Impact of Globalization on Consumer

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					 GLOBALIZATION IN THE FOOD
          INDUSTRY
The impact on market structures
      and firm strategies


      Arjen van WITTELOOSTUIJN
            October 19 2007
                           Introduction
• Two misunderstandings: (a) mixing up
  different types of globalization and (b)
  countries cannot benefit from competitive
  advantages
• Emphasis on economic globalization in the
  Ricardian sense
• Focus on meso level of market structures
  and micro level of firm strategies

                                              1
                                             Review
• Quite a few studies on globalization and / or
  liberalization in the food industry (see, e.g., European
  Review of Agricultural Economics and Food Policy)
• But, all in all, a focus on the macro level of countries
  and regions
• Consensus: globalization and / or liberalization
  promote(s) welfare in the longer run, both in the
  developed and developing world
• Key mechanisms: lower prices (consumer surplus) and
  international specialization (producer surplus)


                                                             2
                     Some stylized facts
1. FDI growth outpaces trade growth
2. Developing world is catching up
3. The leading food companies are growing
4. Low large-firm sales share (about 3 % only)
5. Trade is not that important (about 10 % of sales)
6. Favorite path to growth is by acquisition
7. Consumer preference (taste) convergence
8. Regional differentiation
9. Niche development (bio-energy, eco-food, health …)
10. Impact on market structures and firm strategies?


                                                        3
   Market shares in food processing

Product       C1     C3      C5
category
Bakery        3.0    5.9     7.4

Ice cream     19.3   30.1    30.4

Ready meals   9.7    18.4    19.4

Frozen food   6.1    12.7    12.7

Dried food    3.3    8.8     9.8


                                    4
            Global sales shares Big Six in 2002
Product        Nestlé   Kraft   Unilever   PepsiCo   Danone   Mars
category
Bakery          0.5      3.0      1.0        1.2      1.7      -


Ice cream       8.9      0.1      19.3        -       0.2     1.9

Ready meals     9.7      5.7      3.0        0.2       -      0.8

Frozen food     6.1      2.6      4.2         -        -      0.4

Dried food      2.3      3.2      3.3        0.2       -      0.8




                                                                    5
               Cumulated sales growth 1998-2002

Nestlé
   Europe                               7.0
   Americas                            29.8
   Asia, Oceania and Africa            19.7
   Other                               63.8
  Total                                24.3

Unilever
   Europe                               3.2
   North America                       47.9
   Africa, Middle East and Turkey      40.9
   Asia and Pacific                    32.3
   Latin America                        8.3
  Total                                19.4



                                              6
         Classification of globalization effects

               Non-substitutable Substitutable
               activities        activities


Non-           Industry status quo: Inter-industry
transferable   food retail          drift: bio-fuel
activities

Transferable   Sourcing flow:        International
activities     functional staff      specialization:
                                     food processing


                                                       7
            Resource-based theory
Supply side
Exploitation economies
(Scale and scope)
                         Market structures
                         Firm strategies
Resource shapes
(Centre and periphery)
Demand side


                                         8
      Market structure examples
                Low                High
                density            density


Low             Uniform            Fragmented
concentration   market structure   market structure


High            Concentrated       Dual
concentration   market structure   Market structure



                                                      9
            Firm strategy examples
               Scale           Scale
               economies       diseconomies


Scope          Large multi-    Large multi-
economies      product         product
               generalist      specialist
Scope          Large single-   Small single-
diseconomies   product         product
               generalist      specialist


                                               10
             Market form examples
• Condensed resource space and scale
  economies
                           Oligopoly
• Condensed resource space and scale
  diseconomies
                           Perfect competition
• Tailed resource space, scale economies and
  scope diseconomies
                           Fringe oligopoly

                                                 11
                Impact of globalization
Globalization

      Exploitation economies

                               Market structures
                               Firm strategies

      Resource shapes



                                              12
        Two baseline propositions
• Proposition 1 (exploitation economies):
  Globalization will increase the opportunities to
  reap scale and scope economies.
• Proposition 2 (resource shapes): Globalization
  will increase taste convergence and the love
  for variety, implying larger peaks and
  expanded peripheries.



                                                 13
      Three market form propositions
• Proposition 3 (market concentration): Globalization (a)
  will increase market concentration in the food industry,
  from which (b) a subset of the generalist food
  companies across the value chain will benefit.
• Proposition 4 (market density): Globalization (a) will
  increase market density in the food industry, from
  which (b) a subset of incumbent and many newcomer
  specialist food firms across the value chain will benefit.
• Proposition 5 (specialist viability): (a) The density
  effect will be stronger than the concentration effect,
  implying that (b) particularly specialist viability in the
  food industry will increase in the slipstream of
  globalization.


                                                          14
   Consumer taste convergence and love for variety


Tailed resource space with increasing peak
and expanding periphery




                                                15
         Example of the US beer brewing industry

               1938           1975        1990        1997
C4             13.5           58,4        87.6        90.2

ngeneralists   641            53          23          22

nspecialists   0              1           564         1,334

Market form    Monopolistic   Oligopoly   Fringe      Fringe
               competition                oligopoly   oligopoly




                                                                  16
                                     Bottom line
GLOBALIZATION               AND        REGIONALIZATION

Higher concentration        and             higher density

Large-firm growth           and         small-firm viability

Multi-product generalists   and   single-product specialists




                                                          17
THANK YOU VERY MUCH
 FOR YOUR ATTENTION!




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