Retail concentration
Encyclopedia
Retail concentration refers to the market-share
generally belonging to the top 4 or 5 mass distribution firms present in a regional market, as a percentage on the total.
Retail concentration is not simply a concentration ratio
as is emerging in the food sector. This is due to two factors: the particular relevance retail is gaining on a global scale, and the particular shape of the food chain
.
In recent years, Retail Concentration moved ahead with fusions and acquisitions(http://www.capgemini.com/resources/news/consumers_drive_food_industry_transformation__global_brands_retail_formats_consolidation__says_new_report/) along the entire food chain(http://www.ingentaconnect.com/content/mcb/070/2004/00000106/00000008/art00004. We can assume with Grievink (2003) that in a few years there will be only 5 dominant actors in the globalised food chain(http://www.foodinternational.net/articles/efi-special/1249/state-of-the-art-in-food.html).
The same researcher states that in the 90's the top-5 food manufacturers could count on twice the cash flow
of the top-5 retailers. Nowadays the relation is inverted: the top 5 retailers can count on twice that of the top-5 manufacturers.
Thus, the food chain has become increasingly vertically integrated
, with global corporations able to coordinate inputs from the seed to the field, from the stable to the table. Retail concentration by one hand is the answer that retail is giving to compete with the giants of agrofood industry. By the other hand, is the agrofood industry in itself searching to arrive directly to the consumers, through a refined relations system. In this process, private labels are increasingly attracting consumers, and are expected to grow more and more on their fidelisation strategy, beating on quality, safety and also ethical values (http://www.foodinternational.net/articles/efi-special/583/private-labels-why-europe-is-leading-the-pack.html.
Recently the European Commission
(http://ec.europa.eu/economy_finance/thematic_articles/article13524_en.htm) proposed solutions to face with overall price increase about foodstuff. Among the measures proposed, several relate to the retail power recently acquired.
In particular, the payments delay to the producers; the additional fees asked to the producers to place on the shelves branded products; price transparency; better regulation
on promotional activities and openings/closing time are all issues on the agenda.
For supporters, retail concentration means more chances for consumers, lower prices, better quality. For opponents, by the contrary, the disappearing of traditional shops, of food culture, of neighborhood life in general. Furthermore, too much concentration means squeezing the price of industry and of agriculture, which can lead to outsourcing food from anywhere it can cost less, without a truly long term impact assessment.
RANKING 2000 Cash flow(mln $)
RANKING 2005 Cash flow(mln $)
(Data elaborated from PriceWaterHouse Cooper LLP and Ernst & Young
)
Tim Lang (Food Wars, Earthscan London 2004) described the retail concentration phenomenon such as a "food war", in which winners and losers take place. Tim Lang talks about "food clusters" ([p. 84]) to better handle the idea of concentration along the entire food chain.
There are a lot of legal instruments which allow to get more and more concentrated.
Acquisition being the first one, follow mergers, joint venture
s, partnerships and more not formalised contracts/ agreements.
Note that the "hypermarketization" is not limited to the Western World
, but supermarkets rise fast also in the less developed countries
and in the East and in the South of the World.
(http://www.searca.org/ajad/archives/v-02/01-02/ajad_v2_n1_n2_chowdhury_etal.pdf.
Regarding that, there are a lot of concerns, pretending that the overwhelming power of retailing is making poorer and poorer farmers, in particular in the LDC (Less Developed Countries)(http://www.agobservatory.org/library.cfm?RefID=46604). The "crowding out" effect on local agricultures it is basically due to the global sourcing of the produces, wherever they cost less and offer more. To say it with the words of the Italian food-thinker Corrado Finardi to fairly function, the agricultural system has a different, slower timeline than the market (in agriculture counts the long term investment, while on the global market
it is more important the precise moment in which supply and demand
match).
Market concentration (considering the upper and lower tails)
A more refined form, which calculates the percentage of last 4/ competitors on the first 4/5.
Eve in its static version, it measures the level of competition in the sector.
A diachronic comparison allows for even more insights.
Herfindahl Hirschman Index
This index is used in Europe and in the USA for antitrust regulatory purposes, in order to assess the feasibility of mergers and acquisitions.
The HHI is calculated as the relative frequencies squared and summed, comprehensive of all actors in the playfield. So far, it gives more importance to biggest player in proportion.
Even if interesting, a HHI, often wrongly assess the real behaviours on the field.
Consider, for the comparison sake, the retail concentration in Europe. Top 5 retail distributors account for the 70% of the market share. Even if apparently it gives the idea of a highly concentrated market, the HHI does not allow for that conclusion in most of the cases.
Following 3 different scenarios, we explored the relative market shares of the single actors.
1 scenario: 1= 19%, 2=15%, 3=14%, 4= 12%, 5=10% (total=70% for the top 5), remaining= 2%, 3%, 4%, 5%, 7%, 9%.
In this first case, where there is a linear distribution of market share among players, the HHI scores at 0,121 (considered a moderate concentration indicator)
2 scenario: 14% *5 (top 5 players =70%, having equal market share), the remaining, each equalling 3% (3%*10). In this second case, the HHI scores an 0,098, which stands for an unconcentrated market at all. We can deliberately make some reflections on that, since the HHI seems not taking into account opportunistic behaviours in the direction of oligopoly. It is assumed that, because of the equal market power of the top 5 actors, they are going to compete (even if history shows that more probably they find some form of implicit agreement…). Standardised from 0 to 1, the value is 0,033571429 (very low…).
3 scenario. First player= 20%, followers 12%, then 10%, 9%, 8%, 7%, 4% and the last 10 each 3%.
In this case the HHI is 0,0944 (not concentrated market, even if not highly competitive environment). Standardised from 0 to 1, the value is 0,0378 (very low…).
Even in a case where there is one leading competitor which “makes the market” as in the 3rd scenario, the HHI stays relatively low!
\
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
generally belonging to the top 4 or 5 mass distribution firms present in a regional market, as a percentage on the total.
Retail concentration is not simply a concentration ratio
Concentration ratio
In economics, a concentration ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR4 and the CR8, which means the four and the eight largest firms...
as is emerging in the food sector. This is due to two factors: the particular relevance retail is gaining on a global scale, and the particular shape of the food chain
Food chain
A food web depicts feeding connections in an ecological community. Ecologists can broadly lump all life forms into one of two categories called trophic levels: 1) the autotrophs, and 2) the heterotrophs...
.
In recent years, Retail Concentration moved ahead with fusions and acquisitions(http://www.capgemini.com/resources/news/consumers_drive_food_industry_transformation__global_brands_retail_formats_consolidation__says_new_report/) along the entire food chain(http://www.ingentaconnect.com/content/mcb/070/2004/00000106/00000008/art00004. We can assume with Grievink (2003) that in a few years there will be only 5 dominant actors in the globalised food chain(http://www.foodinternational.net/articles/efi-special/1249/state-of-the-art-in-food.html).
The same researcher states that in the 90's the top-5 food manufacturers could count on twice the cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
of the top-5 retailers. Nowadays the relation is inverted: the top 5 retailers can count on twice that of the top-5 manufacturers.
Thus, the food chain has become increasingly vertically integrated
Vertical integration
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...
, with global corporations able to coordinate inputs from the seed to the field, from the stable to the table. Retail concentration by one hand is the answer that retail is giving to compete with the giants of agrofood industry. By the other hand, is the agrofood industry in itself searching to arrive directly to the consumers, through a refined relations system. In this process, private labels are increasingly attracting consumers, and are expected to grow more and more on their fidelisation strategy, beating on quality, safety and also ethical values (http://www.foodinternational.net/articles/efi-special/583/private-labels-why-europe-is-leading-the-pack.html.
Recently the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
(http://ec.europa.eu/economy_finance/thematic_articles/article13524_en.htm) proposed solutions to face with overall price increase about foodstuff. Among the measures proposed, several relate to the retail power recently acquired.
In particular, the payments delay to the producers; the additional fees asked to the producers to place on the shelves branded products; price transparency; better regulation
Better regulation
The Better Regulation Commission is as non-departmental public body of the British government, independent of any government department but under the oversight of Department for Business, Enterprise and Regulatory Reform...
on promotional activities and openings/closing time are all issues on the agenda.
For supporters, retail concentration means more chances for consumers, lower prices, better quality. For opponents, by the contrary, the disappearing of traditional shops, of food culture, of neighborhood life in general. Furthermore, too much concentration means squeezing the price of industry and of agriculture, which can lead to outsourcing food from anywhere it can cost less, without a truly long term impact assessment.
RANKING 2000 Cash flow(mln $)
- Wal-Mart StoresWal-MartWal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
, Inc. 163.532 - Carrefour Group 52.196
- The Kroger Co. 45.352
- Metro AGMetro AGMetro AG is a diversified retail and wholesale/cash and carry group based in Düsseldorf, Germany. It has the largest market share in its home market, and is one of the most globalised retail and wholesale corporations. It is the fourth-largest retailer in the world measured by revenues . In English...
44.163 - The Home Depot, Inc. 38.434
- Albertson's, Inc. 37.478
- ITM Enterprises SA 36.762
- Sears, Roebuck and Co. 36.728
- Kmart CorporationKmartKmart, sometimes styled as "K-Mart," is a chain of discount department stores. The chain acquired Sears in 2005, forming a new corporation under the name Sears Holdings Corporation. The company was founded in 1962 and is the third largest discount store chain in the world, behind Wal-Mart and...
35.925 - Target CorporationTarget CorporationTarget Corporation, doing business as Target, is an American retailing company headquartered in Minneapolis, Minnesota. It is the second-largest discount retailer in the United States, behind Walmart. The company is ranked at number 33 on the Fortune 500 and is a component of the Standard & Poor's...
33.702 - J. C. PenneyJ. C. Penney-External links:*...
Company, Inc. 31.503 - Royal AholdAholdAhold is a major international supermarket operator based in Amsterdam, Netherlands. Ahold is listed on Euronext Amsterdam and the Frankfurt Stock Exchange.-History:...
31.222 - Safeway Inc. 30.801
- Rewe-GruppeREWE GroupREWE Group is a diversified retail and tourism group based in Germany. Its current turnover is around 50.91 billion euros. It operates in 14 European countries and employs over 325,000 people in its trading and travel divisions.- Trading :...
30.578 - Tesco PLCTescoTesco plc is a global grocery and general merchandise retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues and the second-largest measured by profits...
30.404 - Ito-YokadoIto-Yokadois a Japanese General Merchandise Store, part of Seven & I Holdings Co. There are 174 Ito-Yokado stores operating in Japan. The group has expanded to China, where they formed a joint venture with Wangfujing Department Store and China Huafu Trade & Development Group Corp. to open one of five stores...
Co., Ltd. 30.237 - EdekaEDEKAThe Edeka Group is the largest German supermarket corporation, currently holding a market share of 26%. Founded in 1898, it consists today of several cooperatives of independent supermarkets all operating under the umbrella organisation Edeka Zentrale AG & Co KG, with headquarters in Hamburg...
-Gruppe 30.002 - Costco Companies, Inc. 26.976
- TengelmannTengelmannTengelmann:* Tengelmann Group , a holding company based in Mülheim an der Ruhr, Germany; named after Emil Tengelmann** Kaiser's Tengelmann, GmbH - Family name :* Ernst Tengelmann , a German entrepreneur...
W. 26.509 - The Daiei, Inc. 26.486
RANKING 2005 Cash flow(mln $)
- Wal-Mart Stores, Inc. 285.222
- Carrefour Group 90.297
- Home Depot 73.094
- Metro 70.093
- Royal Ahold NV 64.615
- Tesco PLC 62.284
- Kroger Co. 56.434
- Sears Holdings Corp 55.800
- Rewe Handelsgruppe 50.698
- Costco WholesaleCostcoCostco Wholesale Corporation is the largest membership warehouse club chain in the United States. it is the third largest retailer in the United States, where it originated, and the ninth largest in the world...
Corp. 48.107 - ITM Enterprises SA 47.218
- Target Corp 45.682
- Groupe CasinoGroupe CasinoGroupe Casino is a large French multinational corporation, formerly part of the CAC 40 index, whose main business is with retail and distribution in hyper and supermarkets. The company's head office is in Saint-Étienne....
45.155 - AldiALDIALDI Einkauf GmbH & Co. oHG, doing business as ', short for "Albrecht Discount", is a discount supermarket chain based in Germany...
Einkauf GmbH & Co OHG 42.981 - Scwarz Group (Lidl & Schwarz) 42.571
- Albertson's Inc. 39.897
- EdekaEDEKAThe Edeka Group is the largest German supermarket corporation, currently holding a market share of 26%. Founded in 1898, it consists today of several cooperatives of independent supermarkets all operating under the umbrella organisation Edeka Zentrale AG & Co KG, with headquarters in Hamburg...
Gruppe 39.227 - Walgreen Co. 37.508
- Groupe Auchan SA 37.335
- Lowe's Cos. Inc. 36.464
(Data elaborated from PriceWaterHouse Cooper LLP and Ernst & Young
Ernst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
)
Tim Lang (Food Wars, Earthscan London 2004) described the retail concentration phenomenon such as a "food war", in which winners and losers take place. Tim Lang talks about "food clusters" ([p. 84]) to better handle the idea of concentration along the entire food chain.
There are a lot of legal instruments which allow to get more and more concentrated.
Acquisition being the first one, follow mergers, joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
s, partnerships and more not formalised contracts/ agreements.
Note that the "hypermarketization" is not limited to the Western World
Western world
The Western world, also known as the West and the Occident , is a term referring to the countries of Western Europe , the countries of the Americas, as well all countries of Northern and Central Europe, Australia and New Zealand...
, but supermarkets rise fast also in the less developed countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
and in the East and in the South of the World.
(http://www.searca.org/ajad/archives/v-02/01-02/ajad_v2_n1_n2_chowdhury_etal.pdf.
Regarding that, there are a lot of concerns, pretending that the overwhelming power of retailing is making poorer and poorer farmers, in particular in the LDC (Less Developed Countries)(http://www.agobservatory.org/library.cfm?RefID=46604). The "crowding out" effect on local agricultures it is basically due to the global sourcing of the produces, wherever they cost less and offer more. To say it with the words of the Italian food-thinker Corrado Finardi to fairly function, the agricultural system has a different, slower timeline than the market (in agriculture counts the long term investment, while on the global market
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
it is more important the precise moment in which supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
match).
Market concentration (considering the upper and lower tails)
A more refined form, which calculates the percentage of last 4/ competitors on the first 4/5.
Eve in its static version, it measures the level of competition in the sector.
A diachronic comparison allows for even more insights.
Herfindahl Hirschman Index
This index is used in Europe and in the USA for antitrust regulatory purposes, in order to assess the feasibility of mergers and acquisitions.
The HHI is calculated as the relative frequencies squared and summed, comprehensive of all actors in the playfield. So far, it gives more importance to biggest player in proportion.
Even if interesting, a HHI, often wrongly assess the real behaviours on the field.
Consider, for the comparison sake, the retail concentration in Europe. Top 5 retail distributors account for the 70% of the market share. Even if apparently it gives the idea of a highly concentrated market, the HHI does not allow for that conclusion in most of the cases.
Following 3 different scenarios, we explored the relative market shares of the single actors.
1 scenario: 1= 19%, 2=15%, 3=14%, 4= 12%, 5=10% (total=70% for the top 5), remaining= 2%, 3%, 4%, 5%, 7%, 9%.
In this first case, where there is a linear distribution of market share among players, the HHI scores at 0,121 (considered a moderate concentration indicator)
2 scenario: 14% *5 (top 5 players =70%, having equal market share), the remaining, each equalling 3% (3%*10). In this second case, the HHI scores an 0,098, which stands for an unconcentrated market at all. We can deliberately make some reflections on that, since the HHI seems not taking into account opportunistic behaviours in the direction of oligopoly. It is assumed that, because of the equal market power of the top 5 actors, they are going to compete (even if history shows that more probably they find some form of implicit agreement…). Standardised from 0 to 1, the value is 0,033571429 (very low…).
3 scenario. First player= 20%, followers 12%, then 10%, 9%, 8%, 7%, 4% and the last 10 each 3%.
In this case the HHI is 0,0944 (not concentrated market, even if not highly competitive environment). Standardised from 0 to 1, the value is 0,0378 (very low…).
Even in a case where there is one leading competitor which “makes the market” as in the 3rd scenario, the HHI stays relatively low!
\