Supermarkets and Agri-Food Supply Chains: Transformations in the Production and Consumption

Supermarkets and Agri-Food Supply Chains: Transformations in the Production and Consumption of Foods

Eds: Burch and Lawrence

Chapter for Part 3

Supermarkets and Agri-Food Supply Chains in Europe: Partnership and Protest

Bill Vorley

International Institute for Environment and Development, London

Target: 6000 words

Actual: 8482 words (30 April 2006)

ABSTRACT

Europe has been at the forefront of the supermarket revolution, and that revolution took a big leap in the past decade with the rapid transformation of the sector in central and eastern Europe. This chapter describes the nature and institutional ingredients of that revolution, which includes the internationalisation of retailing and procurement, the growth of own brands and private standards, and supply chain management systems, spurred on by competition from the hard discounters

European governments have been politically unable to modernise competition policy to accommodate the clear shift in the European competitive environment, from producer market power to retailer buyer power.

Producers are waking up to implications for the welfare of primary producers, especially in the wake of reforms to the Common Agricultural Policy. Dealing with the new market realities has been in the form of both producer organisation and professionalisation, and protest, against a backdrop of a fraying social contract between citizens and supermarkets.

Introduction

This chapter describes the development of supermarkets in Europe, the way in they have reshaped the governance of agrifood, and the consequences for other actors in agrifood chains. The focus is on changing power relationships within European agrifood supply chains, in terms of the developments of supply chain partnerships, regulatory responses. and the rise of protest among producers and civil society.

Europe provides a fascinating field of study on the impact of supermarkets and the associated re-governance of agrifood markets.

Firstly, the area is the home of giants of global retailing – in 2005, 18 of the global top 30 grocery retailers were European. European retailers are also the most internationalised – the top eight European retailers all have significant proportions of their floor space and sales outside of their home markets.

Second, it is the site of a tussle for market power between supermarkets and the food industry, which is the leading European industrial sector and accounts for 13 per cent of the total production value.

Third, the fall of the Iron Curtain in 1989 and the eastern enlargement of the EU has been accompanied by a rapid eastwards expansion of European retailers. In the space of a decade, there has a restructuring of the sector in Central and Eastern Europe (CEE) of the kind which took 30 years in western Europe.

Fourth, Europe has led the world in the development of quality ‘own brand’ (private label) products, and the application of private standards, both of which play an important role in the ‘re-governance’ of agrifood

Fifth, Europe is the home of the ‘hard discount’ revolution, which has transformed food retailing in much of continental Europe and is conditioning the development of the supermarket and hypermarket sectors.

Sixth, European producers are waking up to the retail-driven ‘regovernance’ of agrifood, but, having traditionally looked to Brussels and national governments to defend their interests, are uncertain how to act. Reform of the Common Agricultural Policy (CAP) has pulled the state back from management of agricultural markets, and agricultural budgets are restricted to fund enlargement.Many of the countries in CEE have large and influential farmer populations; in the enlarged EU-25, there are now 17 million farms, up from 7 million in the EU-15, and the proportion of farmers in the workforce has grown from 4 per cent to nearly 8 per cent.

Lastly, civil society has developed a love-hate relationship with supermarket sector, exploiting supermarkets’ market power to drive agendas of greener transport, better animal welfare, public health, or higher labour standards in an era of state deregulation.

This is a heady mixture, with unpredictable outcomes. There are certainly lessons from Europe for countries where these changes are just beginning to take hold, for purposes of anticipatory policy. In order to understand the position of primary producers, suppliers and manufacturers in markets dominated by the components of the European supermarket model.

Grocery retail in Europe

The giants of European food retail markets are the UK, France and Germany, based on their high populations and mature markets (Table 1). These three countries, which are also the home markets for Europe’s top 10 retail groups, will dominate the analysis in this chapter.

Deflation is a characteristic of Europe’s larger food markets. Price competition is especially tough in Germany and the Netherlands, but Spain and Italy have also become more price competitive in the wake of the expansion of the hard discounters. Germany has the lowest grocery price index in western Europe – on average 15 per cent lower than the European average – followed by the Netherlands and Spain (AC Nielsen, 2005a).

In line with trends across the OECD, the share of spending on essentials (food, clothing, energy) has declined in Europe, as incomes rise and consumers seek to free up disposal income. In the UK, spending on food as percentage has halved in 40 years, and one food pound in three is now spent away from home. Declining relative expenditure on food, and even food price deflation, is a major factor in the level of competition in food retail.

Table 1. The European Retail Market: Modern Grocery Distribution[1], 2005 (EUR bn)

Rank / Country / EUR bn 2005
1 / United Kingdom / 233
2 / France / 211
3 / Germany / 208
4 / Italy / 104
5 / Spain / 83
6 / Russia / 79
7 / Poland / 42
8 / Switzerland / 36
9 / Netherlands / 33
10 / Sweden / 25
11 / Belgium / 24
12 / Finland / 24
13 / Denmark / 22
14 / Norway / 21
15 / Austria / 21
16 / Romania / 16
17 / Portugal / 16
18 / Czech Republic / 15
19 / Ireland / 12
20 / Greece / 12
21 / Hungary / 10
22 / Slovakia / 6
23 / Croatia / 5
24 / Bulgaria / 5
25 / Ukraine / 4
26 / Latvia / 3
27 / Slovenia / 3
28 / Lithuania / 3
29 / Serbia and Montenegro / 3
30 / Belarus / 2
31 / Estonia / 2
32 / Luxembourg / 2
33 / Cyprus / 2
34 / Iceland / 1
35 / Albania / 1
36 / Bosnia and Herzegovina / 1
37 / Macedonia / 1
38 / Malta / 1
39 / Moldova / 0
Total / 1,291

Source: Planet Retail.

There is a close relationship between per capita GDP and the penetration of ‘modern’ retail (Figure 2). What is interesting from a European perspective are the outriders, such as Italy with a penetration about 20 per cent below predicted, and the UK, which is about 15 per cent above predicted by this relationship. Whether this points to durable exceptions to the rule based on cultural or policy differences, or simply to time lags in some countries, is a subject which warrants serious research.

In CEE, markets are quickly approaching saturation. The EU average is 15 hypermarkets per one million inhabitants. Hungary has 10 million inhabitants, and by the end of 2005 there will be 98 hypermarkets in the country. Hypermarkets in Hungary now account for around a quarter of the market.[2] Modern retailing already has an 18 per cent share of the Russian market.

The biggest companies in European food retail are listed in Table 2. Europe's undisputed leader continues to be French company Carrefour, with a European market share of 6.4 per cent. Carrefour is also the world’s second biggest retailer. German-based Metro is third ranked in Europe and globally, with half of group sales through its cash & carry operations (which in Europe includes Makro[3]), though it also owns consumer electronic stores and department stores. In third place is UK-based Tesco, which in the last decade has moved successfully into CEE, E Asia and SE Asia, but still makes the bulk of its sales in the UK. Wal-Mart, which is by far the world’s largest retailer and grocer, is ranked only 13th place on the European stage, and is the only non-European player in the top 30.

Hard discounters[4] are a growing part of the European food retail landscape, with some notable exceptions such as the UK. Discounters are a huge part of the market in Germany — in 2003, Germany accounted for 43 per cent of Western Europe’s 32,500 discount stores.[5] Although discounters established themselves in packaged goods, the hard discounters have now captured almost 50 per cent of the German fresh produce market over the past 20 years. Their success in Germany has been aided by spatial planning legislation. Similarly, discounting is growing fast in France, where there are also heavy restrictions on store size and a growing emphasis on price. Discounters have been very successful in CEE where the discount store format is spreading into medium size towns

. The growth in hard discounters between 2005 and 2009 in CEE is predicted to be 72 per cent, compared with 14 per cent in western Europe.

Illustrative of a fracturing of the market is the strong growth of up-market ‘craft’ retailers such as Waitrose in UK and Tegut in Germany.

The leading retailers vary in their ownership structure. Carrefour and Tesco are publicly held. Metro is publicly held but with large proportion owned by founder Otto Beisheim, the Haniel group and the Schmidt-Ruthebeck family. The two giants of German hard discounting Lidl (the Schwartz group) and Aldi are privately held, with very little information released. There are some highly successful cooperatives, such as fourth ranked Rewe, owned by its 3000 retail members, and Edeka, which have their origins as buying groups owned by independent retailers, but which have moved into store ownership and an increasingly top-down governance. Wortmann (2003, 2004) points to an especially German nature of these affiliations of independent retailers in that they are based on coordinated organisation ofsmall business (Mittelstand), allowing for successful enterprise with a low concentration at shop level in comparison to Britain or France. ITM IntermarchéandLeclerc are consortia of independent merchants.

Table 2. Top 20 Grocery Retailers in Europe, 2004

Retailer / Country
of Origin / Ownership / Retail Banner Sales
2004 (EUR mn) / Net Sales 2004
(EUR mn) / Grocery
Sales (%) / Domestic
Sales (%) / Foreign
Sales (%)
1 / Carrefour / France / Public company / 75,707 / 62,144 / 75.4 / 59.1 / 40.9
2 / Metro Group / Germany / Public company / 60,291e / 54,114e / 49.1 / 54.5 / 45.5
3 / Tesco / UK / Public company / 49,681 / 45,440 / 71.5 / 87.5 / 12.5
4 / Rewe / Germany / Coop / 44,135e / 40,800 / 75.6 / 71.6 / 28.4
5 / Auchan / France / Limited company / 38,418 / 28,604e / 59.9 / 55.9 / 44.1
6 / ITM Intermarché / France / Voluntary network / 37,380e / 34,052e / 69.9 / 71.5 / 28.5
7 / Schwarz Group / Germany / Private company / 36,964e / 34,263e / 82.3 / 58.2 / 41.8
8 / Aldi / Germany / Private company / 32,485e / 29,465e / 81.8 / 67.7 / 32.3
9 / Edeka / Germany / Coop / 31,582e / 26,175e / 84.4 / 92.0 / 8.0
10 / Casino / France / Public company / 29,458 / 22,909 / 75.0 / 83.0 / 17.0
11 / Ahold / Neth. / Public company / 28,659e / 13,048 / 85.0 / 49.2 / 50.8
12 / Leclerc / France / Voluntary network / 28,566e / 26,377e / 64.0 / 94.7 / 5.3
13 / Wal-Mart / USA / Public company / 24,958e / 22,955e / 74.5 / 0.0 / 100.0
14 / Sainsbury / UK / Public company / 24,128 / 23,017e / 75.9 / 100.0 / 0.0
15 / Morrisons / UK / Public company / 20,722 / 18,130 / 78.0 / 100.0 / 0.0
16 / El Corte Inglés / Spain / Private company / 17,713e / 15,485e / 24.7 / 98.4 / 1.6
17 / Tengelmann / Germany / Limited company / 17,141e / 15,068e / 59.9 / 76.0 / 24.0
18 / Système U / France / Coop / 14,684 / 13,627e / 85.2 / 100.0 / 0.0
19 / Migros / Switz. / Coop / 13,853e / 13,152p / 58.9 / 98.8 / 1.2
20 / Coop Norden / Sweden / Coop / 13,353e / 9,475p / 81.3 / 33.3 / 66.7

Top 30: EUR 744,923 mn

Others: EUR 428,928 mn

Total Europe EUR: 1,173,851 mn

Note: * Marks & Spencer figures include wholly-owned operation in the UK only

Retail Banner Sales(including VAT and/or sales tax): the sum of the sales of all stores under a retailer's banner, including sales from the retailer's own stores, the full retail sales of companies consolidated under the equity method, plus the sales of franchised stores and the stores of independents operating under the respective banner.

e = estimate

The EU-15 food market is already mature, and sales increases for food manufacturing companies depend on gains in market share instead of market growth, or expansion into other retail and service categories. The food retail sector has actually increased its share of the wider retail market in all but four of 19 countries (France, Spain, Sweden and Denmark) by 19 per cent to €870bn between 1999 and 2003; in 2003, European food retailers accounted for 46 per cent of all European retail sales. Tesco’s sales in that period rose by an astonishing 54 per cent. Non-food is the driver of this supermarket growth. It is noteworthy that the hard discounter Aldi is ranked sixth place in clothing retail sales in Germany. .

Internationalisation

The internationalisation of retail in Europe has been, by comparison with other sectors, a recent phenomenon, and only gained momentum in the mid-1990s. There is still quite a strong national characteristic to food retailing in many Western European countries though this hides (a) high levels of international collaboration between firms in pan-European sourcing to increase buying power and (b) the rise of the deep discounters such as Aldi up the ranks of national players.

The leading European retailers and cash and carry operators are nevertheless highly internationalised, in part because European grocery markets are saturated and highly price competitive, and retailers have looked to CEE, SE and E Asia for their growth.Carrefour operates in 38 countries and French overseas departments, Metro in 31, and the most rapidly accelerating transnational retailer Tesco in 14. With its capital-efficient cash & carry format, Metro is often the first major international chain to arrive in emerging countries, as seen by its recent moves into Ukraine, Moldova and Serbia & Montenegro. Internationalisation allows retailers to use their distribution systems for pan-European procurement. For example, Tesco exports Polish and Hungarian products under its private label to its stores in other CEE countries.

Food retail in most CEE countries is now dominated by the multinational chains. The top 10 retailers in the Czech Republic, for example, are all multinationals. There has been a rapid demise of local store networks, with the exception of Hungary where the domestic cooperatives, trade associations and retail chains (CBA, Co-op Hungary and Reál Hungária) have adapted and fought back. There are also some very successful ‘local multinationals’ such as VP Market in the Baltics and Migros Türk in the Balkans and Middle East, which have been able to hold their own and grow against competition from international retailers.

European supermarkets have also intervened in the policy process to influence the international policy environment in favour of supermarket investments. Retailers have been part of a European Services Forum lobby which has had close access to EC negotiators, urging the liberalisation of retail distribution markets in developing countries under the WTO GATS negotiations (ActionAid, 2006). Leaked requests of the EU to the GATS negotiations reveal that the EU requested 60 countries to open up their markets for distribution services according to GATS rules.[6]

Market concentration

Concentration in European retail is progressing. In 2004, the European top 30 captured a combined market share of 63.5 per cent, and this is expected to increase to 72 per cent by 2009. At a country level, concentration ratios are very much higher, with four-firm concentration ratios (CR4, ie the sum of the market shares of the four largest retailers) often above 60 per cent (Table 3). The UK market has been described by the Competition Commission (2000) as a complex monopoly[7], and the dominance of Tesco has reached the point when in 2005 even Wal-Mart called for a probe into its impact on the working of the market.[8]

Table 3. Grocery retail concentration in Europe

Country / CR3 / CR4 / Top firms
Austria / 57.4 / 66.2 / Rewe, SPAR (Austria), Aldi, Metro
Belgium / 61.8 / 70.4 / Carrefour, Colruyt , Delhaize Group, Metro, Aldi
Czech rep / 24.8 / 29.7 / Ahold, Schwartz, Metro, Rewe, Tesco
Denmark / 66.4 – 78 / 74.1 / FDB, Dansk Supermarkt, Dagrofa, SuperBest
Finland / 83.6 / 87.6 / Kesko, SOK
France / 48.1 / 60.0 / Carrefour, Leclerc, ITM, Casino, Auchan
Germany / 44.3 / 56.1 - 66.7 / Metro, Rewe, Edeka/AVA, Aldi
Hungary / 48.2 / 51 / CBA, Tesco, Co-op Hungary, Metro, Reál Hungária
Ireland / 54.4 / 70.3 / Musgrave, Tesco, Dunnes Stores, Stonehouse,
Italy / 29.1 / 36.0 / Coop Italia, Auchan, Carrefour, Conad
Netherlands / 51.5 - 62.6 / 56.9 - 82.6 / Ahold, Casino
Norway / 62.6 – 83 / 76.3 - 99.5 / Norgesgruppen, Coop Norden, Ahold, Reitan
Poland / 14.9 / 17.7 / Metro, Jerónimo Martins, Tesco, Carrefour
Portugal / 48.3 / 56.8 / Modelo Continente, Jerónimo Martins, ITM
Romania / 17.5 / 18.7 - 27.0 / Metro, Rewe, Carrefour, Delhaize
Slovakia / 25.3 / 31.4 / Tesco, Metro, Rewe, Schwartz
Spain / 53.8 / 62.5 / El Corte Inglés, Carrefour, Marcadona,
Sweden / 80.9 – 95 / 83.8 / Ahold, Axel Johnson, Coop Norden
UK / 42.3 – 60.4 / 49.3 – 70.6 / Tesco, Asda-Wal-Mart, Sainsbury’s, Morrisons
Europe / 17.1 / 20.8 / Carrefour, Metro, Tesco, Schwartz

Compiled from PlanetRetail, AC Nielsen, USDA-FAS, FCO

While there is a general trend to concentration in Europe, Dobson et al. (2001) point out that the emerging structures of food retail are not always the same. These authors use a typology of the dominant firm (when the market share of the top firm is >25 per cent and at least twice as high as the second rated firm), the duopoly, the asymmetric oligopoly, the symmetric oligopoly, and unconcentrated structure (when no firm has a market share >10 per cent). Only Italy was the only country ranked as ‘unconcentrated’, though this situation is changing now that Coop Italia has a 12.5 per cent share.

Table 3. Market structure of retail in Western Europe, based on market shares of top 5 retailers, based on 1999 data (Dobson et al., 2001)

Country / Market structure
Austria / Asymmetric oligopoly
Belgium/Lux / Asymmetric oligopoly
Denmark / Duopoly
Finland / Duopoly
France / Asymmetric oligopoly
Germany / Symmetric oligopoly
Ireland / Asymmetric oligopoly
Italy / Unconcentrated
The Netherlands / Dominant firm
Portugal / Duopoly
Spain / Asymmetric oligopoly
Sweden / Dominant firm
UK / Asymmetric oligopoly

Market concentration in CEE countries is also becoming part of the retail landscape, driven by foreign capital. This follows high concentration through state ownership of channels in the communist era, and low concentration on the transition period when privatisation gave rise to many small companies (Table 4).

Table 4. Key characteristics of retail transformation in Hungary (HU), Poland (PL) and Romania (RO) (Csáki et al., 2004).

Characteristics / Phases
Communism / 90-95 / 95-00 / 2003/2004
HU / PL / RO / HU / PL / RO / HU / PL / RO / HU / PL / RO
Concentration in retail sector / H / H / H / L / L / L / LH / LH / L / H / LH / L
Dominant source of capital / D / D / D / D / D / D / DF / DF / D / F / DF / D
Share of modern retail / L / L / L / L / L / L / LH / LH / L / H / LH / L
Share of large multinationals / L / L / L / L / L / L / LH / LH / L / H / H / L

H – highL – low

D – domesticF – foreign

Buying Groups

The accumulation of buying power through alliances between retailers, in the form of buying groups, has long been a feature of the European supermarket scene. Networks of independent grocers such as ITM and Leclerc use their collective buying power to compete with integrated retailers when negotiating with brand manufacturers, and these groups have themselves joined forces to compete with the discounters and integrated hypermarket companies. The giant buying groups AMS and EMD had total sales in 2004 of EUR 90 billion and EUR 100 billion respectively, in excess of the sales of top integrated European retailer Carrefour.