Project Note no 2-2004

Eivind Jacobsen

Private food safety systems: The significance of market structure

© SIFO 2005 Project Note no 2 - 2004 NATIONAL INSTITUTE FOR CONSUMER RESEARCH Sandakerveien 24 C, Building B P.O.BOX 4682 Nydalen N-0405 Oslo www.sifo.no

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Project Note no 2 - 2004

Tittel

Antall sider

Dato

Private food safety systems: The significance of market structure

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08.03.2004

Forfatter

Prosjektnummer

Faglig ansvarlig sign.

Eivind Jacobsen

11-2004-31

Project Note no 2 - 2004: Private food safety systems: The significance of market structure1 Food safety systems in Europe have public as well as private elements2. Within a multi-level governance analysis of food safety systems, not only INGO’s, governments and public agencies, but also private organizations and corporations have to be considered as potential regulators. Due to high consumer sensitivity related to food safety questions, many food providers (producers and retailers) have, on their own initiative, put up food safety systems with higher than (public) mandatory standards. This is off course mainly done in order to win and maintain a volatile consumer confidence. By means of private food safety standards, such as the BRC-standard, and extensive use of the auditing industry, European retailers have taken a special focus on their own brand products and fresh produce. And as Arne Dulsrud pointed out, this has had a profound effect on practices in the supplier industry, e.g. in Norwegian fisheries. By controlling the market access of most producers, they have successfully managed to coordinate food safety activities within their own supplier lines. This way retailers have in effect probably done more to enhance food safety standards than most national public authorities. Retailers have also demonstrated ability to act swiftly and confidently, e.g. by removing disputed products from their shelves, in situations where political authorities have hesitated or been tampered by different kinds of national or international responsibilities. This way they have managed to create an image of themselves as guardians of the consumers. In their book: “Consuming Interest. The Social Provision of Foods”, Marsden, Flynn and Harrison (2000) describe how the big British retailers have been particularly successful in this manner. The major retailers have managed to employ such a degree of self-regulation, that the authors denote the British food safety system as a ’retailer-led-food-governance-system’.3 They claim that the big retailers have employed a profound influence on the way the food safety system is shaped and how related activities are carried out. It should be noted that this analysis was published prior to the establishment of the new Food Agency.

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Presentation for the January 9-11 Paris meeting: European Food Safety Regulation: The Challenge of MultiLevel Governance 2 ‘A food safety system is a set of (governmental and non-governmental) institutional arrangements or a ‘governance structure’ providing formal and informal rules to ensure food safety.’ (Spriggs and Isaac 2001:5) 3 They do this with reference to Streeck og Schmitter (1985) notion of “private interest regulation”.

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Internationally a jungle of private food safety and quality standards is currently making life difficult for the supplier industry and adding to transaction costs in the supplier chain. In this situation European retailers have launched an initiative in order to coordinate standards. The GFSI4, aims at coordinating standards and thereby reduce transaction costs, keep regulation eager politicians at bay and increase consumer confidence. American retailers are also enlisted in these efforts. However, despite EU’s regulations and guidelines, and despite the food processing industry’ and retailer’ considerable cross-border activities, there are huge differences between European countries as regards the prominence of private food safety system and retailers’ engagement in food safety matters. Such differences may partly be explained with reference to distinct national regulatory traditions, and hence, variations in the space offered by the various European countries for such systems. However, I will maintain that such differences should also be studied in relation to distinct differences in the market structure within which the relevant corporations operate. Market structures, here understood in a broad sense as the horizontal and vertical contexts of corporations (the supply chains and the competitors), serve to frame corporate strategies and priorities, including the prominence given to food safety measures. By employing a structural analysis of industrial strategies, it is necessary to see how retailers’ strategies are defined to serve long-term relations to suppliers, costumers and competitors. These relations are again partly defined by e.g. disparities in power (widely defined), sunk costs of different kinds and barriers to trade. The particularities of the different markets should be expected to have a bearing on retailers’ motivation for investing in food safety systems, as it partly defines the marketing mix options open for the retailers (price vs. quality vs. convenience and so on). Market structure is also of relevance in relation to retailers’ assessment of the probability of being held accountable for product quality, possible product defects and related food borne illnesses. A sketchy comparison of the British and Norwegian grocery market will serve to illustrate this. As a start of departure I will merely state the fact that whereas British retailing has been in the forefront of developing private food safety systems, Norwegian retailers have, until recently, been pretty unengaged in these kinds of activities. This may be illustrated by a look at Saintsbury’s homepage on the web, where they claim to have more than 150 persons fulltime

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The Global Food Safety Initiative.

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employed centrally in the organization with food safety related activities. The corresponding figure in the biggest Norwegian retailing group is one or two persons. Sic!! How come? A comparison of the two markets may reveal differences in strategic options of the retailers of the two countries. The two markets are very different. Great Britain has almost 60 million costumers, Norway barely 4,5 million. GB is a EU member, integrated in CAP, Norway is not, with very high fiscal tariff barriers on most agricultural produce. Nevertheless, as a EEA-member, Norwegian food safety regulations comply totally with EU-regulations. Agriculture in GB is highly industrialized. Small-scale units that could be classified as pre- or semi-industrialized dominate Norwegian agriculture. The food processing industry market in GB is highly competitive, with some very big transnational corporations with strong brands, and a wide range of small and medium sized firms. The corresponding Norwegian market is dominated by three or four farmers’ cooperatives. E.g. in dairy production they hold a market share of almost 99 percent of floating milk products (TINE). In meat products the corresponding figure is almost 60 percent (Gilde) and it is more than 80 percent in eggs and poultry products (Prior). Retailing is highly concentrated in both countries, with four groups controlling 86 percent of all grocery sales in Norway. In Britain the figure is a little lower, still high in a European context. Yet the Norwegian and British retailers are very different from each other. In Norway price has for the last 10 years been the dominant focus, with more than fifty percent of gross turnover going through retailers classifying themselves as discounters. Consequently Norwegian grocery shops are mostly boring places with a narrow range of products and little fresh products. The range of own brands is also restricted. Only some 10 percent of Norwegian grocery sales carry retailer own brands, and hardly any fresh food products have retailers’ brands. In Britain on the other hand, quality has been the focal point, with the superstores in the frontline. British retailing also has one of, if not the highest penetration of retailer-branded products in the world, well over 50 percent of total sales. The differences are somewhat sketchy described in the table on the next page.

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Size of market and agricultural market protection: Horizontal competition in the food processing industry: Horizontal concentration in retail: Retailer’s vertical control of supply chain:

Great Britain

Norway

Almost 60 million persons; EU member - CAP

4,5 million persons; EEA – high tariffs on agricultural produce Farmers’ monopolies dominate in the major agricultural sectors. Even higher

Competitive market High

High (Contract farming and own brands production, good access to imports through CAP) brands High

Retailer own penetration: Retailers involvement food safety systems

Modest to small (Blocked by combination of farmer owned processing monopolies in milk, meat and poultry and high import tariffs) Low

Just mandatory (and hardly in Very high Higher than mandatory levels that) for food security;

Table: Comparison of structural dimensions of the British and Norwegian market for food products. Due to monopolies in the processing industry and high import tariffs (and possibly a small market potential), Norwegian retailers have not had the option of building strong own brands in food products. The farmers’ monopolies have refused to produce own brands, and to the extent that own brands have been produced, they have been of inferior quality. As a result Norwegian retailers have chosen to focus on price as their principal promotion vehicle, selling producer brands cheap. Consequently, the retailers have (so far) one-sidedly pointed to the processing industry’s responsibility for the quality and safety of products, and have not in any way, until recently, tried to set up standards exceeding the mandatory public guidelines. It should be added that, as Unni Kjærnes pointed out, a high level of public confidence in the public institutions of this area of regulation has made this position easier to withhold. Trust in food has been a ‘public good’ in Norway, with retailers as the most prominent free riders. Hence, the Norwegian food governance system can in no way be said to be retailer led, at least not when it concerns food safety regulations. However, this should not lead some to believe that the Norwegian system is without it’s private elements. On the contrary, within the frames of what has been called organisational or social corporatism, farmers’ organisations

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and farmers’ controlled food processing industry have, until recently, had a profound impact on the regulatory regime. They have also employed a considerable degree of self-regulation, delegated from the state, on behalf of the state, in matters of great significance for food safety. A lot more could be said about this, but it is no time for that here now. Even though the protectionist Norwegian case may seem extreme, it should be remembered that country borders still delimit food markets also elsewhere in Europe. Despite the fact that CAP is more than 30 years old and the internal market now approach 10 years of history, most food trade is still happening within national borders. A border effect is obviously working, protecting national suppliers as well as retailers, possibly hampering competition, but thereby also making distinct national mixes of private and public food safety elements possible. The structures of national markets are therefore of significance for understanding retailer strategies and the priorities given to food safety concerns (within these strategies). In this light the British and Norwegian cases may be found to constitute extreme points on a continuum of private-public mixes of food safety system elements. Given that we have not yet done an empirical comparative study of national food safety governance systems along these lines, we do not known this for sure. Still we believe it is a good idea to employ these perspectives in a comparative study, and will do so in our different projects. A multi-level governance approach to food safety systems in Europe should therefore include a study of private elements and distinct national mixes of private and public elements. It should also be sensible to the possibility that different private interests and systems command privileged positions in relation to food safety systems in different countries. Finally, recalling a point made by Unni Kjærnes, in order to catch the dynamics of these private food safety elements and systems, it has to focus on consumer trust and sellers strategies of winning and maintaining trust. References: Marsden, T. Flynn, A. and Harrison, M. (2000) “Consuming Interest. The Social Provision of Foods”, London: UCL Press. Spriggs, John and Isaac, Grant (2001): Food safety and international competitiveness. The case of Beef. (Wallingford (UK): CABI Publishing). Streeck, Wolfgang og Schmitter, Phillip C. (1985): From National Corporatism to Transnational Pluralism: Organized Interests in the Single European Market. Politics and Society, vol. 9 nr. 2: 133-164.

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