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Retail Project on Fresh Fruits and Vegetable Outlet

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					           Re-governing Markets Phase 1



    KENYAN CASE STUDY ON FRESH FRUITS,
     VEGETABLES AND DAIRY PRODUCTS




    James K Nyoro, Joshua Ariga and Isaac Komo



         Tegemeo Institute of Agricultural
             Policy and Development
                 P.O. Box 20498,
               00200 City Square
               NAIROBI, KENYA
               Tel: 254-2-2717818
               Fax: 254-2-2717819
           Email: egerton@tegemeo.org




              Submitted August 2004

                   Draft Report

                 Not to be quoted


i
                                                          Table of Contents

LIST OF TABLES ............................................................................................................. iii
LIST OF FIGURES ........................................................................................................... iv
1.0   COMPOSITION AND STRUCTURE OF THE SUPPLY CHAIN ....................... 1
     1.1     The Kenyan Economy .................................................................................................... 1
     1.2     Agricultural Sector ......................................................................................................... 1
     1.2.0 Choice of Study Commodities........................................................................................ 2
     1.2.1 Horticulture Sub Sector .................................................................................................. 2
     1.2.2 Dairy Sub-sector ............................................................................................................ 2
     1.3     Justification for Study .................................................................................................... 3
     1.4     Fresh Fruits and Vegetables ............................................................................................ 3
     1.5     Milk and Milk Products ................................................................................................. 4
     1.6     Outlets for the Fresh Fruits Vegetable ............................................................................ 5
     1.7     Outlets for Dairy and dairy Products .............................................................................. 7
     1.8     Other Traditional Outlets for Fruits and Vegetables ....................................................... 9
     1.9     Supermarket’s Evolving Procurement Systems .............................................................. 9
     1.10 Effect on Producers and other Market Participants....................................................... 11
2.0          DETERMINANTS OF GROWTH AND DIFFUSION ....................................... 13
     2.1     Population and Urbanization ........................................................................................ 13
     2.2     Income and Expenditures ............................................................................................. 13
     2.3     Market Liberalisation and Private sector Development ................................................ 14
     2.4     Women and Development ............................................................................................ 14
     3.2     Procurement systems.................................................................................................... 17
     3.2.1 FFV .............................................................................................................................. 17
     3.2.2 Milk .............................................................................................................................. 19
     3.2.3 General comments ........................................................................................................ 19
     3.3     Direct procurement from Producers ............................................................................. 19
     3.4     Procurement via brokers .............................................................................................. 20
     3.5     Procurement via importers ........................................................................................... 20
     3.5     Procurement via wholesale markets ............................................................................. 20
     3.6     Procurement via wet markets ....................................................................................... 20
     3.7     Implications of product and process attributes for upstream agents ............................. 21
     3.7.1 Technology .................................................................................................................. 21
     3.7.2 Post-harvest ................................................................................................................. 21

ii
  3.7.3 Management ................................................................................................................ 22
  3.7.4 Organization ................................................................................................................ 22
  3.7.5 Finance ........................................................................................................................ 22
4.0  POLICIES IN PLACE TO SUPPORT INCLUSION OF SMALL AND MEDIUM
AGRIBUSINESS FOOD ENTREPRENEURS ................................................................ 24
  4.1     Private sector policies .................................................................................................. 24
  4.1.1 Technical assistance ..................................................................................................... 24
  4.1.2 Finance ........................................................................................................................ 24
  4.1.3 Certification ................................................................................................................. 25
  4.1.4 Use of preferred suppliers ............................................................................................ 25
  4.4.5 Integrated Pest Management Project ............................................................................ 25
  4.2     Public policies and institutions ..................................................................................... 26
  4.2.1 Ministry of Agriculture ................................................................................................ 26
  4.2.2 Pest Control Products Board ........................................................................................ 27
  4.2.3 The Dairy Board of Kenya ........................................................................................... 28
  4.2.4 Kenya Plant Health Inspectorate Service ..................................................................... 28
  4.2.5 Kenya Bureau of Standards .......................................................................................... 28
  4.2.6 Research Institutions .................................................................................................... 29
  4.2.7 Capacity building of small and medium enterprises ..................................................... 30
  4.2.8 Technical assistance ..................................................................................................... 30
  4.2.9 Financing ..................................................................................................................... 30
5.0  CRITICAL ISSUES AND CHALLENGES FOR THE FUTURE ....................... 32
REFERENCES ................................................................................................................. 37
APPENDIX .................... Error! Bookmark not defined.Error! Bookmark not defined.
      Figure 2. Kenya: Domestic Horticulture Sub sector Map ............... Error! Bookmark not defined.Error!
      Bookmark not defined.




                                                     LIST OF TABLES

Table 1: Diffusion of Supermarkets .................................................................................... 6
Table 2: Number of Households Per Type of FFVs Retail Outlets .................................... 7
Table 3: Purchase of Dairy Products by types ................................................................... 9
Table 5: Women in the Labor Force ................................................................................. 15
Table 6: Proportions of FFV procured from each supplier ............................................... 18




iii
                                         LIST OF FIGURES

Figure 3: Milk Marketing Channel in Kenya................................................................. 8



ACRONYMS AND ABBREVIATIONS

BAT               British American Tobacco
CBS               Central Bureau of Statistics
DIN               Deutsches Institut fur Normung
ECF               East Coast fever
ERS               Economic Recovery Strategy for Wealth and Employment Creation
EUREPGAP          European Community on Good Agricultural Practices
FAO               Food Agricultural Organization
FFV               Fresh fruits and vegetables
GoK               Government of Kenya
HACCP             Hazard Analysis and Critical Control Points
HCDA              Horticultural crops development authority
ICDC              Industrial and Commercial Development Corporation
ICIPE             International Centre for Insect Physiology and Ecology
IPM               Integrated Pest Management Project
ILRI              International Livestock Research Institute
ISO               International Organization for Standardization
KACE              Kenya Agricultural Commodity Exchange Ltd
KARI              Kenya Agricultural Research Institute
KCC               Kenya Co-operative Creameries
KDB               Kenya Dairy Board
KEBS              Kenya bureau of standards
KEPHIS            The Kenya Plant Health Inspectorate Service
KETRI             Kenya Tripanosomiasis Research Institute
KWAL              Kenya Wine Agencies Limited
MOA               Ministry of Agriculture


MNR           Minimum National Requirements
MRLs          Maximum residue levels
NGO           Nongovernmental Organizations
PCPB          Pests Control Products Board
PRSP          Poverty Reduction Strategy Paper
SIRC          Standards Information Resource Centre
SMEs          Small and medium entrepreneurs
SRA           Strategy for Revitalizing Agriculture
USAID United States Agency for International Development
WMS           Welfare Monitoring Survey




iv
1.0     COMPOSITION AND STRUCTURE OF THE SUPPLY CHAIN


1.1     The Kenyan Economy
 Kenya’s economy performed below its potential during the 1990s. Since 1997, growth has
averaged only 1.3%, consistently below the rate of population increase estimated at 2.4% per
annum. Consequently, per capita income in constant 1992 prices has declined from US$271 in
1990 to US$239 in 2002. In addition, agricultural productivity has been on the decline,
competitiveness eroded and international financial support diminished. During this period,
poverty and food insecurity have increased.

This poor performance corresponds with the time when the economy has been undergoing major
transformations. Wide-ranging trade and macro-economic policies that affect production costs,
incentive structures, and the competitiveness of different sectors are at various stages of
implementation. At the same time, regionalization and globalization have exposed domestic
production and trade to fierce regional and international competition. One outcome of these
changes has been lower and more volatile prices for key commodities. Through globalization,
new products are expected to be introduced into the local market and stimulate demand, hence
increase opportunities for adding value to existing products. The interaction of exporters with
global supply chains will eventually trickle to producers particularly on quality issues. Currently,
Kenya has a dual horticulture sector with a more stringent export sub-sector co-existing with a
domestic consumption sub-sector that has less strict quality requirements.

Reasons for the weak economic performance and high incidence of poverty include the
persistence of pervasive governance failures, the slow pace of economic reforms, low savings and
investment, a weak banking system, intermittent shortages and rising energy costs, and poor
physical and telecommunication infrastructure, together with an inward looking trade regime that
has protected industries from international competition. The continued high fertility rate and the
burden of disease — particularly HIV, where the infection rate reached 13.5% of the adult
population in 2000, and malaria — are also contributing to the slow growth rate by keeping the
dependency ratio high.


1.2      Agricultural Sector
A number of fundamental issues important to the survival of Kenya as an economy revolve
around the potential and actual performance of the agricultural sector. In most of the literature
available touching on the role of economic growth in improving livelihoods vis-à-vis poverty
reduction, food security issues, pro-poor initiatives, and overall income growth, the contribution
from agriculture is mentioned as the key driving force to solving these problems (Haggblade
2004). Agriculture grew at a rate of 4.7 percent between 1963 and 1975 largely due to area
expansion and increases in yields following the adoption of high yielding maize and wheat
varieties and agronomic research in tea and coffee. This period was also characterized by the
rapid growth of the sector fuelled by heavy government expenditure and donor involvement in
provision of subsidized services and inputs. Agricultural growth rate dropped between 1976 and
1980 due to various factors including the oil shocks of 1973 and 1979 and fluctuations in
international commodity prices of key agricultural exports like coffee and tea. The growth rate
has since then been on a declining trend to the extent that it was about –2.4 percent in 2000, -
1.2% in 2001, and 0.7% in 2002. During 2003, agriculture grew by 1.5%. Average annual
agricultural GDP growth therefore fell from 3.5 percent during the 1980s to 1.0 percent during

1
the 1990s and has remained below 2% since 2000.

By 2001 the Kenya population was estimated at 30.7 million and growth rate of 2.4% per annum.
Approximately 80% of Kenya’s population live in the rural areas (most of them smallholder
producers) and depend on agriculture for their livelihoods (CBS Census). The proportion of the
population living in poverty rose from 48.8% in 1990 to 51.4% in 1997, 55.4% in 2001, and is
estimated to have increased further to 56% in 2003. Majority of the poor households cannot
adequately meet their needs such as health, education, housing, food security or income
generating activities. Apart from being the major contributor to rural income, agriculture
contributes about 26% of GDP (Economic Survey 2004), and employs 51% of the workforce
directly (GoK 2002). Agriculture continues to play a significant role in economic growth but its
share to GDP has been on a general decline from a high of 37% in 1970s (World Bank 2002,
Economic Survey).

By 2002, and with a new government in power, there was momentous drive towards formalizing
key initiatives into government policy papers that were geared towards more private sector
involvement in the various agricultural activities and confining of government to providing an
enabling environment and public goods. The Poverty Reduction Strategy Paper (PRSP), the
Economic Recovery Strategy for Wealth and Employment Creation (ERS), and the Strategy for
Revitalizing Agriculture (SRA) were all policy documents intended to revolutionalize the sector
and devolve most activities into private hands.

1.2.0 Choice of Study Commodities
Fresh Fruits, Vegetables and Dairy enterprises are undoubtedly the most commonly traded agri-
foods in supermarkets and other related outlets such as hospitals, hotels and schools. The dairy
sector, in particular, has recently undergone fundamental restructuring in its marketing setup with
hawkers being the major suppliers of fresh raw milk to urban centers, a role hitherto played by
Kenya Cooperative Creameries (KCC). The sub-sector employs a significant number of small-
scale producers and increasingly small entrepreneurs in the marketing system. For the processed
commodities, milk, yoghurt, cheese, and butter were chosen due to their importance in the
supermarkets.

1.2.1 Horticulture Sub Sector
Horticulture in Kenya has been regarded as a success story. It has undergone dramatic growth
over the years with several players getting involved in export and sale to local markets. In terms
of sub-sectoral contributions to GDP, horticulture has ranked top five for several years. Over the
last four years the sub-sector has grown by over 10% per annum for last four years with an
estimated value of local and export earnings of 60 billion shillings. Horticulture exports in 2001
were valued at 20.2 billion Kenya Shillings, which was 33% higher than 2000. Growth in the
fresh fruits, vegetables have indeed contributed significantly to the success of the horticultural
growth in Kenya. Fresh fruits and vegetables are produced by a large number of smallholder
producers, who are spread all over the country who also depend on these commodities for
incomes, food security and employment. Though significant growth has emanated from the
flower industry dominated by large producers, the smallholders have played an important part in
the growth of the FFV sub-sector.

1.2.2 Dairy Sub-sector
Dairy is another important income earner and source of food for most smallholder producers in
Kenya. The government regulated the dairy sub-sector until 1992 when milk processing and

2
marketing was liberalized. Prior to 1994, the dairy sub-sector was dominated by one major buyer-
cum-processor-cum-seller, the Kenya Cooperative Creameries (KCC), which was a farmer
cooperative with a lot of direct government intervention.

Though KCC collapsed in early 1990s due to mismanagement, the government is in the process
of reviving it but it no longer receives the kind of state patronage/protection it enjoyed before
liberalization.

The Kenya Dairy Board (KDB) was set up by the government to make sure that regulations
governing the sector were enforced. The KDB stretched its powers to make sure that KCC
enjoyed monopoly powers. This stifled private investment in production, processing and
marketing of milk. The processing and distribution were largely under a government-controlled
KCC that also regulated the producer and consumer prices.

Government involvement in KCC affairs despite liberalization distorted prices and sent mixed
signals to an emerging private sector. The insistence by donors on privatization and government
withdrawal from purely private investments, and the introduction of structural adjustments, at
first saw a phenomenal growth in the dairy sector. However, the slow and reluctant nature of
government divestiture from KCC, coupled with mismanagement, resulted in KCC defaulting in
farmer payments or delaying payments for months. KCC collapsed shortly after liberalization.
The lack of smooth transition by government and the resultant absence of a vibrant private sector
entry into the industry led to decreased production and quality standards.

Despite all these impediments, there emerged an informal sector that slowly took over the
marketing of milk. However, the Dairy Act has not been amended to reflect the changing reform
initiatives and it currently reads the way it was set up to protect KCC interests. This is
symptomatic of most sub-sectors where economic reforms are not accompanied by the necessary
legal reforms.

1.3     Justification for Study
Domestic demand for fresh fruits and vegetables and dairy products in Kenya is growing due to
the increasing population and urban drift and increase in purchasing power of certain categories
of people. Investment in supermarkets has evolved to cater for these groups of consumers. Such
changes in agri food distribution systems have the potential to lead to growing concentration in
the processing and retail of these products in the agri-food systems in the country. This
development is no doubt likely to have significant implications for rural livelihoods particularly
of many small-scale farmers who currently dominate production.
As a result of the emerging market structures in the processing and retail of these food
commodities, and taking into account trends of the emergence of supermarkets in particular as
key outlets for food in other countries, a country case study of fruits, vegetables and dairy was
commissioned in Kenya.

1.4      Fresh Fruits and Vegetables
The horticulture sector has had relatively less government intervention compared to the other
sectors. Most of the literature attributes the success of this sub-sector to the participation of the
private sector without undue influence from the government. The production, wholesaling,
transportation, and marketing of FFVs have largely been under the private sector.

In terms of export value, flowers accounted for 50% and FFV 47% of export earnings in the
horticultural sector (MOA Horticulture Division 2001). In terms of both area under cultivation
3
and volumes of output, FFV accounted for more than 95%. Some of the key FFV products in
Kenya in terms of production volumes, area planted, and consumption levels include – bananas,
mangoes, avocados, tomatoes, cabbages, kales, onions, and carrots (Tegemeo’s Urban Survey
2003 and MOA).

In terms of areas covered, these products are grown widely in the country; bananas are the least
concentrated as they are grown in practically every arable area in Kenya (Tschirley and Kavoi,
MOA). Some fruits are more concentrated in the warmer Eastern and Coastal areas although they
are grown widely in the rest of the country – mangoes.

There are no reliable estimates on domestic horticulture production and sales though the MOA
has estimated that 3.4 million tonnes were produced in 2001 of which 94% was consumed in the
domestic market. Of the domestic consumption more than 90% was consumed fresh, not
processed. Exports accounts for about 6% of the total volume of the production of fresh fruits and
vegetables compared to about 94 % for the domestic production. The domestic market, although
very significant, receives less attention in discussions and literature compared to export
horticulture. After independence the government encouraged exports as an agricultural growth
policy and also potential foreign exchange earner. The government also relied on these earnings
to finance its expenditures.

A large proportion of households in Nairobi purchase fruits and vegetables from retail markets
like kiosks and Kibandas1 near their homes. From a survey by Tegemeo Institute (2003)
approximately 7% of the respondents were purchasing fruits and vegetables from large
supermarkets and less than 1% from small supermarkets in Nairobi. Supermarkets are a recent
phenomenon in Kenya compared to some other developing countries. Within a span of 10-15
years a number of supermarkets have developed in Kenya. They are evolving as alternative
market avenues. Currently, wholesale and open markets still remains the most important outlet
for fruits and vegetables in Kenya. This is particularly so because despite the rate of urbanization
being high in Kenya, low incomes of the majority of the urban population makes the wholesale
and traditional retail outlets important sources of fresh fruits and vegetables because of volume,
convenient price and shopping habits of the poor (Weatherspoon et al, 2003).


1.5      Milk and Milk Products
Total annual production of milk in Kenya is about 2.5 billion litres per annum (A.M Karanja,
2003). Milk consumption is estimated at 2.1 billion litres. Demand for milk is estimated to grow
at 3.6% per year and is projected to remain at this level until 2008. Per capita consumption and
production are estimated at approximately 72 and 82 litres respectively. This is still below the
World Health Organization recommended level of 200 litres per person per year. About 63% of
the total milk produced is marketed. The remaining 30% is consumed at home and the rest fed to
calves (GoK, 2002). The value of milk produced in 1995 was estimated at 23.1 billion shillings
equivalent to 14% of the total value of agricultural production (Kodhek 1999). About 80% of the
total milk produced is marketed in the raw unprocessed form mainly by a large number of
hawkers.

The informal market, which handles most of the milk, is unregulated on quality standards or food
safety measures. The small formal sector has been lobbying with government representatives for



Kibandas are more temporary structures than kiosks. Unlike kiosks, Kibandas may be wholly built from wood while kiosks mostly have iron sheet roofs.
4
the banning of hawking of raw milk through KDB. KDB is still dominated by large-scale
producers/processors and government officials.

KCC currently accounts for less than 14% of the market share for milk. In addition to KCC, there
are 45 registered milk processors with an estimated daily intake of 600,000 litres (A.M Karanja).
Processing of milk has been on the decline with about 22% of the installed capacity being
utilized. This is due to a narrow demand base and also the fact that the bulk of milk produced in
Kenya is handled by the informal sector, which targets the poor. Milk processing is concentrated
among a few firms in major towns handling about 80% of the formal market share. Milk
processing costs have therefore gone upward due to the low capacity utilization and also
packaging materials account for a significant part of the processing costs. Imports usually consist
of processed products mostly during drier periods of the year but some products like yogurt and
ghee are imported throughout the year.

1.6     Outlets for the Fresh Fruits Vegetable
Most of the FFV are of high value on the export market and production is largely by smallholders
who are scattered throughout the country. Most fruits in Kenya are consumed fresh and
processing is limited to mainly extraction of fresh fruit juice, which is sold in the local market.
Low local entrepreneurial capacity (information/capital) is attributed to poor technology transfer
and productivity. Among the key vegetables and fruits are French beans, Asian vegetables
(Karella, okra), snow peas, baby cobs, tomatoes, cabbages, onion, oranges, mangoes, bananas,
papaws, pineapples and others such as watermelon.

Fresh fruits and vegetables are consumed domestically or exported in both fresh and processed
forms, with the latter form taking a small proportion of the volume. Processed FFV consumption
is highest in urban centers where incomes are higher and presence of tourists/foreigners gives
impetus to increased consumption. Domestic consumption takes the form of rural household
consumption, urban household consumption, hotels and restaurants, institutions, and animal feed
use. In the rural context, acquisition is either from own production, neighbor, roadside traders,
and local retailers or in the supermarkets.

 The sale of the fruits and vegetables in supermarkets is growing and slowly spreading out of
Nairobi’s middle and upper class areas into poorer areas and rural towns/cities. In 2000,
supermarkets in Kenya were at 200 and 10 hypermarkets (Stamoulis, FAO, 2002). In 2004, it was
estimated that supermarkets had increase to 204 and 11 hypermarkets (Neven and Reardon,
2004). The main supermarkets are shown in Table 1.

The two dominant chains, Uchumi and Nakumatt have about 70% of the supermarket market
share (Weatherspoon et al, 2003) with smaller supermarkets (Ukwala, etc) combining to make
25% of the market share. The Nakumatt and Uchumi chains have now opened branches in major
towns of Kenya. Uchumi has been undergoing an ambitious expansion program locally and into
Uganda. The strong strategic positions of Uchumi and Nakumatt have made it difficult for foreign
competitors particularly those from South Africa.




5
Table 1: Diffusion of Supermarkets
                           #              Network                          # Dealing
                           Branches                                        in FFV
Uchumi                     28             Nairobi, Nakuru, etc, Kampala=1  20
Nakumatt                   12             Nairobi=10,Mombasa=2,Kisumu=1 13
Metro Cash & Carry         3              Nairobi=1,Kisumu=1,Eldoret=1     -
Tusker Mattresses          8              Nairobi=6,Nyahururu=1,Naivasha=1 1
Ukwala                     9              Nairobi=6, Eldoret=2, Kisumu=1   -
Safeways                   4              Nairobi=3, Thika=1               -
Mesora                     2              Nairobi=2                        -
Source: Authors Compilation


Uchumi has extended its network to Kampala, Uganda, where it is competing with Shop Rite of
South Africa. Two foreign multinationals (Metro Cash & Carry and Woolworth) from S. Africa
have recently joined the fray. These new chains are currently not yet stocking the FFV and are
handling processed foodstuffs with longer shelf life. Again being foreign firms, they are less
familiar with the local supply channels but industry sources indicate that S.African firms are
bidding for locally owned Uchumi which has financial problems.
As a result of the changing visual quality requirements and consistency in delivery , some of the
big-chain supermarkets are shifting to more specialized suppliers for their procurement needs and
this has implications that will directly or indirectly affect the final source points at the farm level.
These quality standards are being set by the private sector and are of the domain type (Berdegue
et al) relying on appearance/visual inspection. This has ramifications for vulnerable smallholder
producers who may find it difficult to meet these requirements from a mostly urban, dynamic
market.

If experiences from other parts of the world are indicative of what is likely to happen in Kenya,
there is a need for policies that will ensure the sustainability of smallholder producers and SMEs
that depend on these systems for their survival, by helping them adopt new ways that will
accommodate the changing procurement systems. However, the Kenyan results indicate that
supermarket entry into the Kenya retail market is still in its early stages compared to examples
from other developing countries. Considering the income levels, extent of urbanization, and the
investment climate in Kenya, the supermarket impact is nowhere near that of the S. American or
Asian experiences.

Retail outlets for fresh fruits and vegetables targeting upper and middle-income groups is said to
account for 20% of marketed volume of food in urban areas with 70% of the products produced
locally and 30% imported (Gan, 2000). Similarly, it is estimated that about 55% of the
households that purchased fresh fruits and vegetables were bought from open-air or ―wet‖
markets, 33% from kiosks, less than 7% from supermarkets, and 3% from hawkers. Traditional
retail outlets are therefore predominant sources of purchase for most of Nairobi. However, when
data is disaggregated by income sources, then it is clear that as incomes raise most purchases of
FFV are made at supermarkets and dukas/shops (Table 2).




6
Table 2: Number of Households Per Type of FFVs Retail Outlets

                 Wet     Kiosk/      Large                Duka/ Green             Small
ITEM             markets Kibanda     supermarket   Hawker Shop Grocer             Supermarket
                                     Number of Households
Tomatoes           276        179          36         16     7     6                     2
Onions             281        167          41         12     4     6                     2
Sukuma wiki        223        189          20          5     4     3                     2
Bananas            211        163          26         12     3     6
Irish potatoes     268        115          20          7     5     4                     2
Cabbage            233        139          26         12     3     5                     2
Oranges            211        134          37         14     2     6                     1
Carrots            197        113          38         10     5     6
Mangoes            167         89          19         11     1     5                     1
Avocado            131        106           9          8     3     4                     1
Paw paws           123         64          19         10     0     5                     1
Cooking
bananas            129        56             3            5        0        0            0
Sweet potatoes     100        23             3            6        0        0            0
French beans        44        10            27            4        1        4            1
Percent            55%       33%            7%           3%       1%       1%          0.3%

Source: Tegemeo Urban Consumption Survey 2003, Author Compilation

1.7     Outlets for Dairy and dairy Products
Milk is the most important dairy product in Kenya. Over 80% of the total milk smallholders, to
whom it provides regular incomes, creates employment through production, processing and
marketing of milk products, produce production. A variety of dairy products are produced in
Kenya including raw and processed milk, Ultra Heat Treated milk (UHT), cheese, yogurt, butter,
cultured milk, ghee, ice cream, and pasteurized milk. The current consumption level for milk and
milk products is below potential and outstripped by production

The key retail outlets for milk and milk products in Nairobi include dukas/shops,
kiosks/Kibandas, hawking (moving from house to house), milk bars, and dairy plants or
processors and supermarkets. Hawkers and milk bars sell mostly raw milk while shops and
supermarkets sell pasteurized milk and milk products like yogurt. Kiosks offer a product range
covering raw milk and pasteurized milk in packets. Figure 3 shows marketing channels for milk
and milk products.

Results from the Tegemeo urban household survey (Table 3), indicate that 52% of the
households interviewed bought their milk products from dukas/shops, 12% from
kiosks/Kibanda and milk bars, 28% of households purchased milk and milk products
from large supermarkets while 5% purchased from small supermarkets. Hawkers, who
have become very prominent recently after the collapse of Kenya Cooperative
Creameries, supplied 16% of the sample households with raw milk.


7
Figure 3: Milk Marketing Channel in Kenya
Some producer cooperatives sell raw milk or process the milk and sell directly to consumers.
                                                     PRODUCERS
                                                       (Farmers)




                                                                      ASSEMBLERS




                            HAWKERS
                                                      PROCESSORS                    COOPERATIVES




                                                          WHOLE SALERS



                                              RETAIL OUTLETS
                                                 (Milk bars)


                                                       CONSUMERS
                                                (Individuals and institutions)




8
About 50% of the sample households bought processed milk mainly from shops, kiosks, and
supermarkets, 25% bought raw milk from hawkers, shops, milk bars, and kiosks, while 25%
bought cheese, ghee, and yoghurt mainly from supermarkets in the month of October 2003.

Table 3: Purchase of Dairy Products by types
                                     Pasteurized milk (pack) Raw milk Yoghurt Cheese Ghee
                                                        Number of Households
Duka / shop                                      255               34         14        1       2
Kiosk / Kibanda                                   49               21         2
Large supermarket                                 49                0         62       42      16
Small supermarket                                 3                 0         20        2       2
Hawker                                            0                93         0         0       0
Milk bars                                         0                21         5         0       0
Dairy plant, Neighbor, farm,
institution                                 0             15                  2         1       0
                                           49%           25%                 14%       6%      3%
Source: Tegemeo Urban Consumption Survey 2003, Author Compilation

Some of the large institutional consumers (hospitals, hotels) buy their FFV and milk by bids from
suppliers who buy from farmers, open-air markets, and supermarkets.

 1.8     Other Traditional Outlets for Fruits and Vegetables
About 80% of the households in Nairobi purchase their FFV from kiosks and open-air or wet
markets. These markets also provide competition to other outlets as a substantial consumer base
patronizes them because of their convenience, price, and variety of produce available. These
―traditional‖ markets offer competitive prices but are characterized by lower quality products and
un-hygienic conditions; they however continue to thrive relying on serving the poor in urban
areas. In addition, kiosks and hawkers, due to their extensive location coverage, also cater for a
substantial consumer base in Nairobi and other urban areas.

Wakulima market is the main FFV wholesale market in Nairobi serving retail markets like
Kawangware, Gikomba, Toy, Kangemi, City Park, and Korogocho, which are spread allover the
city. Green grocer consumers are usually the medium to high-income earners who are also quality
conscious. Institutions (hospitals, hotels) purchase their requirements from farmers (both contract
and non-contract), traders, or wholesale or retail markets.

1.9      Supermarket’s Evolving Procurement Systems
 According to the secondary information and interviews at the supermarkets, the procurement
procedures depend on the size and hence volume of demand and the structural and organizational
nature of these supermarkets. Five years ago the big chains used to purchase their FFV
requirements from open-air markets, traders and farmers directly. But issues of timely deliveries,
volatile prices, and quality standards and safety made them restructure their procurements in
order to curtail these problems.

Supermarkets are increasingly looking for supplier channels that ensure that quality standards are
9
maintained and the possibility of traceability to farmer if need arises, a steady supply of expected
volume all year, and consistent delivery times. There is the possibility that direct supplies from
smallholder farmer may dwindle due to these demands and also the spatial scattered nature of
these producers that raise transaction costs especially transport and time. However, evidence does
not show concentrations in supply chains to supermarkets. Supermarkets continue to be supplied
by various sources that include smallholders, preferred suppliers, contracted farmers,
intermediaries,etc.

Nakumatt’s procurement system has evolved from store-to-store to a centralized procurement
system for its Nairobi network with one supplier for horticultural produce who sources some of
the produce from a large farm near Nairobi, some from medium-to-large farmers, imports, and
10% from smallholder farmers. However, it has decentralized system of procurement for its
Mombasa network due to logistical impediments of sourcing everything from Nairobi. The
supply chain for Nakumatt has started laying quality and safety standards for foodstuffs with
some of the produce being labeled with producer identification for purposes of traceability.

All branches of Nakumatt Ltd (1985) deal in FFVs supplied by Fresh An Juici Ltd, wholly owned
by Nakumatt, who took over from Mugoya Vegetables Shop Ltd two years ago. Nakumatt
discontinued its contract with Mugoya with the allegation that the latter delivered poor quality
products and the supplies were not on time. Their current supplier sources the produce from
farmers, wholesale markets, and imports. Nakumatt has already centralized purchasing systems
with this contracted supplier who procures, packages, and distributes to all the branches using
own and hired trucks. Nakumatt’s monthly sales of FFVs have increased from 10 million
shillings in 2003 to 19 million in 2004 due to what Nakumatt attributes to high quality standards
and competitive prices to consumers (prices 10% lower than other outlets), and improved
customer services.

Uchumi is slowly moving towards a distribution centre (DC) type of procurement system in
Nairobi. Uchumi now applies a dichotomous system, using a centralized Nakumatt-style
purchasing system for some stores and decentralized purchases for some directly from farmers
both large and small,intermediaries (who often source from wet markets) or traders. Until
recently Uchumi was receiving supplies from Mugoya but the deal was struck off for similar
reasons as those given by Nakumatt. Uchumi also contracts institutional suppliers who buy from
wholesale markets, other traders, or directly from farmers. There are about 4 large institutional
suppliers and 10 small ones who have emerged due to more stringent demand on quality by
supermarkets. These four institutional supplier firms are Mugoya, Westlands Green Grocers,
Zucchini Vegetable Shop, and Fresh An Juici in declining order of size

Smaller and independent stores/supermarkets, who account for 25% of the supermarket market
share of fresh fruits and vegetables, purchase through brokers who get their deliveries from open
or wet markets or from rural farms directly. Direct procurement from rural farms would be more
convenient if farmers were organized as groups else the brokers would be tempted to give
preference to large scale farmers so that they cut on transaction costs hence maximize their
profits. The volumes of FFV dealt with in these stores are much less compared to their bigger
competitors. In addition, not all these supermarkets deal in FFVs and those that do have less
variety to offer in comparison to large chains.


Some of the suppliers to supermarkets also export to Europe. The requirements imposed by the
export market might have some implications on supermarkets. There is a campaign by
10
Horticultural Crops Development Authority (HCDA) to influence export-targeting horticultural
farmers to adhere to requirements by European Community on Good Agricultural Practices
(EUREPGAP). Otherwise they will be unable to export to European Union (EU) countries
come January 2005. The use of chemicals such as Methyl bromide, considered an ozone
depleting substance, is being phased out and is being substituted by recommended alternatives
such as use of bio-fumigants and solarization (HCDA 2003). A certificate would be issued
(currently by a foreign company) to farmers who comply. The cost of certification in form of a
fee is however very high to a small-scale farmer (about USD 875 excluding air ticket and
accommodation expenses for foreign inspector). Although the EUREPGAP requirements target
export market, it is expected that there will be some positive spill-over effects to the local
market especially the supermarkets, hospitals and hotels where producers that export
sometimes supply or divert the high quality products to these institutions. The institutions
might procure either directly or through brokers some of the high quality products produced
under conditions recommended by EUREPGAP. Some of the quality requirements (eg
emphasis on good hygiene) set by EUREPGAP and those set by local private sector including
large supermarkets, hotels and hospitals are the same, an indication that the formally clear
distinction between local and export market is becoming blurred. This opportunity widens the
market for locally produced goods that have been produced in accordance with international
requirements. This would yield benefits that would trickle down to small-scale farmers
especially those able to access this market say by forming producer groups that would satisfy
the market requirements with minimal costs than would an individual farmer. 1.10           Effect
on Producers and other Market Participants
Though Uchumi and Nakumatt control about 70% of the supermarket market share (Reardon)
their procurement procedures for FFV does not have significant implications for smallholders has
their share of this market is currently less than 7%. . Nakumatt’s sourcing system that favours
centralized purchasing through a single supplier (sourcing from large/medium producers) impacts
negatively on smallholders who have always counted on supermarkets being one of the ultimate
retailers of their produce either from the open air markets or directly by brokerage. The preferred
centralized purchasing through a single supplier, though currently applicable to large producers
may also apply to small farmer but only if they were organized as producer groups. Tegemeo is
currently conducting a study on why some producer groups have worked and others have failed.
Experiences from export horticulture reveals that initially some farmers violated contractual
arrangements by selling to other exporters. But after a while this became untenable as they
became known as risky prospective suppliers for whichever exporter and this habit declined.
Other problems hindering this include poor road networks and non-existent legal framework
recognizing producer groups as entities.

As Nakumatt and Uchumi eventually tighten their requirements on consistency in volume and
quality, smallholder producers and under-capitalized brokers will face tough competition from
larger producers and traders with financial base to sustain these demands. Supermarkets therefore
are increasingly looking for supplier channels that ensure quality standard are maintained and
possibility of traceability to farmer if need arises, a steady supply of expected volume all year,
and -consistent delivery times.

Various outlets for fresh fruits, vegetables and dairy products have been highlighted in this
chapter. Some changes occurring in the market pause challenges to small and medium-scale
entrepreneurs and unless they adopt new strategies, their participation in market would continue
to dwindle. The challenges facing these entrepreneurs include lack of enough capital, quality
demands, need for traceability and ability to supply all year round. These constraints would be
partially addressed by small farmers forming producer organizations. Through the government’s
11
policy documents (PRSP, SRA) there is the objective of assisting farmers to be more competitive
by strengthening support structures –extension, input supply systems, etc. Some ways to organize
farmers will involve private-public partnerships with donor funding.




12
2.0     DETERMINANTS OF GROWTH AND DIFFUSION

2.1     Population and Urbanization
In 1989 Kenya’s population was estimated at 21 million people. This increased to 29 million in
1999. The urban population is currently estimated at about 5 million people, which is about 17
percent of the national population. About 40% of the total urban population in Kenya lives in
Nairobi. Estimates by the Food and Agricultural Organization (FAOSTAT) in 2002 indicate that
65% of Kenyans lived in the rural areas while 35% lived in urban areas. Between the 1989 and
1999 censuses, the population of Nairobi grew by about 4.1 percent per annum. That of Mombasa
grew by an annual average of 4.3 percent in this period. This phenomenal growth is attributed to
the increase in migration from rural to urban centers in search of employment and high levels of
rural poverty. Interestingly the total population of women outgrew that of men in the same period;
with more women joining the labor force and increasingly competing with men for available
opportunities. The urban population grew at a faster rate than the overall population in the
country. On the average the urban population grew at 7% per annum between 1989 and 1999

Total annual population growth was 3.8% in 1979 and has declined to about 2% in 2000.
However the urban population has maintained a high growth rate from about 7% in 1969 rising to
8 percent in 1989 and to about 5% in 2000. The rate of growth in the urban population has been
double that of the rural population. The urban population is likely to continue growing thereby
creating demand for fresh fruits and vegetables ceteris paribus. Urban population has higher
disposable income than the rural population; they also do not normally produce their own food
and therefore depend more on markets for their supplies.

The rural-urban migration over this period offers a wider market for agricultural commodities in
these urban towns and cities. As Nairobi and other major towns get more urbanized so do the
smaller urban centres throughout the country. This has the potential of providing bigger markets
for food items including fresh fruits and vegetables through traditional retails centers and
supermarkets.

2.2     Income and Expenditures
Annual per capita GDP in is Kenya is about US$2252. In the Kenyan rural areas, the richest 10
percent of the population account for 47 percent of the total income and average US$89 per capita
per month. The other 27 million people struggle on US$11.16 per person per month. According
to the Welfare Monitoring Survey (WMS) about 30% of food consumed by rural household is
sourced from own production while for the urban consumers 98% of household food
requirements are purchased from the market. This implies that for both rural and urban markets,
most of the food consumed at home is purchased. From the monthly expenditures on food and
non-food items, rural households adult equivalent expenditures on food items are 72% of total
expenditures while in the urban areas this is 45%.

Despite consumers buying a lot of their food from the market, income inequality in Kenya is
likely to adversely affect the relative growth of supermarkets as poor households go for cheaper
fresh fruits and vegetables in mainly the traditional retail centers. The traditional markets will
continue to play an important role in product supply. However, improving quality and safety
standards of the produce in the traditional markets could attract supermarket supplier to procure
from these traditional markets and this will indirectly improve the health conditions of the poor
consumers.

                                   2 Exchange rate of US$1=KShs80
13
2.3     Market Liberalization and Private sector Development
Beginning in the early 1990s the Kenyan government, under donor pressure, started a slow
process of liberalizing the marketing of agricultural produce. The opening up of markets led to
reduction in the state monopoly in some of these markets and encouraged private investment. The
increased entry of the private sector resulted in employment and income creation for a number of
farmers and SMEs in the market system.

The subsequent freeing of the hitherto controlled foreign exchange regime led to more FDIs and
increased availability of funds either internationally or locally by investors. Restrictive import
quotas and taxes were either reduced or completely removed. Liberalization of both input and
output markets coupled with a market-driven exchange regime, led to private investment in the
production, marketing, processing, and distribution systems for most commodities. The increased
competition meant that players had to be efficient in order to survive in the market.

The indirect consequence of liberalization is the culmination of demanding quality standards set
by some market participants to differentiate themselves from their competitors. This is as a result
of the export sector demands on quality being felt in the domestic market. Liberalization of most
of the economic activities led to increased international trade. This and the subsequent exposure
and demands by savvy consumers culminated in domestic markets slowly trying to adopt
international quality standards. With increased urban incomes and awareness, supermarkets are
raising their standards to capture the middle to higher income households who are increasingly
demanding better quality products. The influx of foreign imports into the country (South Africa’s
fruits are example here) and their acceptance by the consumers also contributed to this
restructuring process. Therefore liberalization, apart from improving efficiency at all levels, also
meant that Kenya had to compete with the rest of the world on an equal footing or else lose its
markets within and without to more efficient systems.

Market liberalization and promotion of the private sector development is likely to promote the
growth of supermarkets as large conglomerates of companies such as those from South Africa
invest in super and hypermarkets.


2.4     Women and Development
A majority of Kenyans live in the rural areas with a larger proportion of these being women. Most
of the rural farm labor consists of women who do most of the activities at the farm – planting,
weeding, harvesting, fetching water and firewood, etc. The gender issue has been targeted by the
government through a National Policy Document on Gender and Development spearheaded by
the Women’s Bureau. The 1999 census showed gender disparities exist more so at the rural areas.
Female-headed households, most of them in rural areas, rose from 35% in 1989 to 37% of all
households in 1999 (Economic Survey 2003). A large proportion of these households did not
enjoy the facilities and amenities available to male-headed households.

Education trends in Kenya have always favored males to females with most decision-makers at
the household level sending boys rather than girls to school as a first priority. However, these
trends are changing fast and women and men are being accorded similar opportunities except for
some communities where tradition and culture still prejudices against women.

Studies indicate that female-headed households in Kenya have less income compared to male-
headed households (Tegemeo Rural Surveys). This is partly due to lower wages that the generally

14
  less educated females face in the market and access to credit facilities to females is limited as
  most collateral holders are males.

  The Kenyan government has always signaled a deliberate ―affirmative‖ action for women in
  politically related appointments but this has not crystallized into action. Most political decision
  makers are men, a trend that is mirrored in private company boardrooms all over the country.

Despite all these, the number of females entering the labor force has continued to increase. In 1995
about 24.2% of the formal (wage) labor force in agriculture consisted of women while nationally
women consisted of 26.2% of the labor force. While the employment percentages remain fairly
steady at the agricultural sector, nationally the employment levels for women increased to 29.3% in
1998, a trend that has continued to date (Table 5).

  Table 5: Women in the Labor Force
                                                              1995       1996       1997       1998

  % Agriculture                                                24.2       25.3       24.7       24.8

  % National                                                   26.2       28.4       28.7       29.3

  National ('000) (women + men)                         1,557            1,619      1,647      1,665
  Source: CBS, Economic Surveys (1995-1999) and Authors

  The increased employment levels can be attributed to the government and private sector push to
  education for all. Private company employers have become more willing to employ women to
  jobs that were mostly occupied by men. The recent free education system at the primary level by
  the government will definitely improve the lot of women by giving them an opportunity to
  improve their skills. The improved situation for women (employment) has meant that women
  now are earning higher incomes than before. For households that had one formal income source
  (male) this means increased household income from the participation of women in the labor force
  (increased earnings from male and female members of households). As women get involved in
  job markets and total household incomes rise it is likely that expenditures on supermarket items
  will rise.




  15
3.0     LINK UP TO THE UPSTREAM AGENTS



3.1     Grading and standardization (FFV)

In Kenya, quality grading of fresh fruits and vegetables normally takes place at the grower’s
farm, or is done by brokers before the produce is delivered to supermarkets, hotels or hospitals.
Inspection is based on visual quality attributes such as size, cleanliness, blemishes, maturity,
color, shape and texture.. Upon delivery of the produce to supermarkets, trained staff inspects the
produce for quality. Poorer grades, typically not sold to supermarkets, are sold through other
retail outlets like kiosks and wet markets. Uchumi recommends certain standards in regard to
packaging to its contracted farmers, for example use of nets in packaging onions and use of
perforated crates where the product line allows. Unlike fresh fruits and vegetables where there is
some grading though not standardized, with fresh milk, there is no grading at farm level. This is
due to the homogenous nature of this product from a visual outlook. Nevertheless, for
acceptability at collection points, milk is tested for adulteration. Nairobi hospital goes a step
further to test milk and milk products for quality in their microbiology laboratory.

Slowly consumers and researchers are questioning the rationale for having dual standards, one for
export and the other for domestic consumption. These two systems apparently co-exist side by
side and the question is why they cannot eventually merge into one .Duality is an issue that
eventually will blur so that Kenya has one system of quality standard.

There are some public bodies that have been set up to deal with issues of standards and regulation
of markets for various products. The bodies involved indirectly in issues related to agri-food
production, marketing, research, regulation and standards in one way or another include: Ministry
of Agriculture, Kenya Bureau of Standards, Kenya Agricultural Research Institute, Kenya
Planters Health Inspectorate Services, Pest control Product Board, and Universities. Kenya Dairy
Board regulates dairy sector. The bodies are usually weak in enforcing regulations pertaining to
production, hygiene and marketing. For instance, although milk hawking in illegal in Kenya, 80%
of marketed milk is channeled through informal sector (Tegemeo 2003). Though the public sector
seems reluctant in enforcing standards due to political reasons (disenfranchising voters) and lack
of logistical capability to monitor the market, on the other hand, the private sector especially large
supermarkets are increasingly becoming sensitive and strict on quality and safety standards to the
extent of setting specifications on the products they would buy.

Uchumi, through its contractual arrangements with some growers, avails a list of inputs that
suppliers should buy for their crops. This is one way that supermarkets can monitor quality of
inputs used by farmers. This system has also been noted with Woolworth supermarket of South
Africa (weatherspoon et al 2003). This is not very common though as it is difficult to enforce by
the supermarkets.
Uchumi also give specifications in the contract describing the quality of products the farmer is
expected to supply. Further, the supermarket-staff make regular visits to the farms to supervise
production. The supermarket however does not specify who should be the supplier of other farm
inputs such as herbicides and insecticides. The grower-supermarket arrangements are market
demand driven and recognize consumer sovereignty and therefore decisions are dictated by
consumer preferences. The arrangement promotes consistent supply, quality, food safety
standards and availability of wide variety of produce throughout the year. For these arrangements

16
to be successful, the supermarkets require a close relationship with growers. More details on
information reflected in a contract are shown in section 3.3 below.

In a move geared to improving quality and standards, Uchumi supermarket is exploring three
options. One is to set up or hire a laboratory for chemical residual analysis especially on products
sourced from open/wet markets and brokers. Second is to partner with Sunripe and the
International Alliance concerned with Hazard Analysis and Critical Control Points (HACCP) to
ensure that suppliers especially growers meet the required standards. Third is to establish a
central handling and inspection warehouse or facility where adherence to standards and quality
would be assessed. The choice of the cause of action to take is yet to be made.

Considering procurement through brokers, issues of standards and grades are not of much
concern to these small chains. They assume that the producer or the broker supplying the products
did observe the expected standards especially good hygiene. Unlike with big supermarkets that
sometimes use formal contracts, these chains are characterized by verbal agreements with
suppliers where they agree on issues such as quantity and price of supplies.

To promote production of quality and hygiene produce, Serena hotels makes impromptu visits to
its suppliers. This is to inspect production and handling procedures as well as assess the
producer’s capacity to supply as expected. The hotel prefers procuring commodities grown far
away from large towns and cities. This is to avoid contaminated agri-foods that that normally
characterize produce grown in these areas using polluted urban waters often containing effluent.

Among the institutions considered in this study, Nairobi hospital proved the most sensitive to
standards and quality in the sense that they comply with International HACCP Alliance standards.
The hospital enforces adherence by sending trained staff at least once a year or as need arises to
its suppliers to inspect if they conform to the standards. The hospital generally procures agri-food
in ready-to-cook form, for instance peeled and cut tomatoes and shredded kales. If a supplier fails
to satisfy HACCP standards, he is dropped and a new one recruited. Such a measure was taken by
the hospital against a Limuru milk processor who did not comply in favor of a Ruiru-based
processor who satisfied the standards. In regard to milk, the standards relate to factors such as fat
content, packaging, taste, cleanliness, microbiological tests, and temperatures at the time of
delivery. The hospital keep very good records and traceability is ensured. It would be interesting
to see how other consumers/buyers can borrow from this remarkable process.


3.2     Procurement systems

3.2.1 FFV
In Kenya, the main suppliers of fresh fruits and vegetables to hotels, supermarkets, groceries and
hospitals are farmers, brokers, open markets and importers while main suppliers of milk and milk
products are processors. Table 6 presents estimates of proportions of quantities by volume of FFV
supplied to two supermarkets (Uchumi and Nakumatt) and a grocery (Corner shop) from each of
the four sources. Nakumatt procures all its supplies through its subsidiary company, Fresh n Juici
and there the proportions presented under it are essentially represent procurements by this
company.




17
Table 6: Proportions of FFV procured from each supplier
                                                  Institution

Suppliers                 Uchumi                      Nakumatt             Corner shop

Farmers                   20%                         60%                  80%

Brokers                   73%                         32%                  0%

Open market               0%                          0%                   20%

Importers                 7%                          8%                   0%

Source: Interviews by Authors

The volumes procured from FFV farmers constitute of all categories comprising of large, medium
and small-scale farmers that delivered directly to the institutions. With this system of direct
procurement from farmers, it is easier to trace back the product to its source in comparison with
produce channeled through brokers and open markets. East African Growers and Kenya
Horticultural Exporters are the main importers for Uchumi and Fresh n Juici (Nakumatt).
Supermarkets do not procure directly from open markets. The markets however form good
sources of the produce that brokers sell to supermarkets and hotels.

Locally produced fresh fruits and vegetables are delivered directly to branches. This is due to
perishability characteristic of these agricultural products and therefore the need to deliver them
quickest possible so as to sell while still fresh.

Nakumatt procures via its subsidiary company, Fresh ―n‖ Juici. This company has relevant
facilities including pack-houses, cold rooms, ample loading and off-loading area, and a
warehouse. The company does sorting, washing, packaging, slicing and dicing before delivering
the produce to supermarkets. Most of these activities add value to the produce. Among the hotels
and hospitals considered in this study, only Serena has branches in form of lodges located both in
Kenya and Tanzania. Apart from the main branch located in the city centre that does procurement
for FFV and milk products independently, procurement for the other lodges in the country is
centralized whereby it is done at the headquarters and then distributed on weekly basis to its
lodges located in places such as Maasai Mara, Amboseli and Kilanguni. Serena unlike other
hotels and hospitals capitalize on long life milk thus permitting weekly deliveries.

 For 2003, procurements of FFV under contract by Uchumi were estimated to account for only
5% of purchased volume. This was very small compared with South African chains that had more
than 90% of procurement under contract (Weatherspoon et al 2003). Although the number of
contracted farmers has gone up (from 10 to 11) during the period, estimates show proportion of
4% by volume. Among all FFV procured directly from farmers, 20% are delivered under contract
while 80% are non-contracted and comprise of 2% from farmer groups (3 groups) and 78% from
other farmers (about 500).

Medium size supermarkets (major ones in Kenya except Uchumi) were estimated by
Weatherspoon to rely 100% on brokers for supply of fruits. The fact that Safeways supermarkets
(Medium size) in now engaged in own production rather than procuring everything from brokers
18
is an indication that the changing procurement system is not only taking place with large
supermarkets but also with these ones. However, small supermarkets are not quality conscious as
medium and large ones. Delivery of supply to the stores by brokers is considered the most
traditional channel. The medium size chains were estimated to procure 55% of their vegetables
from small producers and 10-30% from medium size producers.


3.2.2 Milk

Supermarkets, hotels and hospitals do not buy raw milk but only procure processed milk and milk
products. In general, the main suppliers of milk and milk products to these institutions are:
Brookeside, Egerton University, Delamere, Kenya Co-operative Creameries (KCC), Spinknit,
Eldoville, Lyons Maid, Palmhouse and Tuzo companies. The milk and milk-products supplied are
fresh, long-life, and powdered milk and mara/lala, yoghurt, cheese, ice-cream, ghee and butter.
The range of products supplied differs among processors. Fresh milk is the major dairy product
being traded (accounting for 70% of milk products supplied to Uchumi).


3.2.3 General comments

Suppliers of commodities may be specialized (supplying only one or two products) or supplying a
wide range of products. Some of the institutions prefer or have specialized suppliers who may be
producers (as is the case with Corner shop) or brokers (as is the case with Uchumi). In the
contrary, Safari Park prefers those producers who can produce a wide range and variety of
products. The procurement procedures or sources of Fresh fruits and vegetables and dairy
products vary from one institution to the other. For example, while Corner shop sometimes
procures from open market directly, Uchumi supermarkets do not get from this source unless
through brokers. The procurement approaches include: own production, contracted farmers,
brokers, imports and open/wet3 markets particularly wholesale market (Wakulima) in case of
chains located in Nairobi.

3.3      Direct procurement from Producers
Procurement of produce by gentleman’s agreements with farmers rather than procuring from open
markets or brokers is gaining ground in Kenya. Unfortunately most of the agreements are not
legally binding, as they are not based on legal documents. Among the institutions considered in
this study, only Uchumi supermarket is involved in legally binding contractual arrangements that
are few and far in between. The factors considered for one to be contracted or be considered for
an agreement vary among the chains. Sometimes farmers are required to deliver a sample of their
produce before signing a supplier-agreement. In other cases, agreements are signed after the
farmer has proved reliable through an invoice-only supplying for a certain period thereby
contracting those suppliers that the chains have had long relation with. Formal contractual
arrangement with producers is a relatively new approach (started in 1997 in case of Uchumi
supermarket). Uchumi in addition procured from 2 farmer groups namely Kinangop agri-holdings
limited and Igamuka and an NGO, Family Concern.




  3 Wet markets are markets (normally open air markets) comprising of wholesale traders who get their supplies by collecting from many
  sources without registering or preserving the identity of the farms. These markets are characterized by poor infrastructure, phytosanitary
  facilities and not keen in quality and standards.
19
3.4      Procurement via brokers
Brokers are the main suppliers to supermarkets, hotels and even hospitals. In fact the word broker
is a misnomer as these are important players in the market. Brokers fill a vacuum in the supply
chain has they have access to market information unknown to most. By having information on
prices, supply sources, and sometimes delivering on credit to be paid later, these players provide
important services. They usually bulk supplies from many sources without registering or
preserving the identity of the farms and then delivery this to the buying institutions. Of the total
fresh fruits and vegetables delivered to Uchumi, 73%% are supplied by brokers. Unlike with
growers, there are no contractual agreements between brokers and the supermarkets. Virtually all
procurements at hotels (Safari Park and Serana) are via brokers. Brokers normally source their
produce from farmers, wet markets and some do import.

3.5      Procurement via importers
Sometimes, especially off-peak seasons, supermarkets, hotels and hospitals hinge on imports
from other countries to supplement local supply. This mitigates the effects of fluctuations in local
supply or production of fresh fruits and vegetables thereby promoting consistent product
availability in the market throughout the year. Of the fresh fruits and vegetables sold by Uchumi,
7% are imported (Table 6). Among the imports by Nakumatt (Through its subsidiary company,
Fresh n Juici), about 60% are from South Africa, 30% from Europe and 10% from Middle East.
Commonly imported products are oranges and onions from Tanzania, pineapples and bananas
from Uganda, garlic from China and bell peppers from Holland. In addition to supplying the
market during low seasons, some of the imported products, for instance China’s garlics, are more
competitively priced and further, they offer varieties or quality not produced in Kenya. S. Africa
fruits offer a big threat to Kenyan products as these products have attractive feature (quality)
compared to local products des[ite the higher prices.


3.5      Procurement via wholesale markets
Most hotels, supermarkets and hospitals use wholesale markets as the last resort- normally in case
of emergencies or when other suppliers fail to deliver. There are 6 main public fruit and
vegetable wholesale markets in Nairobi (Ngagi 1995). They include Wakulima market that was
built in 1960s by Nairobi city council and located east of the city’s business district; Kawangware
and Ngong that serve western part of the city; Korogocho and Githurai that supply the eastern
part and; City park market that serve areas such as Parklands and Westlands.


3.6      Procurement via wet markets
Although procurement through wet markets was traditionally a major source of FFV for
supermarkets, hotels, hospitals and groceries, the quantity got from this source is gradually
decreasing. This is due to many problems characterizing this market including poor hygiene and
sanitation, safety and lack of traceability on commodities. Among the institutions interviewed in
this study, only corner shop was procuring directly from open markets and this accounted for only
20% of its FFV volume. In spite of not procuring directly from wet markets, some produce from
these markets still end up in supermarkets, hotels and hospitals. This is through brokers. Wet
markets therefore are still important source or channel for FFV consumed in urban centers. A lot
of produce bought by brokers from small-scale farmers is channeled through the wet markets.

In general, although there are many sources of the produce being sold by various supermarkets,
the direction being taken as shown by market leaders in the country and as shown by past
20
experiences from other countries is the espousal of a procurement system marked by shifts from:
    a) Decentralized to centralization of procurement
    b) Traditional brokers toward specialized and dedicated wholesalers
    c) Spot market toward use of preferred supplier system
    d) Quality insensitive toward use of private quality standards including hygiene concerns.



3.7     Implications of product and process attributes for upstream agents

3.7.1 Technology
Production: Grafting of fruit-trees is the common technology being adopted at farm level. This is
done in fruits such as mangoes, avocadoes, oranges and paw paws. The new varieties developed
by grafting yields a cascade of benefits including increased productivity, and resistance to
drought, diseases and pests. Access to these technologies would give higher yields that coupled
with a good market for the produce would increase farmer incomes thereby alleviating poverty
especially for the rural poor.
With the increased demand for milk and milk products, many farmers are now keeping grade
(exotic) animals that yield higher milk output. A great threat to milk production in Kenya is
disease. To fight common livestock diseases for instance East Coast Fever (ECF), work is in
progress in research institutions to develop vaccines that are affordable, safe and effective.
Development and adoption of these new livestock technologies would increase milk production
by farmers and lower production cost hence economically empowering small and medium scale
farmers and also improving on their nutrition.

In the past, adulteration of milk was a common practice. In an effort to detect this vice, several
technologies are used at farm level. This includes organoleptic test (that rely on smell and sight),
use of lactometer, alcohol clot tests and clot boiling method (Tegemeo, 2003). Assemblers do the
testing of milk. With these tests in practice, farmers have no option but to take care of their milk,
otherwise it would be rejected. This test is common with milk that is acquired by processors.
However, most of the milk is sold via informal markets (hawkers) where such tests are not
common.


Irrigation: The Government of Kenya considers irrigation as the panacea for sustained food
security in the country. There are two rainy seasons in Kenya. To ensure consistence in supply of
fruits and vegetables and also food for livestock (milk production), irrigation would definitely be
practiced. This might be furrow, drip or overhead depending on the type of produce, availability
of water, cost of capital and human investment. Also, there might be increased production of agri-
food products in green houses to ensure all year round production. Adoption of this technologies
by small and medium producers is expensive hence the need for relevant interventions that would
support them. Else, these small and medium entrepreneurs would have to put their meager
resources together and support each other if they are to overcome these challenges. This would
not be possible unless they form co-operatives or producer groups.

3.7.2 Post-harvest
There are various strategies being adopted by farmers and processors to deal with post-harvest
issues. This is normally done to prolong the shelf life of products thereby making them available
even during off-seasons. The technologies being adopted include use of cold storage, solar drying
(e.g. mangoes, kales), small-scale processing of fruits (e.g. passion fruits, mangoes) to juices.
21
Processing of overripe fruits to juices has the advantage of reducing wastage. To maintain high
quality of products after harvest, small and medium entrepreneurs might have to install cooling
systems, pack houses and to use refrigerated transport. This implies additional costs hence a
challenge to these suppliers. Again it would be difficult for an individual small or medium
entrepreneur to acquire these facilities considering the required heavy initial capital. Collective
effort among these entrepreneurs is therefore indispensable.

3.7.3 Management
There is pressure from the market for improved management practices both during production at
farm level as well as handling and transport along the marketing chain. At farm level there is
currently a lot of training and sensitization on appropriate record keeping. This is more so to
enhance traceability, adherence to standards and promote production of high quality products. In
transporting the products from the farm to the market, there is promotion of use of refrigerated
trucks that are specially designed for this purpose. Capacity development on the part of small and
medium scale farmers is fundamental so that they are well equipped with tools and skills to face
the challenges being imposed by market demands. It is encouraging that some supermarkets are
willing to support their growers for instance Uchumi is providing minimal direct technical
assistance to its preferred growers. The chain conduct audits on their farming practices including
assessment on chemical application and usage and hygiene status. Nairobi hospital also gives
necessary support to its suppliers to enable them produce as per International HACCP Alliance
standards.

 3.7.4 Organization
Large supermarkets prefer procuring from contracted farmers who are normally large-scale
producers rather than small-scale farmers. Hotels and hospitals are also inclined to agreement-
based procurement. From the bulk-buyer’s (hotel, supermarkets, hospitals and groceries)
perspective, this model has several advantages including reliability, enhancing traceability and
minimizing transactional and coordination costs. However, this procurement system pauses a
great threat to small-scale farmers who risk being forced out of the supply chain. Given the
intensifying concentration and diffusion of supermarkets that prefer large-scale supplier for the
reasons enumerated above, supply by small producers to these chains is likely to diminish. This
was the experience from South Africa (Weatherspoon et al 2003). Sustenance of small producers
in the supply chain would be possible with interventions such as donor-supported programmes.
Nevertheless, as a survival strategy, already some small and medium entrepreneurs have started
to form associations or economic groups thereby marketing their products as if from one
entity/grower. By so doing they enjoy economies of scale since some costs like that of transport
are shared among them thereby lowering unit cost. This also is advantageous to buyers since
coordination and transactions cost are lowered when they deal with a group of farmers or their
officials rather than each entrepreneur at time. These forms of arrangements also make it easier to
enforce quality standards.

Taking into account the rapid growth of supermarkets and correspondingly the growth in their
procurement volumes, the contracted-grower system being adopted by the chains might be
strained. Competition for these preferred suppliers (mostly medium and large scale farmers) is
stiffened by procurements by institutions such as hospitals, hotels, schools and government
departments especially department of defence majority of whom also depend on such suppliers.

3.7.5 Finance
Credit advancement by supermarkets, hotels and hospitals is a nightmare in Kenya. However, to

22
support the contracted-farmers strategy a new initiative being taken by some FFV-buyers is to
negotiate with sellers of farm inputs for better prices on behalf of the farmer. This was noted with
Uchumi whereby they negotiate with approved seed stockists for lower prices for preferred
varieties. Such seeds are of top quality and are appropriately treated. The use of such seeds in turn
produces high yields and good quality produce. Negotiation for lower prices by supermarkets
improves access to quality inputs by farmers who may not be financially strong to afford
purchase at the usual high prices.

 The market-demands for good quality products especially fruits and vegetables has great
implications to farmers in terms of finances. To be able to service in this market, farmers may
need to invest in storage and refrigeration facilities which are beyond their capacities currently.

In the dairy sector, the revival of KCC is expected to promote production of milk by small-scale
farmers including provision of transport for the produce from the farm to processing plants. The
benefits will however be realized subject to efficient operations by KCC including prompt
payment to farmers.

This chapter has highlighted the current changes taking place in markets for FFV and milk and
milk products. Most of these changes are market driven hence they are being implemented with a
goal of satisfying consumer needs. This influences decision making by the farmer in all stages
right from choice of farm inputs to use (eg fertilizers, seeds and chemicals), farm management
practices including workers socio-welfare, post harvest practices (handling, storage and
transport). This would require the farmer to be well informed and to be economically empowered.
Considering the decreasing external or donor support, then it would be upon the farmers to decide
on means of survival. A small or medium entrepreneur with all these challenges and as an
individual he would be unable to overcome them. Formation of small and medium entrepreneur
groups would be expected to have a positive impact especially because they would take
advantage of economies of scale.

In conclusion, we have seen that there are various sources of FFV by supermarkets, hotels,
groceries and hospitals. The sources include growers, local brokers, open/wet markets and
importers. Processors supply milk and milk products. The FFV market is characterized mainly by
private rather than public standards. To adhere to the private standards or quality provisions,
certain requirements are necessary including improved production practices, storage, handling
and transport facilities. This has implications to small and medium entrepreneurs, who are
financially and socially poor, marginalized and not well informed. Given the stringent
requirements, their participation in the FFV market is threatened. Formation of producer groups
would be essential for such farmers.




23
4.0  POLICIES IN PLACE TO SUPPORT INCLUSION OF SMALL AND MEDIUM
AGRIBUSINESS FOOD ENTREPRENEURS


4.1     Private sector policies

4.1.1 Technical assistance
Supermarkets, hotels and hospitals rarely offer any technical assistance to small and medium
scale farmers. Only Nairobi hospital and Uchumi supermarket were noted to support farmers and
this was mainly to ensure that farmers produce in accordance with the private standards they set.
Some buyers set production, handling, packaging and transport specifications that the farmers are
meant to abide by. These specifications are in line with world quality assurance trends and
include use of only those pesticides that are not harmful to consumers. Uchumi provide farmers
with a list of restricted or harmful chemicals that they ought not use. Some supermarkets. e.g.
Uchumi, however, do send their technical support teams to visit contracted farmers. The main
agenda in doing this is to conduct audits on their farming practices especially assessment on
chemical application and usage and hygiene status. The supermarkets also impose planting
schedules that are prepared based on market demands or rather in such a way that there will be
supply to meet the demand throughout the year. These specifications are not applicable to non-
producer suppliers.

4.1.2 Finance
Little is done by FFV-buyers to support financially small and medium agribusiness food
entrepreneurs. In this study, only one trader, Corner shop, that gave credit to kick-start the
producers and support them till they accumulated enough working capital after which the trader
withdrew. Supermarkets do not extend credit to producers or firms. As noted above however,
they sometimes negotiate on behalf of the farmers for lower farm-input prices and better quality
inputs for instance seeds. This from farmer’s perspective lowers access costs of the inputs. In
addition to this negotiations, some supermarkets intermediate with credit advancing firms for
loans. This can enable the financially weak farmers invest in expensive facilities like irrigation
and delivery trucks.

Micro-finance schemes may be a good source of finance for small and medium enterprises. In
order to boost investment in the country, Government of Kenya supports establishment of micro-
finance institutions that in turn lend to smallholder producers. Access to credit through these
institutions has of late been very promising. Kenya has 62 micro-finance NGOs whose total client
base is 220,000 (Argwings-Kodhek, 2004). Past experience have shown that small entrepreneurs
do not default repayments.

An arrangement boosting small and medium enterprises is where HCDA oversees and facilitates
contractual arrangements between exporters or Nongovernmental organizations and farmers.
Sometimes an NGO or exporter provides the farmer with farm inputs such as fertilizers, seeds and
pesticides well before planting. Actually, at times the inception of idea on the enterprise a farmer
would engage in comes from an exporter who recommends this to the farmer based on an
identified target market and therefore the decision is market-driven as opposed to production-
driven. Once the inputs are advanced to the farmer and hence a contract signed, the exporter then
recovers the cost after the produce is grown, harvested and sold. This provision of credit in form
of farm inputs before or during production considers future harvest as the collateral. Activities
ranging from production, marketing and payments are defined in a contract between the two
24
parties. Information contained in such a contract includes expected quantities and prices, time of
harvest, person to bear transport and packaging cost or the products, point of rejection, mode and
time of payment. This model of supporting farmers, though applied with the export products,
might also be a good one to adopt for the local markets. In this case, supermarkets, hotels,
hospitals and groceries since they are financially stable may buy inputs, deliver them to poor
smallholders who then sell their produce to these creditors to first recover the loan and pay the
rest to the farmers.


4.1.3 Certification
In Kenya, private certification is rare. Within the horticultural sector, where certification applies,
this is commonly with flowers but not fresh fruits and vegetables. Common bodies involved in
certification though targeting export market are Kenya Flower Council (KFC) and Fresh Produce
Exporters Association of Kenya (FPEAK). Where contracting or agreement-based procurement
for FFV is however practiced, the buyer give guidelines (not really certificates) to there selected
producers in regard to production, handling, transport or marketing. Certification is however
noted with institutions such as Nairobi hospital that in collaboration with International HACCP
Alliance team, inspects growers’ farms, facilities and management practices, and then issues a
certificate to show that the farmer adheres to the expected quality and standards requirements if is
the case.

4.1.4 Use of preferred suppliers
The selection of suppliers by supermarkets, hotels, greengrocers and hospitals is influenced by
factors such as level of trust, traceability feasibility, potential for production in terms of quantity
and quality, prices, proximity, and reliability. Preferred suppliers differ among supermarkets for
instance Uchumi prefer procuring directly from growers of all scales though with a bias to those
that are large and medium size. Among these growers, the supermarket prefers those that have
irrigation facilities to allow for year round production, with mobile phones as to cut on
transactional cost (85% of orders by Uchumi are placed on phone) and, with bank account to
allow for payment through bank transfers. Nakumatt on the other hand prefer being supplied by
its subsidiary company, Fresh n Juici that procures from various suppliers including brokers,
producers and importers. From Nakumatt’s point of view, this arrangement enables one-stop
shopping hence lowering transactional as well as coordination costs. While buyers like corner
shop prefer buyers located nearby to enhance prompt delivery, in contrast, Serena hotels prefer
producers located away from urban centres to minimise risk of contaminated produce such as that
that promoted by growing use of raw sewage. The medium and small size supermarkets prefer
being supplied by brokers, who normally deliver to their doorstep hence possibly saving on
transport cost especially when there is high competition among brokers who for purpose of
maintaining the client (supermarket) opt to bear the cost rather than recover by hiking prices for
the products. Safari Park hotel and Kenyatta National Hospital select their suppliers by a monthly
and annual tendering system respectively. They normally go for or prefer the supplier quoting to
deliver at lowest price though also taking note of other factors such as those enumerated above.


4.4.5 Integrated Pest Management Project
The Integrated Pest Management Project (IPM), managed by ICIPE and funded by United States
Agency for International Development (USAID), started in 2002 arising from the recognition that
about 60,000 smallholder horticultural export producers in Kenya were likely to be forced out of
business due to the emerging and stringent standard requirements for exports destined to the

25
European Union (EU) market. Most of these smallholder farmers were not getting adequate
support from large exporters with regard to enhancing their capacity to comply with EU market
regulations. The underpinning factors for initiating this project included the fact that small-scale
farmers in Kenya frequently apply a wide range of pesticides (up to 12 types), some of which are
not acceptable under the EU regulations; that many of small scale farmers have no alternative to
products already registered; that pesticides as an input accounts for a significant part of the total
cost of production (about 14%) and; that there are serious threats on health associated with
pesticides use.

The project basically focused on training of smallholder farmers starting with areas such as Meru,
Sagana, Machakos and Subukia and targeted to start with two export commodities, French beans
and Okra. This is to enable the small entrepreneurs stay in business and maintain their export
market niche. The key activities to achieve the goal were to train master trainers, develop MRL
compliant IPM production approaches including an IPM manual, and conduct farmer group
training.

Key project activities included training of 10 master trainers, drawn from exporters, government
extension agents and local NGOs and training of 28 farmer groups, involving a total of 795
individual farmers. The project is coming to an end and an end-term evaluation exercise is soon
to be undertaken.


4.2     Public policies and institutions

4.2.1 Ministry of Agriculture
Ministry of agriculture (MOA) is taking an active position in addressing the challenges posed by
new markets. In an effort to develop the horticultural domestic market, under which FFV fall,
several initiatives are being undertaken by the ministry in collaboration with other institutions.
The initiatives include: a) Review of agricultural policy and legislative issues b) Development of
wholesale and retail markets c) Rural roads development d) Standardization and product
development e) Extension f) Improvement of information systems.

Pertaining to agricultural policy, the MOA is formalizing key initiatives into government policy
papers. These involve re-defining roles of private sector and that of the government. Essentially,
there is a move towards more private sector involvement in various agricultural activities and
confining of government’s role to that of providing an enabling environment and public goods.
On matters of Legislation, MOA in collaboration with Tegemeo Institute of Agricultural Policy
and Development (Egerton University) is reviewing the various acts that touch on agriculture
with the aim of developing a unified legislation. This among others is aimed at increasing
efficiency and effectiveness in agricultural sector and the benefits are expected to trickle down to
small and medium agricultural entrepreneurs.

In regard to development of wholesale markets, a stalled KFW-funded wholesale markets
development project is being revisited with the backing of MOA. The project had been started
with the aim of modernizing wholesale markets in Mombasa (Kongowea), Nairobi (Wakulima),
Eldoret, Nakuru and Kisumu. By the time the project stalled, only one wholesale market,
Kongowea had been completed.

In an attempt to improve on market information the MOA through Division of horticulture is in
the process of installing internet services to facilitate information gathering. The Division is
26
working in collaboration with the Kenya Agricultural Commodity Exchange Ltd (KACE) to
develop market information kiosks similar to what is being done for the cereals sub-sector.

Now that there are external forces pushing for adoption of eternally introduced standards or
requirements for export fresh fruits and vegetables, the government in collaboration with relevant
stakeholders is training its extension officers on the requirements. The extension officers in turn
train farmers and in so doing the farmers are able to sell their produce to external market such as
Europe. Some of these products are diverted to local markets and sold to retailers for instance the
Kenya Horticultural Exporters limited and East African Growers limited who are exporters also
sell to Uchumi and Nakumatt supermarkets.

The MOA supports initiatives that endeavour to: Improving product quality at all levels of the
market chain; Promoting the marketing of more refined product by training traders to transport
just what is meant for consumption to avoid too much of garbage in market places. For example
bananas are sent to the market as whole bunches while cabbages also get to the market place with
all the inedible leaves; Providing market information to farmers, traders and consumers;
Promoting value addition through processing; Promoting market linkages between farmers and
traders to reduce the excessive powers of broker cartels; Promoting awareness on the nutritional
value of fruits and vegetables through various electronic and press media channels and;
Promoting linkages of the horticultural market with the animal feeds industry


4.2.2 Pest Control Products Board
Pests Control Products Board (PCPB) is the main organ of Government that is charged with the
responsibility of registering and regulating the use and handling of pesticides in Kenya. These
pesticides include those used are used in dairy farming as well as in production of fresh fruits and
vegetables. The pesticides referred to here are: Herbicides (for weed control), Fungicides (for
control of fungal diseases), Insecticides (for control of insects-related problems), Acaricides (for
control of parasitic-related problems) and Growth regulators (which boost or deter plant growth).
PCPB was formed by act of parliament, CAP 346. According to the act, no one is allowed to use
any pesticide in Kenya before it is registered by PCPB as safe to use. PCPB oversees handling,
advertising, manufacture and storage of pesticides. The board issues a certificate to an applicant if
it is satisfied of the safety, efficacy, quality and economic value of the pest control products to be
traded. The organization also undertakes training of stockists.

Main challenge facing the board is lack of capacity to enforce its mandated functions of
registering, surveillance, testing and enforcement of compliance. This is mainly due to lack of
adequate personnel, transport facilities, lack of laboratories or testing facilities in many parts of
the country. Due to these limitations, PCPB have been using other organizations such as KARI,
University of Nairobi and about 10 other private sector organizations including Kakuzi, Dudu
Tech, Delmonte, BAT and Finlay to assist in testing of pesticides in some parts of the country.

The performance of this board would have implications to the success of small and medium size
entrepreneurs. For instance if the board is weak in regulating packaging and advertising of
pesticides, then unscrupulous businessmen would manufacture substandard pesticides and to
create demand they would advertise them in a way that is deceptive, misleading or in a manner
that is likely to create erroneous impression regarding the pesticides’ character, value, quality and
composition. This in turn when bought and used by the poor entrepreneurs would impoverish
them all the more for it will not be effective yet it was obtained at a cost.

27
4.2.3 The Dairy Board of Kenya
The Dairy Board of Kenya was formed under an act of parliament, CAP 336 with its main
functions being: a) To regulate, organize and develop the efficient production, marketing,
distribution and supply of dairy produce, having regard to the various types of dairy. b) To
promote market research in relation to dairy produce c) To permit the greatest possible degree of
private enterprise in the production, processing and sale of dairy produce, consistent with the
efficiency of the producer and the interests of other producers and of consumers. d) To ensure the
adoption of measures and practices designed to promote greater efficiency in the dairy industry.

Given the above functions of the Board, it is clear that if it were efficient and effective in its
undertakings, then farmers and other entrepreneurs in dairy industry would really benefit. For
instance higher margins that would come by due to promotion of market research of dairy
produce would be expected to translate to higher incomes and hence alleviation of poverty in
rural household, the main producers of milk in Kenya. Such profits would be maximized in
farmer who have formed groups and doing direct marketing and possibly processing hence
scooping margins that would otherwise be taken by middlemen.


4.2.4 Kenya Plant Health Inspectorate Service
The Kenya Plant Health Inspectorate Service (KEPHIS) is a State Corporation established in
October 1996. The Corporation's activities and services involve offering inspectorate services on
all matters related to plant health and quality control of agricultural inputs and produce. The
specific activities of KEPHIS include: Certification of the quality of seeds and fertilizers; testing
and monitoring the presence of harmful residual agro-chemicals on agricultural produce, soils and
water systems; Coordination of the release of superior and well adapted varieties/cultivars to the
farming community; protecting the rights of the breeders/discoverers of new plant varieties
through grant of rights to the owners of such varieties and registering them; preventing
introduction into the country of harmful foreign weeds, pests and diseases through adherence to
strict quarantine regulations and procedures; inspecting and grading agricultural produce for
import and export to ensure that they are of high and acceptable quality; implementing the
national policy on the introduction and use of genetically modified plant species, insects and
micro-organisms in Kenya.

The operations of KEPHIS have ramifications on the performance of producers of fresh fruits and
vegetables especially the small and medium entrepreneurs in various ways. First, if farm inputs
such as seeds and fertilizers are not certified, then they have a higher probability of being of
inferior quality and ineffective and therefore farmers would not buy then. Therefore, effective
certification of quality seeds and fertilizers by KEPHIS would result in higher yield by farmers
who use them and if this fetch high price would translate to higher incomes. Again the improved
productivity would boost economic growth.

Second, effective testing and monitoring of the presence of harmful residual agro-chemicals on
agricultural produce, soils and water systems would give assurance to consumers on the good
quality and hygiene of fresh fruits and vegetables thus creating demand for these products. This
would mean assurance or availability of market for these products.


4.2.5 Kenya Bureau of Standards
Kenya Bureau of Standards Kenya Bureau of Standards (KEBS) is the national standards body in

28
the country, it was formed under the standards act CAP 496 and its functions include:
    a) Promoting standardization in industries and commerce
    b) Providing facilities for the testing and calibration of precision estimates, gauges and
        scientific apparatus
    c) Issuing of certification
    d) Providing facilities for examination and testing of commodities in terms of manner in
        which they were manufactured, produced, processed or treated.
    e) Preparing, framing, modifying specifications and codes of practice
    f) Encouraging and undertaking educational works in connection to standardization
    g) Providing for the testing of locally manufactures and imported commodities with the
        view of determining whether they comply with provision of this act (standards of quality)

The task of setting standards is done by, Standards Division of KEBS. Standards applicable to a
particular sector are derived in either of two main ways; a) Borrowing other countries’ standards
but adjusting to suit Kenyan context b) consulting with stakeholders in the sector thereby coming
with workable standards. KEBS sets the Minimum National Requirements (MNRs) that are then
communicated to stakeholders. For most products, standards may include clear labelling and
indications of dates of manufacture and expiry. A catalogue detailing all the set standards for
different products in various sectors is available at KEBS’ library.

The food-processing sector has standards for processed foods, fruit juices and canned fruits
amongst others. Implementation of standards is the task of the Quality Assurance Division of
KEBS. They actually go out to outlets or at any stage along the marketing channel and do random
and scheduled checks on compliance by manufacturers. The Standards Act empowers KEBS to
prosecute manufacturers for non-compliance. The standards set by KEBS are normally on
manufactured goods and therefore there is little contact with a farmer unless he is a farmer-cum-
manufacturer or processor. Currently KEBS have not yet developed local standards for either
genetically modified foods or organically produced foods. However, there are plans to formulate
such standards. KEBS is working with Ministry of Agriculture in training farmers on how to go
about in satisfying international standards required to market FFV in EU countries.

KEBS issues a certificate to the manufacturers who adhere to the set standards. KEBS also does
ISO 9000 certification for local companies at a fee. There is also the Diamond Mark certification
that is given to manufacturers on request and at an annual fee of Kshs. 55,000 (about USD 700).
This is a voluntary scheme that is tailored to give customers double assurance on the quality of
the products so certified.

With respect to horticulture, KEBS is involved in setting standards for quality of inputs
(fertilizers and chemicals) and packaging materials. For the quality of inputs the issues pertain to
maximum residue levels (MRLs) in consumable farm products, while for packaging their role is
in quality/strength, size, colours and hygienic conditions of packaging materials. With regard to
MRLs especially for export products, KEBS provide information on code of practice for
horticultural farmers through HCDA. Such information is contained in a catalogue published
biannually. The catalogue defines standards in regard to handling, grading, packaging and
transportation and covers a wide range of fresh and processed fruits and vegetables.


4.2.6 Research Institutions
It is through research that new technologies are developed and constraints facing various
stakeholders in agriculture investigated so that an appropriate course of action is taken. There are
29
many institutions undertaking research on agricultural development, covering a wide spectrum of
issues from research on appropriate farm inputs, production, marketing and even policy in regard
to both livestock and crops. The Kenyan institutions taking fresh fruits and vegetables one of their
main agenda for research include: Kenya Agricultural Research Institute (KARI), Tegemeo
Institute, Egerton University, Jomo Kenyatta University of Agriculture and Technology (JKUAT)
and University of Nairobi. On the other hand, those with main agenda as livestock research
including dairy are International Livestock Research Institute (ILRI) and Kenya Tripanosomiasis
Research Institute (KETRI). International Centre for Insect Physiology and Ecology (ICIPE)
deals with both livestock and crop research. ICIPE in collaboration with other institutions like
HCDA have been substantially involved in pushing for programs that would empower farmers for
example through training on EUREPGAP requirements hence enable them continue marketing
FFV in Europe.

Some of the new technologies developed by research institutions especially those without
negative externalities hence not much of public goods would be delivered by private sector.
Examples of such technologies are ECF vaccine being developed by ILRI to promote dairy
productivity and the higher yielding genetically modified bananas developed by JKUAT. With
their objective being to maximize profits, the private sector might deliver at high prices
particularly if they are few players and thus low competition. In this case, small and medium
entrepreneurs would not afford the technologies, due to the high price. However, members of
farmer groups though poor will have access to these expensive technologies due to reduced unit
cost arising from shared transport costs and discounts due to bulk purchase among others.

4.2.7 Capacity building of small and medium enterprises
It is important that skills and knowledge are inculcated to small and medium entrepreneurs. This
will promote use of new technologies among others. The main parties involved in capacity
building of small and medium entrepreneurs are Ministry of health, universities and colleges.
Horticultural Crops Development Authority, the body regulating horticultural sector also plays
this role to some degree.

4.2.8 Technical assistance
Technical assistance to small and medium enterprises is essential. This would enhance adoption
of new technologies by relevant stakeholders as well as enlighten them on their use. In connection
to production of fresh fruits and vegetables, the public bodies playing this role include Ministry of
Agriculture and HCDA. The Horticulture Development Center (HDC) funded by USAID is
involved in a number of areas to support smallholder farmers. HDC has a number of agronomists
in the country involved with disseminating best agronomic practices and introducing new crops
into the market. HDC has also a component that encourages production for domestic
consumption. Dairy Board of Kenya gives technical assistance related to dairy industry.


4.2.9 Financing
Financing is a major constraint to success of small-scale farmers especially due to lack of
collateral required for access to credit. Very few organizations have policies in place that ensure
farmers without a collateral access credit.
With respect to dairy farmers, the KDB may make loans available or grant some subsidies to
producers or manufacturers. This provided for in the dairy industry act.

In general, in production and marketing of FFV and dairy products, there are minimal policies,

30
both private and public, that support small and medium entrepreneurs. Bearing in mind the recent
changes in terms of liberalization, rationalization, and globalization, these entrepreneurs are
exposed to other stronger competitors. These competitors have more resources than an individual
small-scale entrepreneur and therefore are likely to dominate the market. Formation of producer
groups would among others increase small-scale farmer’s bargaining power, market participation,
improve his access to credit, information, social capital, and farm inputs.




31
5.0     CRITICAL ISSUES AND CHALLENGES FOR THE FUTURE

Until recent past, there were only a few supermarkets in Kenya and these were located only in big
towns and cities and targeted only the rich class of people. With liberalization, privatisation, and
globalization however, many more supermarkets, some located even in small towns and targeting
middle and low-income earners have emerged. This is an indication that supermarkets are fast
expanding from high class-markets to middle class and even extending further to food markets of
the poor. Share of supermarkets market share in Kenya has been estimated at 18% (Neven and
Reardon, 2004) and projected to be between 10-20% in 10 years time (Tschirley and Ayieko,
2004). This will provide competition giving way to very competitive prices and this happen, it
would have positive impact on the poor by making commodities affordable (would also increase
size of formal economy and develop labour markets). However, considering the emerging chains’
preferred supplier procurement system for FFV, the poor-cum-producers may be affected
negatively as market for their produce would be threatened. Additionally, the small agri-food
retailers (normally the poor) are threatened. In designing policies or strategies aimed at alleviating
poverty, creating employment and promoting food security in the country, it is important that
policy makers consider these new challenges facing the poor.

As the supermarkets in the highest tier, Nakumatt and Uchumi, eventually tighten their demands
on consistency in volume and quality, smallholder producers and under-capitalized brokers will
face tough competition from larger producers and traders that have financial base to sustain these
demands. Many bulk-buyers (supermarkets, hotels and hospitals) of FFV and milk products are
increasingly looking for supplier channels that ensure quality standards are maintained, produce
can be traced if need arises, a steady supply of expected volume all year round, and prompt
deliveries. The direct sourcing from smallholder farmer may dwindle due to these stringent
demands and also the spatial scattered nature of these producers that raise both financial and
economic costs especially in respect to transport and time. It is therefore clear that for smallholder
producers to survive in the emerging structure they have to meet quality standards and also
organize themselves into producer groups that are able to enter into enforceable legal contracts as
entities with supermarkets. Otherwise if the smallholder farmer would continue selling in urban
market, he would have to target channels such as small shops and wet markets. Though
requirements by these non-supermarkets are less stringent, they are not stagnant and as may be
inferred from experiences from other parts of the world, small shops are likely to aggregate to
form procurement clubs while wet markets are likely to improve on quality and hygiene (Neven
and Reardon, 2004). Already in Kenya, plans are underway to improve on operations in
wholesale markets. As indicated earlier in this study, a formally stalled project that was targeting
modernization of wholesale markets in all the three cities and two other big towns in the country
is being revitalized. The smallholder farmer therefore will have to be prepared to deal with these
challenges.

Given the rapidly growing new market for agri-food products that is laying a lot of emphasis on
the need for traceability, quality and standards aspects of the products, it is the high time that
farmers, processors and distributors become more perceptive to these requirements. It is
unfortunate that most of these entrepreneurs lack knowledge and skills on these issues. There is
need for informational, educational and communication activities to equip the farmers especially
the small and medium ones to be able to face the new challenges brought about by the changes in
the market. This may be done by use of private or public extension officers. It is important that
the choice of enterprises they engage in be market-demand driven. The traditional approach used
in making choice of enterprises where production decisions were distinct from market decisions
or in other words the philosophy of ―let’s- find-markets-for-what we produce,‖ is no longer an
32
appropriate approach to service the emerging dynamic markets. Producers would be required to
identify well in advance the market or the buyers and their requirements. For those targeting,
supermarkets, hotel and hospitals, this may be done through significant interaction between
procurement personnel and the producers. Interaction among actors in the agri-food supply chain
including seed companies, packaging companies and financial institutions would also be
important. A shift from production-driven to market-driven strategies would also make Kenyan
produce markets relevant and competitive globally.

A focus on only the demand side factors may not achieve the expected cordial relationship
between buyers and sellers or producers. It is therefore necessary to consider also the supply side
factors. Specific constraints that are hindering producers and processors from meeting the market-
requirements should be identified and subsequently resolved. The areas to mull over are such as
production and post-harvest technologies including commercial practices of the farms or firms,
seeds and other farm inputs, cold chains, packaging, logistics, crop calendars and certification for
particular attributes such as food safety. These supply side activities should be meshed with
iterations and feedback between buyers and sellers until both parties are satisfied and the
relationship is sustainable.

Kenya is generally characterized by poor roads network in high potential areas where FFV and
dairy farming activities take place. This hampers the efficient delivery of the produce to market.
The rough feeder roads in these areas raise the maintenance cost of the vehicles. It is essential that
the deteriorating conditions of these roads be checked. This would lower cost of delivery and
ensure that the high quality of products is maintained. The delivery will also be faster thereby
promoting availability of fresh products in the market, especially now that access to refrigerated
trucks is rarely possible due to high costs. With demarcation of roles among donors, Government
and private sector becoming blurred or with these stakeholders showing greater collaboration, it
would be expected that the improvement of the roads would be achieved through a concerted
effort among all the stakeholders. Supermarkets have demonstrated success of private sector
participation when they engage in community development programmes that are envisaged to
have a return on investment.

By and large, the FFV markets has been characterized by:
    a) Lack of adequate and timely relevant market information
    b) Lack of organized market arrangements among small farmers and traders
    c) Poor quality of products due to lack of the right seed or planting material, poor road and
        marketing facilities, and post harvest handling skills
    d) High congestion in main urban market centers
    e) Poor and unhygienic conditions in most market centers
    f) Lack of level playing ground in the market place due to the strong broker cartels that tend
        to manipulate supplies and prices for their own individual benefits.
    g) High fluctuation of product supply within and between seasons (due to lack of irrigation
        facilities which is vital for calenderization of production, poor distribution network, lack
        of information, strong market cartels among others)
    h) Poor distribution network leading to high mismatch between demand and supply.
    i) Lack of awareness on the nutritional value of fruits and vegetables that in most rural
        areas are perceived as supplementary to the main diet commonly comprising staples.
        Even in urban areas, this perception seems to be high as indicated in the urban diet survey
        (2003), which indicated that fruits and vegetables accounted for only 11% of food
        budget.
    j) Low purchasing power among the majority of Kenyan consumers. The erosion of
33
        purchasing power has been exacerbated by the high rate of population growth that far
        much outweigh economic growth.
     k) High price of produce mainly due to high costs of production, high transport costs, and
        long market chains involving a large number of brokers
     l) Underdeveloped processing capacity (necessary for diversification of products and off-
        loading excess supplies during peak seasons)
     m) Poor quality of products due to poor handling techniques
     n) Lack of reliable and timely market information.

The sluggish sprouting of economic producer-groups or associations is an encouraging move
since its one of the strategies of overcoming the challenges emanating from the markets through
reduced unit costs and enhancing access to credit. It is imperative, however, that the pace be
accelerated. Producer organizations improve farmer’s bargaining power, access to information
and are good vehicles for rural poverty alleviation. These organizations will enable small and
medium entrepreneurs benefit from economies of scale when they operate collectively rather than
singly and from buyer’s perspective would lower transactional and procurement-coordination
costs. Also, where they mobilize savings, this may be advanced to members. The heavy financial
requirement in developing infrastructural facilities required for successful agri-food industry is a
great impediment. This may be conquered by establishing a good linkage with donors, NGOs or
government projects that are improving roads, installing irrigation, rural electrification, building
green houses, and pack houses, or supporting and participating in efforts to improve certification
and food safety and standards system. This would promote local and regional economic
competitiveness and growth in trade.

Importation of fresh fruits and vegetables is a common practice these days and is expected to
continue especially considering the newly created East African trading bloc or East African
Union. Kenyan supermarkets are selling agri-foods from other countries for example bananas and
pineapples from Uganda, oranges from South Africa and onions from Tanzania. There is also
importation of milk but the powdered form. Kenya also does export to other countries for
example tomatoes to Uganda. This is a pointer that what was in the past considered global has
become local. With this scenario that consequently makes the distinction between local and
export markets blurred, local producers must contend with regional and global competitors in
their own backyard.

A growing demand for organically produced commodities is noted in Kenya especially with some
supermarkets and institutions. Safari Park hotel, Corner shop and Uchumi supermarket have a
group of customers who prefer organically produced FFV. This is in line with global trends where
there are increasing sales of organic foods and also increasing production for instance in countries
like Italy and USA (Ferguson 2004). To supply this emerging market, farmers would have to
increase production of such produce. To distinguish such foodstuffs from that inorganically
produced, there is greater interest in documentation of production practices for fresh fruits and
vegetables.

Because of the perishability and seasonal nature of fresh fruits and vegetables, prices and supplies
fluctuate rapidly from day to day, and in some countries even from hour to hour as noted in USA
(Ferguson 2004). This discourages some retailers and wholesalers from adopting contract-method
that would tie them to the agreed price or deny them revenue from possible higher prices. To
facilitate an efficient marketing system however, fast, timely and impartial reporting of supply,
price, and market conditions would be fundamental. It is well known that competitive market
systems require sellers and buyers to be well informed about supply, demand and prices. This
34
information may be gathered through confidential telephone and face-to-face interviews that may
be carried out by personnel skilled in marketing. The information should be impartial, current,
and reliable. It may be disseminated by newspapers, radio, television, or Internet and be made
available on a subscription basis in printed reports that may be issued daily, weekly, monthly, or
annually to assist industry members in making marketing decisions. Wholesale market reports on
fruits and vegetables may be issued daily based on information gathered at major towns.

If experiences from other parts of the world, that have shown small entrepreneurs being forced
out of the market (due to changes in the agri-food markets such as those currently taking place
locally), are indicative of what is likely to happen in Kenya, there is a need for policies that will
ensure the sustainability of smallholder producers and SMEs that depend on these systems for
their livelihood. Given the market dynamism, partnership among public sector, private sector,
NGOs and donors is essential to ensure survival of small and medium entrepreneurs.




35
6.0       Policy Conclusions

The key policy conclusions drawn from this study are that:

         Private and public resources should be allocated fairly along the competing ends of
          preparing farmers to produce for supermarkets and similar non-supermarkets institutions
          like hospitals and hotels. At the same time emphasize must be laid on improving the
          conditions of the traditional markets where the bulk of the FFV are marketed and
          consumed. Investment in areas such as improving the physical infrastructure in markets
          and improving hygiene.

         Public investment should also be geared towards improving the rural infrastructure where
          FFV and dairy farming activities take place. This will facilitate the efficient delivery of
          the produce to market and thereby lower cost of delivery and ensure that the high quality
          of products is maintained. The delivery will also be faster thereby promoting availability
          of fresh products in the market, especially now that access to refrigerated trucks is rarely
          possible due to high costs.
         Facilitating the development of private sector set grades and standards and methods of
          enforcing them to create incentives for production of quality FFV and dairy. Although the
          best quality standards are private sector set, the public sector has a role of regulating and
          legislating the grades and standards.
         Facilitating the formation of stakeholder led and managed producer organizations to raise
          the necessary social capital to organize for the production of the markets. Such producer
          organizations are either totally lacking or if the exists, they are characterized by poorly
          governance and lack of corporate image.
         Provision of market information in collaboration with the private sectors particularly the
          output market intermediaries.




36
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