The food processing sector is widely regarded as having the potential to generate economic growth, entrepreneurial opportunities and employment (FAO, 1997; CIAT, 2002; Lambert, 2001; McCormick and Atieno, 2002). In developing countries the interest in agro-processing is associated with its potential for generating demand amongst smallholder farmers, upgrading primary production through small scale food processing, and also improving food price stability and food security (Cardoso, 2000; Saasa, 2000). Indeed, in 1997 the Food and Agriculture Organisation's annual State of Food and Agriculture report argued that 'because of its high degree of interdependence with forward and backward activities, agro-industry can play a very important role in accelerating economic activity' (FAO, 1997, 8). The FAO also pointed out that agro-processing was suited to developing country contexts due to the fact that processing plants are not always scale dependent. Small operations, they argued, may be as economically efficient as larger plants which can take advantage of economies of scale (FAO, 1997).
The development potential of agro-processing in South Africa has been recognised for some time. In the period immediately before the country's first democratic election, the Macro Economic Research Group (MERG, 1993) suggested that new policy perspectives be developed for the manufacturing-agricultural complex, a group of industries that reflect the complex and dynamic linkages between agriculture and the manufacturing sector. Their evidence based on data from the late 1980s suggested that the manufacturing-agricultural complex accounted for 28% of manufacturing employment, 31% of manufacturing production, and almost 25% of the manufacturing sector's contribution to GDP. Based on this analysis, they recommended a policy for targeting investment in agro-industry (MERG, 1993). More recently the Department of Trade and Industry — through its Integrated Manufacturing Strategy — identified agro-processing as one of five key sectors of the economy capable of stimulating growth and generating employment (Machaka and Roberts, 2003). Interestingly, the DTI also stressed the importance of the food sector in value addition, food price stability and food security (DTI, 2001).
The ongoing interest in agro-industry internationally and within South Africa has coincided with significant changes in the structure of the food system in developing countries. The key driver of change in agrifood markets is the concentration and expansion of retailing combined with foreign direct investment in the food processing sector. There is now a growing body of research that explores the implications of concentration in retailing and processing for farmers and food processors (Dries et al, 2004; Weatherspoon and Reardon, 2003; Reardon and Berdegue, 2002). This research suggests that while urban based consumers are likely to benefit from modern retail structures, the same cannot be said for small scale farmers and food processors. With few exceptions (Dries and Sinnen, 2004) small farmers and small and medium sized processors are excluded from these chains because they are unable to meet the volume and process requirements involved in supplying retailer driven chains. Instead, retailers rely increasingly on larger food processors who can meet the volume demands and the food safety and quality specifications required by large retail chains. These changes in the agrifood system pose considerable challenges to both governments and donors interested in supporting small scale food processors.
This paper explores the development prospects of small, medium and micro enterprises in South Africa's food processing complex. For several reasons, this is an important time to be considering the development prospects of SMEs in this sector. First, the deregulation of agricultural markets from the late 1980s and early 1990s has opened many new opportunities for small and medium sized processors, but we have little insight into how these businesses operate in a competitive environment dominated by large integrated processing companies and powerful retail chains. Second, the Department of Agriculture and Land Affairs has recently released its black economic empowerment proposals for agriculture (NDA, 2004a). While much attention has focused on the land ownership implications of the proposed AgriBEE, there has been very little discussion about its proposals for agri-enterprises, which includes food processors. The AgriBEE suggests that 50% of preferred suppliers be companies owned by black South Africans and local SMEs by 2010. This is a significant intervention given that most preferred suppliers for retailers are large, integrated food processing companies.
This report is based on secondary sources on South Africa's food sector and a non-random sample of 30 small scale food processors. The findings stress the growth opportunities and challenges of SMEs in this sector given the concentrated structure of retailing and food processing. The first section of the paper reviews the international literature on agrifood restructuring in the developing world. This section emphasises the shift to buyer-driven food chains and the implications of this change for small and medium sized food processors. The second and third sections of the paper provide a profile of the food processing sector and an analysis of its recent economic performance. In the fourth section of the paper, the characteristics of food processing SMEs are discussed followed by a detailed exploration of the growth challenges they face. The concluding section suggests support mechanisms for these enterprises in the light of their growth challenges.
For the purposes of this report, food processing is defined using the Standard Industrial Classification codes 301 to 304. These include manufacturing, processing and preservation of meat, fish, fruit, vegetables, oils and fats (301); manufacture of dairy products (302); manufacture of grain mill products, starches and starch products and prepared animals feeds (303) and manufacture of other food products (e.g. bread, sugar, chocolate, pasta, coffee, nuts and spices) (304).