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Raiffeisen-Co-operatives: Challenges of a vertical co-ordinated Agri-Food Business
Jon H. Hanf
*Institut für Agrarentwicklung in Mittel- und Osteuropa,
Theodor-Lieser-Str.2, 06120 Halle (Saale), Email:
Abstract
Today, Raiffeisen co-operatives still play a key role in the German agri-food sector because of or despite of their long history. Nevertheless, despite their present importance, questions about their future role in a changing agri-food business have to be raised. As a result of changes in the agri-food business a change within the vertical co-ordination can be seen, i.e. vertical co-ordinated systems have been established. Thus, one aim of this paper is to analyse the role of Raiffeisen co-operatives in such vertical co-ordinated systems.
Keywords: Agri-Food Business, verticalisation, co-operatives, consequences
Raiffeisen-Co-operatives: Challenges of a vertical co-ordinated Agri-Food Business
1. INTRODUCTION
Even though the beginnings of the co-operative grouping on German soil can be traced back to the German tribes (von Gierke 1954) the Raiffeisen co-operatives which are addressed in this paper “only” date back to the year 1869 (Anschhoff/Henningsen 1986). Today, Raiffeisen co-operatives still play a key role in the German agri-food sector because of or despite of their long history. Nevertheless, despite their present importance, questions about their future role in a changing agri-food business have to be raised.
For several years it has got evident that there has been an industrialisation of the agri-food sector. Farms are getting bigger, processors and retailers are consolidating and the consumers are getting more sophisticated. As a result of these changes a change within the vertical co-ordination can be seen, i.e. vertical co-ordinated systems have been established (van Dijk 1997). Thus, one aim of this paper is to analyse the role of Raiffeisen co-operatives in such vertical co-ordinated systems.
2. Raiffeisen Co-operatives
2.1 The Agri-Food Business
Being part of the German agri-food business for more than hundred years, Raiffeisen co-operatives have to be analysed in the context of the German agri-food business. For this reason, I will briefly describe its structure and the ongoing changes.
The German food retail sector is mainly in the hand of a small number of big players. In 1998 the CR5 was as high as 63% with increasing tendency (Olbrich 2001). Taking a more differentiated look at the top five it is noteworthy that two retailers are fast growing discount chains and two are co-operatives. Even though, the co-operatives are counted as a single group they consist of several thousand self-employed retailers among other business formats. The processor sector is more heterogeneous. There is a number of multinationals like Nestle and Unilever Bestfoods and some big players like Haribo and the dairy co-operative Nordmilch but the majority consists of small and medium-sized companies. It is to annotate that some branches are still dominated by co-operatives e.g. the dairy business. The food handicraft businesses are small, family-run enterprises. However, the number of craftsmen running more than one store is increasing (Hanf/Kühl 2005). The wholesale business is dominated by numerous co-operatives and some private owned family businesses. The German agronomist sector consists of more than 500.000 farms of which the majority is small, family-run and a member in at least one co-operative. Only about half of the farms are run by full-time farmers. Since the re-unification of Germany there are also producer co-ops at the farm level. These agricultural co-ops combine the farms of several members so that agricultural co-ops can be considered to be of very large size. Farm suppliers are again rather heterogeneous. This branch is composed of multinationals, big national enterprises as well as medium-sized companies (Hanf/Kühl 2002).
2.2 Co-operatives in Germany
The German Raiffeisen co-operative system can be described as rich in tradition and highly developed. It is a multi-tier system of the co-operatives in Germany. The first tier are the local trading and service co-operatives, e.g. purchasing and marking co-ops. These local co-operatives provide the basis of regional co-operative business centres representing the second tier. The national co-operative centres are the third part of the system (Anschhoff/Henningsen 1986). The principles of Raiffeisen co-operatives can be delineated by the identity of users and owners, the democratic principle of voting and the non-existing of barriers of entry. Additionally, the legally manifested business aim to nurture their members can be seen as a further characteristic of Raiffeisen co-operatives (Anschhoff/Henningsen 1995, Laurinkari/Brazda 1990). Traditionally, the aim to establish countervailing power has been regarded as the most important duty of a co-operative (van Dijk 1997). Other business aims like correcting market failure, guaranteeing markets and enhancing margins can be seen as levers to operationalise the main business aim. These business aims are corresponding to the ones of the Sapiro I and II co-operatives and the Nourse I and II co-operatives in the USA (Cook 1997). After presenting some general facts on Raiffeisen co-ops in table 1 the development of the Raiffeisen co-operatives in Germany is shown.
1950 / 1970 / 1990 / 2001 / 2002 / 2003Total No. of Raiffeisen co-operatives
/ 23.753 / 13.764 / 5.199 / 3.632 / 3.423 / 3.286Credit with commodity business / 11.216 / 4.920 / 1.474 / 354 / 301 / 274
Supply and marketing / 2.710 / 1.740 / 645 / 473 / 458 / 430
Dairies / 5.726 / 3.705 / 846 / 378 / 354 / 347
of which processing enterprises / 2.569 / 823 / 255 / 87 / 83 / 78
Livestock and meat / 329 / 263 / 205 / 112 / 117 / 106
Wine-growers / 508 / 500 / 310 / 256 / 238 / 236
Fruit, vegetable, gardening / 205 / 201 / 114 / 125 / 121 / 117
Centres / 83 / 90 / 53 / 32 / 29 / 27
Agricultural co-operatives / 795 / 769 / 751
Other Raiffeisen co-operatives / 2.976 / 2.345 / 1.552 / 1.107 / 1.036 / 998
Total proceeds turnover (Mio. Euro) / 3.463 / 17.461 / 39.030 / 39.431 / 37.596* / 37.500*
Total No. membership (in thousands) / 3.278 / 3.870 / 4.487 / 2.653 / 2.495* / 2.385*
Table 1: Development of Raiffeisen co-operatives 1950-2003 (Raiffeisen 2004), *preliminary figures
While the total number of co-operatives and the total number of members has been steadily decreasing a significant increase in the total proceeds turnover can be observed. As table 1 indicates the majority of the co-operatives have remained essentially small and medium-sized organisations. However, as the decrease of total numbers indicates there is a tendency to increase the size by merging. The slight decrease of total turnover in the last years is due to the decreasing commodity prices. Even though these figures show the relevance of the co-operatives, they do not mirror the profitability and competitiveness of co-operatives. Consequently, they cannot be used to predict the future of co-operatives in Germany. Taking a look at the business areas in which German Raiffeisen co-operatives are working in it is indicated that the majority is in the commodity business.
2.3 Changes in the Food Chain
However, especially for the production and processing of commodities changes are taking place. While in the past the heavy subsidised agricultural production was quantity orientated, nowadays markets are demand-driven, i.e. customer orientation can be considered to be a must to stay in the market. Among several other factors of influence especially the Bovine Spongiforme Enzephalopathie (BSE) and Foot and Mouth Disease (FMD) which hit Germany in winter 2000/01 transparency of the whole production process has been demanded by consumers and politicians. In favour of this aspect, the food chain is in the progress to be re-designed.
Besides efficiency gains one of the key driver for the re-design of a food chain is the reliable transfer of trust attributes as a part of the product quality to the consumer. Trust attributes are characterised as such product and service characteristics that cannot be detected by the buyer under ordinary circumstances, neither before nor after the buying process has finished (Hanf 2000; Picot et al. 2001). Trust attributes are often affiliated with the production process, risk related attributes are generally part of the product itself. Bounded rationality, asymmetric information and time restraints are factors that create a situation in which consumers are not able or not willing to prove the quality of food products. Most of the trust attributes are considered to be components of quality by the consumers. In the progress of sophistication of the control- and measurement technologies credence attributes alter to experience attributes (Hanf/Drescher 1994). But, on the other hand there are always new credence attributes evolving. In particular, such credence characteristics which are related to ethic and emotional topics like animal welfare etc. (Hanf/Kühl 2003).
The aforementioned food crises had the effect that the consumers realised that food products are consisting of trust attributes. Knowing about their inability of proving the correctness of trust attributes themselves, people reacted in the case of food crises with a sharp reduction of food demand (Böcker/Hanf 2000). On account of the BSE and FMD scares, consumers as well as politicians demand trust as a major dimension of quality. This development catalyses the formation of vertical co-ordinated systems. Such chain systems could be either hybrids or fully integrated firms. The results of a Pan-European survey clearly show that the majority of firms are involved in vertical co-operations (Kagerhuber/Kühl 2002). Therefore, hybrid forms of organisation in particular on networks have to be analysed more deeply.
3. Vertical Co-ordination as a Result of the Changes
3.1 Networks
Networks are addressing all questions on inter-organisational relationships of more than two firms (Claro et al. 2004, Lazzarini et al. 2001, Zylbersztajn 2004). Generally they can be defined as “specific properties of the transaction relationships, typified by relational relationships in which formal and informal sharing and trust building mechanisms are crucial” (Zylbersztajn/Farina 2003). An approach to classify networks in four groups is taken by Burr (1999). The four groups are referred to as spontaneous, self-organising, project-orientated and strategic networks. The spontaneous network is described as being polycentric and the intensity of the relation is rather low. The network companies are equal, i.e. none of the companies is able to co-ordinate the other network companies. Therefore, such a network has no broker. The project-orientated network can also be described as being of short term nature and having a low intensity of relationship. Even though networks are polycentric by nature this type of a network has some hierarchical co-ordination mechanisms installed. Thus, there is a central company acting as a broker. The self-organising network is characterised as being set for a long term and the intensity of the relations is rather high. Without having a focal company (broker) there is no hierarchical co-ordination. Strategic networks have a broker co-ordinating the participating firms in an hierarchical style. The intensity of the relations within the network is rather high and the network is set for a long term, too. In such an hierarchical-pyramidal network with a broker a strategy leading focal company builds the core element of the network being either manufacturer or retailer. Because of the long lasting explicit or implicit contracts the other network actors are heavily depending on the focal company. Whereas, the level of dependency is higher for vertical than for horizontal ties (Wildemann 1997). Even though it seems as if the dependency is rather unilateral applying the Resource Dependency Theory a mutual dependency is getting evident. The influence of an institution matters to the resource dependency relationships it has with other institutions (Pfeffer/Salancik 1978). If the focal organisation itself is dependent on critical inputs of other organisations, these organisations will have some power over the focal company (Medcof 2001).
As shown, the vertical linkages are relevant in order to guarantee the consumer the correctness of credence attributes like organic produced. Thus, I will refer to strategic networks in the following chapters. In the context of the agri-food business the term “supply chain networks” (SCN) or netchains is often used (Lazzarini et al. 2001, Neves 2003, Hanf/Kühl 2002, Zylbersztjn/Farina 2003). For the German agri-food business the focal company has to take into account that the majority of network members are SME. Quite often such companies do not dispose of a sophisticated IT-infrastructure, high man-power, and sufficient quantity of commodities. Especially for agricultural goods the total amount of supply needed has to be delivered by various farmers. Thus, the focal company has to manage such horizontal co-operations itself or it has to co-ordinate through system suppliers.
3.2 Co-ordination of Supply Chains
As shown, vertical co-operations entail a vast need for co-ordination between the different partners which can be aligned by a sophisticated management concept (Bogaschewsky 1995). The importance of management as well as of strategy for the success of an organisation is well proven (Zahra 2003). However, strategy, management and vis-à-vis strategic management are thought for single firms, most often for conglomerates. Thus, it must be shown that management concepts are also deployable for SCN. Additionally, such a comparison highlights important characteristics that are needed to steer a supply chain.
Characteristics of conglomerates are the uniform control, customs and rules of all firms belonging to the conglomerate. Therefore, a uniform leadership can be seen as a constitutional element of a conglomerate. Thus, whether a network can be viewed as a conglomerate depends on the autonomy of the single firms. Legally the distinction is clear. While a conglomerate has defined corporate boundaries networks have rather fluent boundaries. Taking the characteristic of a uniform leadership into account the distinction is not clear any longer. Regarding the characteristic of a uniform leadership the significant differences in the different types of networks have to be taken into account. Networks which have no broker co-ordinating their activities are not suitable for comparisons with conglomerates. The same applies for networks which have only low intense relations. Thus, spontaneous, self-organising and project-orientated networks cannot be used (Sydow 2002). Being led by a focal company hierarchical-pyramidal strategic networks are characterised by a centralised decision making (Jarillo 1988). Having a centralised authority to decide the focal company is able to design the network (Burr 1999). Furthermore, the focal company exerts influence on the decision which member takes on which task securing the super-ordinate network aims (Wildemann 1997). In conclusion can be said that for strategic networks a comparison with a conglomerate is acceptable (Sydow 2001, 2002).
A chain strategy and management enables the focal company to perform a centralised co-ordination conducting the information and product flows throughout the whole network. Being customer oriented the strategy of a SCN needs to be based on a “unique selling proposition”. In Germany such a USP can be achieved by guaranteeing the correctness of the credence attributes throughout the whole chain. Thus. this USP can only be created by a superior co-ordination of the chain participants. In order to create co-ordination mechanisms the focal company has to consider that within a netchain three different types of interdependencies are existing. Lazzarini et al. (2001) advice to exert managerial discretion for sequential interdependencies, for pooled ones to achieve process standardisation, and for reciprocal interdependencies to co-ordinate through mutual adjustments. Especially, creating a chain culture and shared values facilitate the co-ordination through mutual adjustments and simultaneously the inter-firm information transmission will be simplified. Most important is that the firms’ strategies are adapted in such a way as there is a fit between the single firms’ strategies and the overall chain strategy. This means that a chain strategy has to work for firms of different levels in the food chain. Therefore, a strategic management concept has to have a mechanism to verify that every involved participant has the same strategy understanding. If this goal is reached by a joint leadership the focal company can assure that the network resources are optimally allocated throughout the whole netchain. In the effort to continuously adjust to the changing environment the network has also be re-designed in such a way as new companies are joining in and the ones which do not fit any longer leave the network.
Since the end of the 1980’s when logistics amplified to firm boundaries overlapping approaches concepts addressing the whole chain have been established. These approaches were more conceptualized in the 1990`s by the introduction of the customer orientated SCM and ECR concepts. These concepts refer to the co-ordination and alignment of materials, financial, and information flows for all activities and processes involved in a supply chain, i.e. from raw materials up to the consumer (Lazzarini et al. 2001). Otto/Kotzab (2001) showed that SCM is a very effective concept for perishable products like food. In the context of a literature review Müller et al. (2003) have found out that the majority of SCM concepts are mainly conceptualised to optimise logistics. Additionally, the interdependencies of firms have only been glanced at.
4. THE ROLE OF CO-OPERATIVES
Evolving SCN have not only implications on firm boundaries and the co-ordination within the networks but also on the competition. Building SCN means that chain networks will compete against each other, i.e. there is intra-chain co-operation and simultaneous inter-chain competition. Especially nowadays, it is a competitive must to participate in a Supply Chain Network in the agri-food business. On account of this, it has to be analysed which role German Raiffeisen co-operatives can play in such an environment. In order to discuss the role of Raiffeisen co-operatives in a vertical co-ordinated German agri-food business I will classify the co-operatives according to their business concept into three types: “Traditionalists”, “Modernists” and “mixed ones”.
The so called “traditional ones” are sticking to the conventional business model of co-operatives being commodity supplier. In the context of increasing vertical co-ordinated agri-food systems Sykuta/Cook (2001) showed that at the producer level the most practical co-ordination mechanism is contracting. Because of their very own property rights structure producer co-ops have some advantage compared to investor owned firms. However, besides these benefits it bears also some problems. By using a property right approach Cook (1995) pointed out five general sets of problems: Free Riding Problems, Horizon Problems, Portfolio Problems, Control Problems and Influence Cost Problems. As Cook (1995) showed these sets of problems constrict the different types of co-operatives (Sapiro I-Nourse II) differently. Using a principal-agent approach and the concepts of opportunistic behaviour, conflicts of interest, asymmetric information and stochastic conditions Eilers/Hanf (1999) show that it is not clear who is the principal and who is the agent, i.e. both the co-operatives and the members can be principals and agents. For this reason, neither leadership mechanisms nor selective terms of delivery can be enforced by the co-operatives, i.e. the members can deliver all the commodities which alternative dealers do not accept. Co-operatives being forced to accept these commodities face the problem of adverse selection. Additionally, Fulton/Giannakas (2001) show that the cross-subsidisation and member heterogeneity in large centralised, multipurpose co-ops may lead to substantial financial pressures for the co-operative because members of such co-operatives do not see a strong connection between the success of the co-op and their own business. Furthermore, Karantininis/Zago (2001) showed by applying a game theory model that instead of selling their commodities to open co-ops farmers would rather sell them to IOF`s if they had the choice. Fulton (1995) concludes if markets disappear as a result of an increased vertical co-ordination co-operatives may also begin to disappear. Hendrikse/Bijman (2002) share this assessment for the case that the investment on side of the processor or retailer becomes more important for the total chain value than the investments by the farmers. As some further restraints for German Raiffeisen co-operatives I consider the fact that the majority of the co-operatives is still rather quantity than quality orientated. On account of disadvantages, traditional German Raiffeisen co-operatives have to continuously enhance their relationships to their member so that traditional co-ops are able to strengthen their contracting policy. In order to participate in SCN they have to work out a quality policy that overcomes the aforementioned problems. Thus, if the traditional co-ops get the quality issues under control they will play an important role in vertical co-ordinated supply chains. However, their role will be the one of a major supplier but not as focal company.