Food Value Chains

Abstract

The food value chain is a vertical axis connecting or coordinating supplying, producing, processing and selling the food from farm to table. This chapter describes the structure and integration in the value chain and the respective position of companies in the value chain and their market power. The concepts of value chain and megatrends are connected. Value chains develop and change—often influenced by or as a consequence of megatrends. The balance of market and bargaining power in the value chain shifts: The forms of integration in the value chain develop and change. Furthermore, global value chains are becoming more important. A significant structural development of the retail industry is taking place in terms of increasing consolidation, concentration and globalization.

4.1 Introduction

Value chains in the agricultural and food industry are important as they connect the links from farm to table. Since the food value chain often involves living organisms or perishable products, efficiency is essential.

The concept of the food value chain is not clearly defined. In the following, the food value chain is defined as the network of stakeholders involved in supplying, producing, processing, and selling the food from farm to table.

The from farm to table concept will normally include these essential links in the value chain:

• Supply of inputs to agriculture and the entire value chain including feed, machinery, equipment, capital, R&D, etc.

• Agriculture (farms)

• Processing and refinement

• Wholesale

• Retail and food service

• Consumers

The food value chain is thus a vertical axis. Outside this axis, but in a well-defined sphere, other stakeholders are located including the public authorities, NGOs, etc. Sometimes, several stakeholders outside the vertical value chain are also included, but then it is more of an industrial cluster, which is a broader and slightly different concept than a value chain.

The concepts of value chain and megatrends are connected. Value chains develop and change—often influenced by or as a consequence of megatrends:

• The balance of market and bargaining power in the value chain shifts.

• The controlling and dominant parts of the value chain move vertically (The integrator or the dominant part of the value chain may move from, e.g., farmers to industry).

• The forms of integration in the value chain develop and change.

• The value chains are becoming globalized, and global value chains are becoming more important.

• A significant structural development in the value chain is taking place but at varying speeds and extents in the links.

• Both constant megatrends and cyclical processes (waves) can be identified.

The vertical integration in the food value chains means that the links are coordinated and made more efficient.

The integration or coordination can be either backward or forward.

Backward integration is typical when a food industry is involved in the supplying industries, including agricultural production. There are several examples of food companies entering into long-term production contracts with farmers, whereby the food companies set the conditions for agricultural production. There are also several examples of food companies buying farms around the world in order to ensure deliveries of agricultural raw materials.

If integration takes place with a business unit further down the value chain (closer to the consumer), it is called forward integration. Forward integration by the agricultural industry into the food-processing industry via farmer cooperatives and producer organizations is very widespread. The important drivers behind this development are stronger bargaining power and lower transaction costs.

Forward integration is also called downstream integration, and backward integration is called upstream integration. The opposite of vertical integration is horizontal integration, which includes coordination, acquisitions, mergers or alliances at the same stage of the value chain.

Figure 4.1 illustrates a relatively simple value chain in the agricultural and food sectors with examples of vertical and horizontal integration. A value chain can be expanded with many more links, flows and connections.

Fig. 4.1

(Source Own production)

Examples of vertical and horizontal integration in the agricultural and food value chain

Vertical integration means that a company obtains more control over its value chain. The degree of control varies between cases and ranges from short-term sales contracts to full and integrated ownership, cf. Fig. 4.2.

Fig. 4.2

(Source Own production)

Types and levels of vertical integration

The ranking is not unambiguous and to a certain extent arbitrary as, e.g., alliances and long-term sales and production contracts may have a very high degree of integration depending on the specific conditions in the contract.

Similarly, the degree of vertical integration in cooperatives varies significantly between cases.

4.2 Integrators in the Value Chain

As discussed in Sect. 4.1, the controlling and dominant parts of the value chain move vertically. This shift in power manifests itself in the fact that the dominant or integral parts of the value chain can move from, e.g., farmers to processing companies. It is difficult to show empirically which link is the most integral in a value chain, but cases and estimates of economic performance can be used to indicate a development.

Figure 4.3 shows four value chains with different integrated parts.

Fig. 4.3

(Source Own presentation)

Vertical integration with different links that control the integration

The figure shows value chains (from farm to table) as well as the leading integrators and drivers behind the integration.

The first value chain in Fig. 4.3 is a “traditional” farmer-driven cooperative in which farmers move both forward and backward in the food value chain. As discussed in Sect. 3.7, this form of value chain ownership has worked for many decades, and it appears to continue to be economically, marketwise and organizationally justified.

The next value chain is called supply industry forward integration. Several examples show that large supply companies, particularly within the feed supply industry, are moving forward in the value chain. The supply companies integrate forward into agricultural production via contracts and concept breeding and integrate into processing and refinement of agricultural goods. This is often driven by the fact that mark-ups increase as a company moves downstream toward the consumer link, especially compared to a trading company that buys and sells commodities.

The third value chain, enterprise backward integration, has received more attention recently because ownership, coordination and integration in the value chain is increasingly taking place at the processing and/or refinement stage, i.e., the “integrator model”. In this model, the processing link (typically a slaughterhouse or dairy) is the central integrator in the value chain. The integrator moves backward in the value chain by, e.g., purchasing farms, offering contract production to the farmers, purchasing production inputs (animals, buildings, machines), financing inputs (feed, etc.), deciding production methods, ensuring farm-to-table coordination and traceability, etc.

Spain is often highlighted as a country with widespread use of the integrator model in the pig sector. The Spanish pig sector is thus organized significantly differently than it is in the rest of the EU. In Catalonia, 63 percent of all farms are in integrated value chains—some value chains are from feed to slaughter, while others only include feed and pig production (Eurostat, 2016; ter Beek, 2017).

Interest in the Spanish integrator model is due to the fact that in recent decades Spain in particular has experienced marked progress in the pig industry in the form of strong growth in both the production and export of pork. Today Spain is among the EU's largest producers and exporters of pork, and the integrator model is considered to be a significant explanation for the success.

It seems that the most important reasons (drivers) for the positive development in the Spanish pig industry are:

• Industry concentration: Economies of scale and market power have made large entities more competitive throughout the value chain.

• Financial crisis: The small farms were not sufficiently competitive and, therefore, suppliers integrated forward to farmers in the value chain sometimes to secure the debts owed to them by farmers

• Increasing food security: Vertical integration became more necessary to control and strengthen food security.

In recent decades, the integrator model has become increasingly widespread in parallel with the emergence of more efficient feed factories. The integrator model is today considered a pioneer in the Spanish pig sector.

The fourth and final value chain, retail backward integration, is discussed more in detail in Sect. 4.9.

4.3 Open Markets

As discussed in Sect. 4.1, open market trade involves the least vertical integration in the value chain. However, several factors will support or stimulate greater vertical integration and less open market trade including:

• Lower transaction costs

• Improved traceability

• Improved security of supply and demand and thus improved capacity utilization

• Greater price predictability

• Reduced risk of the spread of infectious livestock diseases

The tendency toward less open market trade can be observed in several examples. Figure 4.4 illustrates the development of the American market for hogs during a period of significant change in market integration.

Fig. 4.4

(Source Own presentation based on Martinez [1999, 2007a, 2007b])

Share of hogs delivered for processing via long-term contracts and vertical integration

Long-term marketing contracts between large packers and large hog producer-integrators have replaced open market transactions. From 1970 to 1980, around 98 percent of hogs were received by packers from open markets, but after 1980, the share decreased significantly.

In 2009, 8.1 percent of all hogs were sold on open markets (spot markets), while 26 percent were owned and slaughtered by the same packer (Grimes & Plain, 2009).

Figure 4.5, which presents the share of open market sales of cattle and the share of cooperative cattle slaughters in Denmark, reveals a similar pattern.

Fig. 4.5

(Note The share of open market: Annual sales on open markets as a share of total stocks of cattle. Cooperative: Intake (number) of cattle to farmer-owned cooperative slaughterhouses as a share of total intake. Source Own calculations based on statistical data from Danish Agriculture & Food Council and Statistics Denmark)

Share of open market sales of cattle and share of cooperative cattle slaughters in Denmark

The figures clearly illustrate that the role of open markets has been steadily declining and is now insignificant, while farmer-owned cooperatives have been experiencing an increase in market share.

4.4 Retail Market Power

Food companies and retail companies are two major players in the value chain—in the farm-to-table chain. In recent decades, the trend has been for the retail companies to become increasingly large, global and concentrated, and the retail industry has thereby gained greater market power. To a certain extent, this development has come at the expense of the food companies, which have not experienced the same rate of development.

A comparison of the power of balance between the large international food industry companies and the large retail chains thus suggests that a shift in power has taken place.

Firstly, Fig. 4.6 illustrates the change in the distribution of power in the food value chain from the period before the Second World War, through the 1990s and up to the present.

Fig. 4.6

(Note The arrows show for each link in the value chain the development from before WW2. Market power is illustrated schematically and qualitatively. Source Own presentation)

Market power in the food value chain—schematic diagram illustrating the change in the power structure

In the period before World War II, the wholesalers had the strongest position and power because they controlled the information about consumer demand, qualitative and quantitative needs and the logistics of the grocery suppliers. The retail trade industry consisted of many small independent shops which were poorly organized. The role of retail was primarily to distribute the manufacturers' goods, which included very few branded products.

After the Second World War, the food companies took over the role of wholesalers and became distributors directly supplying the store chain, thereby bypassing the wholesale link. By improving the efficiency of their marketing, food producers could avoid the expensive wholesale link. At the same time, manufacturers managed to build consumer preferences through increased demand for processed products.

In the 1990s, the balance of power shifted in favor of the retail trade. The important factors were the retail industry's close proximity to consumers, advantages connected to the introduction of private labels and information technology and increasing concentration and internationalization. These factors together meant that the retail industry became a dominant link in the chain from farm to table. In particular, the information about the customers and the market, which the retail chains have due to their position in the value chain, is considered a significant source of market power, cf. for example Grievink et al. (2003).

Also in the 1990s, food service in the form of catering, restaurants, takeaway, ready meals, canteens, etc., gained in importance as a result of changing consumer habits and increasing welfare and purchasing power. A declining proportion of food was bought in supermarkets, but the retail trade was able to protect their power through either growth and structural development or by developing in-store food services.

Since the beginning of the 1990s, further shifts which have further strengthened the position and market strength of the retail industry vs. the food companies have taken place.

The revenue of the five largest retail companies has grown significantly and is now greater than the revenue of the five largest food companies. Indeed, today it is almost twice as large, cf. Fig. 4.7.

Fig. 4.7

(Source Own presentation based on Deloitte [several issues], Grievink [2003] and annual reports from companies and own calculations)

Total revenue of five largest retail companies and food companies

Size is an important competitive parameter: Increasing size leads to economies of scale and greater bargaining power and thus increased competitiveness.

As well as the increasing size of the retail companies, their use of private labels, backward integration and globalization helped the retail industry strengthen its market power and shift the balance of power in its favor.

Looking forward, there are some unanswered questions: Who will have the central role in the future online food service market? Will the retail trade, the hotel and restaurant segment or the food industry play an important role, or will Amazon, Alibaba or the like become the preferred supplier?

4.5 Brands and Private Labels

As discussed in the previous section, market power in the value chain is changing. In many cases, the industry is gaining more bargaining power over its suppliers, which is often the food industry. Increased use of private labels is both a means of strengthening retail's market power and a very visible manifestation of this change in the balance of power.

Firstly, it is necessary to define the two concepts, private labels and brands:

• Private labels (also known as store brands, own labels or distributor-owned brands) are the supermarkets’ own brands, which bear the chain’s name, or a name owned by the chain. The producer’s name does not appear or, if it does, it is very discrete. For producers of private labels, marketing costs are low, which means they can offer the products at a price that is lower than the price of a brand name equivalent. Often, the quality is not the highest, although there is a general tendency for the gap between the quality and price of brands and private labels to narrow. The retail industry hopes to build loyalty to their chain by offering private labels.

• Brands are company labels which retain their identity throughout the process to the ultimate end user. These are often a little more expensive than other products and the company is mainly responsible for marketing and promotion. Brands often require significant investment in marketing in order to maintain the higher market price. Normally, brands are connected with higher quality.

Calculating market shares for private labels is often complicated: Which product groups should be included in the market analysis? Is the selected narrow product group representative of the entire segment? Studies have shown that fresh milk and frozen food typically have large market shares, while other product groups are more dominated by brands.

Despite uncertainties connected with calculation, estimates of the market shares have been made. Several studies conclude that private labels in Fast-Moving Consumer Goods (FMCGs) are increasing:

Gielens et al. (2023) note that in recent decades, private labels have become mainstream in most consumer packaged goods markets. This trend has been observed in many categories, countries and retail industries. The results of their survey show increasing market shares of private labels in all countries. The increases in percentage and in percentage points are greatest in countries with the smallest market shares of private labels.

Bunte et al. (2011) also note that the market share of private labels has grown steadily in recent decades. For example, in the EU, private labels account for 23 percent of the groceries market.

Rabobank (2012) estimated that the market share of private labels in the years 1999–2010 increased from 20 to 31 percent and predicted that it would continue to increase to more than 50 percent by 2025.

Dobson and Chakraborty (2015) refer to several studies and conclude that, globally, the market share of private labels has been increasing over time and represents around 15 percent of FMCG sales.

At the global level, the market share of private labels varies considerably between countries. In general, the market share increases with increasing economic development, cf. Fig. 4.8.

Fig. 4.8

(Sources Own presentation based on Gielens et al. [2023], PLMA [2022], and statistical data from World Bank)

Market share of private labels in EU countries and in the world—as a function of GDP per capita

The figures illustrate a relatively unambiguous and clear correlation. However, the growth in private labels does not only depend on the economic level: The concentration of the retail trade—and thus also market poweris decisive. Therefore, there is also a strong correlation between retail concentration and market shares for private labels, cf. Hansen (2005).

Cultural differences and consumer trust in brands may also be important explanations for differences in private label market shares between countries. However, the trend toward an increasing market share for private labels, especially in countries which only have a few private labels, is relatively certain.

The driving forces behind the growth in private labels are as follows, cf. Hansen (2005), Martec (n.d.), Noormann and Tillmanns (2017).

• Strong retail chains create more private labels. The balance of power between retail chains and food companies is crucial, as retail chains have an interest in private labels, while food companies are primarily interested in strong branded products. However, some food companies which strategically focus on producing private labels for the retail chains have an interest in more private labels.

• Retail concentration. In a market with a few large and thus strong retail chains, private labels typically enjoy relatively large market shares.

• Economic development. A clear correlation between a country's level of economic development (GDP per capita) and the private label share of the market has been identified. Economic development is probably a proxy, which describes the historical and structural change in a society, including changes in the retail trade.

• Consumer trust and loyalty toward branded goods. Marketing is a driving force in that it can strengthen both consumer trust and loyalty.

• Cultural differences: The demand for private labels and/or branded goods may depend on age/generation.

• Differences in product segments: Private labels typically have larger market shares in niche markets such as health products, while branded goods have a relatively large market share in segments that consumers are familiar with such as snack foods, soft drinks, etc.

• Discount wave: Private labels appear primarily in the discount segment, and with increasing discounts, private labels increase their market shares.

• Price gap between private labels and branded products.

• The expansion of private labels in the premium segment increases the product range and thus also the market share.

These drivers may have different impacts and they may be interdependent. For example, a highly concentrated structure in the retail industry will often mean strong retail chains and strong market power.

4.6 Retail Industry: Concentration

Changes in concentration in the value chain can affect market power and, therefore, competitive conditions upstream and downstream. Concentration in the retail industry has had a significant impact on the food industry in several areas. Examples illustrate that structural developments have occurred in the food industry in order to match the increasingly large retail chains (Hansen, 2005). Dobson (2002) believes that the increasing concentration of the retail sector has been a major reason for the structural change in the food industry in the form of fewer and larger companies and the lack of investment in new methods and products in the food industry.

Quantifying the extent of concentration in the food retail industry is complicated for several reasons:

• Concentration is calculated based on information about market shares, which is often considered confidential information by the companies. Access to data can, therefore, be difficult and its quality may be questionable.

• The retail industry may include many different product segments. In general, food will be an important part of the range, but other product groups and own production may contribute to the total turnover and the total market. New online and non-store companies are also part of the market, and they must also be included when market shares are calculated.

• A significant change among the largest retail chains is currently taking place. This means that several companies must be followed and must be included in the ongoing collection of financial key figures, cf. Table 4.1.

  Table 4.1 World top 10 retail companies, 2001 and 2021

As can be seen in Table 4.1, more than half of the companies on the top 10 list in 2021 are new compared to 2001.

In parallel with a major replacement of the largest companies in the international retail industry, a significant increase in concentration has taken place. Figure 4.9 presents some examples of the increasing concentration in the retail industry in selected geographically diverse countries.

Fig. 4.9

(Note USA: Top 4 firms’ share of US food retail sales. Brazil: Concentration rate (CR3) in the Brazilian retail sector. Korea: National CR4 of Conventional Supermarket Sector. Australia: Top 4 firms’ share of retail sales. Germany: Market Share of the top 5 leading companies in German food retailing. Denmark: Top 2 firms’ share of retail sales. Sources Hambur and La Cava [2018], Herrmann et al. [2009], Kim [2009], Retail Institute Scandinavia [several issues], and statistical data from USDA)

Development in concentration in the retail industry in selected countries

The figure demonstrates a very clear trend toward increasing concentration in countries on five different continents during the period.

Generally, the retail industry is most concentrated in the most developed countries (Dobson, 2002), so continued increasing concentration will probably take place in the retail industry in line with economic development.

Among the large globally oriented retail companies, increasing concentration is evident: At any given time, the 10 largest retail companies’ share of the turnover of the 250 largest retail companies has been increasing in recent decades, cf. Fig. 4.10.

Fig. 4.10

(Note Annual revenue of largest 10 retail companies of 200 and 250 largest companies. Trend line for 2004–2019 is included. Source Own presentation based on Deloitte [several issues])

Concentration of global retail industry, 2000–2021

In 2021, the 10 largest retail companies’ share of the total retail revenue of the Top 250 had increased to 34 percent, compared to 29 percent in 2004.

Especially in recent decades, concentration has been increasing in the USA. The increase is largely due to several large mergers among the retail companies.

Among grocery stores in the USA, the 4 largest grocery companies’ share increased from 17 percent in 1992 to 42 percent in 2016, cf. Fig. 4.11.

Fig. 4.11

(Source Rudd, 2019)

Share of sales for the top 4, 8, and 20 grocery stores in the USA, 1992–2016

The level of concentration in the USA seems to have stabilized at a rather constant high level. Competition law and limited economies of scale are likely explanations for this development. Other countries with less concentration and a lower level of economic development will, however, probably experience a continued increase in retail concentration.

In these countries, significant economies of scale are still likely to be available. In addition, the retail industry and the food industry will continuously seek to strengthen their market power vis-à-vis each other through growth and also increased concentration. The food industry has, to some extent, been forced to follow the same development to preserve the balance of power. In the real world, this means that mergers and investments are often motivated by a need to match the ever-larger and more global retail chains—and vice versa.

The differences in concentration levels among the EU countries can largely be explained by two factors: the size of the countries (negatively correlated) and the countries' level of development (positive). To illustrate this correlation, Fig. 4.12 shows that the concentration is highest in the economically most developed EU countries.

Fig. 4.12

(Own presentation based on Dobson [2002] and statistical data from World Bank)

GDP per capita and retail concentration (CR5) in European countries (1999)

4.7 Retail: Globalization

The structure of the retail industry is undergoing continuous change on several dimensions. One of the most significant global trends in recent decades is increasing globalization: Since the early 1990s, the general trend in the retail industry has been an increasing focus on sales outside the domestic market. The increase in foreign sales among the large retail companies has been significant (see Fig. 4.13).

Fig. 4.13

(Note Netto: Retail area in foreign countries. Sources Own presentation based on the companies' annual reports)

Sales outside the domestic market for selected retail companies (percent)

The figure shows a relatively clear increase in international activities. The development has been significant in recent decades; however, stagnation seems to have been reached in recent years.

While Fig. 4.13 shows the long-term internationalization for selected large retail companies, Figs. 4.14 and 4.15 show other average key figures for the 250 largest retail companies in the world.

Fig. 4.14

(Source Own presentation based on Deloitte [several issues])

Top 250 retailers: Share of retail revenue from foreign operations

Fig. 4.15

(Source Own presentation based on Deloitte [several issues])

Top 250 retailers: Average number of countries where companies have retail operations

Figure 4.15 shows that 20–25 percent of the turnover of the large retail companies comes from foreign operations. After strong growth at the beginning of the 2000s, the level is now almost constant or even slightly decreasing.

Almost the same development can be observed when it comes to the number of countries where companies have retail operations—another measure of internationalization. Here, too, strong growth at the beginning of the 2000s was a dominant trend, but subsequently, the development has been almost constant.

The slowdown in internationalization is most evident among the very large retailers, cf. Fig. 4.16.

Fig. 4.16

(Notes Foreign revenue: Share of retail revenue from foreign operations (percent). Foreign operations: Average number of countries where companies have retail operations. Concentration: Top 10 share of Top 250 retail revenue. Source Own presentation based on Deloitte [several issues])

Top 10 retailers: Globalization and concentration

The figure shows the development of the 10 largest retailers in the world. As can be seen, their foreign activities have declined in relative importance—calculated as the number of countries with foreign activities and foreign turnover. In contrast, their share of the 250 largest retailers' revenue has increased. The trend has changed to less globalization and more domestic growth.

Several possible explanations for this development can be identified. The economic benefits of globalization have probably been overestimated, and short-term profit goals have probably been more important than growth goals and long-term profit goals. Gains from economies of scale via expansion abroad have an upper limit, and the marginal benefits may be small compared to the disadvantages in the form of geographical distance, cultural differences, preferences for local providers, logistical problems, international management, etc.

In order to understand, explain and predict the globalization of the retail industry, the driving forces that drive and have driven the development must be identified.

The overall long-term and implicit goal for retail internationalization is assumed to be economic performance, i.e., profit and earnings. In order to achieve this goal, companies typically decide on a number of sub-goals, instruments or drivers that contribute to achieving the goal. Internationalization is not considered a final goal, but rather a sub-goal or a tool to meet an overall goal.

A number of studies have identified a large number of motives and drivers behind the internationalization of the retail industry that has taken place in recent decades, cf., e.g., Evans et al. (2008) and Deloitte (several issues). The motives are proactive, reactive, internal and external drivers, cf. Hansen (2013). The most important motives and drivers are as follows:

• Saturation of the domestic market

• Reduction in economic, political and other risks

• Access to market growth

• Utilizing economies of scale

• Increasing market power

• New opportunities for increased sales and scale efficiencies

• First mover advantage (emerging markets)

• Entering a new market with an underdeveloped retail sector

• Entering a new market with increasing purchasing power of consumers

• Access to new international supply channels

• Exploitation of core competencies

4.8 Waves in the Food Retail Trade

Substantial structural changes downstream in the value chain are also evident—changes in parallel with economic development and following clear megatrends. Four waves or trends can be identified, and the development can be outlined as presented in Fig. 4.17.

Fig. 4.17

(Source Own presentation)

Changes in food retail

The first wave is a trend toward increasingly fewer specialized food shops such as butchers, bakers, fishmongers, etc. The local open markets and the so-called wet markets are also becoming less important. Figure 4.18 presents some examples of the decreasing role of specialized food stores.

Fig. 4.18

(Note Lack of data continuity in 1992–1993 and 1998–1999. The specialized food stores include, among other things, retail sale of bread, cheese, meat, fish, vegetables, sandwiches, etc. Source Own presentation based on statistical data from Statistics Denmark)

Number of specialized food stores in Denmark 1969–2021

In the second wave, the supermarkets become dominant. The function and market shares of the specialized food stores are, to a certain extent, taken over by the supermarkets. Infrastructure, cold chains and distribution are developed, and this part of the value chain is made more efficient.

In the third wave, supermarkets come under pressure from the expanding food service sector. Food service here includes restaurants, canteens, fast food and takeaway. An increasing proportion of food demand is directed toward meals, while food has a decreasing share of total demand.

Many supermarkets are trying to solve this problem of a declining consumer market by establishing food service units inside the supermarkets. In this way, customers can buy both food and meals in the same place. However, the number of establishments in food services is increasing, while the number of establishments in retailing is decreasing or is more constant. Data from the USA illustrates these different trends, cf. Fig. 4.19.

Fig. 4.19

(Note Number of Establishments in Private NAICS 722. Food services and drinking places for all establishment sizes in U.S. Total. Source Own presentation based on Martinez [2007a, b], Harris et al. [2002] and statistical data from U.S. Bureau of Labor Statistics)

Number of establishments in retailing and food services and drinking places in the USA

Figure 4.19 shows the increasing number of establishments in food service since the 1960s.

In the fourth wave, e-commerce will increasingly replace a large proportion of both trade and distribution when it comes to food and meals. Both the retail industry and the food service industry as physical shopping locations will decline in importance. Ready meals will be ordered online. E-commerce will also replace a significant part of the wholesale trade that the agricultural and food sectors depend on.

4.9 Retail Backward Integration

In Sect. 4.2, a fourth and increasingly common value chain was outlined, i.e., retail backward integration. The acquisition of food companies by the retail industry is an example of backward vertical integration. It is obvious that the retail industry is considering whether they should only sell or whether they should also produce or at least become more involved with production.

This section discusses trends whereby the retail industry acquires their direct or indirect suppliers including food companies and farms. The less binding and most reversible forms of integration, cooperation between retail and food industry, is discussed in more detail in Sect. 4.10.

In the past, the retail industry has engaged in backward integration by acquiring or establishing food companies and/or suppliers. Historically, it often took place when the market was imperfect, and when supplies could not be guaranteed from an open market.

In the 1950s and 1960s, there were several cases of backward integration of the retail industry. Retail companies acquired or established, e.g., dairies and milk bottling plants. Right up until 1980, the American grocery industry owned 18 percent of these milk bottling plants, cf. Blayney and Manchester (2000). The purpose of this backward integration was to control the supply. Subsequently, the trend changed completely, and there was a significant number of divestments; a trend that also moved to Europe.

The motives and the background for backward vertical integration by the retail industry have varied over time:

Through the nineteenth century, retail chains typically acquired manufacturing companies to achieve growth and larger volume to exploit economies of scale.

In the middle of the twentieth century, the motive was to ensure the supply of critical deliveries. Reduced transaction costs were also a common motive at this time.

At the end of the twentieth century, competition between the retail chains increased, and at the same time, access to supplies became more available through more perfect markets and increasing internationalization. To a large extent, retail chains followed a strategy based on the core business, internationalization, exploitation of economies of scale, and market strength. The retail chains focused their resources on horizontal integration through mergers and acquisitions, while many of their previous production companies were divested. Backward vertical integration was thereby reduced during this time.

A new and future phase may include a renewed focus on backward acquisitions driven by the availability of unique supplies for private labels, and increasing differentiation of product supply as important competitive parameters, among others. Increased bargaining power toward an increasingly consolidated food industry will drive this new potential phase.

Furthermore, requirements for full traceability and full control over the value chain to achieve high food safety, compliance with own stricter Corporate Social Responsibility (CSR) standards may also make it necessary for retail companies to integrate backward. Weak links in the value chain can destroy the supermarkets' reputation and consumer trust. Direct ownership of suppliers may, therefore, be a necessity.

The various phases are outlined in Fig. 4.20.

Fig. 4.20

(Note PL = Private Labels. Source Own production)

Different drivers behind backward vertical integration of the retail industry in selected time periods

The different motives and phases are partly due to changing market conditions and new technology, as well as changing “strategic recommendations”: In some periods, the recommendation is to outsource and ensure the greatest possible flexibility regarding deliveries. In other periods, the recommendation is to insource and establish own production facilities through acquisitions, and thus ensuring full control over supplies becomes a strategic core competency. In this way, interest in vertical integration develops in waves.

As supply chains become more global and complex, the retail industry needs to ensure a secure supply of products (including raw materials) and product quality and safety to avoid labor-related reputational risks such as child labor or other forms of unfair working conditions in categories such as fruit and vegetables. Vertical integration creates this transparency and control, so that retailers always know where their food is coming from and the conditions under which it has been produced.

4.10 Collaboration Between Food and Retail Industry

As discussed in Sect. 4.1, vertical integration in value chains can occur in several ways, and the degree of integration may vary widely. One form of vertical integration is collaboration between the food and retail industries—and this form of integration seems to be changing over time.

The willingness of the retail industry to collaborate and enter into partnerships with their suppliers—primarily the food industry—varies from time to time. The retail industry may regard the food companies as either strategic partners and collaborators or as independent suppliers and providers.

In some periods and under special conditions, entering into strategic cooperation with the food industry may be advantageous for the retail companies. Such cooperation may be with a selected group of companies, and it may include product development, production of private labels, marketing, category management, etc.

At other times, retail companies may want greater independence from suppliers. Cooperation and alliances with a few selected strategic food companies are being replaced by trading with a larger group of food companies, where the retail companies have greater control, freedom of choice, and independence in terms of supplies. The decisive factor is that the retail chains avoid being locked into one particular supplier for a long time.

The willingness of the retail industry to cooperate with their suppliers, which is almost impossible to quantify, is outlined in Fig. 4.21.

Fig. 4.21

(Source Own production)

The willingness of the retail industry to cooperate with their suppliers

It is difficult—if not impossible—to substantiate this varying willingness to cooperate through empirical studies. Collaboration may be more or less formalized, and the degree of collaboration may also vary widely, which makes it difficult to quantify and compare the willingness from time to time. However, food business managers experience this varying interest and willingness from the retail industry—their customers—but the relationship between the food retail trade and the food industry is often confidential or takes the form of discrete knowledge.

A collaboration may include more than just long-term sales contracts. Production and marketing may also be a part of formalized collaboration. Several examples of long-term collaboration between food companies and retail chains reveal the way in which a product's design, concept, etc., are developed and decided jointly.

Cooperation may be based on the retail company’s very near contact with consumers, which provides valuable knowledge about demand. On the other hand, food companies have unique knowledge regarding production conditions. This combination of market and product competence can thus be combined and used for mutual benefit.

The retail chain receives a unique product, possibly in the form of its own brand (private label), which may improve its image and recognition in the eyes of consumers and strengthen its competitive profile relative to competitors. At the same time, the food company gains market access and ensures sales for a certain time.

Although a company has to invest in product development as part of private label cooperation, the investment would have been much greater, and riskier, if the company had not been able to share the cost with the retail partner.

Collaboration between a producer and a retail chain leads to the emergence of an interdependent relationship, which can be both a strength and a weakness. The strength lies in the fact that it is possible for the partners to exploit each other's competences, while the weakness is that it is possible for one of the partners, in the long term, to abuse the agreement to the detriment of the other. If the retail chain terminates the cooperation, the company will lose significant sales and perhaps also considerable investments in innovation of the product.

Various drivers have an effect on collaboration in different ways, and the drivers are unlikely to remain constant. The willingness to collaborate will probably continue to change in waves, depending on the current conditions, market development and the strategies of food retail companies.

4.11 Share of Retail Food Price

The food value chain is changing in several ways. One of the changes is that the primary links in the value chain (upstream) are receiving a declining share of the price and the value that is created in the final link close to the consumers (downstream).

All links in the value chain including farmers, the food industry, wholesale and retail industry and the state (collecting taxes and levies) receive a share of the final sales value of the food product. The share varies from product to product and between industries, while the size of the share also changes over time.

In this context, the final sales value of the food is sometimes called “the food dollar”. “The farmers' share of retail food price” is the share (percent) of the final retail (or consumer) price that can be traced back to the selling price of the farmers’ production. The size of the farmers' share in the process from farm-to-fork is illustrated schematically in Fig. 4.22.

Fig. 4.22

(Source Own production)

Farmers’ share of food retail value

The figure illustrates that while the farmer's share has reduced, other links in the value chain get a larger share of the value the further downstream the goods move forward toward the consumers. In Fig. 4.22, the farmer's share drops from 100 percent when the products leave the farm gate to approx. 20 percent when consumers buy the food in the retail store. A similar development and pattern are seen in almost all developed countries.

However, the distribution of the added value downstream is very different from product to product. The reason is that the degree of processing and the price of the agricultural raw materials vary considerably.

While the share of the retail food price for the individual links in the value chain differs between products, the development over time is relatively clear. Also, the change in the farmer's share of the retail value, which is often discussed, is quite clear: the farmer's share is falling, which is, to a large extent, a global phenomenon, cf. Fig. 4.23.

Fig. 4.23

Long-term change in farmers’ share of retail value. (1) Calculations based on Input–Output analyses, 1950–2006. (2) Previous calculations based on price series, correction factors, etc. 1993–2021. (3) Calculations based on Input–Output analyses, 1966–2013 (Sources USDA [several issues a], Wendt and Peter [2014], NFU [2010], and calculations based on statistical data from Statistics Denmark and USDA Economic Research Service)

Figure 4.23 shows that the development has been very similar in agriculture in Denmark, Germany, the UK and the USA. The same trend is probably also present in other developed countries, but only a few studies with a long time series have been published.

The trend in the farmers' shares of retail value in the USA can be traced back 100 years. At the beginning of the twentieth century, the share of retail value was around 50 percent.

The variation between the countries can be explained by differences in:

• Taxes and levies (including VAT).

• The product groups included in the analysis.

• Data, product definition, method calculation, etc.

The trend toward a decreasing share of the consumer value for the farmers is also apparent from cross-section data, which can be used to compare the share with the countries' level of economic development. A clear correlation can be observed, cf. Figure 4.24.

Fig. 4.24

(Source Own presentation based on Yi et al. [2021] and statistical data from World Bank)

Farmers’ share of food and accommodations away from home (faafh) as a function of the countries’ economic development (2015)

The figure illustrates a clear trend in which the farmers’ share declines with increasing economic welfare.

For several reasons, the farmer will often face a decreasing share of the retail value:

Firstly, with increasing economic welfare and growth in a society, the amount of processing and value that is added to the food also increases. An increasing focus on convenience, eating out, food service, takeaways, etc., will further strengthen this trend.

With increasing added value and processing, the cost of labor product development, innovation and preparation, etc., will also rise, while the share of agricultural raw materials will fall. The result is a decreasing share of the retail value for farmers. The decreasing share is due to the fact that the total “cake” is getting bigger, and that the farmer's relative share is simply getting smaller.

If a food company invests in innovation, processing and market development, and the investment turns out to be profitable, the investment will result in increased earnings. However, as a result, farmers and the agricultural products will also receive a decreasing share of the retail value because innovation costs, etc., will increase. In this case, the farmer's share of the retail value will fall, but the farmer's earnings will increase because the increasing earnings will belong to the owners if it is a farmer-owned cooperative.

Secondly, farmers' declining share of the retail value can also be explained by the increasing division of labor between farmers and the food industry. The clear trend in the Western World is for the food industry to take over a significant part of the agricultural activities in the agro-industrial complex (Sect. 5.8).

Even though the food industry takes over part of the employment and added value from the farmers and agriculture during economic development, it will still experience a relative decrease in economic significance during increasing economic welfare. The obvious explanation is that the increased value added and marketing in the food industry cannot offset the negative effect of the low growth in demand.

Third, as a consequence of both increasing productivity and the agricultural treadmill, agricultural sales prices will rise more slowly than the price of other products in the economy, on average. In the long term, the prices of both agricultural and food products will increase at a slower rate than inflation, and the terms of trade will fall. When the price of—and thus also the value of—agricultural raw materials rises less than the price of other products and services, the farmer's share of the retail value will also fall—all other things being equal.

4.12 Global Value Chains

Global value chains (GVC), i.e., value chains that break up the production process across countries, have been increasing in importance for a number of years. This also applies to global food value chains for which a significant global trend is dominant. Global value chains refer to the international sharing of production, whereby production is divided into activities and tasks that are carried out in different countries. Firms specialize in a specific task and do not produce the whole product.

However, the term global value chain has not been unambiguously defined, and several definitions exist:

A global value chain or GVC consists of a series of stages involved in producing a product or service that is sold to consumers, with each stage adding value, and with at least two stages being produced in different countries. A firm participates in a GVC if it produces at least one stage in a GVC. (Antràs, 2020)

Global value chains (GVCs) are the cross-border networks that bring a product or service from conception to market. (Xing et al., 2021)

The OECD asserts that a value chain is global when “the different stages of the production process are located across different countries” (OECD, n.d).

UNIDO (2015) lists potential activities and defines a GVC as “the full range of activities (design, production, marketing, distribution and support to the final consumer, etc.) that are divided among multiple firms and workers across geographic spaces to bring a product from its conception to its end use and beyond”.

Figure 4.25 presents a GVC in its simplest form.

Fig. 4.25

(Source Own presentation)

A simple GVC involving two countries

Country A produces an intermediate product for further processing, and it is exported to country B. Country B uses the intermediate product as an input to production. The final product is exported, or it is sold on the domestic market.

The example in Fig. 4.25 involves only two countries and one product. In the real world, there are extensive networks between many countries with many flows of intermediate products crossing borders.

GVC is part of globalization, but it differs from international trade and foreign direct investment because the production takes place in at least two countries and is part of a coherent value chain. International trade and foreign direct investment can be part of a GVC, but the value chain and multi-country production must also apply.

A number of studies conclude that GVCs have been increasing in importance and are gaining an increasing share of total world trade:

According to World Bank (2020), the magnitude and importance of GVCs grew particularly rapidly from 1990 until the financial crisis of 2008. This was driven by technological advances and lower trade barriers, which led manufacturers to internationalize production processes, cf. Fig. 4.26.

Fig. 4.26

(Source Own reproduction from World Bank [2020])

GVC share of global trade, 1970–2015

Xing et al. (2021) confirm the increase in GVCs from the 1990s to around the global financial crisis of 2008–2009. In the following years, the development stagnated. In general, GVCs increased in importance, but less than the world trade total, so GVC's share declined. Increasing political and economic risk connected to participating in long global value chains played a role, and climate policy may also have made local supply and demand more attractive.

Indeed, in the late 2010s, the world was exposed to significant geopolitical risks and climate change, and also the Covid-19 pandemic in 2020. Figure 4.27 illustrates the long-term development of GVCs.

Fig. 4.27

(Note Trade based. Source Own reproduction from Xing et al. [2021])

Global value chain participation rates, 1995–2020

As can be seen, there was a significant increase until the financial crisis, which was followed by a period of stagnation and then a significant decrease during the Covid-19 pandemic.

A third study by Cigna et al. (2022) and published by the European Central Bank uses two methods to illustrate the development in the participation in global value chain, cf. Fig. 4.28.

Fig. 4.28

Participation in global value chains, 1995–2021

(Note GVC tracker based on selected data on trade in intermediate goods. Source Own reproduction from Cigna et al. [2022])

The figure confirms the conclusion derived from the two previous figures. Figure 4.27 also shows a significant increase in 2021, although the data for 2021 only cover the first seven months of the year. In addition, international trade flows were greatly affected by the Covid-19 pandemic, which means it is too early to assess whether a new trend is emerging—also because of subsequent geopolitical uncertainties.

Another study on international trade in intermediate goods, which is a proxy for or part of GVCs, concludes that intermediate goods accounted for 50 percent of total trade for the second quarter of 2022; a ratio that has remained constant during the last decade (WTO, n.d.a). This indicates that the development seen over the last decade is rather stable and constant.

However, a constant ratio does not mean no change. Previously, the trend was driven by access to low labor costs. Now, GVCs are becoming more knowledge-intensive and reliant on highly skilled labor.

Focusing on GVCs in agriculture and the food industries, an expansion and increasing trend has also been identified, although no long-term time series data have been presented to support or document the trend. The OECD (2020) points out that agricultural trade is being increasingly organized within GVCs with the production of food increasingly occurring across countries while inputs sourced from around the world are being used. A rising share of exports from one country is being re-exported by another, after having been used as intermediates for further processing. Therefore, agro-food production from one country can cross borders multiple times through direct or indirect export (as an ingredient in processed food).

The extent of involvement in GVCs can be estimated by calculating the share of total exports that is exported and imported intermediates, which results in a share of around 20 percent. In 2014, on average, 20 percent of all agro-food exports were re-exported by the first importing country. However, OECD (2020) also underlines that most agro-food trade does not cross multiple borders, and that food production and consumption often remain largely local.

As discussed in Sect. 7.2, the international diversion of resources within agriculture and the food industry—and thereby also GVCs—is quite modest. OECD (2020) emphasizes that, unlike in the manufacturing sector, in the agri-food sector, domestic value chains are dominant and dynamic, and while GVCs are important, they are secondary. Short shelf life, self-sufficiency goals, globally available resources, low transportability, etc., are highlighted as the main reasons.

Analyzing the drivers behind GVCs is important in order to determine the potential durability of the current megatrends to which they belong: if the drivers are stable, it is likely that the megatrends will also be stable. However, it is difficult to distinguish the drivers behind GVCs from those behind international trade, foreign direct investment, global offshoring and globalization as the same drivers support many different globalization trends. Nevertheless, it is possible to list several drivers, cf. OECD (2020), Amador and Cabral (2016), World Bank (2020), Hansen (2005):

• Liberalization of international trade.

• Liberalization of international capital markets.

• Reduced transportation costs.

• Faster, better and cheaper means of communication at the global level.

• The end of the Cold War and Russia and former soviet republics’ integration into the world economy.

• East Asia’s and specifically China’s move to a market economy and rapidly increasing participation in international trade and the economy.

• Differences in production costs, productivity and the availability of inputs among countries.

• Business stability including economic growth and the geopolitical situation.

• Tariff escalation. Some countries want to support domestic employment by having a low import tariff on raw materials and a high one on processed goods, which makes GVCs more attractive.

When it comes to assessing future development, the starting point is that GVCs have created and been part of a very significant megatrend in recent decades. However, geopolitical uncertainty and not least the Covid-19 pandemic dampened the development and led to the relative decline in importance of GVCs in international trade. Several factors, both internal and external, are decisive for the development in the future:

On the one hand, the economic and commercial advantages of GVCs may mean that GVCs will continue to be extremely important and perhaps even increase in importance. Most countries will be able to further exploit international specialization together with value chains across national borders to their advantage. Therefore, GVCs will continue to encompass obvious rational economic benefits.

On the other hand, geopolitical uncertainty may increase risk and uncertainty, making GVCs less attractive. GVCs involve and presuppose international trade and a greater or lesser degree of cooperation and coordination across national borders, and geopolitical uncertainty can be or can create a barrier. Countries can put restrictions on GVCs even though it may hurt them economically in order to deliberately hurt other countries economically.

Many countries will also seek to steer their business development away from a focus on the production of raw material or intermediates in order to move downstream and capture a larger share of the added value in the value chain. This will also limit GVCs because the foreign production of intermediates is insourced in the country.

Finally, climate policy measures may discourage geographically long value chains. The climate impact of transportation may slow the increase in the number of GVCs regardless of whether it is justified.

Overall, the potential for continued economic benefits of GVCs is clear, but external and geopolitical conditions are likely to limit the rate of increase, so a continued moderate stable trend is likely.