The Role of The Food & Beverage Sector in Expanding Economic Opportunity

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This report by Harvard University John Kennedy School’s CSR Initiative and FSG Social Impact Advisors reveals that the food & beverage industry plays a unique role in expanding economic opportunity because of its universality to human life and health. The industry operates at multiple levels of society where billions of people grow, transform, and sell food, particularly in developing countries where agriculture dominates all other economic sectors.

Harvard University and FSG conducted telephone interviews with 19 experts representing large multinational or national corporations, and carried out a review of relevant reports, studies, and articles from a range of sources.

The report provides an overview of the business case for engagement in expanding economic opportunity in developing countries. It focuses on the motivation for intervention at global or local levels, and outlines key lessons for the industry in engaging in expanding economic opportunity.

The Advantage of Large Firms

By tackling specific barriers in a few locations around the world, large companies are demonstrating that progress can be made: people can turn their work into incremental gains in income and improved standards of living. Unsurprisingly, companies’ interventions reflect their own business models and span agricultural production of raw materials, food processing, and distribution and marketing activities. By changing the conditions in this “field to mouth” value chain, large companies help provide stability and opportunity to thousands of people.

Such changes target the critical pre-conditions to economic opportunity. They create inclusive business models with emphasis on global or local markets, build the human and physical capital of the poor to participate effectively in food & beverage value chains, and work to overcome the adverse institutional and policy factors, among others, that prevent food & beverage value chains from fulfilling their promise of value distribution.

Expanding Economic Opportunity

The role of large firms and of their partners in expanding economic opportunity can take a variety of forms. Whether the long-term vision is about developing local markets or global supply chains, the different scenarios all have one thing in common: they focus on the ability of poor communities to create and capture more of the value from their labour.

Business Case for Engagement – The Need for Sustainable Food & Beverage Production

Major firms in the industry are concerned about maintaining access to quality foodstuffs despite potential – often man-made – disruptions to their supply chains. These include population growth encroaching on agricultural lands, increasing water scarcity and pollution, climate change resulting in increased frequency and severity of droughts and floods, and the spread of infectious diseases affecting plants, pollinating insects, and human beings. In the context of degrading environments, the poor are particularly affected as they possess fewer resources with which to react or adapt to changing conditions. Global consumers, in turn, are increasingly willing to pay premiums for safe, organic, and sustainable products that address their health concerns, as well as their interests in preserving the environment and fighting poverty. In this equation, lies the opportunity for large companies to anticipate the needs of consumers, improve lives, and mitigate the environmental footprint of their industry.

Improving Global Supply Chains

Food & beverage companies are naturally turning their attention to the state of agricultural supply chains, particularly around crops in high demand internationally, originating from poorer countries, based on highly fragmented production, with farmers struggling to keep up with rising standards of production in terms of both farming practices and product quality. For example, crops such as premium coffee that can be grown under forest cover rather than through slash-and-burn practices, and new, biodiversity-friendly native crops developed as better alternatives to existing raw materials. Such initiatives empower farming communities to raise production standards while offering different levels of guarantee on product uptake. They allow participating companies to count on access to highly traceable food materials at needed quality, quantity, and price levels, and to be sure that they are not associated with environmental degradation.

Meeting Demand for Sustainable Products

Trading companies positioned between growers and food manufacturers are also promoting sustainable agricultural practices. One incentive is to avoid disintermediation by global companies creating direct linkages with the poor in order to offer a “responsible” value proposition to consumers. ECOM, one such trading company, is helping hundreds of coffee producers in Honduras achieve certification for responsible coffee production and sourcing, resulting in both economic gains and wider quality of life improvements in grower communities.

In some cases, companies are taking the responsible or sustainable value proposition all the way to consumers to achieve a “values premium” that goes beyond quality or safety guarantees. This includes additional efforts by lead companies and partners to gain exclusive access to crops, and to brand products on the basis of their benefits to communities and to nature.

Developing Local Food & Beverage Markets

While global companies might first focus on export-based opportunities, a number of companies also emphasize efforts to build local food & beverage value chain and are addressing immediate or anticipated constraints to growing domestic versions of their business models. Such initiatives may focus upstream on supply conditions and food processing or include distribution and consumer marketing. For example, SABMiller and Cargill are focused upstream with their initiative in Rajasthan in India to improve barley production and satisfy domestic brewing needs. A key incentive is to raise local standards sufficiently to lower the companies’ dependence on international supplies of quality barley for malt production. The programme is currently working in 150 villages spread through three districts of Rajasthan.

Business Strategies for Expanding Economic Opportunity

Collaborative action across sectors is often necessary, as no company or partner organization possesses all the capabilities need to overcome all barriers.

The research found different levels of interventions, gien in the table below, which in turn help to overcome a variety of barriers to expanding economic opportunity along food & beverage value chains. These barriers include the poor’s lack of appropriate skills, technologies, and finance, as well as their inexperience in designing and growing businesses, and lack of awareness of the economic and business opportunities.

From this perspective, a number of patterns emerge: First, initiatives are truly collaborative: they all mobilize cross-sector partners, particularly to address community development needs. Second, interventions for creating economic opportunity do not come as single thrusts: all initiatives employ at least two of these interventions simultaneously. Indeed, creating businesses requires empowered people and supportive environments.

Key Lessons

A fundamental question remains, however, when considering the vast number of people living in poverty and the rate at which humanity is consuming natural resources: how quickly can success stories be scaled up across regions and industries? The report offers five ingredients which can be considered:

1. The “Must” of Collaboration

The need for parallel interventions to design and grow businesses, build communities’ assets and capabilities, and improve enabling environments suggests that collaborative approaches are in fact optimal.

2. Patient Capital.

The ability of governments and foundations to provide patient capital (not seeking competitive market returns in the short term or at all), directly or as providers of credit to local businesses, plays a central role in a number of cases. This funding allows for the progressive scale-up of business models which may only yield competitive returns to participating companies in the long term. Because the food & beverage sector can address both economic development and environmental agendas, their initiatives can tap into a range of budgets among public and private donors.

3. Planning for Sustainability

First, economic gains can be made more sustainable. Second, because the food & beverage sector is so deeply connected to the state of natural resources, expanding economic opportunity goes hand in hand with environmental sustainability. These two agendas are increasingly interrelated in terms of scaling up food production and achieving good “values” prices in international markets.

4. The Choice Between Global and Local Approaches

There are two distinct ways of creating new value for poor communities. The first is to raise the quantity and quality of food products for sale in markets with high purchasing power. The second is to build local value chains within rural and low-income communities themselves. Especially if combined with a unique branding strategy around “pro-poor” produce, significant premiums can be paid via the first strategy to poor producers, which can invest the additional income in business growth and diversification. When local models are developed, more jobs might be supported, but only in the context of local prices and wages which leaves little room for income redistribution along the value chain.

5. Designing for Scale and Replication.

It is essential that initiatives should reach vast numbers of people with their asset-and capacity-building interventions. In replication lies a vital ingredient to create economic opportunity on a vast scale, and one that should resonate with large companies’ traditional approaches to testing what works in one market and then sharing the learning on a global scale.

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