The ‘Base of the Pyramid’ (BoP) marketing concept has been relatively successful to distribute fast-moving consumer goods like shampoo, soap, washing powder, toothpaste, snacks, sweets, and even fresh fish and milk to poor consumers in developing countries who might not have enough cash to buy their household supplies in medium- let alone large-sized quantities. Nonetheless, big corporations are still trying to make a profit from selling micro-packaged goods to poor consumers who are keen to use the little income they have to buy consumer products like the rest of us.
However, the BoP concept has not made as much advertised inroads into the farm input supply markets despite just as strong a business case to try it out. Indeed, according to the Food and Agriculture Organization, 1.5 billion people live on smallholder farms around the world. Out of these, 500 million smallholders produce 80% or more of food in Asia and Sub-Saharan Africa. Finally, 43% of these smallholder farmers are women, who in some countries, would also be involved in purchasing other household goods when going to market.
Up to now, the main business model to get small farmers linked to input markets has been to group them into cooperatives or other farmers’ groups so that they could pool their input needs and make use of the economies of scale and bargaining power that should come from buying agricultural inputs in bulk. However, the main hurdle to get this business model to work remains the lack of managerial skills needed by the farmers to handle large input supplies efficiently. Another emerging business model is that of the farmers’ hub: by concentrating many smallholder farmers in one geographical point for one essential activity in their business (e.g. milk collection, productivity enhancing group training), this opens up a sizable market for input providers to sell their products and services to a large number of small farmers.
Would BoP work in agricultural input markets? Here are some insights from the pig value chain in Vietnam, uncovered during a field trip of the REVALTER project. The International Livestock Research Institute (ILRI) has partnered with other French and Vietnamese research organizations in this project funded by the Institut de Recherche pour le Développement (IRD).
INVIVO NSA Group is a large animal nutrition and health enterprise. INVIVO has been operating in Vietnam since 1998. From 1,500 tonnes of animal feed per month, it now produces 25,000 tonnes of livestock and aquaculture feed per month in Vietnam on three different production sites for animal feed and two factories for fish feed spread across the country. It is still a relatively small player with around 2% of the Vietnamese animal feed market. However, thanks to its technical know-how and its competitive advantage in the Vietnamese market, INVIVO Vietnam can achieve double the average 1-2% operating margin of firms in the animal feed sector of industrialized countries.
The farm structure of animal farms in Vietnam is very different from that of developed countries: 80% of the total pig production in Vietnam is still coming from farms with fewer than 50 sows! On average, the farms specialized in pig production in the country raise only 20 sows. To adapt to this environment, a business model based on producing large quantities of generic feed for somewhat genetically homogenous animals will not respond to Vietnamese farmers’ needs. Close to the BoP principle of adapting its products to the actually very diverse needs of smallholder farmers, INVIVO Vietnam makes use of the larger INVIVO NSA group’s decade-long R&D history on animal nutrition and feed production in Europe to adapt existing formulas to the tropical climate and more diverse livestock herd of Vietnam. INVIVO thus offers a complete portfolio of different feed products adapted to the different life stages of the different livestock found in Vietnam, thus making life simpler for Vietnam’s smallholder livestock farmers.
To be able to sell its products into remote rural areas, INVIVO relies on a dedicated network of medium-sized and small distributors specialized in selling INVIVO animal feeds. The first-level distributors handle up to 500 tonnes of feed per month and they rely on second-level distributors who stock and sell up to 200 tonnes of feed per month in pre-packed bags containing 25-50 kg of feed. The small quantities carried allow the feed to be used quickly on the farm and in the distributors’ shop, thus doing away with the need for specialized storage to avoid the feed going bad.
INVIVO produces 61 different animal feed products for all types of pig, cattle, poultry and fish with just 40 feed mix formulas. In particular, INVIVO has created two different brands using the same feed formula to allow neighbouring INVIVO feed distributors not to offer the same products to farmers in the same area. This makes commercial sense for INVIVO as it nurtures its business relationship with its feed distributors, avoiding direct competition between them. Other large animal feed companies in Vietnam use a similar strategy with sometimes up to five different brand names distributed through complementary networks of dedicated distributors. In INVIVO’s case, this doubling of the number of feed products has actually contributed to increase the market share of its products.
The feed distributors are thus an essential marketing link in the group’s business model to reach smallholder farmers. They de-bulk the animal feed by buying wholesale quantities from INVIVO and reselling feed in bags of smaller quantities adapted to the small size of farms. The distributors also allow farmers to buy feed on credit and factor in the costs of this service into the prices they ask from farmers. They thus participate fully in the sustainable development of an animal industry inclusive of smallholder farmers in Vietnam.
There is another element to the success of INVIVO’s business model targeting smallholder animal farmers: INVIVO’s sales staff share their technical and managerial expertise with their distributors and final customers on how best to use their INVIVO feed products. INVIVO was the first animal feed company in Vietnam to set up a team of technicians to help farmers improve their productivity and the quality of their production through better use of feeds. Pig herders buying INVIVO products regularly have benefited from the accompanying technical expertise: their productivity has increased, and their economic efficiency has followed suit.
Other developing countries should try to foster such partnerships between large farm input producers and networks of dedicated distributors leading to base-of-the pyramid marketing for farm inputs. This could help the firms to tap into new markets while enabling smallholder producers in developing countries to access the farm inputs they need to improve their productivity, within their small cash means and small scale of production.
Jo Cadilhon, Policy, Trade and Value Chains Program, ILRI Nairobi
NB: this blog post has been reviewed by INVIVO NSA but the views expressed do not necessarily represent the views of INVIVO NSA.