The Role of Super Markets in Economic Development - Lecture Notes | ACE 551, Papers of Agricultural engineering

Download The Role of Super Markets in Economic Development - Lecture Notes | ACE 551 and more Papers Agricultural engineering in PDF only on Docsity! Fiction, Fad, or Fact of Life: The Role of Supermarkets in Economic Development Rhett Farrell Prepared for ACE551, Fall 2006 Contents: Introduction: supermarkets as a development topic.......................................................2 The expansion of supermarkets in developing regions..................................................3 The determinants of supermarket expansion .................................................................8 Supermarkets in developing regions: what’s the difference? ......................................13 Conclusion ...................................................................................................................19 Introduction: supermarkets as a development topic For the typical food shopper in the United States, supermarkets are the cornerstone of the food buying experience. For many, just hearing the word supermarket probably conjures some image of a large retail storefront situated adjacent an equally large parking lot; contained within are rows of shelves stocked full with food choices, most are processed and presented in colorful and boastful packaging; customers are maneuvering the aisles with shopping carts, collecting necessities and favorites, and eventually queuing at the bank of cash registers where, after a series of familiar chirps from an the electronic scanner, the shopping trip concludes with a payment by cash, check, or credit card. This image of the modern supermarket probably seems out of place set against the backdrop of the developing world, where most consumers are characterized by relatively low incomes, and more traditional markets such as street fairs and small-scale vendors might be considered the norm. Recently, however, some economists have argued a critical urgency in the need to understand the role of supermarkets in economic development, noting that where once these stores existed only in high income urban areas to serve a niche market of economically endowed consumers, in the past 10-15 years supermarkets have embarked on a trend of expansion extending services deep into many of the world’s developing regions. The literature on the subject remains notably shallow; it begins with an effort to document and explain the supermarket growth phenomenon, calling attention to the potential development issues associated with this growth, and has since made only limited progress towards more systematic and empirically rigorous analyses of these issues. The collaborative work of Reardon and others represents the first major effort to establish the growth of supermarkets as a development issue (Reardon and Berdegué for Latin America; Codron et al. for low income Mediterranean countries; Dries, Reardon, and Swinnen for Central and Eastern Europe; Faiguenbaum, Berdegué, and Reardon for Chile; Hu et al. for China; Neven 2 superettes, club stores, and convenience stores, typically all fall into the supermarket definition in the development literature. Again depending on the source and context, these terms would each represent some definitional variance according to store size and sales format, but they all share key characteristics of modern retailing and marketing practices (e.g. self-service, increased product variety, processed and semi-processed products, packaged goods, and centralized procurement and ownership consolidation to increase economies of scale). Thus, in the development literature, the term supermarket focuses less on standardized classifications based on the particular physical characteristics of a retail outlet, and more on a general concept of evolution in the food distribution system from traditional to modern practices. In this way, supermarkets may generally be thought of as an endpoint in the modern food marketing channel, or simply as an institution that has developed to facilitate the distribution of food from farmers and processors to consumers in a specifically modern way. Before 1990, supermarkets represented an insignificant portion of retail food sales in nearly every developing region, but by 2000 these shares had changed dramatically. In the six largest Latin American countries in terms of income and population (Brazil, Argentina, Chile, Costa Rica, Colombia, and Mexico), the supermarket share of total food retail ranges from 30- 75%, with the highest share in Brazil. At least six other Latin American countries have also experienced significant supermarket growth, although to a lesser extent, with supermarkets now totaling 20-40% of the market in Panama, El Salvador, Guatemala, Ecuador, Honduras, and Nicaragua (Reardon and Berdegué). In East and Southeast Asia, the trend towards supermarkets started approximately 5-7 years later than Latin America, but has also shown significant expansion since that time. The average share for processed/packaged food in retail is about 33% in Indonesia, Malaysia, and Thailand, and about 63% in South Korea and Taiwan (Reardon, Timmer, and Berdegué). In China, the supermarket share of food retail is growing by 30-40% per year (Hu et al.) In the northern countries of Central and Eastern Europe, (Czech Republic, Hungary, Poland, and Slovakia) the share of supermarkets in food retail had reached 40-50% by 2000. In the southern countries in this region (Croatia, Bulgaria, Romania, and Slovenia), the share is around 25-30% on average. In Eastern Europe, the share is about 10%, but the authors also note this area is identified by international retailers as the number one retail foreign direct investment (FDI) destination (Reardon, Timmer, and Berdegué). The trend toward supermarkets has been more recent in Africa. In South Africa the supermarket share is about 55%, and in Kenya it is about 20% and growing rapidly (Neven and Reardon). South African chains are actively investing in supermarkets in other countries across southern and eastern Africa including: Zimbabwe, Zambia, Namibia, Botswana, Swaziland, Madagascar, Mauritius, Angola, Mozambique, Uganda, and Tanzania (Weatherspoon and Reardon). As one might expect, the supermarket share of the retail food market tends to be higher in more developed countries. Within each region, sharp contrasts are noted in supermarket penetration, the differences generally associated with varying progress in economic development and market liberalization (these and other factors to explain supermarket growth will be addressed later). For example, in Brazil supermarkets account for 75% of retail food sales while the supermarket share in Bolivia is a relatively meager 10%; similar variations are present in each region (Reardon, Timmer, and Berdegué). Even so, in countries where supermarkets have yet to overwhelm the retail food market, an interest in expansion is often found, as in the case of South African chains investing in other African nations. The supermarket share of retail food sales also tends to vary substantially between food categories, with the overall food market share typically well above that of fresh foods such as fresh fruits and vegetables. In general, this has been explained by a tendency of supermarkets to first develop retail capabilities and exploit economies of scale in processed products and dry goods, and later extend services into perishables. More traditional outlets such as farmer’s markets and street fairs often remain competitive against supermarkets where daily produce shopping is customary. The supermarket share of fresh goods in Latin America is typically one half to one third their share of total food retail (Reardon, Timmer, and Berdegué), and similar findings are reported for the other regions. Taken as a whole, the contributions in this area present substantial evidence for the presence and rapid expansion of supermarkets in nearly all developing regions, but they also reveal wide variations in the extent of supermarket penetration in retail markets of individual countries and among product categories. This caveat to the growth phenomenon perhaps provides some insight into the reason the field has, in general, been slow to embrace supermarkets as critical development issue. Since inter-country differences often appear correlated with a country’s progress in economic development, a natural question arises around the direction of cause and effect in this relationship. To this question of whether supermarkets determine (as either driver or constraint) or simply follow economic growth, the documentation of supermarket expansion argues the former, but also recognizes the importance of the latter in triggering the initial growth. While numerous case studies in this literature discuss the potentially deterministic aspects of supermarket growth in the context of economic development, so far relatively little has been achieved in the way of empirical verification. Even if the debate over the ultimate impact of supermarket expansion on economic development remains unsettled in the literature, the rapid growth trends observed throughout developing regions reveal a clear implication for producers; supermarkets will most likely represent an increasingly important channel for market access as development occurs. As an for shopping convenience and processed food. Demand capacity is measured by real per capita income growth, growth in ownership of refrigerators, growth in access to cars and public transportation. As per capita income grows, so should the demand for variety and non-staple foods (an application of Bennett’s Law). As the authors note, income growth gives rise to the middle class, which is often the entry point for supermarkets offering greater variety and lower costs. Refrigerators allow consumers to move away from daily shopping for perishables, and better transportation options provide a means to and from the supermarket and enable a greater volume of purchases on each trip. These determinants to explain the demand for supermarkets services mirror those witnessed in the United States and Western Europe over the past century. The authors similarly divide the supply side of their conceptual model into incentive and capacity determinants, although the designation of each is somewhat more general. The supply incentive is essentially the prospect of market expansion and higher margins for retailers, especially where FDI is involved. Underserved markets present an opportunity to increase the customer base, and for foreign chains with saturated home markets, an opportunity for higher margins. Supply capacity is primarily explained by FDI, which increased rapidly in the developing world as a result of market liberalization policies in the 1990s. With foreign investment came an infusion of capital and technology into the retail sector; foreign chains arrived with well developed technologies and expertise in logistics and inventory management which could effectively lower the marginal cost of supermarket services. In addition, the authors observe several cases of spillover effects in management technology, whereby domestic firms, in order to remain competitive, either invested in new technologies themselves or hired the services of multinational logistics suppliers. The literature includes at least three attempts to verify this conceptual model with empirical rigor, each using cross sectional data (mainly due to a lack of temporal information on supermarket growth), and each more or less supporting the models merit in explaining the pattern of supermarket expansion. Dries, Reardon, and Swinnen correlate several determinants suggested by the conceptual model to the share of modern retail in total food retail for a cross section of countries in Central and Eastern Europe. They report strong correlations with per capita income growth and market liberalization (as captured by the reform index of the European Bank for Reconstruction and Development), and weak correlations with urbanization and the percentage of women in the work force, noting these weak correlations are likely due to insufficient variation over the countries studied. Furthermore, where socioeconomic development preceded market liberalization, they discover an apparent latent demand for supermarket services, finding the most rapid supermarket expansion occurring under these conditions. In a second empirical test, Hu et al. models supermarket penetration (measured in per capita turnover) as a function of various characteristics of Chinese provinces. The results suggest a significant positive influence from urbanization and per capita disposable urban income, and a significant negative correlation with the number of wholesale markets per capita in the province. The authors attribute this negative correlation to a trend by Chinese supermarkets to abandon traditional wholesale procurement channels in favor of specialized or dedicated wholesalers. This finding is reflective of similar changes in procurement identified in most regions, and is discussed more thoroughly in the next section. In a third empirical study, Traill attempts a more direct test of the conceptual model by fitting an econometric specification over a cross section data from both developed and developing countries. In terms of explanatory power, his final model represents the data quite well, and also returns the expected positive correlations for variables representing market liberalization, per capita income, urbanization, female participation in the work force, and the existence of a large middle class. As the work of Hu et al. reveals, the conceptual model of the demand for and supply of supermarket services not only describes a general framework for expansion according to changing socioeconomic factors and foreign direct investment policies at the country level, but may also be applied to consider supermarket diffusion within a region. In fact, Reardon and the other contributors to this literature address this process of expansion within regions extensively in the previously mentioned literature. Drawing again on examples from the numerous case studies in this literature, Reardon, Timmer, and Berdegué discuss a pattern of intra-region and intra-country supermarket expansion that generalizes across regions. Growth in the middle class typically marks an entry point for supermarkets, which often locate initially in higher income urban areas. As competition intensifies in these markets, supermarkets begin to move to lower income urban areas, usually differentiating services to meet the needs of poorer consumers. Continuing in their search for new customers, supermarkets also begin to move away from the large urban areas into smaller towns, and in some cases, rural areas. Often, the progression away from saturated markets into smaller cities is led by smaller domestic competitors, with the large multinational chains eventually following suit. As a context to summarize literature addressing determinants of supermarket expansion, it is perhaps best to return to the idea of supermarkets as an adaptive institution, and consider the expansion process from the perspective of the supermarket. In the developed world, the institution first arose in response to consumer demand for reduced food prices, and has come of age, so to speak, through an intense competition for new customers based on an understanding of the evolving preferences of consumers for price, convenience, and service. Survivors emerged example, monitoring costs at the point of delivery. The second procurement objective is quantitative, reflecting the need for reduced costs and increased volumes. This is especially important as supermarkets expand into poorer regions, where low prices are crucial for gaining access consumers. These objectives are reflected in several consistently observed trends in the procurement systems adopted by supermarkets in developing countries. Reardon, Timmer, and Berdegué formalize the discussion of these trends using “four pillars” to describe the goals of supermarket procurement. The four pillars they suggest include: the use of specialized procurement agents (referred to as dedicated or specialized wholesalers), centralization and regionalization of procurement, assured and consistent supply through preferred suppliers, and high quality, safe products achieved through private safety standards. Specialized wholesalers are those who deal in a limited number of products, and dedicated wholesalers are those who specialize in supplying supermarkets. Case studies from each region reveal a supermarket preference for procurement through these wholesalers rather than traditional wholesale markets. The explanation of this preference is two fold. First, specialized wholesalers are generally able to exert more control over product quality and consistency than traditional wholesalers. Second, dedicated wholesalers typically adopt logistics technology to interface directly with that of supermarkets, increasing responsiveness to supermarkets needs and reducing transaction costs. Centralization of procurement occurs in the management structure of the supermarket procurement function and refers to the consolidation of the purchasing functions of individual stores into a central procurement office. The shift usually takes place once the number of stores in a region reaches some critical mass, at which the economy of scale gains realized through a central buying and distribution center exceed the increase in transportation costs associated with this move. Regionalization is essentially just a broad manifestation of the shift to centralized procurement, and refers to cross-border product sourcing. In each case, as a the number of individual procurement offices decreases, supply requirements are standardized over larger regions, often leading to a convergence in standards to those of the highest in the region. Preferred suppliers are those which have been “listed” with the procurement office, usually based on some minimum requirements for consistent and capable delivery. At the farm level, this is probably most applicable to fresh fruits and vegetables (FFV), since these are the products most likely to be supplied directly to supermarkets. In some cases, preferred suppliers receive premium prices. In other cases, and especially in areas where supermarkets represents a large share of the output market, prices are competitive and market access provides the necessary incentive for producers to become preferred suppliers. Supermarkets use preferred supplier networks to improve the consistency and quality of delivered product, often requiring these producers to upgrade storage facilities and product handling procedures, make minimum investments in logistics technology, and improve management skills. Finally, private quality standards refer to consistency standards like grading, and safety standards, such as safe production, handling, and storage practices, which allow supermarkets to differentiate themselves on the basis of product quality and also offer some protection against product liability concerns. The standards are private in the sense that supermarkets have generally adopted their own rules in response to the commercial benefit from heterogeneity in product attributes; often the desire for product differentiation has led to private standards which are well beyond the public regulations for product quality and in developing countries. In some instances, multinational chains even rely on public standards set forth in their home markets in Europe or the United States. Their zeal in this area implies quality, consistency, and safety are competitive advantages supermarkets are eager to protect. These tendencies in supermarket procurement practices have a number of implications for small-scale producers in developing counties, and the recognized importance of this population group in overall economic development motivated the concerns raised in the early literature. The concern centered on the potential exclusion of small-scale producers from the increasingly important supermarket retail channel. Supermarkets prefer high quality suppliers and deal in large volumes, constantly seeking reductions in distribution and transactions costs. In the developing regions, small producers face significant challenges in meeting the requirements of this procurement system, and as supermarkets penetrate deeper into retail markets, the marketing alternatives for these producers begin to disappear (Reardon, Timmer, and Berdegué). Consider, for example, the negative correlation between supermarket penetration and the number of traditional wholesale markets in Chinese provinces (Hu et al.) and the exit of many small retail shops during the period of supermarket expansion in Latin America (Reardon and Berdegué, Faiguenbaum, Berdegué, and Reardon). With regard to supermarket requirements, the authors in this literature describe the relative disadvantage of small producers, who are often constrained by production technology, access to financing, and human capital. Focusing on fresh food products, the initial case studies in this literature report some evidence of a preference for large-scale producers in supermarket procurement systems, but the impact of supermarkets on small-scale producers has yet to be tested empirically. Many regions simply lack a sufficient number of large producers to meet the total quantity demands of supermarkets, and here, perhaps reluctantly, procurement from small-scale producers becomes a near necessity. Under these conditions, intermediaries have been employed to aggregate small- The challenges they face in supplying the supermarket procurement system, namely constraints in production, technology, financing, and human capital, are not new to the development literature. The only real change is the institution from which they arise, and here, there is at least some note of optimism since the supermarket has a commercial interest in internalizing the solution to these market imperfections. However, the incentive for supermarkets to invest in the competency of their suppliers rests on their ability to capture the gains of this investment. Innovations in contracting and vertical coordination in the supply chain show promise in achieving this goal, but the question has not been addressed empirically in the context of supermarkets. Returning once again to the concept of supermarkets as an institution, an interesting comparison can be drawn against another institution with widely accepted merit in economic development. Microfinance, as an institution, was conceived with development goals in mind as a means to overcome a particular market imperfection, and its success has now captured some commercial interest. Supermarkets, by contrast, have expanded into the developing world through commercial interests, but represent a potential, albeit unproven, solution to market imperfections constraining small-scale agriculture producers. Even if this assessment of supermarkets proves valid, this comparison is not to suggest supermarkets represent the same development potential as microfinance, but rather to highlight one critical and shared attribute, self-sustainability. Microfinance, at least conceptually, earns a return, and therefore can exist even without donor aid. Likewise, if supermarkets internalize the cost of market imperfections, they surely do so because it is commercially profitable. Thus, if supermarkets do in fact bring about some positive influence on economic development, they do so through market incentives, and the development benefits are realized even in the absence of donor assistance. Carrying on with this optimistic view of the role of supermarkets in development, this review concludes with a brief consideration of the voids in the current literature to highlight several areas where additional research and formal models might contribute to a better understanding of the issue. First, supermarkets presumably enter markets with unmet demand for supermarket services, which should indicate an increase in consumer welfare. These effects are not yet addressed by the literature. Next, if supermarkets do increase consumer welfare, ignoring producer welfare for the moment, constraints to supermarket expansion (beyond market liberalization) should be addressed beyond the current empirical models, perhaps considering characteristics such as the location and quality of the supplier base and the location of processors. For example, the supply base objective might be stylized into a selection model where supermarket’s maximize profit as a function of expected quality and costs (with “quality” taken as a representation of supplier conformance to supermarket requirements) by choosing to source from supplier groups which have observed or unobserved variation in capability. The most capable suppliers might be identified by size or capitalization level, but once this source is exhausted (according to the increasing transportation costs associated with widening the geographical base), supermarkets face information asymmetry in determining the most capable and reliable small producers to support with assistance programs. Finally, the impact of supermarkets on the welfare of producers, large or small, has yet to be quantified by empirical methods, and the urgency of supermarkets as a development topic cannot be validated until some quantitative approach is taken to document the aggregate and individual welfare effects on producers and consumers. References Anonymous "1926-1936: Entrepreneurs And Enterprise: A Look At Industry Pioneers Like King Kullen And J. Frank Grimes, And The Institution They Created." Progressive Grocer 75 (1996):39. 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