Supermarkets and Agri-Food Supply Chains: Transformations in the Production and
Consumption of Foods
Eds: Burch and Lawrence
Chapter for Part 3
Supermarkets and Agri-Food Supply Chains in Europe:
Partnership and Protest
Bill Vorley
International Institute for Environment and Development, London
Target: 6000 words
Actual: 8482 words (30 April 2006)
ABSTRACT
Europe has been at the forefront of the supermarket revolution, and that revolution took a
big leap in the past decade with the rapid transformation of the sector in central and
eastern Europe. This chapter describes the nature and institutional ingredients of that
revolution, which includes the internationalisation of retailing and procurement, the growth
of own brands and private standards, and supply chain management systems, spurred on
by competition from the hard discounters
European governments have been politically unable to modernise competition policy to
accommodate the clear shift in the European competitive environment, from producer
market power to retailer buyer power.
Producers are waking up to implications for the welfare of primary producers, especially in
the wake of reforms to the Common Agricultural Policy. Dealing with the new market
realities has been in the form of both producer organisation and professionalisation, and
protest, against a backdrop of a fraying social contract between citizens and
supermarkets.
Introduction
This chapter describes the development of supermarkets in Europe, the way in they have
reshaped the governance of agrifood, and the consequences for other actors in agrifood
chains. The focus is on changing power relationships within European agrifood supply
chains, in terms of the developments of supply chain partnerships, regulatory responses.
and the rise of protest among producers and civil society.
Europe provides a fascinating field of study on the impact of supermarkets and the
associated re-governance of agrifood markets.
Firstly, the area is the home of giants of global retailing – in 2005, 18 of the global top 30
grocery retailers were European. European retailers are also the most internationalised –
the top eight European retailers all have significant proportions of their floor space and
sales outside of their home markets.
Second, it is the site of a tussle for market power between supermarkets and the food
industry, which is the leading European industrial sector and accounts for 13 per cent of
the total production value.
Third, the fall of the Iron Curtain in 1989 and the eastern enlargement of the EU has been
accompanied by a rapid eastwards expansion of European retailers. In the space of a
decade, there has a restructuring of the sector in Central and Eastern Europe (CEE) of the
kind which took 30 years in western Europe.
Fourth, Europe has led the world in the development of quality ‘own brand’ (private label)
products, and the application of private standards, both of which play an important role in
the ‘re-governance’ of agrifood
2
Fifth, Europe is the home of the ‘hard discount’ revolution, which has transformed food
retailing in much of continental Europe and is conditioning the development of the
supermarket and hypermarket sectors.
Sixth, European producers are waking up to the retail-driven ‘regovernance’ of agrifood,
but, having traditionally looked to Brussels and national governments to defend their
interests, are uncertain how to act. Reform of the Common Agricultural Policy (CAP) has
pulled the state back from management of agricultural markets, and agricultural budgets
are restricted to fund enlargement. Many of the countries in CEE have large and influential
farmer populations; in the enlarged EU-25, there are now 17 million farms, up from 7
million in the EU-15, and the proportion of farmers in the workforce has grown from 4 per
cent to nearly 8 per cent.
Lastly, civil society has developed a love-hate relationship with supermarket sector,
exploiting supermarkets’ market power to drive agendas of greener transport, better
animal welfare, public health, or higher labour standards in an era of state deregulation.
This is a heady mixture, with unpredictable outcomes. There are certainly lessons from
Europe for countries where these changes are just beginning to take hold, for purposes of
anticipatory policy. In order to understand the position of primary producers, suppliers and
manufacturers in markets dominated by the components of the European supermarket
model.
Grocery retail in Europe
The giants of European food retail markets are the UK, France and Germany, based on
their high populations and mature markets (Table 1). These three countries, which are
also the home markets for Europe’s top 10 retail groups, will dominate the analysis in this
chapter.
Deflation is a characteristic of Europe’s larger food markets. Price competition is especially
tough in Germany and the Netherlands, but Spain and Italy have also become more price
competitive in the wake of the expansion of the hard discounters. Germany has the lowest
grocery price index in western Europe – on average 15 per cent lower than the European
average – followed by the Netherlands and Spain (AC Nielsen, 2005a).
3
In line with trends across the OECD, the share of spending on essentials (food, clothing,
energy) has declined in Europe, as incomes rise and consumers seek to free up disposal
income. In the UK, spending on food as percentage has halved in 40 years, and one food
pound in three is now spent away from home. Declining relative expenditure on food, and
even food price deflation, is a major factor in the level of competition in food retail.
Table 1. The European Retail Market: Modern Grocery Distribution1, 2005 (EUR bn)
1
Rank
Country
EUR bn 2005
1
United Kingdom
233
2
France
211
3
Germany
208
4
Italy
104
5
Spain
83
6
Russia
79
7
Poland
42
8
Switzerland
36
9
Netherlands
33
10
Sweden
25
11
Belgium
24
12
Finland
24
13
Denmark
22
14
Norway
21
15
Austria
21
16
Romania
16
Modern Grocery Distribution is defined by PlanetRetail as a specific retail universe, comprising gross sales
(i.e. including VAT or sales tax) generated from (1) modern retail formats predominantly selling food, such
as hypermarkets, superstores, supermarkets, discount stores, convenience stores, drugstores and
independent outlets associated with a retail organisation or grocery retail company; (2) mixed merchandise
retail formats operated by grocery retail groups predominantly selling non-food; and (3) non-food retail
banners operated by grocery retail groups; modern wholesale formats, such as warehouse clubs, cash &
carry outlets and delivered wholesale (including distributors in the foodservice sector). Specialist food
outlets, such as butchers, bakers, etc. and open markets are excluded from the category.
4
17
Portugal
16
18
Czech Republic
15
19
Ireland
12
20
Greece
12
21
Hungary
10
22
Slovakia
6
23
Croatia
5
24
Bulgaria
5
25
Ukraine
4
26
Latvia
3
27
Slovenia
3
28
Lithuania
3
29
Serbia and Montenegro
3
30
Belarus
2
31
Estonia
2
32
Luxembourg
2
33
Cyprus
2
34
Iceland
1
35
Albania
1
36
Bosnia and Herzegovina
1
37
Macedonia
1
38
Malta
1
39
Moldova
0
Total
1,291
Source: Planet Retail. www.planetretail.net
There is a close relationship between per capita GDP and the penetration of ‘modern’
retail (Figure 2). What is interesting from a European perspective are the outriders, such
as Italy with a penetration about 20 per cent below predicted, and the UK, which is about
15 per cent above predicted by this relationship. Whether this points to durable
exceptions to the rule based on cultural or policy differences, or simply to time lags in
some countries, is a subject which warrants serious research.
5
Figure 2. Large Supermarket penetration vs. GDP per Capita
Source: Booz-Allen Hamilton, 2003
Large Supermarket penetration in
Consumer Goods Market
100%
Belgium
UK
90%
USA
Sweden
Germany
80%
Denmark
Switzerland
Norway
Finland
70%
Portugal
Austria
60%
Chile
Spain
Costa Rica
Greece
Argentina
50%
Italy
Brazil
Colombia
Mexico
40%
30%
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
GDP/Capita in USD (2001)
In CEE, markets are quickly approaching saturation. The EU average is 15 hypermarkets
per one million inhabitants. Hungary has 10 million inhabitants, and by the end of 2005
there will be 98 hypermarkets in the country. Hypermarkets in Hungary now account for
around a quarter of the market.2 Modern retailing already has an 18 per cent share of the
Russian market.
The biggest companies in European food retail are listed in Table 2. Europe's undisputed
leader continues to be French company Carrefour, with a European market share of 6.4
per cent. Carrefour is also the world’s second biggest retailer. German-based Metro is
third ranked in Europe and globally, with half of group sales through its cash & carry
operations (which in Europe includes Makro3), though it also owns consumer electronic
stores and department stores. In third place is UK-based Tesco, which in the last decade
has moved successfully into CEE, E Asia and SE Asia, but still makes the bulk of its sales
in the UK. Wal-Mart, which is by far the world’s largest retailer and grocer, is ranked only
13th place on the European stage, and is the only non-European player in the top 30.
2
Interfax Hungary Weekly Business Report, May 18, 2005.
3
In 1998, the European organisation of SHV Makro was merged into Metro Cash & Carry GmbH
6
Hard discounters4 are a growing part of the European food retail landscape, with some
notable exceptions such as the UK. Discounters are a huge part of the market in
Germany — in 2003, Germany accounted for 43 per cent of Western Europe’s 32,500
discount stores.5 Although discounters established themselves in packaged goods, the
hard discounters have now captured almost 50 per cent of the German fresh produce
market over the past 20 years. Their success in Germany has been aided by spatial
planning legislation. Similarly, discounting is growing fast in France, where there are also
heavy restrictions on store size and a growing emphasis on price. Discounters have been
very successful in CEE where the discount store format is spreading into medium size
towns. The growth in hard discounters between 2005 and 2009 in CEE is predicted to be
72 per cent, compared with 14 per cent in western Europe.
Illustrative of a fracturing of the market is the strong growth of up-market ‘craft’ retailers
such as Waitrose in UK and Tegut in Germany.
The leading retailers vary in their ownership structure. Carrefour and Tesco are publicly
held. Metro is publicly held but with large proportion owned by founder Otto Beisheim, the
Haniel group and the Schmidt-Ruthebeck family. The two giants of German hard discounting
Lidl (the Schwartz group) and Aldi are privately held, with very little information released.
There are some highly successful cooperatives, such as fourth ranked Rewe, owned by its
3000 retail members, and Edeka, which have their origins as buying groups owned by
independent retailers, but which have moved into store ownership and an increasingly topdown governance. Wortmann (2003, 2004) points to an especially German nature of these
affiliations of independent retailers in that they are based on coordinated organisation of
small business (Mittelstand), allowing for successful enterprise with a low concentration at
shop level in comparison to Britain or France. ITM Intermarché and Leclerc are consortia
of independent merchants.
Table 2. Top 20 Grocery Retailers in Europe, 2004
Retailer
Country
of Origin
Ownership
Retail
Net
Grocery
Domestic
Foreign
Banner
Sales
Sales
Sales (%)
Sales
Sales
2004
(%)
4
(%)
Food stores working to the discount principle, that is, limited product range, basic store fittings and
low prices. Generally around 600m2 floor space.
5 PlanetRetail
7
1
Carrefour
France
Public
2004 (EUR
(EUR
mn)
mn)
75,707
62,144
75.4
59.1
40.9
60,291e
54,114e
49.1
54.5
45.5
49,681
45,440
71.5
87.5
12.5
company
2
Metro Group
Germany
Public
company
3
Tesco
UK
Public
company
4
Rewe
Germany
Coop
44,135e
40,800
75.6
71.6
28.4
5
Auchan
France
Limited
38,418
28,604e
59.9
55.9
44.1
37,380e
34,052e
69.9
71.5
28.5
36,964e
34,263e
82.3
58.2
41.8
32,485e
29,465e
81.8
67.7
32.3
company
6
ITM
France
network
Intermarché
7
Schwarz
Germany
Aldi
Private
company
Group
8
Voluntary
Germany
Private
company
9
Edeka
Germany
Coop
31,582e
26,175e
84.4
92.0
8.0
10
Casino
France
Public
29,458
22,909
75.0
83.0
17.0
28,659e
13,048
85.0
49.2
50.8
28,566e
26,377e
64.0
94.7
5.3
24,958e
22,955e
74.5
0.0
100.0
24,128
23,017e
75.9
100.0
0.0
20,722
18,130
78.0
100.0
0.0
17,713e
15,485e
24.7
98.4
1.6
17,141e
15,068e
59.9
76.0
24.0
company
11
Ahold
Neth.
Public
company
12
Leclerc
France
Voluntary
network
13
Wal-Mart
USA
Public
company
14
Sainsbury
UK
Public
company
15
Morrisons
UK
Public
company
16
El Corte
Spain
company
Inglés
17
Tengelmann
Private
Germany
Limited
company
18
Système U
France
Coop
14,684
13,627e
85.2
100.0
0.0
19
Migros
Switz.
Coop
13,853e
13,152p
58.9
98.8
1.2
20
Coop
Sweden
Coop
13,353e
9,475p
81.3
33.3
66.7
Norden
Top 30: EUR 744,923 mn
Others: EUR 428,928 mn
Total Europe EUR: 1,173,851 mn
8
Note: * Marks & Spencer figures include wholly-owned operation in the UK only
Retail Banner Sales (including VAT and/or sales tax): the sum of the sales of all stores under a
retailer's banner, including sales from the retailer's own stores, the full retail sales of companies
consolidated under the equity method, plus the sales of franchised stores and the stores of
independents operating under the respective banner.
e = estimate
The EU-15 food market is already mature, and sales increases for food manufacturing
companies depend on gains in market share instead of market growth, or expansion into
other retail and service categories. The food retail sector has actually increased its share
of the wider retail market in all but four of 19 countries (France, Spain, Sweden and
Denmark) by 19 per cent to €870bn between 1999 and 2003; in 2003, European food
retailers accounted for 46 per cent of all European retail sales. Tesco’s sales in that
period rose by an astonishing 54 per cent. Non-food is the driver of this supermarket
growth. It is noteworthy that the hard discounter Aldi is ranked sixth place in clothing retail
sales in Germany. .
Internationalisation
The internationalisation of retail in Europe has been, by comparison with other sectors, a
recent phenomenon, and only gained momentum in the mid-1990s. There is still quite a
strong national characteristic to food retailing in many Western European countries though
this hides (a) high levels of international collaboration between firms in pan-European
sourcing to increase buying power and (b) the rise of the deep discounters such as Aldi up
the ranks of national players.
The leading European retailers and cash and carry operators are nevertheless highly
internationalised, in part because European grocery markets are saturated and highly
price competitive, and retailers have looked to CEE, SE and E Asia for their growth.
Carrefour operates in 38 countries and French overseas departments, Metro in 31, and
the most rapidly accelerating transnational retailer Tesco in 14. With its capital-efficient
cash & carry format, Metro is often the first major international chain to arrive in emerging
countries, as seen by its recent moves into Ukraine, Moldova and Serbia & Montenegro.
Internationalisation allows retailers to use their distribution systems for pan-European
procurement. For example, Tesco exports Polish and Hungarian products under its
private label to its stores in other CEE countries.
9
Food retail in most CEE countries is now dominated by the multinational chains. The top
10 retailers in the Czech Republic, for example, are all multinationals. There has been a
rapid demise of local store networks, with the exception of Hungary where the domestic
cooperatives, trade associations and retail chains (CBA, Co-op Hungary and Reál
Hungária) have adapted and fought back. There are also some very successful ‘local
multinationals’ such as VP Market in the Baltics and Migros Türk in the Balkans and
Middle East, which have been able to hold their own and grow against competition from
international retailers.
European supermarkets have also intervened in the policy process to influence the
international policy environment in favour of supermarket investments. Retailers have
been part of a European Services Forum lobby which has had close access to EC
negotiators, urging the liberalisation of retail distribution markets in developing countries
under the WTO GATS negotiations (ActionAid, 2006). Leaked requests of the EU to the
GATS negotiations reveal that the EU requested 60 countries to open up their markets for
distribution services according to GATS rules. 6
Market concentration
Concentration in European retail is progressing. In 2004, the European top 30 captured a
combined market share of 63.5 per cent, and this is expected to increase to 72 per cent by
2009. At a country level, concentration ratios are very much higher, with four-firm
concentration ratios (CR4, ie the sum of the market shares of the four largest retailers)
often above 60 per cent (Table 3). The UK market has been described by the Competition
Commission (2000) as a complex monopoly7, and the dominance of Tesco has reached
the point when in 2005 even Wal-Mart called for a probe into its impact on the working of
the market.8
Table 3. Grocery retail concentration in Europe
Country
CR3
CR4
Top firms
Austria
57.4
66.2
Rewe, SPAR (Austria), Aldi, Metro
6
See www.wdm.org.uk/action/EUleaksmedia.htm
Complex monopoly exists where a group of companies which are not connected and which
together account for a given percentage of the supply or acquisition of any particular description of
goods or services (25 per cent is the figure in the United Kingdom law) engage in conduct which
has or is likely to have the effect of restricting, distorting or preventing competition.
8The Sunday Times, August 28, 2005
7
10
Belgium
61.8
70.4
Carrefour, Colruyt , Delhaize Group, Metro, Aldi
Czech rep
24.8
29.7
Ahold, Schwartz, Metro, Rewe, Tesco
Denmark
66.4 – 78
74.1
FDB, Dansk Supermarkt, Dagrofa, SuperBest
Finland
83.6
87.6
Kesko, SOK
France
48.1
60.0
Carrefour, Leclerc, ITM, Casino, Auchan
Germany
44.3
56.1 - 66.7
Metro, Rewe, Edeka/AVA, Aldi
Hungary
48.2
51
CBA, Tesco, Co-op Hungary, Metro, Reál Hungária
Ireland
54.4
70.3
Musgrave, Tesco, Dunnes Stores, Stonehouse,
Italy
29.1
36.0
Coop Italia, Auchan, Carrefour, Conad
Netherlands
51.5 - 62.6
56.9 - 82.6
Ahold, Casino
Norway
62.6 – 83
76.3 - 99.5
Norgesgruppen, Coop Norden, Ahold, Reitan
Poland
14.9
17.7
Metro, Jerónimo Martins, Tesco, Carrefour
Portugal
48.3
56.8
Modelo Continente, Jerónimo Martins, ITM
Romania
17.5
18.7 - 27.0
Metro, Rewe, Carrefour, Delhaize
Slovakia
25.3
31.4
Tesco, Metro, Rewe, Schwartz
Spain
53.8
62.5
El Corte Inglés, Carrefour, Marcadona,
Sweden
80.9 – 95
83.8
Ahold, Axel Johnson, Coop Norden
UK
42.3 – 60.4
49.3 – 70.6
Tesco, Asda-Wal-Mart, Sainsbury’s, Morrisons
Europe
17.1
20.8
Carrefour, Metro, Tesco, Schwartz
Compiled from PlanetRetail, AC Nielsen, USDA-FAS, FCO
While there is a general trend to concentration in Europe, Dobson et al. (2001) point out
that the emerging structures of food retail are not always the same. These authors use a
typology of the dominant firm (when the market share of the top firm is >25 per cent and at
least twice as high as the second rated firm), the duopoly, the asymmetric oligopoly, the
symmetric oligopoly, and unconcentrated structure (when no firm has a market share >10
per cent). Only Italy was the only country ranked as ‘unconcentrated’, though this situation
is changing now that Coop Italia has a 12.5 per cent share.
Table 3. Market structure of retail in Western Europe, based on market shares of top
5 retailers, based on 1999 data (Dobson et al., 2001)
Country
Market structure
11
Austria
Asymmetric oligopoly
Belgium/Lux
Asymmetric oligopoly
Denmark
Duopoly
Finland
Duopoly
France
Asymmetric oligopoly
Germany
Symmetric oligopoly
Ireland
Asymmetric oligopoly
Italy
Unconcentrated
The Netherlands
Dominant firm
Portugal
Duopoly
Spain
Asymmetric oligopoly
Sweden
Dominant firm
UK
Asymmetric oligopoly
Market concentration in CEE countries is also becoming part of the retail landscape,
driven by foreign capital. This follows high concentration through state ownership of
channels in the communist era, and low concentration on the transition period when
privatisation gave rise to many small companies (Table 4).
Table 4. Key characteristics of retail transformation in Hungary (HU), Poland (PL)
and Romania (RO) (Csáki et al., 2004).
Phases
Characteristics
Communism
HU
Concentration in
retail sector
Dominant source
of capital
Share of modern
retail
Share of large
multinationals
PL
RO
90-95
HU
PL
95-00
RO
HU
PL
2003/2004
RO
HU
PL
RO
H
H
H
L
L
L
LH
LH
L
H
LH
L
D
D
D
D
D
D
DF
DF
D
F
DF
D
L
L
L
L
L
L
LH
LH
L
H
LH
L
L
L
L
L
L
L
LH
LH
L
H
H
L
H – high
L – low
D – domestic
F – foreign
12
Buying Groups
The accumulation of buying power through alliances between retailers, in the form of
buying groups, has long been a feature of the European supermarket scene. Networks of
independent grocers such as ITM and Leclerc use their collective buying power to
compete with integrated retailers when negotiating with brand manufacturers, and these
groups have themselves joined forces to compete with the discounters and integrated
hypermarket companies. The giant buying groups AMS and EMD had total sales in 2004
of EUR 90 billion and EUR 100 billion respectively, in excess of the sales of top integrated
European retailer Carrefour.
The challenge from the hard discounters has fuelled the demand for increased buying
volumes. Greater European alliances will become a more significant part of the buying
process, and it is likely that more private labels will also be sourced more widely through
buying groups. Larger buying groups and buying alliances in Europe put manufacturers
under tough negotiation pressure, faced with the risk of losing all Europe-wide listings
Buying groups can have a significant impact on actual industry concentration. Because of
the buying groups, Grievink (2003) estimated that in western Europe, only around 110
buying desks account for about 85 per cent of the total retail food (not foodservice) sales
of the western European countries.
Own Brands
Retailers’ own brands (also known as private labels) ‘have been one of the competitive
forces which shifted strongly in favour of retailers’ (Wrigley and Lowe, 2002). Europe is
the leading region for private labels with a 23 per cent market share9 (by sales), growing at
four per cent annually (AC Nielsen, 2005). Switzerland has a remarkable 45 per cent
market share of own brand (Table 5), though growth is especially strong in the emerging
markets of central and south-eastern Europe. Much of the growth in own brands is driven
by the hard discounters, which have business models built around a very high proportion
of own brand sales (Table 6).
“Europe” in AC Nielsen’s study is Austria, Belgium, Finland, France, Germany, Greece,
Ireland, Italy, Netherlands, Portugal, Spain, Denmark, Great Britain, Israel, Norway, Sweden,
Switzerland
9
13
Table 5. Retailer own brand market share and growth in Europe
Global rank
Country
Share of
Annual growth rate
own brand
of own brand
1
Switzerland
45%
2
Germany
30%
3
Great Britain
28%
4
Spain
26%
5
Belgium
25%
6
France
24%
3%
7
Netherlands
22%
8%
9
Denmark
17%
11
Sweden
14%
12
Austria
14%
14
Italy
11%
15
Portugal
11%
16
Hungary
10%
15%
17
Slovakia
10%
14%
18
Finland
10%
16%
20
Norway
8%
14%
21
Ireland
7%
22
Czech Republic
7%
25
Greece
4%
24%
34
Croatia
2%
77%
3%
16%
10%
Source: AC Nielsen 2005
Table 6. Own Brand Share of European Grocers, 2004
Estimated Share of
Company
Private Labels (%)
Aldi
95
Schwarz Group
63
Tesco
45
Casino
40
14
ITM (Intermarché)
35
Carrefour
32
Rewe
25
Source: Planet Retail Ltd - www.planetretail.net
A number of factors are working together to underpin the growing popularity and
importance of private labels to retailers. Own brands have growing acceptance among
consumers, and retailers continually seek market differentiation and strengthened
customer loyalty, especially in the face of tough competition from discounters. Own brands
allow retailers to chose from several suppliers, and thereby exert more control over the
supply chain. There are also higher margins to be made; the UK Competition Commission
report (2000) showed retailer’s purchase savings of 29.4 per cent (in part due to a lower
supplier margin of 18.8 per cent) which allowed a higher retail margin of 10.1 per cent
even with a lower selling price of 19.3 per cent (PlanetRetail, 2006).
Private standards
Supermarkets endow themselves and their brands with private standards and certification
schemes. European retailers have led the charge in creating their own standards and
operating food safety systems which go beyond that required by public regulation and are,
with own brands, another tool in the control and rationalisation of supply.10
The Euro-Retailer Produce Working Group (Eurep) began developing standards for farm
certification in 1996. EurepGAP started off as entirely retail-driven, though it has grown to
include other actors from the supply chain, and it is now governed by an elected group of
equal numbers of suppliers and retailers drawn from retailers and producers worldwide.
EurepGAP is currently the nearest thing to a ‘global pre-farm gate standard’, and is
becoming a minimum market entry requirements for fresh produce destined for many
European supermarkets (Tallontire and Greenhalgh, 2005). Some retailers add their own
more stringent standards, such as Tesco’s ‘Nature’s Choice’, in the pursuit of stronger
brand protection. EurepGAP is a mix of process and performance standards.
Independent audits and certification by accredited verifiers are used to measure
compliance. Retailer-driven private standards are business-to-business rather than
consumer-facing, and are unfunded requirements of suppliers and primary producers.
10
See Harrison et al., 1997 and Marsden et al, 2000 for analysis of private standards within context
of ‘private interest regulation’
15
Despite EurepGAP’s slogan “the global partnership for a safe and sustainable food
system’ the focus is heavily on safety. It is nevertheless the only pan-industry standard to
include environmental issues. The other leading private sector food standards (Global
Food Safety Initiative GFSI, SQF 2000, and the new ISO 22000) are focused entirely on
safety.
What is often not appreciated is the connection between own brand and the growth of
private standards such as EurepGAP. First in the UK and then in the EU, there has been
a privatisation of responsibility for food safety, with the role of government shifting to
oversight. Marsden et al. (2000) refer to this as the “second phase of food regulation” in
which regulation is driven primarily by the way food safety issues are perceived by large
food retailers, with the State acting mainly as auditor rather than enforcer.
Own brands have, in European law11, turned food retailers into ‘food business operators’.
The General Food Law Regulation 178/2002 Article 17 assigned food safety responsibility
to the private sector, with competent authorities implementing control systems and
verifying compliance. Under the regulation, “food and feed business operators at all
stages of production, processing and distribution within the businesses under their control
shall ensure that foods or feeds satisfy the requirements of food law which are relevant to
their activities and shall verify that such requirements are met.”
Private standards therefore become a business “firewall” response to legislation – a
mechanism to demonstrate proof of due diligence, safeguard reputation and reduce legal
liability for own brand retailers. They are also a means to reduce governance costs for
lead firms in value chains (through codification of standards), and to allocate risks along
the chain and transfer the costs of compliance with public and private standards further
upstream.
Vertical Coordination and Supply Chain Management
The modern supermarket model is an accelerator of structural change towards vertical
coordination of agri-food chains. European supermarkets have been at the forefront of
applying the principles of ‘lean retailing’ and supply chain management (SCM) to the food
11
General Product Safety Directive Article 2
16
sector in the management of risk and defence of quality, consistency and assurance to
consumers, especially in support of own brands.
Rather than trading through wholesale and arms-length markets, SCM is built around
‘partnerships’ with preferred suppliers in a rationalised supply base, using national and
cross-border systems to coordinate procurement. The costs of operating SCM are
outweighed by the benefits of reliability and continuity of supply, consistency, quality and
scale, shorter lead times and lower prices. Consumer expectations are more clearly fed
along the food chain than with arms-length and bulk commodity markets.
In line with the business model moving from ‘trading’ to ‘partnership,’ supermarkets rely
more on fixed prices with regular reviews, increasing the predictability for both processor
and producer (Figure 2). There is also increased use of transparent fixed margin or costbased pricing for products which involve heavy investment to meet retailer specifications.
Fixed prices reduce the ability of growers to ‘play’ the spot market but are usually
rewarded with greater security (EFFP, 2003). On the other hand, suppliers are highly
leveraged, especially when they are ‘tagged’ within exclusive relationships with a single
retailer, to the extent that retailers may cap supplier and, by extension, farmgate prices
against predetermined retail margins. The bigger retailers get better terms from suppliers
which leads to a virtuous circle of growth (Burt and Sparks, 2003),12 though as noted
earlier, branded suppliers get higher margins than unbranded ones.
Figure 2. Changes in pricing models (Source: EFFP, 2004)
12
Demonstrated by the 2000 UK Competition Commission report, which produced data which
showed that retailers with a market share of less than 5% tended to pay around 4% more than the
average supplier price, while retailers with more than 15 percent market share paid between 2%
and 4% less than the average price
17
Fixed and
review
Future
Current
Historic
Market
Transparent
/ cost-based
Some of the trends towards narrowing and rationalisation of the supply chain, and
outsourcing category management to first tier suppliers, are reversible. In some
supermarkets there is concern that reliance on too few first tier suppliers gives those
preferred suppliers too much countervailing power, and procurement is being taken back
in house.
The position of suppliers and the tussle for market dominance
Much of the discussion around supermarkets and farmers is presented as if farmers trade
directly with retailers. While this is true for the largest fresh produce suppliers, the food
and drink industry transforms more than 70 per cent of the agricultural raw materials
produced in the EU. The alignment of farmers with processors and manufacturers is
under-stressed. The power relations between retailers and first tier suppliers are very
important in determining the impacts on primary producers.
Flat consumer demand and an increasingly competitive retail sector are forcing supplier
prices down. Price wars have been a feature of the Netherlands since Ahold’s Albert Heijn
chain slashed prices in Oct 2003 in what seemed a pre-emptive strike to assert dominance
over the Dutch market (van Heerde et al., 2005). There has also been tough price
competition in the UK since the entry of Wal-Mart in 1999.
18
In a situation of oligopoly and stagnant demand, price warfare and the squeeze on
suppliers is a much used strategy for oligopoly firms to defend their position in the market.
In some grocery categories, such as bread, bananas, milk and eggs, it can be argued that
consumers are paying too little for their produce, because supermarkets are passing on
‘economies of scale’ (value captured from highly leveraged suppliers and producers) to
consumers in order to raise or defend their market share (Vorley, 2004). The structure of
concentrated agrifood markets affects both the size of the retail ‘pie’, as well as the share
of the pie between primary producers, manufacturers, and retailers.13
The Dutch price war produced some interesting tussles for dominance between big brand
suppliers and retailers. In early 2006, the Dutch brewer Grolsch began boycotting Albert
Heijn after a dispute over beer prices. A battle also broke out between Albert Heijn and
Coca-Cola in 2002, when the supermarket boycotted Coca-Cola products, and with
Unilever in the same year when the retailer de-listed some Unilever brands.
In the UK, even the large food manufacturers are struggling in face of market pressures
from their supermarket customers. Research by accounting firm Ernst & Young points to a
rising tide of profit warnings from food companies in 2005, with food companies citing
customer problems, delays and discontinued contract negotiations as a main causes of
financial trouble, with strong resistance to the price rises needed to offset higher energy
costs. "Supermarket chains are insisting on broader and new product choice, lower prices
and rapid response to fast changing promotions putting food producers under pressure
like never before.”14 Some processing sectors such as coffee roasting have been
relatively insulated from retailer price pressures, thanks to their ‘gatekeeper’ position on
key parts of commodity chains. It will be interesting to see how this plays out in years
ahead, as the own brand revolution spreads into these sectors.
Another feature of supplier-retailer relations which reflects disparities of market power is
the so-called ‘back margins’ (marges arrières) or off-invoice discounts. Supermarket
chains invoice suppliers for the provision of services, such as shelf placement and in-store
marketing, as well as volume rebates, or even make ad hoc demands for cash payments.
Since 1988, UK farmers have seen the farmers’ share of retail basket of goods drop by 13
percentage points compared to an overall increase in retail price of food. This equates to a
decrease of 28% for the farmgate price paid for the goods (source: The DEFRA report on UK
Agriculture 2003).
14 just-food.com, 10 April 2006
13
19
In France, marges arrières are typically equivalent to 20 per cent of the price of yoghurt
and as much as 60 per cent of the price of ham and cooked meats.15 Back margins make
it impossible to estimate the profits which supermarkets make on individual products.
These deals have been brought into the open by a change in French law (the Dutreil Law)
which has confirmed the supremacy of the manufacturers' terms of sale, rather than the
supermarkets' terms of purchase. Under this law, any discounts received over 20 per cent
must be integrated into the price of the products, thus reducing prices for consumers and
shrinking back margins for retailers.
The services which ‘back margins’ are paying for are not always clear, and in France this
has led to both Lidl and Leclerc being sanctioned for false invoicing during 2005. Lidl was
found to have asked the suppliers to fund a new warehouse near Montpellier in exchange
for exclusive contracts that were not honoured. Leclerc was ordered to refund €23 million
to suppliers in a similar incident.16
In the UK, there has been much controversy in 2006 around requests for up-front cash
payments from Asda Wal-Mart. Reports claimed that big suppliers had been asked to pay
between £10 million and £60 million to keep their preferred status as part of Asda’s
reinvigorated ‘Buy for Less programme’ in which suppliers are asked to ‘share the benefits’
of growth with the supermarket and customers.17
The role that suppliers have as “bankers” of the expansion of big supermarkets has also
been scrutinised in the UK. A Financial Times investigation in 2005 claimed that
“Increased reliance on trade credit in much of the UK supermarket sector has been
associated with an apparent increase in pressure on suppliers in terms of the number of
days' credit that retailers take from them.” The authors conclude that “In effect, suppliers
have acted as surrogate bankers to [Tesco and Asda] on a remarkable scale, contributing
growing amounts of finance in a period when cash flow from depreciation covered only
one-third of the combined investment outlay.”18
What is also not fully appreciated is the role of the hard discounters in price negotiations
between suppliers and mainstream retailers. The major full service supermarkets are in a
15
Carrefour in legal bind with supply chain. Food&DrinkEurope 4 January 2006.
Court retail ruling swells French legislative pressure. Food&DrinkEurope 2 December 2005
17 Asda defends payment demands. Freshinfo News 31 March 2006.
18 Financial Times, 7 December 2005
16
20
position to demand that suppliers match the terms which they offer the deep discounters.
This was recently reported in Switzerland, where the Swiss retail groups Migros and Coop
were reported to have told companies who supply Aldi or who are considering supplying
them in the future, that they will not tolerate manufacturers supplying Aldi on better terms
than they are getting.19
There is of course a significant development dimension to the debate around supplier
relations with European retailers (Humphrey, 2005). Price pressure and narrowing of
supply chains is felt by smallholders and wage labour on farms supplying air-freighted
vegetables in Kenya, as much as farmers and labourers within Europe.
Many supermarket requirements relating to volume, consistency, quality and safety, as
well as services (such as delivery of product on time to supermarket distribution centres,
and compensation in the event of any problems) are difficult to meet for many small firms
and producers, as they require capital, technology, specialization and organisation. The
result is the exclusion of those firms that are generalists, financially weak or immobile.
The incompatibility of SCM and the capacity of smaller producers are starkly contrasted
when supermarket chains decide to source some local products in response to consumer
demands (Vorley et al., forthcoming).
Private standards in particular, while providing a level playing field for third countries to
access high value markets, may be scale-biased and regressive instruments with relative
higher costs and complexity — especially in determining conformity to technical
regulations — falling on the smallest operation. There are concerns in Europe that
standards are accentuating prevailing inequalities, and excluding small firms and
producers from participating in market growth, marginalising small-scale primary
producers or entrepreneurs. The critique continues that the costs, risks and benefits of
compliance are not equitably shared along the supply chain, between the ‘standards
makers’ and ‘standards takers. The experience of business-to-business standards from
horticulture is that the costs of private standards are borne by the producer whereas the
benefits accrue to the retailer. All farm assurance initiatives have skirted issues of
19
ALDI suppliers in Switzerland under pressure. PlanetRetail News Bulletin 8 February 2006
21
declining price, market structure (Tallontire and Vorley, 2005). The accusations of private
standards as barriers to market have even reached the WTO.20
Labour bears much of the brunt of the cost-price squeeze, as documented in a trio of
highly critical books and reports released in 2004, by Lawrence, Blythman, and Oxfam.
The challenge of regulating buyer power in Europe
There have been a range of approaches to regulating buyer power in Europe in pursuit of
fairer trading relationships between primary producers, suppliers and European
supermarkets. The overall impression is of policy paralysis in the face of clear shift in the
European competitive environment in agrifood, from producer market power to retailer
buyer power, thus providing little guidance for countries where these changes are just
starting. In line with the scope of this chapter, legislation to protect small traders, restrict
planning, or preserve diversity of wholesale markets is not covered.
Buyer power can affect the proper functioning of markets from a narrow perspective of
consumer welfare (because it presents barriers to entry and reduces suppliers’ long-term
viability and incentives to invest). Supply chain management and the drastic narrowing of
supply networks clearly does present barriers to entry of new firms – supermarket buyers
report an extreme reluctance to opening new accounts – and exclusive contracts are
common in supermarket-supplier relations. Furthermore, the exercise of raw market power
either through ‘front margins’ or ‘back margins’ can lever more favourable terms from
suppliers than would be expected under normal competitive situations, and also increases
risk of unlawful behavior
But European governments have been politically paralysed in the face of the shift from
producer market power to retailer buyer power. Imperfect markets provide a big challenge
20
WTO members examined for the first time the role of private sector standards in restricting trade
during the 29-30 June 2005 meeting of the Committee on Sanitary and Phytosanitary (SPS)
Measures although the issue has been raised in the Technical Barriers to Trade (TBT) Committee.
St Vincent and the Grenadines, supported by Jamaica, Peru, Ecuador, and Argentina, complained
that SPS and TBT requirements for exporting bananas and other products imposed by EurepGAP
are tougher than the governments’ requirements — and so government rules should apply. The
discussion was centred on the need to clarify SPS Agreement rules pertaining to government
responsibilities for private sector standards. Referring to Article 13 of the SPS Agreement, which
says that Member governments "shall take such reasonable measures as may be available to them
to ensure that non-governmental entities within their territories... comply with the relevant provisions
of this agreement," these countries argue that the EU rules should apply to private sector.
Argentina said that this matter needed to be resolved or "twenty years of work" would be wasted.
22
to regulators -- the OECD acknowledged in 1999 that “Large multi-product retailers could
enjoy substantial buyer power despite having retail market shares and consequent shares
of manufacturer sales falling well below levels most countries would regard as necessary
to constitute a (single-firm) dominant position on either the selling or buying side.” This is
because of the triple effect of (a) direct power in purchasing, (b) own brands, and
supermarkets competition with their branded suppliers, and (c) supermarkets’ hold over
the marketplace, through control of shelf space (Dobson, ref.).
In the UK, Prime Minister Blair has twice described farmers’ relationships with
supermarkets as an “armlock”, firstly in March 2001, when he promised action, and almost
exactly four years later in March 2005.21 Over the space of those four years, Tesco’s
profits doubled from £1 billion to just over £2 billion, and the company extended its lead
over its rivals, with a market share increasing to very close to 30 per cent. There was very
little regulatory action over those four years, despite much scrutiny from the competition
authorities.
A report on the sector in 2000 by the UK Competition Commission found no evidence to
support the claim that consumers were suffering from retail concentration – on the
contrary, it argued that consumers were being extremely well served by supermarkets.
However, the inquiry did find evidence of misuse of buyer power, but struggled with
recommending an appropriate instrument to deal with abuses. In an indication of their
discomfort, the Commission recommended only an industry code of conduct on dealings
with suppliers, released in March 2002. The Code has, by admission, failed to deal with
these concerns. The ‘Breaking the Armlock’ alliance22 of farming and civil society
organisations, along with some parliamentarians, are calling for a strengthening of
supermarket supply chain legislation. Meanwhile, the UK Office of Fair Trading has stated
bluntly that “Our role is to make markets work well for consumers.”23
Practices that exploit dependency relationships between retailers and suppliers are likely
to continue even when codes are given legislative teeth, considering suppliers’ reluctance
to bring cases to court (Dobson et al., 2001). Economic dependency laws, such as in
Germany and France, have proved generally ineffective in protecting suppliers against
21
'Farmers Still in an Armlock on Prices' Western Morning News, 9 March 2005
www.breakingthearmlock.com
23 Response from Bob MacDowall, Markets and Policy Initiatives Division, OFT to letter, 25 Aug
05
22
23
opportunistic behaviour by powerful retailers (Dobson, 2003). German competition
legislation was reformed in July 2005, with large companies prohibited from using their
market power to demand “unjustified and repeated” special terms and conditions from their
suppliers. But the German government admits that abuse of market power will be hard to
control as few suppliers will be ready to take legal measures against their clients.
Dobson (2003) observes that in Europe “Authorities appear unwilling to prohibit retailer
practices that potentially offer both efficiency benefits and anti-competitive effects even if
they serve to reinforce buyer power.” This gives rise to accusations that regulation in
Europe is asking the wrong questions, and is incapable of looking beyond narrow
consumer interests. The NFU accuses the UK Office of Fair Trading of operating a “one
dimensional approach to competition policy” where “if it looks good for consumers
because it is reducing prices then it must be fair trade.”24
There are regulations in some European countries against below-cost selling. In Germany
the 1999 Restraints on Competition Act forbids retailers from setting prices permanently
below purchase prices, allows firms to take action in the courts against the abuse of a
dominant position without having to wait for the Cartel Office to take action, and allows
suppliers who wish to complain about the abuse of purchasing power by a retail chain to
remain anonymous during the Cartel Office investigations. The Groceries Order in Ireland,
which included a ban on selling below the net-invoice (notably not including ‘back
margins’) was revoked in late 2005.
There have been no attempts to regulate own brands, for instance by allowing retailers to
be either completely own brand, or be open to all suppliers, rather than the status quo of
supermarkets’ own brands competing with their suppliers.
Where next for Europe: Partnership and Protest
"My conclusion is that the consumer is the best regulator and there is room in a thriving
market for anyone who satisfies customers."
Lucy Neville-Rolfe, Tesco corporate affairs director. BBC News 15 February 2006
It comes as no surprise that supermarkets’ procurement strategies are both a driver of
restructuring and professionalisation of primary production, and a source of growing
24
Action required now on latest retailer demands, says NFU. Press Release.
24
resentment and protest from those producers and suppliers who are being excluded or
marginalised along the way.
As stated earlier, SCM demands that producers are equipped with technology, capital and
organisation. SCM is a big driver of the establishment of Product Marketing Organisations
(PMOs), in order to ‘cooperate to compete’ and build the transactional and technological
capacities of preferred suppliers. ‘Alliance capitalism’ leads to more formal and secure
relationships between primary producers and retailers. PMOs can increase producer
bargaining power and improve services which producers get from retailers, including
technical assistance, credit and transport. This is especially important in countries where
there are low levels of producer organisation and investment in processing, such as the
UK and much of CEE. The supply chain has been an especially important source of credit
in CEE (Swinnen, 2005).
‘Alliance capitalism’ also increases dependency and leverage, and the mainstream
farming organisations in Europe are beginning to refocus their political action to issues of
market structure and corporate concentration, after years of promoting the value of chain
partnerships with supermarkets. It is one area where members of the International
Federation of Agricultural Producers (IFAP) north and south can agree.
A sector where protest has become Europe-wide is dairy. As suppliers of an unbranded
product which they make on behalf of the supermarkets, dairy farmers’ gross margins
have been under severe strain.25 There have been protests against supermarkets across
Europe, with tractor convoys and blockades of processing plants and retailer distribution
depots. In Germany, agricultural organisations such as the Arbeitsgemeinschaft bäuerliche
Landwirtschaft have protested against Lidl and other discounters since the beginning of
2004. The farmer-controlled milk processor Arla did not escaped these protests, when in
September 2005 supplies of Arla milk and dairy products to supermarkets were disrupted
by British farmers protesting against low farmgate prices, which had slumped below the
cost of production.
None of these protests has resulted in a sustained improvement in price, and media
interest has been muted. Major processors blame the supermarkets, especially the
25
Financial Times ref
25
discounters for depressing the market through price wars. The retailers blame farmers for
depressing market prices through overproduction.
A recent study shows that leading dairy producers are having to raise additional debt and
equity to "stay at the table" in their negotiations with the supermarkets. In Germany,
discounters have a 42 per cent share of drinking milk and fresh milk products (Aldi alone
has 18 per cent), and their share of total sales for fresh dairy goods is increasing by 5-6
per cent per year. So when these organisations suggest a price to processors, it is usually
accepted.26 For example, although Asda’s rationalisation of its milk supply in May 2005
down to a single supplier27 did not automatically mean that the retailer could exert specific
price pressure, it certainly “sharpened their pencil” and created “conditions in which
competition creates its own pressure.”28
Symptomatic of a radicalisation of the traditionally conservative UK farming unions,29 the
president of the National Farmers Union of Scotland John Kinnaird, responded angrily to
reports of Asda demands for one-off payments from suppliers in order to fund consumer
price cuts: "Frankly, this latest move makes a mockery of Asda's pledge to invest in its
business through its own margins. It is doing exactly the opposite and asking its suppliers
to pick up its bills for attempts to win market share which appear to be acts of desperation.
Whilst I'm sure Asda will state that these payments are 'voluntary', it must answer to the
reports that it plans to label suppliers as 'superior, complacent or underperforming'
depending on whether they pay these lump sums.”30 In response to criticisms, the Asda
chief Andy Bond has called for “flair and not fear” from suppliers.31
26
Better Farming Letter from Europe, March 2005
In May 2005, Asda Wal-Mart announced that it was further narrowing its UK milk supply base,
and would buy solely from Arla Foods. The Scottish dairy company Robert Wiseman saw around
£40 m wiped off its value after it lost the key £70m Asda supply contract. Dairy producers supplying
into Arla are collaborating horizontally through the Arla Milk Partnership and have invested in the
supply chain by buying shares in Arla UK. This ‘partnership’ and the fact than Arla is ostensibly a
farmer-controlled business has not insulated Arla from protests from producers around farm gate
prices for milk.
28 Nick Holt-Martyn, director of ADAS Dairy Group, interviewed in Farmers Weekly
29 Spurred in the UK by the establishment in 2005 of the breakaway “Better NFU” which accused
the incumbent NFU leadership of being “cowed into submission and have done nothing for the past
two years" to deal with the major retailers who abuse their monopoly position.
www.betternfu.org.uk
30 Fury at Asda Cash Demands. Press Release National Farmers Union of Scotland. 31 March
2006
31 Freshinfo poll 28 October 2005
27
26
Other than protests, another angle has been to expand Fairtrade labelling from developing
countries to European producers. An attempt by the Soil Association to do this in the UK
failed because of serious unease in the Fairtrade movement about brand equity being
diluted and consumers becoming confused (Tallontire and Vorley, 2005)
It would be accurate to say that farmers in Europe have yet to find their voice in the new
politics of agrifood, in the face of their declining political influence, media disinterest in their
struggle, widespread citizen assent with the supermarket model, and the dominant policy
priorities of low inflation and job creation.
A wider set of concerns is entering the policy narrative. In CEE, this centres on threats to
small scale retail and national food sovereignty. Hypermarkets in Poland became a hot
issue when the then conservative finance minister Teresa Lubinska said in late 2005 that
hypermarkets were not welcome, with Tesco singled out as “an example of the kind of
non-productive investment that was not needed in Poland.” 32 In Hungary, agriculture
minister Jozsef Graf has been prepared to breach EU competition rules by asking
manufacturers and retailers to sign a voluntary code of conduct in support of a minimum of
70 per cent Hungarian content.33
In the UK, despite the fact that price competition has delivered considerable consumer
savings,34 a point seems to have been reached in 2004-5 at which the market leader
Tesco came up against serious questions of legitimacy, with potential knock-on impact on
shareholder value. The snubbing by the largest retailers of voluntary approaches to wider
stakeholder accountability, such as the ‘Race to the Top’ initiative (Fox and Vorley, 2004)
and the NFU’s proposed voluntary Buyer’s Charter35,36 has cleared the way for more open
Tesco ‘not welcome’ in Poland. Financial Times, 5-6 November 2005
Hungary snubs foreign produce. CEE-foodindustry.com, 8 February 2006.
34 Fierce price wars between the UK’s leading supermarkets has squeezed grocery prices, saving
consumers £3 billion in shopping bills between the late 1990s and end of 2006. in Grocery
competition saves shoppers billions, Food&DrinkEurope 30 November 2005.
35 The NFU Buyers' Charter had a broader scope than the current Code of Conduct, being (a)
owned and administered by representatives of all major parties in the food supply chain, (b)
applicable to all key aspects of trading relations, including the day-to-day relationships between
suppliers and their customers, and (c) independently audited with an independent panel to consider
complaints and disputes which cannot be resolved at company level. The idea of a buyers’ charter
was welcomed by the Office of Fair Trading in their report on the Code of Practice (OFT, 2005)
36 NFU Anger at Charter Rejection. Farmers Guardian, 12 August 2005.
32
33
27
hostility on a number of fronts, with Tesco and the ‘Tescopoly’ campaign37 as a lightning
rod for campaigns on local food; defence of town centres and small retailers; transport,
congestion and ‘food miles’; health; labour rights; and international development, together
with the issue of welfare of primary producers.
European supermarkets have become adept at taking on the ‘sustainability’ agenda, with
the promotion of Fairtrade and organic products, and contribution to the Ethical Trading
Initiative. Indeed, ‘sustainability’ has become another unfunded cost of doing business
with supermarkets. But little seems to have changed in procurement practice, and
supermarkets’ Corporate Responsibility policies make little mention of supplier welfare
despite huge imbalances of market power between producers and retailers. In fact, the
current trading environment is characterised by both a proliferation of standards for ethics
and sustainability and the abuse of market power by powerful buyers, leading to a classic
cost-price squeeze for producers.
In the years ahead, it is likely that market structure and the welfare of primary producers
will move to centre stage in European debate on sustainable development.
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