It started off when our ag analyst, James, showed me something interesting. According to the FAO, Sri Lanka and Kenya exported an almost identical quantity of tea in 2016. Kenya at 293,000 tonnes and Sri Lanka at 286,000 tonnes. But the total value of exports was striking with Sri Lanka’s earning almost 71% more. Even more remarkably yield (tonnes/hectare) is almost 25% less than Kenya’s
It turns out the reasons are quite complicated including strategic positioning, value-added processing capabilities, CTC black tea vs orthodox, free trade agreements, sector maturity, etc. BUT, one of the clear differences was the power of commodity branding. Sri Lanka’s National Tea Board had spent a fortune building the ‘Pure Ceylon Tea’ brand along with the closely monitored, ‘Lion Logo’, a stamp of authenticity. Kenya, on the other hand, is selling bulk black CTC tea to supermarkets who rebrand as their own.
This got me rethinking about why commodity branding and strategic positioning should be at the center of developmental agriculture strategy and how agribusiness in the developing world can benefit from higher prices for their products, in turn, high incomes for their smallholders.
Here’s my $0.02
Summary: Key Points
- Price Takers: Homogenous, undifferentiated soft commodities are characterized by buyer-driven markets, meaning emerging market producers are price takers. Their primary customers (supermarkets, F&B, wholesalers etc) can source inputs and products from multiple suppliers across the globe which drives down profit margins for the smallholder farmers who need it most.
- Brand Leverage: By placing commodity branding at the centre of developmental strategy, we can increase the negotiating leverage on the producer side which will increase total profits for the smallholders
- De-commoditization: The end consumer is always kings, and agribusinesses, along with support from national governments must focus on building a national commodity-specific brand that justifies a higher price to the end consumer and has a higher perceived value. Differentiation and de-commoditization is the key.
- Operational Effectiveness vs Strategic Positioning: The conventional approach to developmental agriculture has emphasized the tangible objectives of food production efficiency (farming practices, input efficiency, storage, technology, etc) as opposed to the intangible higher risk opportunities with strategic positioning and brand building.
- Not Radical: This strategy has been deployed by western agribusinesses for a long time and indeed, superior positioning, branding, and marketing capabilities are the primary driver of top-line growth and profitability for supermarkets and F&B companies. The advent of digital marketing has never made it easier for the producer to reach the consumer and build a differentiated brand perception for their commodity.
- 95/141 developing countries depend on commodities for at least half of their export earnings
- Approximately 2/3rds of the world’s 3bn rural people live in 475m small farm households working on land plots smaller than 2 hectares. Globally, farms smaller than 2 hectares are responsible for 30–35% of the world’s food production.
- Agricultural export value (also a measure of retail value captured by growers), has been in heavy decline for all major soft commodities in developing countries since the 1970s, meaning smallholder producers are capturing less value than ever before.
Differentiation in food and agriculture:
The goal of differentiation is to occupy a position in your consumer’s mind which allows them to easily distinguish you from your competitors. American cooperatives and global FMCG’s companies have been the kings of strategic positioning and brand building.
In development strategy, can we apply the same principles at a global trade level, to distinguish country X’s commodity among end consumers?
Will this lead to higher prices paid? Is this approach more effective than focusing on food production efficiency?
Yes, Yes and Equally Important
Types of Brand Differentiation for Producers:
As we move down the table, the degree of execution risk increases significantly. Similarly, the reward (measured by the price paid/tonne) also increases.
Does it work:
Proving this is a little bit hard. Global agriculture does not adhere to simple categories like this. Finding the right homogenous soft commodities, with little to no value-added processing across export markets is hard. Finding the right countries to compare which fit these categories is another challenge. Isolating branding and positioning as the primary cause of higher prices paid is also difficult.
Using the FAO statistics, I looked for export value per tonne (Export value/export quantity) as a measure of perceived value and the ability to capture a larger amount of the retail price. With a quick search here are a few examples
- Wine: France $6312/tonne, Toga $1144/tonne and Madagascar $3689/tonne
- Roasted Coffee: Italy $7511/tonne, Laos $1507/tonne and Uganda $1507/tonne
- Vanilla: Madagascar $253,790/tonne, Papa New Guinea $95,022/tonne and India $103,116/tonne
The End Consumer:
The consumer is king, and pricing leverage can only be applied if your customer’s customer is willing to pay more and perceives additional value. Brand building and marketing exercises to immediate buyers would be better spent targeting the end consumer.
The advent of digital marketing has never made it easier to get the right message in front of the right consumers, anywhere in the world. Ironically, hyper-precision targeting and brand building on digital has been underutilized by agribusiness and exploited as a core capability by the very businesses they are selling to, helping them to capture most of the industry profit pool.
Importance of Positioning and Brand Building
Erosion of cost leadership is a developmental inevitability:
Look across most competitive industries, in 60% of those cases, market leadership can be attributed to cost leadership. This law applies none more so than in agriculture.
In 1999 Sri Lanka boasted 21% market share of the global tea market, with total ag sector employment at over 40%. In 2018, market share stood at 14.7% while total sector employment was 26%.
Sri Lanka’s labour costs have increased substantially, lowering international competitiveness and eroding any cost leadership position it may have once had. This is an inevitability of development.
Total labor costs were 68% of the variable costs in 2015 for the Kenyan tea industry. In developmental agriculture, market leadership through cost leadership will not last forever. The need for de-commoditization, a refocus on positioning and brand building will inevitably take heightened importance, the alternative is industrialization and automation.
Case study: Barbados Sugar Cane
Small scale production of Barbados’s sugar cane industry meant it could not compete on price in the world market against industrial producers like Brazil. In 2007 the West Indies Sugar & Trading Company Ltd (WISTCO) was formed to build a brand and positioning strategy where its high relative production costs could be passed onto consumers through premium pricing.
After careful analysis, the firm found an underserved market segment and built itself a niche position. The firm now supplies to over 1,400 UK stores including Waitrose and Harrods while also targeting 500,000 European tourists every year. The below table shows how smart positioning and branding can help relatively inefficient smallholder countries outperform industrial producers.
Strategy 101: Operational Effectiveness vs Strategic Positioning
The godfather of modern business strategy, Michael Porter, showed us there is a fundamental distinction between operational effectiveness and strategic positioning. Both are essential for superior performance.
‘’Operational effectiveness (OE) means performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to any number of practices that allow a company to better utilize its inputs. In contrast, strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.” Porter
In the case of developing countries producing a homogenous soft commodity, tangible operational efficiency investments seem to take priority.
These include agro-engineering projects, processing facilities, storage capacity, farm training, input quality, soil improvement, water efficiency etc. Reducing the gap between best in class global producers should remain a priority. But positioning and brand building should be equally as important.
The old strategy adage of sticking to your core remains here. Most agribusinesses in developing countries do not have the necessary capabilities to successfully execute the Barbados example.
Developing these capabilities in-house would be fruitless endeavor (pun intended) with high costs and long payback periods. To successfully compete in this manner, requires not just capabilities, but superior ones, especially considering the competitive environment. As such, outsourcing is the only viable option.
Three capabilities are needed:
- Strategy: Conduct deep quantitative and qualitative analysis to establish which markets to play in and how to win in those markets. Match market opportunities with core capabilities to build a positioning strategy which maximizes profit potential
- Branding: Build a differentiated brand perception amongst the target consumer by building on the strategic positioning analysis. The process will involve everything from building the brand’s values to the visual identity.
- Marketing: Marketing experts will be the final piece of the jigsaw and ensure the right message gets in front of the right audience.
For those of us involved in developmental agriculture, we know market-based solutions are the only viable option. Government, NGO, and philanthropic funding are temporary plasters. We must successfully play within the rules of the game. A focus on strategic positioning and brand building to the end consumer does just that and will increase the negotiating leverage for sellers, thus driving up prices.
Huge amounts of investment flow into operational efficiency improvements for these smallholders and domestic agribusinesses to compete globally. For a fraction of that investment, top-line efforts can be executed. Of course, the risk is higher, but as Barbados showed, the reward justifies trying.