FSRG Publication Structural Changes in Food Retailing: Six Country Case Studies edited by Kyle W. Stiegert Dong Hwan Kim November 2009 Kyle Stiegert [email protected] Dong Hwan Kim [email protected] The authors thank Kate Hook for her editorial assistance. Any mistakes are those of the authors. Comments are encouraged. Food System Research Group Department of Agricultural and Applied Economics University of Wisconsin-Madison http://www.aae.wisc.edu/fsrg/ All views, interpretations, recommendations, and conclusions expressed in this document are those of the authors and not necessarily those of the supporting or cooperating organizations. Copyright © by the authors. All rights reserved. Readers may make verbatim copies of this document for noncommercial purposes by any means, provided that this copyright notice appears on all such copies. ii Table of Contents Page CHAPTER 1: INTRODUCTION AND LITERATURE REVIEW 1 1. Introduction 1 2. Outline of the Book 1 3. Impact of Dominant Food Retailers: Review of Theories and Empirical Studies 3 3.1. Market Power vs. Efficiency 3 3.2. Vertical Relationship between Food retailers and Food producers: Vertical Restraints, Fees and Services Enforced by Retailers 5 Fees and Services 5 Coalescing Power 8 3.3. Market Power Studies 8 References 17 CHAPTER 2: THE CASE OF AUSTRALIA 21 1. Introduction 21 2. Structure of Food Retailing in Australia 21 2.1 Industry Definition of Food Retailing 21 2.2 Basic Structure of Retail Food Stores 22 2.3 Food Store Formats 24 2.4 Market Share and Foreign Direct Investment 25 3. Effects of Increased Food Retail Concentration on Consumers, Processors and Suppliers 28 4. Is There Any Empirical Evidence of Uncompetitive Conduct? 30 5. Summary and Implications 30 References 31 CHAPTER 3: THE CASE OF BRAZIL 35 1. Introduction 35 2. The Structure of Food Retailing in Brazil 36 2.1 Food Retail Definition and Data 36 2.2 Market Concentration 36 2.3 Turnover 40 3. Performance 43 3.1 An Aggregated Performance Indicator 44 3.2 Additional Performance Evidences 47 4. Final remarks 48 References 49 iii CHAPTER 4: THE CASE OF GERMANY 51 1. Introduction 51 2. Structure and Development of Food Retailing in Germany 51 2.1 Structure and Changes at the Store-type Level 52 2.2 Changes at the Industry Level 55 3. Foreign Direct Investment 58 4. Market Conduct in German Food Retailing: Retailers’ Pricing Strategies 62 4.1 The Price Level in German Food Retailing 62 4.2 Pricing Strategies of German Food Retailers: General Patterns 65 4.3 Pricing Strategies of German Food Retailers: A Case Study for Coffee 70 4.4 Market Power in the German Retailing Sector and Consequential Impacts 72 Conclusions 73 References 73 CHAPTER 5: THE CASE OF KOREA 77 1. Introduction 77 2. Structure of Food Retailing in Korea 77 2.1 Industry Definition of Food Retailing 77 2.2 Basic Structure of Food Stores 79 2.3 Major Food Store Formats 84 Conventional Supermarkets 84 Nontraditional Food Retailers (Discount Stores) 85 Department Stores 88 2.4 FDI in Food Retailing 89 Entry Process of Foreign Retailers 89 Influences of Foreign Food Retailers 91 2.5 Concentration of Food Retailers 91 3. Effects of Dominant Food Retailers on Producers 95 3.1 General Impact of Development of Large-scale Retailers 95 3.2 Impact on the Food Distribution Channel 97 3.3 Impact on Agricultural Producers 100 4. Summary and Implications 101 References 102 iv CHAPTER 6: THE CASE OF POLAND 105 1. Introduction 105 2. Structural Development in the Polish Food-retailing Sector 105 2.1 Structure and Changes at the Store-type Level 106 2.2 Structure and Changes at the Firm Level 112 3. Foreign Direct Investment 114 4. Determinants of Foreign Direct Investment in the Polish Retail Trade 120 4.1 The Analytical Concept: Potential Determinants of Foreign Direct Investment 120 Market Size 121 Proportion of Specialized Shops in the Retailing Sector 121 Personnel Costs 123 Former Investment Behavior 123 4.2 Empirical Results 124 5. Summary and Conclusions 126 References 127 CHAPTER 7: FOOD RETAILING IN THE UNITED STATES: HISTORY, TRENDS, PERSPECTIVES 131 1. Introduction: Food Retailing: 1850-1990 131 2. Food Retailing 1990 to Present 135 4. Private Labeling Practice in the US Food Retailing System 141 3. Concentration in the US Food Retailing 142 References 145 v Contributors Danilo R.D. Aguiar is an Associate Professor at Federal University of Sao Carlos, Sorocaba Campus, Brazil. [email protected] Garry Griffith is Principal Research Scientist with the Productivity and Food Security Research Industry and Investment, NSW Department of Primary Industries, University of New England, Armidale, Australia. [email protected] Roland Herrmann is a Professor at the Institute of Agricultural Policy and Market Research at the University of Giessen, Germany. [email protected]. Vardges Hovhannisyan is a Ph.D. student in the Agricultural and Applied Economics Department at the University of Wisconsin-Madison, USA. [email protected] Dong Hwan Kim is a Professor in the Department of International Trade and Distribution, Anyang University, South Korea, and Director of the Agro-food New Marketing Institute, South Korea. [email protected] Anke Möser is a Research Fellow at the Center for International Development and Environmental Research, Germany. [email protected] Kyle Stiegert is an Associate Professor in the Agricultural and Applied Economics Department, and Director of the Food System Research Group, at the University of Wisconsin-Madison, USA. [email protected] Sascha Weber is a Research Fellow at the Institute for Market Analysis and Agricultural Trade Policy at the Johann Heinrich von Thuenen-Institute, Federal Research Institute for Rural Areas, Forestry and Fisheries, Germany. [email protected] Vic Wright is an Adjunct Associate Professor, School of Business, Economics and Public Policy, University of New England, Armidale, Australia. [email protected] vi Chapter 1: Introduction and Literature Review Kyle Stiegert 1. INTRODUCTION Since the 1990s, the progress of increased globalization and foreign direct investment (FDI) has altered considerably the economic landscape for most nations. These changes are noteworthy for the food retailing sector due primarily to the introduction and expansion of multinational, large scale food retailers. Consolidation of the food retailing sector has left many countries with only a handful of large-scale domestic and foreign retailers in dominant market positions. This has led to increased concern about the market power of food retailers, both as sellers and buyers. Consumers, farmers, food processors/manufacturers and other intermediaries in the food retail system often perceive limited options to confront this new and emerging market structure. The early stages of this trend began when large- scale European retailers such as Carrefour, Metro, and Tesco opened stores in overseas markets. In recent years, major US retailers like Wal-Mart and Costco also have been active in locating stores in foreign countries. The entrance of foreign retailers significantly affects the competitive structure among food retailers and the marketing system of host countries. It is, therefore, of considerable interest to investigate the internationalization process within food retailing. For selected countries, this book describes the characteristics and market structure of food retailing and analyzes factors affecting structural change, including the internationalization process. 2. OUTLINE OF THE BOOK The book uses six country case studies to examine structural change in food retailing and its impact on agricultural producers and the national economy. Country case studies were selected to provide coverage of different continents and differing levels of national development. As developed countries, United States, Germany, and Australia represent North America, Europe, and Oceania. As newly industrialized countries, Korea and Brazil represent Asia and South America. Poland is included to represent a nation transitioning from a Soviet-style command economy to a capitalist one. Each of the case studies presents a general trend toward a more concentrated food retailing structure. Although there are many differences among cases, the unmistakable march toward a food industry with dominant domestic and international food retailers is presented and discussed. The evidence to date indicates that these changes have not been translated into significant price hikes at the retail level. In many ways this is not surprising. In an effort to establish a market footprint, new entrants often compete on price terms, which may cause short-term periods of competitive conditions. However, once these markets settle into relatively stable structures, oligopoly firms are less apt to compete on price. While some cases provide empirical evidence of significant vertical market power exercised by concentrated food retailers, other country cases showed opposite or ambiguous results regarding this relationship. 1 Major findings from country case studies follow. In Germany, the most important structural change in food retailing during the last four decades is an increasing concentration of stores with a rising store size, combined with the growing role of discount stores. Consumers benefited from an intensive price competition despite the higher market shares of leading food retailers. The analysis of market conduct, in terms of price formation and pricing strategies, revealed a typical situation of imperfect