1
Distribution and the price of food: Competition and the Hunger Millennium
Development Goal1
Global commodity chains do not consist
merely of flows of materials across national
boundaries. They consist of networks whose
key decision-makers influence the outputs of
the chain and its composition.
(Dolan and Humphrey,2001)
A straightforward relationship between food distribution and prices and
development could be stated as follows. Food and drink expenditure takes an important
share in poor people’s income. In Brazil, for example, food responds for about 17% of
families’ total expenditure, while for low-income group, this participation increases to 32%
(Table 1). A decline of food prices raises real wages, without further impact in general
production costs. A sustainable raise in real wages foster the market for industrial goods
and enables families to invest in education. These effects can build blocks of a virtuous
circle in which effective demand and factor’s productivity grow jointly.
If the ubiquitous wave of mergers and acquisitions in retailing and food
processing sectors provoke a rise in food prices, development could be hampered and
poverty deepened. Furthermore, agricultural prices could be negatively affected by the rise
of buyer’s power, reinforcing the negative impacts on development of rural areas, and
poverty.
The natural conclusion that arises from the former reasoning is that
competition authorities should assume a presumption against allowing mergers among food
retailers to take place.
Though extremely appealing this reasoning may not be confirmed in
developing countries, and the Brazilian experience shows a very different scenario.
Retailing concentration, competition policy and Food Prices – the Brazilian experience
During the 90’s a strong wave of mergers and acquisition took place in the
Brazilian retailing and food processing sectors. From 1994 to 2005 the five largest
supermarket chains almost doubled their market-share (considering the retailing of food
and non-food products), while the ten largest food processors controlled almost one third of
industrialized food sales.
In Chile and Argentina, the increase in market share of the big supermarket
chains is similar to the Brazilian experience as shown by Table 2.
The ideas and opinions presented on this paper are personal and do not reflect any CADE’s or official
opinions/position.
1
2
Many operations were submitted to the Brazilian Competition System and
the concern of the authorities with the rapid concentration in the supermarket sector was
clear. In the majority of the cases, the Secretary of Economic Monitoring and/or the
Secretary of Economic Defense suggested the approval with restrictions, and determined
that several supermarket stores were sold2. The diagnoses were mainly based on the
presumption of high entry barriers3 and insufficient rivalry. However checking what really
happened to the post-merger situation, it is easy to conclude that there has been a
systematic overvaluation of the barriers to entry. Even before the final decision was made,
several entries had already occurred or the market-share of the merged firms declined, due
to rivalry among the remaining firms4. That is, despite the high concentration in
supermarkets sector a better understanding of the pattern of competition is required.
During nineties, real retail food prices slumped 50% in average, and from
2000 to 2005 the decline continued to happen, though in a lower magnitude. (Graph 1). The
impact on real income of the low-income population was expressive and had positive
distribution effects. The first consequence was a strong increase in food demand, without
reversion of the price decreasing trend. Meanwhile, a strong merger wave was in progress.
Empirical studies using non-parametric tests (Almeida, 2003) rejected the
hypothesis that the increase in the degree of concentration in the Brazilian food retailing is
correlated to the increase of food prices to the consumer. Changes in the degree of
concentration among different Brazilian regions in food retailing were not significant to
explain the variations in the food prices to the consumer. Furthermore, retail food prices
decreased more than wholesale food prices (Graph 2).
In Chile, according Morgan Stanley (2004), “… increased competition in
Chile’s supermarket sector — particularly among non-perishable food products — has
helped push food prices down […]”.5 Wal-Mart’s motto, “always low prices”, expresses
the new role of retail competition. That is, despite the high market share of the 5 largest
supermarket chains, competition is responsible for lower food prices.
As a matter of fact, former monetary stabilization and prices liberalization
increased competition and are in the roots of the Brazilian food retail restructuring. The
growth of the leading companies was achieved by costs rationalization, green investments
but mainly through M&A of large and medium supermarket chains. The result of the
process as a whole, was the exploration of scale and scope economies, increasing
productivity and efficiency, not only within the stores but also in the procurement systems
2
Some of these cases are still under analysis
Based on the calculation of Minimum Efficient Scale, the markets were characterized as highly
concentrated, by the non-existence of effective competitors and small opportunities of sales, what could make
the entry more difficult. Therefore, it was recommended the sale of specific stores
4 OECD DAF/COMP/WD(2005)70, EM 07-Oct-2005 - Roundtable On Barriers To Enter,19 October
2005,Contribution From Brazil – Cade
5
http://www.morganstanley.com/GEFdata/digests/20040121-wed.html
3
3
adopted. Because of competitive advantages of the big retail, the only alternative for
medium and small businesses would be to sell their companies and leave the market or to
find ways to compete with lower prices and/or differentiated services. Therefore,
movement of acquisitions was not restricted to the largest firms: acquisitions occured
among the smaller chains, which in turn have been incorporating independent units.
A more careful look at the food retailing evolution in Brazil, confirm the
easy of entry. Despite the increase of the degree of concentration in the segment of
supermarket chains, Farina & Nunes (2003) noted a discrete trend of deconcentration in
food retail at a national level. This trend is associated to the expansion of the independent
supermarkets (in number of establishments and market share) and of traditional retail (only
in number of establishments), as shown in Table 2.
The regional reality, however, shows important distinctions. The more
densely populated metropolitan regions with higher income presented greater advances of
supermarket chains. Big retailers were responsible for more than 70% of food sales in the
large Metropolitan Regions of São Paulo and Rio de Janeiro. In the other areas, this
number was between 20% and 50%. The similar distribution in the large metropolitan
areas suggests that the urban densification favors the presence of supermarket chains,
whose performance would depend on larger consumer markets.
In all regions but two, the relative weight of the chains in food sales was
reduced, due to the expansion of independent supermarkets. In the large metropolitan
regions the share of this form of retail was stable.
That is, the empirical evidence does not support the theory of the
disappearance of small retail caused by the expansion of the supposedly more efficient
large supermarket chains. At the same time, the food price behavior, and a more extensive
variety of stores and services show that the urban consumers have benefited from these
changes.
Big retailers, competition on quality and farmer’s income
Despite the competition environment in the food markets, another problem
could arise if the decline in food prices in the urban areas reflects an impoverishment of the
rural area. That is, if the strongest buyer power of big retailers could impose most part of
the lower price burden on the agriculture producer. For sure, the reduction of costs with the
acquisition of merchandise obtained principally from price negotiation, conditions of
payment, and added services from suppliers partially explain .the improvement in the
operational results of food retail.
Therefore, the sustainability of high urban real wages could be threatened by
accelerated depreciation of physical and human capital allocated in agricultural sector. Too
low prices in present could mean too high prices in future, since present standard of life
4
would result from the depletion of a stock of physical and human capital previously
accumulated in agricultural sector and food industry6.
Once more, the Brazilian experience does not support this hypothesis.
During the nineties, agricultural prices grew more than food prices, as shown in Graph 3, so
the real slump of food prices happened without looses in the rural income.
Besides price competition, the modern retail strategy has spurred
competition based on products quality and convenience of stores. Large supermarket
chains, most of them multinational enterprises, introduced private quality and safety
standards, in order to compete on product differentiation. The consequence to suppliers is
as challenging as the power on price negotiations.
Competition on food safety and quality is based on standards. In less
developed countries (LDC) public quality standards are often absent or weakly enforced. A
probable outcome from differentiation competition in LDC is the market segmentation in
two groups: one of them embraces high price and quality products and consumers willing
to pay; the other group contains low income and weakly concerned in quality consumers. A
market failure arises when products have hidden attributes and there is no or weakly
enforced public standards. Large informal production characterized by tax evasion and no
compliance to public basic standards, reinforces the food market segmentation based on
quality attributes.
According Dolan and Humphrey (2001), large retailers in Europe play a
decisive role in structuring the production and processing of fresh vegetables exported from
Africa. “The requirements they specify for cost, quality, delivery, product variety,
innovation, food safety and quality systems help to determine what types of producers and
processors are able to gain access to the fresh vegetables chain and the activities they must
carry out”.
Multinational retailers and food market enlargement
Foreign direct investment (FDI) is one of the leading forces of the M&A
wave in retail. Multinational retailers used to build supply chains connecting farmers and
food industries of the regions where they are settled.
Carrefour, the 2nd retailer in the world, started investing offshore in 1973, in
Spain. Two years later, Carrefour opened its first hypermarket in Brazil. In 1982, the chain
reached Argentina, and in 1989, Taiwan. The internationalization of Carrefour chain was
intensified in the ‘90s. Nowadays the group is present in 29 countries with 6,546 stores. Its
strategy consists of building group market share in each country in which it does business
by expanding the type of retailing best suited to the local market and by taking advantage of
the way their formats complement one another.
6
In order to prevent big retailers abuse of upstream market power, retailers of Argentina
adopted voluntarily a conduct code that banished practices such as price squeeze and unjustified price
discrimination. Self-regulation tends to reduce transaction costs in supply chain, but it is not enough to
prevent damages when incentives and monitoring costs are high.
5
Among Carrefour’s strategic priorities are the effort “to strengthen the
partnerships with the local companies in all countries and promote fair and long-term
relations with suppliers” and the adaptation to local demands.
Wal-Mart, the world’s first retailer, extended its activities to 11 countries:
United States, Mexico, Canada, Brazil, Argentina, Puerto Rico, Germany, China, South
Korea, United Kingdom and Japan.
Raikes et.al (2000, 393) stated that demand-driven chains may give more
opportunities for advantageous higher value added participation from developing countries.
According the authors, even subordinate participation in global chains can provide indirect
access to markets at lower costs than faced by individual small producers
Welfare benefits from standards dissemination are twofold. Standardized
products benefit consumers directly. Farmers are also benefited from the knowledge
transfer needed to reach standards and from the enlargement of market opportunities for
their standardized products. Sometimes multinational supermarket chains adopt a global
supply strategy that matches with local farmers capabilities. The highest barrier to reach
global markets is the missing knowledge concerning the attributes of demanded products
and the supply channels, and multinational supermarket chains have helped farmers to
overcome knowledge barriers. In 1999, four largest supermarket chains in UK offered
asparagus from Zimbabwe, Thailand, Peru, Guatemala and Spain, corn from Thailand,
Kenya, South Africa, Zimbabwe, and Guatemala, and fine beans from Kenya, Gambia and
Zambia (Dolan and Humphrey,2001).
Consumers in developed region are benefited from a wider space of choice
and opportunity of taste exotic food. These consumers are buying far more tropical
products, many items for the first time. Reardon et al. (2001) give an example: the recent
appearance of mangoes and chirimoyas (custard apples) from Latin America on
supermarket shelves in the U.S. Midwest.
As UNCTAD (2005) pointed out, “there is a growing trend towards
harmonizing private sector standards among international supermarket chains, making
conformity with those standards a requirement for market access”.
The other side of the coin is the effect of high compliance costs and
potential or actual trade losses, due to competition with more gifted producers.
Intra-firm exports of supermarket chains tend to grow quickly, as theirs
supply chains include new regions where investments are settled. Tariff reductions and
improvements in transport systems have globalized supermarket supply chains. For
example, the cost of sea freight fell almost 70% between the early 1980s and the mid
1990s. (Brown, 2005)
Market access created by intra-firm food trade was not enough however to
make LDC exports grow faster than global food trade. Graph 4 shows that developed
6
countries and the rest of the world have both equilibrated food trade balances . Farmers
connected to global agri-food networks experiment income raises, but this seems to be a
marginal phenomenon unacapable to change the present international food trade pattern.
Conclusion
Despite the growth of leading food retailers, and also food processors, food
relative prices have declined in several developing economies. Furthermore, a growing
variety of products and services have been provided to urban consumers. This result brings
positive effects to development process as contributes to increase real wages without
impact the production costs.
Though the Brazilian experience does not support the widespread view
medium and small retail is disappearing, there has been a strong competition pressure on
them. However, the positive efficiency effects that have resulted of the more competitive
environment for urban consumers, especially for lower-income population, does not
recommend any intervention to protect the smaller retailers, or even food processors.
The negative impact on the rural area and smaller businesses upstream that
has raised major concerns on Governments deserves attention, but also does not
recommend any anticompetitive intervention, such as price regulation. Most important are
the changes related to public and private standards, set by big retailers and food processors.
There will not be one international standard, but a number of standards that will be
met by different suppliers. Instead of an inevitable and endless concentration process, there
seems to have a tendency of continuous differentiation among consumers, retailers,
processors and farmers in a much more complex system of relations than is currently
described. If this scenario is correct, it is worthless to try to stop the recent tendency of
adopting private standards. On the contrary, in order to improve the capacity of small
farmers and small businesses to benefit from these trends, a constant provision of
information and proximity to the most dynamic markets is needed. For the small,
information is costly and sometimes impossible to obtain. A close relationship between
governments and small business associations with international organizations could fulfill
this gap.
Governments and International Organizations are not able of avoiding exclusion in
the competition process. Most of all, it is not desirable. Consumers have benefit from the
recent developments in the food system. Consumers of developing countries also benefit
from lower food prices that are provided by big retailers. They cannot afford to pay higher
food prices in order to preserve small retailers and food processors or even small farmers.
What is desirable is that the small have the opportunity to be efficient and respond to
market trends (from Farina et all. Report to OECD, 2005).
References
Almeida, S. F.de. (2003). Impactos da Concentração do Setor de Varejo de Alimentos
sobre o Consumidor. Thesis - Departament of Economics. School of Economics, Business
and Accounting. São Paulo University - FEA/USP, São Paulo.
7
Brown, O. (2005) Supermarket Buying Power, Global Commodity Chains and Smallholder
Farmers in the Developing World. UNDP - Human Development Report 2005. Occasional
Paper.
CEPAL (2001) Foreign investment in Latin America and the Caribbean, 2001
http://www.cepal.org/publicaciones/DesarrolloProductivo/8/LCG2178PI/LCG2178_ARGE
NTINA.pdf
Dolan C., Humphrey, J. (2001) Governance and Trade in Fresh Vegetables: The Impact of
UK Supermarkets on the African Horticulture Industry. Journal of Development Studies
37(2) Journal of Development Studies 37(2): 147-176.
Supermarkets and their Impacts on the Agrifood System of Brazil: the competition
among retailers , Agribusiness: an International Journal, vol 21(2) 133-148, 2005
Wiley Publishers, ISSN 0742-4477
Farina, E.M.M.Q., Nunes, R. & Monteiro, G.F, Revising the paper The Rapid Rise of
Supermarkets and the Use of Private Standards in their Food Product Procurement
Systems in Developing Countries, OECD report, 2005
Farina, E.M.Q. and Nunes, R. (2003) A Evolução do Sistema Agroalimentar no Brasil e a
Redução de Preços para o Consumidor: os Efeitos da Atuação dos Grandes Compradores.
Texto Para Discussão, Brasília, v. 970, p. 1-68, 2003.
IBGE, 2003. Pesquisa de Orçamentos Familiares – POF. www.ibge.gov.br
Raikes Ph., M.F. Jensen, S. Ponte: Global Commodity Chain Analysis and the French
filière Approach: comparison and critique. in: Economy and Society, vol. 29, no. 3, pp.
390-417, August 2000
Reardon et al. (2001) Global Change in Agrifood Grades and Standards: Agribusiness
Strategic Responses in Developing Countries. International Food and Agribusiness
Management Review, 2(3/4): 421–435
UNCTAD (2005) Developing Countrien in International Trade 2005
http://www.unctad.org/en/docs/ditctab20051ch2_en.pdf
8
Table 1 - Brazilian households food expenditures per month - 2003
Income Range
R$
Till 400
More than 400 to 600
More than 600 to 1000
More than 1000 to 1200
More than 1200 to 1600
More than 1600 to 2000
More than 2000 to 3000
More than 3000 to 4000
More than 4000 to 6000
More than 6000
Total
Households
n
7.949.351
6.747.421
10.181.484
3.528.908
5.086.643
3.349.073
4.571.410
2.416.195
2.236.892
2.467.262
48.534.638
%
16,4
13,9
21,0
7,3
10,5
6,9
9,4
5,0
4,6
5,1
100,0
Food
Expenditure
R$
148,59
195,85
234,26
282,12
312,33
359,76
397,94
474,54
523,77
788,70
304,12
Total
Expenditure
R$
454,70
658,18
920,69
1.215,33
1.494,43
1.914,35
2.450,03
3.270,20
4.445,42
8.721,91
1.778,03
Food /
Total
%
32,7
29,8
25,4
23,2
20,9
18,8
16,2
14,5
11,8
9,0
17,1
Source: IBGE, 2003. Pesquisa de Orçamentos Familiares - POF (Household Budget
Survey)
Table 2 – Supermarkets in Latin América - Concentration and Multinationalization 2002
Brazil
Share of top 5
Share of foreign
Share of foreign
chains in
multinationals-full ownership multinationals in top 5
supermarket sales*
or joint venture) in
chains´ sales
supermarket sales
47%
64%
84%
Argentina
76%
43%
91%
Chile
55%
10%
18%
* Sales include food and non-food products and durable goods as well.
94
19 01
94
19 06
94
19 11
95
19 04
95
19 09
96
19 02
96
19 07
96
19 12
97
19 05
97
19 10
98
19 03
98
19 08
99
19 01
99
19 06
99
20 11
00
20 04
00
20 09
01
20 02
01
20 07
01
20 12
02
20 05
02
20 10
03
20 03
03
20 08
04
20 01
04
20 06
04
20 11
05
20 04
05
09
19
90
19 01
90
19 07
91
19 01
91
19 07
92
19 01
92
19 07
93
19 01
93
19 07
94
19 01
94
19 07
95
19 01
95
19 07
96
19 01
96
19 07
97
19 01
97
19 07
98
19 01
98
19 07
99
19 01
99
20 07
00
20 01
00
20 07
01
20 01
01
20 07
02
20 01
02
20 07
03
20 01
03
20 07
04
20 01
04
20 07
05
20 01
05
20 07
06
01
19
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Graph 1 - Brazil –Real Food and Beverage Retail Price Index (1990-2005)
1,5
1,4
1
2
IPCA-Alimentos e Bebidas / IPCA-Geral
dez. 1993 = 1
1,3
1,2
1,1
1,0
0,9
0,8
0,7
0,6
Graph 2 - Retail Food Price Index1 / Wholesale Food Price Index2 Ratio
(1994, aug = 100)
120
100
80
60
40
20
IPCA – alimentos e bebidas
IPA-DI – gêneros alimentícios
10
Graph 3 - Agricultural Products Price Index3 / Wholesale Food Price Index4 Ratio
(1994, aug = 100)
1,5
1,3
1,1
0,9
0,7
2005 11
2005 06
2005 01
2004 08
2004 03
2003 10
2003 05
2002 12
2002 07
2002 02
2001 09
2001 04
2000 11
2000 06
2000 01
1999 08
1999 03
1998 10
1998 05
1997 12
1997 07
1997 02
1996 09
1996 04
1995 11
1995 06
1995 01
1994 08
1994 03
1993 10
1993 05
1992 12
1992 07
1992 02
1991 09
1991 04
1990 11
1990 06
1990 01
0,5
IPA-OG produtos agrícolas
IPA-OG gêneros alimentícios
Graph 4 - Agricultural Products - Imports and Exports – US$ 109
500
450
400
350
300
250
200
150
100
50
0
1990
1991
1992
1993
Imports Developed Countries
1994
1995
1996
Imports Rest of the World
1997
1998
1999
2000
2001
Exports Developed Countries
2002
2003
2004
Exports Rest of the World
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TABLE 2 - BRAZIL – Number of stores and participation in food retail by type of retail (1994 – 2002)
Number of Stores
Year
Traditional
1994
211.965
1995
227.603
1996
238.671
1997
257.607
1998
1999
257.822 262.348
2000
269.438
2001
284.538
2002
282.989
Chains
Independent
3.735
33.808
3.907
37.933
3.961
39.802
3.954
42.121
3.888
43.825
3.536
54.218
3.763
55.665
2.962
58.972
Total Brazil
249.508
269.443
282.435
303.673
305.534 319.428
327.192
343.965
344.922
Volume of Food Sales (%)
Year
1994
1995
Traditional
14,90%
15,30%
1996
15,60%
1997
15,40%
1998
1999
15,60% 13,70%
2000
13,20%
2001
21,00%
2002
20,40%
Chains
Independent
44,60%
39,80%
44,90%
39,70%
46,60% 44,70%
37,80% 41,60%
42,80%
44,00%
44,70%
34,52%
43,85%
35,74%
45,10%
40,00%
44,40%
40,30%
3.884
53.196
Obs: There was a change in the methodology utilized in calculating the volume of Sales as of 2001, so that the values cannot be
compared with the previous years. Until 2000, the volume of sales collected in the channels was focused on the categories
audited by the various indices of ACNielsen. The new methodology considers the total volume of Sales of each channel,
including all the categories that each channel sells, such as fresh vegetables and fruits.
Source: AC Nielsen Census, apud Farina & Nunes (2002)