers are assisted to develop capabilities to ensure that processes and practices meet minimum food safety and quality standards. Assistance also includes access to infrastructure (irrigation facilities, pack houses and distribution centres), improving efficiency of farmers and allowing them to sell higher quality produce at higher prices. Other support includes training, mentorship, business development and market readiness. Non-trade support is sometimes offered on logistics and legal services.

The support is typically for a defined and relatively short duration (3–5 years). The programmes have contributed to employment creation as seen in Table 1, but given their short duration, it is not clear if employment is sustained after the programme. The programmes also generally include commitments from the supermarkets on offtake agreements, on providing access to shelf space, and on preferential terms which can include lower rebates for suppliers. There is also support by non-profit organisations like TechnoServe in some SDPs involving agriculture value chains.

It is important to note that the programmes of Woolworths in Table 1 do not reflect the chain’s contractual support to its larger, commercial suppliers of their private label products (accounting for most of Woolworths’ sales) but reflect its efforts under its CSR initiatives. The extent of upgrading of its commercial suppliers is likely to be greater, with some exclusively supplying Woolworths.

3.1. Compliance or real transformation of suppliers?

The SDPs examined in Table 1 for the period 2008–17 reflect some, albeit limited, upgrading by recipients of the support. The SDPs were however limited in scale and scope, ad hoc in nature and only for short durations. Many of these SDPs also did not benefit from aligned co-support from government. This questions the nature, design, approach and scope of the earlier programmes.

The SDPs appear to have been approached as part of CSR or as compliance with Codes of Good Practice under the South African Broad Based Black Economic Empowerment (B-BBEE) Amendment Act (Act 46 of 2013). In the B-BBEE Code, Qualifying Small Enterprises have an annual turnover of R50m or less, and at least 51% black beneficiaries. The compliance scorecards have categories of support with weightings including for enterprise and supplier development. Supplier development includes mandated contributions of 2% of Net Profit After Tax (NPAT) or 0.2% of annual turnover, while enterprise development includes contribution targets (1% of NPAT or 0.1% of turnover) for development and sector specific programmes.²

When approached purely as compliance, with no complementary support from government, the sustainability and effectiveness of such programmes are limited. There is little incentive for supermarkets to engage and invest deeper in supplier development beyond the bare minimum that is necessary to simply comply with the code. Under this approach, retailers seek to minimise the cost and the work of compliance. The level of effort or investment in suppliers is not sufficient to have real impact on sustainable transformation.

3.2. A new trajectory?

We find, however, that since around 2018, there have been positive changes in the approach to supplier development by retailers in South Africa, moving in the direction of more long-term, mutually beneficial SDPs and going beyond just BEE compliance or CSR. Massmart offers a good case study of this evolution (Box 1).

Box 1. Massmart SDPs

What started as an SDP created as part of conditions imposed by the Competition Appeal Court in the Walmart/Massmart merger has evolved and extended past the required duration and scope of the conditions.

The retailer initially invested R40 million of the mandated R240 million towards smallholder farming to support Massmart’s move into fresh produce and grocery market (Massmart, 2016). However, the farming and agro-processing SDPs were largely unsuccessful. In farming, the requirement to provide additional support in terms of equipment, fertilisers, logistics, pack houses, extension services and to carry out significant investment in attaining food safety requirements, was underestimated. Massmart also had to assist small farmers with mitigating crop disease and weather conditions, which was costly. In agro-processing, the suppliers were successful initially, with Lethabo Milling, Marble Gold and Thistle Bakery being supported. These however have subsequently failed or have been liquidated.

Through these failures, Massmart has learnt that supporting and growing suppliers for which it was not a ‘market leader’ at the retail level limits its ability to pass on costs and allow the supplier to get a foothold in the market. Massmart considers being a market leader an important aspect to be able to set prices at the retail level. Massmart has since shifted its focus to building suppliers in markets where it regards itself a leader. The ‘new’ Massmart SDP model focuses on established business that can be up-scaled quickly in FMCG, general merchandise, DIY and building material, where it makes mutual commercial sense for Massmart and the supplier (Massmart, 2017/2018). This includes manufacturers of tiles, bricks, doors, nails, ladders and chefs’ clothing.

Massmart had around 30 suppliers in its SDP portfolio in 2017/18 (Table 2). Suppliers in these categories have a greater chance of success because customer demand is more consistent and predictable allowing regular off-take orders with large volumes. Focusing where there is a shortage of supply in the local market, either because there are concentrated local markets or imports, is another strategy in its SDP going forward. Support is generally given to brownfield businesses that have been running for at least 3 years to ensure greater chances of success.

Table 2. Massmart SDP Portfolio

Cluster	Total projects since inception	Active projects, 2018	Amount disbursed	Procurement	Market access
Building Materials	9	9 (3 import replacement)	R25.7m	R146.6m	South Africa; 2 supply Botswana, Mozambique, Zambia
Bricks	5	2	R19.2m	R141.5m	South Africa
General Merchandise	18	12 (3 import replacement)	R40.35m	R100.1m	South Africa; 3 supply Botswana, Mozambique, Zambia; 1 supplies United Kingdom; 1 supplies Australia, Chile, New Zealand
Clothing and Textiles	3	3	R5.5m	R72m	South Africa
Processed Food	6	3 (1 import replacement)	R10.8m	R49.4m	South Africa

Source: Massmart, 2017/18.

The chain ‘project manages’ the SDPs more closely than in previous programmes, deploying experts, turnaround strategists and industrial engineers if programmes involve manufacturing. This kind of support more deeply facilitates product and process upgrading as deployed experts work to ensure the plant and equipment of the supplier are running optimally, and to identify and fix bottlenecks in production processes.

The other main supermarket chains also appear to be evolving in their approach to SDPs, focusing more on high-impact, commercially oriented, mutually beneficial initiatives that go beyond BEE and CSR requirements. SDPs are designed with longer-term commercial considerations for both supplier and retailer. In some cases, they involve greater control and management of input requirements, financial management through accountants (especially working capital and cash flow management, a major constraint for small businesses), regular audits and site visits, support in functional upgrading (for instance, in packaging), in addition to the support given in previous SDPs. Retailers also provide pricing support in certain cases to allow the product to gain traction in the market. Aside from Massmart, other examples of this new approach by retailers include Pick n Pay’s ‘Meet the Maker’ initiative³ and Shoprite’s investments in SMEs.⁴

A change in the approach to supplier development is therefore apparent, where supermarkets have recognised that deep expertise, investment, and intimate involvement with the supplier is necessary to make them succeed. Approaching supplier development by just providing funding to suppliers is ineffective as learnt in earlier programmes. The form and impact of these SDPs need to be evaluated after sufficient time has passed, as not much information is available in the public domain.

Importantly, there appears to be an understanding that such investments also benefit the retailer in the long term. More suppliers with capabilities can reduce costs for retailers, improving competitiveness. It reduces dependence on imports which can be subject to import duties, high transportation costs and longer lead times. Local suppliers are also more easily accessible, allowing for closer monitoring of the quality and required standards. Furthermore, local sourcing is beneficial to the supermarkets’ goodwill and public relations, particularly given the growing power of consumers in demanding ethical and fair practices, and greater transparency in supply chains. As noted in advances in the GVC framework, these sources of governance are important. Overall, the development of supplier capabilities can lead to more efficient value chains.

However, this approach also raises negative governance and power concerns, with supermarkets exerting even tighter control of suppliers in value chains by dictating and managing terms of participation. This greater degree of vertical control, especially when extended to managerial control of supplier activities, can result in captive and hierarchical forms of governance. Supermarkets have more power and dictate the conditions of supplier participation (Gereffi & Fernandez-Stark, 2011). This is tantamount to competition concerns emanating from vertical integration in a value chain, including exclusionary conduct and foreclosure of competing suppliers which raises barriers to entry for them. Similar concerns of captive governance arise in relationships between supermarket chains and suppliers of private label and house brands (das Nair et al., 2018). Exertion of power by the supermarket can limit suppliers of private label or house brands producing and selling their own branded products, which often sell at higher margins.

The upgrading of suppliers through SDPs has positive externalities for rivals, and absent exclusive supply requirements, investments by supermarkets in SDPs may result in free-riding by competing chains (Segal & Whinston, 2000). Supermarkets may therefore impose exclusivity requirements for suppliers in their SDPs. If the exclusive supply conditions are sustained for a period of time, the supplier is prevented from negotiating better trading terms and supply conditions with other supermarkets.

We discuss possible responses to curb exertion of such power in Section 4.

3.3. Regional initiatives

South African supermarkets are making efforts to procure locally in countries into which they spread. Past research highlighted agreements between government and supermarkets. For instance, in Zambia, some supermarkets have committed to sourcing value-added products in food processing and packaging industries, as well as in value-added chemical products from Zambian firms⁵ (see also das Nair et al., 2018). Other supermarket chains, like Woolworths, have also engaged in local supplier development initiatives in the region.

However, in practice, aside from procuring fresh produce (vegetables, fruit, meat, poultry and dairy), there appear to be very few, structured SDPs in the region that aim to build long-term, commercially oriented relationships in value-added and manufactured products. Most efforts have been largely reactive to pressure from governments to source locally (which has included banning of imports, raising import tariffs in certain product categories or ‘soft’ local content policies). Presently, there are few concrete initiatives that we are aware of in value-added or manufacturing industries supported by supermarket chains, although the progress in Namibia under the Namibian Retail Charter, discussed below, is promising. This is an area for further research, including around how SDPs can be tailored to have regional benefits, rather than narrower national benefits.

4. Support from government, interventions in the retail sector and the Namibian Retail Charter

4.1. Government support in South Africa

Upgrading capabilities requires effort from other stakeholders in value chains, including government. There are a number of government programmes that offer support to suppliers in South Africa.

The IDC has two avenues of support. The first is through its core funding mandate as part of its Agro-processing and Agriculture Strategic Business Unit which funds firms in horticulture, high-value field crops, beverages, wheat, sugar, livestock, fishing, aquaculture and forestry sectors. A value chain approach to integrate suppliers into supermarket chains is undertaken, where small farmers are helped to commercialise over a period of time through ‘pairing’ with large commercial farmers. This is hoped to allow for transfer of skills and sharing of infrastructure and technologies, facilitating upgrading of small farmers. A combination of equity and debt funding is used, with commercial farmers contributing to equity while the IDC provides grant and/or debt finance. In fruit, the IDC supports black farmers by facilitating their integration into orchards, packhouses and infrastructure, and linking them to large commercial farmers. The second avenue that the IDC has to develop suppliers is through its Development Impact Support division (IDC, 2017). This division supports the main business units of the IDC with a narrow mandate to promote broad-based empowerment, transformation and inclusive participation, focusing on youth employment, community and employee ownership. The IDC mostly works with NGOs and social enterprises to manage these programmes. The funding for this is very limited.

The Department of Trade, Industry and Competition (DTIC) runs the Black Industrialists Scheme. For existing businesses only, this programme shares costs with suppliers through grants for tools, machinery and equipment. It offers business development and training interventions to improve corporate governance, management, marketing, productivity and use of modern technology.

There are other programmes by government not covered in this paper. In general, however, studies have highlighted that the process of accessing public funds is onerous, complicated and requires extensive paperwork. Suppliers claimed to face considerable bottlenecks, forcing them to use consultants at great expense to access such pockets of funding (Bosiu et al., 2019).

The DTIC, through the various iterations of the Industrial Policy Action Plan (IPAP) have also stipulated several interventions to support suppliers in different sectors, including in clothing, textiles, leather and footwear and agro-processing. In food, the Agro-processing Supplier Development Programme in IPAP 2017–20 explicitly recognised that SDPs need to move beyond CSR-type projects, and targets included building proactive partnerships between government, the private sector and donors to ramp up procurement by large retailers and agri-producers from emerging producers and farmers, and medium-sized suppliers. The envisaged role of state support included reducing barriers in terms of regulation and infrastructure, land reform, access to utilities and extension services. Key milestones encompassed proposed agreements on a Procurement Charter and a Charter or Code of Conduct with leading retail chains and food processing conglomerates.

While there have been some investments in agro-processing and partnerships with some retailers in clothing and textiles as highlighted in IPAP 2018–21, certain of the other objectives were pursued by the retail inquiry and buyer power provisions by the CCSA, which we discuss below. There is also a masterplan in agriculture and agro-processing underway in which SDPs may be revisited.

For the SDPs in Table 1, although there were some government partnerships with the retailers, this has been very limited as noted. The different programmes by supermarkets and government generally did not speak to each other. Limited partnerships and coordination between retailers and government can lead to inefficient outcomes. Government does not have the information that supermarkets have on what is needed to develop suppliers and on how to appropriately channel funding to develop required capabilities. On the other hand, certain areas are often overlooked in SDPs when designed just by supermarkets, such as land ownership and the linked ability to access finance, water rights, community dynamics and environmental issues. Also overlooked are input costs to suppliers of FMCG products, such as packaging for instance, which is critical in establishing a brand.

These elements suggest that in addition to addressing bottlenecks in the value chain in a traditional vertical sense, an extended value chain approach is necessary which looks at the role of multiple actors, both at vertical and lateral levels. This calls for closer partnerships between government and retailers, and on how government support and funding can complement retailer SDPs programmes. This should be an integral part of the programme design.

4.2. South African and international interventions in retail

As noted in the introduction, the CCSA’s retail inquiry made recommendations on buyer power in supplier-supermarket relationships and on enterprise/supplier development programmes. On buyer power, the recommendations included finalising regulations and enforcement guidelines to the new buyer power provisions in the amended Competition Act. This has subsequently been finalised, with guidelines to the regulations released on 12 May 2020.⁶ The GRMI also recommended that following finalisation of these regulations and guidelines, the CCSA should engage the large national retail chains on alignment of the regulations with their procurement practices, failing which it should consider initiating investigations into trading practices. With regards to measures to be taken by FMCG suppliers, the GRMI recommended the appointment of a facilitator to secure voluntary compliance. If that fails, it recommended that Government introduce a legislative framework through a code of good practice and the establishment of an industry Ombudsman financed by FMCG suppliers.

With regards to formalising and strengthening enterprise development programmes of the national retail chains, the GRMI provided guidance on how this can be achieved. This includes setting binding industry targets for a proportion of turnover to be supplied by SMEs and historically disadvantaged suppliers, as well as a proportion of turnover to be spent on the development of new suppliers (CCSA, 2019).

It is useful to review the forms of intervention in the retail sector internationally. While in South Africa, the inquiry recommendations are voluntary at this stage, in other countries interventions that followed retail sector inquiries initiated by competition authorities have resulted in mandatory codes of conduct that govern supermarket-supplier relationships.

In the UK, the mandatory Groceries Supply Code of Practice is overseen by an independent Grocery Code Adjudicator (GCA). The GCA was established following the Groceries Market Investigation Order of the Competition Commission recommending the establishment of an ombudsman for the sector. Its operations are funded by a levy on the large retailers. The GCA has the power to arbitrate disputes, launch investigations, make recommendations and impose fines. There have been concrete actions taken against supermarkets for charging unjustified fees to suppliers, for concerns around de-listing and for behaviour affecting supplier profitability (Groceries Code Adjudicator, 2018). A statutory code in Ireland also prohibits certain practices under the Consumer Protection Act (Grocery Goods Undertakings) Regulations of 2016. The regulations cover practices relating to payment terms and conditions, shelf-space allocation, promotions, marketing and advertising costs. The legislation prohibits fixed fee payments, unless they are justified, objective and reasonable estimates of the underlying costs.

In other countries like Australia, a voluntary code of conduct under the Australian Competition and Consumer Commission addresses a range of conduct including prohibiting charging of listing, shrinkage, wastage and promotion fees or payment for better positioning of products on shelves. While there are no financial penalties for breaching the code, other remedies are available after investigation, including court-ordered injunctions, compensation for losses or damage caused by misconduct and contract variations (ACCC, 2018). A voluntary Retail Trade Code of Practice was also developed in Kenya in January 2019, following a situation where late payments by supermarkets led to the collapse of several suppliers (Bowmans, 2019). The code deals with behavioural matters, with a Retail Trade Settlement Dispute Committee to settle issues in the first instance. Disputes from this process can be dealt with by a separate ‘Buyer Power Department’ within the Competition Authority of Kenya, which has powers to prosecute abuses of buyer power.

4.3. The Namibian Retail Charter

Unlike other retail codes of conducted adopted around the world, the Namibian Retail Charter of 2016 is one of the only interventions that targets both retailers’ behaviour and supplier development. The charter was enacted as part of efforts to increase procurement of locally produced goods to boost local manufacturing and value-added processing. It stemmed from Namibia’s successful 2002 National Horticulture Development Initiative which aimed to stimulate economic growth and development, in line with Namibia’s 4th National Development Plan and the ‘Growth at Home’ industrial development plan (Namibia Trade Forum, 2016).

The Charter stipulates targets, including increasing local procurement from 6% to 20%, although it does not specify the time to achieve this goal. Signatories must ensure procurement comprises 10% Namibian manufactured goods and services, 6% of goods that are locally packed or co-packed, 5% of local distributers and 30% local content spend from Namibian suppliers. Signatories should spend 5% of advertising budget to promote local brands, and 1% of NPAT to develop SMEs. Further, the Charter aims to promote transparency and fairness in procurement procedures, terms of credit payment and rebate provisions.

The Charter offers useful lessons on the importance of consistent political and institutional commitment from government’s side. The role of the Namibian government has been instrumental in spearheading the charter. The government understood that, from its side, it would have to address infrastructure backlogs and the cost of utilities to assist suppliers. It has tried to do so with complementary investments, for instance, developing local barcoding facilities, which make it easier for products manufactured in Namibia to be sold in local and international retail stores (Brandt, 2018). There is also a clear custodian for the Charter – the Namibian Trade Forum.

The government further signalled its commitment from the inception of the initiative and this has had a positive impact in encouraging buy-in of retailers and is fundamental for its on-going success. Large regional supermarkets such as Woolworths and Shoprite are signatories, Pick ‘n Pay’s Managing Director is also Chairman of the Retail Charter Council (EPA Monitoring, 2017).

While it is too early to quantify its impact, and there are likely to be several challenges in its implementation, such as the weak local supplier base and the voluntary nature which does not enforce compliance, there are already promising indications of progress. For instance, two large supermarket chain are sourcing more local milled products and animal products like beef and poultry. This has stimulated local milling companies and resulted in the upgrading of local meat suppliers to produce higher quality poultry.

5. Conclusions: lessons for a future policy roadmap

Lead supermarkets and other retailers play a critical role in developing supplier capabilities through transferring skills, knowledge and best practice to suppliers. Their strategies can set the pace and direction of upgrading of suppliers. For supermarkets to have the incentive to invest in suppliers, the costs need to be more than offset by the benefits of integrating more suppliers into their value chains. This requires a long-term view of the benefits of increasing a competitive supplier base overall for supermarket profitability. There is a need to move from conflictual relationships between supermarkets and suppliers to building shared capabilities in supply chains.

Upgrading capabilities also requires effort from other stakeholders, especially governments. Government efforts in supplier development need to complement and support the needs of supermarkets. Initiatives can include public-private partnerships in investments in infrastructure, skills development and support through development finance. The Namibian Retail Charter highlights that political will and on-going commitment by the government to the process is critical.

There are encouraging developments in South Africa that suggest that supermarkets are approaching supplier development with longer-term, mutually beneficial, commercially oriented mindsets. There is the realisation that increasing participation and upgrading of supplier capabilities requires much more than just funding of programmes. It requires identifying and remedying barriers to entry faced by suppliers and active participation of retailers in the SDPs.

There is still, however, considerable scope to replicate, broaden and deepen the existing SDPs of retailers, with stronger complementary support from government. There are real opportunities to upgrade supplier capabilities through SDPs and recommendations from interventions like the GRMI pave the way for this. The tension between investment in support to, and control over, suppliers is important to bear in mind in SDPs. The CCSA’s buyer power regulations and guidelines which aim to curtail possible abuse of power of large players in designated sectors should guide retailers in this regard.

Government and development finance institutions further need to appropriately channel funding in close partnership with retailers. Development funding needs to be more agile and flexible to cater for the unique and evolving needs of suppliers, while addressing barriers to entry in value chains.

These efforts need to extend to the region to realise the industrialisation objectives of SADC. A regional retail charter, with both commitments on fair treatment of suppliers and supplier development elements like the Namibian Retail Charter, could facilitate regional supplier development in value-added products.

There are political economy issues that arise when considering a regional retail charter and these need to be managed. Governments are biased towards protecting their own national industries. This creates a tension between national and regional objectives. Political economy issues also arise through lobbying of governments to protect local suppliers from imports. These tensions needs to be balanced with long-term growth objectives in SADC as a whole. Ambitions to develop and build scale and capabilities of local suppliers in one country can be limited if these suppliers are not allowed to export to other countries because of tariff or non-tariff measures. Not every country in the SADC region can, however, successfully grow and develop all their suppliers to become regional suppliers to supermarkets, and quid-pro-quo decisions need to be made at the SADC level about which suppliers in the region have potential to grow into regional suppliers as part of bigger deep-sea import replacement strategies. This requires significant inter-government or SADC level co-operation, in addition to close collaboration between supermarkets and suppliers.

Active support by government and an enabling regulatory framework for alternative routes to market to the mainstream retailers is further critical to ensure that suppliers have greater choice in terms of market access. In previous studies, the importance of enabling a diversity of retail channels by reducing the barriers to entry and expansion for different types of retailers has been emphasised (das Nair & Chisoro, 2015, 2017).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Six in-depth semi-structured telephonic interviews were conducted.

2 Government Gazette: 6 May 2015 No. 38766.

3 https://www.fasa.co.za/pick-n-pay-gives-small-businesses-a-boost/, accessed 30 May 2020.

4 https://www.shopriteholdings.co.za/content/dam/MediaPortal/LatestIntegrateReport/IR2019/Shoprite_IR_2019_Full.pdf, accessed 30 May 2020.

5 http://www.zda.org.zm/?q=content/copperbelt-business-linkages-forum-yields-results, accessed March 2019.

6 http://www.compcom.co.za/wp-content/uploads/2020/05/Buyer-Power-Guidelines.pdf, accessed 30 May 2020