Transformation of the global economy

In large part as a result of the neoliberal reforms, the last one-third of the twentieth century marked a sea change in the global economy. Trade in food and agricultural products expanded at a rapid pace. Supermarkets began to operate across national boundaries. And, supply chain management (SCM) eclipsed business to business exchanges in spot markets. Let us examine each of these phenomena in turn.

2.3.1 Trade in food and agricultural products

The last 50 years has seen a rapid, indeed astonishing, growth in global trade in food and agricultural products. From 1961 to 2007 the value of global food imports rose from US$ 34,696 million to US$ 903,431 million. Similarly, the value of global food exports rose from US$ 32,118 million to US$ 876,410 million (Figure 2.1).³⁷

37 Food and Agriculture Organization, 2009. FAO Statistical Yearbook 2009, FAO, Statistics Division, Rome, Italy.

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000

1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Million dollars

Year Imports

Exports

Figure 2.1. World Agricultural Trade, 1961-2007.

This extraordinary growth can be directly linked to the opening of world markets under the GATT and later the WTO.

2.3.2 The rise of transnational supermarket chains

The legal restructuring of global food and agricultural markets through the GATT and the World Trade Organization, and especially the SPS and TBT agreements, had another important consequence: They opened the door for the larger supermarket chains to penetrate previously closed markets.

Prior to that time, few supermarket chains operated across national boundaries. If they did, their operations in one nation were largely divorced from that in other nations, since tariffs and quotas, as well as different local laws and regulations on food products, made global sourcing and distribution expensive, difficult, or impossible.

However, this all changed with the new trade regime. Global sourcing of most fresh and processed products became possible. Moreover, different chains employed different strategies with respect to store format (e.g. big box, convenience store, small supermarket, etc.). More importantly, the various chains took different strategies with respect to regional penetration. On the one hand, some chains invaded the national territory of other chains, either by direct competition or by purchasing smaller national chains. For example, recently the British supermarket chain, Tesco, entered the US market by opening a group of upscale small format stores on the west coast under the name Fresh and easy. On the other hand, some chains ventured into the nations of the former Soviet bloc and/or the middle and even lower income nations of Africa, Asia, and Latin America where supermarket chains were either weak or non-existent.³⁸ And, at the same time, major firms consolidated their market shares in their home markets, such that a few firms dominate in most industrialised nations.³⁹

2.3.3 Supply chain management

The growth in scale and geographical reach of supermarket chains was paralleled by a growth in their market power. While much of the twentieth century was marked by the dominance of large food manufacturers (e.g. Coca-Cola, Kraft,

38 Dries, L., Reardon, T. and Swinnen, J.F.M., 2004. The rapid rise of supermarkets in central and eastern Europe: implications for the agrifood sector and rural development. Development Policy Review 22(5):

525-556.

Reardon, T., Timmer, C.P., Barrett, C.B. and Berdegue, J., 2003. The rise of supermarkets in Africa, Asia, and Latin America. American Journal of Agricultural Economics 85(5): 1140-1146.

Weatherspoon, D.D. and Reardon, T., 2003. The rise of supermarkets in Africa: implications for agrifood systems and the rural poor. Development Policy Review 21(3): 1-17.

39 For trends in concentration see: Busch, L. and Bain, C., 2004. New! Improved? The transformation of the global agrifood system. Rural Sociology 69(3): 321-346.

Quasi-states? The unexpected rise of private food law

Nestlé), the current century has so far been marked by the growing dominance of food retailers. This is a consequence of several parallel developments. First, the sheer size of some of the larger retailers dwarfs anything found in the food processing sector. Wal-Mart, for example, now has annual sales of over $375 billion, making it the largest single company in the world.⁴⁰ This can be compared to the annual sales of Nestlé, currently the world’s largest food processor. Its annual sales for 2008 were ca. $100 billion.⁴¹

Second, supermarkets have been at the forefront of organisational innovation.

In particular, they have shifted their buying practices dramatically. As late as the 1960s, supermarkets tended to buy whatever products were available on the wholesale market, bringing them in through the back door, stacking them on shelves, and sending them out the front. Even the invention of bar codes had little effect on these practices. In addition to seasonal variations for fresh products, there were regular shortages of packaged products, the result of disruptions in shipping or availability of raw materials. This meant that supermarkets had to have large on-site storerooms where additional items for sale were kept ‘just in case’, or they had to have rather large numbers of ‘out of stock’ (OOS) items.

Both were costly. Warehousing products for sale later required extra space (that might have otherwise been used for sales floors), while OOS items meant empty shelves and lost sales.

The favoured solution to this problem proved to be Supply Chain Management (SCM). Two somewhat different versions of the origins of SCM can be identified.⁴² One places its origin in the systems literature of the 1950s; the other places it in the transformation of the Japanese automobile industry, especially at Toyota, in the 1970s.⁴³ Regardless of its origins, SCM transformed the food industry. SCM was simultaneously a conceptual and a practical innovation. It involved the organisation of an entire supply chain such that goods would be delivered ‘just in time’, and that shelves would always be full. This involved paying much greater attention to all the details of logistics (i.e. the flow of goods, resources, and information within and across firms), as well as to the development of commensurate handling practices all the way through the chain. Moreover, it involved vertical coordination of most or all the actors in a supply chain by a ‘supply chain captain’, a company with sufficient marketing clout to discipline the other companies in the chain and to ensure that goods flowed smoothly through the entire chain.

40 Wal-Mart, 2008. Annual Report. Available at: http://walmartstores.com/sites/annualreport/2008/

message_from_lee_scott.html.

41 Nestlé, 2008. Management Report 2008. Nestlé, Geneva, Switzerland.

42 Croom, S., Romano, P. and Giannakis, M., 2000. Supply chain management: an analytical framework for critical literature review. European Journal of Purchasing & Supply Management 6: 67-83.

43 Importantly, Toyota was greatly influenced by the post-war work on quality control of J. Edwards Deming. See: Edwards Deming, W., 1982. Out of the crisis. Massachusetts Institute of Technology, Center for Advanced Engineering Study, Cambridge, MA, USA.

What this has meant in practice is that large retailers have been able to specify standards for a wide range of product qualities and supplier practices. However, relations between suppliers and buyers in supply chains vary considerably.

Kaplinsky suggests that there are:

‘… two contrasting paths of value chain standards in corporate-driven value chains. One involves close and high-trust relations along the chain, with cost-reduction an outcome of largely cooperative efforts between lead-buyers and their tiers of suppliers. The second involves the use of standards to promote much more conflictive, arms-length relations along the chain.’⁴⁴

At least with respect to the food industry, this distinction may be overdrawn.

Instead, at one end of a rough continuum we find companies that employ the

‘Toyota model’, directly working with suppliers to ensure that the qualities of what suppliers produce meet their quality standards in the most efficient and profitable manner. This may involve provision of various forms of advice (which is nearly impossible to ignore), as well as supplier investments (i.e. lock-in costs) in specialised capital equipment (e.g. packaging, varieties, delivery arrangements) in return for increased profits and long-term relationships. At the other end of the continuum are buyers who employ standards, but who remain at arms-length from their suppliers. As one auditor put it, ‘The objective is to push the responsibility for food safety and quality back down to the suppliers. Unfortunately, this is the reason why most companies are audited.’⁴⁵ This allows those demanding audits to profit from competition among suppliers, while avoiding the costs incurred by working closely in long-term relationships. In point of fact, however, supermarket chains and fast food restaurants use a wide variety of approaches to link suppliers to buyers.

Thus, on the one hand, retailers have been able to specify the sizes and shapes of food packages, and, especially in the case of private label (also known as own brand, or store brand) products, the specific ingredients and processing techniques for the product. On the other hand, retailers have been able to intervene in supplier practices, including setting of standards for on-farm growing and handling, and even reorganising suppliers’ businesses so as to make them more efficient (thereby lowering costs for retailers). Some firms, such as Walmart, also link to their suppliers through Electronic Data Interchange (EDI); put differently, as products are sold at retail, orders are automatically sent electronically to suppliers, specifying timing and volume of replenishments.⁴⁶

44 Kaplinsky, R., 2010. The role of standards in global value chains. The World Bank, International Trade Department, Washington, DC, USA, p. 5.

45 Stier, R.F., 2009. Third party audits: what the food industry really needs. Food Safety Magazine 15(5): 44.

46 See Walmart Corporate, Requirements: http://walmartstores.com/Suppliers/248.aspx.

Quasi-states? The unexpected rise of private food law

SCM has been spurred on by the neoliberal transformations of the market noted above. In particular, retailers have enjoyed and defended the ‘freedom to operate’ provided by relatively weakly regulated markets. But they have also been frightened by the ‘horror vacui’ of weakly regulated markets. SCM, combined with private standards, provided a solution to the problem. Put differently, SCM provided a means for developing and imposing private standards on suppliers.

Yet, paradoxically, even as it avoided additional regulation, it depended heavily on nation-states’ legal systems for the enforcement of contract and criminal law.⁴⁷