Issue No 53 January 2015
DISCOUNTING OUR FUTURE?
With apologies for the long gap in the production of this Bulletin, we offer you this editorial on the role of the so-called 'hard discounters' in the current pricing problematique in Europe's two biggest banana markets. Your reactions are very welcome, as are your efforts to help bring more big retail chains to the table of the World Banana Forum.
Also published this week, by Santiago-based on-line journal freshfruitportal.com, is an Op Ed by Banana Link's International Coordinator on the acquisition of Chiquita by Brazilian groups Cutrale and Safra.
The Banana Link team takes this opportunity to transmit all the very best for you and yours in 2015.
To industry observers, bananas demonstrate how low European hard discount pioneers will go to secure their customers' loyalty. The banana business model they have adopted is uncompromising, and the impacts of the strategy on people and environment are very serious indeed.
Unions representing plantation and packhouse workers, who have studied the buying practices of a company as notorious as Aldi in the banana world, believe that the hard discounters are using the fruit as a hook to get new customers through their doors at the expense of those who labour hard to produce it in the tropics.
Aldi, followed by Lidl, play the competition rules in their home market closer to the letter than to the spirit of the law. Banana prices fixed by Aldi on a quarterly basis (since 2011) are for fruit delivered to the ripener, but the transport costs from there on are not included in the company's retail price-setting calculations. If they were to include transport costs to depots and on to their stores, then Aldi (and other supermarket chains that follow the same business model) would almost certainly fall foul of the German competition authorities for below-cost selling when they retail bananas at 79 or 85 euro cents per kilo.
In the UK, of course, the hard discount leaders, like Asda/Walmart, and retailers who only offer Fairtrade-labelled bananas, like J Sainsbury, have been selling loose bananas at or below cost for several years, making up some or all of the 'sacrificed' margins on bagged fruit. Unlike in France or Germany, below-cost selling in the British market is not illegal . This allows the major retailers in the UK - who with one notable exception, The Co-operative Group, all sell loose bananas at or below cost – to argue quite legitimately that they are not breaking any law and that it is their own sovereign decision to fund this near-permanent rock-bottom price.
Attempts to reverse the race frustrated
And so, led by Aldi and Asda, the race to the bottom in the European banana market is fuelled by the belief that cheap bananas are what everybody needs/wants. Even more serious for those trying to construct a sustainable future for the industry is that all attempts to reverse this futile and damaging race in Europe's two biggest markets are frustrated by the playground behaviour that has come to characterise banana pricing.
Tesco, Sainsbury and Waitrose have all made bids to raise the loose banana retail price since the permanent price war set in four or more years ago in the UK, but every time the cynical Asda price-setters have sat it out, safe in the knowledge, from their point of view, that every kilo sold at £0.68 (0,87 euro at 5th
January 2015 rates) hurts their competitors' margins more than it hurts their own! Besides, as long as a 'Pack of 10' in Asda costs £1.00 a kilo, there are still profits to be recouped, as long as the customer prefers a bag...
Other banana retailing worlds do exist...
In France, apart from the very occasional short-lived price 'promotion' at 0,89 or 0,99 cents/kilo, it seems that the major retailers have little or no appetite for systematically sacrificing their margins as the hard discounters do in Germany and the UK. Carrefour, Auchan, Leclerc or Intermarché are in no danger of infringing national legislation that prohibits below-cost selling; far from it. Banana retail margins are, to say the least, substantial, with an average retail price across all outlets that still exceeds 1,50 euro/kilo. Typically, a kilo of loose bananas from the same supplier sold in the UK at £0.68 can be found at Є1,49 in a French hypermarket. Loose bananas in smaller city centre outlets are usually 1,79 or 1,99. Of course, none of this value generated at the retail end in France is systematically available for investment in producing countries; and the Fairtrade market share is very small compared to the UK, even though it is growing again for the first time in many years; Fairtrade loose bananas are non-existent.
Imagine a European market where French retail prices prevailed, nobody had to take any notice of Aldi and their faithful price followers Lidl, and where the hard discounters and French retail giants were participating actively in the very fruitful discussions in the World Banana Forum, alongside the big German and British banana buyers. The potential for moving quickly towards a fairer distribution of value along the chain would be massively enhanced.
In the North American markets, by the way, banana retail margins are more typically where they were in the UK before the price wars became a permanent feature of this market: stable and not excessive; retail prices have risen in the USA, as has consumption... Bananas have always liked to confound conventional economic theory!
Back to the global giant: as the US retail price shows, a multinational like Walmart does not have a single global policy when it comes to pricing. We are dealing with what the retailers call 'price-flexing', but at a planetary scale when it comes to Walmart. Flex your muscles when your competitors need teaching a playground lesson!
Back in the UK-KVI ! Welcome to the upwardly mobile discounters
Bananas are of course not the only Known Value Item (KVI) that suffer from inter-retailer price wars in the UK. Milk, oranges, bread and pork pies are victims too, with producers and those they employ at home and abroad the ones who have to pay the not-so-hidden costs. This we know. However, what is newer- and very worrying for the competitors of Aldi and Lidl – is that it seems bananas may be helping bring people through the doors of the hard discounters and change consumers' shopping habits.
Behind this statement there is, as usual, a certain complexity: Aldi's banana retail prices per kilo for conventional bananas in the UK are even harder to work out than in other retailers. Firstly, they do not deal in loose bananas (where prices per kilo are posted for customers to see). They sell packs of three in a plastic tray at £0.39, a seven 'Funsize' pack at £1.09, or Organic Fairtrade at £1.39 per kilo. Secondly however, a truth that is of great concern to their UK competitors is that Aldi and Lidl both sell more than double the volume of bananas that their overall food market share would indicate. Intriguingly for banana-watchers, it seems this high banana volume is not based on price, especially as the per kilo Aldi retail price for conventional works out at well above the £0.68 that six major retailers still espouse.
What is also certain is that Aldi and Lidl are attracting customers – increasingly ‘up-market’ customers - away from the big four or five 'traditional' retailers, in many cases through massive advertising campaigns. The new consumers are not the traditional hard discount store customers with whom the German discounters forged their entrance into the UK – the poorest consumers in the country. These are customers switching, voting with their feet, maybe attracted by less
choice not more... The lack of visibility of a price per kilo reinforces the theory that, actually, the great majority of banana consumers do not look at the price; they just know they are cheap!
Whatever the reasons, the big UK players are compelled to differentiate themselves clearly, but how?
A global effort led by Europe's biggest banana retailer
UK-based Tesco trades almost one banana in every thirteen sold in the European Union, more than any other retailer. But its biggest single food-line is barely contributing to profits, as bananas do for almost all other retailers worldwide, small, large, 100% organic or 100% Fairtrade alike. Now that almost all the bananas they sell are sourced directly from growers across six countries, with written multi-annual contracts to boot, the company is feeling the market heat. In the UK and Ireland for sure, and doubtless elsewhere, Tesco is losing customers to hard discounters who buy their bananas cheaper and sell them, at least in the UK, at a higher price. Economics on its head, you say. Yes, but ethics too.
Europe's biggest banana seller has decided to differentiate itself through a responsible sourcing strategy, which is still in its infancy, but which shows enormous promise. In 2014, two inter-related commitments set the stage for a transformation of the European banana market that should be welcome news for all. In March, a public document called “Trading Responsibly
” committed Tesco to covering the costs of sustainable production in all their banana supply chains; for the time being they are using the Fairtrade Minimum Price, set by Fairtrade International e.V., as their benchmark for a sustainable price to their suppliers. Where this price was not attained in 2014, the difference in price to suppliers has been set aside whilst a mechanism to transfer the money to workers and their families is being designed.
Linked to that, in November, the company stated in a blog on their website that they will ensure that by 2017 living wages will be paid on all the banana plantations that grow and pack exclusively for Tesco (of which there are growing number spread across the four major Latin American exporting countries). The details of how this strategy pans out are being discussed with a wide range of other stakeholders - including trade unions, growers' associations, fruit companies, NGOs and a leading banana exporter government – in the World Banana Forum's permanent Working Group on a fairer distribution of value along the chain.
A race to the top in the ethical content and the prices paid for bananas is now only being held back by the short-sighted strategies of a couple of other powerful multinational retailers. One of these already participates in some of the discussions in the World Banana Forum, through its wholly-owned global sourcing company, IPL. The other blanks all approaches, even in its home country, to take part in the lively multi-stakeholder dialogue on how a sustainable banana economy can be achieved in practice. French-based global player Carrefour could also help change the game, but the company needs to see beyond its dependence on weak private standards for ensuring sustainable and responsible sourcing on its most important food-line.
(non-violentes), citoyens et consommateurs!! Workers have done their homework, and an increasing number of other players are with them in trying to design a new way of doing business. It is not an exaggeration to say that the banana industry's very survival depends on this long-awaited sea-change taking place over the next couple of years.
A good rallying-point for all concerned is the third global conference of the World Banana Forum in the Dominican Republic at the end of June this year. We look forward to seeing all the top five global retailers at the table, alongside governments, shippers and those of us already engaged.