Electronic Report from the Economic Research Service United States Department www.ers.usda.gov of Agriculture The U.S. Food Marketing System, Agricultural Economic 2002 Report No. 811 Competition, Coordination, and Technological Innovations Into June 2002 the 21st Century J. Michael Harris, Phil R. Kaufman, Steve W. Martinez (coordinator), and Charlene Price Abstract This report focuses on recent trends in the food supply chain. Chapters on food manu- facturing, wholesaling, grocery retailing, and food service provide a detailed overview of structure, performance, information systems, new technology, and foreign direct invest- ments. The report also contains a comprehensive set of appendix tables containing sales, concentration, trade, productivity, and other indicators. At the time of publication, most of the data sets used in this report included data through the year 2000. Keywords: Consolidation, concentration, trade, sales, technology, profits, foreign direct investment. Acknowledgments We are indebted to several reviewers for helping us to get this publication off the ground. Special thanks are due to Jean Kinsey, University of Minnesota; Jim MacDonald, Economic Research Service; and Brian Todd, The Food Institute; for detailed comments and suggestions on the entire draft. We also thank Joe Uhl, Purdue University; John Connor, Purdue University; and Gerald Grinnell, Grain Inspection, Packers and Stockyards Administration (GIPSA); for detailed comments on specific chapters. Finally, we gratefully acknowledge Alden Manchester and Mark Denbaly, Economic Research Service, for their valuable comments on the manuscript; Veronica Jones for invaluable assistance with the extensive set of appendix tables; Dale Simms for excellent editorial assistance; and Wynnice Pointer-Napper for exquisite design. Note: Use of brand or firm names in this publication does not imply endorsement by the U.S. Department of Agriculture. Contents Preface . .iii Introduction . .1 Steve W. Martinez Food Manufacturing . .3 J. Michael Harris Food Wholesaling . .12 Steve W. Martinez Food Retailing . .21 Phil R. Kaufman Food Service . .34 Charlene Price Appendix Tables . .50 ii ● U.S. Food Marketing System, 2002 / AER-811 Economic Research Service/USDA Preface This research report is an electronic version of ERS’s former Food Marketing Review report. At this point, organization and content remain much the same as the previous version. However, users now benefit from links between a reference to an appendix table or chapter and their actual occurrence. Besides the new electronic format, the most significant changes have come in the appendix tables. We have elimi- nated extraneous information and combined similar data. Consequently, the number of appendix tables has been roughly cut in half. Unfortunately, because we collect a wide range of data from a variety of sources, data for various series often begin and end at different dates. The U.S. food system has undergone much change since 1996, when the last version of this report was published. The North American Industry Classification System (NAICS) is replacing the U.S. Standard Industrial Classification (SIC) system, which presented problems in creating comparable time series for some tables. Additional information on the move to NAICS can be found at the U.S. Census Bureau (http://www.census.gov/epcd/www/naics.html). We will continue to improve the content and tailor the organization of this report to users’ needs. To this end, we welcome your comments and suggestions (contact Steve Martinez, [email protected]). Note: To return to your previous position in this document after following a link (highlighted in blue) within the document, you must “right click” your mouse and select “Go to Previous View.” Economic Research Service/USDA U.S. Food Marketing System, 2002 / AER-811 ● iii The U.S. Food Marketing System, 2002 Competition, Coordination, and Technological Innovations Into the 21st Century Steve W. Martinez Introduction Figure 1 Percent of U.S. food dollar going to the farm sector verus marketing services, 1960-2000 The food marketing system is an important part of the U.S. economy. In 2000, the food and fiber marketing Percent system accounted for 7.7 percent of U.S. GDP (table 1) 100 and employed over 12 percent of the U.S. labor force. Marketing services An increasing share of what consumers spend on food 80 goes to marketing services added after the product leaves the farm. In 2000, over 80 percent of the U.S. 60 food dollar went toward value-added services and mate- rials—transportation, processing, distribution, labor, 40 packaging, and energy (fig. 1). Farm value Efficiency gains in the food marketing system continue 20 to result in abundant supplies of a variety of affordable food products. From 1996 to 2000, real value added to 0 1960 65 70 75 80 85 90 95 2000 GDP per worker in the food and fiber system, including farmers, processors, and distributors, rose by 8.5 percent Source: ERS, Elitzak. from $28,019 to $30,413. Income growth has outpaced http://www.ers.usda.gov/briefing/foodpricespreads/bill/index.htm increases in food expenditures, leading to continuous reductions in the share of income spent on food. Today, Figure 2 consumers spend just 10 percent of their income on Total U.S. food expenditures as a share of food, compared with almost 18 percent in 1960 (fig. 2). disposable personal income, 1960-2001 Percent Table 1—Value added by the food and fiber system, 2000 Value added to GDP Share of GDP 20 $ billion Percent Farming 82.0 0.8 15 Input industries 426.0 4.3 Manufacturing Food processing 165.2 1.7 10 Nonfoods 54.3 0.5 Distribution Transportation 42.9 0.4 5 Wholesaling and retailing 337.7 3.4 Food service 156.4 1.6 Food and fiber manufacturing 0 and distribution 757.0 7.7 1960 65 70 75 80 85 90 95 2001 Total food and fiber system 1,264.5 12.8 Source: ERS, Edmondson. Source: ERS, USDA. http://www.ers.usda.gov/briefing/foodmarketstructures/foodandfiber.htm http://www.ers.usda.gov/briefing/CPIFoodAndExpenditures/Data/table7.htm Economic Research Service/USDA U.S. Food Marketing System, 2002 / AER-811 ● 1 There are several notable trends occurring through- assists with scheduling and inventory. This reduces out the U.S. food marketing system. First, merger costs, reduces instances of empty grocery shelves or and acquisition activity continues to result in out-of-stocks, and enables firms to better target alter- increased concentration. Recent concentration in the native consumer segments. Internet services are even retail sector has seen the share of U.S. grocery store being tailored to the food-away-from home market sales by the top four food retailers increase from (see “Food Service” chapter). 16.6 percent in 1996 to 27.4 percent in 2000 (see “Food Retailing” chapter).1 By contrast, this four- Developments in the food marketing system also have firm sales share had declined from 17.1 percent in important implications for the agricultural sector. 1987 to 16.6 percent in 1996. Merger and acquisition Competitive pressures are mounting for farmers to deliv- activity has also accelerated in food service distribu- er the right types of products at the right time. Retailers tion. In 1995, sales by Sysco, the leading U.S. food are demanding a variety of high-quality products (for service distributor, outpaced its nearest competitor example, organic produce or exceptionally lean pork) by 84 percent. With U.S. Foodservice’s purchase of delivered in a timely fashion. This increases the impor- Alliant in 2001, this gap closed to 28 percent (see tance of agricultural product differentiation and precise “Food Wholesaling” chapter). information. For example, leading new product introduc- tions were convenience foods, organic and natural foods, Changes in concentration vary by food marketing and functional foods (see “Food Manufacturing” chap- stage, segments within a particular stage, and types of ter). In addition, grocery retailers are experimenting with products processed and handled. Commonly cited rea- new formats (for example, supermarket-sized natural sons by companies for mergers and acquisitions, hori- food stores) to meet the growing needs of natural food zontal or vertical, include (1) to maintain bargaining and ethnic consumers (see “Food Retailing” chapter). power with other stages of the supply chain undergo- ing consolidation, (2) to ensure a market outlet in an International trends in trade and foreign direct invest- increasingly consolidated downstream segment, (3) to ment offer U.S. food marketers an alternative to the ensure a consistent, high-quality source of raw materi- slowly growing domestic food market. It also leaves als, (4) to capture efficiency gains and lower procure- the U.S. food marketing system increasingly exposed ment costs, and (5) to improve ability to compete with to foreign economic developments, policies, and alternative formats, such as nontraditional retailers (for changing consumer preferences. The United States is example, Wal-Mart and Costco) and the food-away- the world’s largest importer and exporter of processed from-home sector. Commonly cited reasons for com- food, and U.S. food companies continue to expand panies divesting include (1) to resolve bankruptcy operations overseas. Investment by foreign-owned cases by reorganizing, (2) to focus on alternative for- food retailers in U.S. food retailing is on the rise mats (for example, high-volume price impact super- through acquisitions. markets), (3) to focus limited resources in particular The remainder of this report describes important geographic areas, and (4) to adhere to antitrust require- developments in the food marketing system (manufac- ments regarding a proposed merger. turing, wholesaling, retailing, and food service) Buyer-seller relationships are changing throughout the with regard to structure, organization, productivity, food supply chain as stages become increasingly interde- technology, and trade. pendent. For example, farmers are increasingly engaged References in contracts and vertical integration in some agricultural sectors.