The Missing Link

Linking into productive chains is an option for those who enjoy daily competition

In the beehives of Cuautitlán Izcalli on the outskirts of Mexico City, some of the best honeys of Wal-Mart—the largest retail chain in the world and the leading chain in Mexico—can be found. There, all types of honey are produced: organic, pure and mixed. Small glass jars of 300 and 600 grams are sent daily from the hives to supermarkets and large stores throughout Mexico.

These products belong not to Wal- Mart, however, but to DeMiel Mexico, a small Mexican gourmet honey company. Two years ago, DeMiel was distributing its products to small stores catering to wealthy consumers. But ever since it gained a foothold on Wal-Mart’s shelves, the company has enjoyed accelerated growth. Mexico’s growing middle class is now also getting to taste the honeys with almonds, nuts and hazelnuts.

DeMiel Mexico is a good example of a small company opting to link into a productive chain. In fact, joining Wal-Mart’s distribution network meant DeMiel could take considerable advantage of its old competitors. In increasingly competitive settings, linking into a productive chain can mean survival and, if things go well, success. But this option also has some risks, and not all small companies are willing to associate with an emporium with enormous power to fix the prices and buying conditions of its suppliers.

Many Mexican and Chilean entrepreneurs—already used to rules of open competition with American, European and Asian companies—know about productive chains. But some cases are appearing in small economies that have been steadily opening to international markets.

For some time now, the United States Agency for International Development (USAID) has been following the linking process of several small, productive microenterprise chains in Central America. According to Elizabeth Dunn—research team leader for the U.S. organization ACDI/VOCA, which is supported by USAID—the goal of promoting these processes has been to see if wealth can be created by linking poor communities in developing economies with productive chains.

Together with the economic opening, Central America’s supermarket chains have grown significantly in the last decade, according to Claudio González-Vega, an Ohio State University professor. In the last 10 years, Central American retail chains have gone from holding 4.5% to 40% of all food sales. They also have stabilized agricultural prices, modernized trade relations and introduced new contracts and innovative efficient criteria with respect to scheduling and logistics among suppliers. “Also, the new chains are significantly helping to deepen financial markets,” says González-Vega. “It’s as if it’s the beginning of a revolution similar to that of microfinance.”

According to Dunn, linking into productive chains has helped microentrepreneurs innovate their processes and products, specialize their operations and enter new markets. “If such improvements are happening, it is because entrepreneurs have learned,” says Dunn. “Now they have more information on markets, are paying closer attention to new opportunities and are acquiring the knowledge and skills to successfully introduce new products, procedures and operations.”

But if this is happening, it is because supermarket chains have taken a proactive approach to microentrepreneurs. The Central American Retail Holding Company (CARHCO) and its associates in the region—La Fragua in Guatemala and the Corporación de Supermercados Unidos (United Supermarkets Corporation or CSU) in Costa Rica—have shown interest in helping microentrepreneurs adopt stricter standards. “They are key sources of information on changes in market, procedures and products, and as service providers [they also offer new markets for microenterprise products],” says Dunn.

Chain Reactions

USAID began a project called “Jump Starting” in Honduras in 2002, which financed and followed the process of linking agricultural microentrepreneurs into productive chains through technical assistance mechanisms coordinated by agriculture experts from the Centro de Desarrollo de Agronegocios (CDA, or Agrobusiness Development Center). USAID put forth the idea that microentrepreneurs could compete in “top potential” chains occuring in general competitive settings, both global and domestic. USAID wanted to identify the characteristics of successful entrepreneurs and figure out how to help those who were reluctant to link and compete.

USAID began working with CDA in the wake of the disastrous Hurricane Mitch, which destroyed Honduras’ agricultural sector in 1998. “The key factor was that everything hinged on a rapid response and obtaining concrete results in a matter of months,” says Geoffrey Chalmers, USAID financial development adviser in Mexico. “In a short time, [the producers] had new sales, exports and products.”

In addition to financing, the project included international technical assistance from CDA agricultural experts. The plan was to build relations with the productive players, transfer skills to create new products and through technical assistance create a sustainable plan over time.

Initially, the project focused on obtaining immediate results in order to show the buyers, sellers and providers that this type of relation and ties could work. But later, sustainability came to be viewed as important a goal as increasing sales. “We wanted to connect results and sustainability, and show that they are not exclusive, that results can bring sustainability,” says Chalmers.

The plan was based on developing loyal, long-term commercial relations between clients and buyers. CDA technicians performed the work. Many of them were from Zamorano University, and went to the fields to transfer knowledge. They met with suppliers to convince them to help their buyers. They took the sellers to the fields so that they could teach, for example, how to apply fertilizer more efficiently. They did the same with the buyers—medium and large supermarket chains—and convinced them to work with small producers and invest in development.

Results have been positive. Corporación de Supermercados Unidos was involved in the process and it opened relations with producers. Today, the Costa Rican chain buys fruits and vegetables not only from Costa Rican farmers but also from small producers in Nicaragua who receive technical support from nongovernmental organizations, and also from microentrepreneurs in Honduras supported by USAID. CSU’s commitment is growing beyond these relations, as it has begun to invest in the producers in Honduras and, as always, finance and buy from Costa Rican farmers, who never received support from donors.

CSU’s experience has shown that several of the existing preconceptions on the competitive potential of microentrepreneurs were wrong, or at least incomplete. USAID says it is wrong to think that small producers cannot compete in top-potential chains; experience has shown that although this road is not for all producers (risk is an important factor in the decision to enter into a high-production chain), it is possible to do it with sustainable improvements and training. According to Chalmers, this can come from building vertical relations and demonstrating to the buyers (the chains) that they won’t lose money working with microproducers. “The issue is to facilitate and motivate win-win relations,” he says.

In the case of CDA, for example, small exporters in Honduras received high-quality services in logistics, coordination, packaging and marketing. In Honduras, USAID sought to involve more private-sector entities as well as service providers, whether they were buyers, intermediaries or suppliers, to transfer their expertise to the producers for sustainable, long-term relations. In this process, USAID learned that these kinds of links also change its own role as donor. “The role of donor is that it also has to understand that some of the best investments are those with longer-term results, of several years,” says Chalmers. “Now [in Honduras], there is another expanded program called RED, with new components such as financing, that works with banks and microfinance institutions to see how to finance producers in a more sustainable way.”

According to Chalmers, they also showed that the chains are more willing to incorporate into a vertical relation when they don’t have to work individually with the small producers. The big buyers always prioritize ties with groups of farmers, given that negotiating with only one focal point is more practical and less costly in time and money. “Jump Starting” also showed that the poorest producers can unite in associations and compete, and find local and commercial sources to acquire knowledge and improve.

Cultivating Credit

Equally, USAID found that in many cases financing continues to be dependent on external sources, such as donors, especially in countries with poorly developed capital markets. However, the more sophisticated the market that companies want to enter, the greater the need for an improved process and greater capital investment to incorporate diverse technologies. “The example of this is irrigation equipment: it is very expensive, but in some countries it is affordable for small producers who have financing,” says Chalmers. “Without good equipment, it would be very difficult for a small producer to participate in a domestic market or export market with sophisticated buyers.”

But the need for capital from foreign sources is not always necessary. Chalmers says that some producers are able to finance with capital or cash from their own savings, or through a client or provider. The producers learn how to plan a more flexible planting schedule, and then finance their activities using the profits of a sale precisely when they need to start the next planting. “However, this is quite a sophisticated technique and [those who apply it] have to have an [advanced] source of knowledge,” says Chalmers. “Also, it doesn’t work for investments that require more capital, such as irrigation systems.”

Although banks never show interest in rural microproducers, and few microfinance institutions possess adequate instruments for them, USAID found several positive experiences in Costa Rica that refute that idea. There, Hortifruti, an affiliate of CDA and a principal provider for CARHCO supermarkets, owned a small independent commercial bank. In the past, the bank did not offer loans to the producers associated with the company. But when Hortifruti began to show it had some high-performance products, the bank began to pay attention.

Chalmers says that Hortifruti did not guarantee the entrepreneurs would pay, but they did say to the bank: “You know us, you know our reputation, and we can give you a list of 25 small producers and several cooperatives from whom we have been making purchases for a year, we have assessed and monitored, and they have always made reliable deliveries. We have a contract with them, often verbal and not written, that says we will buy this quantity at more or less this price.” The financial entity understood that there was a strong informal guarantee by personally knowing the client and it decided to give loans to some producers without asking for real guarantees. “It is credit from a financial institution, but it takes into account the relation with Hortifruti, which calms the bankers, because they often want to offer loans but require guarantees that cannot be met,” says Chalmers. It is a pilot project, but it could be a potential model for other banks and chains. “If the donors enter into agreements with banks, microfinance institutions and credit unions, they help with product design, they favor loans based on commercial relations, and finally they favor small producers.”

For some small producers, linking into a productive chain is an attractive alternative to achieving sustainability and expanding access to financing. “That new credit recipient can in time show that it has the ability and willingness to pay and that it understands loan technology,” he says.

Experience in Guatemala

When USAID implemented a similar project in Guatemala to adopt quality standards in the agriculture market, it emphasized that linked small producers are examples for economic development. As in Honduras, in Guatemala USAID tried to prove that vertical and horizontal relations contribute to an improvement in productive conditions. Guatemala was an interesting place given that its productive chains have a high number of participating microentrepreneurs. Like the rural producers in Honduras, Guatemalans faced a new competitive scene after CAFTA.

That practice in Guatemala led the USAID to see that there are new lessons that donors can learn to improve assistance to microenterprise, suggests Phillip Church, director of DevTech Systems, a U.S. organization that works with developing markets. Among the lessons: consider including international standards in their development programs; connect producers with buyers and suppliers that help to reduce times and costs in improving activities; adopt new product standards (from phytosanitary norms to eco-sustainable production) in order to improve the relations with the productive chains; and communicate to other microentrepreneurs news of the successful cases.

Not by accident, globalization has put the small Honduran, Nicaraguan and Costa Rican farmers who sell their products to Hortifruti on a path similar to that taken by the Mexican honey producer DeMiel Mexico. At the beginning of the year CARHCO was renamed Wal-Mart, after the U.S. giant acquired control of the Central American corporation. A regional chain became part of one of the major productive chains in the world, a new challenge that promises both risks and opportunities.