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April 11, 2007

Banana trade is a 'race to the bottom'

The banana market is intensely competitive and the chain from the plantation worker to ultimate consumer is dominated by a few large companies. At the retail end of the chain, consumers increasingly buy from a handful of supermarket chains. In the UK, for example, 75% of bananas are bought from just four retailers.

Bananas are what the retail trade calls a “Known Value Item” (KVI) or a “Key Value Line.” Along with a few other basic everyday products (that comprise the so-called “Grocer 33” products which are price-checked every week), they are used in price wars between the supermarkets. Supermarkets sometimes choose to sell these lines very cheaply in order to give the impression to consumers that shopping at their supermarket offers better value for money (even though in reality the price of these KVIs may not have any relation to other goods sold in their stores).

In Europe, supermarkets typically expect to make a gross margin of between 20 and 35% on all the fresh produce that they sell; bananas are no exception. The only way they can win the price war is by buying their bananas at ever cheaper prices from the banana traders.

Five big international companies dominate the world’s banana trade. Although these are major companies, they are still small compared to such international retailing giants as Walmart, Carrefour or Tesco. The big fruit traders find it difficult to resist the pressure to keep prices low. Fearing loss of contracts with the big retailers, who control access to the consumers, they are on the look out for ever cheaper sources of supply. Traditionally many of these companies owned and ran their own plantations, but in the last decade they, like many manufacturing brands, have sold many of their plantations and out-sourced production to independent producers, from whom they too demand lower prices.

As they divest themselves of plantations, they free their companies up to source bananas from wherever they can get cheaper supplies. Under pressure from the supermarkets pricing policies, they increasingly re-locate their sourcing and/or their own production to countries with the lowest costs and the most permissive or un-enforced labour and environmental laws. Plantations in countries with higher standards take radical steps to stay competitive, often by firing permanent labour and sub-contracting to gang masters who take on the same workers at lower rates of pay, and without social protection, as short-term temporary labour. Prices paid to small-holders plummet in the face of such competition.

Globalisation and liberalisation of markets are often praised by financial experts. Liberalisation, by increasing competition, leads to efficiency savings and lower prices for consumers, so the theory goes. But in the absence of enforceable labour and environmental standards, the reality has another side. The reality for many banana workers and smallholders is what has been termed the “race to the bottom”.

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