Dynamic Explanation of Industry Structure and Performance
Cotterill
current and near term future issues of organization and
performance. These include the analysis of farm to retail
price transmission in noncompetitive market channels,
the rationale and impact of leveraged buyouts, the
impact of successive monopoly/oligopoly on vertical
strategy, the rise of retail buying power including
slotting fees, and the impact of globalization on the
vertical and horizontal organization and performance of
the food sector.3
2. 20th Century Redux
The food sector in the developed economies of the
U.S. and Europe has indeed been extremely dynamic. In
1900, for the majority of North American and Western
European "consumers", food was either grown or
purchased in raw form and it was cooked over a wood
burning stove in a house with no indoor plumbing, no
mechanical refrigeration or freezing, and no electricity.
Centuries old procedures for food preservation were
commonly used: drying, salt, smoke, or storing in root
cellars. Up to 50 percent of a household's disposable
income and probably an equal proportion of a
household's labor were needed simply to eat. Moreover
the common diet was atrocious with an excess of salt
and fat, and a lack of fresh fruits and vegetables. Clearly
20th century progress in the food sector has offered more
for human welfare than progress in the sector over the
prior 2000 years.
This progress has come part and parcel with the
development of an industrial, science based food system
and the growth of advanced wealthy industrial
economies wherein consumption has clearly been
divorced from production in all industries due to
economic specialization.
The mere fact that we are dramatically more well off
today than in 1900, however, does not preclude careful
analysis of the organization of the food sector to
improve its performance. The fields of agricultural
marketing, industrial organization analysis, and general
economic analysis have similarly grown exponentially
with the rise of the modern 20th century economy. This
coincidence is more than fortuitous. To paraphrase
Thorstein Veblen, economists are engineers who tinker
and tune the price system and its corresponding set of
markets to change and improve performance. Improved
3 A complete view of the economic evolution of the food
sector would include changes in farming including agricultural
policy and cooperative marketing as a movement to sustain
parity in economic welfare for farm families and rural
communities. This issue begs for attention (Kristoff),
however, this paper is all ready at its limit in size.
performance is identified not only by gains in economic
efficiency but also by public goals set by governments.
Turning to Table 1 one can identify four major eras
in the evolution of the food sector since 1900. In the first
era firms and other market intermediates were small or at
best medium sized with the exceptions of a few "trusts"
in areas such as sugar and beef. The advent of the
transcontinental railroads and commercial refrigeration
prior to 1900 had allowed the red meat, dairy and other
food industries to develop on a national or regional basis
(Chandler, 1977, Part II). For the first time vertical
market channels of some import appeared e.g. dairy
farmer, milk assembler, rail transport, milk bottling and
distribution door to door. Most food processing
however remained rudimentary and local/regional in
nature. Most markets, were effectively competitive and
entrepreneurial. The supply chain in urban areas was
run by regional or city wide wholesalers. Commodities
dominated. In 1900 40 percent of Americans still lived
on farms (Kristoff, 2000).
From 1920 to 1945 the first wave of science,
industrial organization, and consumer convenience hit.
Food processing by large publicly owned corporations
established national and regional brands. The large-
scale production of these packaged goods required and
was made possible by the development of advertising in
print and on radio. The advent of the automobile, truck
and a road system transformed the logistics of food
distribution. In 1920 chain stores accounted for only 2-
3% of all grocery sales. By 1930 the top 5 chains
accounted for 25% [Bain, 1968, p. 484]. Only A&P was
close to national with operations in 37 states in 1948.
Safeway was next with operations in 23 states (NCFM,
1966b, p. 347). Since in most local markets only one or
two chains were present with multiple outlets, local
market concentration in the 1930s and 1940s was very
low, below 40% in most major cities.
These retail chains were innovators. To a large
extent they passed on to consumers the cost savings
gained by integrating and creating large, for that era,
wholesale operations. Product variety increased with the
advent of brands, and chains introduced private label
(their own version of the brand) during the 1920-1945
era. Sutton (1991) argues convincingly that the advent
of commercial advertising and national brands in this era
initiated the trend towards concentration in food
manufacturing. This was more often than not via merger
and acquisition (Hoffman 1940).
Supply chain control shifted from merchant
wholesalers to the national food manufacturers with the
tacit cooperation and support of integrated retail chains
and surviving wholesalers. The latter moved towards
voluntary or cooperative status to capture many of the
Food Marketing Policy Center Research Report No. 53