|
|
Printer-friendly
format
Download PDF version
Email this page
Processed Food Trade Pressured by Evolving Global Supply
Chains
Anita Regmi, USDA/ERS (top); Mark Denbaly,
USDA/ERS (bottom) |
The last three decades have seen tremendous growth in
sales of processed food—sales now total $3.2 trillion, or
about three-fourths of the total world food sales. But, contrary
to initial expectations, this phenomenon has not led to significant
growth in global trade—only 6 percent of processed food sales
are traded compared with 16 percent of major bulk agricultural commodities.
Although consumer demand for processed foods continues to grow globally,
growth in trade has generally stalled since the mid-1990s. Global
trade in processed food grew rapidly during the 1970s and 1980s,
as consumers in high-income countries demanded more foreign food
products. Through the mid-1990s, these products accounted for a
bigger share of growth in U.S. agricultural exports, with expanding
exports to Japan, Canada, and Mexico. However, since the mid-1990s,
growth in both global and U.S. processed food trade has slowed,
and bulk agricultural commodities account for more of the recent
growth in U.S. agricultural exports.
The slow growth in trade of processed food products
has often been attributed to existing multilateral trade rules that
favor trade in raw commodities at the expense of processed products.
But trade policy is not the whole story—many other factors
affect the choice of locations to produce and sell food products.
Patterns of food trade are strongly influenced by the changing nature
of competition in the global food industry—from shifting consumer
preferences to the growth in multinational food retailers and the
ways they manage their global supply chains. Consumer-driven changes
are increasingly pushing food suppliers to meet consumer demand
and preferences at a local level, even as the food industry becomes
more global. Local processing allows manufacturers to strategically
tailor both manufacturing and packaging to suit local tastes, preferences,
and retailer needs. The result of this trend has been an acceleration
of foreign direct investment (FDI), often at the expense of trade.
As a case in point, U.S. food companies sell five times ($150 billion)
more through FDI sales than through U.S. export sales ($30 billion).
Shifting Preferences Shape Supply Chains
Food suppliers are increasingly tailoring their marketing strategies
to the unique characteristics of consumer demands in each market
that they serve, and the choice of strategy can either stimulate
or discourage trade. At the broadest level, there are significant
differences between developed- and developing-country markets, and
suppliers have developed very different strategies in serving these
two types of markets.
Market sizes, as indicated by retail sales value, are
much larger for developed countries. The United States, the European
Union, and Japan together account for over 60 percent of total retail
processed food sales in the world. However, market growth has generally
been faster among developing countries, particularly lower-middle-income
countries such as China, Morocco, the Philippines, and many Eastern
European countries. The transitioning Eastern European countries,
such as Bulgaria, Romania, and Ukraine, experienced double-digit
growth in retail sales of many food and beverage products during
the late 1990s. While sales in these markets have stabilized, Asian
markets have picked up in the past few years, and processed food
product sales are expected to continue to significantly increase.
|
Consumer preferences, shaped primarily by incomes, changing
lifestyles, and evolving cultural preferences, largely determine
the items available in grocery stores in different markets. In developing-country
markets, higher incomes result in diet upgrades, with increased
demand for meats, dairy products, and other higher value food products.
These include packaged cereals, pasta, oils, and other items used
in meal preparations. In the developed-country market, where consumers
already consume sufficient quantities of these items, sales growth
is noted for labor-saving products, such as prepared meals. Food
sales in developed-country markets are also being influenced by
consumer preferences for greater product variety and food products
possessing specific attributes—for example, products perceived
to be safer or more healthful or products produced in ways that
are more beneficial to the environment and take animal welfare and
equitable labor concerns into consideration.
In developed-country markets, where the volume of food consumed
increases largely with population growth, food suppliers can increase
returns mainly by adding value to their products—either by
increasing the production of ready-to-eat food products or producing
foods with special attributes desired by consumers, such as organic
foods or foods with special health properties. In contrast, in developing
countries, where incomes are rising and lifestyles are rapidly changing
with urbanization, retail sales growth results largely from increased
volume and, to some extent, increased sales value. As the signals
from different markets are transmitted up the supply chain, food
producers, processors, and traders adapt to meet the evolving retail
demand in each market. The differing adaptations ultimately contribute
to changes in food trade patterns by influencing the import demand
for processed food products and the inputs used in their manufacture.
Demand Growth Lures FDI to Developing Countries
Recognizing the large potential in developing-country
markets, food manufacturers are expanding their operations in those
markets. But they have several options for selling their products;
exporting is just one option and, in many cases, not the preferred
one. Most foreign food sales are generated by investing abroad and
processing in foreign markets. The choice between exports and FDI
depends on the type of products sold. Products that do not undergo
major changes from their basic commodity forms through processing
(known as land-based products), such as rice, wheat flour,
meats, and fruits and vegetables, are less suited for FDI because
their production is limited by specific growing conditions. For
these products, processing generally takes place close to the location
of primary production. Processed land-based products, such as fresh
or frozen meat, frozen and canned fruit and vegetables, and dry
milk powder, can be exported to foreign markets.
Production of manufactured foods is less location specific because
technology and capital are mobile in the world food economy. Through
FDI, food manufacturing can expand to another country to satisfy
the demand there. Therefore, land-based products tend to be traded
far more than manufactured packaged products, and account for over
75 percent of the total value of U.S. processed food trade (see
Food and Agricultural Product Trade Shaped
by Product Characteristics).
Food
and Agricultural Product Trade
Shaped by Product Characteristics |
Trade in
food and agricultural products can be distinguished
by the international mobility of inputs used in the
production process. On the one hand, trade is generally
greater among products for which production largely
depends on land and other geo-climatic factors—termed
for simplicity in our discussion as land-based products.
On the other hand, there tends to be less trade in
consumer-ready manufactured products, which can be
produced almost anywhere investments in processing
facilities are made.
Land-based food products include bulk agricultural
commodities, such as wheat, corn, soybeans, coffee,
and tea; horticultural products, such as fruit, nuts,
and vegetables; semiprocessed products, such as vegetable
oils, grain flours, sugar, and animal products; and
some processed food products sold packaged and consumer-ready
in grocery stores, such as fresh and chilled meats,
flour preparations, and processed fruit and vegetables.
Manufactured foods include other processed foods that
use multiple inputs in their formulation and undergo
significant changes from their raw forms. Examples
are breakfast cereals and various bakery and confectionery
goods. As can be expected, trade among processed food
products varies based on their characteristics. Land-based
products, identifiable by their basic commodities,
such as meats and frozen vegetables, tend to be traded
more than manufactured products.
|
|
The largest firms, based in Western Europe and the United
States, are expanding their sales in numerous foreign markets to
maintain growth, while growth in the home markets stagnate. Some
firms, such as Nestlé, Kraft, and Unilever, already operate
in over 140 countries. With young, growing populations in Asia and
Latin America driving sales in baby foods, milk-based products,
bakery products, and confectionery, it is no surprise that manufacturing
firms are expanding to supply the emerging large-scale supermarket
chains in these regions.
Growth in large-scale retailing in the developing countries has
coincided with new investments by foreign food manufacturers. In
2002, Heinz expanded its plant capacity by 15 percent in China and
opened a new plant in the Philippines. The Kellogg Company now has
manufacturing plants in China, India, Japan, South Korea, and Thailand
for supplying retail chains in Asia. PepsiCo, the second-largest
U.S.-based food company, is continuously extending its geographical
reach with its extensive international marketing arm in snack foods,
currently focusing on Latin America and Asia-Pacific. The French-based
Danone Group is developing a stronger presence in Africa and the
Middle East through investments in fresh dairy and bakery products.
Smaller companies with a narrower focus are also looking for new
markets across national boundaries. Italy's popular confectionery
company, Ferrero, is expanding operations in Asia-Pacific and Eastern
Europe. Confectionery manufacturer, Wrigley Jr. Company, and the
Fonterra Group of New Zealand, a dairy company, have also expanded
operations and currently sell their products in over 140 countries.
Whether multinationals' operations in foreign markets promote or
inhibit food trade depends on the individual products sold in these
markets. Depending on transportation cost savings and the ease in
customizing to suit consumer needs and provide quality assurance,
consumer-ready food products may be manufactured in local markets
through FDI. This in turn can generate trade growth in the raw commodities
used to manufacture the final food products.
Supermarkets Change Industry Structure in Developing Countries
Supermarkets'
share of retail sales
is growing in many countries |
|
NA
= Not available.
Sources: T. Reardon and J.A. Berdegué,
"The Rapid Rise of Supermarkets in Latin America:
Challenges and Opportunities for Development,"
Development Policy Review, Vol. 20, No. 4,
September 2002, pp. 317-334. D. Hu, T. Reardon, S.
Rozelle, P. Timmer and H. Wang, "The Emergence
of Supermarkets with Chinese Characteristics: Challenges
and Opportunities for China's Agricultural Development,"
Development Policy Review, Vol. 22, No. 5,
September 2004, pp. 557-586 |
|
The last decade has witnessed an unprecedented growth
in supermarkets among developing countries, particularly in Asia
and Latin America where rising income levels have increased consumer
demand for many higher valued processed food products. The trend
has led to increasing centralization of distribution networks and
also closer geographical integration. These developments can have
both positive and negative impacts on trade.
Until 1990, there were only a small number of supermarkets
in most Asian and Latin American countries, existing mainly in major
cities and wealthier neighborhoods and primarily financed by domestic
capital. By the early 2000s, supermarkets had penetrated the middle-class
neighborhoods, and even the poorer urban neighborhoods and rural
areas, particularly in Latin America. While supermarkets accounted
for 15-30 percent of the national food retail sales before 1990,
they currently account for 50-70 percent of the retail sales in
many Latin American countries, registering in one decade the level
of growth experienced in the United States in five decades. The
development of the supermarket sector in Asia is similar to that
of Latin America, but 5-7 years behind in its expansionary process.
However, supermarkets in Asia are growing at a faster rate compared
with those in Latin America.
The expanding supermarket sector in developing countries is increasingly
foreign owned. In Latin America, large multinational firms (such
as Ahold, Carrefour, Wal-Mart, and others) constitute 70-80 percent
of the top five supermarket chains per country. These global retail
companies have also invested aggressively in the Asian markets in
recent years. The success of these companies in the global retail
market is largely due to their ability to offer a wider variety
of products year-round and at lower prices. With their large-scale
operations and supply chains reaching into many countries, these
companies can efficiently handle time-sensitive and large volumes,
resulting in cost savings. These savings can be passed on to consumers
in the form of lower prices.
The changes in the food retail sector have resulted
in a trend toward centralization of procurement, whereby large distribution
centers have taken over the distribution functions of myriads of
smaller centers and middlemen. A Carrefour distribution center in
São Paulo may serve 50 million consumers in three different
States, and an Ahold wholesaler in Costa Rica may serve the entire
Central American food retail market for Ahold. The logistics sector
has also improved the interface between suppliers and retail outlets.
The presence of multinational retailers is likely to lead to an
overall increase rather than decrease in food trade. The quest for
year-round supply of fresh products has encouraged joint venture
partnerships and strategic alliances among firms in the northern
and the southern hemispheres, increasing trade in these products.
Similarly, alliances with retail outlets can open export opportunities
for both small and large producers and manufacturers when the alliance
is with a large multinational retail chain. However, the presence
of large multinational retailers may also encourage food manufacturers
to expand their manufacturing units into the region by assuring
steady markets. In such cases, the presence of multinational retailers
may encourage more local processing from domestically produced raw
products, thus discouraging trade.
Private Brands Ensure Quality but Restrain Trade
In response to changing consumer demands, retailers have adopted
more proactive marketing strategies, where they try to achieve customer
loyalty not only by improvements in service, location, and store
layout, but also by more control over the overall value creation
process in the food chain. One strategy is the adoption of private
labels, where retailers seek dual objectives, lowering retail price
and enhancing product value. The use of private labels, especially
when the purpose is to guarantee quality, is often accompanied by
strict control of suppliers of raw material and can, as a result,
inhibit trade.
In the United States and many other countries, private retail brands
have generally been cheaper substitutes of similar or lower quality
compared with major manufacturer brands. This use of private retailer
brands is currently rising in developing countries due to the ongoing
replacement of the traditional informal food market sector by a
more formal sector characterized by the presence and expansion of
supermarket chains. For example, the retail chain Food World leads
in private retail brand sales in India, selling store brand products,
such as jams and honey, at lower prices than major manufacturer
brand products. However, in the affluent segments of West European,
Japanese, and U.S. markets, where consumers are willing to pay extra
for quality-assured food products, private retailer brands are increasingly
designed to provide products with specific attributes sought by
consumers.
Retailers may seek to add value and provide higher quality products
when the existing products in the market do not meet consumer demands
for specific product attributes. For example, the Danish retailer,
Dansk Supermarket, operates a series of different private brands
for dairy products as higher quality alternatives to major manufacturer
brands. The Dansk brands are advertised as being of a superior quality
due to the use of local dairy output produced under traditional
practices with due consideration given to food safety concerns.
Similarly, other retailers across Europe have introduced retailer
brands for other products catering to specific consumer demands
regarding safety, environment, animal welfare, and other issues.
In implementing a strategy of using private brands, retailers must
ensure that their brands meet the desired quality standards. This
requires careful selection of suppliers and the type of product
for branding. A study of 751 retail purchasers in 16 European countries
suggests that, in addition to traditional factors like price, quality,
and the ability to supply needed volumes, retailers select suppliers
based on product traceback ability and willingness to engage in
long-term relationships with the retailer. As the branding function
places more responsibility for product design, quality control,
and product liability on the retailer, traceability and closer cooperation
with manufacturers are necessary.
Increased use of private retail brands can have negative impacts
on food trade. For example, the European consumers’ preoccupation
with food safety issues has promoted retail brands, such as Dansk,
which use local inputs. If the practice of private labels using
local sourcing were to be expanded to wealthier segments in other
developed-country markets, the use of private retail brands could
potentially reduce the role of imports in the branded product supply
chain. Moreover, the certification of quality assurance requires
adhering to national and retail standards, which, if more stringent
than those adopted in other countries, can potentially restrict
imports.
Trade Rules May Deter Some Processed-Product Trade
Ultimately, however, suppliers' decisions whether to locally source
or import products is also influenced by the rules governing trade
in these products. One of the main accomplishments of the 1994 World
Trade Organization (WTO) Agreement on Agriculture was to subject
agricultural trade to stronger international disciplines, leading
to a general reduction in agricultural tariffs. However, tariffs
on agricultural products remain relatively high and vary considerably
across both countries and products. Many countries impose low or
no duty on many products, but maintain very high tariffs, often
in excess of 100 percent, on import-sensitive products.
Tariff
escalation in cocoa and products |
|
|
|
|
|
|
|
|
Cocoa |
Cocoa beans |
|
|
|
|
|
Cocoa paste
|
|
|
|
|
|
Cocoa butter |
|
|
|
|
|
Cocoa
powder |
|
|
|
|
|
Chocolate
and products |
|
|
|
|
|
|
Source: Agricultural Market
Access Database (AMAD) and International Bilateral Agricultural
Trade Database (IBAT). |
|
Barriers to trade in processed products are often more
restrictive than on raw commodities. Tariffs on average are greater
on processed products than on their less-processed forms, a phenomenon
known as tariff escalation. Analysis of tariff data from
22 countries indicate that the average tariffs on fully processed
products exceed those on primary products, with differentials ranging
from 2 percent for the United States to over 40 percent for Turkey.
Over the entire group, the average tariffs range from 30 percent
on fully processed goods, dropping to 20 percent on horticultural
products, 18 percent on semiprocessed items, to 17 percent on primary
products. As an example, most countries have no tariff on raw cocoa
beans, with the exception of Australia, which has an ad valorem
tariff equivalent of 1 percent. However, as one moves up the processing
chain, ad valorem tariff equivalents tend to increase, with tariffs
on chocolates and other cocoa products ranging between 15 and 57
percent. Similar examples of tariff escalations exist among many
other commodity sectors, including coffee and oilseeds.
In addition to tariffs, countries have numerous other instruments
at their disposal to regulate the flow of imports, such as the various
trade remedy measures. For example, imports can be reduced for limited
periods through antidumping and countervailing
duties and safeguard measures that allow temporary actions
when imports surge. Available data show that WTO member use of trade
remedy measures on agricultural products has risen, especially on
processed food products. Of the total 76 antidumping and countervailing
duties present worldwide on agricultural products in 2002, 43 were
on processed food products and only one was on a basic agricultural
commodity, the remaining consisting of semiprocessed and horticultural
products. Similarly, safeguard measures have also been used predominantly
on processed food products.
The presence of tariff escalation and increased use of trade remedy
measures on processed foods suggest that countries are seeking to
capture value-added locally and implement trade regulations that
encourage imports of relatively less-processed agricultural commodities.
While this has undoubtedly contributed to slower growth in trade
of processed food products, trade flows are also shaped to a growing
extent by the changing dimensions of the global food industry. More
integrated supply chains that locally customize products to meet
regional consumer preferences may encourage trade of less-processed
agricultural commodities over trade in processed food products.
Therefore, even as the food industry becomes more global with the
same multinational retailers and manufacturers operating across
the world, food demand is being increasingly satisfied at the local
level where food suppliers are better able to meet specific demands
of local consumers.
|