/ 7 February 2011

Apples of Walmart’s eye

Apples Of Walmart's Eye

There is an orchard in the Koue Bokkeveld in the Western Cape where apples hang round and red from trees standing in orderly ranks, the soil hot beneath them.

In a matter of weeks, hundreds of thousands of these crunchy fruits will be sitting in rows in an Asda store, the British subsidiary of retail conglomerate Walmart. The orchard, one of many owned by the Du Toit family, has been supplying Asda for more than a decade. So, if you think Walmart is only just arriving in South Africa, think again. It has, if indirectly, had a footprint here for years.

With Walmart’s purchase of 51% of the local Massmart group, how the company will work with local suppliers, labour, regulators and customers will be closely watched. Walmart’s turnover dwarfs our country’s GDP and its impact on wages in the retail sector and on local suppliers, manufacturers and ­economies as a whole has yet to be understood.

For the Du Toit Group, which moves 130 000 tonnes of apples, pears, onions and potatoes a year, the association appears to have been a positive one. Gysbert du Toit, a director of the group, said that the family-owned company started supplying Asda with fruit and vegetables in 1997 when the South African agricultural market was deregulated.

International Produce Limited (IPL) was formed in 2004 to source fresh produce for Asda by two external shareholders. In 2009 IPL was acquired by Walmart and became a wholly owned subsidiary. Du Toit has worked with IPL since its inception. The Du Toit Group exports about 60% of all its produce and 15% of that — about 10 000 tonnes of apples and pears — goes directly to Asda.

Leading a charm offensive, IPL co-hosted journalists on a tour of the company’s operations, to better understand the ways in which Walmart works with its suppliers. The whole point of IPL, according to Nick Scrase, its managing director, was to cut out the middleman. “Anywhere where we can remove a middleman or remove an agent and improve quality, that’s what it’s about,” Scrase said.

Growing the company
The company sources food directly from growers like the Du Toit Group, avoiding what it terms “importers’ profit” and ensuring cheaper end prices for consumers.

It has established a base in Stellenbosch, one of a number across the globe, where a team of agronomists work with suppliers like the Du Toits. Walmart, impressed with the savings IPL has brought its business in the United Kingdom, intends to grow the company fivefold in the next five years.

Du Toit said the long-standing relationship with IPL and Asda had given the company an element of stability at a time when farmers in South Africa had to play the market as often as they had to check weather reports. The arrangement ensured that the family did not have to “trade its way through the year”, he said.

It also meant that where Walmart went, Du Toit fresh produce could follow, said Pieter du Toit, the managing director of the group.

He said that the rand’s strength had made the past year difficult for the group — the currency’s 15% growth in the past year, with a 5% growth in operational costs, had resulted in a 20% hit on the com­pany’s income. He said labour made up 40% of the company’s operational costs, and water and electricity made up another substantial contribution.

But in spite of tougher times, the company has remained profitable — the operation is slick and the Du Toit Group has a wealth of expertise and knowledge to draw on when it comes to dealing with a retailer like Asda. But it is not clear how smaller local suppliers would stand up to the might of Walmart.

Pieter du Toit said relentless negotiations drove this endless movement of food. Prices were set according to a seasonal programme and then reconfirmed on a three-week basis. If price agreement could not be reached, the volumes were readjusted and the fruit redirected elsewhere.

Du Toit said that, with the arrival of a giant like Walmart in South Africa, smaller local suppliers would have to consolidate, forming cooperatives or joining other companies. It was an international trend, he said, but there would be space for lifestyle and organic farming and farming with exotic products or for local communities. How greater commercial farming consolidation will play out remains to be seen, but Pieter du Toit said that the local retail supply chain could do with an increase in efficiency.

Supplier consolidation
He said that only about 60% of the fresh produce destined for South Africa’s top five retailers made it to the stores — a large chunk of fresh produce moved through “very informal and badly organised channels”. But the Massmart/Walmart deal would provide “huge opportunities for organising the rest of the trade”, he said.

Retail analyst Brian Roberts of Kantar also said that supplier consolidation could be expected. He said that many South African retailers made money when they bought from their suppliers rather than when they sold to customers. “South African retailers are reliant on vendor alliances or promotional or marketing support for a lot their profitability,” he said. So, from a supplier point of view, many suppliers might prefer to do business with Walmart, he said.

“It might involve Walmart offering a lower price than other [retail] customers, but what Walmart offers in return is huge volumes and huge growth.” There might be some difficult “initial conversations”, Roberts said, but what Walmart offered in terms of efficiency and simplicity would benefit shoppers and ultimately suppliers.

How Massmart adopts Walmart’s systems and operations remains to be seen, and Massmart’s growth in the fresh produce arena has some way to go. Asda places an emphasis on local suppliers with established “Asda hubs”. These, usually formed by suppliers in a particular region, source a wide range of products, which might include sausages, eggs, ice cream and cake, for regional stores.

But Michael Bride, the deputy organising director for global strategies at the United States-based United Food and Commercial Workers’ Union, warned that the advent of Walmart in South Africa would not necessarily mean more jobs or an improvement to the local economy. In the US Walmart put relentless pressure on suppliers to reduce prices.

“Walmart exerts never-ending downward pressure on its suppliers to provide it with increasingly lower prices that simply aren’t sustainable. This has forced suppliers who once manufactured in the US to move their operations overseas to countries with cheap labour forces,” Bride said. “In this way Walmart has been a major contributor to the decline of the US manufacturing sector. In short Walmart’s bad business practices don’t just have an impact on workers in its retail stores, but [also] on workers up and down the supply chain.”

Bride said Walmart should commit itself to sourcing goods locally instead of “simply importing the items it sells from other countries that [will] do nothing to enhance the South African economy”. “The threat Walmart poses to local suppliers and manufacturers is real,” he said.