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Credibility of Halal Beef Value Chain in Malaysia and Willingness of Consumers to Pay Premium Prices Case Study


Introduction

Beef industry in Malaysia has been growing at a slow rate over the last decade. As a result, the country has been unable to meet the demand given the rapid increase in Halal beef consumption. The per capita consumption of Halal beef has increased from 1kg to over 6kg (Mohamed et al. 2008 p. 58).

The low production of beef has forced the government to import beef from the neighboring nations to meet the ever-growing demand. The low rate of production is mainly attributed to farm inefficiencies, which has also led to high cost of production (Mohamed et al. 2008, p. 59).

There are five categories of beef producers in Malaysia, namely: ranch integrators, vast estates, commercial feedlots, and customary agriculturalist. The five categories differ in animal numbers, a system of management and size of land. They are all involved in the production of both cattle and buffalo beef.

The customary agriculturalists are the majority and possess nearly 80 percent of cattle and buffalo farms (Mohamed et al. 2008, p. 60). The ever-increasing demand for Halal beef products and services has had a significant impact on the local beef industry (Yeong-Sheng et al. 2015, p. 43).

Since Malaysia is a predominantly Muslim nation, there is a special attachment to Halal products. Muslims abide by the strict dietary rule and are only permitted to eat Halal products. Therefore, Halal is very significant in the country’s food sector, including beef industry (Hamdan et al. 2013, p. 55). In addition, the growing demand for Halal products all over the world means that Halal food sector is no longer an industry that conforms to spiritual necessity, but is turning into an economic force in its own right (Noordin et al. 2009, p. 1).

Generally, Muslim consumers often have a tendency to buy certified Halal products for a sense of security. For this reason, consumers in Malaysia are more concerned about the quality of Halal products than their prices. Malaysia Department of Islamic Development is the body responsible for Halal accreditation in Malaysia (Yeong-Sheng 2015, p. 5).

According to Yeong-Sheng et al., demand for beef in Malaysia is inelastic to expenditure and price, which means consumers are willing to pay premium prices for quality beef products. However, the price elasticity of beef is relatively lower compared to advanced nations due to the general income level (42).

The slow growth of beef industry and its enormous potential provides the rationale for choosing the topic under study. Moreover, businesses are now moving away from consumer-geared approach to value-driven approach to increase profitability and to build brand equity. Brand equity is defined as “any given brand name that has a specific significance and value to consumers and, therefore, influences future earnings and consumer loyalty (Westberg & Pope 2012, p. 3).

Beef industry in Malaysia and Concept of Halal and its traceability

From the early 1960s to 2010, the individual consumption of beef in Malaysia has grown from 1kg to over 6kg. This is mainly attributed to increase in income and population, as well as the affordability of beef products (Mohamed et al. 2008, p. 58). Since more than 60 percent of the population is Muslims, food items must be prepared using Halal methods.

In addition, consumers in Malaysia are increasingly becoming vigilant and conscious of the ingredients in food products and, therefore, are very selective. Some authors attribute this to a high level of literacy and increased concern for food safety, quality, and legitimacy. The global food safety crisis also prompted Malaysia people to demand transparency in the production of Halal beef products (Hamdan et al. 2013, p. 55).

Halal basically refers to food that has no trace of swine or pork and does not cause any harm to the body or physical wellbeing. Pork and Swine are highly forbidden in Islam. In other words, any food can be considered to be Halal as long as it is prepared or processed according to Islamic Shariah law (Lokman 2008, p. 2).

The Halal guidelines and procedures are not just limited to Islamic law, but also hygiene and quality regulation. The materials and equipment used must also conform to Islamic law. Additionally, the production process must be observed and regulated by a qualified Muslim inspector. Food products, including beef that has met the Halal standard, are said to be Halal certified (Lokman 2008, p. 3; Hamdan et al. 2013, p. 57).

Consumer Purchasing Pattern

As already been mentioned, demand for beef in Malaysia is inelastic to expenditure and price, which means consumers are willing to pay premium prices for quality beef products (Yeong-Sheng et al. 2015, p. 42).

The concern about the quality and safety of beef products in Malaysia has been aggravated by the recent fraudulent activities and safety incidences, for instance, the traces of pork DNA found in Cadbury chocolates in Malaysia two years ago. For this reason, consumers only purchase products that are certified and have markings and logos (Yeong-Sheng et al. 2015, p. 31).

The majority of Halal beef consumers trust local butcheries manned by Muslims than supermarkets. This happens despite the fact that meat products are highly regulated in Malaysia. The prices of beef are slightly higher than other meat products because the beef industry is controlled by cartels.

However, the willingness to pay premium prices for Halal beef products depends on consumer income levels. Low-income consumers in Malaysia tend to overvalue low-quality beef, whereas high-income consumers tend to overvalue high-quality beef (Hamdan et al. 2013, p. 60).

Malaysia Overview

The growth of the beef industry is still slow in Malaysia. However, the industry’s prospects are enormous given the increasing demand for Halal beef both locally and globally. This provides the rationale for choosing the topic under study. In addition, Halal beef consumers in Malaysia still have trust issues with their supply and value chain system. As a result, the majority of them only buy beef products from local butcheries and shops instead of supermarkets.

This because consumers are more concerned about the quality and safety of beef products than prices. They are even more willing to pay premium prices for Halal accredited products (Yeong-Sheng 2015, p. 42; Hamdan et al. 2013, p. 60). Therefore, the case study will contribute to the body of knowledge aimed at improving the country’s Halal beef supply and value chain.

Malaysia Halal Beef Industry Value Chain Analysis

Value chain basically refers to an array of activities or processes used by businesses to enhance the quality of products. It also refers to a methodical way of splitting business operations and how they add value to the consumers. The main elements of Halal beef value chain are processes, information, and stakeholders (Backer & Miroudot 2014, p. 55). The term value chain was first introduced by Porter in 1985.

Porter (1985, p.34) defined value chain as organizational activities connected to a company’s competitive position. There has been a considerable shift in Halal beef marketing from client-based approach to value-based approach. The Malaysia government is striving to align the beef supply chain and value chain to enhance consumer experience and satisfaction.

Citizens had started to question the integrity of the existing supply chain due to its complex nature and inability to detect matters of integrity. The susceptibility of the supply chain was also attributed to its size and increasing demand for Halal beef (Mohamad & Backhouse 2014, p. 3).

The accreditation process ensures that beef products are prepared in accordance with Islamic principles and procedures (Tieman, van der Vost & Ghazali 2012, p. 222).

The certification process is managed by the Malaysia Department of Islamic Development. Besides, State Islamic Religious Department and Council are also mandated with the responsibility of issuing Halal licenses and logos (Muhammad, Isa & Kifli, 2009, p. 54). Critics argue that the challenges facing the Halal accreditation in Malaysia is not with the process, but implementation. The issues affecting the implementation process include operational inefficiencies and governance (Noordin et al. 2009, p. 7).

Mapping Halal Beef Industry Value Chain Analysis

Value chain rests on the division of various operations and mapping of relations that might create value or costs in the production process. Value chain maps illustrate the industry players and functions. It usually contains a number of elements, which include: input suppliers, production, processing, wholesale, retail, and consumers. These elements assist in organizing important information regarding the players/actors in the value chain (Backer & Miroudot 2014, p. 6).

The Halal beef value chain in Malaysia has developed over the past decade into an array of complex components involving different players that include ranch integrators, vast estates, commercial feedlots, and customary agriculturalist. However, the largest share of Halal beef in Malaysia is produced by customary agriculturalists.

They account for nearly 80 percent of the total production. They are often found in the countryside where access to market and infrastructure is inadequate. Market and pricing information are unattainable. Earlier attempts to organize smallholder farmers into cooperatives and self-help groups have been futile. Therefore, these players in the value chain are not doing enough to add value to their products (Muhammad, Isa & Kifli, 2009, p. 57).

The village middlemen, on the other hand, usually gather animals from remote locations and take them to slaughterhouses where they are well fed and watered. The middlemen are autonomous operatives who utilize their local knowledge and social-economic relations to gain access to local markets. Most of them are restricted to certain geographical region due to financial constraints. They frequently distort prices and benefit at the expense of the farmers.

In addition, they charge ridiculous fee and add no value. Instead, they add more than 10 percent of the abattoir gate price. In a nutshell, middlemen are not offering much in terms of value addition, yet they extract a fee from the value chain system that can barely sustain the additional cost. Therefore, there is a need to design and implement reliable information dissemination mechanism to enhance trust and collaboration between different players in the value chain (Muhammad, Isa & Kifli, 2009, p. 59).

Large estates and ranches often have feedlots for fattening both young and mature animals. The fattened young animals are basically for the export market, whereas the mature animals are for the local market. The feedlots are always located near the urban areas where there is a ready market. Nevertheless, the cost of operating feedlots has increased significantly, while the earnings from animals have gone down. This is mainly attributed to the inflated cost of inputs (Mohamad & Backhouse 2014, p.9).

Among the existing slaughterhouses, only 12 are operational. All of them have facilities for goats and sheep. However, facilities for cattle and buffalos are limited. Upon arrival, the animals are taken through a bodily inspection and rested for 72 hours in the holding areas where they are fed and watered. 12 to 24 hours before slaughtering, they are placed in a lairage where they are given water only (Mohamad & Backhouse 2014, p.9).

At the lairage, they are taken through another examination process. Animals that have passed the test are then slaughtered using Halal procedures and methodology. The slaughtering process must be observed and regulated by a qualified Muslim inspector. A while later the remains are chilled at – 2 to 2 degrees Celsius for a day. In most occasions, slaughtering is done when a client makes an order (Mohamad & Backhouse 2014, p.11).

The only processing that takes place is putting the carcasses in stockinet ready for transportation or shipment. All the abattoirs have their own refrigerated trucks for transporting Halal beef products. However, the cold stores are limited. The abattoirs in Malaysia sell both Halal beef and by-products, for instance, blood, organs, and intestines. The sale of by-products helps the slaughterhouses to break even.

The main responsibility of the wholesalers is basically picking the Halal beef products from the slaughterhouses and selling them to the retail market. They have limited storage capacity and, therefore, do not hold beef for long. The wholesalers and retailers grade and repackage the Halal beef products (Muhammad, Isa & Kifli, 2009, p. 59).

Figure 1: Schematic description of the beef value chain

Schematic description of the beef value chain

Table 1: Summarizing the Value Chain Mapping

Beef Production Processing Distributing Wholesaling Retailing
Inputs Commercial feeds and minerals
Pesticides
Money
Ice
Packaging
Beef Beef Beef
Activities Zero grazing and open grazing
Feed formulation
Purchasing inputs
Processing includes slaughtering, handling, preparation, inspection and packaging
Distributing beef from slaughterhouses to wholesalers Picking up beef from slaughterhouses and sell products to retail market
Most of the whoesalers have limited storage and, therefore, do not hold beef for long.
Selling to consumers
Outputs Beef cattle or Buffalo Beef Beef Beef Income
Actors Ranch integrators, vast estates, commercial feedlots, and customary agriculturalist Abbattoirs
Malaysia Department of Islamic Development
State Islamic Religious Department and Council
Middlemen from the villages Wholesalers Retailers, Supermarkets and local butcheries
Problems Farm ineficiencies, which has led to high cost of production
Poor methods of production
Strong role of informal lenders and middlemen that have trapped farmers in poverty
Fragmented markets
Uncertainty of raw material suppliers
Accreditation challenges
Lack of adequate fund to modernize the faccilities
Trucking facilities without coolants
Poor road infrastructure in some areas which increases transportation cost
Most wholesalers lack adequate storage facilities and, therefore, can not stock large quantity of beef
The industry is controlled by cartels who regulate prices
It is difficult to control the entire value chain in order to maintain standard quality and quantity
Lack of consumer trust
Low-income consumers tend to overvalue low-quality beef, whereas high-income consumers tend to overvalue high-quality beef
Short product shelf life
Lack of business and management skills
Possible solutions Introducing scientific production methods
Training farmers
Providing affordable loans and promoting farmers cooperatives to eliminate the middlemen
Establishing adequate buffer stock for raw materials
Restructuring the accreditation process and enhancing public awareness
Modernizing public abbattoirs
Improving the road networks to reduce transportation cost
Providing trucks with refrigerated facilities at affordable price
Building more warehouses
Introducing a stringent law to eliminate the cartels
Enhancing the entire value chain to enhance product quality and quantity, which will also deal with the trust issues
Providing free or affordable training to traders

Recommendation to Improve Halal Beef Industry Value Chain

In order to improve the existing value chain and make Malaysia a global Hub for Halal beef, the country should embrace the Western USA (California) model. The model targets five aspects, namely: institutional structures, improved productivity, improving local infrastructure, training players in the value chain, and stimulating demand for beef products. Currently, the beef industry in Malaysia is divided and has ineffectual umbrella body, as well as a poor grading system.

The country should form a meat board like in the US. The body will oversee the formulation and implementation of a sound regulatory system, facilitate various segments within the value chain, enhance productivity across the value chain, improve credit access for abattoirs and processing companies, improving access to international market; come up with a standard grading system, and advise the government on matters related to beef sector.

The government should support the formation of cooperatives and self-help groups. The cooperatives and self-help groups will not only help farmers to access credit facilities, but also market their products. The government should also increase access to loan facilities by providing interest-free loans and subsidized inputs through the cooperatives and self-help groups.

In addition, training and public awareness on modern production methods should be carried out through these groups. The training should focus on livestock breeding, animal well-being, feeding and grazing land management, and fiscal management.

The local infrastructure can be improved through the following ways: modernizing all the public abattoirs to international standard; improving road network; introducing feedlot facilities to help in fattening young calves and livestock ready for market; strengthening the certification body through adequate staffing and funding; providing cold storage facilities, including trucks and warehouses; and providing livestock scales at local markets among others.

Figure 3: Change in the Halal beef Value Chain after the suggested intervention

Change in the Halal beef Value Chain after the suggested intervention

Conclusion

Halal beef consumers still have some trust issues with the country’s supply and value chain system. This arose after the recent fraudulent activities and safety incidences, for instance, the traces of pork DNA found in Cadbury chocolates in Malaysia. In order to increase the credibility of Halal beef, each stage in the value chain have to be restructured.

This can only be achieved by embracing the Western USA (California) model, which targets five aspects, namely: institutional structures, improved productivity, improving local infrastructure, training players in the value chain, and stimulating demand for Halal beef.

References

Backer, K & Miroudot, S 2014, Mapping Global Value Chains, OECD Publishing, Paris.

Hamdan, H, Issa, Z, Abu, N & Jussof, K 2013, ‘Purchasing Decisions Among Muslim Consumers of Processed Halal Food Products’, Journal of Food Products Marketing, vol. 19, pp. 54-61.

Lokman, A 2008, Shariah and Malaysia Halal Certification System, Universiti Sains Islam Malaysia (USIM), Kuala Lumpar, Malysia.

Muhammad, M, Isa, F & Kifli, B 2009, ‘Positioning Malaysia as Halal-Hub: Integration Role of Supply Chain Strategy and Halal Assurance System’, Asian Social Sciences, vol.5, no. 7, pp 44-50.

Mohamad, N & Backhouse, C 2014. ‘A Framework for Development of Hala Food Products in Malaysia’, Proceedings of the 2014 International Conference on Industrial Engineering and Operations Management, Bali, Indonesia, pp. 2-11.

Mohamed, Z, Shamsudin, M, Radam, A & Serin, T 2008, ‘The efficiency of beef cattle production: A case study in the target area of concentration in Johor, Malaysia’, Economic and Technology Management Review, vol. 3, pp. 57-74.

Noordin, N, Noor, NL, Harshim, M & Samicho, Z 2009, ‘Value Chain of Halal Certification System: A Case Study of the Malaysian Halal Industry’, European and Mediterranean Conference on Information System, Izmir, Turkey, pp. 1-14.

Porter, M 1980, Competitive strategy: Techniques for analyzing industries and competitors, Free Press, New York.

Tieman, M, van der Vost, J & Ghazali, M 2012, ‘Principles in Halal Supply Chain Management’, Journal of Islamic Marketing, vol. 3, no. 3, pp. 217-243.

Westberg, K & Pope, N 2012, ‘Building brand equity with cause-related marketing: A

Comparison with sponsorship and sales promotion’, Journal of Marketing Communications, pp.1-19.

Yeong-Sheng, J, Shamsudin, M, Mohamed, Z, Abdulla, Z & Radam, A 2015, Demand for beef in Malaysia: Quantity or Quality, Sage Publications, London, UK.

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