Dynamic Explanation of Industry Structure and Performance
Cotterill
(Means, 1935)4. Stocking and Watkin's (1946) had
carefully documented many global price fixing cartels
during the interwar period. Their impact on trade and
aggregate demand was an issue. Finally there was the
concern that economic concentration and power would
coalesce with political power as it had done in Japan,
Germany, and Italy to subvert democracy. On the
positive side for economic concentration was the lonely
plea by Schumpeter (1949) that economic concentration
was necessary for business to be able to afford to do
research and development that would contribute to long
term economic Krondiatriff cycles and growth, thereby
avoiding another depression.
As the 1945-1980 era unrolled, economic research
and the balm of economic growth refined and generally
rejected all of these theories as causes of depressions.
Research turned to a more focused analysis on how
mergers and other strategic moves by firms in
oligopolies affect pricing efficiency and consumer
welfare.
The final 20 years of the century was an era of
globalization. The cold war ended and capitalism as a
social as well as an economic system advanced. The
most important transformation was the rise of a global
capital market that is a more direct and powerful
mechanism for controlling the fortunes of publicly
owned corporations, including food firms. In this era the
hostile takeover, the leveraged buyout or the defensive
leveraged recapitalization (e.g. Kroger 1988) re-
engineered American corporations, especially food
retailers and manufacturers, in the U.S. A similar
process is now underway in Europe with the
liberalization and merging of capital markets into the
global market. Important components include the Euro,
the revitalization and expansion of European stock
markets as a vehicle for allocating equity capital and for
deploying consumer savings, and finally the advent of
American style investment banking to power this
"American" capitalist system forward (Andrews, 2000).
During the 1980-2000 era market concentration in
food manufacturing and retailing accelerated to high
levels (Rogers, 2000). Curiously vertical integration
between the two stages declined dramatically, especially
for food retailers. This polarization or specialization,
however, was accompanied by a rise in retailer
controlled brands produced under contract in a tightly
coordinated fashion by manufacturers. In Europe
control of the supply chain is clearly lodged at the retail
level (Bell, 2000). Given the lack of commercial TV
advertising, and consequently weak, more fragmented
4 For an excellent review of Means hypothesis and the
literature that has subsequently addressed it see Greer, 1992.
brands in each county, retail brands and channel control
has always tended to be stronger in Europe.
In the U.S. supermarket retailers during this period
rapidly moved towards superstores and even larger
combination food-drug emporiums, and super centers -
full scale supermarkets combined with a discount mass
merchandise operation that sells everything from lawn
and garden to car repair, to home fixtures and clothing.
The top six supermarket retailers (Kroger, Safeway,
Albertsons, Royal Ahold, WalMart and Del Haize) now
control over 50% of supermarket sales, up from 32% as
recent as 1992 (Cotterill, 2000). This increase in buyer
concentration and increased focus on retail labels has
clearly shifted control of supply channels towards
retailers.
At the end of the century a new distribution channel,
firms that specialize in Internet based home delivery of
groceries has surfaced. Although many see this as the
harbinger of new competition, we question whether they
will survive another 12 months.5 The stock market was
the major source of equity capital, via IPOs, for these
new firms. The stock market performance of Peapod,
Webvan, Streamline, and Home Grocers has been
disastrous (Appendix A). Investors in these IPOs have
lost more than 80% of their capital to date and the trend
clearly suggests a complete loss. Peapod, the largest
and oldest Internet grocers lost $28.5 million in 1999 on
sales of $73.1 million (Food Institute, 2000, p. 4). At its
initial public offering in June 1997 its stock traded at
$11.25 per share. On April 12, 2000 its stock traded at
$2.81 per share. On April 14 Royal Ahold purchased
51% of Peapod. Ahold also recently purchased the
second largest food service firm in the U.S. Perhaps
they see synergies, but we remain most skeptical of
internet and warehouse based home delivery business
models.
Until one can establish a dense distribution network
in a local market area, the genius of the supermarket
model, getting consumers to do the final picking and
distribution of products, will dominate for all but the
most wealthy consumers. Moreover those probably will
be most efficiently supplied by Peapod's old model,
internet ordering but delivery from a local supermarket.
Ahold, in the affluent Northeast corridor, is well situated
for adding this value added service to its supermarkets.
The warehouse based distribution model that Peapod is
converting to may be history.
5 Internet ordering of groceries from local large supermarkets,
and the Priceline.com offering of low priced groceries, a very
clever adaptation of consumer promotion and trade programs,
may be successful.
Food Marketing Policy Center Research Report No. 53