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Food Marketing Policy Center
Continuing Concentration in the U.S.:Strategic Challenges to an Unstable Status Quo
By Ronald W. Cotterill
Food Marketing Policy CenterResearch Report No. 48
August 1999
Research Report Serieshttp://www.are.uconn.edu/FMKTC.html
University of ConnecticutDepartment of Agricultural and Resource Economics
Continuing Concentration in the U.S.:Strategic Challenge to an Unstable Status Quo
by Ronald W. Cotterill
Food Marketing Policy CenterResearch Report No. 48
August 1999
Department of Agricultural and Resource EconomicsUniversity of Connecticut
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Contents
Tables and Figures.............................................................................................................................................iii
Acknowledgements............................................................................................................................................iv
Executive Summary............................................................................................................................................v
1. Introduction.....................................................................................................................................................1
2. Food and Tobacco Manufacturer Concentration in the U.S.: Who are the Major Players andHow Dominant are They? ...........................................................................................................2
3. Food Retailer Concentration in the U.S.: Local Market, Regional and National ConcentrationEstimates....................................................................................................................................2
4. Shifting Power Balances Drive New Coordination Programs..............................................................4
5. An Out of the Box Solution: Truly National Supermarket Chains......................................................6
References..............................................................................................................................................8
Food Marketing Policy Center Research Report Series Ordering Information.......................................21
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Tables and Figures
Table 1 Food Processing Magazine's Top 25 U.S. Food Processing Companies, 1998 ..........................10Table 2 Leading Company Advertisers in Food and Tobacco Processing, 1997 ....................................11Table 3 Mean Values for Supermarket Four-Firm Concentration Ratios in MSA Areas: 1987 and
1998 .........................................................................................................................................11Table 4 Supermarket Sales and Concentration Ratios for Selected Regions in the U.S., 1992 ...............12Table 5 Supermarket Sales and Concentration Ratios for Selected Regions in the U.S., 1998 ...............13Table 6 Top 20 Supermarket Chains, Total U.S., 1992 ........................................................................14Table 7 Top 20 Supermarket Chains, Total U.S., 1998 ........................................................................15Table 8 Supermarket Merger Activity in the U.S., 1991 to 1999..........................................................16
Figure 1 Increasing Dominance by the Top 20 Food and Tobacco Manufacturing Companies,Census Years 1967-1995...........................................................................................................17
Figure 2 Histogram or Supermarket Four-Firm Concentration Ratios in Metropolitan StatisticalAreas: 1987 and 1998 ...............................................................................................................18
Figure 3 Scatter Plot for Local Market Concentration and Price Level: Royal Ahold Prices in SelectedConnecticut and Pennsylvania Markets .....................................................................................19
Figure 4 The Problem of Channel Coordination: Successive Monopoly................................................20Figure 5 Elimination of Double Marginalization by Trade Promotion...................................................20
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Acknowledgements
This study was published as a chapter in William Ramsey ed. "Challenges for International Food Manufacturers andRetailers Competing in a Global Market," Financial Times Monograph Series, London, November 1999. The author wouldlike to acknowledge the encouragement and support of Bill Ramsey, research support by Andrew W. Franklin and clericalsupport by Lorraine Knight. Financial support was from USDA CREES Special Research grant 98-34178-5932. This reportcan be downloaded from the University of Connecticut Food Marketing Policy Center website:http://www.are.uconn.edu/FMktC.html.
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Executive Summary
• Food manufacturing industries in the U.S. are more highly concentrated than in Europe. The top 20 firms account for52% of the sector’s value added and approximately 70% of the sector’s advertising. Thus, branded food productmarketing is more concentrated among the sector’s top firms.
• Supermarket concentration at the local market level is high and has increased substantially over the past decade. For 94large U.S. cities four-firm concentration averaged 74.4 % in 1998, up from 64.5% in 1987.
• Supermarket concentration in many regions comparable in size to countries in Western Europe has also increased and isapproaching European level. For example, the top four chains in California (population 32 million) now account for70% of supermarket sales.
• National supermarket concentration has also increased but not to such high levels. The top four chains accounted for31.7% of total U.S. sales in 1998, up from 23.3% in 1992.
• Foreign firms, most notably Ahold, Tengelmann, Sainsbury and Del Haize, are major players in U.S. retailing; however,leading U.S. chains, Kroger, Albertsons and Safeway are also participating in the merger wave that has been the primarysource of increased retail concentration at local, regional, and national levels.
• High concentration and strong brands at the manufacturing level combine with high local market concentration at theretail to create a vertical coordination problem. Double marginalization due to the exercise of market power atsuccessive stages of the food channel means prices are higher and total channel profits are lower than they would be withjoint, or vertically coordinated pricings by retailers and manufacturers. Many systems innovations including efficientconsumer response, (ECR) and category management programs are best seen as attempts to eliminate doublemarginalization.
• Every day low pricing (EDLP) programs have failed to supplant trade promotion, which in the ECR framework is seenas inefficient and wasteful, because trade promotion is one of the most effective strategies for eliminating doublemarginalization.
• Copycat private labels are an alternative coordination strategy that lower prices to consumers and allow retailers tocapture a larger share of increased channel profits.
• National market concentration may well double in the near future if the leading chains, which are still essentiallyregional, merge to form truly national supermarket chains.
• Truly national supermarket chains may attain the critical mass needed to establish retailer brands as leading Europeanchains have done with supply chain management systems that tap into the creativity and flexibility of smaller foodmanufacturers. This “out of the box” solution could severely diminish the position and power of the large foodmanufacturers and smaller supermarket chains.
• Antitrust enforcement in the U.S. has not impeded the steady rise in concentration at all stages of the U.S. food system.However, support for more vigorous merger enforcement may soon come from major players within the sector. Sincethe context of antitrust is now “double monopoly” public actions to limit mergers that tend to create monopoly power atone stage of the channel benefit not only consumers but also firms at other stages who capture higher channel profits.Powerful firms at one stage of the food marketing channel have a vested interest in preventing mergers that create orsustain powerful firms at other stages.
• In the current environment the Robinson Patman Act, with its proscription of discriminatory discounts by manufacturersto large retailers, i.e. better trade terms that are not cost justified, may become a more binding constraint.
• Ultimately, the evolution and performance of the U.S. food system depends upon strategic moves by leading globalmanufacturers and retailers and public policy actions, especially antitrust enforcement. Given the current unstableenvironment, the stakes for winners and losers in this game are very high.
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1. Introduction
Both food retailing and food manufacturingindustries continue to consolidate in the U.S. The mostrecent wave of consolidation at the manufacturing leveloccurred in the 1980s, and the sector is moreconcentrated than food manufacturing is in WesternEurope. Seller concentration in U.S. supermarketretailing has accelerated during the 1990s and is rapidlyapproaching European levels. The U.S. food system hastraditionally been led by its large, often global, foodmanufacturers with retailers serving a passive andcooperative role as shopkeepers for manufacturer’sbranded products. Today, however, the increase in retailconcentration and power in distribution channels isfundamentally altering retailer-manufacturer relations.No one knows with certainty how this dynamic scenariowill play out. It depends on strategic moves by theworld’s leading food firms and public policy, especiallyantitrust enforcement.
This paper documents key trends in concentration atboth the manufacturing and retailing level in the U.S.Recent mergers have been a major contributor to retailconcentration. Many of the recent innovations invertical coordination including Efficient ConsumerResponse (ECR), Every Day Low Pricing (EDLP),category management and other strategic moves are bestunderstood as responses to increasing concentration atall stages of the post farm gate food system. Thechannel now has “shared” monopoly, i.e. tight oligopolyat both the manufacturing and retail stages. There is aneed for vertical coordination between manufacturersand retailers to supplant market price determination inwholesale and retail markets. Large manufacturers, withcategory dominant national brands, and largesupermarket chains that occupy powerful positions inmany local food markets must rely on more thanindependent product pricing (what economists callvertical Nash pricing) to reduce “doublemarginalization.” As we show below reducing doublemarginalization, i.e. the exercise of market power at twostages in the channel increases total channel profits andlowers prices to consumers.
From a public policy perspective, for whateverreason, antitrust policy has been ineffective in limitingconcentration and the exercise of market power in foodindustries. Now we face compound market power.Antitrust challenges that enhance competition at onestage of the marketing channel should have support notonly from consumers but also powerful firms at otherstages of the market channel because such actionsincrease their profits.
Box 1: External Forces Driving Observed Changes in theFood System
Several forces, external to the food industry, are drivingchanges in the system that offer challenges and opportunitiesfor manufacturers and retailers:• Information technology is reconfiguring businessorganization and procedures with major gains in laborproductivity and ability to manage. First generation uniformcommunication system/uniform product code scanningsystems are universal. Second generation intranet and internettechnologies are rapidly gaining acceptance.• Biotechnology and other food science technologies arecreating new functional foods for health needs.• The revolution in communications is directly affecting theability of food firms to advertise and build brands. Mass-market advertising is being fragmented into much finerconsumer segments via the offer of multiple cable TVchannels. Indirectly, the revolution in communications,including mobil telephones, faxes, e-mails, etc., is creating asociety where instant gratification is common. Consumershave low tolerance for cumbersome, time consumingrelationships, including food shopping and food preparation.• U.S. consumers envision an affluent, multicultural globalsociety in the future. Travel, trade, and open communicationensure this. Diversity in the workplace will increase and bevalued. Incomes will continue their recent strong growth. Arecent survey finds that 51 percent of U.S. teenagers expect to“live outside of country of birth”. This compares to 37percent for European teenagers (Quelch).
Strategic Implications
• Food manufacturers must move beyond traditional old-line brands and line extensions thereof to apply their brandingskills to truly new food products that consumers find novel,interesting and valuable. This includes moving beyond“ethnic” food to international cuisines, sourced globally.• Food retailers may find advantage in reconfiguring thesuperstore to offer more than rows of shelves with groceriesarranged by product category for preparation at home.Superstores will take advantage of new technologies anddemographic trends by offering cuisine areas (Chinese,Mexican, Italian, Indian) with prepared food entrees for on-site or at home consumption, and chilled entrees for use athome, as well as packaged groceries for preparation at home.• Executives in both manufacturing and retailing will ofnecessity need a global view of the food system to capitalizeon external forces affecting the food system.
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2. Food and Tobacco Manufacturer Concentration inthe U.S.: Who are the Major Players and HowDominant are They?
The U.S. food manufacturing system is highlyconcentrated with relatively few large firms dominatingthe sector. Table 1 lists the top 25 food processingcompanies for 1998 in the United States. Philip Morriscompanies with 31 billion in food sales leads the list.The top ten companies all had more than 10 billiondollars in annual sales in 1998. For comparison, a 1997study of European food manufacturing lists only 3companies with annual sales of over 10 billion dollars.(FT Study, Ramsay 1997). They are Nestle (38.8 billiondollars), Unilever (26.7 billion dollars) and Danone(12.8 billion dollars). Twelve European companies, asopposed to 25 American companies, have sales of over 4billion dollars annually. The American list includes onlythe U.S. sales of Nestle. Nestle is ranked number 14. IfNestle total company sales were, in fact, included, as isthe case for the other American companies on this list, itwould rank number one.
Figure 1 documents the increase in dominance bythe top 20 food and tobacco manufacturing companiesover the past 30 years. In 1995, the top 20 food andtobacco manufacturing companies are estimated toaccount for over 52 percent of the sector’s value added.This is up from 23 percent of value added in 1967. In1995, if one adds the value added from the remainingtop 100 food manufacturers they account for 77 percentof the sector’s value added. This figure is up from 50.8percent of value added in 1967.
Since advertising is the key component in brandedfood product marketing, an examination of companyadvertising outlays gives us an indication of who themajor players are in branded food product marketing.Table 2 lists the top 21 advertisers in the food andtobacco processing sector for 1997. Sixteen of theseleading advertisers are among the top 25 food processingcompanies in the country. Philip Morris leads both listsand is far and away the largest food advertiser withadvertising expenditures of over 1.3 billion dollars in1997. Note that the top 20 advertisers in food andtobacco processing accounted for 71.9 percent of allfood advertising in 1997. This compares 52 percentvalue added in 1995. Thus, food advertising andbranded food product production is even moreconcentrated than all food and tobacco manufacturingactivity. Fresh product, i.e. fruit, vegetable, and meatindustry concentration is also very high at the packerstage with a few agricultural cooperatives, as well asprivate firms, capturing large market shares.
From the standpoint of food manufacturer/foodretailer relationships it is clear that food retailers aredealing with relatively few large organizations for a verysignificant proportion of the products that they sell intheir supermarkets. Moreover, these companies sellhighly differentiated products that have strong consumeracceptance; i.e. these brands have relatively inelasticdemand curves.
3. Food Retailer Concentration in the U.S.: LocalMarket, Regional and National ConcentrationEstimates
Commentaries on retailer power often do notappreciate the important distinction betweensupermarket concentration in local city markets andaggregate concentration measured at the regional ornational level. They quickly leap to the latter and theissue of “bargaining power” against manufacturersassuming that it is the paramount issue. This is amistake, because the problem of successive monopolyand its attendant demand for increased coordinationbetween manufacturers and retailer is, by far, moreimportant for understanding today’s market place. Localmarket concentration measures the ability ofsupermarkets to exercise market power to raise retailprices. Figure 2 reports the distribution of four firmconcentration ratios in 94 of the top 100 U.S. cities for1987 and 1998. There is a clear upward shift in four-firm concentration over this 11-year period. Forexample, in 1997 one third of these markets (31) hadfour-firm concentration above 80 percent of supermarketsales. In 1987 only 12 markets were that concentrated.Four firm concentration for 1998 averaged 74.4 percent.In 1987 four firm concentration averaged 64.5 percent.Markets with four-firm concentration above 60 percentwould routinely be expected to offer sellingsupermarkets some ability to exercise market power overretail prices. (See Box 2 on the relationship betweenseller concentration and price.) All but 12 of these 94markets had four-firm concentration above 60 percent.
Table 3 gives the mean value for metropolitanstatistical area concentration ratios for selected regionsof the country as well as for the entire country. Localmarket concentration is highest in California at 90.7percent average and lowest in the Midwest at 69.3percent in 1998. Local market concentration uniformlyincreased throughout the country.
Since European authors often quote country levelconcentration ratios when discussing European foodretailing, I have computed regional concentration ratiosfor regions of the United States that are of a similar sizeto European countries. Table 4 gives such concentration
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Box 2: The Relationship between Local MarketConcentration and Prices
Figure 3 is an illustration of the relationship betweenmarket concentration and price levels. Prices for severalRoyal Ahold supermarkets for a set of local markets withvariation in concentration were collected in March 1999. Thelowest priced supermarket was assigned an index value of100. Prices across these markets were as much as 20 percenthigher than the lowest priced store. Some of this pricevariation is due to factors other than market concentration;however, as this plot reveals a very significant proportion ofobserved price variation is explained by marketconcentration.*
Market concentration in Figure 3 is measured by theHerfindahl Index, which is the sum of the square of eachmarket share. The Herfindahl ranges from near zero (manysmall share firms) to 10,000 (one firm with 100 percentSOM). Four-firm concentration ratios are highly correlatedwith the Herfindahl. A four-firm ratio of 60 percent is roughlyequivalent to a Herfindahl value of 1,000. A four-firm ratio of80 percent is roughly equivalent to a Herfindahl of 1,800. TheU.S. federal merger guidelines consider markets withHerfindahls below 1,000 to so unconcentrated as to offer nochance for the exercise of market power. Between 1,000 and1,800, the exercise of power is deemed feasible. Above 1,800the U.S. government becomes very concerned. Figure 3supports the government’s conjecture. Between 1,000 and2,000 prices clearly rise, and thereafter, the price risecontinues but at a less steep rate.
*Fitting a logarithmic line to these data explains 60.1 percentof the variation in price.
ratios for 1992, and Table 5 gives them for 1998 so thatwe can evaluate in detail the increase in retailconcentration for these regions of the United States. InTable 4 the state of California with population of 29.7million had four-firm concentration of 50.1% in 1992.Four-firm concentration for the state of Florida withpopulation of 12.9 million was 77.7% in 1992,considerably higher than for the state of California. TheNortheast and the upper Midwest both had four-firmconcentration ratios of roughly 31% in 1992.
Moving now to Table 5, by 1998 four-irmconcentration in the state of California had increased19.7 points to 69.8%. This dramatic increase of fourfirm concentration is due primarily to two major mergersin California. Albertsons acquired American Stores, andSafeway acquired the Von’s grocery store company. By1998 concentration in the state of Florida also increasedincreasing 10 points to 87.7%. In the Northeast with apopulation of 57.9 million people, which is similar insize to the United Kingdom, four-firm concentration
increased 10.7 percentage points to 41.3 percent. Again,a major source of this increase in four-firm concentrationwas mergers between firms in the region, especiallymergers under the Royal Ahold corporate umbrella. In1992 Ahold wasn’t even listed in the top 5 retailers forthe Northeast region, but by 1998 it was ranked firstbecause it had acquired the Stop & Shop chain in NewEngland, the Giant Food chain in Washington, D.C. andBaltimore, and the Pathmark chain in the greater NewYork City region. Note also that Sainsbury with itsacquisition of Shaw’s and Star Markets in New Englandjoined the Tengelmann/A&P chain in the top 4 rankingfor the Northeast. Thus, 3 of the 4 leading supermarketchains in Northeastern United States are now Europeanowned.
In the upper Midwest, retail concentration increasedonly 2.3 percentage points to 34 percent of the market.The region was relatively calm on the merger front,however, Safeway acquired the Chicago basedDominick’s chain and the Jewel chain, a subsidiary ofAmerican stores, was acquired by Albertsons.
Note that the regional four-firm concentration ratiosin Table 5 are all uniformly lower than thecorresponding average local market concentration ratiosfor cites and that are reported in Table 3. For example,local market concentration in California in 1998 in its 6major cities averaged 90.7 percent, which is significantlyhigher than the statewide four-firm concentration ratio of69.8. This means regional concentration ratiosuniformly tend to understate local market concentrationand thus uniformly tend to understate the degree of sellerpower that supermarket chains have in local geographicmarkets. This insight also holds for country vs. localcity market comparisons in Europe. The relevantconcentration figures are for local urban food markets,e.g., Manchester or Birmingham, or possibly sections ofsuch major urban areas, not the total U.K.
Table 5 also gives the regional dollar sales and thetotal U.S. corporate sales for each chain. For, multi-national chains it gives a total global sales as well. Notethat Walmart with 136.6 billion dollars (which includesall of its non-food operations as well as its foodoperations globally) is by far the largest retailorganization. Kroger is next with total sales all in theUS of 43 billion dollars, then Albertsons with total sales,again all in the US, of 35.7 billion. Three leadingEuropean chains rank among the largest retailersglobally. The Tengelmann chain has total sales of 29.6billion (10.5 billion in the United States.) The Aholdchain has global sales of 25.9 billion with 19.7 billion inthe United States and the Sainsbury chain has a totalglobal sales of 23.8 billion with only 4.2 billion in theUnited States.
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Moving on to national market concentration onefinds a significantly weaker but very visible trendtowards increased concentration. Table 6 reports thesales and market share position for the top 20supermarket chains in 1992. The top four chainsnationally in 1992 were Kroger, American Stores,Safeway and A&P/Tengelmann. Those four firmstogether, however, accounted for only 23.3% of USsupermarket sales. The top 20 firms in 1992 accountedfor 51.0% of supermarket sales in 1998. Table 7 showsthat top chain, Kroger, increased sales by 21.9 billiondollars to 43.1 billion. Kroger’s market share increasedfrom 7.7% in 1992 to 10.8% in 1998. Much of this gainwas due to acquisitions (see Table 8.). The number 2chain in 1998 is the combination of Albertsons andAmerican at 35.7 billion with an 8.9 percent marketshare. The number 3 chain is the combination ofSafeway and Vons with 25 billion in sales and 6.2%market share. The number 4 chain is the Aholdcompanies, which moved up from number 8 in 1992 tosales of 23.4 billion in 1998 and a market share of 5.8%.The top four firms in 1998 account for 31.7% of themarket up from 23.3% in 1992. The top 20 firms in1998 accounted for 60.4% of the market, up 10.2percentage points from 1992. Thus, we can conclude ifone is comparing national concentration to nationalconcentration across the Atlantic, concentration at thenational level is indeed lower in the United States than itis in most of the smaller European nations. However,American supermarket chains are larger in absolutedollar volume size than European companies in Europe.This suggests that they should, if anything, enjoy largereconomies of scale and scope related to the productionand physical distribution of food products than Europeanchains.
With regard to the exercise of retailer power againstmanufacturers and other suppliers in the food system,local and regional concentration may be more importantthan national concentration because suppliers can’tthreaten to switch sales to other geographic localities.Fully national distribution is important to them. Thisimproves retailers’ bargaining position in anycoordination games and is a major reason for the rise inslotting allowances, street money, and other transfers toretailers.
Table 8 lists the major supermarket mergers for 1991through the first half of 1999. Kroger’s acquisitionconduct is a classic example of smaller fish beingswallowed by progressively larger fish. Kroger, the bigfish, acquired Fred Meyer in 1998, which acquiredRalphs and Quality Foods in 1997, and Quality Foodsacquired Hughes in 1996. Over the 1991 to 1999 period,the aggregate value (price paid) for acquired
supermarkets relative to their annual sales has increasedfrom the .2 to .3 range in 1991 to the .5 to .8 range in1998-99. Acquirers are now paying a higher premiumper dollar retail sales. To make such a merger pay foracquiring firm shareholders, even larger efficienciesand/or more pricing power needs to flow from thecombination.
In summary, two related major forces contributed toincreased retail concentration in the United States duringthe 1990s: the entry of European chains into US markets,and mergers. In many instances these mergers hadsignificant horizontal components, i.e., the mergedchains competed with each other in one or more localgeographic markets. Only one merger was stopped byantitrust authorities. The state of California successfullychallenged the American Stores-Lucky merger forcingAmerican to divest its Alpha Beta chain to Food 4 Lessin 1991 (see Table 8). In all other mergers FederalTrade Commission and state antitrust authorities haveroutinely forced divestiture of only overlapping stores inan attempt to preserve competition. The regional andlocal market concentration data presented here, however,indicate that in spite of antitrust authority efforts,concentration has increased significantly. Recently,individual firms, the American Antitrust Institute, andother trade associations representing consumers, farmers,and food firms, have called for stiffer anti-mergerenforcement in food industries, especially food retailing(Foer, 1999, Cotterill, 1999b).
4. Shifting Power Balances Drive New CoordinationPrograms
In the 1980s leading food-manufacturing firmsenjoyed powerful market positions with stronglydifferentiated brands supported by significantadvertising expenditures. Their position has notappreciably changed since then, however, the position offood retailers has. Local market retail concentration hasincreased significantly giving retailers the ability toexercise market power on a more systematic andpervasive basis than in the 1980s. Consequently, wehave a food system that is predominantly served bypowerful food manufacturers selling to powerful foodretailers.
A successive monopoly model of the distributionchannel captures the essence of the channel coordinationproblem in the U.S. Food manufacturing industries suchas carbonated beverages, breakfast cereal, and beer aretight oligopolies that sell highly differentiated brandsthat have reasonably inelastic (-1.5 to -3.0) brand leveldemand curves at retail (Tellis, 1988, Cotterill et al.1996, Langan and Cotterill 1994, Langan 1997, Ma
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1997, Nevo 1997, Cotterill and Haller 1997). Theobserved brand inelasticity is primarily due to productdifferentiation, however, some is also due to coordinatedpricing, i.e. price followship tends to reduce brandelasticities (Cotterill et al. 2000). Consumer pulladvertising and promotion by the brand manufacturerreduces any bargaining power of buying groups(Cotterill 1997, Gerstner and Hess, 1991). Consumerswant the brand so retailers must carry it. Thus eachbrand tends to be a monopoly; i.e. its food manufacturersface a brand level demand curve that has slope. As wehave explained, however, retailers also have marketpower in the local markets where they sell products dueto high seller concentration in such local markets (Alsosee Marion et al. 1979, Weiss, 1989, Cotterill, 1986,1999a, Foer, 1999).
Spengler (1950) was the first to analyze the impactof successive monopoly on channel coordination andeconomic efficiency. Figure 4 can be used to explain theproblem.1 Dr is the retailers demand curve. MRr isthe corresponding retail marginal revenue curve. If weassume, without loss of generality and for ease ofillustration, that the retailer has a fixed cost of retailingand that the only variable cost is the purchase of theproduct Q , then the retailers marginal cost is themanufacturer price, w . Since a profit maximizingretailer always equates marginal revenue and marginalcost (MR wr = ) the retailers marginal revenue curve isthe demand curve for Q at the manufacturer level. Themanufacturer therefore equates the marginal revenue ofthe retailers input demand curve (MRm) to its marginalcost of manufacturing the product. In other words, themanufacturer computes the marginal revenue of theretailer’s marginal revenue, hence the name doublemarginalization. In Figure 4 the profit maximizingmanufacturer offer quantityQ2 at price p1 = w, and the
profit maximizing retailer sells this quantity at price p2 .If the two firms integrated the new single monopolistwould maximize profits by lowering price to p1 and
sellingQ1 . The integrated firm’s total profits are greaterthan the profits of the two successive monopolists.
The implications of this double marginalizationphenomena are very real for the US food marketingsystem today. Food manufacturers and food retailers,can in fact, increase their profits if they discardindependent pricing practices and talk to each other tocoordinate pricing and other terms of trade. To the
1 This analysis of double marginalization to explain formallythe role of trade promotions and private labels in the foodsystem was first presented in Cotterill (1999d).
extent that retailers also have power in wholesalemarkets, this “big buyer power” affects their bargainingability to capture a larger share of the coordination gains.The double marginalization model predicts that verticalcoordination will increase channel profits and lowerprices to consumers. This is a very rare win-winsituation in economics, the “dismal science” of tradeoffs!
With this economic model one can begin tounderstand why strategic moves such as the efficientconsumer response (ECR) program with its everydaylow pricing (EDLP) component was only partiallysuccessful. ECR moves to improve the logistical flow ofproducts through the system, such as just-in-timeinventory management procedures, have been successfulbecause they reduce cost. However, one of the largestprojected savings due to the innovation of ECR wasrelated to the elimination of stop-go price promotions viathe establishment of everyday low prices (EDLP)throughout the food system. EDLP didn’t work andsavings due to smoother product flow haven’t accrued.EDLP has failed in the United States precisely becauseof the need for trade promotion programs as a vehicle tocontrol or eliminate double marginalization in thechannel.
Consider Figure 5. The manufacturer can offerproduct to the retailer on the condition that it bepromoted at price p1 the channel profit-maximizingprice. To obtain the retailers cooperation, themanufacturer need only lower w to a level thatincreases the retailer’s profits from the nonpromotedlevel. Figure 5 illustrates a trade promotion's impact onprices and profits. At the nonpromoted retail price level,p2 , the channel profit .the manufacturer has profits
equal to the area, wbde. The retailer earns profits equalto area, .2abwp With promotion the retailer agrees to
sell at p1 and the manufacturer lowers the wholesale
price to w1 . The retailer participates in the trade
promotion because its profits, area p fiw1 1, are greater
than its nonpromotion profits, area abwp2 .
Manufacturer profits under promotion are area w ige1 ,
which is larger than nonpromotion profits, wbde.Under the trade promotion scenario both the
manufacturer and retailer share the increased profits dueto the elimination of double marginalization. Thus anold logistically inefficient workhorse in the food system,trade promotions, has not been put out to pasture. It hasa new more central role for pricing efficiency inconcentrated food channels.
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The retailer, however, has a second marketingstrategy that can dominate participation in a tradepromotion. If the retailer can introduce a private labelproduct of equal quality and consumer acceptance, i.e. aproduct that destroys all manufacturer brand equity builtup due to advertising, product trademarks, and design,the retailer can appropriate all of the profits earned atp Q1 1 in figures 4 and 5. Private label products,
however, rarely are so successful that they eliminatemanufacturer brands but clearly they diminish nationalbrand pricing power (Cotterill et al. 2000). Tradepromotion by manufacturers reduces the incentives fordevelopment of private labels, and the amount of brandequity that manufacturers have created also affectsretailers ability to introduce private label products. Onecannot analyze private label pricing in a vacuum.Nonetheless, the rapid growth of private label productsin the 1990’s is in large part due to the problem ofsuccessive monopoly in the food system.
5. An Out of the Box Solution: Truly NationalSupermarket Chains
Moves to improve channel coordination and pricingefficiency such as trade promotions, ECR, categorymanagement, and copycat private label programs are “inthe box” solutions. They don’t challenge the structure ofthe food-marketing channel, essentially leaving the food-manufacturing firms intact and in control of the contentof the system. Although U.S. supermarket chains arelarger in absolute size than their European marketscounterparts, and they dominate regions of the U.S.comparable in size to many European countries, unlikemany European supermarket chains they have notestablished themselves as channel captains by institutingstrong retail brands via supply chain managementprograms.2 In the U.S. this is an “out of the box” movethat would diminish the position and stock market valueof large U.S. food manufacturers. The breakfast cerealindustry has experienced a very strong taste of this since1995 (Cotterill, 1999c).
The next phase in retail concentration may well bethe harbinger of such a radical shift in economic fortunesin the U.S. food system. That phase is the emergence oftruly national supermarket chains, unseen in the U.S.since the heyday of A&P in the 1930’s and 1940s. Inthe near future, we undoubtedly will see more mergers
2 Cotterill (1997) discusses this option and whether developednations’ food systems might converge to it. See Wrigley(1999), a leading British geographer, for a very interestingEuropean perspective on the transformation of U.S. foodretailing.
among the top 10 supermarket chains. Since this is an“out of the box” solution, lets speculate on some feasiblegeographic combinations that would assemble trulynational chains with significant national market shares.Using Table 7 as a base, and ignoring the impact ofhorizontal divestitures that attempt to protectcompetition in local market areas, if Kroger, Safeway,Winn Dixie and Shaws (Midwest, West, South, andNortheast) combined, the resulting company would betruly national in scope with sales of $86.4 billion and anational market share of 21.5%. A second combinationcould be Albertsons, Ahold, Food Lion, and Meijer(West, East, South and Midwest). It would have sales of$77.9 billion and a national market share of 19.3 percent.These two mammoth chains would account for slightlyover 40 percent of supermarket sales. Walmart’s muchballyhooed expansion by building supercenters is trivialin comparison. A third combination could assembleanother 20 percent firm in response to these conjecturedconsolidations. These three firms plus a larger Walmart,e.g. 10 percent SOM, would put national four-firmconcentration at 70 percent.
Consolidation to this level would have two majorimpacts. The first is a quantum leap in bargaining powerthat was the basis for the Robinson Patman Act (the antiA&P act) in the 1930’s. Recently, the AmericanAntitrust Institute (AAI) and Wakefern FoodCorporation, Elizabeth, New Jersey, the nation’s largestretailer-owned cooperative wholesale, petitioned theFTC on, among other things, this issue. The AAIalready is concerned that recent mergers have, in fact,generated sufficient size disparity in the supermarketindustry to trigger Robinson Patman claims:
“What we are calling the mega-chains–the fivelargest retail grocery sellers–exercise enormousbuying power, which they employ against the foodproducers and manufacturers. The sheer size of themega-chains looms as a lever–the manufacturersmust get their products onto the shelves of thelargest retailers, even if they have to pay higher,even exorbitant, slotting and other allowances andmake other costly concessions–which they areforced to do. As a result, manufacturers may raisetheir prices to all customers in order to earn anacceptable return on investment. In that case, allother customers subsidize the mega-chains....smaller customers are always at a competitivedisadvantage, because they are not receiving thehigher allowances and other concessions, whicheffectively raises their cost of goods.”(Foer, 1999,p.7).
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The R-P Act may come to the forefront after decadesof relatively inactive and marginal enforcement. It givesretailers (read smaller ones) legal recourse againstmanufacturers that grant discounts to other retailers (readlarger ones) that are not cost justified. In the conjecturedscenario, manufacturers would have two choices: eithergive all retailers noncost justified discounts that largeretailers demand, or give no one such discounts.
This latter option may not be sustainable in the longrun because the truly national chains may go out of thebox. They may develop strong retail brands thatsupplant or at least significantly curtail time honoredmanufacturer brands. Leading manufacturers andsmaller retail chains would both lose position in the foodsystem.
Whether this large chain strategy is viable dependsupon the trade off between economies of specializationversus economies of scope in branding food products.Economies of scale and scope in production anddistribution are not an issue. Branded food companies,for example, in fruits, vegetables and cheese have spunoff production to agricultural cooperatives. They buythe product as a graded commodity and then put theirbrand on it. Supermarkets in Europe do the same withtheir supply chain management approach.
Does a company such as Kellogg’s or Campbell’shave a competitive advantage in branding new productsin cereal or soups, or does a truly national supermarketchain have the edge because of scope economies? Ifadvertising is losing its punch due to new technologies,then the era of branding food products with TV mediamay be over (see Box 3).
Box 3: Goodbye to Advertising As We Know It
“ Thanks to smart new VCR-like machines from SiliconValley, the viewer is king, media moguls are fretting, andadvertisers are terrified. A DVR (Digital Video Recorder)incorporates a hard-disk drive, a modem, and silicon circuitry.It converts TV programs entering your home via cable,satellite dish, or antenna into digital bits (up to 30 hours’worth) that the hard drive can store for you to view at yourconvenience… It’s a Trojan horse that couldsurprise…advertisers with radical change… That’s because,yes, DVRs let you skip commercials with ease. Advertiserswill feel added pressure to come up with ads “sticky” enoughto keep viewers from zapping them… Forrester Research ofCambridge, Mass., predicts that 13% of U.S. households willhave one by 2004, an adoption rate faster than that of VCRs.”(Schlender 1999)
If a retailer can establish a uniform high qualityreputation across several categories, the retailer namealone would be the brand, and it would be transferable tonew product categories. Underlying this economy ofscope argument is the supposition that truly nationalchains could develop extensive managerial cadre thatcould work with smaller manufacturers in a supply chainmanagement context to produce and market trulyinnovative new foods and high quality established foods.Truly national chains could make more effective use ofTV media that is segmented along demographic ratherthan geographic lines. These chains would not rely onleading manufacturer brands to do categorymanagement. Their own management would do it.Fundamentally, this battle for channel control distillsdown to whether large old-line food manufacturers, ornew retailer “product development and marketing”departments working with smaller possibly moreexperimental and entrepreneurial food manufacturers canbe the most innovative and creative.
Truly national chains may also be able to capitalizemore quickly on two emerging trends: meal solutionsand international cuisine affinity centers within stores.With continuing economic growth, wealthier consumerswill pay for prepared meals rather than brandedingredients to combine and cook at home. Affinitycenters will replace the traditional aisles of packagedgroceries with more circular areas that will offer an arrayof prepared ready-to-eat meals and ingredients for aparticular cuisine such as Indian or Mexican.
If, in fact, economies of scope at retail can dominateeconomies of specialization at the manufacturing levelfor the marketing of specific food products, we may verywell eliminate double marginalization in food channels;however, we would be left with a food systemdominated by retailers who are sharedmonopolists/monopsonists. Can three or four huge retailbureaucracies truly be efficient and responsive? Themonopsonistic power of large retailers against primaryfood producers is already becoming a concern amongU.S. farmers. Recently, farmer groups were concernedwhen a glut of pork depressed farm level prices by morethan 50 percent for several months, but retail pork pricesremained unchanged. Rapid and responsive pricetransmission is necessary to expand consumer demand insuch situations to reduce the severity of commodity pricecycles.
Unless antitrust enforcement is significantlytightened, mergers will continue to contribute toconcentration at all stages of the food system. Antitrustchallenges at retail may very well be supported bymanufacturers and small retailers as well as consumersto the extent that they curtail double marginalization,
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limit the bargaining power of large retailers, andpreclude the European solution. Nonetheless, ifconcentration in local retail markets and in foodmanufacturing markets continues to increase, problemsof double marginalization will increase creating evenmore impetus for vertical coordination. Third partymarketing firms that facilitate vertical coordination in allphases of marketing will thrive. Those include A.C.Neilsen Information Resources, Inc., Catalina Marketingwith its electronic in-store coupons, Vlassis withnewspaper coupons, and News America/Actmedia withnewspaper coupons and in-store electronic and paperpromotion programs.
The European retail brand/supply chain managementmodel is a real and viable option (Cotterill 1997). Butmost American marketing pundits prefer a more diverseless bureaucratic food system with cooperative efforts toimprove coordination. A tougher stance against retailermergers by antitrust agencies would preserve a morediverse system. We end this essay with the insightproffered in the introduction. No one knows withcertainty how this dynamic scenario will play out. Itdepends on strategic moves by the world'’ leading foodfirms and public policy, especially antitrust enforcement.
References
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Cotterill, R.W. 1999a. Marketing Power and the DemsetzQuality Critique: An Evaluation. Agribusiness. 15(1):101-118.
. 1999b. An Antitrust Economic Analysis of the ProposedAcquisition of Supermarkets General Holdings Corp. byAhold Acquisition Inc. Food Marketing Policy Center,University of Connecticut. April 19.
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Cotterill, R.W., R. Dhar, and W. P. Putsis. 2000. On theCompetitive Interaction Between Private Label andBranded Grocery Products. Journal of Business73(1):109-137.
Cotterill, R.W., A.W. Franklin, and L.Y. Ma. 1996. MeasuringMarket Power Effects in Differentiated ProductIndustries: An Application to the Soft Drink Industry.
Research Report No. 32. Food Marketing Policy Center,University of Connecticut, Storrs, CT.
Cotterill, R.W. and L. Haller. 1997. An Econometric Analysisof the Demand for RTE Cereal: Product Definition andUnilateral Market Power Effects. Research Report No. 35,Food Marketing Policy Center, University of Connecticut,Storrs, CT.
Foer, A. A. 1999. Mergers in the Food Industry:Ahold/Pathmark. A letter to Robert Pitofsky, Chairman,Federal Trade Commission. June 18.
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Gerstner, E. and J.D. Hess. 1991. A Theory of Channel pricePromotion. American Economic Review 81(4):872-886.
Goch, R. 1998. Merger and Acquisition Activity in the USSupermarket Industry 1991-1998. InformationClearinghouse Inc. Great Neck, New York. December 21.
Global 500, 1998. Fortune. (http://www.fortune.com).Langan, G. 1997. Brand Level Demand and Oligopolistic
Price Interaction Among Domestic and Foreign BeerBrands. Ph.D. Diss., University of Connecticut, Storrs,CT.
Langan, G. and R.W. Cotterill. 1994. Estimating Brand LevelDemand Elasticities and Measuring Market Power forRegular Carbonated Soft Drinks. NE-165 Working PaperNo. 42. University of Connecticut, Storrs, CT.
Ma, L., 1997. An Econometric Analysis of Competition in aDifferentiated Product: The U.S. Ready-to-Eat CerealIndustry. Ph.D. diss., University of Connecticut, Storrs,CT.
Marion, B, W. Mueller, R. Cotterill, F. Geithman, and J.Schmelzer. 1979. The Food Retailing Industry: MarketStructure, Profits and Prices. New York:Preager.
Megabrands Ranked 101 to 200 in 1997. Advertising Age.(http://www.adage.com).
Nevo, A. 1997. Demand for Ready-to-Eat Cereal and itsImplications for price Competition, Merger Analysis andValuation of New Brands. Ph.D. diss., HarvardUniversity, Cambridge, MA. May.
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Top 100 Megabrands, Advertising Age. (http://www.adage.com).
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Insights from the Corporate Restructuring of U.S. FoodRetailing. Geographical Analysis 31(3):288-309.
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Table 1. Food Processing Magazine’s Top 25 U.S. Food Processing Companies, 1998
Millions $Rank Company Food Sales Total Sales Percent Food
1 Philip Morris Companies, Inc. 31,527 71,592 44 2 Conagra, Inc. 28,840 28,840 100 3 Cargill, Inc. 21,400 51,000 42 4 Pepsico, Inc. 20,917 20,917 100 5 The Coca-Cola Company 18,800 18,868 100 6 Archer Daniels Midland Company 16,109 16,109 100 7 Mars Inc. 14,000 14,000 100 8 IBP, Inc. 13,259 13,259 100 9 Anheuser-Busch Companies, Inc. 12,832 12,832 10010 Sara Lee Corporation 10,800 20,000 5411 H.J. Heinz Company 9,209 9,209 10012 Nabisco, Inc. 8,734 8,734 10013 Bestfoods 8,400 8,400 10014 Nestle USA, Inc. 7,800 7,800 10015 Dairy Farmers of America 7,000 7,000 10016 Kellogg Company 6,830 6,830 10017 Campbell Soup Company 6,696 6,696 10018 The Pillsbury Company 6,500 6,500 10019 Tyson Foods, Inc. 6,356 6,356 10020 General Mills, Inc. 6,033 6,033 10021 Quaker Oats Company 5,010 5,010 10022 The Proctor & Gamble Company 4,376 37,154 1223 Dole Food Co., Inc. 4,336 4,336 10024 Hershey Foods Corporation 4,300 4,300 10025 Land O’Lakes, Inc. 4,195 4,195 100
Source: The 1998 Top 100 Food Companies, Food Processing, December 1998 Issue.
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Table 2. Leading Company Advertisers in Food and Tobacco Processing, 1997
Rank Company 1997 Advertising Expenditure Percent Of Total Cumulative Percent
1 Philip Morris Inc. $1,313,430.9 17.48 17.482 General Mill's 416,684.6 5.55 23.033 Kellogg Co. 403,215.5 5.37 28.394 Coca-Cola Co. 317,190.1 4.22 32.625 Pepsico Inc. 292,467.8 3.89 36.516 RJR Nabisco 287,243.6 3.82 40.337 Anheuser-Busch Inc. 263,366.1 3.51 43.84
8 Diageo PLC* 251,715.8 3.35 47.199 Campbell Soup Co. 250,726.4 3.34 50.5310 Mars 192,424.4 2.56 53.0911 Nestle 183,748.4 2.45 55.5312 Quaker Oats Co 176,602.1 2.35 57.8813 Proctor & Gamble 174,623.4 2.32 60.2114 Hershey Foods Corp 174,331.7 2.32 62.5315 Unilever 142,082.1 1.89 64.4216 William Wrigley Co 139,334.7 1.85 66.2717 Adolph Coors 139,289.6 1.85 68.1318 Seagram Co 114,412.9 1.52 69.6519 Conagra Inc. 91,537.2 1.22 70.87
20 Slim Fast 78,959.0 1.05 71.9221 Bat Industries 68,861.6 0.92 72.84
* Includes the following subsidiaries: Pillsbury, Green Giant Vegetables, Haagen-Dazs, Old El Paso, Guiness.Source: Calculated from Competitive Media Reporting, 1998. Based on a total $7.513 billion in advertising for cigarettes and food products.
Table 3. Mean Values for Supermarket Four Firm ConcentrationRatios in MSA Areas:1987 and 1998
All MSA's FL CA NE MW
1998 74.4 72.4 90.7 73.5 69.31987 64.5 60.0 82.9 59.7 60.6
n= 94 10 6 26 13
Source: Trade Dimensions Market Scope 1988, 1999.
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Table 4. Supermarket Sales and Concentration Ratios for SelectedRegions in the U.S., 1992
RegionArea Rank Chain Share Population
California 29,760,0001 Lucky 19.02 Vons 13.83 Ralphs 9.44 Safeway 7.85 Alpha Beta(Food 4 Less) 5.4
C2= 32.8C4= 50.1
Florida 12,938,0001 Publix 35.22 Winn-Dixie 27.63 Albertson's 9.24 Kash N Karry 5.75 Food Lion(Del Haize) 5.1
C2= 62.8C4= 77.7
North East1 53,798,0001 A&P(Tengelman) 12.42 Pathmark 8.03 Giant Food Inc. 5.54 Acme (American) 4.75 Stop & Shop 4.2
C2= 20.4C4= 30.6
Upper Midwest2 32,820,0001 Kroger 10.62 Jewel(American) 10.03 Dominick's 5.84 A&P(Tengelman) 5.35 Cub(SuperValu) 3.8
C2= 20.6C4= 31.7
1 Includes Washington D.C., Baltimore, Pennsylvania, New York, and New England2 Includes Michigan, Wisconsin, Illinois, Indiana, Ohio, and Minnesota.Source: Cotterill, R.W. 1997. The Food Distribution System of the Future: Convergence Towards the US or UK Model? Agribusiness 13(2):123-135.
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Table 5. Supermarket Sales and Concentration Ratios for Selected Regions in the U.S.1998
Region Total U.S. Total GlobalArea Sales Region Corporate Sales Sales(population) Rank Chain ($ Billion) Share ($ Billion) ($ Billion)
California $31.1 (32 million) 1 Albertsons/Lucky 7.6 24.5 35.7
2 Safeway/Vons 6.9 22.0 25.03 Ralphs(Kroger) 5.6 18.1 43.14 Stater Bros. 1.6 5.2 1.75 Raleys 0.7 2.4 2.5
C2= 46.5C4= 69.8
Florida $16.2 (14.6 million) 1 Publix 7.0 43.1 12.1
2 Winn Dixie 4.4 26.9 13.93 Albertson's 1.5 9.5 35.74 Food Lion(Del Haize) 1.3 8.2 10.2 14.55 Wal Mart 0.4 2.5 12.81 136.6
C2= 70.0C4= 87.7
North East2 $69.7 (57.9 million) 1 Ahold3 15.9 22.8 23.4 25.9
2 A&P(Tengelmann) 5.3 7.6 10.5 29.63 Shop Rite/Wakefern 3.9 5.6 5.24 Shaws(Sainsbury) 3.7 5.3 4.2 23.85 Acme (Albertson's) 2.2 3.2 35.7
C2= 30.4C4= 41.3
Upper Midwest4 $40.6 (34.1 million) 1 Kroger 6.1 15.1 43.1
2 Jewel(Albertsons) 3.3 8.2 35.73 Dominick's (Safeway) 2.5 6.3 25.04 A&P(Tengelmann) 1.8 4.4 10.5 29.65 Meijer 1.7 4.2 8.6
C2= 23.3C4= 34.0
1 Grocery sales account for 40% of the total Wal Mart sales or $12.8b.2 Includes Washington D.C., Baltimore, Pennsylvania, New York, and New England3 AHOLD operates Bi-Lo, Edwards/Finast, Giant Food Stores, Tops, Stop & Shop, Giant (Landover MD), and Pathmark (assuming approval with nodivestiture).4 Includes Michigan, Wisconsin, Illinois, Indiana, Ohio, and Minnesota.Source: Trade Dimensions, Market Scope 1999, Trade Dimensions, Marketing Guidebook 1999, Bureau of Census Population. Fortune Global 500,1998, www.fortune.com. Forbes, Top 100 Largest Private Companies, www.forbes.com.
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Table 6. Top 20 Supermarket Chains, Total U.S. 1992
SalesRank Chain ($ Billion) Share
1 Kroger 21.9 7.72 American 19.0 6.63 Safeway 15.1 5.34 A&P/Tengelmann 10.7 3.75 Winn-Dixie 10.3 3.66 Albertson's 10.2 3.67 Food Lion 7.1 2.58 AHOLD* 6.3 2.29 Publix 6.1 2.110 Vons 5.6 2.011 Penn Traffic/Grand Union 5.6 2.012 Supermarkets General 4.7 1.613 HE Butt 3.8 1.314 Giant Food (Landover, MD) 3.5 1.215 Stop & Shop 3.2 1.116 Food 4 Less 3.0 1.017 Ralph's 2.9 1.018 Bruno's 2.7 0.919 Roundy's 2.5 0.920 Spartan Stores 2.4 0.8
C2= 14.3C4= 23.3C8= 35.2C20= 51.0
* Ahold operates Bi-Lo, Edwards/Finast, Giant Food Stores, Tops, Stop & Shop, Giant (Landover MD),Source: Supermarket News January 18, 1993. The Food Institute Food Retailing Review 1994, Fair Lawn, NJ. Trade Dimensions, MarketingGuidebook, 1994, Supermarket sales of $286.3b.
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Table 7. Top 20 Supermarket Chains, Total U.S. 1998
SalesRank Chain ($ Billion) Share
1 Kroger 43.1 10.82 Albertsons/American 35.7 8.93 Safeway/Vons 25.0 6.24 AHOLD* 23.4 5.85 Winn-Dixie 13.9 3.56 Wal Mart 12.8 3.27 Publix 12.1 3.08 A&P(Tengelman) 10.5 2.69 Food Lion(Del Haize) 10.2 2.510 Meijer 8.6 2.111 H.E. Butt 6.9 1.712 ShopRite(Wakefern ) 5.2 1.313 Shaw's(Sainsbury) 4.2 1.014 SuperValu 4.1 1.015 Giant Eagle 4.0 1.016 Fleming 3.5 0.917 Hannaford(Sobey's) 3.4 0.818 Hy Vee 3.2 0.819 Penn Traffic/Grand Union 2.8 0.720 Randall's 2.5 0.6
C2= 19.7C4= 31.7C8= 44.0C20= 60.4
* AHOLD operates Bi-Lo, Edwards/Finast, Giant Food Stores, Tops, Stop & Shop, Giant (Landover MD), and Pathmark (assuming approval withno divestiture).Source: Supermarket News January 25, 1999. Supermarket sales of $400.5b.
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Table 8. Supermarket Merger Activity in the U.S., 1991 to 1999
Transaction AggregateValue2
Year Acquiree Acquirer Value1 Sales EBITDA
1991 Almac's Leonard Green 125.0 N.A. 7.5American Stores Food 4 Less 248.0 0.2 4.5Tops(Freeman Spogli) Royal Ahold 125.5 0.2 6.4Purity Supreme Freeman Spogli 319.9 0.3 5.9Williams Brothers Vons Companies 48.0 0.2 N.A.
1992 Baker's Supermarkets Fleming Cos. 50.0 0.2 N.A.Cullum Randall's 468.0 0.4 7.7Grand Union3 Grand Union 1,404.7 0.5 7.1Jewel (TX/OK/FL) Albertson's 455.0 0.3 5.3Wetterau Inc. SUPERVALU 1,164.6 0.2 6.8
1993 Big Star Stores Great A&P 121.0 0.3 N.A.Insalaco Penn Traffic 45.0 0.3 N.A.Pueblo International Cisneros Group 418.0 0.3 5.9
1994 Acme N.E. PA Penn Traffic 94.0 0.3 5.8Ralph's Grocery Food 4 Less 1,581.0 0.6 6.9Scrivner, Inc. Fleming Cos. 1,085.0 0.2 6.4Smitty's Yucaipa 168.0 0.3 6.2Star Markets Investcorp 285.0 0.3 6.7Wilson's Hannaford Bros. 127.0 0.6 7.4
1995 Bruno's KKR 1,233.3 0.4 8.0Dominick's Yucaipa 693.0 0.3 6.2Jitney Jungle Bruckman, Rosser 317.5 N.A. 5.9Mayfair Royal Ahold 188.0 0.3 7.6Purity Supreme Stop & Shop 255.0 0.3. 7.9
1996 Hughes Quality Foods 391.5 0.3 6.4Kash & Karry Food Lion 342.5 0.3 6.0Smitty's Smith's Food & Drug 195.4 0.3 6.7Stop & Shop Royal Ahold 2,900.0 0.7 8.9Vons Safeway 3,447.2 0.6 9.9
1997 Delchamps Jitney Jungle 244.4 0.2 6.6Quality Food Centers Fred Meyer 1,700.0 0.9 11.2Ralph's Grocery Fred Meyer 3,100.0 0.6 8.2Randall's Food Markets KKR N.A. N.A. N.A.Riser Foods Giant Eagle 403.0 0.3 7.2Smith's Food & Drugs Fred Meyer 2,000.0 0.7 7.3
1998 American Stores Albertson's Inc. 11,700.0 0.6 8.5Buttrey Foods Albertson's Inc. 169.0 0.5 10.2Carr Gottstein Safeway 330.0 0.6 7.2Dominick's Safeway 1,846.2 0.7 10.0Fred Meyer Kroger 12,800.0 0.8 10.0Giant Food Royal Ahold 2,790.3 0.7 12.2John C. Groub Co. Kroger 121.5 0.5 11.0Sessel Holdings Albertson's Inc. 88.0 0.5 9.3Star Markets J. Sainsbury 759.0 0.5 N.A.
1999 Pathmark Royal Ahold 1,750.0 0.5 N.A.(1st half) Glen's Markets Spartan Stores N.A. N.A. N.A.
Family Fare Supermarkets Spartan Stores N.A. N.A. N.A.Cox Supermarkets Marsh Supermarkets, Inc N.A. N.A. N.A.
Note: All sales figures in million dollars.1 Includes completed and pending transactions.2 "Aggregate Value" equals net debt plus equity.3 As part of recapitalization, Salomon Brothers sold its 40.7% stake in Grand Union.Source: Goch, 1999; The Food Institute: Food Institute Report, various issues.
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Figure 1. Increasing Dominance by the Top 20 Food and Tobacco Manufacturing CompaniesCensus Years 1967-1995
23.4 24.3
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11.9 12.2 11.7 11.19.4 9 10
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1967 1972 1977 1982 1987 1992e 1995e
Source: Rogers, 1999
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Figure 2. Histogram of Supermarket Four Firm Concentration Ratiosin Metropolitain Statistical Areas: 1987 and 1998
0
1 1
4
6 6
14
18
13
10
14
7
0
3
2
5
8
15
17
15
9
10
2
8
0 00
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4
6
8
10
12
14
16
18
20
<=40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 80-85 85-90 90-95 95-100
Source: Trade Dimensions Market Scope 1999, 1988, n=94
1997
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Source: Cotterill, R.W. 1999. An Antitrust Economic Analysis of the Proposed Acquisition of Supermarkets General Holdings Corporation by Ahold Acquisition Inc. FoodMarketing Policy Center, University of ConnecticutStorrs, CT 06269, April 19.
Figure 3. Scatterplot for Local Market Concentration and Price Level:Royal Ahold Prices in Selected Connecticut and Pennsylvania Markets
90
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125
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Continuing Concentration in the U.S. Cotterill
Food Marketing Policy Center Research Report #48 20
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Figure 5. Elimination of Double Marginalization by Trade Promotion
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1
FOOD MARKETING POLICY CENTERRESEARCH REPORT SERIES
This series includes final reports for contract researchconducted by Policy Center Staff. The series also containsresearch direction and policy analysis papers. Some of thesereports have been commissioned by the Center and are authored byespecially qualified individuals from other institutions. (A list ofprevious reports in the series is given on the inside back cover.)Other publications distributed by the Policy Center are theWorking Paper Series, Journal Reprint Series for RegionalResearch Project NE-165: Private Strategies, Public Policies, andFood System Performance, and the Food Marketing Issue PaperSeries. Food Marketing Policy Center staff contribute to theseseries. Individuals may receive a list of publications in these seriesand paper copies of older Research Reports are available for$20.00 each, $5.00 for students. Call or mail your request at thenumber or address below. Please make all checks payable to theUniversity of Connecticut. Research Reports can be downloadedfree of charge from our website given below.
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