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At Issue

by Bridget Kenny & Charles Mather

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The Zambian dairy sector is currently undergoing a phase of dynamic change and development.  Foreign Direct Investment (FDI) by South African companies in the processing node of the dairy chain, combined with significant developments in the retail sector, have led to rapid changes in both the production and consumption of dairy products. While the structural adjustment programme in Zambia that underpinned the dairy and retail privatisations has been widely criticized for its negative impact on labour markets, industrial capacity, living standards and overall economic sovereignty, the case of the dairy sector raises important questions around strategies for engaging FDI.

"While the structural adjustment programme in Zambia that underpinned the dairy and retail privatisations has been widely criticized ... the case of the dairy sector raises important questions around strategies for engaging FDI."

Are there ways of “disciplining” FDI to ensure local production and consumption benefits – even in poorly resourced countries like Zambia? Can foreign investment be channelled to fuel local development? Are local accountability and inclusion consistent with commercial viability? In each case, the Zambia dairy sector raises new and perhaps unexpected answers to old questions.

Zambia’s Dairy Sector

National dairy sectors are typically organised around integrated primary production, milk processing and commodity retailing chains. In Zambia, commercial components of the industry have been in place since the 1920s, when a small group of white settler farmers introduced dairy cows to the country. A modest dairy industry was established by independence in 1964. Following independence, the departure of many white dairy producers and new primary production development schemes instituted by the Zambian government, the sector was substantially restructured. The results were distinctly mixed.

A decline in commercial milk production from the mid-1960s into the 1970s coincided with increases in dairy consumption, especially in the growing urban centres of Lusaka, Livingstone and Copperbelt towns like Kitwe and Ndola.  Government responded by establishing parastatal dairy operations on former white settler owned farms.  Production on these farms, heavily subsidised by the state, began in the late 1960s. Within a decade they were supplying over 30 percent of processed milk. However production bottlenecks limited further expansion, and the country remained dependent on imports to meet local consumption needs.

Meanwhile, the government launched various donor-backed schemes to increase milk production through encouragement of smallholder farming. A Dairy Settlement Scheme saw the identification of land in peri-urban areas suitable for dairy cows and the training of farmers in dairy husbandry and management. A Rural Milk Production Scheme, supported by the World Food Programme, involved the identification of smallholder farmers, who were provided with cows on loan and support in marketing milk; and the Smallholder Dairy Development Project, a World Bank funded initiative, aimed at establishing 1800 farmers with soft loans for the purchase of animals and equipment, producing milk for the government’s own Dairy Produce Board (DPB).

These schemes were largely unsuccessful from the 1970s, and very little of the total milk processed in Zambia today originates from these initiatives. The reasons for failure were characteristic of such approaches: insufficient extension work around dairy cattle management, a complete absence of financial management support to individual beneficiaries, and continuing dependence on external inputs like manufactured feed (which exposed farmers to volatile swings in exchange rates), all contributed to stagnation in the smallholder sector. Meanwhile the DPB, which controlled milk processing from the mid 1960s and had several processing plants across the country, was afflicted by financial and management problems. Distribution chains, too, were inefficient and often unprofitable. Growing demand moved ahead of local production and supply chains.

"(Government dairy) schemes were largely unsuccessful from the 1970s... Growing demand moved ahead of local production and supply chains."

Restructuring through Privatisation

In the 1990s, Zambia’s embarkation on a wide-ranging structural adjustment programme had a dramatic impact on the dairy sector. Central links in the parastatals commodity chain, including the DPB and the dominant state-owned national supermarket chain, were earmarked for restructuring and privatisation. The prospect of a sudden influx of dairy sector FDI amid the loosening of import controls on commodities raised fears by some that local production would be effectively marginalised, a new case of “deindustrialisation” by adjustment. The reality would be less bleak and more ambiguous, with some positive signs – however unexpected – of local development in the sector.

The cornerstone of the parastatal dairy sector, the DPB, was privatised in the mid 1990s when its majority stake was sold to South African-based Bonnita for US$800,000. Zambian commercial farmers were guaranteed 28 percent of the shares in the new company, and Bonnita committed to retaining the DPB’s 130 employees.  In the late 1990s, Bonnita South Africa was itself bought by Parmalat, the Italian dairy multinational, making Parmalat the new direct investor in Zambia via South Africa.

Parmalat remains the dominant player and now processes almost 50 percent of the raw milk produced in Zambia by commercial farmers and smallholders. There are at least 30 other smaller processing plants that are involved in a range of fresh and processed dairy products, with several of these linked to local dairy cattle farms. One, the Livingstone-based Finta Dairy, has processing capacity to match Parmalat’s but its production output is far lower, with its efforts focused on capital intensive long-life milk products – much of which relies on imported powdered milk inputs.

In the same period as the DPB deal, government privatised its national grocery chain, selling its 17 store network in 1996 to South Africa’s multinational supermarket corporation, Shoprite. As a parastatal, the chain had been poorly managed and resourced, and its shops were mostly uncompetitive and loss-making. As a result, Shoprite was able to negotiate substantial concessions during the privatisation process, including tax holidays and customs waivers, which benefited the new owner over competitors – including the South African franchised Spar chain (currently has 4 stores but plans for 30), the local Melissa network and many independent grocers (see Table below). In the context of experiences in other countries, where the influx of multinational retail businesses had led to restructuring and decimation of local food commodity chains, there was considerable anxiety about the impact of the Shoprite privatisation on domestic dairy farmers, processors and competing retail businesses.

Supermarket No. of Stores Urban (Lusaka) Rural Towns Origin
Shoprite 18 4 14 South African
Spar 2* 2 0 Franchise – South African
Melissa 3 3 0 Zambian
Independents Several Several Several Zambian
Table: Supermarkets selling food products in Zambia, 2004 *4 stores by 2006 (Source: Emonger 2006: 804)

New Dynamics Emerge

The arrival of Parmalat and Shoprite as dominant players in two key components of the dairy commodity chain, processing and retail, fundamentally changed the Zambian dairy industry – but without shaping it entirely to the interests of the new market leaders. Confronted by international and domestic production constraints, local competition, and rising local demands for linkages with local production and distribution networks, the FDI ventures were forced to engage with the complex changing realities of the local business terrain.

One reality involves the sources of local primary production. Parmalat, the country’s largest milk processor, receives 70% of its raw milk from large commercial farmers. But it also processes milk from approximately 400 smallholder farmers who are organised into cooperatives, or who supply the processor individually. Indeed the number of larger commercial farmers has remained static or has declined since the early 1990s, while the amount of milk produced and processed by smallholders has been increasing. Faced with rising demand, the dairy processing sector – including smaller local players in Zambia – now sees a revitalised smallholder producer sector as the only viable way of increasing raw milk production in the medium term. Instead of marginalisation of small-scale dairy producers, Zambia has seen a different dynamic: in the case of Parmalat, the company (in cooperation with the Zambian government) is consolidating sourcing strategies from smallholders by investing in infrastructure to assist them in improving the volumes and quality of raw milk.  Support is also being provided for the transportation and collection of raw milk, which historically has been a serious problem for smallholders.

"Instead of marginalisation of small-scale dairy producers, Zambia has seen a different dynamic:
... investing in infrastructure to assist them in improving the volumes and quality of raw milk."

Further down the production chain, Parmalat’s linkage strategies have led to improvements in the quality and variety of dairy products overall, with positive effects on local processors and the growth of the industry. A range of small scale operations making a variety of dairy products, including butter, cheese, yoghurt and long life milk have survived by improving production standards and better matching the needs of a growing local market. Fresh products like milk and yoghurt, which have a shorter shelf life and are more costly to transport, have provided clear advantages to locally based processors. While Zambian retailers and dairy processors continue to source cheese, butter and other processed products from South Africa and further afield, this practice is currently the subject of intense debate within the national Dairy Processors’ Association. The association has been increasingly successful in limiting dairy imports particularly when they can be sourced locally.

The changing terrain of retailing has also had important knock-on effects in the dairy industry. There are four main retailing channels for dairy products in Zambia:  large and medium supermarket chains, smaller retail shops mostly in urban compounds and smaller towns, Parmalat-owned metal shipping containers in urban compounds, and informal vendors.  Additionally many processors sell to wholesalers who in turn sell to smaller retail shops and informal vendors around the country.  

Shoprite, the country’s largest retailer, sources many dairy products locally— fresh milk, yoghurt, and some cheese and butter (though it also continues to import processed items from South Africa, Ireland and Denmark). However most of its locally sourced goods come from large scale processors, including Parmalat and Finta. Shoprite also has a “strategic partnership” with Zambeef (a medium-sized local producer) to run its in-store butcheries, and it stocks Zambeef’s butter and fresh milk.  Importantly, the partnership ensures that Shoprite does not compete directly with Zambeef’s own network of retail shops.

For the most part, local smaller processors have been excluded from Shoprite’s supply chain by the latter’s high sourcing standards for product volumes, reliability, and quality. Shoprite generally requires processors to supply all of its branches, and small-scale processors generally cannot meet these volume requirements; nor do they have the transport infrastructure to deliver to all branches, or the capacity to meet the extended credit cycle which Shoprite often expects of suppliers. In addition, Shoprite also insists on standards of quality, packaging and presentation that are uneconomic for smaller processors. For example, having invested heavily in refrigeration capacity, the chain demands ten-day shelf life of its fresh milk, where smaller processors may have only one-day shelf lives. High standards around weight packaging and labelling, including automatic bar coding and sell/buy date information, also pose challenges for small scale suppliers.

Other dairy retailers, like South African franchised Spar and the Zambian-owned Melissa chain,  have been more accessible to smaller processors. Evidence suggests that the growth of dairy retail competition is forcing Shoprite to be more flexible in its product sourcing, and rethink strategic links with suppliers. Spar stores do not buy dairy products centrally, and evidence suggests that this has enabled Spar to source from some smaller milk and cheese processors who could not meet Shoprite’s volume or quality standards. The Melissa chain sources from large and small local and international suppliers depending on price.  While it has short term and sometimes erratic sourcing arrangements with suppliers, it too serves as an alternative client in a growing market. So do smaller independent retail stores, often located in compounds and small towns where consumer markets are competitive, highly price sensitive and not easily reached by the bigger chains and stores. Parmalat also has its own distribution networks of metal shipping containers in compounds.  The company appoints agents who sell the milk, and Parmalat owns the containers.  The agents are paid by commission on the amount of milk sold. Smaller processors who focus mainly on producing the least capital intensive products, like yoghurt and sachets of milk, often use mobile vendors to sell their products on the street in compounds.

Sub-imperialism or Something Else?

While it is clear that recent South African investments have inspired new dynamics in the Zambian dairy sector, their implication for national development, local businesses and ordinary Zambian consumers is open to debate. But the argument that larger commodity-focused FDI brings with it destructive “sub-imperial” strategies for displacing local producers – a view associated with sub-imperialism – does not adequately explain Zambian dairy dynamics. Instead, the last decade demonstrates not only the complexity of production restructuring in practice, but also the opportunities for host countries to discipline incoming foreign investors. While the dairy sector has specific dynamics that facilitate constructive interaction with external companies, the Zambian case also provides broader lessons about the “politics of the possible” for holding FDI accountable by local states.

"While the dairy sector has specific dynamics that facilitate constructive interaction with external companies, the Zambian case also provides broader lessons about the ‘politics of the possible’ for holding FDI accountable by local states."

In Zambia, the peculiarities of dairy production have afforded special leverage to local players. The bulkiness and perishability of raw milk products like fresh milk and yoghurt means that these products are not normally traded internationally or even regionally, and are instead locally produced and sourced. At the same time, several dairy products including butter, cheese and long life milk, are more easily transported over distance, and also can be manufactured using milk powder – which is a globally traded commodity. Ironically, this currently works in Zambian producers’ favour: a global shortage of milk powder has pushed up its costs to uncompetitive levels in the Zambian milk market. Nonetheless, internationally traded processed products remain heavily subsidised in places like the European Union. Meanwhile, international health and hygiene standards associated with raw milk production and processing enable a degree of local market protection, under the banner of consumer protection.

This evolving mix of production factors presents opportunities for a range of interests and agents in the Zambian dairy chain, which continues to change. There is growing evidence that the simple categorisation of capital as either “foreign” or “local” provides little help in predicting the actual behaviour of companies in Zambia. Indeed, the way in which companies identify themselves has changed over time, partly because some agents have become increasingly “embedded” in the Zambian political economy, for both “push” and “pull” reasons. This especially, adds new complexity to any efforts to identify a company as being a sub-imperial agent; and raises important questions about the scale at which sub-imperialism as a concept can be used.  The experiences of Parmalat and Shoprite both point to important lessons involving FDI, market discipline and local accountability.

Embedding as Good Business Practice: Parmalat

By engaging with foreign producers in the different contexts of a changing local market, Zambian dairy producers have developed increasing capacity and skill to defend local interests while consolidating local commodity chains.

At first glance, Parmalat and its strategies could be interpreted as sub-imperialist.  It is a subsidiary of a South African branch of a large multinational corporation, and continues to import processed dairy products from South Africa. Although it imports mostly processed products, it occasionally brings in products at higher cost that can be produced locally for less using local suppliers of raw milk. 

That said, many of Parmalat’s market strategies suggest a perceived need to demonstrate a commitment to the Zambian political economy by making concessions to local interests.  For instance, in negotiations with the Dairy Processors Association, Parmalat came under strong pressure to discontinue imports of dairy products that could be sourced locally. It responded by restricting these imports, agreeing informally to bring in only products that could not be produced locally, such as speciality cheeses and flavoured butters.  Parmalat also agreed to upgrade its Zambian UHT plant in order to boost local production and reduce the need for imports. Significantly, no legal compulsion was put in place to force Parmalat’s shifts; it did so voluntarily and in the spirit of growing the local dairy sector.

At the same time, it seems clear that Parmalat recognised the political leverage and production gains that came with its local embeddedness. Support to the local small scale sector both lends the company a developmental image and makes economic sense in a period of high international prices for powdered milk. In addition, the overall shortage of raw milk due to increasing domestic consumption means that Parmalat has had to move beyond its traditional supply base of large-scale commercial farmers. Within the company, there is another strong motive for nurturing linkages with the domestic industry: by the original privatisation deal, 33 percent of the company is held by local farmers and employees.

Ironically, Parmalat’s local linkage strategies contrast with those of Finta, Zambia’s leading locally owned dairy processor. Finta sources all of its raw processing material from Brazil. Moreover, its partnership with South Africa’s Clover company sees Finta serving as a key conduit for South Africa dairy products into the local market. The location of company ownership, therefore, is not a reliable guide to market practice.

"Ironically, Parmalat’s local linkage strategies contrast with those of Finta, Zambia’s leading locally owned dairy processor. Finta sources all of its raw processing material from Brazil."

The situation with retailers is equally complex.  Locally-owned Melissa, which runs a chain of retail outlets, appears to have no specific commitment to local dairy processors and seeks out international products, particularly when they are cheaper. But while Shoprite was initially not strongly supportive of Zambian dairy suppliers, there is evidence that local pressure for higher levels of local sourcing has resulted in strategy changes. The Zambeef partnership is one example; the allotment of greater shelf space to local ice cream producers following lobbying from the Dairy Producers Association is another. The arrival of retailer Spar also added to pressure on Shoprite, as Spar franchise stores tend to source locally with lower-end competitive products. As a result, the proportion of locally sourced dairy products at Shoprite is higher than the chain’s average 30 percent share of Zambian-sourced foodstuffs.

Trade regulations have also been used by Zambian dairy producers to protect their market from predatory pricing and competition by external producers, including Kenyan dairy companies. In the latter case, the Dairy Producers Association responded to cheap imports by mobilising government to apply World Trade Organisation sanitary and phytosanitary standards to block Kenyan milk imports. Illegal imports from Zimbabwe have also been targeted in the past.

New Dynamics, New Questions

International dairy commodity chains are complex, globally-linked and highly dynamic. Since the buy-in by South African capital in the 1990s, it has become increasingly clear that this also applies to the Zambian case, where expansion of production, processing and retailing capacity has led to dynamic changes in a commodity chain that had been in decline for nearly 25 years. But the question is: to whose benefit have these changes been, and at what cost to local development priorities? Here, perhaps the Zambian case provides food for thought and lessons for future strategies in engaging regional FDI.

The transformation of the dairy sector cannot be adequately explained by straightforward arguments associated with sub-imperialism. That perspective typically points to FDI’s displacement of local capital and impoverishment of invaded labour markets, and its objective of expanded repatriation of profit. In less nuanced versions, notions of sub-imperialism also entail  unidirectional swamping or subordination of host country political-economic sovereignty. 

The experience of dairy FDI into Zambia suggests a much more dynamic and ambiguous form of foreign-local interaction. While processor and retailer FDI has established South African companies as local industry leaders, the terms of engagement with local components of the commodity chain have helped to discipline the activities of these companies and ensure the emergence of positive participation in the sector. The Parmalat and Shoprite ventures have improved the national supply and quality of dairy products, and created new opportunities for small and medium sized dairy primary producers, processors and retailers. Zambia has become less dependent than ever on powdered milk and dairy imports, while expanding production capacity to record levels for a growing consumer market.

One key factor in extracting higher local participation in the re-energised sector involves the specificity of the dairy industry; another relates to the political strategy of local player interests. 

Unlike most processed foods – for which Zambia remains overwhelmingly dependent on imports – important dairy products like fresh milk and yoghurt can only be competitively produced locally. In the context of currently high costs for powdered milk in global markets, this has forced Zambian processors to pursue strategies to increase local raw milk production for a range of production needs. The challenge now for Zambian primary producer networks is to lock large-scale processors and retailers into local commodity chains, to ensure longer-term growth, coherence and stability in the sector.

More broadly, the “embedding” of foreign companies is actively being pursued by a range of local players, with some success. Political lobbying by dairy industry interests backed by government has created strong pressures on foreign companies to demonstrate their commitment to the Zambian economy through constructive interaction and market concessions. This kind of creative engagement has identified the commercial gains behind local embedding, not just the political benefits associated with good corporate citizenship. And there is now evidence that pressures for embedding are reaching beyond foreign businesses, to include Zambian-based enterprises that have traditionally sourced commodities outside the country.

"There is now evidence that pressures for embedding are reaching beyond foreign businesses, to include Zambian-based enterprises that have traditionally sourced commodities outside the country."

This final potential twist in the commodity chain – the prospect that local capital may be disciplined according to the same ethical standards applied to foreign investors – raises additional critical questions about the evolving repercussions of South African FDI in Zambia. If FDI has provoked engagement and resistance from local business interests, it has perhaps helped to reopen wider debates about the accountability, responsibility and social embeddedness of national capital, too.

(Bridget Kenny and Charles Mather teach at the University of the Witwatersrand, in Johannesburg, in the Department of Sociology and the School of Geography, Archaeology and Environmental Studies respectively.)

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