6. Case Studies:
Kenyan Avocados: Connecting to High-value Export Markets
Kenya is frequently cited as a “bright spot” in African agriculture.1 Conducive government policy, strong donor support and private-sector leadership have helped to create success stories in exports to the EU; for example, French bean exports climbed from zero in the late 1980s2 to 19,000 tons by 20103. Policy changes supporting this growth include the liberalization of the fertilizer market. Following the removal of price controls and subsidies, increased competition led to lower fertilizer end-prices, triggering a 14 percentage-point increase in adoption rates among smallholders4. Today, agriculture amounts to half of Kenyan GDP and employs 75% of the Kenyan workforce5. Kenyan policy-makers and agribusiness players continue to prioritize the growth of agricultural exports, both in green beans and other cash crops like avocados.
Kenya is one of the world’s largest producers of avocados, with production of 110,000 tons in 2010.6 For comparison, the largest producer is Mexico with about 1 million tons produced annually.7 Local varieties dominate Kenyan production (about 70% of total), whereas Fuerte and Hass, the varieties suitable for export, make up approximately 20% and 10%, respectively.8 Most of the avocado farms are near Nairobi, where the export packaging factories are located.9
Of the total production, 20-25% is exported.10 Kenya ranks as the sixth-largest exporter to Europe, with a 5-6% share of volume in 2010,12 and enjoys a competitive advantage versus Peru, its main competitor in Europe: the Kenyan Hass harvesting season extends later in the year than Peru’s, granting Kenya a window of opportunity.13
The focus of this case study is on the high-value, high-growth market of avocado exports to Europe. Kenyan avocados sell in Europe at roughly three times their domestic price, making the export opportunity extremely attractive.14
2. Kenyan Avocado Export Supply Chain15
An estimated 70% of Kenyan avocados – even those for export – are produced on smallholder farms (Figure 26).16 When not linked to exporters through an out-grower scheme, farmers market their avocados through middlemen, either legally government-certified agents or unofficial brokers17. These middlemen typically harvest avocados themselves and organize transport to Nairobi packhorses.18 This initial leg of transport is usually done with small pickup trucks.19 Once at the factory, avocados are quality-checked, sorted, washed, waxed, pre-cooled and packed in cartons (Figure 27). Once packed, exporters stuff the cartons into refrigerated containers (“reefers”) outside the processing gate, and shipping companies then transport the reefers to the Mombasa port. There, the reefers, which are controlled-atmosphere-treated, are loaded onto a ship and later trans-shipped in Salalah, Oman. Finally, the reefer containers are unloaded in Europe and delivered to importers (see Figure 28 for an illustration of the overall value chain economics.).
Figure 26: Kenyan Smallholder Avocado Farmers Typically Use Manual Harvestng
Source: A.P. Moller-Maersk
Figure 27: Avocados Are Packed in Nairobi before Export
Source: A.P. Moller-Maersk
Figure 28: Kenyan Avocados Sell for a Healthy Margin in the EU, Freeing Up Resources for Investment“Are Horticultural Exports a Replicable Success Story? Evidence from Kenya and Côte d’Ivoire”, p.16, IFPRI, August 2004.[/fn]
Note: (*) Procurement is estimated based on the local selling price of avocados in Kenya Source: Interviews
Most often vertically integrated with exporters, packers procure and package a 4 kilogram (kg) carton of avocados at a cost of about US$ 4.10. An additional US$ 1.60/carton is required for shipping to Europe by sea in a reefer (Figure 28). With the import price fluctuating around US$ 7-8/carton, the supply chain overall is profitable.20This situation was enabled by government-led infrastructure investments, followed by private-sector investment in reefers, which helped to reduce transport costs versus expensive air shipments. Once this tipping point of profitability was reached, investments started to naturally flow into the sector.
3. Impacts of Supply Chain Barriers and Potential Solutions
Successful initiatives to overcome supply chain barriers are presented, as well as some remaining opportunities to overcome challenges to future growth.
Transport and Communications Infrastructure
Corridor infrastructure investments benefit multiple value chains.
Mombasa is the pivotal port for East African countries and is accessed via the main corridor, the Nairobi-Mombasa highway. By the early 1990s, the quality of this road had deteriorated due to high traffic. The Kenyan government, with the help of the World Bank and the EU, decided to invest in rehabilitating the highway.22
Investments were made over approximately a decade, ending in 2005. Travel time from Nairobi to Mombasa was reduced by 40%, from 12 to 7-8 hours, and costs decreased as well.23 Typically, road rehabilitation projects in East Africa drive operational cost reductions of 15%.24 Although this saving has a marginal impact on the Kenyan avocado industry – less than 1%25 of the European end price – the incremental benefit is applied to many different value chains. The overall benefit for Kenya and Kenyan agricultural export value chains is thereby important.
Introduction of reefer container technology has made Europe accessible for Kenyan avocados.
One of the major challenges previously faced by this industry was the lack of suitable transport equipment. If not cooled, avocados ripen faster than the time it takes to ship them to Europe.26 Exports to Europe, therefore, were only possible through expensive air shipments. Alternatively, transporting by sea was only feasible for the more proximate Middle East,27 where avocados sell for much less than in Europe.
Recognizing this opportunity, exporters first engaged temperature-controlled, break-bulk vessels to replace expensive air freight.28 They then approached A.P. Moller-Maersk to present the business case for refrigerated container transport. Shipping companies consider a number of factors when evaluating a value chain for reefer investment. Most importantly, they look at the economics and growth potential of the value chain. In this case, if Kenyan avocados were able to be sold profitably when transported by air, there was a clear case for investment in sea freight, provided quality could be maintained during the journey. In addition, key enablers must be in place to ensure sustainable operations.29 Fortunately, the Kenyan government had invested in the Mombasa port and was able to provide the necessary infrastructure (e.g. specific plugs, berth capacity) to support reefers. Continuous investments are being made to accompany the growth of reefers in the Mombasa port, including a new berth to open this year.30
Early packing of containers ensures an uninterrupted cold chain.
When dealing with perishable produce, maintaining an uninterrupted cold chain is critical for food quality and safety.31 When reefers were first introduced, exporters preferred to transport avocados to Mombasa in regular trucks and pack the reefers at the port. Over time, exporters realized that they could command a price premium in EU markets if a cold chain was begun as close to the farm as possible. This price premium outweighed the costs of bringing an empty reefer to Nairobi and loading it at the packhouse gate. This extended cold-chain-arrangement also simplified logistics by eliminating one touchpoint at the port, and is now common practice32 (Figure 29).
Figure 29: After Pre-cooling, Reefer Containers Are Packed Next to the Packing Facilities
Source: A.P. Moller-Maersk
The use of open-truck transport from farmers to packhouse results in sun damage.
Transporting avocados from the farm to the packhouse is often done using small, open trucks (Figure 30). This transport mode triggers approximately 5% food loss, mainly due to sun exposure on the top layer of fruit, but also due to spillage.33
Figure 30: Avocados Are Transported from Farmer to Packhouse in Pickup Trucks
Source: A.P. Moller-Maersk
When sourcing directly from farmers, exporters have introduced covered trucks for this leg of the transport route. This investment can be recovered quickly, given avocados’ high value and the gains from eliminating losses.34 An investment of about US$ 10,000 in a covered truck can be paid back in approximately 20-25 trips35 (Figure 31). However, scaling this intervention to the broader market faces two issues. First, for the investment to be paid back quickly, the truck must make frequent filled trips, which does not always occur due to the atomized Kenyan smallholder model. This challenge could be addressed by exporters introducing shaded collection points.36 Second, access to finance is a common challenge for actors in agricultural value chains, making the upfront investment required for a covered truck difficult from a cash-flow perspective. Here, farmers could form cooperatives to pool resources, and governments or donors could provide guarantees or loans. A long-term solution is to develop commercial farming, where scale and access to resources facilitate such investments.
Figure 31: With Sufficient Volumes, Investment in Covered Trucks Is Rapidly Paid Back
Note: (*) For a 5-ton truck capacity, assumption made of saving 5% of food losses at European prices of 1.70 US$/kg Sources: Bain & Company analysis; interviews
Trans-shipment in Salalah is unreliable and leads to quality issues.
In addition to overland transport challenges, Kenyan exporters face a strong competitive disadvantage versus exporters in Peru and South Africa due to trans-shipping at the Salalah port in Oman37 (Figure 32). Peruvian and South African avocados are shipped directly to Europe.38 Ships from Kenya, however, have to steer wide of the Somalian coast for piracy reasons39, making the trip longer and more expensive due to insurance coverage. Moreover, vessels sometimes miss the trans-shipment in Oman and must wait for a week in Salalah’s port40. While specific data on the frequency of this issue is difficult to obtain, both exporters and importers indicate it has a significant impact on operations. Another contributing factor is that the peak period for Kenyan avocados occurs during the Khareef, or monsoon season, in Oman; the severe weather significantly affects operational efficiency at Salalah’s port.41
Figure 32 Avocados Are Trans-shipped in Oman
Sources: Bain & Company analysis; interviews
When trans-shipment is missed, importers must either maintain additional inventory or default on customer commitments. Relationships are thus damaged, and Kenyan avocados as a whole are seen as a less reliable product. In addition to the reliability issue, avocados can become overripe from delay, driving both quantitative and qualitative losses.42 Qualitatively, overripe avocados suffer from price discounts, meaning exporters lose revenue on a per-avocado basis. Quantitatively, avocados lose physical weight over time. In practical terms, the decrease in weight creates the need to repackage cartons at arrival. Traded in 4 kg cartons, avocados are often overpacked in Mombasa (to around 4.4 kg when leaving Kenya) in anticipation of weight loss during transport. With a normal journey of around 25 days (Figure 33), the cartons arrive weighing above 4 kg. If the cartons miss the trans-shipment in Oman, they risk weighing less than the required 4 kg; thus the need to repack the avocados to comply with the 4 kg standard. Repackaging triggers a loss of value because importers charge exporters a US$ 2,700 fee per reefer for this additional handling.
Figure 33: Avocados Arrive in Rotterdam after a 20- to 45-Day Sea Voyage
Source: A.P. Moller-Maersk
A number of market access barriers can restrict the movement of agricultural goods (Box 1). In the case of Kenyan avocados, the biggest barriers are the challenges of attaining consistent compliance with quality requirements of European customers.
Box 1: Market access in agriculture
Many non-tariff barriers can restrict the movement of agricultural goods, including sanitary and phytosanitary standards (SPS), technical barriers to trade (TBT), export and import bans, variable import tariffs and quotas, restrictive rules of origin, and price controls. Lack of open borders contributes to price volatility, drives food loss, and creates unpredictable environments that reduce the private sector’s willingness to invest.43 For example, sanitary and phytosanitary standards (SPS), are intended to protect human, animal, or plant life or health. However, according to the WTO, “a sanitary or phytosanitary restriction which is not actually required for health reasons can be a very effective protectionist device, and because of its technical complexity, a particularly deceptive and difficult barrier to challenge.”44 Furthermore, information about newly imposed SPS requirements is not always clearly communicated, or exporters lack access to the information. As a result, ~0.85% of agricultural products are rejected at import borders, equating to an annual product value of approximately $4 billion in 2000-01.45
Governments have a primary responsibility to ensure that their own policies impacting market access are harmonized, scientifically justifiable, and predictable. They also have a central role to play in helping domestic producers and exporters successfully navigate market access barriers.
Overall, farmers lack a clear understanding of optimal harvesting techniques (e.g. the effect of picking timing on avocado size, pest management).46 The resulting practices trigger losses for exports, especially at the processing gate during the quality check performed by packers (details on food loss across the value chain are covered in the Box 2 and Figure 34). Although redirected to local markets, rejections are around 10% during the peak summer season,47 even if they vary during the year.
Box 2: Food Loss in the Kenyan Avocado Value Chain
Note: Food loss figures are estimates only and based on a limited number of primary interviews with various actors along the value chain.
Although functioning and suitable for exports to Europe, the Kenyan avocado supply chain – as it is structured today – still suffers from around 15% food loss at the different stages of the avocado journey from farm to importer (Figure 34).
Harvesting: Current manual harvesting techniques, still widely used among smallholder farmers, generate about 7% in avocado losses due to fruit damage from falling on the ground, poor handling and loading on pickup trucks.
Transport: Since pickup trucks are open vehicles, the first layers of avocados are exposed to the sun and must be discarded as they become overripe, even to the point when they cannot be redirected to domestic markets. Moreover, avocados can fall off trucks due to bumpy roads between farmers and packers in Nairobi. This step of the supply chain causes about 5-6% in avocado losses.
Packaging: Once at the packaging gates, avocados are quality checked. Harvesting techniques are not always well suited to exports (e.g. the picking timing for avocado size), due to lack of training on European standards. This stage generates many rejections, but rejected avocados are redirected to domestic value chains. During the peak season, it is estimated that around 10% of avocados are rejected at the packhouse gate due to small size.
Sea shipment: Shipment to Europe is a critical and risky step in the supply chain regarding food losses. The losses are binary. If vessels arrive on time, losses are essentially zero due to reefer technology; however, if a container misses trans-shipment in Oman, a delay of one week can occur and, as a result, the avocados become overripe during transport. These avocados are not completely discarded, but significant weight loss occurs. Although it is difficult to quantify the frequency of missed trans-shipments, importers claim that these situations drive avocado losses of about 1-5%.
At the other end of the value chain, quality issues mainly stem from “briefcase exporters” who sell avocado containers on the spot, usually with no long-term contracts. These small exporters significantly affect the reputation of Kenyan origin, as most of their shipments are of lower quality and consisting of poorly sorted avocados that are difficult to sell in Europe.48 Importers purchasing Kenyan avocados struggle to predict the level of quality they will receive, creating a climate of mistrust. As a result of this and other factors, Kenyan avocados sell at a 15-20% discount to Peruvian avocados in European markets.49
One structural improvement to the value chain that would mitigate the impacts from a number of barriers is large-scale farming. The development of such farms offers many benefits: lower losses during harvesting and quality checks, profitable investment in covered trucks and improved long-term relationships with importers. Kakuzi Farms, a vertically integrated, large-scale Kenyan avocado farm/packer/exporter, generated on average 18% earnings before interest and tax (EBIT) in the avocado segment over the last three years,50 compared to the industry average of about 10-15%.51 Government should provide the enablers, where feasible, for replicating this success story, for instance by facilitating access to finance and land ownership while integrating high-potential smallholders.
Kenya is implementing a redesigned border management system to reduce costs and delays (see the case study in the report’s “Enabling Smart Borders” section for more details).
4. Conclusion and Next Steps for Industry Stakeholders
The Kenyan avocado value chain has passed the tipping point of profitability and is now functioning well. However, some challenges are slowing the virtuous circle of investments in this industry. Two main priorities or initiatives for the Kenyan supply chain have emerged (Figure 35). The first – mitigating the impact of unofficial exporters – could be considered a quick win due to the relatively high ease of implementation. The second initiative – mitigating missed trans-shipment in Oman – is a longer-term opportunity with high value at stake but more challenging implementation requirements.
Figure 35: Potential Initiatives to Reduce Avocado Supply Chain Barriers
Note: (*) Ease of implementation is assessed based on the number of stakeholders, nature of stakeholders, time for implementation, investment required, need to adapt/change the legal framework and contentiousness of reform. Sources: Bain & Company analysis; interviews
Quick win: mitigate the situation concerning “briefcase exporters”
European importers and Kenyan exporters agree that unofficial exporters have a negative effect on the reputation and pricing of the overall Kenyan origin.52 To begin with, the industry could benefit from an organization established to develop and promote Kenyan avocados. The organization could be composed of the Horticultural Crop Development Authority, an exporters’ association (potentially created as a division of the Fresh Produce Exporters Association in Kenya), shipping companies and customs authorities (KenTrade).
Using this organization as a platform, a next step would be to further understand and quantify the issue, including an assessment of root causes through primary data gathering and interviewing key stakeholders (including importers). The findings could help drive a brainstorming session for developing potential solutions, along with a preliminary assessment of value, ease of implementation and risks.
As a short-term initiative, exporters could create a consortium of high-quality growers and define common standards. This could include an advertising budget to communicate on the Kenyan “brand”, as well as specific packaging or labels. Importers could potentially have access to an online database for checking exporter compliance with the brand’s standards. In the long term, possible initiatives include investing in more traceability, monitoring and testing resources.
Longer-term opportunity: mitigate the trans-shipment risk in Oman
In the short- or medium-term future, direct routes from Mombasa to Europe are not feasible because volumes are far from sufficient.53 Consequently, the risk of missing trans-shipment can only be mitigated through improved processes and coordination between key stakeholders. The root cause of missed trans-shipments could not be pinpointed by any actor along the value chain. To determine the cause, solutions must begin with additional investigation.
Without the benefit of that analysis, however, a few potential solutions can already be suggested. Concerned shipping companies, as well as Mombasa and Salalah port operators, could better coordinate with each other when the risk of missing trans-shipment is high. The Kenyan government could continue to invest in the Mombasa port to increase capacity and improve processes, in order to better manage vessels and avoid delays. Shipping companies could better communicate the time sensitivity of their vessels’ merchandise to Salalah port authorities. Finally, prioritization of loading and unloading could be done jointly to create fast-track processes for containers.