Dynamic Explanation of Industry Structure and Performance
Cotterill
that would diminish the position and stock market value
of large U.S. food manufacturers. The breakfast cereal
industry has experienced a very strong taste of this since
1993 (Cotterill, 1999b). Box 1 provides the executive
summary from a very insightful paper written by
Richard Bell, Institute of Retailing, Oxford University
that focuses on the current status of European food
distribution. Leading supermarket chains in Europe are
clearly the channel captains, and their market power
continues to increase. Leading manufacturer brands no
longer automatically command distribution. Retailers
are branding their stores and their own label lines. In the
U.S. even Walmart has not yet aggressively pursued this
strategy. National brands, cheap, has been their primary
focus to date.
The next phase in the U.S. food system may well be
the harbinger of such a radical shift in economic
fortunes. That phase could be the emergence of truly
national supermarket chains, something never seen in the
U.S. In the near future, we undoubtedly will see more
mergers among the top 10 supermarket chains. Since
this is an “out of the box” solution, lets speculate on
some feasible geographic combinations that would
assemble truly national chains with significant national
market shares. If Kroger, Safeway, Winn Dixie and
Shaws (Midwest, West, South, and Northeast)
combined, the resulting company would be truly national
in scope with sales of $86.4 billion and a national market
share of 21.5%.15 A second combination could be
Albertsons, Ahold, Food Lion, and Meijer (West, East,
South and Midwest). It would have sales of $77.9
Box 1: EXECUTIVE SUMMARY: THE CHALLENGE
OF FOOD DISTRIBUTION (IN EUROPE)
1. The process of distribution has developed from a conduit
between the functions of production and consumption to a
position where it exerts considerable influence on both the
process of production and the pattern of consumption.
2. Product brand owners can no longer presume that
numerical distribution will occur automatically given
brand awareness and product acceptance.
3. The structure of retailing in most countries of European
Union countries is largely oligopolistic and the level of
concentration continues to increase.
4. Information technology, led by epos data, has enabled
retailers to integrate the process of distribution and
European perspective on the transformation of U.S. food
retailing.
15 The 1999 market shares for this exercise are from Cotterill
(2000).
reverse the supply chain from producer push to consumer
pull.
5. Retailers are now vertically integrated with dedicated
distribution systems substantially replacing the role of the
wholesaler. This has further disadvantaged small retailers,
and created an effective entry barrier.
6. Retailers are now seeking strategic alliances to allow
them to maximise the utilisation of their logistics
infrastructure and their buying power. The UK and US are
now experiencing horizontal integration of the
replenishment process.
7. Food retailers have developed large surface out of town
sites which have increased consumer search costs. Each
site contains just one food retailer thus minimising the
opportunity for consumers to compare prices. The
combined effect of these developments is a reduced
ability for the consumer to switch between stores and, as a
consequence, a greater willingness to purchase substitute
products.
8. Grocery retailers are developing their chains into retail
brands thus differentiating themselves from their
competitors. The manifestation is the growth of private
label products and increased selective listing of branded
items. The effect is reduced head-to-head price
competition.
9. The benefit of product branding is that the manufacturer
has controlled most of the down and up stream variables
through the bond of the brand with the consumer.
Retailers now control the in-store marketing levers and
act as gatekeeper to the consumer. This, together with
their up-stream control, weakens the control of the
product brand owner.
10. The manufacturer is now confronted by:- the conflicting
demands of individual retailer driven supply chains; the
loss of control of the in-store marketing levers (for which
category management is a partial response); a situation
where the customer is also competitor (through private
label); and an adverse tilting in the balance of information
availability.
11. Patterns of ownership and financial control of many
continental European retailers preclude them from
achieving all of the benefits of vertical integration that are
available to Walmart and leading British food retailers.
They are thus disadvantaged as Walmart enters European
markets.
12. New channels of distribution are opening, driven by
changes in consumer lifestyle and developments in
information technology. The pace of development is
retarded by site availability (partially through the land
planning process) and the practical difficulties of
delivering perishable items for daily consumption via the
Internet.
13. Competition authorities are taking an increasing interest
in the oligopolistic structure of food retailing; but their
criteria is consumer welfare rather than producer
protection.
Source: Bell, 2000.
Food Marketing Policy Center Research Report No. 53
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