Supercompra: Sourcing from Small Andean Farmers

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R E V : S E P T E M B E R 3 , 2 0 1 5

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This case was written by Professor Josefina Bruni Celli and researcher Manuela Plaza, both from Instituto de Estudios Superiores de Administración (IESA) as part of the SEKN Case Collection. Please, be aware that this is a disguised case. The identities of people and organizations have been concealed following the wishes of the protagonists. Professor Josefina Bruni Celli and researcher Daniel Mogollón were in charge of the research and preparation of the analytical case. SEKN cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012 Instituto de Estudios Superiores de Administración (IESA). To order copies or request permission to reproduce materials, call (800) 988-0886 or (617) 783-7500 outside U.S. and Canada, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of the above mentioned copyright holder. At the time this case was developed, the SEKN membership consisted of AVINA, EGADE, Harvard Business School, INCAE, Pontificia Universidad Católica de Chile, Universidad de Los Andes, Universidad de San Andrés, Universidade de São Paulo, IESA, ESADE and Universidad del Pacífico.

J O S E F I N A B R U N I C E L L I

M A N U E L A P L A Z A

Supercompra: Sourcing from Small Andean Farmers

On the afternoon of March 20th, 2006, Juan Pedro Zapata, CEO of Supercompra, an Ecuadorian retail corporation, was having a cup of coffee in his Quito office. As he waited for Rodrigo Paredes, the National Manager of Agro-processed Products, Zapata looked back on the five years that had passed since he had been asked by his boss at Grupo Mazaplan to come to Ecuador to run Supercompra. This had happened just after the Mexican Grupo Mazaplan had acquired a majority of the company’s shares.

Upon arriving, Zapata and his team set out to completely transform Supercompra’s purchasing strategy. Zapata discarded the existing model whereby fresh produce was purchased by a central office from national middlemen who then made direct deliveries to points of sale, and substituted it with a new model featuring decentralized company units called “proximity platforms” located in various parts of the country, which purchased the fresh produce regionally and then delivered it to points of sale in that same region. The first of these platforms was set up in 2002 near Pallatanga, an Andean village sitting 1,420 meters above sea level in the Province of Chimborazo. The purpose of this reform was to reduce indirect purchases through middlemen, increase quality control during purchasing, and gain control of deliveries (which were now done by the company itself). By buying directly from farmers rather than from distributors Supercompra was “shortening” the supply chain; but Zapata knew that to achieve this, he and his team had to devote considerable time and effort to develop a direct and stable relationship with the farmers.

Zapata looked up and noticed on his desk the Supercompra 2005 Corporate Social Responsibility Report. It had been left there a few hours earlier by Carmen Francés, the National Corporate Affairs Manager. He picked it up and leafed through it; then paused thoughtfully in the section highlighting one of Supercompra’s responsible contributions to the country’s development: prepping small farmers to become direct suppliers of fresh produce. Zapata had good reason to feel that this was perfectly in line with Supercompra guidelines, which stressed the importance of “sustainable development”.

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Suddenly, Zapata remembered something that one of the purchasing agents at the Pallatanga platform had said to him just a few months back: many of the small farmers’ co-ops that Supercompra had helped create had dissolved and no longer existed, and the number of small farmers selling directly to the platform had also diminished. Zapata had not paid much attention to the matter at the time, because the platform was doing well buying from bigger farmers and local distributors who were committed and loyal; after all, the company had set up the platforms purely for commercial purposes. But today Zapata could not stop thinking about this. Should Supercompra go the extra mile to rekindle a direct relationship with small farmers, or simply let the platform continue to expand its relations with bigger farmers and local distributors? Paredes would be arriving any minute now. Maybe he could help him shed some light on the matter.

Supercompra and Grupo Mazaplan

Supercompra was a subsidiary of Grupo Mazaplan, a Mexican multinational corporation with more than thirty years of experience in retailing. Grupo Mazaplan had entered the Ecuadorian market at the end of 2000 when it purchased a controlling interest in Supercompra. In 2006 Supercompra’s shareholders were Grupo Mazaplan with a 50.1 percent interest, Almacenes Populares (an Ecuadorian corporation) with 28.6 percent, and a group of individual Ecuadorian investors with 21.4 percent.

In Ecuador, Supercompra was a leader in the supermarket, hypermarket and cash and carry1 categories, with annual sales exceeding US$230 million in 2005. Between 2001 and 2004 the shareholders had invested approximately US$200 million, mostly to refurbish and expand the Supercompra supermarket chain. The company planned to invest another US$400 million between 2005 and 2009 in an expansion plan aimed at making Supercompra Ecuador’s largest retail company. In 2006 the company employed 5,000 people in 39 supermarkets, six hypermarkets and 18 hard discount stores nationwide.

Grupo Mazaplan was a leading company in retail sales in Mexico, its country of origin. International expansion had begun in the early 1990s, and in 2006 Mexico still accounted for 75 percent of the group’s consolidated net sales. The group had decided to expand internationally only after consolidating its investments and practices in Mexico where the roots of it’s know how lay.

Grupo Mazaplan entered the Andean market with the support of Ecuador’s Almacenes Populares in mid-1999. Purchasing a controlling interest in Supercompra in 2000 marked the group’s entrance into Ecuador. Supercompra’s vision was “to be a leader and a model, setting the pace for the retail business,” and its mission was “to grow, innovate and promote free and healthy competition to facilitate consumer access.”

Development of Supercompra’s proximity model

Zapata’s business strategy at Supercompra featured “shortening” the grocery supply chain to make it “increasingly linear” and direct. The purpose was to lower costs for consumers, and to provide rapid response to their demands. Zapata explained the purpose of this “proximity model” as follows:

1 In retail, “cash and carry” means a store operating on a basis of cash payment for goods that are taken away by the customer.

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The purpose is to bring freshly picked string beans or lettuce to the customer on the same day, and for that you need production and distribution to take place at no more than a certain number of kilometers from the stores.

Upon arriving in Ecuador, Zapata hired Rodrigo Paredes, a young Ecuadorian agricultural engineer who came from a family of flower growers. Paredes had done an internship in Holland where he apprenticed with variety enhancers. While living there he had come to know about supplier development in the retail business under the guidance of his host, a flower grower who was also the retired purchasing agent of a very large retail corporation. In the job interview, Paredes also told Zapata that he enjoyed “working with farmers and co-ops,” underscoring his “social orientation,” and the fact that he specialized in “rural development” while studying agronomy at the Central University of Ecuador.

As soon as they took on the company, Zapata and Paredes noticed that Supercompra purchased all groceries through a single office at the company’s only distribution center, located close to Guayaquil. The distribution center’s team of purchasing agents acquired all agro-processed products (fruit, vegetables, fish, poultry and meat) from large distributors, but because these products were perishable, a large proportion of them were delivered directly by these distributors to each of Supercompra’s supermarkets. Zapata and Paredes disliked this method because the company had no control over the conditions and quality of the perishables that distributors were dropping off at the supermarkets.

In order to have more control over the quality of the produce, Zapata and Paredes decided to set up two “logistics platforms” or “proximity platforms” strategically located in the North-central and the South-central parts of the country. The plan was that large distributors would no longer ship the fruit and vegetables (fruveg) to supermarkets. Instead, company staff located in the logistics platforms would buy fruveg directly from producers or local middlemen and apply quality control procedures upon receipt. Under this scheme Supercompra took over the task of delivering fruveg to its supermarkets.

There was a second stage to Zapata and Paredes’ plan of action. They wanted the platforms to gradually stop buying from middlemen and to purchase everything from farmers instead. The goals they had in mind were to take the middleman’s margin and gain greater control over the quality of the produce.

In order to identify the best places to set up the platforms, in 2001, Paredes hired an independent consultant (who in turn sought data and advice in a government agency called CIAGRI2) to conduct a study on agricultural production, distribution and marketing in Ecuador. The Cantón Santo Domingo of the Provincia de Pichincha was chosen to set up the North-central logistics platform because a large proportion of the country’s fruit was grown there (see Exhibit 1). It was decided that the second platform should be set up in Pallatanga, an Andean town located in the Provincia de Chimborazo (see Exhibit 1), country’s second largest vegetable producing region --the first being Provincia de Tungurahua (see Exhibit 2). There were approximately 700 small middlemen in the area who received vegetables from farmers. Their small “collection centers” supplied the larger national distributors who had been the Supercompra’s traditional suppliers.

No sooner had the platform been set up that Zapata and Paredes took a radical measure: they dismissed the incumbent agro-processed product purchasing staff en masse. In Paredes’s own words:

2 CIAGRI was originally created to foster organized participation of rural communities in Ecuador. It offers various training programs which encourage the development of small farmers and producers.

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The whole agro purchasing team was replaced the first year (2002), with the exception of one of the former purchasing agents who was retained because he understood what we were doing very well and had experience as an agricultural extension agent… There were corruption issues which prevented us from continuing to work with those people. This is a very sensitive problem and therefore a big challenge … there is a lot of money involved… If I buy a lot from a particular tomato distributor, he is not going to want to lose his business, so he will bribe the purchasing agent and create an entry barrier.

Setting up the logistics platform in Pallatanga

A location was needed to set up the platform in Pallatanga, but the company did not wish to buy a building at the time. Paredes made contact with a farmer’s co-op called Cooperativa Agroandes, which owned a 600 square-meter warehouse intended for its own use. The warehouse was not being used by the co-op because, for various reasons --lack of organization, capabilities and capital--, shareholders were selling their produce individually to distributors instead of through their co-op. Supercompra offered to rent half of the warehouse. Rodrigo Paredes commented:

Fernando Bastardo, the co-op’s president with whom we signed the agreement, started generating sales profits for the co-op that went from zero to US$ 46,500 a month. It was very easy for them; they received produce from farmers on their side of the warehouse, selected it, and we were right there beside them, so they would deliver the produce to us; in addition we paid rent and went on with our daily tasks.

The Pallatanga platform started to operate in June 2002. From that moment on, Cooperativa Agroandes as well as local distributors began selling their merchandise to the platform, where Supercompra’s staff received the produce on a daily basis, organized it and delivered it directly to different supermarkets.

Actions taken to guarantee direct produce supply in Pallatanga

Zapata and Paredes had resolved to substantially reduce Supercompra’s dependence on distributors at the Pallatanga platform within a year. In order to do so, they decided to study the terrain. The company signed an agreement with the Universidad Nacional de Ecuador (UNE or National University of Ecuador) under which students from the university’s Department of Agronomy would work as interns at the platform. The students conducted a census of producers, and of public and private organizations in the agricultural sector (suppliers, trading companies, organizations supporting farmers’ irrigation systems, and others) working in municipalities close to Pallatanga. With this information they produced a “strategic map” of the area. The map included estimates of potential production, available farming area, and grower’s capability to directly supply the platform.

As a second measure, Paredes hired an agro-industrial engineer called David Valles, who was to be in charge of purchases made from the platform. Valles moved to Pallatanga with his wife in October 2002. The task ahead of him was to convince producers to develop a direct buy-sell relationship with Supercompra. In order to locate and approach these producers, Valles relied on two recognized and renowned organizations in the area, which had been identified by UNE’s interns: Sistema Hidráulico Chimborazo–-the irrigation authority of the province-– and ACEP (Asociación Civil de Extensión Agrícola de Pallatanga), a para-statal organization which organized and located

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potential markets for growers in the area. Sistema Hidráulico Chimborazo officials went from farm to farm dealing with producers’ irrigation problems, as water availability in the area was dreadfully scarce. Valles accompanied the officials in their rounds in order to get to know growers and talk to them. With the institutional backing of Sistema Hidráulico Chimborazo and ACEP, he also attended meetings of a variety of local producer organizations, which according to Valles were abundant in the area:

Many of these organizations did not even deal with commercial issues, but attended to other common needs; they [producers] are united by rural credit unions and the lack of passable roads. These things spurred meetings at the home of a local leader. I used these meetings as an opportunity to talk to everyone, and they would ask questions. You see, if you visit a grower individually at his own farm, he’s not going to ask any questions because he’s afraid to.

At these meetings Valles discovered that fear and distrust were his biggest obstacles to approaching producers. Growers feared being robbed because all had suffered bad experiences with distributors who had “kept producers’ money for themselves.” In addition, since the platform had been set up, a number of local middlemen (distributors) had been returning to growers the produce that had been rejected by the platform’s quality control team. This situation had led to rumors against Supercompra. In order to persuade farmers that it was worthwhile to work directly with Supercompra, Valles focused on convincing “local leaders” (usually the bigger farmers in the area) who had the clout to “pull the others.” As Valles commented:

In this area people don’t sign written contracts; what works is trust… once you convince the leader… you’re done… the rest is simple… ‘if the leader does it, if they don’t rob him, son can I’… because what they are worried about is having to deal with someone new… someone who will take their produce - because distributors buy on credit terms - and not pay them …

Valles soon discovered that the local leaders with whom he had managed to establish a relationship were those “you could talk to” because they understood what Supercompra was proposing, and because they knew how to “express themselves,” and this was related to their level of schooling. These interlocutors were usually college educated agronomists who owned the larger and more technically advanced farms (a farm of eight hectares was very large by local standards); they were different from the majority of farmers who had barely finished primary school. But Valles also realized that not all educated farmers were trusted by other farmers. The leaders with the greatest pull were those that had been born and bred in the region; they had to be the sons or relatives of local producers, people who understood the local culture and spoke the local language. This was the case of Pedro Baptista, one of the founding leaders of the Cerro Lindo Association of Vegetable Producers, a young agricultural engineer who farmed a six-hectare plot inherited from his father, a local farmer of old.

The message sent to producers by Valles through local leaders was that Supercompra was going to guarantee payment security, purchase security, legal security (with the issue of purchase orders and invoices), price stability and a long-term relationship. Valles argued that this type of stable relationship would facilitate the purchase of trucks and other assets; help them capitalize: “…it’s not that I’m going to buy from you today only because I need to, and forget about you tomorrow and not buy anything from you; we’re talking about building stable relationships based on trust and reliability, and this also means legal trustworthiness.” To encourage producers, during the first two months Supercompra offered to pay after 7 days of each delivery to the platform (distributors and local middlemen paid producers after up to 21 to 60 days of delivery), with the agreement that the terms of credit would gradually increase to a maximum of 30 days from date of delivery.

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Supercompra was also up against the fact that the vast majority of producers in the area were very small farmers (the average size of plots in the area was 2.8 hectares – see Exhibit 3; also see description of small Andean farmers in Exhibit 4). Since it was not technically and economically feasible for the company to work with hundreds of smallholders, the buy-sell relationship had to be established with producers’ associations and co-ops. At first, Valles sought to establish relationships with existing associations and co-ops, but as it turned out, very few small growers were organized. Moreover, existing organizations did not meet many company requirements. It was company policy that these associations should have a legal persona, comply with certain legal formalities, and have bank accounts, since the company did not work via cash payments but through direct deposits into a bank account. Consequently, to the task of having to convince farmers to work with Supercompra, another was added: helping farmers to set up associations and co-ops, or bring existing ones up to par. Valles discovered very soon that to “formalize” growers was no easy task, as producers “were not used to it,” and deemed it to be “very expensive and very difficult.” He thus paid weekly visits to the associations planning to work with Supercompra, went with their leaders to obtain a tax

identification number at the SRIE,3 took them to registries and notaries, contacted printing companies to provide them with legal invoices, and went to the bank with them so they could open their accounts.

Attempts to set up new co-ops and associations were not always successful. According to Valles “many of those we tried to create were never actually formed, and others disappeared within six months,” since it was not easy for producers to agree with one another or to convince them it was worthwhile to join forces. But Valles’s efforts bore good results. By the end of 2003, 16 small growers’ co-ops and associations and 11 larger commercial producers were either supplying or getting ready to supply the Pallatanga platform. Rodrigo Paredes described what happened during this period:

Our purchasing agent over there, David Valles, traveled all across the region. He’s a very sensitive person. He managed to touch people’s hearts… We became involved with their everyday life. On the day of San Isidro, their patron saint of agriculture, we participate, we make donations, and we organize a Farmer of the Year competition. This gives us credibility… More people came along, not just from Pallatanga but from other neighboring towns too, and as more [producers] began to trust us, farmers from other towns came to us…

Terms of the relationship between Supercompra and producers from Pallatanga

Supercompra’s buy-sell relationship with growers required some “preparation.” When merchandise was received at the platform, the company’s Quality Control Department (managed by agro-industrial engineers) selected a sample of the produce and examined it to validate its compliance with quality control standards, which were based on a “technical specifications datasheet” prepared by that same department for each variety of “fruveg.” Before arriving at the platform, growers had to select their produce based on those specifications, which indicated desired size, color, thickness, degree of freshness, and ripeness of the vegetables. If vegetables didn’t meet these specifications, they were rejected. In order to ensure farmer compliance and reduce rejection rates, during “preparation” Supercompra offered farmers tips with regards to ripeness at picking, types of seeds and storage and transportation methods that helped keep vegetables fresh.

3 SRIE (Servicio de Rentas Internas de Ecuador) is the Ecuadorian tax authority.

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Supercompra also considered it vital to involve organized producers into a “programmed harvesting” scheme, because as Rodrigo Paredes explained “there is no point in my wasting time on producers if I obtain produce when I don’t need it.” Supercompra maintained a “perfect purchase order” policy, which meant platform staff gave its “supplier catalogue” 48-hour notice of exactly what was required from each of them. Orders were placed based on each supermarket’s requirements. Because purchase orders were “perfect,” absolutely everything that arrived daily between 10:00 a.m. and 4:00 p.m. at the platform was delivered by Supercompra’s trucks to supermarkets; that is, no produce remained at the platform overnight. One way of ensuring this was by getting producers to program their crops based on planned requirements made by platform staff. Therefore, Valles had to negotiate crop plans with each grower or association of growers; and based on those plans, platform staff would place purchasing orders. To support compliance of each crop plan, Supercompra provided each supplier with indications on what to grow and when, depending on weather, season and soil conditions. These indications were formulated with the help of the School of Agronomy of the UNE (National University of Ecuador).

Supercompra also promoted added value by the farmers in the post-harvesting process, by paying extra to those growers who invested time in separating, organizing and packing their produce, or making the vegetables shelf-ready. Paredes commented:

This is the industrialization phase: it involves tying up [the vegetables], added value, the co- op’s own brand ... Some [producers] have already started hiring people and have a small staff working for them. Others already own their own trucks. One co-op already stamps its logo on packages and has hired a manager. They are very excited. They’ve made some improvements to their warehouse and even have a nursery and distribute seedlings to their members. I heard them talking and I was moved by something one of them said, a man who, at the beginning, thought this wasn’t going to work. He said not long ago: ‘Today I believe… and know I have a company, a legacy for my children.’ There are not many cases like this, because failure rate of co-ops and associations is high, but the successful ones developed because of our relationship with them.

Finally, it was company policy to make sure price issues were secondary in the relationship between Supercompra and farmers. Supercompra’s Management of Agro-processed Products developed several different schemes based on each producer’s characteristics to deal with price issues (see Exhibit 5). According to Paredes “agriculture was very dynamic;” thus, different solutions had to be created for each type of product and each type of grower also had to be treated differently:

It’s a way of achieving the kind of stable and harmonious relationship needed to attain maturity in the relationship. This is emphasized in introductory meetings with producers… We sit down with them and go over the numbers, and if the price scheme suits us all and it’s profitable we go ahead with it… Price schemes are drafted in an open and transparent way that is easily understood by producers; they are also based on historic price statistics… Negotiations are carried out twice a year; a price band is established for the first six months of the year and another one for the second half…We wanted it to be an annual price band, but producers were not keen on the idea … We buy more and pay more than local distributors and middlemen in the Pallatanga area.

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Downturn in direct purchases from farmers

In 2003, Supercompra purchased 56 percent of its vegetable supply from 11 co-ops and farmers’ associations (encompassing 198 small farmers) and nine larger-scale commercial farmers. One year later, these direct purchases reached 60 percent; but in 2005 these fell to 50.6 percent and, due to the withdrawal of several farmers, the outlook for 2006 was a further reduction in direct purchases from farmers at the Pallatanga platform. Local middlemen would be filling the gap.

Withdrawals centered on smaller farmers. Between 2003 and 2005, five co-ops had stopped supplying their produce to the company, and membership had dwindled in those associations that continued supplying the platform. In 2005, after supporting the development of two new three- member associations, Supercompra’s direct purchases from farmers were distributed as follows: 44 percent from eight co-ops and associations comprising 103 small growers; the remaining 56 percent from 11 larger commercial farms averaging 20 hectares in size.

Quality control procedures at the Pallatanga platform annoyed some of the small farmers. Producers would get upset when their produce was rejected by the platform’s quality control staff. For example when one of them found out that his delivery of 350 kg of carrots had been rejected because it did not conform with technical specifications, he angrily hurled all 350 kg onto the platform and left, preferring to let them go to waste rather than return home with them. Referring to this incident, Valles commented on the farmers’ strong character and the impact that selection and packing specifications had had on them.

Price oscillations due to market conditions also had an influence on farmer desertion. It also happened on occasion that growers preferred to sell their produce to distributors when they offered prices above the top of the band farmers had agreed upon with Supercompra, even if the difference was small. As explained by a co-op member,

… We all want to make money, so they [producers] inquire about market prices and if Supercompra is offering 100 dollars for a given product and they find that elsewhere it can be sold for 110, they sell elsewhere, not minding that if today they ‘lose’ 10, tomorrow they might gain 20 by selling to Supercompra. They simply are not trustworthy; they don’t keep their word…

Valles explained that the platform preferred to stop buying from farmers that behaved in this way.

The “planned harvesting” policy was also a source of tension. Under this scheme, Supercompra would ask a co-op to plant a specific kind of vegetable, say lettuce. It turned out many growers had never worked with lettuce and were not willing to go through the process of learning how. They wanted to sell what they had always specialized in. In addition, and according to Valles, “… their crop plans had to adapt to our specifications, and they dislike this because they plant their crops according to price expectations …”

Another source of antagonism was Supercompra’s practice of purchasing specific crop items only from those who had been programmed to plant them. Since many farmers did plant their crops out of price expectations, thereby disregarding the agreed upon “crop plan,” there were times when there was overproduction of certain items, and growers expected Supercompra to purchase the whole harvest. Also, crop plans were a source of conflict within co-ops and associations because farmers often quarreled among themselves about who was to plant what and the distribution of related tasks.

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Platform demands (crop planning, selection, washing and packaging) led many growers to opt out of the co-ops or associations, preferring to sell their crops to less fussy middlemen. For example, the “Cerro Lindo Association of Vegetable Producers” had 50 members in its inception, but within a few months membership had dropped to 16 growers. A member explained that these former members had gotten “tired” of demands and utterly disliked “having their produce checked and selected.”

Unwillingness to abide by platform demands was not the only reason why direct provision of small farmers did not grow and even began to dwindle. Many of the producer’s associations that Valles had tried to create dissolved and disappeared early on in the process. According to Valles, the “fatality rate” in these associations and co-ops was a direct consequence of frequent quarrelling among members. For members with landholdings of different sizes, reaching agreements was no easy task. For example, members owning larger landholdings, who thereby produced more vegetables than owners of smaller ones, owned the association’s truck in exactly the same proportion, which was at times perceived as unfair since the former contributed more to the pool of vegetables delivered to Supercompra than the latter. Also, assuring transparent bookkeeping was a complex and difficult task because members delivered in different amounts a large variety of differently priced products; doing it correctly required an amount of effort and dedication that not all farmers were willing to give, as well as hiring specialized staff. In some co-ops and associations, issues such as these could not be solved.

Lack of member commitment was also a frequent cause of co-op or association dissolution. According to one producer, many growers skipped weekly meetings because they considered them “a waste of time” and when they did attend, “they were concerned for their own interests rather than the common or collective one.” Another producer lamented that “… people leave out of apathy; they don’t have a long-term perspective and don’t look at this as a group activity; that is why they leave…”

Larger growers, who often related better to Supercompra, were usually better educated than the smaller ones, had greater technical knowledge of horticulture and marketing, as well as more capital, which enabled them to put into practice better planting and harvesting techniques than those used by the smaller producers. For example, irrigation was commonplace among larger growers, which enabled them to consistently harvest better quality products, and allowed for multiple yearly harvests of the same item. Irrigation techniques and other technology-supported practices usually meant higher productivity and income for these larger growers.

Value of the Pallatanga platform for Supercompra

As the company established direct links with local producers through the Pallatanga platform, it also captured the 20 percent intermediation margin. Rodrigo Paredes explained “… we saw quite an important business opportunity … with the possibility of a margin that exceeded 20 percent … it immediately caught our attention.” Moreover, crop plans and technical assistance, in addition to improved post-harvesting practices, guaranteed fresher and more varied produce, resulting in better positioning in the consumer market. Another benefit was a 30 percent reduction in waste, as previously vegetables often reached supermarket stores in less than ideal conditions or in excessive quantities, and soon spoilt or even rotted on the shelves or displays. Finally, Paredes mentioned that “with distributors, products often weren’t yet suitable for harvesting, now I can request from the producer the ripeness point I want when they harvest.”

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The company invested US$1.2 million to setup and put into operation the Pallatanga platform (which included producer preparation). Yearly net gain obtained from having switched from the previous procurement system to the platform in 2004 and 2005 (see last row of table in Exhibit 6) was twice that sum. In Zapata’s words, “We were able to benefit consumers with better quality products at a better price, whilst generating profit for both growers and ourselves. It’s obviously good business!”

Value of the Pallatanga platform for small farmers

Members of the eight producer associations and co-ops still supplying the platform in March 2006 perceived their relationship with Supercompra to be very valuable. The greatest need met by Supercompra was payment security and income stability. As one producer explained:

We had many payment-related troubles here… if I sold distributors my crop for 600 dollars, they only paid me 450 dollars and I had to accept that in order to sell the produce and not lose money. If they [distributors] wanted to, they paid you after two or three months. We often lost money because they decided not to pay us. We organized a farmers’ association so that Supercompra could give us marketing advice, which is what really interests us… Supercompra got involved and helped us with that… it was like having the law backing us up… and it’s gone very well for us with Supercompra.

Payment security had enabled farmers to increase capital assets in their associations. As explained by a small farmer, “before, we had to hire a truck; now we have a truck that belongs to us.” Purchasing the truck became possible because the formality of the relationship with Supercompra and the associated regular flow of funds were perceived by banks as a guarantee.

Another farmer mentioned an additional set of benefits from being associated with Supercompra:

The association deducts from its members six percent [of their income] which is deposited in a fund and this fund is used to help workers, and it is also used for our patron saint’s celebrations… It gives you peace of mind… not like before when everything was chaotic. [Now] I can sleep at night without worrying, and my family has peace of mind too, because we know that with Supercompra we can partner through good times and bad times...

Many growers admitted not trusting Supercompra at the beginning, but now they knew that thanks to their relationship with the company they had “a business we can pass on to our children.” Working with the platform had enabled them to set up producers´ associations or co-ops and generate legally recognized invoices, all of which had facilitated their inclusion in the formal economy. Supercompra had also added value to the farmers’ production process, by advising, valuing and paying a premium for vegetables that had been washed and packed before delivery at the platform. Lastly, Supercompra had helped growers improve produce quality by recommending seeds and offering advice on when to plant and harvest their crops.

Pallatanga in Supercompra’s Corporate Social Responsibility Report

In compliance with the “sustainable development” policy upheld by Grupo Mazaplan, in 2003 Supercompra began publishing an annual Corporate Social Responsibility Report, in which it described actions carried out by the company to “promote sustainable development.” Within this

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Supercompra: Sourcing from Small Andean Farmers SKE-145

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report, the purchasing model based on proximity platforms was coined “Direct Commercial Integration Model” (DCIM). The various experiences of direct purchasing from suppliers around the country were included in this report under the title “successful stories in fair trade”: the proximity platform in the Cantón Santo Domingo in the Provincia de Pichincha (North-central Ecuador); the Supercompra initiative to foster small fishermen in Provincia del Guayas (see Exhibit 1); salty fish purchases from a local Afro-Ecuadorian community and, direct purchasing of buffalo, duck, pork, rabbit, and turkey meat from small producers throughout the country.

According to the 2005 report, with the DCIM the company sought to align the interests of three players: customers, who sought freshness, quality and good prices; producers, who needed to be more organized and productive; and Supercompra, which wanted to promote the development of reliable suppliers. In that same report the company indicated that the DCIM was based on the Fair

Trade approach,4 signifying that by eliminating distributors and middlemen, and establishing a direct business partnership with small farmers, the company contributed to improving the latter’s terms of trade. The following principles guided the DCIM:

 Direct producer participation in the value chain

 Promotion of innovative and economically responsible people

 Dialogue, openness, transparency and respect in relationships

 Respect for human rights in labor practices and standards

 High quality standards in production processes

 Environmental responsibility

Doubts regarding next steps in the platform

Seated in his office at the end of the day, Juan Pedro Zapata was discussing with Rodrigo Paredes the latest developments of the Pallatanga platform and, in particular, the situation of small farmers. Paredes was concerned. The farmers’ associations Supercompra had invested time and effort in creating and developing were experiencing high failure rates. The number of middlemen and large commercial farms supplying the platform had increased over the last year. Small local growers did not really represent an important fraction of platform suppliers. Paredes was of the opinion that an opportunity was being wasted because, in his experience, organized small farmers, with whom the company had established a stable relationship, were very trustworthy, and had proven, in the medium term, to be better business partners than larger producers or distributors. Nonetheless, the disappearance of many of the associations Supercompra had fostered meant that continuing with the effort was a potentially fruitless endeavor.

In order to properly foster small farmer development, the continuous presence of purchasing agents in Pallatanga was necessary; but in the last few months, rotation of purchasing agents in the Pallatanga platform had increased. David Valles was no longer working at the platform, and Supercompra had had no luck finding a replacement. Potential purchasing agents either rejected the

4 Fair Trade is an alternative form of commerce promoted by various non-governmental organizations, the United Nations and social and political movements (i.e. pacifist and ecological), which promote more just commercial relations between producers and consumers.

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SKE-145 Supercompra: Sourcing from Small Andean Farmers

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job or lasted only a few months at the platform, mainly because their families did not like living in Pallatanga because it was a very isolated town.

Even though purchases from middlemen had increased, the Pallatanga platform still managed to acquire good quality produce due to its strict quality controls. Distributors and local middlemen had adapted to Supercompra’s quality standards, and managed to supply the variety of produce required by company supermarkets at competitive prices.

Zapata recalled that working with small producers had never been an end in itself; it simply had been seen as a potentially profitable business opportunity in Ecuador, where, as it turned out, a high proportion of producers were very small. It was only after a specialized consultant on corporate social responsibility was hired that Zapata realized that Supercompra’s approach to small producer development met the principles of “fair trade” and “sustainable development.” Though unexpected, this result had been important for Grupo Mazaplan because the group had recently entered the Global Reporting Initiative (GRI), and in so doing, was seeking to position itself as a globally responsible corporation. But the fact was that doing business with small farmers was not holding up so easily. Zapata wondered what to do. Should Supercompra continue to invest efforts and resources in developing small farmers? Would this be profitable in the long run? Would it make sense to reframe small farmer development as a form of “social investment” rather than as a profitable business opportunity? Present purchasing trends at the platform, which implied doing away with a direct provision from small farmers, were generating good financial results, so why bother?

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Supercompra: Sourcing from Small Andean Farmers SKE-145

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Exhibit 1

Map of Ecuador

Location of Ecuadorian Provinces

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Exhibit 2

Vegetable Production in Ecuador’s Andes

The eight sierra provinces of Ecuador produce 71% of the countries vegetables. Leading producers are, in order of importance: Tungurahua, Chimborazo, Azuay, Pichincha, Bolívar and Cotopaxi. These six Andean provinces account for 63% of total national vegetable production.*

1996 2003

National production in tons 459,300 495,560

Source: Ministry of Agriculture

* The Pallatanga platform purchases root vegetables and other vegetables from other nearby provinces.

Exhibit 3

Average Extension of Landholdings in Ecuador and the Andean Provinces

Units of agricultural production

Number of cultivated hectares

Average size in

hectares

Ecuador 842,882 12,355,831 14.66

Sierra (Andean Provinces) 567,853 4,762,331 8.39

 63% of Ecuadorian farmers own 1.4 hectares or less

Source: III Ecuadorian Agricultural Census, 2000.

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Supercompra: Sourcing from Small Andean Farmers SKE-145

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Exhibit 4

Small Farmers of the Ecuadorian Andes

Small Andean farmers were not all the same; among them there was a hierarchy. At the top of that hierarchy were the owners of small plots (smallholders) where produce was grown; these plots were between one and six hectares each (more than half of them were less than three hectares). They were followed in hierarchy by aparceros (sharecroppers), growers without land, acting as smallholders’ “partners”, on a 50 percent sharecropping basis. At the base of the pyramid were farm laborers, hired for a short period of time, usually during planting and harvesting days.

The largest smallholders had more sharecroppers; each sharecropper partnered with a smallholder to farm between 0.5 and 1 hectare. Thus a smallholder with 6 hectares could have between 6 and 10 aparceros partnering with him. A high proportion of these sharecroppers were the children, nephews, sons-in-law or brothers-in-law of smallholders. Also, though in a position of lower hierarchy, there were sharecroppers who were not part of the smallholder’s extended family. In the smallholder-sharecropper relationship, sharecroppers were the ones who worked the land. Sometimes smallholders worked the land themselves, but most of the time they just looked after the seedling nurseries, bought fertilizers, insecticides and seeds, negotiated production with external agents, and prepared produce for dispatch and sale. Usually smallholders joined sharecroppers during harvesting time.

The better-educated sons of older farmers were, according to Supercompra, “the best interlocutors” because they were familiar with the technical and commercial language used by company managers and purchasing agents. They were respected and appreciated by other less educated farmers. And because they were growers´ sons, they sympathized with these less educated farmers and engaged with them as equals. Rodrigo Paredes commented: “There are the sons; it is easy to enter the group by contacting them, because they are more open to working with you and have a higher educational level than their fathers and elders…the young are friendlier and more self- confident.”

There were technical reasons behind the small size of plots in the high valleys of the Andes. Due to low technology levels, smallholders were not able to increase production scale on their own; they thus offered their children (and other relatives) plots under the “share-cropping scheme” in order to harvest vegetables. When the son of the smallholder up and proved to be responsible, his father would give him ownership of a part of the smallholding. Overtime, plots have become smaller and smaller due to a combination of population growth and the aforementioned tradition of land- splitting.

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SKE-145 Supercompra: Sourcing from Small Andean Farmers

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Income and Other Features of Small Growers from “Cerro Lindo Association of Vegetable Producers”, 2005

Name of Smallholder

Hectares Age Education # of other mem- bers in

the small-

holder's family

# of share-

croppers

# of other members

in sharecrop-

pers' families

Yearly net income of

smallholder in US$

Yearly net income

equivalent for smallholder

family of five in US$

Yearly net income of sharecrop- per in US$

Yearly net income

equivalent for

sharecrop- per family of five in

US$

Santos Irenio Pérez

3 43 5th grade 7 2 8 $13,395 $8,372 $6,698 $6,698

Francisco Antonio Abreu

5.5 44 3rd grade 10 2 8 $24,558 $11,163 $12,279 $12,279

Juan Carrizo 1 37 6th grade 6 1 3 $4,465 $3,189 $4,465 $5,581

Manuel Pinilla

1.5 61 6th grade 8 1 4 $6,698 $3,721 $6,698 $6,698

Victor Porra 2 27 6th grade 8 5 7 $8,930 $4,961 $326 $679

Roso Ocanto 1.5 44 6th grade 3 3 11 $6,698 $8,373 $1,786 $1,914

Circunsición Parra

5 37 3rd grade 10 7 18 $22,326 $10,148 $2,233 $3,126

Pedro Abreu 3 39 6th grade 9 7 23 $13,395 $6,698 $3,189 $3,721

Juan Rojas 6 56 3rd grade 18 4 17 $26,791 $7,050 $6,698 $6,379

Jacinto Peñaloza

1.5 39 High School

Diploma

4 2 6 $6,698 $6,698 $3,349 $4,186

Javier Gómez

1.5 39 Associate degree in livestock

8 2 5 $6,698 $3,721 $3,349 $4,784

Carlos Rodríguez

1 39 6th grade 15 1 5 $4,465 $1,395 $4,465 $3,721

Juan Artigas 3 40 7th grade 6 1 3 $13,395 $9,568 $13,395 $16,744

José Isaac Alarcón

5 29 High School

Diploma

8 5 14 $22,326 $12,403 $4,465 $5,875

Pedro Baptista

6 39 College Agronomis

t

4 10 32 $26,791 $26,791 $2,679 $3,189

Antonio Jaramillo

5 34 High School

Diploma

5 10 31 $22,326 $18,605 $2,233 $2,723

Weighted mean

$14,372 $10,470 $3,650 $4,352

Median

$13,395 $9,568 $2,679 $3,200

Note 1: Due to lack of available data, the data provided on this table are gross estimates based on strong assumptions: 1) identical productivity of the land for all the plots; 2) identical cost structure for all the plots. It is possible for the productivity of the smaller plots to be overestimated. Note 2: The sharecroppers’ average income is a weighted average.

Poverty threshold 1: annual income of a family of 5 when $1 per/person/per day is obtained $1,825 Poverty threshold 2: annual income of a family of 5 when $2 per/person/per day are obtained $3,650

Note that the average annual net income of a smallholder with a family of five is US$9,568 and that the average annual net income of a sharecropper with a family of five is US$3,200. This last figure is below the poverty threshold established by the World Bank for Latin America: two dollars per person per day. The smallholders’ annual net income median is above that poverty threshold, but it is still well below that of any developed country. In the case of Ecuador that figure corresponds approximately to the population’s low-middle income sector.

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Supercompra: Sourcing from Small Andean Farmers SKE-145

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Exhibit 5

Pricing Schemes Between Supercompra and Farmers Supplying the Pallatanga Platform

Scheme 1: Every six months a price band is established based on price statistics of previous years. Supercompra’s purchasing agents show these statistics (in charts and graphs) to farmers and the price band is negotiated. Price bands are agreed upon in January and July; this may vary depending on the market. According to Rodrigo Paredes, “What often happens is that when the price [we offer] is outside the price band, producers start to get edgy…We generally use this scheme with serious farmers we can count on...We try to set up [with them] long-term accounts…” This scheme is generally used with relatively large producers.

Scheme 2: A price band is established based on Ecuador’s largest public produce markets. Supercompra obtains daily information on market prices; this way Supercompra’s Management of Agro-processed Products can decide how much above or below these market prices it is prepared to pay. Producers are asked whether or not these prices work for them. If they agree, they enter this scheme, which is the most frequently used at the Pallatanga platform.

Scheme 3: Supercompra prepares a cost structure analysis of each producer’s farm. “He [the producer] says to me: I want to make a profit of 15 percent, and based on this we negotiate.” This scheme is used mostly with large producers, “…but also with medium-sized producers and co-ops… it worked with Agroandes Cooperative because they are highly organized in that respect.”

Scheme 4: The scheme based on cost structure analysis is combined with market reference prices. For example, in the case of plantains: The daily market price of “la pesada” (meaning “the heavy”, a measurement of 300 kilos of plantain bunches) is set as benchmark price. Every day a local radio station located on the Atlantic Coast announces the price of “la pesada”. Based on the daily announced price, the purchasing price of a box of selected plantains is negotiated, bearing in mind additional costs attributed to efforts associated with grading the fruit, preparing the crates where the plantain is stored, labeling the fruit, and the amount of manpower used for these tasks. Plantain growers then sell the “unselected” plantains to the agro-industry (for the production of plantain chips, for instance). This scheme is used when aiming to add value to the farmer’s production.

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Exhibit 6

Intermediation Margin Obtained by Supercompra with the

Direct Commercial Integration Model (DCIM) = 20%

In the case of the Pallatanga vegetable growers, this meant the following:

2003 2004 2005

Annual kilos purchased directly from producers in Pallatanga

9,384,000 28,034,317 23,957,198

Total value of direct purchases from producers in US$

$3,936,915 $11,761,375 $10,050,880

Total value of purchases if produce had been obtained from distributors and middlemen in US$ (counterfactual)

$4,724,298 $14,113,650 $12,061,056

Value of the amount captured by Supercompra in US$

$787,383 $2,352,275 $2,010,176

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