Case Study: Food Retail Industry Challenge Fund – A private sector-led food innovation initiative infoD v INNOVATION & ENTREPRENEURSHIP Case Study: Food Retail Industry Challenge Fund – A private sector-led food innovation initiative © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Website: www.infodev.org Email: info@infodev.org Twitter: @infoDev Facebook: /infoDevWBG This work is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the donors of infoDev, the World Bank Group, its Board of Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions: This work is available under the Creative Commons Attribution 3.0 Unported license (CC BY 3.0) http://creativecommons.org/ licenses/by/3.0. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution: Please cite the work as follows: “Case Study: Food Retail Industry Challenge Fund – A private sector-led food innovation initiative.” 2018. Washington, DC: The World Bank Group. License: Creative Commons Attribution CC BY 3.0 Photo Credits: Cover Photo: Arne Hoel / World Bank Case Study: Food Retail Industry Challenge Fund – A private sector-led food innovation initiative infoD v INNOVATION & ENTREPRENEURSHIP Case Study: Food Retail Industry Challenge Fund – A private sector-led food innovation initiative Acknowledgements This case study was developed by the infoDev and Industry Solutions Units of the Finance, Competitiveness & Innovation Global Practice of the World Bank Group with technical support from Agland Investment Services and J.E. Austin Associates. Other contributors include the International Finance Corporation and the Agriculture Global Practice of the World Bank Group. The study team included Anupa A Pant, Blair Edward Lapres, Ellen Olafsen, Loraine Ronchi, and Peter A Cook of the Finance, Competitiveness & Innovation Global Practice, and William Mott, Martin Webber, Stephanie Haile, Madeleine Nelson, William Scott, Gareth Smail, Donald M. Taylor, and Laya Hess-Skinner of a consortium of Agland Investment Services and J.E. Austin Associates. The team received guidance from a decision review panel chaired by Ganesh Rasagam and consisting of Dietrich Fischer, Milaine Rossanaly, and Christopher Ian Brett. The paper benefited from discussions with and guidance from numerous World Bank colleagues, Bradford Roberts, Parmesh Shah, Selchuk Tanatar, Bas Rozemuller, and Sarah Ockman. This study was made possible through the support from the governments of Norway, Sweden, Finland, and the UK’s Department for International Development (DFID). Table of Contents Synopsis 1 Introduction to the Food Retail Industry Challenge Fund (Frich) 1 Frich Fund and Lead Firm Assumptions 2 FRICH Fund Assumptions 2 Lead Firm Assumptions 3 Linkage Strategies And Results 4 Intersnack Group and Equatorial Nut Processors 4 Project Results: Intersnack Group and Equatorial Nut Processors 5 Marks & Spencer (M&S) and Iriaini Tea Factory Co. LTD. 6 Fullwell Mill Ltd and Fruits of the Nile (FON) 7 Project Results: Fullwell Mill Ltd and Fruits of the Nile (FON) 9 Overall Project Results: FRICH Grant Fund 9 1. An open and competitive process will elicit the most promising innovations. 9 2. The grantees will test new and innovative projects. 9 3. Commercially viable innovations (or variants) are scaled up by grantees and then replicated by others. 10 4. Increased market access to the United Kingdom and EU leads to increased incomes for poor African producers. 10 5. An increase in income leads to a decrease in multi-dimensional poverty. 10 Lessons Learned 10 Lesson 1: Project Duration & Funding. 10 Lesson 2: Role of Public Sector. 11 Lesson 3: Project Objectives and Commercial Focus. 11 Lesson 4: Commodity vs. Consumer Product. 11 Lesson 5: Improved Quality and Quantity of Raw Material. 12 Lesson 6: Commercial Expertise. 12 Lesson 7: Regulation and Competitiveness. 12 Lesson 8: Product origin and traceability. 12 Lesson 9: Export vs. Local Markets. 12 Bibliography 14 1 Synopsis Introduction to This is a case study, not of a single business- the Food Retail Industry Challenge to-business linkage, but of a United Kingdom Department for International Development (DFID) initiated challenge fund with the objective of providing financial incentives to private sector U.K./EU food retailers and processors to source and import African food products. The Fund (Frich) Food Retail Industry Challenge Fund (FRICH), operated over five years, initiated four calls The United Kingdom Department for International for proposals and made 25 matching grants. Development (DFID) initiated the Food Retail Industry Most of the cases focused on increasing crop Challenge Fund (FRICH) to incentivize the U.K. food production and raising incomes for farmers, industry to seek and import more food products from but several involved improving the capacity of Africa. FRICH was a £7.4 million (US$10,500,000) small and medium enterprises (SMEs) to supply challenge fund launched in July 2008 and closed in product to the lead firm. September 2014. The project was selected as a case Three grants involving retailers and processors study because of its focus on mobilizing innovative and SME agro-processors are discussed in private sector food and retail companies to serve as lead this case. The examples provide insights into firms for establishing a supply chain to reach small and the interests, motivations, and abilities of medium enterprises (SMEs) and farmers in Africa. the private sector to implement linkages with DFID sees the private sector playing an increasing African agro-processing SMEs for new sources role in economic development. In a recent speech, the of raw materials and finished products for U.K. Secretary of State for International Development export to U.K. and EU markets. The examples commented that “working with private sector involve a diverse group of lead firms, including partners—the new development players—to maximize an established retailer, a food ingredients the development impact”1 is one of three key pillars processor, and a snack food processor and of DFID’s approach to economic development. DFID’s marketer. Lessons learned are presented both Private Sector Department oversaw FRICH, and on the use of a challenge fund to create agro- the international economic consulting firm Nathan processor innovation and linkages to export Associates London Ltd. was responsible for the fund’s markets, and on how the private sector worked management and implementation, including:2 with African SMEs. • fund design, marketing, monitoring and evaluation, and contracting; • project evaluation, management, and supervision; • value chain and market analysis; • communication of lessons learned; and • pre-financing of grants and fund financial management. 1 Justine Greening, “Frontiers in Development - economic growth is key” (speech, Washington, D.C., September 22, 2014), Wired Gov, http://www. wired-gov.net/wg/news.nsf/articles/justine+Greening+Frontiers+in+Devel opment+Economic+Growth+is+key+23092014071000?open 2 Mark Thomas, Director of Nathan Associates (UK), in discussion with the author. 2 The fund was initially established for U.K. retailers and and smoothies, flowers, tilapia fish, beef, baobab, palm food manufacturers as a pilot project that grew out of oil, groundnuts, and vanilla. The majority of selected an earlier program between the U.K. food industry and projects focused on increasing the production of specific DFID. The objective was to test how small grants could crops or introducing new crops in accordance with the stimulate innovative ways in which private sector-led fund’s objective of raising farmer incomes. Five of the sourcing of food and beverage products could provide 25 projects involved working with small and midsize opportunities for small-scale African producers and food processing facilities. processors. When appropriate, U.K./EU grantees and their African partners were expected to contribute matching funds that were equal to the amount of the award, although contributions were not required from African partners. FRICH Fund In its final two years, the fund was expanded to EU companies. In order to qualify for a grant, an applicant was required to: and Lead Firm • Identify as a private sector enterprise—either a retailer Assumptions or a retail brand with an established share of the U.K. market or other European markets—or propose a FRICH Fund Assumptions partnership with such an enterprise. Five basic DFID assumptions guided the formation of the • Demonstrate financial and technical capacity and be fund and the issuance of grants5: willing to contribute at least 50 percent of project costs. • Propose testing of an innovative concept or business 1. An open and competitive process will elicit the model, or scale-up of a successful pilot project. most promising innovations. The designers of the (Business finance was not eligible.) fund assumed that an open and competitive process would reveal some of the best and most innovative • Demonstrate potential for commercial sustainability. projects. The open nature of the competition was • Identify the key U.K./EU or African firms or institutions emphasized because there was a sensitivity to involved in the project and their roles, and demonstrate disbursing public funds to large companies that, on how poor African farmers, farm workers, or small-scale the surface, would not need grants to further their entrepreneurs were likely to sustainably improve their business interests. livelihoods as a result of the success of the project.3 2. The grantees will test new and innovative projects. The availability of matching grants would stimulate The selection process required two steps: 1) Presenting grantees to consider new ideas and approaches that a concept document, and 2) if accepted, a more detailed were considered too risky or expensive to pursue plan and budget. The selection was made by a steering on their own. In addition, the grants would enable committee made up of both public and private sector grantees to test the commercial viability of the members. innovation. Over six years, the fund held four competitive calls for 3. Commercially viable innovations (or variants) are proposals, funding 25 projects in 11 countries4. The scaled up by grantees and then replicated by others. maximum award size was £250,000 (US$333,000). Fund designers assumed that successful projects The projects covered a range of products, including tea, would be replicated through the demonstration coffee, chilies, cocoa, fruits and vegetables, fruit juices effect. The fund targeted profit-oriented businesses (lead firms) that sought an edge in the competitive marketplace by finding new products or processes. 3 U.K. Department for International Development, “UK helps farmers in Africa trade their way out of poverty,” press release, October 24, Excerpts from a project design memo indicated 2012. 4 Kenya, Democratic Republic of Congo, Malawi, Rwanda, São Tomé 5 Winters, Mark and Rajan Soni, “Strategic Review of the Food and Principé, Ghana, Uganda, Senegal, Namibia, Zimbabwe, and and Retail Industry Challenge Fund (FRICH),” Department for Ethiopia International Development, November 2014. 3 Brief Description Linkage Motivation for Linkage Motivation Lead Firm SME of Project Scope Lead Firm for SME Develop new sources of Develop a new source Equatorial raw material; particularly of aflatoxin-free Develop new supplies of Intersnack Nut groundnuts from Africa groundnuts from Africa groundnuts for export and Group Processors based SMEs, as well as for processed snack raw material for domestic (Dutch) (Kenya) improve the quality of foods developed for the markets sourced raw material. UK/EU markets • Move from commodity Source a finished and production to value-added Develop a new Iriaini Tea branded point of origin Marks & Factory product which increases product that further • Obtain technical skills Spencer incorporates social from partner Co. LTD. value-added at source and (UK) (Kenya) generates a product which responsibility programs • Leverage market linkages into business strategy and commercial know- can be certified as Fair Trade. how from partner Source dried fruit Expand company product products - a raw Expand dried fruit sales to FullWell Fruits of offerings of dried fruit – both material for the existing buyers, by testing Mill Ltd the Nile for buyers of raw material/ company’s sales to and drying new varieties (UK) (Uganda) ingredients and for use in food processors and for (berries) proprietary snack bars own label snack bars that “FRICH will provide relatively small amounts 5. An increase in income leads to a decrease in to test new ideas that, if successful, could provide multidimensional poverty. Multidimensional business models with a much wider applicability poverty was understood to mean poverty beyond across Africa.”6 “Success will be measured in producer just incomes, including health, education, and incomes and in increased market access for low- living standards. This was a bold objective for a income, rural households. But given the limited modest investment in a new commercial project, funds and pilot nature of FRICH, real success will be but increasing the income of the rural poor was an measured in the replication of FRIC-inspired business important foundation for the project.8 models across Africa.”7 Presumably, success for the lead firms would be measured in commercial sustainability. Lead Firm Assumptions 4. Increased market access to the United Kingdom and From the group of 25 projects, three lead firms were European Union (EU) leads to increased incomes for selected for this case study because of the important poor African producers. Increased access to higher- role SME agro-processing played within their supply priced markets was expected to translate into higher chains. The companies are Intersnack Group, a leading prices for small and midsize producers. The fund Dutch snack food company; Marks & Spencer, a particularly emphasized that projects should increase large U.K.-based retailer; and Fullwell Mill Ltd, a U.K.- the incomes of the rural poor. based food ingredients company. The background and 6 U.K. Department for International Development, Food Retail motivation of each lead firm and their relationship with Industry Challenge Fund-FRICH Project Memorandum (November their SME partners are summarized below. 2007), 7. 7 U.K. Department for International Development, Project Memorandum, 3. 8 Summarized from Winters (2014). 4 The three lead firms shared a general interest in Intersnack’s competitive strategy was to actively seek diversifying and expanding their sources of raw new sources of product that could pass the increasingly material, and found FRICH to be a convenient vehicle strict U.K./EU quality and phytosanitary standards, for testing new raw material sourcing strategies, as particularly for groundnut supplies from Africa. In this well as initiating and creating relationships with SME context, the company has initiated raw material sourcing suppliers. Intersnack and Marks & Spencer selected projects in Kenya, Burkina-Faso, Benin, Ghana, Malawi, well-established partners: Kenyan midsize processors and the Ivory Coast. of nuts (Equatorial) and tea (Iriaini). In contrast, Fullwell Mill partnered with a small,9 village-level processor of To carry out its FRICH proposal, Intersnack partnered with dried fruit. Equatorial Nut, an established Kenyan nut processing firm, to develop a source of aflatoxin-free groundnuts. If the project proved successful, Equatorial Nut would become Linkage Strategies And Results a long-term supplier of groundnuts for Intersnack. Before The three companies developed unique strategies for the launch of the project, Equatorial Nut’s main processed sourcing crops and food products from Africa. The FRICH product was macadamia nuts—which the processor had fund managers found their strategies compelling, and supplied to Intersnack in the past—and its supply of selected them for matching funds. groundnuts was imported. Equatorial Nut was searching for other nuts that it could process and market, and the prospect of a local source for groundnuts, particularly Intersnack Group and Equatorial groundnuts that could be exported, was attractive. Nut Processors In its partnership with Intersnack, Equatorial Nut Intersnack has a strategic objective to increase the Processors was expected to collect, process, and export quality and quantity of tree and groundnuts sourced groundnuts from local sources. (This represented a shift from Africa by working with local SMEs. The company from the company’s previous role of packaging and has found that by improving processing and grading at marketing groundnuts imported from Malawi to service the source, they are able to reduce processing expenses the local market.) The company would support farmers in their EU factories and reduce the amount of produce by collecting produce from farms; providing reliable and that does not meet their specifications. swift payment using M-Pesa, a mobile phone-based money transfer service; and sharing access to local storage and Groundnuts are an important raw material for processing facilities (see Figure 2). Intersnack, and there is concern within the company that global sources of aflatoxin-free groundnuts10 are becoming scarce or unreliable. According to Wim FIGURE 2: EQUATORIAL NUT Schipper, Intersnack’s Procurement Director for GROUNDNUT SUPPLIER Africa, the United States is an important source of groundnuts, but any change in U.S. agricultural policy, such as a reduction in subsidies, could reduce groundnut production and exports. Africa also has a history of groundnut production, but in recent years, exports to the United Kingdom and EU have been limited—partially due to control of aflatoxin, which is a significant challenge for small farmers. Proper drying and storage of the raw product is critical. 9 Less than US$600,000 in annual turnover 10 Aflatoxin is a naturally occurring toxic residue from strains of the aspergillus fungus found in the soil. It can have serious long-term health implications and it is of particular concern with maize and groundnut processors. There are various ongoing research projects in Africa to find ways to produce and harvest aflatoxin-free product, with emphasis on improved drying and hermetic storage methods, which are methods that could be used by small farmers. 5 FIGURE 1: EQUATORIAL NUT’S PEANUT PROCESSING CHAIN L v s, St ms, Vin s, Ston s, nd Oth r Tr sh Unlo din Dr in Cl nin Sh ll Aspir tion Scr nin Roll Crushin Scr n Si in Sh ll Aspir tion K rn l Si in Sh ll d P nut B in Air S p r tin or Bulk Shippin nd Gr din Sh ll Aspir tion = PM EMISSIONS The project was implemented by FairMatch in area. A more likely outcome is that the FRICH funding collaboration with two Kenyan nongovernmental will have helped consolidate Equatorial Nut’s relationship organizations (NGOs), the Africa Centre for Environment with out growers, and the groundnuts will go to the and Development (ACFED) and ReACT Kenya. Project domestic and regional market. Any advance against funding was utilized primarily for (1) research with the the prevalence of aflatoxins in groundnuts in Kenya, University of Nairobi on how aflatoxin contaminates the when that happens, will be the result of the broad range crop, (2) farmer training programs, and (3) facilitating of public interest, action-research driven interventions and exchanging knowledge between Intersnack and being undertaken by agricultural research institutions.”11 Equatorial Nut. Although local production was established and two containers of groundnuts were exported, there were Project Results: Intersnack Group and indications that the product could not meet EU standards. Despite not meeting all of its expectations for Equatorial Nut Processors the FRICH project, Intersnack continues to pursue new Intersnack received funding in the fourth phase of groundnut supply projects in Africa. Likewise, in a recent the fund, which left them only 18 to 24 months to interview, Equatorial Nut managers spoke positively accomplish an ambitious project. Their goals were to about the results of the trials and noted their interest in achieve better prices for small outgrowers, to support continuing development of a local supply of groundnuts. outgrowers in improving product quality and producing Initially the processor would focus on local markets aflatoxin-free groundnuts, and to introduce African where regulations were less stringent and prices peanuts into the EU market. were higher, with a goal to export once a supply was An internal strategic review by DFID concluded that the established. However, while Equatorial Nut was willing to project was probably too ambitious. The report stated, make investments to develop a local groundnut supply, “Our prognosis is that in the absence of further public the processor felt it would be necessary to partner with subsidy, it is very unlikely that Intersnack will invest its own capital in such an out grower model in the Meru 11 Winters (2014) 6 a farming organization to obtain technical assistance in 2011 to observe the production line and the first tea production. If this partnership can be achieved, Equatorial packed by farmers. The packaged tea, which featured Nut feels confident in their ability to export groundnuts a “Mount Kenya Teabags” logo (Figure 3), was launched to the United States and EU, once they have an aflatoxin- in 296 M&S stores in February 2012 to coincide with free product. fair trade week, and a video of the project was shown in stores and on the M&S website. The formal project was completed in early 2013. Marks & Spencer (M&S) and Iriaini Tea In many ways, the partnership between M&S and Iriaini Factory Co. LTD. was a unique project within the Kenyan tea industry. The U.K.-based large retailer is a leader in buying and Kenya is a large supplier of commodity tea to the global utilizing fair trade products from Kenya. With the market; however, the industry had experienced little increasing popularity of fair trade products among U.K. progress toward capturing value-added products. The retailers, however, M&S sought new ways to demonstrate global tea industry is dominated by seven companies their corporate social responsibility. By purchasing that control approximately 85 percent of the trade. fully packaged tea from Kenya, the value added from Almost all of these companies are highly integrated processing and packaging could be captured by African multinationals, and many own their own plantations farmers, thereby enhancing farmer incomes. M&S and factories, while also purchasing raw tea from Kenya decided to pursue a branded tea bag packaged in Kenya and elsewhere in bulk. Since the price of raw tea is that could be imported for sales in their U.K. stores. typically less than 20 percent of the price for the finished M&S felt it was important to its customer base that product, breaking into the consumer market is a major the company support DFID programs, particularly rural achievement. The product was also unique because most income enhancement projects in Africa. This interest of the packaged teas available in stores are blended and coincided with considerable local political interest in few can claim a single source. sourcing more value-added products from Kenya. Since M&S had been working with Kenyan fair trade tea farmers since 2010, the FRICH program provided an FIGURE 3: MOUNT KENYA TEABAGS PACKAGE opportunity and incentive to test the idea of packing a FOR MARKS & SPENCER finished tea product (tea bags) at its source for sales in U.K.-based stores. This strategy sharply contrasted with the approach of most multinational firms, which imported Kenyan tea in bulk, and then graded, blended, processed, packaged, and branded the tea in or near U.K. or EU consumer markets. M&S partnered with a midsize enterprise, Iriaini Tea Factory, one of 67 cooperative tea companies operating under the umbrella of the Kenya Tea Development Agency Holdings Ltd (KTDA). During an annual visit to Kenya, M&S was impressed with the Iriaini Tea Factory’s income diversification project, funded by revenue from the fair trade premium. The companies entered into an agreement to develop a packaged consumer tea product with technical and retail support provided by M&S. Project funds were used to lease and purchase tea bagging equipment, hire technical consultants, prepare a “clean room,” install equipment, purchase special tea bag paper, and carry out staff training programs. The project generated a huge amount of interest in both Kenya and the United Kingdom. The Kenyan president visited the newly built tea packing facility in November 7 The M&S proposal quickly won local supporters because FIGURE 4: IRIAINI TEA BAG PACKAGING of the international project backers, and it was a popular MACHINE subject with the Kenyan press and political leadership. PROJECT RESULTS: MARKS & SPENCER (M&S) AND IRIAINI TEA FACTORY CO. LTD. The project has not generated large sales for M&S. At the end of the formal project in 2013, retail sales reached £39,000 (US$50,560). Orders are still being placed, but are small (400 to 1,000 kilograms per shipment), and factory output is low compared to its capacity. Although the project was initiated by a department of M&S that focuses on ethical trade and social responsibility, the product seems to be run by the commercial side of the business; therefore, if sales continue to lag, the product could lose shelf space. Profit margins for the factory are also low, given the limited production levels. Still, Iriaini is selling tea to M&S at a price equivalent to $7 per kilogram, compared to the current Kenyan auction price of $2.35 per kilogram12. If 25 to 30 percent of the factory’s output could be used for a consumer product, it would have a profound impact on the income of Iriaini’s 8,000 member farmers. For example, an average farm family who receive about $110 per month from the cooperative based on the commodity tea price could increase their income to about $200 per month13. Despite the low export sales, the real market opportunity is likely to be the domestic market. Iriaini Tea Company is already selling a tea bag product and a loose tea product in a limited area near the factory, with one store at the factory itself. Historically, the company has been production-oriented, and it does not have a marketing department. The project has influenced the factory management and cooperative members to begin implementation plan, Nyambura added. rethinking their strategy. Jane Nyambura, a manager at the Ethical Tea Partnership in Kenya, commented that “the real success of this project is not the amount of Fullwell Mill Ltd and Fruits of packaged tea currently being sold, but that the eyes of the Nile (FON) management and the cooperative members have been Fullwell Mill is a leading U.K. fair trade food manufacturer opened to the opportunities to supply the consumer that supplies raw material (food ingredients) to food market, and to think beyond only being a commodity processors, produces food products under license producer.” The company needs funding and expertise to for major U.K. brands and supermarket chains, and develop a domestic marketing strategy and a market manufactures products such as snack bars under their own label. For many years, the company has purchased solar dried fruit from Fruits of the Nile (FON), a company 12 $7 per kilogram and commodity auction price estimate from a manager at formed in 1987 in Uganda. FON processes dried fruit Iriaini Tea Company products, principally pineapple and banana, that are 13 Assuming 30 percent of the tea was sold by the coop as a consumer product ($7/$2.35 x 0.30 x $110) both organic and fair trade certified. FON established its 8 FIGURE 5: FRUITS OF THE NILE CAPE GOOSEBERRY PRODUCTION Nile Growers Association (FONA) in 1997 to administer temperature of about 50 degrees Celsius14. The dried organic and fair trade programs, which in turn opened fruit is delivered to FON for further washing, drying, up new marketing opportunities for FON. and grading, and then packaged and exported to Fullwell Mill and other local clients. Fruits of the Nile is a unique SME because it has taken the processing of fruit to the village level, Fullwell Mill had been receiving an increasing a task that is difficult to accomplish. The dried number of requests from clients for new dried product is then further processed and exported, fruits, particularly dried berries, for use in new food meeting strict U.K. food quality standards. About product formulations. The company decided to test a third of the members grow pineapples and two- whether farmers could produce and successfully thirds grow bananas, which have fair trade market dry several new berry varieties. Developing new prices of $1.50 and $3.00 per kilogram, respectively. products for its clients was an important linkage A farmer can earn the equivalent of $70 to $150 motivation for Fullwell Mill. per year, an attractive cash crop. Approximately 60 fruit driers, located in villages, service 450 farmers During its FRICH partnership, FON focused on the who are organized into 50 to 60 associations. growing and drying of new berry crops, including The simple wooden solar drier is covered with 14 Construction of the driers costs about $300 each, and the cost is polyethylene that traps the sun to dry the fruit at a shared: two-thirds contributed by the producers and one-third from FON as an interest-free loan. Producers repay the loan through product. 9 strawberries, blueberries, raspberries, and not enough time to evaluate the best season, location, cape gooseberries, and provided samples of and care for the berry varieties. The small company the products to Fullwell Mill. The berries were is unlikely to fund further research and trials, but it planted at 10 trials sites where FON was already intends to expand the cape gooseberry product. working with farmers. The sites represented different agro-ecological soil and weather conditions in order to test which would be most suitable for production. Several of the trial sites were scheduled to become nursery sites for the production and distribution of seedlings to Overall Project farmers for commercial production and drying. Fullwell Mill’s main contribution to the project Results: FRICH Grant Fund was researching berry varieties and finding planting material. DFID and its implementation firm evaluated the results Project Results: Fullwell Mill Ltd and of the 25 projects funded by FRICH. The analysis Fruits of the Nile (FON) provides valuable insights for organizations that might The production of raspberries and blueberries consider similar development projects in the future. The was not particularly successful, as farmers had overall findings are summarized below in response to no experience growing the crops and lacked each of the program’s five assumptions: understanding of the best environment for production. Drought and weather conditions also negatively impacted the berries, as they require 1. An open and competitive process will irrigation. Strawberries matured quickly, but the elicit the most promising innovations. high moisture content of the berry did not produce Donor programs regularly find it difficult to inform firms an acceptable dried product. However, some of the in the private sector about grant funding opportunities, farmers found that supplying fresh strawberries and learn that “open and competitive” can still reach a to the market was a good business. limited audience. Large private sector food processors The most successful berry was the cape and retailers are often unaware of the availability of gooseberry (Physalis). The local agronomic grant funding, and have little understanding of how or conditions were well-suited to the crop and it why they should participate. In the case of the FRICH dried well with a golden color. Farmers were project, private and NGO development professionals interested in expanding production and Fullwell learned about the opportunity and brought it to Mill was anxious to purchase the product. Farmers the attention of the private sector. Therefore, the also found that the fresh berry sold well in local development community was an important motivational markets, which restricted the supply for drying. force behind the project’s development. However, the NGO community, although well-intentioned, may lack The limited time frame for the trial turned out understanding of the commercial realities of the project to be a constraining factor in the success of the or industry, and as a result, may minimize the challenges project. Fullwell Mill required time to research or oversell the opportunities associated with the project. berry varieties and to determine the best location to carry out the varietal trials. Planting material was eventually purchased from a South African 2. The grantees will test new and nursery, and research on drying methods was innovative projects. left to FON. In the end, there was only time to dry The three projects profiled in this case study focused berries from one harvest season. In hindsight, on firm-based innovation. The limited success of these there was too little time for both researching new projects suggests that firm-based innovation may crops and conducting fruit drying trials, which be less valuable for public development funding than caused delays in the implementation plan, said market-based projects, in which an entire market Adam Brett, a manager at Fullwell Mill. There was segment is positively impacted rather than a single 10 firm. Firm-based innovation can have positive sector for direct marketing is small (less than 1 percent) and impacts, but the results from imitation and copying are has not impacted the average prices received by farmers. often realized more slowly. Still, cooperative members learned that the value of their tea significantly increases when it is packaged as a The post-project review also questioned whether the consumer product. innovative projects would have occurred without grant funding. Some of the 25 projects might well have been initiated independent of the grant program, but 5. An increase in income leads to a for the three companies profiled in this case study, decrease in multi-dimensional poverty. grant funding was indeed necessary to stimulate implementation of the projects. An important objective of the fund was to increase the income of the rural poor. Presumably, any agricultural or SME activity should have positive impacts on the 3. Commercially viable innovations income of workers. When questioned, all the smallholder (or variants) are scaled up by grantees farmers in the nine project sample indicated that they had benefited from their association with the project. In and then replicated by others. general, the analysis suggested that if a project intends Because of its limited time frame, it is difficult to to have a positive impact on the “rural poor,” then it determine the long-term impact of the FRICH fund, must dig deeper into the structure of the labor market. It particularly for the objective of “replication by others.” was found that agricultural enterprises tend to restrict In fact, in a sample of nine projects from the internal permanent employment in favor of casual labor, which DFID review, only two projects continued without is paid at a much lower rate than permanent labor. This additional financial support, and only one project had point is often not considered when designing projects to its positive results replicated by other firms. Certainly, address agricultural worker incomes. there are many examples in the developing world where new crops or processes have been introduced, and the The objective of alleviating multidimensional poverty observed success of the innovation was replicated was beyond the ability of the fund, and projects did not by farmers and SMEs, leading to the development of have a significant impact on social services, a benefit an entirely new industry. However, it is a long-term generally provided by governments. African participants process. Clearly, individual firms cannot be expected to were asked the open question: “In what other ways provide valuable knowledge to their competitors as this could UK Aid help you further, if that was possible?” runs counter to their commercial interests. The participants pointed to “schools, roads, water, [and] electricity,”15 all of which are significant long-term investments. 4. Increased market access to the United Kingdom and EU leads to Lessons Learned increased incomes for poor African producers. In general, the three projects had insufficient data on producer incomes to draw conclusions on this subject, Lesson 1: Project Duration & Funding. although two agricultural projects of the nine projects For new agriculture and SME processing projects, sampled had a positive impact on worker income a considerable amount of time must be allotted for because of access to new markets. Two of the projects research, trial and error, and implementation in order to did not impact worker income, including the Marks & achieve project goals. Often only one crop and associated Spencer tea project. Cooperative members are paid processing season is possible per year, in comparison to based on the overall production and price of commodity tea. At this stage of the project, the amount of tea used 15 Winters (2014) 11 non-agricultural manufacturing, which can occur year- Companies are increasingly investing resources in round. Both Intersnack and Fullwell Mill indicated corporate social responsibility, but these initiatives may that their plan should have included more time to not have the sustainability of a commercial project. For implement the project. Intersnack was one of the last example, the Marks & Spencer project originated in the firms to receive grant funding, so only had 18 to 24 company’s social responsibility programs. However, months to initiate and complete their project. after an initial launch, a product will eventually be evaluated from a commercial perspective, where shelf In the case of Marks & Spencer, it was clear space elasticity, retail margin, and other measures are that introducing a new consumer product into of greater importance. the competitive U.K. retail market would require considerable time and resources to create a Lead firms that are processors of consumer products sustainable marketing program. For example, the tea often have larger budgets and higher margins to bag’s package is already being redesigned after a introduce a new product over a period of one to three year in the market. While a food processor often has years. Retailers, such as Marks & Spencer, have a significant budget for marketing a new product, a different business models. Retailers work on small profit retailer often does not have the orientation or profit margins, often 1.5 percent after tax on gross sales, margin to develop a new product (see Lesson 3). A and product turnover is important. Therefore, retailers common suggestion from the three participating lead closely evaluate the revenue per square foot of floor firms was that the project duration should be three to or shelf space.16 Retailers may develop proprietary five years in length. products, but these products are often variations of existing food products. Lesson 2: Role of Public Sector. The public sector played an important role in all 25 Lesson 4: Commodity vs. projects through the establishment of the FRICH Consumer Product. Fund to support innovation in the food supply chain. In general, it is financially attractive for commodity A majority of the projects would not have occurred producers to differentiate their product and move without public support, including the three companies up the supply chain, and even produce a consumer that are featured in this case. In general, the food product. In the Marks & Spencer case, the SME tea sector in the United Kingdom and EU was exposed processor was anxious, as were political supporters to agriculture sector supply issues in Africa, but in Kenya, to move up the supply chain and produce a significantly, 25 companies were selected and funded consumer product for an influential U.K. supermarket to pursue their planned innovation. The fund manager chain. Even with the correct market linkages, it was indicated that it takes considerable time (usually more difficult to achieve the project’s objectives. Although than budgeted) for hands-on work with applicants packaging and sales of the product in the U.K. retail to introduce the concept of the fund, respond to market continues, the volume is small compared to the questions, and evaluate both the proposal and the total volume of the commodity being processed by the applicants. SME cooperative. For Fruits of the Nile, it was easier to produce a unique product because they were further Lesson 3: Project Objectives and along the supply chain as ingredient suppliers for the food industry, so the move to retail marketing was a Commercial Focus. shorter jump. Moving a food product from commodity In selecting lead firm and supplier linkage projects, it status to a consumer or differentiated product remains is necessary to ensure that the supplier’s commercial a goal of many producers, but it is one of the most interests are aligned with the project’s objectives. difficult shifts to make in the supply chain. Commercial firm goals—such as increasing sales volume, reducing product cost, and targeting consumer demand—are basic objectives that need to 16 Net profit after taxes (2014) from “Supermarket Facts,” Food Marketing be considered. Institute, http://www.fmi.org/research-resources/supermarket-facts 12 Lesson 5: Improved Quality and for dried fruit using village producers and driers. This success could be attributed to the long-term relationship Quantity of Raw Material. between the two firms. Significantly, Intersnack emphasized outreach to SMEs and local sourcing of raw material, both as a means to increase supply and to improve the Lesson 8: Product origin quality of raw material at the point of production. and traceability. The company noted that this approach can result in All three lead firms shared an interest in forging closer a net decrease in the cost of raw material, but did ties with their SME suppliers. Over the past five years, not share a specific figure. The lesson is that these consumers, retailers, and processors within the food approaches can benefit many companies seeking supply chain have increased their ability to trace the raw material, and often provide better prices for local sources of raw material, whether fresh or processed. SMEs through improved supply chain efficiency. The objective is to be able to quickly trace sources of contamination, chemical residue, pathogens, and overall Lesson 6: Commercial Expertise. quality problems. Consumers have expressed concern over traceability, and food processors are responding by Evidence from the three projects suggests that requiring point of origin and traceability information with the most successful partnerships occur when each shipment. lead firms and SMEs are directly involved with project implementation, rather than delegating This trend is also reflected in retailing, where consumers implementation to a third party. For example, view point of origin as an indicator of product quality. Intersnack had limited experience in crop production Product origin may also positively influence consumers and sourcing in Africa, and had to rely primarily on who seek to support agriculture and farmers in several NGOs who had local agricultural experience. In developing economies. Marks & Spencer predicted that comparison, both Fullwell Mill and Marks & Spencer, processing and packaging consumer tea products at together with local SMEs, brought considerable point of origin would be a selling point for consumers, commercial African experience to the table, which but it did not seem to have a positive impact on sales contributed to the project’s results. These two (although the source of the product had limited emphasis firms were able to provide hands-on experience to on the package). Still, for products such as wine, coffee, partner SMEs, improving their chances of success tea, and many other food products, the country or and allowing midstream corrections to be made region of origin is often important to consumers and when required. an essential component of a marketing and pricing strategy. Lesson 7: Regulation and Additionally, the use of fair trade or a similar certification by suppliers (signaling support for higher prices to Competitiveness. farmers) was important to FullWell Mill’s customer base Food and agricultural projects exported to U.S. and to Marks & Spencer corporate strategy. and European markets face increasingly complex and strict phytosanitary regulations that are difficult and expensive for a new supplier to achieve, Lesson 9: Export vs. Local Markets. making the products uncompetitive (although Two of the three SMEs (Equatorial Nut and Iriaini Tea), domestic markets in Africa can be attractive while originally focused on the export market, discovered alternatives). It is particularly difficult for small that the domestic market was also attractive. It is SMEs to meet these regulations; for example, the worthwhile to consider the potential of the growing Intersnack groundnut project was uncompetitive domestic market in Africa. In fact, the experience of in the export market because it did not meet EU the FRICH fund suggests there may be merit to an standards. On the other hand, the partnership of innovation fund focused on developing new products or Fullwell Mill and Fruits of the Nile was remarkable food and agriculture approaches specifically for local or in its ability to meet U.K. phytosanitary standards regional markets in Africa. 13 Interview List Organization Interviewee Name(s) Date of Interview Fruits of the Nile, Man. Dir. Angello Ndyaguma May 11, 2016 FullWelll Mill Adam Brett April 12, 2016 Ethical Tea Partnership Jane Nyambura May 13, 2016 FairTrade Frank Olok May 13, 2016 Fair Trade Catherine Maina May 13, 2016 Marks & Spencer, London Hazel Culley April 6, 2016 Marks & Spencer, Tech. Cons. Phil Mumby April 21, 2016 Kenya Tea Dev. Authority, Marketing Manager Lucy Nyaklore May 17, 2016 Irianini Tea Factory Matthais Ithiga May 17, 2016 React Africa Re. Env. Nut Co. Joyce Gema May 17 2016 Intersnack Wim Schipper April 10, 2016 14 Bibliography Food Marketing Institute. 2014. “Supermarket Facts, Net profit after taxes.” http://www.fmi.org/research-resources/ supermarket-facts Greening, Justine. 2014. “Frontiers in Development - economic growth is key.” Speech delivered at USAID’s Frontiers in Development, Washington, D.C., September 22. http://www. wired-gov.net/wg/news.nsf/articles/justine+Greening+Frontie rs+in+Development+Economic+Growth+is+key+230920140710 00?open U.K. Department for International Development. 2007. “Food Retail Industry Challenge Fund-FRICH Project Memorandum.” U.K. Department for International Development. 2013. “Guidance Page: Food Retail Industry Challenge Fund (FRICH).” https://www.gov.uk/guidance/food-retail-industry-challenge- fund-frich U.K. Department for International Development. 2014. “Programme Completion Report.” iati.dfid.gov.uk/iati_ documents/4787319.odt U.K. Department for International Development. 2012. “UK helps farmers in Africa trade their way out of poverty.” Press release, October 24. Winters, Mark and Rajan Soni. 2014. “Strategic Review of the Food and Retail Industry Challenge Fund (FRICH).” Department for International Development. 15 © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Website: www.infodev.org Email: info@infodev.org Twitter: @infoDev Facebook: /infoDevWBG infoD v INNOVATION & ENTREPRENEURSHIP