The Food Industry

Abstract

The food industry is involved with the processing, preparation, preservation and distribution of food and beverages. Agri-food companies, which mostly supply agriculture with inputs, are also included in the food industry in this context. A number of structures and market conditions are special in the food industry, which demands a focus on this industry: The food markets and the food companies are subject to unique terms and conditions which differ from the conditions elsewhere. The structural development of food companies and the food industry is described in different ways, including size of companies, consolidation, concentration, globalization, specialization, M&As and their overall goals. In the agri-food industry, a long-term and clear trend toward increasing concentration, consolidation and globalization can be observed. FDI but also reshoring is increasing. The stakeholder and shareholder approach seems to develop in waves.

3.1 Introduction

The food industry is involved with the processing, preparation, preservation and distribution of food and beverages. Food companies sometimes both demand products from farmers and sell products to them. Agri-food companies, which mostly supply agriculture with inputs, are also included in the food industry in this context.

In this book, the food industry includes the following companies and groups of companies:

• Companies that process and prepare meat, milk, eggs, fish, vegetables, fruit, potatoes, cereals and sugar beets/cane. These products are mostly supplied directly by farmers

• The beverage industry

• The bakery industry

• The food ingredient industry

• Companies that supply agriculture with inputs such as feed, vitamins, etc.

The food industry accounts for a significant and an increasing share of the added value in the food value chain, so it is an interesting industry.

The explicit focus on the food industry and food companies in this book can always be discussed: Is the food industry so special that it deserves its own field of research? Would it not be more relevant just to transfer research trends, results, experiences, etc., from industries in general to the food companies?

The answer is that the general business models, methodologies and theories can also be applied, to a large extent, to the agri-food companies.

However, a number of structures and market conditions are special in the food industry, which demands a focus on this industry: The food markets and the food companies are subject to unique terms and conditions which differ from the conditions elsewhere.

In terms of the structural conditions, the forms of ownership in the food industry are distinctive in that cooperative ownership is relatively widespread compared to other industries. This is especially true in the parts of the food sector that are most dependent on local agricultural produce, which are close to the agricultural sector in the value chain.

Another special structural condition is the vertical integration, which also plays a relatively important role in the food sector. Furthermore, globalization and barriers to globalization play a particular role for food companies compared to many other companies.

3.2 Consolidation

Consolidation, i.e., the trend toward increasingly fewer companies in the industry, is both significant and rather uniform among countries. Despite a general increase in global food production, a decline in the number of food companies from year to year is a widespread phenomenon.

Consolidation, which is part of continuous structural development, is connected with other processes in the food industry including concentration, growth, mergers and acquisitions (M&As), globalization, etc. When companies merge or grow, consolidation is often the outcome.

Several drivers are behind this structural development and thus also behind the consolidation that has been identified, cf. Hansen (2013).

In a very long-term perspective, it is clear that technological development, improved infrastructure and generally increasing economic welfare are driving the consolidation. A global pattern can be identified in that the structure of the food industry (and other industrial sectors) is most consolidated in the most industrialized and developed countries.

Among the most developed countries, consolidation in the food industry began in the 1930s and 1940s as the examples in Fig. 3.1 illustrate.

Fig. 3.1

(Sources Bjørn [1982], Demko [2018], USDA [2015a, 2015b, 2015c] and statistical data from Statistics Denmark, Federation of Danish Cooperatives and Danish Agriculture and Food Council)

Long-term development of farmer cooperatives: Number of companies

The figure presents two examples of long-term development with growth, maturation, saturation and consolidation.

The consolidation since the 1930s and 1940s has been driven by two factors in particular:

• Economies of scale: Larger units could outperform smaller companies by exploiting economies of scale, which lowers unit costs. Technological development was—and still is—a major reason for the continuing economies of scale in the food industry.

• Infrastructure: Local factories or companies close to suppliers and customers were no longer as necessary. It became increasingly possible and advantageous to transport, e.g., milk over longer distances, which meant that small local dairies in villages became redundant.

The scope, process and duration of consolidation vary between sectors. Sectors which were exposed to competition and which were export-oriented with distinct potential for economies of scale were the first to initiate consolidation.

Figure 3.2 presents another example of long-term consolidation in the agri-food industry.

Fig. 3.2

(Sources Own data collection, calculation and presentation based on annual reports from companies and business organizations)

Number of companies in the Danish agri-food industry, 1960–2020

The figure illustrates that, in Denmark, the number of companies in the agri-food industry—excluding breweries—has been declining significantly for decades. From 1960 to 2020, the number of food companies fell by more than 90 percent.

The change in the number of breweries is also shown as this industry has exhibited a very different development compared to the other sectors. As can be seen, the number of breweries has been increasing significantly since the beginning of the 2000s, which is in contrast to the general trend in the food industry as a whole.

For many years, structural development in the global brewing sector was characterized by consolidation, concentration, specialization and internationalization: the total number of breweries was decreasing, the large brewing companies were becoming increasingly large and were focusing on beer production and exporting and investing abroad. However, the trend toward fewer breweries reversed at the beginning of this century in step with the emergence of microbreweries (craft breweries).

Figure 3.3 illustrates the number of breweries in Denmark and the USA since the early 1900s, and there is a very uniform development.

Fig. 3.3

(Sources Own calculations based on Brewers Association (nd), Tremblay et al. [2005], and statistical data from Danish Brewers’ Association)

Consolidation of breweries in the USA and Denmark, 1900–2023

Microbreweries originally started in the USA and UK in the 1970s, but since then, the concept has spread to most of the world. This “reversed” development in the consolidation of the brewing industry resulting from the boom in microbreweries is a special case which is unlikely to counteract the overall trend as it is unlikely that “micro dairies” or “micro meat companies” would be successful to the same extent: Beer is a differentiable and consumer-oriented product in that its unique characteristics, origin, taste, local identity and innovation are strong parameters in marketing. In contrast, food products such as bread, meat, dairy, etc., do not have the same potential for differentiation.

In the USA, the total number of food companies has decreased on average by approximately 2.5 percent per year in recent decades. However, this change has been more rapid in some sectors than in others. The dairy sector, in particular, has been exposed to significant structural development, while the reduction has been less significant in, e.g., the sugar and flour industries; see Rogers (2001).

Focusing on the total number of food companies in the USA, the downward trend now seems to be stagnating or even reversing, see Fig. 3.4.

Fig. 3.4

(Source Martinez, 2007)

Total number of food businesses in the USA

The increase in the number of food manufacturing plants and food companies since the early 1990s was mainly due to an influx of small new start-up companies, typically in high growth niche markets and often only with activities for part of the year. These numerous small companies had a negligible influence on the overall picture as they only represented a very small part of the total turnover and activity in the sector.

There are, however, also examples from other countries of new small businesses emerging out of the shadow of large and growing companies. New niches develop, and entrepreneurs start new businesses based on new technology, new markets and the like.

This can thus be interpreted as a sign that the number of companies has a certain lower limit. Large-scale operations, international mergers and acquisitions along with efficiency improvements will, above a certain threshold, create a vacuum that will attract new businesses.

At the same time, it is also an indication that structural development and consolidation may well occur simultaneously with the establishment of new businesses.

3.3 Size of Companies

During recent decades, the size of food companies around the world has, in general, increased significantly as a result of mergers and acquisitions. This growth in turnover and revenue is remarkable considering the fact that market growth is generally quite low in terms of agriculture, food and beverages.

Growth has been, and is, a consistent strategic goal for many agro-food businesses. Growth in volume and revenue per se is an explicit goal in the strategies of many food companies, which means that there is an internal drive toward ever-growing companies (Hansen, 2013).

Excerpts from the strategies of selected large food companies exemplify this:

• Heineken: We aim to deliver superior and balanced growth (Heineken, n.d.)

• Mondeléz:... we're focused on accelerating growth by investing (Mondeléz, n.d.)

• Nestlé: Our objective is to sustain a mid single-digit organic growth rate... (Nestlé, n.d.)

• Tyson Foods: Tyson Foods is targeting volume growth ahead of the market in every segment (Tyson Foods, 2021).

As an example of growth, Fig. 3.5 presents the change in the average size of dairies in selected countries.

Fig. 3.5

(Note Calculated as total volume of milk delivered in proportion to the number of dairy companies. Sources Wadsworth [2019], USDA [several issues b] and statistical data from Danish Agriculture and Food Council and Danish Dairy Board)

Change in average size of dairies in selected countries

The following drivers are likely to stimulate continued growth and an increase in the size of food companies:

• Growth is an explicit strategic goal of food companies.

• Economies of scale stimulate growth and larger companies.

• Greater size means greater market power in the value chain and thus increased competitiveness.

• Increasing globalization and access to a larger global market benefits the large companies the most.

However, trends and drivers are also pulling the development in a different direction. The question is whether a new era of smaller, locally oriented niche food companies is emerging. An example could be the previously mentioned brewing industry, where a large number of microbreweries have completely changed the structural development calculated in terms of the number of companies and thus also in terms of average size.

Therefore, an even sharper distinction between two types of companies will probably emerge:

• A group of a few large internationally oriented companies with competitive advantages in terms of scale, volume, branding and marketing, efficiency and relatively low prices.

• A group of many small companies that are more locally oriented and specialize in unique and niche products.

Many small businesses will often be start-ups developed by entrepreneurs who will use new ideas or concepts as the platform for a new business. Therefore, the spirit of innovation and entrepreneurship, which seems to have received much greater attention in the past decade, will help to create this sharper distinction and polarization between small and large companies.

3.4 Concentration

In this context, increasing concentration involves large companies obtaining an increasing share of the total production, sales or market. Concentration is defined by the number of companies and their share of all companies.

The level of concentration can have a major impact on markets and market efficiency. A strong market concentration, in which a few companies have a large market share, may lead to imperfect markets, unbalanced market power and a lack of competition.

However, concentration in the form of a few large companies may also be the result of strong competition, where the most competitive companies with the best performance are able to grow. In this way, concentration is the result of competition and not necessarily a restriction or barrier to competition. Concentration is only a problem when the market power gained is abused, thereby harming the market, competitors and, in the long run, also potentially the company itself.

Several studies have analyzed concentration in various industries, countries and periods. Although different definitions, delimitations, methods of calculation, etc., make comparisons difficult, a number of common and general trends can still be identified.

Below, examples of the change in concentration in different countries, food industries and periods are presented. Starting with processing industries close to agriculture, Fig. 3.6 presents the change in concentration in the US livestock slaughter sector, 1980–2015.

Fig. 3.6

(Note The share of animals slaughtered by the four largest firms. Source Own presentation based on Deconinck [2021])

Market concentration in the US livestock slaughter sector, 1980–2015

The US livestock slaughter industry has witnessed a strong increase in concentration in recent decades. The share of steers and heifers slaughtered by the four largest firms increased from less than 40 percent in 1980 to almost 85 percent in 2015; for cows and bulls, this share grew from around 10 percent to almost 60 percent. Finally, the share of hogs slaughtered by the four largest firms increased from around 35 percent in 1980 to around 65 percent in 2015.

In the brewing industry, a long-term and clear trend toward increasing concentration can also be observed, cf. Fig. 3.7.

Fig. 3.7

(Source Own presentation based on Tremblay et al., 2005])

Concentration (Top 4 and HHI-index) for US macro brewers

As discussed in the section on consolidation, in recent decades, the brewing industry is segmented into macro and micro brewers, respectively. The number of micro brewers has increased significantly, while macro brewers still account for what is by far the largest share of total beer sales.

Figure 3.7 presents the change in concentration for macro brewers. As can be seen, there is a clear increase in concentration over a very long period. The market share of the four largest brewers increased from 44 percent in 1970 to 1998 percent in 2003.

Furthermore, on the global beer market, recent data reveals a significant increase in concentration. In 2013, the top 5 breweries represented more than 50 percent of the global market compared with 32 percent in 2003 (Boesler, 2014). In 2020, the five largest breweries were producing 61 percent of total global production, and the ten largest breweries in the world accounted for 74 percent of the market share in terms of production (BarthHaas, 2022).

Turning to Asia, Fig. 3.8 illustrates the change in concentration in Korea.

Fig. 3.8

(Note A chaebol is a large family-owned business conglomerate. Conglomerates account for the lion’s share of companies in Korea. Source Own presentation based on Wi [2018])

Share of 5 largest and 20 largest chaebols in South Korea: Sales and affiliates

The figure illustrates increasing concentration in South Korea. The sales of the top 20 largest companies (conglomerates) increased from 52 percent in 2007 to 60 percent in 2017 of total sales of the 500 largest companies. Furthermore, the share of affiliates of the biggest conglomerates increased significantly in the period.

In terms of the food and drink industry in South Korea, in recent years, concentration seems to have remained relatively stable, cf. Fig. 3.9.

Fig. 3.9

(Source Own calculations based on information from KOSIS (nd))

Market shares of the biggest company (Top 1) in South Korea in food and drink industries 2001–2020

Concentration in the alcoholic beverage manufacturing and in the non-alcoholic beverage, mineral water and ice manufacturing is quite high, as the biggest company in each sector in 2020 had 41 and 33 percent of the market share, respectively. Concentration is only increasing in alcoholic beverage manufacturing.

Concentration is quite stable in the dairy and animal feed industry. One explanation may be that these industries are quite regional with extensive local networks, which may make further concentration disadvantageous.

In addition, conglomerates account for a significant share of the Korean agri-food industry. Being a conglomerate, economies of scale for a company can be achieved by growth in several industries, while concentration within individual industries is not a necessity.

Finally, using Denmark as a European example, significant and increasing concentration can be observed in the agri-food industry, cf. Fig. 3.10.

Fig. 3.10

(Sources Own calculation and presentation based on annual reports from companies and from industry organizations)

Trend in concentration in the Danish agri-food industry

Figure 3.10 shows a marked increase in concentration for large parts of the period. The concentration and structural development are now almost complete, and will not increase significantly in the future. The reduced concentration in recent years is mainly due to the entry of a German slaughterhouse, which has become the second largest company and has undergone significant expansion.

The Fig. (3.10A) also shows that concentration often decreases immediately after an increase, i.e., after an M&A. This indicates that after an M&A, companies are unable to maintain the new common market share. The lost market share can be explained by problems with integration after an M&A, too strong a focus on mergers and an inadequate focus on the day-to-day management and business development as well as lack of support for M&A from owners, customers or suppliers.

The HHI-index (Fig. 3.10B) is high—and significantly higher than the typical limit for a warning of the potential for a lack of competition. However, the smaller the country or region, the higher the concentration. In a small geographic or demographic region, typically only a few companies will be present. Conversely, in large areas, more companies will be present and will also be able to grow and create economies of scale, even though the concentration rate is low.

3.5 Specialization and Conglomerates

The structural development of the food industry is not just a matter of size and number. It is also a question of the specialization and diversification of companies. As discussed in the previous chapter, agriculture is developing toward increased specialization driven by economies of scale. The food companies consist of much larger units, so the question is, does the same pressure and tendency for specialization exist in the food industry?

In this context, two types of companies are relevant: One is highly specialized and operates within a single, narrow business area. The core business is an essential part of the business strategy for which the aim is to exploit economies of scale and size within production and on the market. The large market size implies improved bargaining power in terms of both suppliers and customers.

The second type has very different (diversified) business segments called conglomerates, which have undergone a unique historical development and have been exposed to particular driving forces.

The importance of conglomerates varies significantly over time. From the 1950s to the 1970s, many companies followed a conglomerate and diversification strategy. The purpose was, in particular, to diversify the activities into several different business units in order to limit risk. Conglomerates were thus widespread in the 1960s. There was also a significant wave of mergers until about 1970, which was anchored in the creation of several major conglomerates, cf. Fig. 3.11.

Fig. 3.11

(Source Own presentation based on Cho and Chung [2022], Sisodiya [2004], UNCTAD [several issues])

Global waves in mergers since the beginning of the 1900s

The wave of conglomerate mergers was also driven by monopoly legislation and a general distrust of market-dominant corporations.

Since the 1970s, many conglomerates have been split up, and most companies have instead focused on creating competitive advantages within their core business. This restructuring thus created a subsequent wave in mergers for which the core business, focus and growth were the driving forces.

Since the 1990s, there has been a rapid growth in M&As, according to Cho and Chung (2022), but drivers other than conglomerate strategies have been dominant.

Today, conglomerates are generally considered to be outdated, and this is generally due to two factors: First, investors do not benefit from the fact that conglomerates are low risk because they can spread risk through diversifying their portfolios. Secondly, conglomerates are considered to have structural and managerial weaknesses.

There is no sharp distinction between specialized companies and conglomerates. The degree of specialization is fluid, and different business units in a conglomerate may well be linked and create synergistic effects. As was the case with cooperatives, the statistical basis is relatively weak when it comes to describing the global trends for conglomerates in the food industry. For this reason, it is useful to assess the underlying driving forces, advantages and disadvantages in order to assess future developments.

A number of possible disadvantages or risks connected with conglomerates can be identified:

• Conglomerates lead to risk diversification, but this does not add value for investors as they can spread their risk by managing their portfolios.

• The conglomerate structure per se is inefficient and unfocused as a company cannot be equally competitive in many business areas at the same time.

• Less profitable and less competitive parts of a conglomerate will attract unnecessary resources, which will prevent very profitable parts from providing the necessary resources and focus in terms of both management and capital.

• Increasing economies of scale force many companies to limit their areas of activity and portfolio in order to achieve the largest market share possible. In order to achieve a sufficiently high market share in an increasingly global market, it has been necessary to focus on and specialize in core areas.

• Finally, the structure, competitiveness and potential profit of conglomerates will often be unclear. Investors may have difficulty assessing the real value due to the complex structure, and perhaps one specialized analyst may not have the ability to review all business areas in a conglomerate. This uncertainty and complexity thus results in poor pricing.

For a number of reasons, companies follow a conglomerate strategy by developing entirely new business areas. Therefore, a conglomerate strategy may encompass a number of opportunities and advantages under the following conditions:

• Moving from Red Ocean to Blue Ocean: If the market is characterized by overcapacity, fierce competition, low growth and profit, and if new competitors have entered the market with unique products or if the company’s products are generally technologically obsolete, it may be advantageous to shift focus and develop new business areas. The existing activities—in whole or in part—can continue temporarily and be cash cows for the company.

• If the company has unique general competencies (management, organization, IT, brands, technology, etc.) that can be effectively utilized across business units. Access to big data is a competence and competitive advantage from which conglomerates may benefit. The more data that can be collected, the more uses the company has for it. Consequently, a new generation of conglomerates is data-focused rather than product-focused. Recent examples such as Apply, Amazon and Sony illustrate this cross-industry development.

• Management may be another important competence. Investors will often assess a business case based on the people rather than the project itself. If the management—or a single individual—has managed to implement a project successfully, attracting investors and resources for other projects will be easier. In these cases, the business area is not so decisive—core business or not—because the investors have confidence in the individuals behind the projects.

• If access to internal financing for growth is a very limiting factor, the formation of a conglomerate may be advantageous or necessary. The relative success and importance of conglomerates in Asia can be explained by this factor, cf. Hansen (2018), Vestring and Felenbok (2017). Although such financial drivers behind the development in Asia are now weaker, well-established conglomerates are unlikely to be significantly reduced in Asia.

The main drivers, advantages and disadvantages are now identified. Drivers are structural and thus static. What will be decisive in the future is whether the drivers will favor or limit specialized companies and conglomerates.

In general, the wave of conglomerate mergers that took place in the previous century was driven by factors that probably will not be important in the near future. As long as perfect—or almost perfect—markets exist, conglomerates will in general not be more competitive than specialized companies.

However, new cross-industry technology to drive a new semi-conglomerate trend or wave is likely, although as far as the food industry is concerned, such a driver will not be a game changer if we exclude very downstream activities such as food retail and food service industries.

Food companies that are strictly based on meat, dairy, fish or eggs, are now faced with high market growth in plant-based food. Meat replacement products, vegan food or vegetarian food may not be a segment within the core business of the companies, and competitive strength may be lacking. Supply chain, processing technology, knowhow, etc., may be quite different in the plant-based food industry. However, the traditional animal food-based companies seem to be increasingly focusing on these plant-based food segments. This change which involves the inclusion of a new and broader business segment means more diversification and, to some extent, a kind of conglomerate strategy.

However, the overall trend for food companies will be to focus on the core business, growth, market shares and specialization as a means to increasing profit.

3.6 Global Mergers and Acquisitions (M&As)

In the intersection between structural development, foreign direct investments, M&As and globalization, a trend is emerging in that global M&As are becoming increasingly important.

Global M&As include the sale of companies in a host economy to foreign multinational enterprises (MNEs), but they do not include the sale of foreign affiliates (already owned by foreign MNEs) to other foreign MNEs. Divestments (the sale of foreign affiliates to domestic firms) are subtracted from the value, so in some years the value of global M&As is negative.

In periods of strong structural development, consolidation and globalization, it is to be expected that global M&As will also grow. As Fig. 3.12 shows, the value of global M&As has increased significantly in recent decades, and mergers in the food industry (food, beverages and tobacco) have developed in much the same way as the manufacturing industry as a whole.

Fig. 3.12

(Note Five-year moving average. Source Own presentation based on UNCTAD [2023])

Value of cross-border M&A purchases in “manufacturing, total” and “food, beverages and tobacco”, 1990–2021

As the figure illustrates, the food industry and total manufacturing industry have followed a similar development over time, which is an indication that it is being driven by the same factors. Financial crises, pandemics and geopolitical instability have reduced both the total number and value of global M&As. In general, more than 30 drivers behind M&As and the growth of food companies have been identified, cf. Hansen (2013).

In the studied period, global M&As in particular increased in the service industries, especially within finance and insurance. Global M&As in the food industry account for 15 percent of global M&As in the manufacturing industry and 5 percent of global M&As in all industries including service industries. The share has been increasing since 2012.

The relatively high and increasing share of global M&As in the food industry is remarkable considering the fact that the food industry is often rooted locally. However, the beverages and tobacco industry, which is also included, has historically been more globally oriented, and large M&As in these industries can explain the increase in the past decade.

An increase in M&As will probably continue and can be identified as a megatrend, but whether this does in fact transpire will depend on the conditions for globalization including any geopolitical developments. M&As tend to slow down during times of uncertainty or market volatility. However, technological development and improved infrastructure can also become drivers for future global M&As. Furthermore, access to markets, a stable legal framework, etc., are important factors for growth in global M&As.

In a world of economic, political and commercial stability, companies will often seek to grow to take advantage of economies of scale via international expansion. Global M&As can be an attractive way of exploiting these advantages, but because the risks are usually relatively high and such a move would be irreversible, there must be a certain degree of certainty connected with any potential M&A.

3.7 Farmer Cooperatives

Cooperatives play an important role in the food industry in many parts of the world. Cooperatives differ from other companies as the owners and users are one and the same. In the food industry, cooperatives are especially prominent among dairies, slaughterhouses, trading companies and suppliers. Although cooperatives are based on specific principles, and although there are fundamental and structural differences between cooperatives and capital-owned companies, cooperatives are primarily business-oriented companies, where the goal is to create profit in the short and long term for the owners—just like with other types of company. However, cooperatives may face special challenges in the future, e.g., when it comes to the globalization of markets.

Statistical mapping of the global development, significance and performance of farmer-owned cooperatives is lacking. The International Cooperative Alliance (ICA), which represents more than 1 billion cooperative members and 3 million cooperatives worldwide, says that “There is no global-level comprehensive database of cooperative statistics because statistical offices analyze cooperatives differently from country to country. Therefore, it is difficult to get a complete picture” (ICA, n.d.). This fact makes it more difficult to identify megatrends, so additional approaches must be considered.

The assumption is that there are driving forces or conditions that stimulate the establishment of cooperatives. Therefore, in order to understand the performance of farmer-owned cooperatives—historically and in the future—the driving forces behind their formation and development must be identified.

The extent to which cooperatives can survive and grow nationally or internationally depends on the following market conditions which can make it more or less advantageous to establish—or maintain—cooperatives (Hansen, 2020):

• 1. No or Only Weak Market Power in Existing Supplier Associations, Etc.

  Farmers can often achieve a degree of market power by establishing supplier and producer associations, which have bargaining power over their supply and processing companies. In these situations, the benefits of establishing a cooperative are fewer. Conversely, the absence of such supplier and producer associations increases the incentive to establish farmer-owned cooperatives.

• 2. Insufficient Competition Up- or Downstream

  Fundamentally, cooperatives are created because a group of farmers needs to solve an important market problem. If there is insufficient competition up- or downstream, the market will be imperfect, and the farmers’ market power will be adversely affected. Therefore, there is an incentive to establish cooperatives in these industries.

• 3. Farmers’ Professional, Democratic and Social Skills

  The establishment, organization and operation of a cooperative implies that the members have the appropriate professional, democratic and social skills. Farmers need to understand and respect the common rules and have the ability to cooperate and recognize mutual benefits.

• 4. Delivery Guarantee Can Be Crucial for Farmers

  When agricultural products are sold on a daily basis, or almost daily, an efficient sales organization and the right to deliver is crucial for the farmers. For dairy farmers, it is important that the milk can be delivered every day, while it is easier for grain producers to, e.g., store grain and spend time evaluating alternative sales opportunities. Therefore, the right to deliver—and thus also the value of being a member of a cooperative—is more important in some industries than in others.

• 5. Legislation Promotes Cooperative Ownership

  Legislation may be a significant driver for the establishment of cooperatives in several areas. In a number of cases, the government supports the formation and development of cooperatives through special support schemes, exemptions or other kinds of legislation.

• 6. Financial Structure and Needs

  The financial situation of cooperatives, including the cooperative’s capital needs relative to the number of members, also has an impact on the significance of cooperatives. If processing activities are highly capital intensive, and if there are very few members, the capital requirement per member will be so large that the cooperative model will be unsuitable—especially if there is a start-up phase.

• 7. Position in the Vertical Value Chain

  Usually, farmers will establish cooperatives in industries close to the agricultural production in the vertical value chain. Downstream activities very close to consumers typically have lower cooperative market shares (Hansen, 2013). The reason is probably that the involvement of farmers in cooperatives in industries close to agricultural production often gives those farmers a more direct and transparent advantage.

The drivers can thus be both internal and external in relation to the cooperatives: The cooperative structure in itself may be more or less advantageous in the individual cases. In addition, a number of external factors such as competition, market power and legislation may be key drivers or barriers to the establishment and development of cooperatives.

It is evident that the driving forces behind the formation and development of cooperatives may be more or less present in different countries—and thus the expediency and the prevalence of cooperatives may vary. It also means that a low degree of cooperative organization per se is not negative, as the right drivers and conditions must be present to make cooperatives useful and successful. In other words, cooperative organization is not a goal in itself. It is a means of ensuring a more efficient value chain, and thus improved earnings for the cooperative members, i.e., the farmers.

Cooperatives have a number of advantages and disadvantages in relation to capital-owned companies. This means that cooperatives are not superior in all respects, and the net advantages depend on the specific situations and market conditions. The development of these advantages and disadvantages will also affect the development of the cooperatives—historically and in the future: if a possible disadvantage or a possible problematic issue, e.g., globalization becomes more important, it can weaken the position of the cooperatives. Conversely, an increasing focus on local supply, traceability and short value chains can strengthen cooperatives' market shares.

A number of significant advantages and disadvantages of cooperatives compared to capital-owned companies are identified in Table 3.1.

Table 3.1 Cooperatives: Significant advantages and disadvantages compared to capital-owned companies

Table 3.1 emphasizes the fact that substantial advantages and disadvantages are connected to the cooperative model. Cooperatives can thus be advantageous in situations in which the special benefits are important and can be utilized. However, there may also be situations in which the disadvantages are too crucial and/or the benefits are less important.

Efficient value chains, including elements such as traceability, security of supply and low food loss and waste, are expected to be of great importance in the future. These factors will be even more important when the pressure on the markets increases and when the climate policy agenda is further prioritized. Such factors will be available and present in cooperatives, and they will thus have a relative competitive advantage in these areas.

Poor access to capital and being tied to members' deliveries are likely to be even more important disadvantages in the future. The demand for capital increases when the structural development in the food industry continues in the direction of increasingly large companies. Increasing globalization can also both increase the need for capital for foreign direct investments and necessitate access to supplies from non-members, which will be detrimental to cooperatives.

Therefore, the potential positive and negative impacts on the cooperatives can influence their future development and there is no clear direction.

As mentioned previously, statistical mapping of the global development in farmer-owned cooperatives is non-existent, which makes it difficult to identify megatrends. However, country-based cases and cross-section figures may be used to identify some megatrends. Below, the focus is specifically on the prevalence and importance of cooperatives, given that it is assumed that a number of megatrends for the food industry also apply to cooperatives.

The European Commission has previously published market shares for agricultural products sold through cooperatives. Data for 10 important products and product groups in the years 1972–1997 are available. More recent statistics have not been published or are not available. Based on these data, Fig. 3.13 presents a calculated weighted average of the market shares of farmer cooperatives in the EU.

Fig. 3.13

(Note Weighted average for 10 agricultural products for the EU countries where data is available. Three-year moving average. Source Own calculations and presentation based on European Commission [several issues])

Market shares of farmer cooperatives in the EU 1972–1997

The figure shows a fairly clear trend toward increasing market shares for cooperatives in the period shown. However, it should be noted that the extent of cooperative organization varies considerably from product to product—and from country to country—in the EU.

Differences in the cooperatives' market shares and importance between countries in the EU show a relatively clear pattern: Cooperatives have the greatest prevalence in countries with the highest GDP per capita, cf. Fig. 3.14.

Fig. 3.14

(Note Multiple memberships. Part-time or hobby farmers can also be members of cooperatives. Source Own presentation based on Cogeca [2015] and statistical data from World Bank)

Memberships of farmer cooperatives per farm holding as a function of GDP per capita—among EU countries (2014)

The figure shows a relatively clear trend: Cooperatives are less common in the poorest countries, while their significance increases concurrently with economic growth. The figure shows a snapshot based on cross-sectional data, so one must be cautious about drawing very firm conclusions regarding that development over time. However, a dynamic interpretation and even causality can be justified: Often, the establishment of cooperatives requires a certain level of infrastructure, education and organization—conditions which are most prevalent in the most developed countries.

A few studies have analyzed the long-term development in market shares (and, therefore, also the development in competitiveness) of farmer cooperatives, cf. Fig. 3.15.

Fig. 3.15

(Source Own presentation and calculations based on annual reports, Wadsworth [2019] and USDA [2005])

Examples of the development in cooperatives’ market shares. Denmark: Share of milk intake by cooperatives. USA: Cooperative member milk volume as a percentage of volume sold to plants and dealers. After 2007: Cooperative share of US total.

Figure 3.15 presents long-term market shares for milk in the USA and Denmark and for several agricultural products in Denmark. The figures indicate a long-term increasing trend.

Existing farmer cooperatives will often have embedded competitive advantages, which will ensure survival in the future and probably also growth. Cooperatives can grow through increasing market shares (organic growth), M&As and diversification. However, establishing a new major cooperative from scratch may now be much more difficult. Limited access to capital combined with a decreasing number of farmers is making it difficult to attract sufficient capital.

Furthermore, even though cooperatives are often economically robust, there are cases in which cooperatives suffer economically and are outcompeted or acquired by investor-owned companies. In such cases, the market shares of cooperatives may fall significantly and irreversibly.

All things considered, both positive and negative factors will affect the future development of cooperatives, and no clear direction is evident. Cooperatives will also be present in the future due to competitive strengths, but weaknesses, cf. Table 3.1, will also limit future growth.

3.8 Offshoring and Reshoring

Offshoring is the process of relocating domestic business operations (production or services) to a foreign country (usually a developing nation) with the intention of reducing the cost of doing business. The specific reasons for locating operations outside a corporation’s home country are lower labor costs, lower tax, more lenient environmental regulations, less stringent labor regulations and close proximity to raw materials.

Reshoring (also sometimes referred to as backshoring, onshoring, rightshoring or inshoring) is the opposite of offshoring. Reshoring means that companies move their production and processing back to the home country, i.e., to the country where the company was first established. So, if a company has moved some or all of its production operations overseas (offshoring), reshoring is the process of bringing some or all of it back again.

Nearshoring means that a company moves its production and manufacturing to another country, but it is close to the home country.

Figure 3.16 shows a simplified illustration of offshoring.

Fig. 3.16

(Source Own presentation)

Domestic value chain from farm-to-fork (upper chain) with offshoring

The principle is that part of the value chain is moved abroad. After further processing abroad, the products return to the original value chain. In some cases, the goods are shipped directly from the offshoring country to the final customer.

The influence of globalization on the agricultural and food sector and on agricultural and food markets is relatively small. This is because, among others, transportation is often complicated and expensive due to low durability, and that political objectives favor domestic production. Nevertheless, there are significant examples of both offshoring and reshoring when it comes to the agri- and food industry:

The labor-intensive part of meat processing has, in some cases, been relocated to low-cost countries. This applies to Europe and other continents, but there are also examples of meat and fish products from Europe undergoing further processing in Asia after which they are either returned to the original producers or sent to the final customer.

The sorting and final processing of intestines (from pigs, cattle and sheep) takes place, to a large extent, in China, which today is an international center for this industry. The raw materials come from both domestic and foreign producers. In this case, relatively low wages, good infrastructure, economies of scale and standardized processing have been important drivers behind the creation of this global intestine cluster in China.

There are also examples of the offshoring of production and processing to be found in the horticulture sector. The production of cuttings is relatively labor intensive and, therefore, parts of this production have been moved from, among other places, Europe to countries in Africa and Asia with low wages and low or no energy costs.

However, according to EY (2015), the industries that are most likely to reshore are those that are capital intensive with complex supply chains and are exposed to rapidly changing consumer markets. The food industry (dairy, meat, bakery, processed foods, etc.) is belongs to the group of industries with the lowest propensity to reshore.

The distinction between offshoring, reshoring, nearshoring, foreign direct investment and international trade is not clear, and there are many borderline cases in which only a small amount of processing or finishing occurs outside the home country. For this reason, it can be difficult to document any statistical trend. However, some studies have identified signs of an increasing degree of reshoring:

For example, Dikler (2021) asserts that, in recent years, reshoring has definitely been increasing in developed countries, but that the effects of reshoring on national economies are still much debated.

The Reshoring Initiative® is a private non-profit organization in the USA that strives to bring manufacturing jobs back to the USA or keep existing jobs in the country. Since January 2010, approximately 250.000 manufacturing jobs have been brought to the USA from offshore. Currently, the inflow of jobs is roughly equal to the outflow, but according to Reshoring Initiative® (n.d.a), there are still approximately four million potentially recoverable jobs offshore. The reversal of the offshoring trend and increase in reshoring is driven by rapidly rising Chinese wages and by companies realizing that producing in or near the market has benefits in terms of the balance sheet, risk and strategy, which often outweigh the higher wage costs.

Based on job announcements, Reshoring Initiative® (n.d.b) estimates job creation, which is used to illustrate the trend in reshoring. While foreign direct investments and reshoring develop almost in parallel over time, reshoring increased sharply in 2020 due to the Covid-19 pandemic, but the trend continued into 2022, cf. Fig. 3.17.

Fig. 3.17

(Source Own reproduction based on Reshoring Initiative® [n.d.b])

Job announcements per year, reshoring vs. FDI, 2010–2022

As can be seen, the figure confirms that an increase in reshoring does not necessarily mean that offshoring has been reduced: Offshoring may continue, perhaps at a lower growth rate, but reshoring may increase when it is advantageous. Therefore, the trend is that offshoring is decreasing while the relative importance of reshoring is increasing.

The future importance of reshoring depends on the factors driving the development. If the positive driving forces become more important in the future, reshoring will, in general, increase.

A number of drivers behind the trend toward more reshoring can be identified:

Although offshoring often reduces the labor costs of a food company, several factors make reshoring appealing.

• New robotic technology can replace labor, which means that low labor costs will no longer be such an important competitive parameter. The benefits of offshoring are diminishing while reshoring is becoming more attractive.

• With significant growth and increasing incomes in Asia, in particular, production costs are also increasing, including labor costs, which means that the labor cost gap between developed and less developed countries is narrowing. For some industries, the cost gap has narrowed to such an extent that the benefits of offshoring have more or less disappeared. As an example, Fig. 3.18 shows the change in the average annual wage in China and the USA, 2010–2020.

  Fig. 3.18

  

  (Source Own presentation based on statistical data from World Bank)

  Change in average annual wage in China and the USA

  Although wage increases in China are much stronger than in the USA, there is still a significant gap in labor costs between the countries. In total, labor costs in China are approx. 25 percent of the level in the USA—and even lower in manufacturing and in agriculture—but the gap is narrowed significantly in recent years (Fig. 3.19).

  Fig. 3.19

  

  (Note Average monthly earnings per employee—in US Dollars. Source Own presentation based on statistical data from ILO)

  Labor cost gap between China and the USA 2012–2020 in selected industries

  The USA and China are relevant examples as both countries are important as offshoring country and host country, respectively. At the same time, studies indicate that China is the country where the USA had the most reshoring activities in the years 2010–2020 (Reshoring Initiative®, n.d.c). Although several factors can explain and justify reshoring, the figure indicates that the difference in labor costs is one of the factors behind less offshoring and more reshoring between the USA and China.

• The Covid-19 pandemic exposes the vulnerability of offshoring to remote countries. Although it is likely to be a temporary phenomenon, the pandemic demonstrated that international infrastructure and logistics can be disabled or significantly weakened. At the same time, it also became clear that pandemics are difficult to contain and that new future pandemics are very likely. Therefore, reshoring can help protect supply chains from highly disruptive pandemics in the future.

• Geopolitical uncertainty increases as a result of conflicts between superpowers and the greater role of China and Russia on the international stage. This increasing geopolitical uncertainty implies vulnerability and greater risk for companies with overseas operations. Dikler (2021) refers to political instability as one of several disadvantages connected to offshoring.

• Securing the benefits derived from locating R&D and production together in the host country can be achieved via reshoring. Offshoring often involves splitting up parts of the value chain, whereby development and production activities are separated geographically, which often results in more difficult or weaker coordination between the links in the value chain. In times of more volatile market conditions, weaker coordination and market adaptation can be an increasingly harmful competitive disadvantage.

• Lower transaction costs, leaner workflows, just-in-time systems and strengthened supply chain management are becoming increasingly important in international competition. Reshoring means that most links in the supply chain will be located in the same time zone, which means they will be closer to each other and easier to monitor. At the same time, material standards, quality control issues, etc., will be easier to control.

• An increasing focus on the climate impact of business activities, higher transport costs and increasing demand for traceability in the food sector, in particular, will also drive reshoring. Shorter and more direct value chains can reduce energy consumption and thus the climate impact.

• Offshoring involves a risk of losing intellectual property rights, which seems to be a growing problem. Reshoring—and ultimately insourcing—reduces the risk of losing intellectual property rights.

• Political and economic measures to increase reshoring will also have an effect. Several governments want to boost the domestic economy by pulling jobs, assets and resources back home. Such initiatives strengthen and increase reshoring and limit offshoring. However, this political interest in reshoring also risks leading to a conscious or unconscious overestimation of the economic benefits of reshoring.

3.9 Shareholder and Stakeholder Focus

In business strategies, two different management theories are prevalent: The shareholder approach and the stakeholder approach.

A shareholder is a co-owner of the company, typically an institutional investor or other small or large investors. A member or owner of a cooperative is also a shareholder in this context.

The only aim of the shareholder approach is to maximize profit for the shareholders in the short and/or long run. Shareholder value is the benefit delivered to the owners of a corporation as a result of management leading to an increase in profit and value for the owners.

A stakeholder is any individual, group, institution or party that has an interest in an organization and the outcomes of its actions. Stakeholders have different interests, and companies often face trade-offs when trying to accommodate all of them.

Stakeholders can be classified in many ways: They can be grouped according to different criteria such as internal and external groups, primary and secondary groups as well as groups in order of power and interest.

Important stakeholders may be:

• Employees

• Customers

• Shareholders

• Lenders

• NGOs

• Suppliers

• Communities

• Governments

Stakeholders have an interest in the performance of a company for reasons other than profit maximization. Therefore, stakeholder value is the value delivered to all the company’s stakeholders, and it includes the optimum level of return for all stakeholders in an organization, which is a broader concept than in the shareholder approach.

There is an ongoing discussion about whether a shareholder or stakeholder approach is the most common and widespread, and whether the importance of the two models is changing over time. One of the reasons for this discussion is, of course, that it is very difficult—or even impossible—to precisely determine the significance of the two models. However, based on literature studies, discussions, business objectives, etc., trends and waves in the prevalence of the two approaches can be outlined, cf. Fig. 3.20.

Fig. 3.20

(Source Own presentation)

Shareholder and stakeholder focus: Outlined waves and drivers

After WWII, companies were expected to take national interests into account and help solve socio-economic problems in parallel with the objective of profit maximization.

However, the economic shocks of the 1970s, the breakdown of Bretton Woods (an international monetary agreement), oil crises, inflation, etc., created an unstable environment. Therefore, the shareholder approach became dominant, and Milton Friedman—the American economist, who was awarded the Nobel Memorial Prize in Economics in 1976 was an outspoken supporter of the shareholder value model. He argued that the role of corporations is to maximize profit and to serve the owners of the company. Any interest in social responsibility, such as environmental protection or improved workers’ rights, should not be pursued at the expense of the company (Friedman, 1970).

The shareholder model dominated for many years as a way of increasing competitiveness. Furthermore, the global spread of the academic disciplines of economics contributed to its dominance (Bottenberg et al., 2017).

However, the financial crisis that started in 2008 raised questions about the validity of the shareholder model as well as the legitimacy of the institutions that drove the development. Companies were accused of abusing their power, and a misalignment between corporate and societal goals created mistrust in the banking and financial sector, cf. Mukunda (2014).

Also, grassroots movements began to encourage companies to think about their triple bottom line, profit, people and the planet (Marquis, 2019). Companies were asked to take into account people and the planet along with their profits.

The new stakeholder approach was also supported by Professor F. E. Freeman, who was among the first to describe the theory, see for example Freeman (2010).

The desire to think about more than just the shareholder is a trend that has been growing since the 2008 financial crisis.

Not only the financial crisis but also several other factors have driven and strengthened the stakeholder approach. The Covid-19 pandemic and geopolitical tensions have probably also motivated business leaders to place more emphasis on the stakeholder approach. As shown in Fig. 3.20, the climate crisis, the UN sustainability goals, resource scarcity, etc., have also contributed to changing the agenda.

A significant milestone in a new stakeholder wave emerged in 2019, when the CEOs of nearly 200 companies announced that shareholder value was no longer their main objective. For the past 20 years, the Business Roundtable, a non-profit organization consisting of the CEOs of US companies has had the view that maximizing shareholder value should be the principal goal of a corporation. However, in August 2019, The Business Roundtable updated its statement to reflect the belief that there was a “fundamental commitment to all of our stakeholders”, cf. Business Roundtable (2019).

Assuming that this is a new long-term wave and not just a short-term bubble, a dominant stakeholder approach will set a new framework for the behavior and development of food businesses.