Technical Reviews

Consolidation in Food Retailing and Dairy:
Implications for Farmers and Consumers in a Global Food System
Mary Hendrickson, William Heffernan, Philip Howard and Judith Heffernan

National Farmers Union, Denver, Colorado. 2001

Over the last decade, it has become clear that the consolidation in the food system will likely be organized around five or six global food chain clusters and will extend to retail markets [see “Consolidation in the food and agriculture system,” reviewed in Sustainable Agriculture Summer 2000 (Vol. 12, No. 2)]. Horizontal integration, vertical integration and globalization are the three major processes driving this consolidation. This article describes these trends in the retail and dairy sectors and outlines the implications and questions such trends raise for farmers and consumers.

Retail sector players

In the last three years, rapid consolidation through horizontal integration (where similar retail firms acquire each other) has occurred in the retail sector. Today, Kroger, Albertson’s, Wal-Mart, Safeway and Ahold USA account for 42 percent of retail food sales in the United States. In 1997, the top five food retailers had only 24 percent of the market. Vertical integration, which formally connects retailers back to the production and processing stages, has also accounted for an important part of these firms’ strategies. Kroger, for example, has beef supply agreements with Excel (Cargill) while Stop and Shop (Ahold USA) has a dairy agreement with Suiza Foods. Wal-Mart obtains meats from IBP, Farmland and Smithfield.

Kroger is currently the number one retailer in the United States, after acquiring Fred Meyer in 1999. It is estimated that 10 cents of every supermarket dollar in this country is spent at a Kroger store. Kroger’s sales of beef and pork products tie it to the Monsanto/Cargill food chain cluster.

Wal-Mart is now the second largest food retailer in the United States and has caused considerable concern among its competitors due to its large size and its ties to dominant food chain clusters. It is also a key player on the global level. It has major operations in the United Kingdom and an important presence in Germany, Argentina, Brazil, Canada, Mexico, China and Korea. The perceived threat of a Wal-Mart monopoly on a global level was so great that two French retailers, Carrefour and Promodes, announced their merger as a way to cope with Wal-Mart. This French merger created the second largest retailer in the world. The Dutch firm, Royal Ahold (parent firm to Ahold USA) is not far behind with about 28 percent of the Netherland’s food retail market and operations worldwide, especially in Latin America, Eastern Europe, Sweden, Norway and China. Some analysts have predicted that in the near future, only about six global food retailers will control the retail sector. Wal-Mart, Carrefour, Ahold and Tesco (UK) are likely contenders.

As financial control shifts to retailers, away from manufacturers, the smaller entities—farmers, small-scale processors and consumers—are being left out. Retailer fees (slotting allowances, display fees, presentation fees, pay-to-stay fees and failure fees), which account for as much as 50-75 percent of total net profits for large retailers, prevent smaller processors and farmers from getting into the system. Food system consolidation also impacts consumers and communities when retailers cease to locate in inner urban and rural areas.

U.S. dairy sector

For most of its history, the dairy sector was not affected by the restructuring going on in the rest of the food system because it was organized through local and regional cooperatives which were the dominant milk processors. The dairy sector was already vertically integrated from production through processing and distribution and even through retail stages due to well-established, local brand names. The cooperatives allowed dairy farmers to remain in control of the system and cushioned them from non-farm processors which had begun to dominate other commodity sectors. Even up to ten years ago, investor-owned processors in the dairy sector also operated on a local level with well-known brand names in their communities. However, the emerging horizontal integration that is rapidly occurring in the dairy sector today suggests that this sector too will soon follow the patterns of the other sectors, to the detriment of dairy producers.

With the exception of Philip Morris’ (Kraft) dominance in the cheese segment, the market share concentration by the four largest firms in the dairy sector is fairly low—35 percent (Dean Foods, Suiza Foods, Kroger and Prairie Farms). Three major factors are forcing major changes in the dairy sector, however. First is the concentration in the retail sector. The retail sector is now in a position to process their own dairy products (through their acquisitions of certain dairy processors) so they can begin challenging dairy processing firms for market share. The retailers want to establish national brands, which will require huge supplies of product across the country.

The second force is the growing direct involvement of transnational firms. Nestle, Unilever and Philip Morris, the three largest food processors in the world, continue to expand their acquisitions in the dairy sector. The third force is the horizontal integration that has occurred in the last few years with investor-owned firms and cooperatives forming joint ventures and acquisitions. The management unit is becoming blurred.

Changes in the dairy sector underscore how retailer dominance presents challenges for farmers, processors and consumers. As retailers grow ever larger, they are able to develop relationships with dominant food manufacturers, effectively shutting out the smaller wholesalers, processors, retailers and producers. As retailers begin dictating terms to food manufacturers, food manufacturers begin to serve their interests rather than the interests of farmers.

Implications for producers, consumers & alternative food systems

In the final analysis, the authors ask, “Who has power in the manufacturing/retail channel?” Even as the power shifts towards retailers, smaller entities are left out. Smaller farmers, processors and retailers might see these trends as an opportunity to join forces and create new relationships that build the infrastructure for alternative food systems. These new systems could help farmers capture more of the food dollar while simultaneously encouraging the development of small processing businesses that are the backbone of many rural communities.

On the other hand, the authors caution that while cooperatives at one time provided dairy farmers with an alternative, they are now struggling to survive. They have always faced capitalization problems and will continue to struggle with their relationships with investor-owned firms. As transnational cooperative relationships emerge, it is unclear how the small family farmer will be treated.

The organic industry provides many U.S. farmers with another new, alternative market, allowing them to compete in the global marketplace. However, it cannot be denied that as the organic industry has grown, it has begun to mirror the horizontal and vertical integration of the conventional food system rather than creating new relationships that enhance communities economically, ecologically and socially. Not only is consolidation in the organic sector occurring in supermarkets, but also in dairy. For example, Suiza Foods has a 13 percent stake in Horizon Dairy, one of the largest organic dairies in the U.S.; Dean Foods recently bought Alta Dena, another major organic dairy processor.

The authors conclude that the food system remains dynamic. Although the short-term trends of horizontal and vertical integration are clear, this is probably unsustainable in the long-term. First, in several cases the FTC has already stepped in to stop supermarket consolidation. This could signal further antitrust actions in the future. Second, the U.S. balance of trade in agricultural exports is declining and imports are increasing. Although the U.S. may be one of the most efficient producers, it is no longer the low-cost producer due to our integration of health and environmental regulations. The loss of U.S. farmers makes little difference to transnational corporations, according to Steven Blank in his book The End of Agriculture in the American Portfolio. Hendrickson et al., ask whether the loss makes a difference to American farmers and consumers. The trends are becoming more apparent and consumers are now beginning to experience direct economic impacts through higher prices at supermarkets or lack of access to any supermarket. Because everyone must eat to live, food is a necessity and therefore a different kind of commodity than virtually any other good or service. The question is whether the public thinks making decisions about what food is produced, who produces it, where and under what conditions it is produced, and who gets to eat it, is ultimately important. If so, conclude the authors, public policies that address social and cultural aspects of food production and consumption, environmental costs and food security at community and national levels, may be required.

For more information: Mary Hendrickson, Department of Rural Sociology, University of Missouri, Columbia, Missouri 65211.
Email: HendricksonM@missouri.edu

National Farmers Union, 11900 East Cornell Ave., Denver, CO 80014.
Web site: www.nfu.org

DEC. 607

Contributed by Gail Feenstra