Cover Image
close this bookCERES No. 072 (FAO Ceres, 1979, 50 p.)
View the document(introduction...)
View the documentAcknowledgements
Open this folder and view contentsCerescope
View the documentThe public granary: an historical basis for state intervention.
View the documentFood grain imports: whether, when, and how?
View the documentProvisioning the urban poor: the new challenge in food marketing systems
View the documentInstruments for consumer protection: the Indian experience
View the documentTCDC and the communications problem: an Asian dilemma
View the documentReaction
View the documentComment

Provisioning the urban poor: the new challenge in food marketing systems

The pace of population increase in the Third World is a phenomenon familiar to most of us, but the rate at which its city populations are growing surpasses imagination. Mexico City already has 11 million people, all dependent for their daily food upon a complex marketing system. If the present growth rate persists, the population of Mexico City will exceed 28 million by 1990.

Keeping such enormous population groups contented becomes a primary concern of governments in the developing world. Often, however, the measures adopted have conflicted directly with the promotion of domestic food production and marketing systems to meet these people's needs. This article is concerned with the facts behind this problem and with the policies that can contribute to its solution.

For the period 1950 to 1970, the rate of urban population growth in developing countries has been estimated as double that of developed countries (4.6 percent per annum against 2.3 percent). In 1960, 20 percent of the total population of developing countries lived-in urban areas. By 1970, this proportion had increased to 30 percent and it will probably reach 40 percent by the year 2000. In Latin America, where more than half the population already lives in cities, it is estimated that about 75 percent of the people will be urban by the end of the century. By that time, urban population in all developing countries will be 1500 million or 250 percent greater than in 1970. The comparative figures in developed countries are 300 million or 40 percent (see Fig. 1). Comparatively high rates of urban area growth are expected in Africa and in Asia where the urban population is expected to increase by 1 120 million or by 200 percent between 1970 and 2000. These are the regions of the world where marketing infrastructure is already inadequate, so that the expected population growth is certain to create major difficulties and congestion in food distribution if drastic action is not taken to improve the situation. In many cities food demand will double in 10 years. This calls for a doubling of marketing capacity in the same period, a challenge never faced in advanced countries.

Understandably sensitive

A second important feature of this dramatic urbanization process is the low-income levels of many of the people concerned. In most cities of the developing world, the numbers of impoverished people living in slum areas will grow rapidly in the coming years. In Nairobi, for example, it has been estimated that the low-income section of the population (less than US$86 per household per month), now 40 percent of the total population, will grow by more than the average annual rate of 6-8 percent in the coming years if migration from the countryside to the cities cannot be halted or at least reduced.

More often than not, these cities are also the centres of governments understandably sensitive to the welfare of the population within the capital. There is immense pressure on them to take action when their people complain that retail food prices are too high. Unfortunately, their interventions are often of a short term and misguided nature. In the face of complaints, governments have been inclined to set lower retail prices by decree. The effect is often to create a black market at the retail level and discourage further production on the farm. The determination with which governments have kept down the prices paid to farmers for basic food grains in the developing countries is now recognized as one of the main causes of the 1973-74 world food crisis. One economist has written that "if the farmers of the developing countries had received the same prices for food grains as those prevailing on world markets at the time, there would have been no world food problem.”

To keep down rising retail prices for food, many governments have set up direct state marketing enterprises supported from government budgets. These buy and sell in competition with the private trade. IDEMA (Colombia), CONASUPO (Mexico), EMPROVIT (Ecuador), COBAL (Brazil) and the National Milling Corporation (Tanzania) are examples. The goal of these enterprises is to maintain food prices at low levels, particularly in conditions where inflation is rife, and to encourage innovation. Opinions vary as to the benefits derived from such enterprises. In some countries, the view is that they are the only effective means of supplying low-income consumers with staple foods at reasonable prices in times of inflation and scarcity. The additional costs involved are regarded as less significant than the benefits that accrue. Other views hold that there are other, more efficient means of helping low-income consumers, such as through a food stamp system that can be introduced along with improvements in the existing marketing systems, or ration cards, selling to needy consumers at subsidized rates. The direct state marketing programmes are subject to the usual problems of bureaucracy. Moreover, frequent changes of government, lead to corresponding shifts in managing personnel, often without due regard to skill and qualifications, and inadequate attention to marketing costs.

In many situations, there is still ample room for improving consumer access to essential foods at lower prices through normal commercial supply systems.

Among the ways of improving food supply systems in metropolitan centres are:

· construction of new wholesale markets and supply centres sited and designed to avoid traffic congestion and to facilitate better handling methods and organization;

· promotion of vertical linkages between enterprises along the marketing channel to reduce costs due to small-scale independent operations and uncertainties regarding supplies and outlets. Such linkages may be achieved by direct integration of successive enterprises or by voluntary groupings, and vertical coordination of marketing activities;

· public provision of services to support those engaged in food distribution, including short- and longer term credit on convenient terms, technical and business advisory services, price and outlook information services;

· provision of practical training programmes adapted to the requirements of managers and staff of food distribution enterprises.

In one enterprise

The main problem at wholesale level is experienced with perishables, such as fruit, vegetables, meat, fish and dairy products. These call for fast, timely handling too often hampered by inadequate facilities. Most cities with more than half a million inhabitants have obsolete wholesale markets, often built many decades ago and quite unable to handle the larger throughput of present times. Serious traffic congestion, insufficient space for the efficient movement of produce in and out, inadequate storage and improper methods of management are major obstacles that increase marketing costs.

Bigger and better wholesale markets are not, of course, a universal panacea. Their role changes with stages of economic development. In the least developed countries, wholesaling and retailing often continue to be combined into one enterprise. In many cities of tropical Africa, per caput consumption of fruit and vegetables is comparatively low. The need for special wholesale markets arises once cities have reached a certain stage of development, say with one million inhabitants, and when the consumption of fruit and vegetables is increasing in line with incomes.

At an intermediate stage of development are many urban centres of Latin America, the Mediterranean countries and the more highly developed Near and Far Eastern cities. There, wholesale markets have an important function in the distribution of fruit, vegetables and fish to a large number of specialized retailers.

Middlemen, hawkers and pedlars

The third stage is found in cities with higher consumer incomes, e.g., parts of Latin America and Western Europe, where integrated and associated food chains have developed. An increasing proportion of fruit and vegetables traded is bought directly from packing stations and delivered to the wholesale depots of food chains for redistribution to their supermarkets without passing through the wholesale market. With such a structure, the traditional wholesale market performs only a supplementary function. It provides a source of supply for the more highly seasonal and perishable food but not the bulk of the fruit and vegetables consumed.

A second major issue for city food supply organizers is how to reduce costs and raise efficiency in distribution systems featuring large numbers of small enterprises. For a long time, these enterprises were decried as middlemen, as hawkers and pedlars. Marxists consider them unproductive; administrators find them inconvenient and authoritarian governments try to abolish them. Now, they are back in fashion as "the informal sector" of an economy and the international banks would like to channel development capital to them. In developed countries, grouping of retailers for joint purchasing and sales promotion arrangements has achieved major improvements in food supply performance. This practice is now being followed in Latin American countries and tried out in some places in Africa. Group purchasing of cooking oils by small-scale retailers in Kenya has been demonstrated as advantageous. Other systems of vertical coordination are organized by wholesalers ranging from large-scale distributors to women wholesalers, the "market queens" of coastal West Africa. The linking of a retail chain in Recife with a rice mill in the Sao Francisco valley area of Brazil led to a 15 percent reduction in the price of rice in Recife.

A sideline activity

Despite support received from bilateral aid agencies, consumer cooperatives of the Western European type have made little progress in developing countries. The difficulties are mainly in the field of management. Furthermore, the economies of large-scale retailing in low-income countries are often less than is expected. There? food retailing is often undertaken as a sideline activity for returns determined by alternative earning possibilities, usually considerably lower than the government-fixed minimum salaries that a consumer cooperative would have to pay for sales assistants.

The almost complete takeover of retail food distribution in North America and northern Europe by self service chains has led both private enterprise and governments to promote similar systems in the developing countries. But it is not the lower income consumers that they serve. The tendency, whether in Latin America, the Near East or Africa, is for the first of the new integrated food marketing enterprises to direct their sales toward medium- and higher income consumers.

The services offered by the supermarket or self-service grocery chain are those of convenience in buying a large number of items at one place ready prepared for consumption, with prices clearly marked. Because of the range of products handled under one management, the supermarket can offer basic foods at low prices and cover the costs through larger margins on products for higher income consumers and non-food items. In principle, the loss leader technique is well suited to helping low-income consumers. However, the supermarkets still serve best those consumers who are able to buy a considerable amount of food at one time and are able to travel some distance to do it. The lower income consumer has much less appreciation of this kind of service: he has neither the cash nor storage facilities to buy large quantities at one time nor the mobility to travel to an advantageous source. On the contrary, he may have to buy small quantities frequently from a place near his home and probably on credit - a facility generally only available from the smaller retailer who knows him personally, and whose services involve higher total distribution margins.

The essential lesson to be learned from supermarket-type operations for low-income consumers, however, is not so much the type of sales, which are mainly self-service, but the systematic organization of procurement of stocks at wholesale and retail level, the optimum formulation of the assortment, the pricing and transport organization and their systematic vertical coordination with the objective of minimizing marketing costs. These principles can be systematically applied in traditional food systems, in the form of voluntary chains, namely as cooperatives between wholesalers and selected retailers and in the form of retailer cooperatives. A higher level of coordinated performance of the whole food chain requires effective training and
advisory services. Efforts in this direction are being undertaken at present in Mexico and Kenya.

Much can be done to reduce costs in marketing and improve services to low-income consumers. Nevertheless, price levels required by farmers to supply the food needed to maintain rapidly growing populations may still be too high for many urban consumers after marketing costs are added. Rich countries can apply subsidies. In the United States, this is done through food stamps obtainable at a discount which, when presented to certain retailers, count as part of the payment and so reduce the actual cash required. A project designed along such lines is currently envisaged for Colombia with World Bank financing. Here the method of allocation of stamps to lower income consumers will enable them to purchase at subsidized prices while commercial prices are paid by the rest of the population, thus reducing the cost to the Government.

Poor countries will not have the resources to go far in this direction. For them, ways of charging the market price including marketing costs differentially according to the income of the consumers served may be relevant. This approach to the problem of paying enough to producers to keep supplies coming yet ensuring that lower income consumers can purchase their requirements lies theoretically in establishing two sets of consumer prices. If, for example, an average retail price of $100 per ton of some food product is needed to maintain an adequate level of output at the farm and this is too high for some population groups, then a socially oriented marketing system would sell, say, 60 percent of the total supply at $120 per ton and 40 percent to lower income consumers at $80 per ton. The total amount of money obtained to pay for production, processing and marketing is about the same. By social welfare criteria, a more efficient distribution would be secured. The lower income group can buy what it needs. Consumers with higher incomes are asked to pay more, but since they have more money available and a more varied dietary intake, generally they attach less importance to purchases of basic foods.

To implement such systems, a large part of the supplies of the basic food concerned must be delivered to a single government-controlled assembly and wholesaling agency committed to operating the programme. There must also be some means of distinguishing clearly lower from higher income consumers at the retail level. The starting point is usually the agency that operates a national supply and price stabilization programme for basic grains. At the retail level, it must either maintain its own outlets or sell through shops contracted to apply its prices. Incomes of purchasers can be distinguished explicitly by allocating ration cards to residents of poor neighbourhoods or by locating retail outlets only in such neighbourhoods or by various other devices, including restriction of sales to early hours in the morning.

A gradual corruption

A two-price system has operated in India for rice and wheat through "fair price shops" for many years. In 1974, the shops received wheat from the government procurement system for 1.25 rupees per kg. They sold 2 kg to each consumer at about Rp 1.28 to 1.30 per kg on presentation of a ration card. Taking into account the value of the sack, their margin was about 5 percent. About half the quantity of wheat marketed went through this channel; the balance was sold on the free market at prices ranging from the ration price to 60 percent higher according to quality, location and season. Programmes with similar objectives have been organized in other Asian countries, such as Sri Lanka, Bangladesh and Pakistan.

The operating costs of a socially oriented system of pricing is a major concern for governments of developing countries. It can be eased if the organization is assigned the marketing of an essential import available at such low prices internationally that it offers a generous margin when resold domestically, e.g., milk powder for re-constitution or wheat in Bangladesh. Alternatively, the produce may be one bought mainly by higher income groups that can be priced up without adverse nutritional effects. Examples are flour for white bread and polished rice in countries where the basic food of low-income people is maize, sorghum, or yams and cassava.

There are practical issues in implementation that must be faced. How to identify and keep separate the lower income group is one. Even the allocation of ration cards based on income status faces a gradual corruption. Institution and maintenance of the system call for major inputs of capital, organizing ability and consistent government support. The relatively large size of the group to be assisted in some developing countries and the complications of assuring that the types of grain liked are available in all locations where they are needed may be seen as a measure of the scope for international assistance. Case studies recently carried out in Bangladesh and Sri Lanka provide further information on details of the problems involved.

Uniformed and arbitrary

The extraordinary growth in many developing countries of urban populations dependent on the market for their supplies will call for increasing attention. Rarely are city authorities oriented and equipped to handle the problems that ensue. Central government concern is increasing, but the policies applied are too often uninformed, arbitrary, of an ad hoc character and, over the longer run, negative in effect.

Expansion of wholesale and retail market systems in pace with population growth is essential, and there must be incentives for those concerned to make the necessary investments. Improvements in planning, organization, management and arrangements for training, information and other support services will also be needed.

Generally, it will be more economical of resources and effective in practice to harness existing and potential independent enterprises into building up marketing systems adapted to local requirements rather than imposing blueprints from above and abroad. However, some developing countries may not be able to meet their own food needs without prices to agriculture that result in retail prices too high for the poorest urban consumers. Some kind of differential pricing system for basic food grains may then be essential.