Dynamic Explanation of Industry Structure and Performance
Cotterill
consider imperfect competition and market power as a
determinant, or a result of vertical channel structure.
Stigler's theory can be expanded to provide a richer
understanding issues that affect the organization and
performance of the global food sector. His theory is
driven by output related scale effects and the size of the
market. Clearly other factors, in total, are more
important. Table 2 lists all factors that influence the
vertical and horizontal organization of industry. It also
briefly identifies their impact. The first set contains the
classic factors that Smith cited as determinants of the
extent of the market. Economic growth, the growth of
cities, transportation, and communication all increase
incomes via increased economic specialization and
exchange. The larger markets that result from advances
in these areas make it economic to spin off functions into
new industries. Also one can develop entirely new
market channels, a possibility neglected by Stigler.
Examples of the latter include convenience food stores
versus supermarkets versus mass merchandisers versus
internet home delivery.
Technical progress, a factor neglected by Stigler and
also Perry (1989) in his review of vertical integration,
has to be ranked as the single most important
determinant of economic organization.7 Food industry
organization has changed due to advances in agricultural
and food processing equipment, biological sciences,
chemistry, pharmaceuticals, computers, optical scanners,
and yes, the social sciences including marketing.
Technological advances have lowered the cost of
production, created new products, improved the quality
of older products, created new industries and new market
channels. Examples for the last two include the rise of
the data utilities, A.C. Neilsen and Information
Resources Inc., the artificial insemination industry for
dairy cattle, the frozen food industry, and the chilled
food industry.
Changes in culture and social structure via their
effect on the work force and consumer demand also have
a major impact on economic organization. The changing
roles of men, women and children, minorities and senior
citizens, are important, as is the value of leisure time.
These shifts create demand for new products, diverse
marketing channels that offer different mixes of
7 Perry states: "Technological economies may be an important
determinant of vertical integration in some industries.
However, they will not be a central topic of this chapter. In
the theoretical discussions, we will generally presume that
firms have integrated so as to internalize technological
economies. This allows us to focus upon the more interesting
economic reasons for vertical integration." (Perry, 1989, p.
185)
convenience, value, and quality. As the labor force has
changed the optimal deployment of labor has also
affected vertical and horizontal organization of the food
sector. Consider, for example, that the continued growth
of the fast food restaurant channel may depend on
seniors as well as young workers. Consider also the role
of immigrant farm labor in the development of the
corporate farm fruit and vegetable industries, the current
role of immigrant labor at relatively low wages in the
meat packing industry after the unions were broken8, and
working moms preference for ready prepared foods, take
out, or the food court at the mall.
4. The Triumph of Capital Markets: Mergers,
Leveraged Buyouts and their Impact on Performance
An unrecognized determinant of food industry
organization is the recent development since 1980 of a
deep and unfettered global capital market. The stock
market performance for leading U.S. and European food
manufacturers, retailers, and startup Internet grocery
firms are graphed in charts in the Appendix. Even a
cursory examination of these gives great insight into the
relative performance of these three groups and the
impact of financial moves on particular firms. Compare,
for example, the chart for RJR Nabisco, the victim of the
most famous leveraged buyout (LBO) of the century, to
the charts of other firms. Nabisco is now for sale as a
downsized, stagnant business.9
Stock prices rise for many reasons. Fundamental
factors are a drop in investors required rate of return and
growth in the earnings stream. Growth in earnings can
arise from growth of the company or an increase in
market power. For market power to fuel a steady rise in
stock price it must also be increasing over time. A one
shot increase in market power would only cause a single
increase. Firms that possess market power thus may
have constant or even decreasing stock prices if
prospects have been squandered (See Nabisco and
Kelloggs).
The invention of junk bonds by Michael Milken,
Drexel Burham and Lambert, and soon copied by other
investment bankers, enabled takeover artists such as
Henry Kravis, Carl Ichahn, and the Haft family to
8 See Cohen, 1998, New York Times and Bartlett and Steele,
1998, Time, for stories on the reorganization of the meat
packing industry, the role of immigrant labor, and the related
demise of family farm agriculture.
9 See McCauley, et al., (1999) for an excellent case study
chapter on RJR Nabisco. They conclude, after careful
analysis, that the only additional value created by the merger
was the 784 million dollars of fees collected by the organizers
of the LBO. ( pp. 139-142)
Food Marketing Policy Center Research Report No. 53