Dynamic Explanation of Industry Structure and Performance
Cotterill
Patman Act will have to address the issue of access to
third party programs by independent operators and
smaller chains.
The last option (giving no discounts) may not be
sustainable in the long run if the truly national chains
can go out of the box. They may develop strong retail
brands that supplant or at least significantly curtail time
honored manufacturer brands. Leading manufacturers
and smaller retail chains would both lose position in the
food system.
Whether large chains can succeed in branding depends
upon the trade off between economies of specialization
versus economies of scope in branding food products.
As such it is a fitting end to this paper, a paper that
began with Adam Smith's observations on the economics
of specialization.18 Does a company such as Kellogg’s or
Campbell’s have a competitive advantage in branding
new products in cereal or soups, or does a truly national
supermarket chain have the edge because of scope
economies? If advertising is losing its punch due to new
technologies, then the era of branding food products
with TV media may be over (see Box 2). If a retailer can
establish a uniform high quality reputation across several
categories, the retailer name alone would be the brand,
and it would be transferable to new product categories
(Bell, 2000; Cotterill, 1997).
Box 2: Goodbye to Advertising As We Know It
“Thanks to smart new VCR-like machines from Silicon
Valley, the viewer is king, media moguls are fretting, and
advertisers are terrified. A DVR (Digital Video Recorder)
incorporates a hard-disk drive, a modem, and silicon circuitry.
It converts TV programs entering your home via cable,
satellite dish, or antenna into digital bits (up to 30 hours’
worth) that the hard drive can store for you to view at your
convenience... It’s a Trojan horse that could
surprise...advertisers with radical change. That’s because,
yes, DVRs let you skip commercials with ease. Forrester
Research of Cambridge, Mass., predicts that 13% of U.S.
households will have one by 2004, an adoption rate faster than
that of VCRs.” (Schlender, 1999)
18 Economies of scale and scope in production and distribution
here, however, are not an issue. Branded food companies, for
example, in fruits, vegetables and cheese have spun off
production to agricultural cooperatives. They buy the product
as a graded commodity and then put their brand on it.
Supermarkets in Europe do the same with their supply chain
management approach.
Underlying this economy of scope argument is the
supposition that truly national chains could develop
extensive managerial cadre that could work with smaller
manufacturers in a supply chain management context to
produce and market truly innovative new foods and high
quality established foods. Many of them may be fresh or
chilled or ready to eat prepared entrees. Truly national
chains could make more effective use of TV media that
is segmented along demographic rather than geographic
lines. These chains would not rely on leading
manufacturer brands to do category management. Their
own management would do it.
Fundamentally, the battle for channel control distills
down to whether large old-line food manufacturers, or
new retailer “product development and marketing”
departments working with smaller possibly more
experimental and entrepreneurial food manufacturers can
be the most innovative and creative. Adam Smith and
George Stigler could appreciate this 21st century version
of the economic organization problem.
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