Supermarkets not only change the way we shop, but also radically change food supply chains and producer-retailer relations through new procurement practices. In Asia, changes to supply arrangements wrought by supermarkets are not as advanced as in other regions, but procurement practices appear to be heading in the same direction as other regions (Reardon et al, 2005). It is thus instructive to look at the direction of these changes.

Firstly, supermarkets in Asia will establish closed supply chains parallel and separate from traditional wholesale markets, complete from producer to retailer. This has begun in Asia with the use of specialized and dedicated wholesalers, which enforce standards on behalf of supermarkets, guaranteeing a certain level of quality. These wholesalers also sometimes contract production, rather than relying on wet markets or collectors. Secondly, supply chains will become increasingly centralized through ‘distribution centres’ which procure for dozens of stores, an occurrence not yet common in Asia (Chen et al, 2005). Thirdly, supermarkets will also implement internationally consistent food quality and safety standards such as guaranteeing a safe water supply, providing toilets and hand washing facilities for workers, packing houses with cement floors and stringent bookkeeping procedures (Tallontire and Vorley, 2005).

Although it is still early days yet, it appears that these changes will result in the gradual exclusion of the smaller and poorer farmers from supermarket supply chains. Supermarkets demand large quantities of produce at consistent quantity and quality every day of the year. Thus, where possible, supermarkets source their products from large farmers, or if there are insufficient large farmers, as is the case in Asia, specialized wholesalers, who in turn tend to source from farmers who are better endowed with capital, organization, skills, education and land area (Fritschel, 2003). The centralization of procurement excludes those without access to fast and reliable transport infrastructure. Supermarket-imposed standards will favour farmers with large amounts of capital who can absorb large fixed costs, requiring investments such as cooling sheds, refrigerated trucks, irrigation equipment, greenhouses and packing machines (Reardon and Hopkins, 2005; Vorley, 2005).

For those farmers who are able to supply supermarkets, production costs increase. Farmers must undertake risky investment in equipment, new crops and varieties and in the long run rely on only a few crops (Shephard, 2005). Supermarkets are unwilling to give loans to famers prior to the harvest, as traditional wholesalers do, and will even delay payments up to 90 days. Based on case studies conducted in Asia, there is some evidence, however, of higher net benefits for farmers supplying supermarkets through higher profits and more reliable prices and demand, particularly for non-commodity products (Moustier et al, 2005).

However, Asia is currently in an intermediate phase of supermarket development, and the net benefits of supplying supermarkets are likely to diminish as the market consolidates. If food markets in Europe and North America are any guide, as the market consolidates producers will see farm-gate prices decline. A report by the Competition Commission in the UK, where the top four firms account for 75 per cent of the market, found a direct correlation between supermarket market share and their ability to extract favourable terms from suppliers, and thus farmers and farm labour. Low farm-gate prices are passed on to consumers and shareholders. In regions where the supermarket penetration into the food market is more advanced, many small farmers have simply gone out of business. Small dairy farmers in South America, for instance, could not afford to buy equipment required to meet supermarket safety standards and as alternative markets declined, lost the market for their product (Tallontire and Vorley, 2005).

It appears that small farmers in Asia are in for a rough ride. Farmers in Asia will not have the luxury of a gradual transition as occurred in Europe and North America where farmers had decades to respond to changes in their markets, had more capital and received more public support than farmers in developing countries (Reardon and Hopkins, 2006). However, the shape of government policy is a crucial determinant in how small farmers will cope, by regulating (or not) supermarket development, as well as enabling farmers to sell to supermarket chains through assistance with capital and training.

Written by William Henderson, Research Associate, UNESCAP-CAPSA, Bogor, Indonesia.

(References available upon request)