characterized by relevant flows of innovative products. For example, Rogers (2000)
noted that the number of new products introductions in the U. S. rose from 4,540 to
12,400 items in the period 1983- 1997. In a recent study based on a large survey of
3500 European food manufacturing firms undertaken in 1996- 7, Traill and
Meulemberg (2002) found that according to a score for top ten sources of competitive
advantage, ‘new product development’ (NPD) resulted the third most important source
of competitive advantage, immediately after ‘high quality product’ and ‘efficiency in
production’. The survey also shows that manufacturers interviewed expected an
increasing importance of product innovation in the next five years. In fact, NPD was
expexted to become the second most important source of competitive advantage after
‘high quality product’.
While this evidence cannot be considered a rigorous test of our prediction, it provides
strong indications that despite the increasing concentration and bargaining power of
retailers, food manufacturers are not less oriented to innovate. On the contrary, the
focus on innovation may be even stronger. 12
There is also evidence that second- tier brands face the strongest vertical competitive
pressure (our second prediction). The fact that secondary brands are particularly
vulnerable in an environment of vertical competition and that store brands harm
seriously second- tier manufacturer brands, is supported by several empirical results.
For example, Cullen and Whelan (1997) provide empirical findings supporting this
prediction in their analysis of fast moving consumer goods (FMCG) industries in
Ireland. They find that the competitive position of leader brands improved
considerably over the period 1982- 1993, while many second tier mass market brands
have become ‘trapped’ in an accelerating downward spiral in market share. The
development of high quality store brands resulted particularly damaging to the third,
fourth and fifth brands in each market.
They also find that while total advertising expenditure increased significantly over the
period, fewer brands were actually spending on traditional mass- market advertising
methods. In particular, manufacturer advertising concentration increased since
dominant brands advertised more intensely while the advertising levels of trapped
brands declined.
The reason why several second- tier brands result so vulnerable is easy to understand
in the context of our framework. These brands are forced to reduce their advertising
expenditure levels just when an escalation of commitment to advertising would be
necessary in order to avoid delisting.
12 Vertical pressures leading to higher R&D, marketing and advertising costs mean that
vertical competition can become a significant source of endogenous sunk costs for the
food industry with far reaching implications for firm’s size and market structure. It
may determine higher levels of market concentration given that higher levels of output
may be needed to amortize increased endogenous fixed costs. Larger firms are able to
spread these endogenous fixed costs over more units of output enjoing larger scale
conomies at the firm level (Galizzi and Venturini, 1996). This hypothesis seems
supported by recent structural changes in the U.S. and EU where food industries have
been characterized by processes of consolidation and concentration (Gilpin and Traill,
1999; Cotterill, 2000; Rogers, 2001).
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