emerging trends in the new food economy: exploring the ... point presentatio… · supply chains in...

Emerging Trends in the New Food Economy: Exploring the Policy Issues

Jean Kinsey, Professor, Applied Economics Department; Co-Director, The Food Industry Center, University of Minnesota, USA

OECD ConferenceChanging Dimensions of the food Economy:

Exploring the Policy IssuesThe Hague, Netherlands

January 5, 2003

Global Exchange of Goods and Services - New Paradigm

The New Food Economy is

not about money or trade negotiations

it is about information and information technology &personal networks

Trends :Consumer driven demand/supply loops

Consumers seek “value” – accommodated by discount retailers

Horizontal consolidation at all points

Intricate and shifting networks of firms around the world

Human contacts count more than ever

Trends :

Trading nations diminish relative to private firms in procuring food.

More food, more variation locally, less variation globally

Public policy focusing on food for health care, food safety, and food security.

Trends :

Consumer driven demand/supply loops Consumers seek “value” –accommodated by consolidated discount retailers

Whole-saler

Self--

distrib.

First LineHandler

RetailFood

MANU-FACT-URER

FoodService

FoodService48%

Consumer

-&

Farmers

Seed/Feed

Science Labs

RetailStore

52%

Ingredient/Flavor

Companies

Supply chainDemand chain

Citizen

Whole-saler

SystemDistrib.

Food Industry

Information Technology Demands COORDINATION/COMPATABILITY

Retailer orderspull product

POS Data

Privatealliances

Internet Interface-UCCNet?

Food Manufac-turers/

Processors

Wholesalers/Self Distributors

The ECR Vision => CPFRTimely, accurate, paperless information flow

Smooth, continuous flow of product matched to consumption

Supplier Distributor Retailer Consumer

4 Top International Grocers

Wal-MartCarrefourRoyal AholdKrogerMetro

Brought to you by information technology

The Food Institute, 2002

Supply Chains in S. America

Dominated by large supermarkets and large food processors

Rapid growth in supermarket power Rise in supermarkets weight in all of food retail sales in SA from 20% in 1990 to 60% in 2002

(About 72% in the U.S.)

Direct Foreign Investment by Multinational firms dominate the growth

Giants are Ahold, Wal*Mart, and Carrefour

Source: Reardon, 2002


Determinants of the rise of supermarkets and their supply chains.

Urbanization, rising incomes, women working outside the home, refrigerationRelaxing trade regulations, cheaper imports

Old wholesale system inadequate, mixed quality, poor sanitation, unreliable quantities


Build new distribution between retail owned distribution centers and new larger food processors and farmers (dairy) and packing houses (fruits and vegetables).

Increased contract buying, higher public and private quality and safety standards (equivalent to export standards or more)

Supply Chains in China

Rapid growth in supermarket (retail) power Rise in modern retailers (supermarkets, hypermarkets, convenience stores and department stores) accounts for 60% of consumer good sales in 4 major cities in China.

Direct Foreign Investment by Multinational firms dominate the growth

Chang, WSJ, 11/26/02


Chinese supermarkets: (Joint Ventures since mid 1990s. Must have local partner until 2004)

Carrefour 31 storesWal*Mart 22 storesMako (SV Holdings – Dutch)Metro (Germany)

Buy directly from international companies 5% of goods come from within China


Build new distribution links between retail owned distribution centers and new larger food processors and International brands.

Natural synergySupermarkets multinational brands.

SM allow brand names to enter more remote areas of high population. (Hormel/Wal*Mart)

7 Top International Food Processors

Nestle S.A. (Switzerland)Kraft Foods Inc. (USA)ConAgra Inc. (USA)PepsiCo Inc. (USA)Unilever plc (UK,Netherlands)ADM Co. (USA)Cargill (USA)

Prepared Foods, 171:12, 2002

Consolidation at the beginning of the Food Chain Too

Cargill

Monsanto

Scripps Merck

Novartis

SandozCIBA Seeds

Dow

Supply Chains in Food from Farm to Fork:

Supply chain => supply push of products Linear systems

Demand chain => demand pull with information, coordination and agreements with global sources

Circular flow of information and inventory replacement

Product Distribution Networks – Webs of arrangements

Trends :

Intricate and shifting networks of firms around the world –electronic and human facilitators

Handle Waste,Environment

Manage, Train Labor

Adopt TechnologyTransmit InformationAbout Demand, Analyze Data

Science, Research, Development

Finance,Credit

Oversee Market & Economic Welfare

Grow Crops, Raise Animals

Transport, Delivery

Add Value (Process,Package, Cook)

Aggregate, Store

Monitor Quality,Safety

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Demand Driven Food Productionand Informed networks

Presents a fundamentally new way to conduct business, form organizations, and value assets

Changing Web PatternsMakes changes harder to track

Raw product source – global, seasonalPrices – negotiated, secret

Control points and profit margins shift from:hard assets to market intelligenceSellers to buyers (retailers) Producers to analyzers

New Food NetworksA move from an economy based on a firm’s production of goods to an economy based on the use of knowledge about markets.

Markets replace firm’s (or nations) as a unit of analysis

Trends :

Trading nations diminish relative to private firms in procuring food

New Food Networks & MarketsMarkets are local but firms that supply them can be anywhere. How do global suppliers learn about local buyers preferences?

1. Shared data -- e-commerce 2. Human networks

The (Human) Networked TradeBusiness and Social Networks

Facilitates information about trading opportunitiesEnforces ContractsBuilds Trust

Source: Rauch, 2001

The (Human) NetworkImportance of immigrants to trade with home country:

As immigrants increase by 10% exports increase 13 -47% (network effect)

As immigrants increase 10% imports increased 33-83% (taste and network effect)

Rauch, 2001

Networked TradeEnforces Contracts – Build TrustJapanese word: keiretsu

Know the characteristics of those who would be helpful & loyalEnforces rules by internal punishmentIncreases direct foreign investment

Rauch, 2001

Networked TradeBuyers and sellers match in characteristics space – need “thicker” information to “match” partners

Transnational networks can overcome informal trade barriers – enhance exports

Domestic networks can create trade barriers by collusion to restrict foreign firms – inhibit imports

Rauch 2001

Global Supply Chains: Producer DrivenAnd Buyer Driven

Producer driven for capital and technology intensive industries: automobiles, aircraft, semiconductors

Profit greatest for those with scale & technology(manufacturers)

Rauch, 2001

Global Supply Chains: Buyer Driven

Buyer driven for labor intensive, consumer goods industries: garments, footwear, toys, electronics – FOOD? Profits greatest for those with design and marketing expertise (retailers).

New Food Economy?The market we know and love is being “de-democratized” by networks – human and electronic

Both depend on specific knowledge for specific products and markets

Efficiency models are not enough and maybe not right for globally differentiated products and market networks

Global Supply Chains: Buyer – Seller Driven?

Driven by the part of the supply chain/network that is in the best position to capture the most value from the chain.

Where is that in food and agriculture?Increasingly at the retail end.

Globalization of Supply Chains

•Will more formal (computerized) information networks increase or decrease the usefulness of business and social (human) networks?

•Yes – if e-commerce networks become dominant and parties trust the information to represent the behavior of trading partners.

•No – if products increasingly differentiated and “human” interpretation of preferences and markets needed -

and more immigration builds human networks and more DFI across borders.

New Supply Networks for FoodSlowly adopting information technology to track and manage inventory. Still trying to catch up to Wal-Mart’s logistics.

Losers: Regional wholesalers, small farmers, small processorsWinners: Consumers – lower prices, variety, convenience, diversity, safety, quality

Multinational food companies (Nestle’) use Supermarkets to gain access to remote areas.

Food Variety and AbundanceThe new nutrition - too many calories

USA 2002:65% of adults overweight30.5% obese (BMI over 25)25% children overweight or obese

Doubled in a decade

Food Abundance and Health CareDiabetes – linked to overweight and obesity

In 2002 17% of Americans has diabetes linked to diet60% pf children have at least one risk factor for heat disease

10% of Health Care Costs go to treat diabetes

This is a health care crises in slow motion

Countries with at least 10 Percent of the Adult Population Obese

10.0 10.8 11.2 11.4 11.5 12.9 14.618.7 18.7 19.4 20.0

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iumFi

nland

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lSpa

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ada

Austra

iliaIce

land

Germ

any UK

USA

Source: OECD Health Statistics (2000)

Global Exchange of Goods and Services - New Paradigm

The Brave New World of Globalization - Myths

Food and agricultural policy is about increasing food productionFood security is about feeding hungry people We live in a borderless world. Food in Paris & Amsterdam looks just like food in Tokyo and New York these days. Obesity is America’s problem

Globalization and Public PolicyEconomic integration of private companies with national and international trade policies and standards

Homogenization of the foods across nations, more variety of food within a nation

Nation states have less control over policy and items traded

Globalization and Public PolicyRetail domination giving consumers lower prices – so far.

Demise of small farmers and undercapitalized firms

Foods for health, food safety, food (bio) security is international business

Global Exchange of Goods and Services - Consumer DrivenFirms make strategic decisions based on nations’

laws and infrastructure (trade agreements, physical infrastructure and capital flows).

- but also on opportunities to find the cheapest source of supply and the buyers most willing to pay.

Q:How do they find these opportunities? A: Information networks – formal and informal.

Global Exchange of Goods and Services - Consumer Driven

Consumer Driven means that buyers (consumers, retailers) decide what will be

produced, on what schedule, and at what price and specifications.

Global means that buyers and sellers are located anywhere in the world.

Consumer Driven and Global:

⇒ Everyone is a “specification buyer” (more differentiated products)

⇒ Reference prices carry little information

⇒ Downstream firms capture the highest margins (profits)i.e. retailers capture the value created by manufacturers in the supply chain (network).

Networked Trade

Keiretsu works best for differentiated products

Provides information and matches parties Prices contain little information and few reference prices

Rauch 2001

Learning NetworksTechnology transfer often by foreign buyerswho inspect production plants and set specifications

In food – will traceability transfer technologies?

Transfer of information within “global community chains” coordinated by manufacturers or retailers – 2 types of chains

Producer-Driven Chains

Gereffi, 1999 & Rauch, 2001

Buyer-Driven Chains

Gereffi, 1999 & Rauch, 2001

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