Getting their slice

Entrepreneurs cut middlemen from food chain

Getting their slice

They’re known as the ‘Veggie Brothers’ and their exploits have become one of the most searched for items on China’s internet, according to Baidu. Like Batman and Robin they are on a mission to help society. But in the Veggie Brothers case it’s by fighting inflation rather than crime.

The duo – who are not in fact real brothers – are from Urumqi. A couple of months ago they got into an argument with a local vegetable vendor over the price of green peppers, and decided to carry out some further research on the vegetable supply chain.

The Brothers soon discovered that if they drove their minibus to rural wholesale markets or even to farms directly, they could cut prices substantially. For example, the same Rmb8 per kilo of green peppers that they had begrudgingly purchased the previous month they could be sold for Rmb3 per kilo, all the while still turning over modest profit.

The Veggie Brothers have in fact drawn attention to a broader issue, reports the South China Morning Post: the chronic number of middlemen in Chinese agriculture’s supply chain.

In particular, the newspaper examined the journey of cucumbers from field to consumer dining table. At a Shandong farm cucumbers are sold for Rmb2 per kg to a local trader in Shouguang. He in turn sells them for Rmb2.04 per kg to a wholesaler outside Beijing. This wholesaler then sells them to an inner-city wholesaler for Rmb2.4 per kg, who marks them up to the retailer for Rmb2.5 per kg. The shop finally sells to the consumer at the biggest mark up, for a final selling price of Rmb5 per kg.

In other words, from farm to table, the price has risen 150%, with the supply chain adding Rmb3 per kg to cucumber prices.

It’s not just the Veggie Brothers who are trying to track their way down the supply chain. So too is Zhang Tonggui, although as the 21CN Business Herald says, he came at the issue from a different direction by trying to source organic fruit and veg.

Zhang was a successful Shanghai businessman with a chain of 30 restaurants. But he became aware that the farmers supplying him had two separate pieces of land on which they grew produce.

One was used to sell to the cities, and involved the use of large amounts of fertilisers and chemicals to maximise crop yields. The other plot was used to grow food for the farmers’ own consumption and to send to family and friends. It was organic and, Zhang concluded, much cleaner and healthier.

Zhang decided to explore further, developing a business case for organic produce while completing an executive MBA at Shanghai’s China Europe International Business School (CEIBS). He discovered that, in developed markets like Europe and Japan, organic produce accounted for 10% of consumer purchases. But in Shanghai, organic fruits and vegetables constituted just 1%. If it could grow to 5%, that was a Rmb5 billion ($759 million) market opportunity. So in 2005 Zhang founded Tony’s Farm. He leased farmland on the outskirts of the city’s Pudong district and after letting the soil rejuvenate naturally, got his organic certification. His first harvest was in 2009.

That meant distribution was his next problem. Zhang decided the only way to price his fruit and veg competitively was to bypass the existing wholesalers and big supermarkets. Instead he set up his own sales channels and hooked up with Japan’s Yamato Logistics to ensure delivery.

Tony’s Farm today sells directly to 20 big companies in Shanghai (such as Baosteel) and via the internet to around 5,000 families (it delivers from farm to home in less than 24 hours). Zhang says that distribution costs now make up just 20% of the final price charged; versus as much as 80% when the full middleman layer is involved.

Zhang reckons by cutting out the middlemen, he’s offering his Shanghai customers better quality, for a cheaper price. And he’s leasing thousands more hectares in Yunnan and elsewhere to expand. He won’t singlehandedly reform China’s inefficient agricultural supply chains, but the more successful his model the more others might follow…

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