Supermarkets : Competition Inquiries Into the Groceries Market

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THE IMPACT OF INVESTMENT AND CONCENTRATION AMONG FOOD SUPPLIERS AND RETAILERS IN VARIOUS OECD COUNTRIES Gabor Konig, PhD

Session 2.2. Promoting responsible international investment in agriculture

This paper is distributed as part of the official conference documentation and serves as background material for the relevant sessions in the programme. The views contained within do not necessarily represent those of the OECD or its member governments.

OECD Global Forum on International Investment OECD Investment Division www.oecd.org/investment/gfi-8

THE IMPACT OF INVESTMENT AND CONCENTRATION AMONG FOOD SUPPLIERS AND RETAILERS IN VARIOUS OECD COUNTRIES

Gabor KONIG, PhD
Hungarian Ministry of Agriculture – Agricultural Economics Research Institute (AKI) Zsil utca 3-5, Budapest, 1093, Hungary gabor.konig@gmail.com, gabor.konig@aki.gov.hu

ABSTRACT In developing and transition countries, agriculture depends heavily on foreign direct investment (FDI). FDI commonly flows into food retailing, where the anticipated profit is higher, rather than into food production and processing. FDI brings needed capital and growth and leads to increased concentration of market players. Food retailer concentration increases competition, enhances efficiency, and lowers consumer prices, which benefits consumers and the general economy. Supplier (producer or processor) concentration is slower and occurs on a smaller scale but as is the case for retailers, concentration makes suppliers more competitive and allows them to lower their costs and selling prices. With a higher level of concentration, retailers have more turn-over and better financial standing/capital intensiveness, giving them stronger buying and bargaining power. This increased power has had disadvantaged suppliers. The retailers’ leverage (higher concentration and bargaining power) over suppliers increases retailers’ profits. Food retailers are often large and foreign-owned in developing and transition countries and unreasonably burden smaller, national food producers. National producers’ concerns have increased protectionist pressure on investment policies, a fact that governments need to address. This paper aims to help governments 1) Understand supplier-retailer relations and FDI and 2) Strengthen and more effectively target their investment and policy commitments. The paper presents possible conflicts between food suppliers and retailers; explains reasons for concentration including market structure and foreign ownership; and supplies regulatory examples and recommendations for policies to address the problem. Keywords: FDI, bargaining power, food industry, processors, retailers

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TABLE OF CONTENTS

Introduction 1. Conflicts 2. Concentration trends: market structure, foreign ownership 3. Regulations Recommendations and Conclusion

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INTRODUCTION

Traditionally suppliers are the sellers and retailers are the buyers. Today, retailers act as sellers who sell their services suppliers, who are obliged to buy these services if they want to sell their products to retailers. Retailers act as customers by directly forwarding customer needs to suppliers. Smaller local suppliers basically produce products and ship them to large and increasingly fewer foreign-owned retailers, meaning suppliers have moved further and further away from the final buyers or consumers. This concentration trend in the supply chain has had adverse effects. For example, large retailers with increasingly greater "buying and selling power" sell suppliers’ products below cost. This paper addresses some interesting questions: What are the determinants of the supply chain concentrations? How is it possible to counterbalance the adverse effects of the strong buying power of foreign retailers against local food suppliers? How is it possible for governments to handle conflicts between retailers-suppliers and better investigate vertical conflicts between suppliers and producers? How is it possible...
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