Conquering the Mango Market in Niger

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Conquering the Mango Market in Niger

“Opportunities for Mango Producers in Burkina Faso on the Mango Market in Niger:

Designing the appropriate Marketing Channels”

Master’s Thesis Bart Jalving

June 2007

University of Groningen, The Netherlands SNV Netherlands Development Organisation

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Submitted in partial fulfilment of the requirements for the Degree of:

Master of science in Business Administration

University of Groningen Faculty of Economics

Department of Bedrijfseconomie, Management & Organisatie

25 EC

Author: Bart Jalving Student number: 1198149 E-Mail: bart_jalving@yahoo.com

Organisation: SNV Burkina Faso

Supervisors University of Groningen: Dr. C.H.M. Lutz Prof. Dr. H.J. ter Bogt

Supervisor SNV Burkina Faso: Drs. K.J. van Til

Groningen, June 2007

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Conquering the Mango Market in Niger

Acknowledgements

A CKNOWLEDGEMENTS

Writing this page of my master’s thesis fills me with a great amount of joy and pride. It represents the conclusion of my student life and the final step in obtaining my master’s degree in Economics (Business Administration) from the University of Groningen. The research for this thesis has been conducted in the West African countries of Burkina Faso and Niger. The time I spent in these two countries has been a challenging and unique period in my life. There were some difficult moments as I was confronted with the hardships that are unfortunately too common for so many people in developing countries today. Nevertheless, the friendliness and hospitality of the people I encountered and the inspiration I felt from living, working and being part of daily life in both countries has helped to make the whole experience truly fantastic, and something that I will always look back on with fond memories.

I would like to thank Kees-Jan van Til of SNV Burkina Faso for providing me with the opportunity to conduct this research, for his assistance and support during the research period and of course for the great times in Burkina Faso. A further word of thanks and gratitude goes out to all the SNV staff in Bobo-Dioulasso for making me feel very welcome. I am grateful to Lamine Ouattara of APIPAC for his help in arranging a mango truck to take me to Niger. I am thankful to all the staff of SNV Niger in Niamey for their hospitality and kindness, especially to Ibrahim Oumarou for assisting and mentoring me, and providing me with so many useful contacts for my research. Thank you to Rahila for arranging so much for me during my time at SNV Niger and to Yahaya for his translating skills, which were of great help to me.

My thanks also goes out to my supervisors at the University of Groningen: Clemens Lutz and Henk ter Bogt. Clemens, for initiating the cooperation with SNV and providing me with this research opportunity and for all the useful support, discussions and advice. Henk, for your never-ending enthusiasm for the research and my experiences, approving my thesis topic and your constructive tips and feedback.

Finally, I would like to thank all my friends and family for encouraging me and for staying in touch during the period I was in West Africa. Leon Peter and Ewoud, it was great to spend time together in Burkina Faso! Hilde, for your willingness to help and critical comments, which increased the quality of this thesis. Mam and Pap, for your support and belief in me, not just now but throughout my entire studies. Especially the past year has been very difficult for us all, and your understanding and support has been very important to me. Florence, for your enthusiasm, optimism, support, confidence and encouragement during the time I was away and while I was writing my thesis, and for coming to Burkina Faso. Travelling with you in Burkina Faso and Ghana was a special and fantastic time, and a perfect way for me to finish my stay in West Africa.

Bart Jalving

June 2007

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Executive Summary

E XECUTIVE S UMMARY Context of the Research

Cooperation between the University of Groningen and SNV Burkina Faso has led to several interrelated research assignments to address the problem of international market access for some of SNV’s clients: mango producers in Burkina Faso. This research has been conducted within this cooperation and is focused on the market of Niger. The main research question has been formulated as:

“How should mango producers in Burkina Faso design their marketing channels to take optimal advantage of the opportunities on the market of Niger?”

SNV clients are not significantly involved within the existing marketing channels, as they mostly focus their attention on the European export market. However, due to overproduction of mangoes in Burkina Faso and increased competition on the European market, SNV would like to explore new export possibilities for its clients. Niger has been indicated as a potential new export market on which SNV clients could focus their attention. However, useful and reliable information on the Nigerien market does not exist and neither SNV, nor its clients, can make a realistic estimate about the size of the Nigerien market, the different segments that exist within it, the degree of competition or how the channel that supplies the market functions. Without such knowledge it is not possible for SNV to advise its clients on how to optimally take advantage of the opportunities that the market presents.

The Current Market Situation

A significant part of the Burkinabé mango production is exported to Niger each year. In 2005

around 7.000 tons of Burkinabé mangoes were exported to Niger, although a margin of error

must be considered due to the limited reliability of these figures. Niger itself only has a very

small, fairly insignificant, mango production and is extremely dependent on foreign mango

supply to meet its demand. Burkina Faso does not have any significant competition from

other countries on the Nigerien market. For many years Burkina Faso has been providing

over 95% of all imported mangoes in Niger. There is no prospect of this situation changing in

the future and Niger is therefore very dependent on mangoes from Burkina Faso.

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Executive Summary

Different segments of final consumers cannot really be distinguished in Niger, as the demands of most consumers are limited to: affordable mangoes of an adequate quality. The market for transformed mango products in Niger is very limited and the size of this market is negligible compared to the market for fresh mangoes.

The Channel Structure and Environment

The existing channel is entirely informal with no officially registered channel members, no government involvement, and practically no rules or regulations influencing the market.

Producers that supply mangoes are mostly small, individual producers who respond to demand from exporters and do not actively involve themselves in downstream channel activities. There are a great number of exporters from Burkina Faso exporting mangoes to Niger, and their numbers vary from year to year and so does the composition of this group throughout a season. In Niger there are only a limited number of wholesalers, who have organised themselves in an unofficial cartel that dominates the channel. Cooperation between wholesalers, transit-brokers and customs officials denies any exporter direct access to the Nigerien market without going through these wholesalers.

Surrounding the channel are various government officials and intermediaries who are involved in the channel through transit and customs procedures that take place during the export process. Corruption is widespread throughout the channel as government officials will exploit the informality of channel members by demanding informal payments in exchange for their cooperation.

Problems within the Channel

The channel as it exists presently results in:

• Practically all power within the channel residing with the Nigerien wholesalers.

• An inequitable distribution of channel risks and profits between channel members.

• Intermediaries and various officials who profit from the channel without providing a value- added activity in return, thereby substantially increasing transaction costs.

• Producers in Burkina Faso receiving low prices (and therefore profits) for their mangoes.

• Final consumers in Niger receiving very poor quality mangoes.

• Unnecessarily high prices that final consumers have to pay for these mangoes.

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Executive Summary

A lack of organisation and coordination by channel members in Burkina Faso is largely responsible for this situation. The abundance of exporters who do not coordinate their activities leads to them having to compete with each other in order to fulfil the demands of a well organised group of Nigerien wholesalers. As a result, the profit that exporters can make is variable and depends on factors they cannot control. Producers also suffer as they are very isolated as individuals in a weak negotiating position, who cannot exert any influence on downstream channel activities.

The lack of rules and regulations that exist within the channel and the informality of the channel and its members also lie at the cause of these problems. Furthermore, the government and institutional environment surrounding the channel do not guarantee property rights, nor properly enforce the rules and regulations that do exist, which influences the way in which exchanges are conducted within the channel and how agreements are enforced.

Finally, the channel and its members cannot approach the government to support the channel, help address inequalities or appeal against illegal or corrupt practices within the channel or instigate some quality or transport requirements. This is because the government does not officially recognise the informal channel members and access to the judicial system is denied because of this.

Channel members lack knowledge of proper mango harvesting, handling and packaging

techniques, or do not care about the consequences that these have for the quality of

mangoes that final consumers in Niger receive. There is also no integrated channel thinking

among channel members, as all channel members are only focused on their own short-term

interests (profits) without thought for the interests of the channel as a whole, which increases

total channel costs and therefore final consumer prices. The end goal of any successful

marketing channel should be satisfying final consumers, through which the entire channel

should prosper through increased value within the channel. However, producers, exporters

and wholesalers do not contemplate the effects of the way in which the current channel

activities damage the interests of final consumers by providing them with poor quality

mangoes and forcing them to pay a very high price, which cannot be justified through

necessary transaction costs.

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Executive Summary

Recommendations for the Future

If the Burkinabé wish to realise the potential that the Nigerien market clearly presents, and create an efficient channel that realises its goals, the current design of the channel and the way in which it functions needs to change. This cannot be realised overnight and the proposed measures represent ways to work towards a more efficient channel in the long-run.

SNV clients that wish to involve themselves in the channel, as well as current channel members, need to actively pursue certain changes if improvements are to be made:

• Producers and exporters in Burkina Faso need to be convinced of the potential benefits of cooperation and organise themselves to command more channel power and reduce the influence of intermediaries and channel members that currently dominate the channel and command the significant part of channel profits. Exporters need to plan exports, share market information and coordinate their efforts to increase their negotiating positions vis-à-vis the Nigerien wholesalers, while producers and exporters can help to limit each others’ costs and risks through increased cooperation.

• Producer unions and cooperatives that are currently not interested in the Nigerien market (SNV clients) need to become involved in the channel, and understand the potential that it offers. Their cooperation is necessary to professionalize the channel and increase channel standards.

• A move into the formal economy would provide channel members with a legitimate platform to press for institutional changes and enforcement of property rights and existing rules and regulations that are necessary to improve the environment in which the channel functions. Cooperation with the institutional environment could also help create some minimum standards to which the activities within the channel must adhere.

• More integrated channel thinking by channel members and a focus on overall channel interests. This should be expressed by sharing knowledge and increasing awareness through the channel on proper harvesting, handling and packaging techniques and the importance of this to increase mango quality for final consumers and decrease the final prices that they have to pay. By doing so, the potential value (and therefore profits) within the channel can actually be increased, as consumers will be able to purchase a larger quantity of mangoes; a situation that all channel members can benefit from.

• The creation of a new channel (niche market) to service the high-end part of the market

with superior quality mangoes that bypass the existing channel and the inefficiencies that

exist within it. Such an initiative would provide external competitive pressure that could

challenge the existing channel structure and help facilitate the necessary changes.

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Abbreviations

A BBREVIATIONS

ACFP Association des Commerçants des Fruits et Plantes ANPIP Agence Nigérienne de Promotion de l’Irrigation Privée

APIPAC Association des Professionnels de l’Irrigation et des Activités Connexes BACB Banque Agricole et Commerçiale du Burkina

BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest BIC Bénéfice Industriel et Commercial

BRS Banque Régionale de Solidarité

CAFER Caisse Autonome de Financement de l’Entretien Routier CBC Conseil Burkinabé des Chargeurs

CDC Chambre du Commerce

CEFORE Centre de Formalités des Entreprises (Burkina Faso) CFA Used in the text to denote CFA Franc (see below)

CFA Franc Communauté Française d'Afrique Franc (656 CFA Francs = 1 Euro) CFE Centre de Formalités des Entreprises (Niger)

CIB Carte Identité Burkinabé

CNUT Conseil Nigérien des Utilisateurs des Transport Public DPV Direction de Protection des Vegetaux

FEDAF Fédération des Agriculteurs Fruitier GDP Gross Domestic Product

HDI Human Development Index

IFU Identifiant Financier Unique

INS Institut National de la Statistique du Niger NGO Non Governmental Organisation

NIF Numéro d’Identification Fiscale

ONAC Office National de Commerce Extérieur

PAFASP Projet d'Appui aux Filières Agro-Sylvo-Pastoral SNV SNV Netherlands Development Organisation SOBFEL Société Burkinabé de Fruits et Légumes SOD Service Output Demand

SP-CPSA Secrétariat Permanent de la Coordination des Politiques Sectorielles Agricoles TVA Taxe sur la Valeur Ajoutée

UAFK Union des Agriculteurs Fruitier de Kenedougou

UCOBAM Union des Coopératives Agricoles Maraîchères du Burkina Faso UDPFK Union Départementale de Producteurs Fruitier de Koloko

UEMOA Union Economique et Monétaire Ouest Africaine

UNDP United Nations Development Programme

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List of Figures

L IST OF F IGURES

Page

Figure 1: Channel Management Framework 19

Figure 2: Channel Flows 20

Figure 3: Institutional Economics Framework 31

Figure 4: The Conceptual Model 40

Figure 5: Map of Burkina Faso 46

Figure 6: Mango Plantations 47

Figure 7: Burkina Faso's Mango Exports 48

Figure 8: Average Weight of Mango Varieties 49

Figure 9: Amélie 49

Figure 10: Brooks 50

Figure 11: Kent 50

Figure 12: Keitt 51

Figure 13: Mixed Plantation 51

Figure 14 : Map of Niger 62

Figure 15 : Niger's Mango Imports 65

Figure 16 : Niger's Mango Juice Imports 73

Figure 17 : Channel Flows and Activities 74

Figure 18 : Transportation of Mangoes from the Orchards to the Market 77 Figure 19 : Purchasing Prices at Local Markets and en Brousse 79

Figure 20 : Selection and Packaging 81

Figure 21 : Weak Packaging Material 82

Figure 22 : Loading Process 83

Figure 23 : Transport to Niger 86

Figure 24 : Unloading Process 97

Figure 25: ‘New’ Cartons 98

Figure 26: Street Vending 103

Figure 27: Range of Consumer Prices in Niamey 104

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T ABLE OF C ONTENTS

Page

1. Introduction ... 12

1.1. Research Background and Justification ... 12

1.2. Research Questions ... 14

1.3. Outline of the Research ... 16

2. Theoretical Background ... 17

2.1. Introduction ... 17

2.2. Marketing Channel Theory ... 18

2.2.1. Introduction... 18

2.2.2. The Existence of Channel Intermediaries ... 20

2.2.3. Channel Design ... 21

2.2.4. Implementing New Channels or Refining Existing Channels ... 23

2.2.5. Channel Implementation ... 27

2.3. Institutional Economic Theory ... 28

2.3.1. Introduction... 29

2.3.2. Transaction Costs ... 31

2.3.3. Incentives and the use of Contracts ... 34

2.3.4. The Informal Economy... 35

2.3.5. Corruption... 37

2.4. Conceptual Model ... 38

3. Methodology... 41

3.1. Research Period ... 41

3.2. Data Collection ... 41

3.3. Data Analysis... 43

3.4. Research Limitations ... 43

4. The Market in Burkina Faso... 45

4.1. Introduction ... 45

4.2. Mango Production... 46

4.3. Mango Varieties ... 49

4.4. Channel Members... 51

4.4.1. Producers ... 51

4.4.2. Cooperatives ... 53

4.4.3. Coxseurs... 54

4.4.4. Exporters ... 55

4.5. Institutions, Rules and Regulations ... 57

4.5.1. The Informal Economy... 57

4.5.2. Moving into the Formal Economy... 57

4.5.3. UEMOA... 59

5. The Market in Niger... 61

5.1. Introduction ... 61

5.2. Mango Production and Varieties... 62

5.3. Supplier Country Competition ... 64

5.4. Channel Members... 66

5.4.1. Wholesalers... 66

5.4.2. Traders and Demi-Grossistes... 67

5.4.3. Street Vendors ... 68

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5.4.4. Consumers ... 68

5.5. Institutions, Rules and Regulations ... 69

5.5.1. The Informal Economy... 69

5.5.2. Moving into the Formal Economy... 70

5.5.3. UEMOA... 70

5.5.4. Customs... 71

5.6. Transformed Mango Products... 71

6. Analysis of the Existing Marketing Channel Activities... 74

6.1. Ordering ... 75

6.2. Arranging Transport... 75

6.3. Purchasing, Negotiation and Prices ... 76

6.4. Harvesting ... 79

6.5. Selection, Packaging and Loading ... 80

6.6. Transport ... 84

6.7. Transit and Customs ... 86

6.7.1. Burkina Faso ... 87

6.7.2. Niger ... 90

6.7.3. Niamey ... 94

6.8. Unloading, Negotiation and Payment ... 96

6.9. Selling to the Final Consumer ... 101

7. Problems within the Existing Channel... 105

7.1. Introduction ... 105

7.2. Distribution of Channel Power... 105

7.3. Distribution of Channel Risks and Channel Profits ... 106

7.4. Institutions, Rules and Regulations ... 110

7.5. Consumer Prices... 111

7.6. Mango Quality ... 112

7.7. Integrated Channel Thinking ... 112

7.8. Other Problems ... 113

8. Recommendations for the Future ... 114

8.1. Introduction ... 114

8.2. Organisation and Coordination within the Channel... 114

8.3. Knowledge Dissemination through the Channel... 120

8.4. Entering the Formal Economy... 123

8.5. Cooperation with Institutions in Niger ... 127

8.6. Create a New Channel for Quality Mangoes (Niche Market) ... 129

9. Conclusions... 132

Bibliography... 136

Appendix A: List of Sources ... 138

Appendix B: Cost Summary of an Export Voyage ... 140

Appendix C: Channel Member Profits ... 141

Appendix D: The Value Chain... 142

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Introduction

1. I NTRODUCTION

1.1. Research Background and Justification

SNV Netherlands Development Organisation (SNV) is a Dutch development organisation that aims to help harness and mobilise the innate skills and motivations of societies so they are free to pursue their own sustainable development. SNV advisors contribute to this goal by strengthening the capacities of local organisations.

Cooperation between SNV Burkina Faso and the faculty of Management and Organisation of the University of Groningen, the Netherlands has led to several interrelated research assignments for students from Groningen to be conducted for SNV. Several of SNV’s clients, mango producers in Burkina Faso, are facing the problem of international market access.

The ultimate goal of the research assignments is to aid the mango producers of Burkina Faso in their pursuit of reaching a sustainable level of development. In addition to this the research is interesting from a theoretical point of view: to further enhance the knowledge of rural economic development and to understand how economic theories can be used to explain the issues and problems that developing economies currently face.

One of the international markets SNV Burkina Faso wishes to study is the market in the neighbouring country of Niger. SNV would like to gain insight into the opportunities for Burkinabé mango producers in alternative market segments in the mango market of Niger, and how these segments can or should be served. At the moment there is very little or no information on the total market demand for mangoes in Niger, which segments exist and how successful different actors are within the market. Furthermore, there is no knowledge of which parties are currently supplying the market, where their supplies originate from or how the suppliers are integrated into the overall marketing channels.

Due to this lack of information it is not possible for SNV to provide its clients with advice on

how to take advantage of the existing opportunities on the mango market in Niger. Burkina

Faso’s mango production greatly exceeds its internal demand so export is a necessity for

many mango producers if they want to have any chance of making a decent living. For these

reasons SNV has requested the researcher to conduct a descriptive research to collect

general information on the Nigerien market and come to an initial understanding of the forces

at work within the marketing channel. Research is necessary for SNV to gain insight into the

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Introduction

market and understand the relevant factors determining the structure and functioning of the market and how its clients can use this knowledge to undertake successful business activities. At present, SNV clients (and other producers) are generally not interested in the Nigerien market and unaware of its potential and their main focus is on export to Europe.

The mango is the most exported fruit of Burkina Faso. Changing preferences of European consumers has led to Burkina Faso losing market share in Europe over the past years.

Burkina Faso used to export a lot of the Amélie variety, but Amélie is being demanded less and less in favour of Kent and Keitt varieties. Burkina Faso has so far not succeeded in planning and organising the export of sufficient numbers of these varieties, and as a result export to Europe has been stagnating. Other countries (such as Mali and Côte d’Ivoire) have taken advantage of this by better adapting to European changes in taste and currently export significantly more mangoes to the profitable European market. In 1986 Burkina Faso exported over 1.627 tons per year to Europe

¹

, since that time, due to developments in other countries within the sub-region such as the appearance of large, modern orchards

²

; this has decreased substantially to around 1.000 tons at present. Especially Côte d’Ivoire that exported 2.500 tons at the beginning of the 1990’s, was already exporting over 10.000 tons by the year 2000. Côte d’Ivoire, like Ghana, has the geographical advantage of a maritime front, substantially facilitating European export compared to landlocked countries such as Burkina Faso

³

. Senegal exported 3.200 tons in 2004

⁴

, and as a nation with a maritime front, and geographically a lot closer to Europe, is an important competitor for European market share. The European export channel is confronted with a fast evolution of the exogenous regulations, based on increasingly strict qualitative and sanitary standards

⁵

that are costly and difficult to adhere to.

These developments on the European market and the decline of Burkina Faso’s competitiveness in supplying this market mean that, more than ever, it is vital for producers and exporters in the mango channel to be able to command healthy profits from sub-regional markets. The market in Niger may not offer the profit margins per mango of the European market, but the substantial size of the market in Niger definitely offers profitable opportunities for producers and exporters in Burkina Faso.

1

Rey, J-Y. et al. (2004a) p. 127.

2

Vannière, et al. (2005) p. 383.

3

Rey, J-Y. et al. (2004a) p. 121.

4

Vannière, H. et al. (2005) p. 395.

5

Vannière, H. et al. (2005) p. 383.

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Introduction

1.2. Research Questions

Following from the description of the situation at hand, the general problem statement and main research question can be defined as follows:

“How should mango producers in Burkina Faso design their marketing channels to take optimal advantage of the opportunities on the market of Niger?”

A number of issues need to be addressed before an adequate answer can be given to this question. First of all, it is necessary to define which market segments exist, how big these segments are, how much of the demand is currently being satisfied with supply, who the current suppliers are and where the supplies are originating from. These issues lead to the formulation of the first two sub-questions:

‘Which market segments can be distinguished in the mango market of Niger?’

This will include distinctions such as varieties, degree of processing and any other required marketing services by the final consumers. Ultimately, it needs to be determined if the mango producers in Burkina Faso can meet the criteria necessary to fulfil these demands.

and

‘Is it domestic supply or foreign supply that dominates these segments?’

The mango producers in Burkina Faso need to know how tough the competition is and where the competition is coming from. Is demand in the market easily being fulfilled or are there supply shortages? What comparative advantages or disadvantages do the producers in Burkina Faso have in relation to their competitors?

Other issues that need to be addressed are the factors influencing the design of the marketing channels such as existing rules and regulations (both formal and informal) and the degree of separation (or integration) of sequential channel activities. This leads to a further sub-question:

‘How are the marketing channels organised for each market segment?’

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Introduction

This question addresses issues such as cultural differences between the producers, their channel partners and the final consumers and how these differences affect the way in which business is conducted. Other aspects of this question are in what way deals and contracts are made between actors in the channel, what mechanisms are in place to enforce these agreements and ultimately, what the effect is of these issues on the organisation of the various activities within the channel.

When the assessment has been made of the current situation on the mango market in Niger and the different forces at work that shape the way in which activities are conducted it is necessary to determine how the mango producers in Burkina Faso can optimally take advantage of the opportunities provided. This leads to the final two sub-questions:

‘Which market segments should be targeted by mango producers?’

Taking into account the different segments that exist within the market in Niger and the ability of mango producers to satisfy demand in these segments it should be possible to determine which market segments can be most successfully targeted by the mango producers of Burkina Faso.

and

‘How should the marketing channels for these segments be organised?’

When the market segments to be targeted have been identified it is necessary to determine the optimal design of activities within the channel to satisfy demand in Niger and provide channel members with appropriate profits. This includes addressing the existing problems within the channel and how these can be solved. These problems may also stem from outside the marketing channel itself, from the external environment in which the channel has to operate.

What is ultimately the best way for the mango producers of Burkina Faso to service the

various market segments in Niger is dependent on many variables. Aspects such as quality

standards, rules and regulations, market power of intermediaries, information and

infrastructure access, profit margins and transaction costs are all factors that need to be

taken into account. Furthermore it is also important to assess what the influence will be of an

international border running through the marketing channel, meaning that the existence of

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Introduction

import quota’s, tariffs as well as any other factors influencing trade between the two countries will also need to be taken into consideration. These issues are all factors that ultimately influence the optimal way for the mango producers to service the market in Niger.

During the research it is necessary at all times to take into consideration the specific attributes of the region in which the activities are taking place and the practices of the local cultures. When talking about issues such as contract negotiations, contract enforcement and existing rules and regulations it is important not to think of these in a traditional, western sense but to try and understand and appreciate the culture and traditional social hierarchies governing society. By using such an approach, a more realistic assessment of the mango producers’ possibilities of successfully servicing market segments in Niger can be made.

1.3. Outline of the Research

Following upon this introduction, the report has been divided into several chapters, each representing a different aspect of the research. Chapter 2 gives an overview of relevant literature to help understand the concepts and ideas involved when analysing marketing channels and the environment in which they exist, with special regard to developing economies. The chapter finishes with a description of the conceptual model that will serve as a guide throughout the report in answering the research questions. Chapter 3 describes the methodology that has been used to conduct the research, as well as the limitations of the research. Chapters 4 and 5 provide detailed introductions to Burkina Faso and Niger respectively. These chapters focus on the importance of the mango market in each country, the structure of the channel and the external environment in which the channel operates (in both countries). Furthermore, these chapters provide a description of the market actors involved in the channel and the activities that they conduct. Chapter 6 gives a detailed analysis of the entire marketing channel from beginning to end by describing all individual channel activities and how they are conducted. Chapter 7 continues with a summary and general analysis of the major problems (from chapter 6) that exist within the channel.

Subsequently chapter 8 continues with recommendations for measures that need to be taken

to tackle these problems and improve the functioning of the channel in the future. Finally,

chapter 9 presents the conclusions of the research that will be used to provide answers to

the original research questions.

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Theoretical Background

2. T HEORETICAL B ACKGROUND 2.1. Introduction

As a first step towards answering the problem statement it is necessary to evaluate a number of relevant theories to gain a more complete understanding of the issues at hand. Theory on marketing channels plays an important role in this:

• What are the different types of functions normally conducted within a marketing channel to get the product from its origin to the final consumer?

• Which factors determine whether each step in the marketing channel will be done by different actors or if one actor will perform multiple steps?

• When do changing circumstances call for a new channel and when is refinement of existing channels a sufficient solution?

• What is the role of potential channel conflicts on the channel structure?

Complementing this is a look into the institutional economic approach:

• What forces and institutions are at work in a society that influence its structure?

• Why are organisations organised the way they are?

• Which factors influence the behaviour of economic actors in a certain market?

Insights from institutional economics are discussed in this light and play an important role in coming to a complete understanding of the forces at work within and around the marketing channel. Institutional economic theory takes a broad view of a society and goes beyond neoclassical growth theory by not just describing but also examining the underlying causes of economic growth and stagnation

⁶

. With regard to the position of Burkina Faso and Niger as poor, developing countries, and the problem statement in particular, these are indeed important issues to address.

6

Yeager, T.J. (1998) p. 23.

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Theoretical Background

2.2. Marketing Channel Theory

2.2.1. Introduction

The following discussion of marketing channel theory is primarily based on the work of Coughlan et al. in their book ‘Marketing Channels’

⁷

. As a starting point for the discussion of marketing channel theory it is necessary to come to a definition of what marketing channels are. Coughlan et al. define marketing channels as the downstream part of a value chain.

They further state that the originator of goods or services gains access to a market through these marketing channels. Members within a channel are producers, intermediaries (wholesale, retail and specialised) and final consumers (see figure 2).

Consumers are usually unaware of the many necessary actors and flows within a channel, which are necessary to deliver the goods and services that they consume. A consumer of a mango in Niger will most probably not think of all the growing, harvesting, loading and transport processes that were necessary for him to be able to consume the mango.

Combinations of actors and organisations specialising in production, wholesaling, retailing, transport and other areas join forces within marketing channels. Seen in this light Coughlan et al. further define a marketing channel as:

‘A set of interdependent organisations involved in the process of making a product or service available for use or consumption.’

⁸

This previous definition entails that each channel member depends on the others to be able to do its’ job correctly, and illustrates the running of a marketing channel as a process (flow) and not as a singular event. A mango wholesaler in Niger will be unable to conduct his business if mango producers in Burkina Faso stop producing mangoes. Conversely, a mango exporter in Burkina Faso loses his business if consumers in Niger no longer prefer buying mangoes. The purpose of any marketing channel should be to satisfy the consumers within the market, and all channel members should focus their attention on this. In other words: effective channel management should strive towards optimally serving the final consumers. When managing the channel it is possible to eliminate channel members, but not the flows performed by these channel members. Eliminating channel members implies that

7

Coughlan, A.T. et al. (2001).

8

Coughlan, A.T. et al. (2001) p. 3.

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Theoretical Background

the functions performed by these members must be taken over by other members further up or down the channel. It can be attractive to eliminate channel members because their flows can be performed as effectively and at least as cheaply by other members, leading to a more efficient channel design. Establishing or changing a marketing channel so that it is best for a particular product is an important question and poor decision making in this area can bring high costs with it.

Channel Management itself consists of two distinct phases: channel design and channel implementation. Designing the channel involves segmenting the market, determining the positioning within these segments and which ones to target and establishing (or refining) the channels in the marketplace. Channel implementation, strives towards channel coordination, which is the effective management of the channel over time by understanding sources of power and potential for conflicts within the channel. Figure 1 illustrates the channel management framework.

Figure 1: Channel Management Framework

(Source: Coughlan, A.T. et al. (2001) p. 30)

This research will mostly focus on the channel design process due to the exploratory and

descriptive nature of the research and the lack of available information on the current

channels that exist between Burkina Faso and Niger. Identifying the existing channels and

addressing their appropriate design are the focus points of the research and analysis. The

conclusions that are drawn from this analysis will be used to address implementation related

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Theoretical Background

issues, which should be used in future efforts to implement the channel and achieve a coordinated channel over time.

2.2.2. The Existence of Channel Intermediaries

The flows within the channel can move either in the direction from producer to consumer or from consumer to producer. The flow of mangoes for example, moves through the channel from the Burkinabé producers to the Nigerien consumers. Payment on the other hand, flows back through the channel from the consumers in Niger to the producers in Burkina Faso.

Other flows can move in both directions or are conducted solely between two sequential members of the channel. These flows are depicted in figure 2.

In most markets producers do not deliver their goods directly to consumers but rely on different intermediaries. Mango producers in Burkina Faso do not sell their products directly to consumers in Niger. Intermediaries facilitate searches and thereby help to reduce uncertainty at both ends of the channel. Burkinabé mango producers sell their mangoes to exporters, who in turn transport these to Niger and sell them to wholesalers. These wholesalers then sell mangoes on to retailers, who in their turn sell the mangoes to the consumers. Thanks to intermediaries it is not necessary for consumers to search the entire market to find what they are looking for: intermediaries take over these search costs, leaving consumers free to focus their attention on other issues.

Figure 2: Channel Flows

(Source: Coughlan, A.T. et al. (2001) p. 10)

Intermediaries also perform the valuable function of sorting goods. As producers and

consumers have a natural discrepancy in the assortment of goods they respectively offer and

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Theoretical Background

demand, the intermediary can focus his attention on creating an efficient fit between these.

Mango producers in Burkina Faso grow very large quantities of mangoes and want to sell these in accompanying large quantities, while the average individual consumer in Niger will only want to buy a few mangoes at a time. Different intermediaries in the value chain facilitate in this by ‘breaking bulk’: allocating goods received into smaller quantities before selling them.

Without intermediaries, every producer would have to interact with every potential buyer to create all possible market exchanges

⁹

, which would be a costly exercise. Intermediaries help to reduce the total number of contacts by interacting with both suppliers and consumers and therefore have the potential to make market exchanges more efficient as producers do not need to come into contact with all potential consumers to be able to cover the entire market.

However, an efficient channel reduces transaction costs to a minimum by only involving actors who have a competitive advantage to execute specific functions

¹⁰

.

2.2.3. Channel Design Segmentation

Consumers have varying demands for products, their quality and the level of service required, so it is important to distinguish these differences. This is done by dividing the market into various segments and acknowledging the characteristics of each of these segments. When defining market segments, it is critical to understand the nature of consumer demands. Consumers have Service Output Demands (SODs) that minimise their search, waiting time, storage and other costs. Without an analysis of the service demanded by consumers, a proper design of the marketing channel is not possible. Consumers in Niger will probably limit their participation in the channel to visiting retailers to purchase mangoes, and will generally demand small quantities of mangoes as the perishable nature of the product and the low income levels of most consumers will not allow larger purchases.

Obtaining access to affordable, good quality mangoes will probably be the defining SODs of consumers in Niger.

If disposable income in a market segment is low, as is the case for most consumers in Niger, the product and service rendered and, therefore, also the design of the channel, must be

9

Coughlan, A.T. et al. (2001) p. 6.

10

Lutz, C. et al. (2003).

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Theoretical Background

adapted to this, to avoid unnecessary costs. If there is considerable income disparity among potential consumers this will provide the opportunity of creating various channels as richer consumers will be willing to pay more. Understanding the environmental characteristics and constraints is important when determining whether this is the case. Due to the fact that different groups of consumers value service outputs differently, multiple marketing channels can exist for the same product. Such an analysis can be used to determine how many channels are necessary to service the entire market demand.

Positioning

Positioning is identifying the optimal channel flow to serve the market: designing the distribution channels to meet each segment’s demand. In this way an analysis can be made of why certain segments will be targeted while others will not and the process may reveal some new, previously unexplored segments that could offer attractive opportunities. This process should accumulate in the necessary channel flows and the channel structure regarding who should be the members of the channel and how many of each type of member there should be. This could especially be interesting when exporting mangoes from Burkina Faso to Niger as it is important for a distributor to have good relationships with local channel partners in the target market, and some may be significantly better placed to successfully achieve this than others, which in turn influences the potential success in the market.

If a channel does not offer the required level of service to its consumers, theoretically there should be nothing that guarantees a protected market and sales over time. Where market opportunities exist because consumer demands are not being adequately met, other actors who may or may not already be active in the market, could sooner or later attempt to exploit these opportunities and compete for market share. However, as will be discussed during the review of institutional economics later on in this chapter, these theoretical assumptions do not always hold in reality, especially in developing economies such as Burkina Faso and Niger.

Targeting

Targeting is the step where it must be determined which segments should be targeted, as

well as which ones should not. The focus must be on the key segments from which the

channel could expect to be able to generate profitable sales. The internal and external

environments of each identified segment should ultimately guide the decision which

segments should be targeted, and what this means for channel flow performance and

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Theoretical Background

channel structure. Environmental and managerial bounds may exist that limit the extent to which a segment can be targeted. As will be discussed further on in this chapter it is not always possible to remove these bounds and they may very well lead to the actual channel design deviating from the optimal one.

The advantages and disadvantages of selling to each segment must be assessed while some required channels may be too difficult or costly to manage that it does not warrant targeting. When the Burkinabé decide which segments in Niger to focus on, the most important factor should be where the largest relative growth opportunities are. To target the chosen segments, new marketing channels must be designed or ones that are already in place must be refined.

2.2.4. Implementing New Channels or Refining Existing Channels Channel Flow Performance

It is important to identify what channel flows are being performed, by whom, and where in the channel these activities are taking place. This knowledge of flow performance is necessary to help diagnose shortcomings in the channel as well as how to improve these. Knowing which channel members have incurred what costs in performing the flows can help in allocating profits from the channel efficiently and equitably. This can help to create a sense of fairness in the channel that can help to avoid channel conflicts. For this it is important to understand how channel costs are shared among the channel members, how each member contributes to overall value creation within the channel and how important each channel flow is. These should be compared to the channel flows that are necessary to deliver the service-outputs demanded by consumers. Understanding these issues will help explain current channel performance and assist in making channel improvement decisions over time.

Physical possession of goods and ownership of the same goods do not necessarily go hand

in hand (see figure 2). Negotiation occurs when terms of transactions or the maintenance of

an ongoing relationship are discussed and decided upon. The actual profit made by channel

members should be compared to what share of total profit (or value) the flows performed by

each channel member are responsible for generating; this is defined as the equity principle:

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Theoretical Background

‘Compensation in the channel system should be given on the basis of the degree of participation in the marketing flows and the value created by this participation. That is,

compensation should mirror the normative profit shares for each channel member.’

¹¹

Adhering to this principle should create the right incentives among channel members to direct their activities towards creating value for the channel. Depriving a channel member of its deserved rewards can lead to underperformance of channel flows in the future and channel conflicts. This means that if competitive conditions do not give one channel member profit leverage over another, actual rewards should at least roughly correspond to the actual value added by a channel member’s activities.

Channel structure

The channel structure encompasses what type of channel members will be involved in the channel, the amount of each type of channel member and the number of separate channels that should exist in the market. The first question that arises is whether to use intermediaries in the channel at all. The mango producers in Burkina Faso must decide whether they have the capabilities and the possibilities to sell their mangoes directly to consumers in Niger. If the decision is to use intermediaries, the next decision should be what type of intermediaries to use. Especially when entering foreign markets, as is the case for the Burkinabé producers, this can be a problem as the intermediaries to choose from may be limited. Once the decision has been made to add a particular type of intermediary to the channel, it must be determined which specific intermediary to use.

Channel intensity is the decision about how many of a certain type of channel partner would be optimal to engage within the channel. With regard to channel efficiency, it is important to use enough intermediaries to cover the market but not so many that no intermediary can make a profit in conducting their activities. This last point can also be a source of channel conflict. A certain amount of competition within a channel can be useful but this must not become too extreme. If there are no significant barriers to entry for activities within the mango exporting channel there may be too many actors in the market, leading to intense competition and low profits.

11

Coughlan, A.T. et al. (2001) p. 98.

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Theoretical Background

Gap Analysis

If there is unmet demand, a channel design needs to be established that comes closest to meeting the target market’s demand. If a channel already exists, a gap analysis must be conducted between the optimal channel and the actual channel, to reveal the existing gaps within the channel. As the market in Niger is already being supplied with mangoes from Burkina Faso, a gap analysis will be required.

When a good view has been established of the necessary channel structure to meet the target segments’ needs, the channel that meets these service output demands and does so at a minimum total cost should be designed. When structuring this channel some subjects should be addressed to create the ideal channel structure such as:

• Can some functions be eliminated without damaging customer satisfaction?

• Are there any redundant activities that could be eliminated to lower costs in the channel?

• Can certain tasks be eliminated or redefined to minimise the total amount of steps necessary?

Channel gaps can exist because consumers’ demands have not been properly taken into consideration or because managing costs in the channel has not been carefully thought through (managerial bounds). These gaps exist when the total cost of all channel flows is higher than necessary, implying that a lower-cost method is possible. These managerial bounds can be harmful to consumers because they pay a too high price, or to certain channel members because they do not receive an appropriate reward for their activities.

The environment in which the channel operates can also limit the extent to which an optimal channel can be implemented. These environmental bounds, usually legal constraints or underdeveloped infrastructure, can create channel gaps especially when entering a foreign market as government regulation may prevent foreign companies from entering a market in the manner that they would wish to. The review of institutional economics later in the chapter will show that especially these environmental bounds in developing countries such as Burkina Faso and Niger can be substantial.

Several strategies can be used to close these gaps but once a channel already exists, it may

be very difficult and costly to do this. This shows the strategic importance of initial channel

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Theoretical Background

design, implying that the structure of a channel may be path dependent

¹²

. A badly designed channel may lead to the situation that channel members have to live with a suboptimal channel indefinitely, even after gaps have been recognised, as it may be too costly to close all the gaps within the channel. It may not be possible to relax some constraints, making it impossible to actually attain an optimal channel design outcome. If this is the case but actors still wish to be active in the market, the channel should be designed around these constraints, taking them as a given and designing the best alternative design. However, the

‘rules of the game’

¹³

can be influenced by active organisations within markets. If Burkinabé actors feel that they are being unfairly disadvantaged in their commercial dealings with Niger, they could lobby their own government to help relax market restrictions, making it easier to compete.

There can also be limits to channel design stemming from within the channel itself or because of the orientation or culture of specific channel members. A lack of trust among channel members can put limits on the way in which a channel is structured. Seen the ethnic, cultural and linguistic differences between people in Burkina Faso itself and with people in Niger, this may pose a real problem. Situations can arise whereby it is in a channel member’s best interests not to optimise the channel as in the sub-optimal situation he is receiving above average profits.

Vertical Integration

Many producers in all types of sectors do not give thought as to how to structure their channels and give little consideration to vertical integration decisions. They often just react to opportunities and problems as they occur and attempt to deal with these situations in an effective manner. Frequently this leads to the fact that an existing marketing channel is one that has ‘happened’ as opposed to one that has been designed. As noted before, choices made in the past tend to determine future possibilities within a channel.

The producer of a product is identified with the product even if he has no direct contact with consumers. Mango consumers in Niger will most likely never meet the mango producers in Burkina Faso, but their satisfaction with the mangoes will determine their image of products coming from Burkina Faso. The Burkinabé producers are therefore identified with the entire

12

Path dependency is discussed in more detail in chapter 2.3.3.

13

For a detailed description of what the rules of the game entail, refer to the review of Institutional Economics

later on in the chapter.

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Theoretical Background

channel. Also, the mango producers can obtain a great deal of information or market intelligence from the channel as what they know about the market in Niger depends heavily on the information they receive from other channel members. These two issues merit at least the consideration of vertical integration within the channel.

Vertical integration could also be a way for mango producers to reduce uncertainty for themselves in the channel. Producers already possess the best information on production and could use this knowledge to their advantage in more downstream channel activities. By taking control of (a part of) the channel they could learn more about the forces at work on the market in Niger and design a coherent strategy of dealing with them. On the other hand, not integrating gives more flexibility and can be less risky by seeing how events unfold instead of committing to it.

2.2.5. Channel Implementation Identify Power Sources

A channel is made up of different organisations or actors, who may or may not all have the same incentives to implement an optimal channel design. These conflicting interests are a problem as the channel members are dependent upon each other to be able to conduct their individual activities and adequately service the final consumers. The question is how a channel member can achieve this when perhaps not all channel members have the incentive to cooperate in the best interests of the channel as a whole. This has to be done through channel power, which is a member’s ability to control the decision variables in the marketing strategy of another member in a given channel at a different level of distribution

¹⁴

. This power can be used to service ones own incentives but it can also be used to influence all channel members to do the jobs that an optimal channel design would have them do (a channel leader). If this is the case then the result will be a channel that can better deliver what the consumers in Niger want, and at a lower cost.

Identifying the sources of power is crucial when attempting to implement a new channel or refine an existing one. If overall channel improvements would negatively influence a powerful channel member who is benefiting from the current situation, he will resist these changes. He must either be convinced of the necessity of these changes or other channel members must find a way to circumvent his power or obtain channel power of their own so they can exercise

14

Coughlan, A.T. et al. (2001) p. 36.

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Theoretical Background

pressure for change. The initial channel structure and power distribution within the channel determines which approach is necessary. Some channels may be market-based, which means that no actor drives the channel, while others may be more based on relationships between certain channel members or based on strong hierarchies with one or two channel members calling the shots

¹⁵

.

Identify Channel Conflicts

Channel conflicts can seriously damage the interests of the channel as a whole and identifying possible conflicts is therefore also an important part of channel implementation.

They emerge when the actions of one channel member prevent the channel from achieving its goals; these conflicts are common and dangerous to the success of a channel’s overall distribution efforts. These conflicts directly inhibit a channel member to perform the flows necessary within an optimal channel design and therefore lead to suboptimal channel performance. To combat this it is necessary to identify the sources of channel conflict and distinguish these from merely poor channel design. Secondly, a decision must be taken on the necessary action (if any) to control and eliminate the identified conflicts within the channel. Generally speaking, channel power is necessary to reduce conflicts within a channel.

2.3. Institutional Economic Theory

Marketing channel theory alone is not sufficient for a complete analysis of the mango marketing channel. The channel operates within a larger environment, consisting of rules, regulations and institutions. This larger environment influences the channel and the way in which it is forced or permitted to operate. Institutional economic theory attempts to explain the functioning of this larger environment, and understanding this is important in understanding the forces influencing the marketing channel.

15

Gibbon, P. (UNCTAD: 2003) p. 16.

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Theoretical Background

2.3.1. Introduction

North (1991) defines institutions as follows:

‘Humanly devised constraints that structure political, economic, and social interactions. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of

conduct) and formal rules (constitutions, laws, property rights).’

¹⁶

Institutions are the ‘rules of the game’ within a society, or in other words: the rules established by a society for human interaction. Institutions reduce the uncertainty involved in human interaction by prescribing patterns for human behaviour

¹⁷

. This entails the making routine of daily interactions and hereby includes how to act in certain social settings towards others and what is deemed to be acceptable behaviour and what is not.

North (1990) states that an institutional framework consists of three components, namely:

• Formal rules

• Informal rules and

• Enforcement mechanisms

Institutions are the rules, regulations and enforcement mechanisms and organisations mostly act within these general boundaries and habits set by the external environment, however they are also able to devise their own rules and regulations within their own area of responsibility. Organisations are defined as groups of individuals who band together to achieve some common objective

¹⁸

. Formal rules are the written rules of society. Formal institutions therefore are represented by laws governing contracts, crime, political systems, product information, and imposition of tariffs, quotas, taxes etc.

The second component, informal rules, are the unwritten rules of society and these include culture, norms of behaviour and codes of conduct etc. that individuals are taught while growing up and living in a society. These informal rules also include customs and attitudes

16

North, D.C. (1991) p. 97.

17

North, D.C. (1990).

18

Yeager, T.J. (1998) p. 10.

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Theoretical Background

and very often people are not aware of them because they are so ingrained into society.

When confronted with other cultures these informal rules become visible as cultural differences.

The third and final component is enforcement mechanisms. These are necessary because institutions are ineffective if they, and their laws, are not enforced, as individuals and organisations could then act as if the institutions and laws did not exist. Some rules or laws are self-enforcing due to strong ethics or safety issues, others can be enforced strongly, marginally or not at all depending on the costs and benefits involved with enforcement.

Enforcement is by its very nature an integral part of a nation’s institutional framework and may be the single most important element in explaining differences in economic performance

¹⁹

.

Williamson (1998) uses a similar approach but divides institutional economics into four levels of social analysis, whereby each level imposes restrictions on the one below

²⁰

(see figure 3):

• The first level corresponds to social theory and can be described as the influence that informal institutions, customs, traditions, norms and religion have on the way society is structured. This is usually taken as a given because it takes generations for these aspects to change and they therefore have a significant long-run effect on economies.

• The second level is the institutional environment, or the formal ‘rules of the game’, and refers to constitutions, laws and especially property rights. These aspects are very difficult to change or reform, barring extreme developments such as wars, coups, and severe financial crises. An important task for the governments of Burkina Faso and Niger and other formal institutions is to define these rules and, subsequently, to enforce them in order to guarantee that the market is on a level playing field

²¹

.

• The third level deals with governance, or the ‘play of the game’, and can generally be described by transaction cost economics. It is at this level that economic actors attempt to adjust their governance structures to the first two levels, to function successfully within society and take advantage of the given opportunities.

19

Yeager, T.J. (1998) p. 10.

20

Williamson, O.E. (1998) p. 26.

21

Lutz, C. et al. (2003).

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Theoretical Background

• The final level is a continuous process of economic actors to get the marginal conditions right: adjusting their resource allocation and employment through prices and quantities and by aligning incentives. It is through this process that short-term change and adjustment to new circumstances and opportunities can be realised. This level is expressed by the way that the channel actors in Burkina Faso and Niger will interact with one and other.

Figure 3: Institutional Economics Framework

(Source: Williamson, O.E. (1998) p. 26)

2.3.2. Transaction Costs

The existence of transaction costs was first suggested by Ronald Coase when he attempted to explain the existence of firms by challenging the assumption that the process of exchange is costless, an important assumption in neoclassical economic theory, first stated by Adam Smith in 1776 (the working of the ‘invisible hand’ in markets). Ronald Coase challenged this assumption, that presupposes that all markets are perfectly competitive, all firms earn a normal rate of return, all economic actors have perfect information when making exchanges and that there is no chance of one or more parties of an exchange not honouring an agreement. In his paper

²²

Coase (1937) stated that the market outcome is indeed always

22

Coase, R.H. (1937).