Reflections on the role of finance capital in the internationalization of supermarket chains : the cases of Walmart, Carrefour, Tesco and Ahold

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Reflections on the Role of Finance Capital in the

Internationalization of Supermarket Chains

The Cases of Walmart, Carrefour, Tesco and Ahold

Master Thesis Political Sciences

07-09-2014

UvA Graduate School of Social Sciences

MA Politicologie

Thomas Geels

0307785

Research Project: Food Production and Natural Resources Use:

Current and Future Decision-making

in the Context of Globalization

Supervisor: Dhr. Dr. R.J. Pistorius

2nd Reader: Dhr. Dr. J.M.J. Doomernik

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Reflections on the Role of Finance Capital in the Internationalization of

Supermarket Chains

The Cases of Walmart, Carrefour, Tesco and Ahold

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Foreword

While writing this thesis has mostly been a lonesome endeavour, it has at the same time made me realize how lucky I am to have supportive people around me. A special thanks goes therefore out to those without whose support this thesis would never have been written down. To start with, my friends Steven and Thomas, for giving me a wake-up call and stimulating me to proceed with what I started. A special thanks should also be given to the pharmaceutical industry and the Zuiderbad swimming pool for substantially lowering my blood pressure when I most needed it. While it usually goes without saying, I also owe a lot to my supervisor. Whether he decides to read this final effort or not, he has been more than patient, and has stimulated me even during the many moments in which I could only be accurately described as a hopeless case. Finally, a very special thanks to Sjors, for his unconditional support, assistance and love. But most of all, for giving me many reasons why I should still give a damn.

Ik draag deze scriptie op aan mijn lieve ouders, die meer dan wie dan ook wilden dat ik deze ooit afmaakte. Nu ik mijn laatste belofte heb ingelost, valt er een enorme druk van mijn schouders. Tegelijkertijd maakt het me ongekend bang en verdrietig. Want nu is het moment aangebroken om los te moeten laten, en onze eigen wegen te gaan. Wees niet langer bezorgd en neem de rust die jullie zo verdienen. Ik weet zeker dat we elkaar ooit terug zullen zien.

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Figures

Figure 1: The global geographies of leading transnational food retailers ... 1

Figure 2: Total Sales Carrefour ... 23

Figure 3: Carrefour active in number of countries. ... 25

Figure 4: Total Sales Wal-Mart. ... 29

Figure 5: Wal-Mart Stores Inc. active in number of counties. ... 31

Figure 6: Total Sales Ahold. ... 35

Figure 7: Organizational Models. ... 36

Figure 8: Ahold active in number of countries... 38

Figure 9: Total Sales Tesco. ... 41

Figure 10: Tesco active in number of countries. ... 43

Figure 11: Companies active in number of countries. ... 45

Figure 12: Companies entering / leaving countries. ... 46

Figure 13: The proceeds of equity and debt offerings of Ahold during 1989-2003 in € million. ... 97

Figure 14: The buy-and-hold returns of Ahold, Carrefour, and Wal-Mart, 1989 - 2003. ... 98

Figure 15: Wal-Mart Market Capitalization vs. Revenue. ... 99

Figure 16: The global distribution of Ahold Stores, 2001. ... 1088

Figure 17: The global distribution of Tesco Stores, 2003. ... 1099

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Figure 1: The global geographies of leading transnational food retailers

Source: Dicken, P., 2011. Global Shift: Mapping the Changing Contours of the Wold Economy. 6th ed. The Guilford Press: New York, p.295

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Introduction

In February 2003, one of the most iconic larger Dutch enterprises, Koninklijke Ahold N.V., saw its fascinating international expansion project shatter to pieces. An accounting scandal in one of its US acquired chains lead to the demise of a truly globally active player, operating in 27 countries in several continents of the world. In lists published by IGD retail analysis and Deloitte and Touche’s ‘Global Powers of Retailing’, Ahold held the top position when looked at foreign sales as percentage of total sales, was ranked only second to French giant Carrefour in terms of international store operations and was even the third biggest retailer worldwide (after Walmart and Carrefour) in total sales with a turnover of 67 billion dollars. Only 17 percent of its sales were derived from operations in its home market, the Netherlands, making its international operations a crucial aspect of its business concept. For a short period of time, from the early 1990s to the opening years of the current century, Ahold seemed to prove the following commonly accepted premise wrong: that food retailing was an inherently locally bounded activity.

Anno 2014, Ahold has dropped many places in those same rankings. In the years in between it has made substantial losses and was forced to sell off most of its international divisions. The company no longer is considered to be a leading global actor, even though it still has an extremely dominant position within its home market and has even expanded internationally once again into Belgium and the Czech Republic. The years of contraction finally seem to have halted, but its current sales are still at only half of during its heyday. But even more importantly, its competitors have not been passively waiting around. In Ahold’s biggest market, the US, Walmart has assumed dominance in food retailing in only a decade’s time and now seems to be its greatest threat. Walmart has also expanded internationally, from Mexico to the UK, from Brazil to East Asia to Southern Africa. It has reached global presence, and is especially dominant on the very lucrative North American continent. Ahold’s position as the number three global retailer has meanwhile been taken over by Tesco, which has a strong presence in Eastern Europe and East Asia. In short, Ahold may have disintegrated, its global strategies failed, but this has not been the outlook for global food retailing in general.1

1_{Throughout this thesis both the terms supermarket and food or big box retailer are used to indicate the}

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Thus although the opinion was long hold that retailing was an inherently domestic economic activity, not suited to be transferred abroad2, the growth and persistence of foreign activities by international retailing companies has forced academics to come up with new theories and models to account for this new reality on the ground. And so, many theories and models were set up by scholars from a plurality of schools and disciplines. Since retailing has both social, psychological, cultural, socio-economical, economic, political, social geographic and political-economic relevance and impact on society, there have been many recent efforts to grasp the nature, development and impact of these ‘globalizing’ actors. So far, this has not yet led to the dominance of a particular school, model or paradigm. Since social science is a multi-paradigmatic activity, this should not come as a major surprise or anomaly. However, there appears to be frustration from the fact that the occurrence of retail internationalization, especially concerning food retailers, has remained under-theorized and neglected by some academic disciplines.3

It seems unlikely that these arguments are based upon the amount of theories in circulation. Rather, the theories available are contradictory and create a confusing picture, instead of creating clarity in a complex world, which is their raison d’être. Even more importantly, they are not capable of explaining, let only predict the patterns one can empirically see on the ground. An important reason behind this is the often cited critique of a disconnection between the literature on retail internationalization and global structural transformations, which was already noted already in the 1990s (Reardon et al. 2007, p 400; GPN working paper 8, 2003: p 3). In this thesis, I attempt to bridge this divide by using an approach focused on changes in the capitalist superstructure, or landscape level of analysis in order to gain a better understanding in the internationalization paths of four prominent global food retailers: Carrefour, Walmart, Ahold and Tesco.

The particular approach applied in this thesis, called financialization, is a relative young paradigm through which changes in the capitalist system have been studied, but its underlying principles can store, and retail company the overall term that captures both this format as well as discount and

neighbourhood shops, hypermarkets and a whole range of other concepts.

2_{Hollander (1970) and Dawson (2006) describe that retailing for centuries has been domestic, Welch and}

Luostarnen (1988) deem it to be non-transferable

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Wrigley (2000) calls the globalization of retail distribution and the rapid emergence of retail industry TNCs during the 1990s ’a totally neglected topic’ in works on economic globalization (pp 292, 211). And many years later he still sees it as an ‘understudied aspect of economic globalization’ and deems research in this area to be in its ‘infancy’ (Coe & Wrigley 2007, p 341). Dawson (2007) argues that ‘the impacts and activities of

international retailers have been largely ignored in the globalization discourse’ (2007, p 373). This is particularly the case in the operations of stores (p 374). Marsden et al (2000, p 24) noticed that ‘agrarian political economists have had difficulty in locating corporate retailing into the broader, and still largely production-oriented models of global food regimes.’

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be traced back to Karl Marx’s ‘Capital’, and subsequent Neo-Marxist approaches. As will later be explained, the approach describes structural changes arising from the increasing importance of financial actors, motives, instruments, objectives and pressures on the global economy at large, as well as on firms and households. This landscape shift has been likened to the (return of) dominance of finance capital (Demenil & Levy 2005, pp 25, 40; Burch & Lawrence 2009, p 275; van der Pijl 2012, pp 262-271). Unlike other approaches on corporate activities which often are geared towards the manufacturing sector, it acknowledges differences between economic sectors and it thus able to incorporate the particularities of retail activities. Even more importantly, it allows for studying changes over time, making it very dynamic approach, which seems to make it an appropriate tool for analyzing the volatile expansion paths of international food retailers. In this thesis I will argue that by making use of a financial lens, a better understanding of the internationalization path, and the nature of these actors is possible. It is my hope that such an approach will transcend the current globalization versus localization debate on the nature of food retailers, which so far has not proven to lead to any substantial theoretical progress. The research question thus follows:

What role has ‘financialization’ played in the rise and development of the four largest global supermarket chains: Walmart, Carrefour, Tesco and Ahold, and how can standing theories on retail internationalization be enriched by insights on the role of finance capital?

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Goal & Methodology

The goal of this thesis is to contribute to the understanding of the process of foreign expansion by the largest international food retailers. The specific angle chosen is an approach based on the influences of changes in long-term socio-historical trends, which take place at the so-called ‘landscape level’. This level is defined as ‘representing the most sedimented or anchored regimes by far in time-space’, and its dynamics are seen as ‘organizing principles, which characterize and affect all the major institutions in a certain period of time.’(Spaargaren 2012, p 12). In particular the focus be on the landscape influence of ‘financialization’, which has recently been introduced into the food regime approach as a view to analyze the increasing influence of financial investors in all aspects of the food chain, but which has not yet widely been applied within the analysis on the internationalization of retailers. In order to delineate the scope of the thesis, a focus is laid on the current three largest grocery/ big box retailers, Walmart Carrefour and Tesco, as well as former top three company, Ahold. The latter is included because of its explicit presence during important past phases in the international retail expansion period.

A great part of the analysis will be devoted to expose why standing theories and approaches have not been able to account for crucial stages of the retail internationalization process of these four companies. This effort is a valuable and important step on the way to defend an incorporation of the financialization approach into future research on retail internationalization for the following reasons. First of all, rather than making general claims and criticisms that standing theories lack explanatory power, or that the retail internationalization school is weakly developed, it explicitly specifies the gaps and the exact reasons of what standing theories lack, ignore or are incapable to incorporate into their analyses, and why this is the case. Such a way of reasoning clears some of the fog that seems to be around the internationalization phenomenon and transcends current discussions between globalization and localization, which appear not only futile, but also less of a contradiction than one may expect. Second of all, and more importantly, it adds to the argument of the added value of making use of the financialization approach, which will be discussed in the final chapters. It is argued that there is a strong fit between the deficiencies of standing theories, and what the financialization approach potentially has to offer. In sum, the main argument is that the inability for standing theories to account for the internationalization path of these four retailers cannot simply be resolved using alternative theoretical approaches that suffer from similar deficiencies. To get to the crux of the matter, one should look at a higher level of abstraction, the so-called landscape level, and the dominant regime of accumulation that determines its influences.

The material studies in this thesis mainly consists of secondary literature on cases of corporate expansion by leading retailers, supplemented with newspaper articles; reports by retailer analysts

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such as Deloitte and Touche, Pwc/ Kantar retail and IGD retail analysis and combined with basic data from annual company reports of Walmart, Carrefour, Ahold and Tesco. Not being trained as an accountant, nor having the skills to delve into most technical details concerning financial data, a profound balance sheet analysis is not included in this thesis. Although there is no formal testing included in the analysis, evidence indicative of financialization will be presented in the final chapter, as well as suggestions for further interdisciplinary research.

Throughout the thesis, I will make use of two ‘analytical tools’ to structure and clarify my

arguments. The first is a ‘time-based clustered graph’ which will be drawn on the basis of empirical findings on the foreign expansion paths of the four companies. It will be demonstrated that their internationalization paths can be roughly divided into four different patterns or dynamics, in which movements are surprisingly similar. This graphs forms the basis of the analysis, as approaches that aim to account for the internationalization process should be able to account for them. The advantage of the graph is that it is inclusionary, thus able to incorporate strengths of different theoretical approaches, instead of looking for a single explanatory framework or superior theory which is unlikely to exist. Many articles depart from one single theory, and I expect this to be part of their inability to account for the broader process, which involves period of changes, rapid

expansions, set-backs, volatility and stability.

The second analytical tool is a ‘unit or level of analysis pyramid’. This pyramid consists of layers of what I see as analytical abstraction, beginning at the most basic and common unit of analysis in retail internationalization, the firm. Moving upwards, the unit of analysis incorporates ever larger aspects of the external environment of the firm, which have often been excluded from existing analyses. In fact, it is the criticism by authors in the subject area, of not involving the external world that has been the inspiration for this tool. The level above the firm includes the dynamic of the actions of other firms into the analysis, whereas the third level looks at the institutional context of the host country in which the firm desires or already operates. Finally, the top level includes system wide changes that affect the institutional workings of all countries in some ways. Although one may argue

?

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that in the end all changes are related to the institutional approach, I find it useful to distinguish these layers as many accounts of institutionalism on retail internationalization do not sufficiently account for the underlying causes of institutional change.

Personal motivation and inspiration

Global retailers are in many ways remarkable actors. Their rise in terms of geographic spread, levels of concentration, and thus power, has occurred in an incredibly short amount of time. These actors have great influence over such a crucial aspect of our most basic needs for human survival, food, as a large and growing part of food purchases in many countries occur through a form of retailing format. Therefore, in order to understand the world of food, it is no longer sufficient to study the farm sector, food manufacturing companies or even states. Along these, food retailers have come to take an important position, as expressed by their issuance of private regulations and their crucial

strategic position in the food chain, between producers and final consumers. Unlike most of the corporations that affect our daily lives but seem hardly visible, these corporations are actually grounded in our streets. We visit them regularly, some of us even on a daily basis. It has been estimated that an average person in the West spends up to 2 % of his life in a supermarket! For me, personally, the supermarket is associated with my father. One of his favourite moments during the day, even when on holiday, was to buy our daily groceries. As a young child, he would take me there with pride. I will always associate a trip to the supermarket with my father. He would have loved to have seen me pick his favourite entity as the focus of my thesis.

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The exact angle for this thesis was somewhat more difficult to choose. As supermarkets have come to take such a prominent place in the food system, academic interest has risen since the 1990s. Articles and books have already dealt with a wide range of topics linked to them such as power issues: their relations to other actors in the supply chain (manufacturers, famers), health issues: their relation to diet changes, food wastage, labour rights, the environment and so on. The main gap did not seem to lie in the wide range of matters being connected to the rise of retailing power, but more in the ontology of the concept itself, or at least the confusing representation of it. Approaches I was familiar with, food regimes and global commodity chains, did not seem powerful tools to address this concern. On the contrary, they appeared a further cause of confusion when I studied

contributions of those who worked in these paradigms. Inspiration for an angle only came after a while when I came across the many remarks on the inability of current theories to deal with the phenomenon of the retail internationalization. This shifted my focus from the consequences to the process of global expansion itself. In the course of my studies I became familiar with a number of theories and approaches that have proven to be useful in studying societal and systemic change, including the Multi-level Perspective, the Food regime literature and the Marxist concept of fractions of capitalism. These seemed to address exactly what was missing from the standing theories up to now, and have formed the inspiration for this thesis.

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Chapter Outline

This thesis has at its basis a very simple and straightforward structure. It first describes an apparent change; subsequently it looks at how standing theories have tried to account for that change and in what respects they have failed; finally it tries to match the reasons for failure to the strength of an alternative approach and argues that this approach should be used in future research. A more detailed description follows now.

Chapter one introducers the reader to the broader subject matter under analysis in this thesis, big box retailers that have come to operate on a global geographical scale in recent times. The chapter provides the reader with reasons of why global retailers are such important actors to study. It does so by providing both a historical as well as a conceptual description of the form, place and function that retailers have in today’s (food) economy, and their increasingly concentrated and geographically spread nature. It will be argued that although the impact of retailers on the economy has widely been addressed in academic research, the process that led to their presence all over the world, retail internalization, has remained poorly understood. Subsequently, the chapter will put the spotlight on the biggest of these internationally present big box retail companies that are the focus of this thesis: Carrefour, Walmart, Ahold and Tesco. Some basic historical and organization information is provided, and their expansion paths are revealed. In doing so, it is argued that a pattern of time clustered movements can be detected, which forms the basic foundation of the analysis in this thesis.

Chapter two describes the way in which standing theories and approaches have attempted to account for the retail expansion patterns of the four companies detected in the first chapter. It is argued that most research in this field is can only account for particular aspects or time periods in the expansion paths of these four corporations. As these four companies are so dominant and their presence so ubiquitous, this leaves an important gap that needs to be addressed. The chapter will use the graph of expansion paths as a starting point for its analysis. It argues that the use of standing theories in this model most suitable in periods of limited expansion but exposes its limits in other periods. These limits are claimed to be in the particular level of analysis; the crept in reflection of the particular circumstances in which these theories were written down, and their internally focused orientation.

Chapter three reveals how recent academic attempts to address points of criticism on standing theories have worked out, as some of the most common attempts from the last few years to include the external environment into the analysis of retail internationalization are discussed: market based theories, strategic interaction and institutionalism. Based upon the expansion graph, it is

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demonstrated in which ways these approach contribute to our understanding of the retail internationalization paths of the large retailers under study. But it is also argued that these approaches still have their limits and leave certain parts of the expansion timeline unexplained. The chapter ends with the argument that for this matter to be resolved, the analysis should turn to an analytically higher landscape level, something which I have not yet come across in standing theories. In chapter four, a landscape level approach is used in the form of the financialization approach. It is argued that the particular regime of accumulation and encompassing mode of regulation is likely to have an influence not only on the specific place food retailers have secured in society, but also on their internationalization pathways. The chapter starts off by explaining this way of thinking through drawing on neo-Marxist theories that hold that throughout history many shifts have occurred between a regime of accumulation dominated by an industrial capital orientation, and a financial capital one. It then traces down the use of financialization in current research in the agri-food sector and comes up with a definition and suggested use for its inclusion in research on retail internationalization.

Chapter five offers the reader some preliminary evidential material that supports the relevance and use of the financialization approach in future interdisciplinary research on retail internationalization. In particular, it looks at how three major characteristics of ‘financialization’ can be linked to the retail internationalization process. The chapter ends with an overview of the influence of financialization over the entire period summed up in the time-based clustered graph.

The concluding chapter will sum up the main findings of this thesis and will suggest directions for further research.

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CHAPTER 1 The Globalization of food

Retail Companies

This chapter introduces the reader to the subject area, global retailers. It describes the development towards the crucial place food retail companies, particularly from Western countries, nowadays occupy in the global economy. Resulting from this position, it is argued that they influence a large number of different actors, both directly as well as indirectly. It is therefore important to develop a better understanding of their nature and fill in the questions that still exist around their presence, as their sudden and dramatic rise for many academics on globalization seems to have largely gone unnoticed, while others who did get involved in the topic were largely taken by surprise. One such gap has arisen over the internationalization process itself, which is the focus of this thesis. In the second part of this chapter, the particular way in which this thesis attempts to grasp the internationalization process is exposed as four leading food retail companies are introduced as the cases that will be dealt with in the endeavour. Their origins, particular corporate models as well as their expansion course are discussed, and from the latter aspect, a graph is made that will form the basis of theoretical investigation in subsequent chapters.

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1.1 The rise of the modern food retailing company

Few people living in the Western world today would be amazed by the institution of the supermarket. From being seen as a symbol of modernity and American efficiency by the young and well off, and as a symbol of alienation by the more conservative in the 1950s4, to a symbol of convenience and cheap food for the mass in the 1960s and 1970s, it has now turned into a food authority, or gatekeeper of the food system, a ‘food authority’ and the consumer’s friend.5 But most of all, it has become a ‘taken for granted’ part of life. Some estimates go as far as claiming we spend as much as 2 % of our lives there, to buy one of the most basic but important purchases, our daily groceries. (Seth & Randall 2005, p ix) In western markets such as the UK, the supermarket share in the grocery market has risen to 80 percent, while the number of independent stores has declined dramatically. (Lawrence and Burch 207, p 3) Through different periods of time supermarkets have been powerful institutions because of their strategic position in the food system.6_{During the post}

war decades, the supermarket was the central spill to connect mass consumption with mass production. In the current era of product and lifestyle differentiation, its influence even seems to have increased. Having such a common position in daily life, this may escape the attention of many, as things that are taken for granted are usually the ones less questioned. But if anything, the historical development of the supermarket is nothing short of being remarkable! In just over half a century it has completely transformed our distribution system, from a family run small scaled business into an industry of large stores which belong to a single brand.7 Both technological, societal and regulatory changes which occurred in many Western countries during the second half of the 20th century are held important in having enabled the rise of these institutions.8_{Under their roof not only}

food items are sold, although these remain their core component9, but an increasing amount of goods and services that are absorbed into the orbit of the modern retail corporation. Modern food retailers naturally have a competitive advantage in the sale of canned, frozen, packaged and other durable foods (Reardon 2005, p 4; 2007, pp 407, 408), of which they introduce thousands of new

4

See Yanov (1993); Grin (2012).

For a detailed historical description of the staged development of the supermarket concept see Kaynak & Tamer Cavusgil (1982)

5

See Dixon (2007)

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Harvey (2007) speaks of a Janus head, as supermarkets face/ stand in between producers and consumers. Their status as food authority, market power and issuing of private regulation enables them to exert power over practices of both production and consumption.

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To get an impression of their spectacular growth, see Baud & Durand (2011), p 245. While world GDP grew 240 % between 1990-2007, revenue of some of the largest companies has grown by around or even over 1000 % in the same period

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See for example: Dawson et al. (2006), pp 197-201; Ducatel & Blombley (1990), pp 222-224; Lichtenstein (2012), p 17; Grin (2012), pp 35-56

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products each year and increasingly produce under their own labels. (Lawrence & Burch 2005; Burch & Lawrence 2007) But they have also become heavily involved in the distribution of fresh produce like meat and fruits and vegetables, which are often produced under direct contract with farmers.10 The economic structure of the sector has turned over years into what can be described as an oligopoly on the level of the nation state. The concentration ratio for the largest five retailing store brands easily exceeds 50 percent in most of the old EU member states (Dobson 2003, p 3). In the vast US market, these concentration figures are lower, but they have increased from 24 per cent in 1997 to 46 per cent in 2007.11 (ETC Group 2003, 2005; Hendrickson & Heffernan 2007) . On the global the level, the six largest retailers had a market share of 15 per cent in 2003, which was expected to reach nearly 20 per cent by 2008 (Planet retail 2005). Although this may seem low, the value of the total grocery retail market was estimated at an astonishing $8 trillion in 2008, with the three largest retailers accounting for half of the top 10 revenues (Clapp 2012, pp 109, 110). Furthermore, concentration has also become a marked feature in vertical relations between lead firms with their suppliers, resulting in an increased control over the entire supply chain in a great number of commodities. Gereffi has named this development, which he argues defines current corporate relations in many sectors, as ‘buyer driven chains’ supply chains dominated not by manufacturing firms, which had been common for most of the post-war period, but by large retailing firms (Gereffi 1994; Humphrey 2006, p 7; Lichtenstein 2012, p 14).

This increased concentration in power of relatively few powerful firms is called an oligopsony, the existence of only a few and often contractually fixed buyer firms. By internalizing parts of the distribution infrastructure, retailers have cut out former middlemen such as wholesalers, and spot markets on which farmers could previously auction their produce (Reardon, 2007, pp 419, 420). When studying a retailer, one should thus look at structures that exceeds mere asset ownership.12 European retailers, both large and small, tend to cooperate and concentrate their procurement in cross-border alliances or so-called buying groups, such as AMS and EMD, which make the level of power of these entities over suppliers even greater (Dobson 2003). And thus, over the years the balance of power between food suppliers, food manufacturers and food retailers has fundamentally shifted to the latter (Dobson et al. 2003, p 121; Seth & Randall 2005, p 197; Lawrence & Burch 2007, pp 8-9)13.

10

See Dolan and Humphrey (2001) for the case of British retailers in the African horticulture industry; OECD (2006) on the role of supermarkets in the supply of meat ; Reardon (2007) p 418

11_{The European market as a region shows a similar level of concentration.} 12

See for ‘the extended firm’ concept: Nolan, Sutherland & Zhang (2002); Nolan, Zhang & Liu (2007)

13_{The same authors, Lawrence & Burch (2005; 2007; 2009) have also repeatedly argued supermarkets to be}

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This dynamic has subsequently been amplified by the increasing production of own brand products, which for some items consist of up to 40 per cent of product sale (Dawson et al, 2006, p 203).14

1.2 The effects on other actors in the food chain

But what has this development meant for the world around the supermarket? While on the positive side, food prices for (Western) consumers who are served by these retailers have been kept low, this situation has also brought along many negative side effects. Suppliers have felt constant pressure by these big buyers to lower their prices, resulting in pressures on income for farmers and manufacturing companies. Lower incomes and reduced guarantee of future purchase of farmers’ produce by supermarkets have led to lower levels of investments, which are likely correlated to instances of fraud (horsemeat scandal, bread scandal in the Netherlands) and depressing innovation in sustainable and more animal friendly forms of livestock farming.15_{Retailers themselves amplify}

this race to the bottom by their famous inter-club ‘price wars’ to lure consumers to their shop. Meanwhile, suppliers are expected to pay all kinds of fees, named ‘forced funding’ (promotion, shelf space, retro-active discounts) to keep the retailer satisfied (Humphrey 2006, p 38; Baud &Durand 2012, pp 243, 256-259; Burch & Lawrence 2005 ;2009, p 276).16 It should be no wonder, that through these rent seeking activities, as well as the rents derived from ownership of own brand products, retailers, while originally involved in food distribution, are increasingly able to capture a large part of the surplus value derived from food production. These dynamics have enticed all other actors in the supply chain to increase in size and/or merge, to be both financially strong enough to survive and be able to have some negotiations space vis-à-vis retailers.17_{The rise of large retailers can thus be seen}

overtook manufacturers in size is believed to be somewhere in the 1980s/early 1990s (GPN working paper 9, 2004: p 5). The power asymmetry resulting from it are clear when one considers that a particular retailer may account for 10-20 per cent total sales of a manufacturer, while the same retailer may only be depended on that manufacturer for 1 or 2 per cent of its total sales (ibid.)

14_{Whereas own brand products started off as cheap alternatives to manufacturing brands, they have become}

leading edge in a number of modern ready meal foods. See Burch & Lawrence (2005).

Meanwhile the farmers’ share of the retail price is believed to have dropped to less than 20 per cent. (Busch & Bain 2004, p 331)

15

See Vrij Nederland 20-06-2014. http://www.vn.nl/Archief/Politiek/Artikel-Politiek/De-dierenrevolutie.htm

16

In addition to the rents it earns from these practices, another part of it consist of the fact that retailers derive free cash from the time between the supplier delivers the goods and the customers pays for it, until the moment the retailer pays its suppliers. This period has been increasingly stretched up to even 90 (!) days in some case today (Isakson 2013, p 8). Consequently inventory costs and risks have been shifted away from the retailer to its supplying firms (ibid, pp 7-8). Both consequences increase the profitability of the retailer, and saves up funds, without any necessary increase in efficiency or productivity at its basis.

17

The level of concentration can be spotted from the so-called hour-glass model. Although retailers are in many commodities form the most concentrated stage, concentration in the food sector is not a unique feature of retailers. See Grievink (2003) for the ‘hourglass model’

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as an important factor in the historical development towards a much more highly concentrated agri-food sector.

1.3 The global dimension of leading food retailers

What makes this story even more remarkable is that these developments have not remained exclusive to the Western world. Exactly the same processes, termed as the ‘retail revolution’, are now taking place in developing countries in even a shorter amount of time.18 Frequently, the same Western retail giants, faced with a saturated home market, and slowdown of domestic sales growth, have expanded abroad into these developing countries.19 Because of the strength derived from their size and many years of experience, as well as the opportunity given to them by the opening up of these countries to (retail) foreign direct investment (FDI) they have sometimes even come to dominate these emerging markets with their stores .20 Retailing in this respect has been considered a possible growth sector for developed economies as it involves a flow of knowledge export which is the reverse to the one in primary and some secondary sectors, where exports from developing economies usually flows to the developed (Dawson et al 2006, p 212). At the same time as Western retail companies open stores in these countries, domestic farmers and firms operating in the food sector of these markets have become increasingly incorporated into the supply chains of global retailers.21 This has only increased their power, which is currently even felt on a global level.

Besides using the bargaining power that comes with their vast size in structuring these supply chains, retailers have also used more subtle methods through which influence can be exercised. Acting together, leading retailers have been able to seize the moment after the food scares in Western Europe in the 1990s, to develop collective private standards, leading to their codification in GlobalGAP, whose criteria their suppliers must fulfil in order to provide these companies that dominate food sales, with their produce (Humphrey 2006, pp 15, 21).22 Although this has created higher and tougher standards on food safety, through which the image as gatekeepers of the system has only been reinforced, the standards are not decided upon democratically and the burden of adjustment to live up to these new and stricter standards usually falls on the shoulder of suppliers.

18

Reardon (2005; 2007) described this process historically through a number of so-called ‘waves’ time-periods from the mid-1990s to the mid-2000s) in which the supermarket concept became a dominant means through which food was sold in particular countries outside of the Western core. This period coincides with the largest expansion of retail MNCs as we shall see.

19

For reduced home market opportunities as a motivational reason see Wrigley (2000); Baud & Durand (2012)

20_{The opening up to FDI has often been stimulated by structural adjustment reforms, see Clapp 2012, p 110} 21_{A more skeptical interpretation sees the Global South having been turned into a farm for the global North.}

McMichael & Friedmann (2007), p 301

22_{Friedmann sees this as the crux of the corporate/environmental food regime. See (Friedmann 2005).}

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(Humphrey 2006, pp 26-29; Konefal et al 2004).23 Many small farmers cannot meet these requirements and are delisted (Reardon 2005, p24).The result of all this is that although the largest global retailers do not yet form an oligopoly on a global scale that matches the ones that can be detected in many other sectors24, their market share and global reach are growing, and they thus seem an important factor in the globalization of the food sector in two ways: through their store presence in a large number of countries and through their global organization of supply chains. This has led McMichael (2009) to argue that the retail revolution has been an important factor in the transmission of (high) world food prices throughout national economies, something he argues to be an important mechanism in the World Food crisis of 2007-2008.

Whether one agrees or not with McMichael’s argument, it has become clear that retailers have become very powerful global actors. The importance of service sectors in the global economy in terms of output, employment, profits, trade and investments has substantially increased in recent decades, and several of these global retailers have become among the largest corporations in the world, which adds extra importance to the study of these actors in two different ways. Because of their vast size, on the one hand, they have influence on many aspects outside their direct ownership structure. These include both direct influence over other actors25 as well as structural re-distributional effects which include the following items as part of a much longer list: lower commodity prices, depressed wages; unemployment of small famers and neighbourhood shop owners, lower sectoral earnings; diversion of trade patterns, regional trade integration, trade imbalances through increased imports, and thus an effect on domestic economic development and national competitiveness; ecological damage through increased food transportation and meat consumption; greater inequality in haves and have nots.26

23

‘The struggle [over standards] is fierce precisely because it is not about ‘intrinsic qualities’ , but about profit, market share, premium prices, consumer loyalty and monopoly rents. (Shaeffer, 1993, p 74)

By controlling the making of standards retail multinationals ‘are able to use standards to control the production and distribution of food. In doing so, they are exerting control over the agro-food system itself’ Konefal et al (2004), p 295

24

See for example Nolan and Sutherland (2002) pp 95-100

25

Among others, farmers, suppliers, manufacturing companies, workers and consumers. The first two

categories are affected by the retailers control over access to commodity chains. In terms of workers, retailing is a labour intensive activity, employment has been turned into a low wage, flexible/part-time tenure. A negative side effect for the consumers being the supposed link between the offers and promotions by supermarkets and obesogenic diets, see Lawrence & Burch (2007), p 1

26

On re-distributional effects and concerns for their negative consequences, see McMichael and Friedmann, (2007); Lichtenstein (2012); Ducatel & Blomely (1990); de Schutter (2010)

Although ICT has created a raise in productivity, this has not been reflected in wages. Most of the increase in efficiency/cost reduction has been captured by the retailer (Burch & Lawrence 2005; Baud & Durand 2012, pp 243, 254-258)

Walmart has been argued to be the biggest contributor to the trade deficits of Mexico and the United States. In both cases, increased imports mainly came from China. In fact, it has been argued that if Walmart were a

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This altogether could also lead to a situation of depressed global demand. In that sense, on the other side, retailers capture within them or even represent broader structural developments within the global economy.27 Retailing has even been termed as ‘one of the driving forces of economic globalization’ (Wrigley and Lowe 2010, p 3), ‘Masters of the Food system’ (Winson 1992) and the largest of these companies ‘some of the most powerful economic agents ever seen on this planet (Lawrence & Burch 2007, p 22). A study of these actors may thus even inform us of developments outside the realm of their main sector.28

1.4 The retail internationalization process, the focus of this thesis

While much work has been devoted to the consequences of the retail revolution, what has been left more open to investigation and remains disputed, is the process that has led to the current situation in which we find the same big box retailers in many countries of the world, the so-called process of ‘retail internationalization’. And even within this process, many scholars with a political science background focus on the back-end supply chain part of the process, using approaches such as the Global Value Chain approach that map current constellations, but have less analytical strength in accounting for change. Where attention has focused on the front-end, horizontal expansion, many former historical descriptions have often pointed to one of the following extremes. During the 1970s, and even up to the early 1990s retailing was often considered to be a domestic activity by nature (Goldman 1974; Holland 1970; Segal-Horn & Davidson 1992), while during the booming years of retail globalization in the second half of the 1990s, a level of global oligopoly in a world market dominated by only a handful of players was seen as only a matter of time (ABN Amro 1999; Adler & Maslan 1998; Crawford 1998) The reality now looks somewhere in between. Although the top three country, it would be China’s 6th biggest trading partner. (see Durand 2007, pp 402 -407, Gereffi & Christian 2009; Dawson et al 2006, p 3, Seth & Randall 2005, p 21).

Durand reported an 18 % wage decrease in the Mexican retail sector between 1994 and 2003 (Durand 2007, p 401)

Reardon (2007, p 416) argues about increased South-South trade and competition as a result of the regionalization of global retailers’ operations in emerging markets. On trade flows, global sourcing and national competitiveness: (Reardon 2007, pp 409, 413 – 416, 424; Dawson at all 2006, pp 2-8) Diverted trade patterns could potentially also lead to greater food (import) dependence.

However, there are also positive sides connected to their rise in power: NGO’s sometimes find allies in supermarkets, such as in the GMO case in Europe, see Clapp (2012), pp 112-113. When power is visible it can also be pressured and shamed (Lichtenstein, 2012, pp 23-24).

27_{For example a suggested development towards Merchant capitalism (Lichtenstein, 2012) or a Buyer- driven}

global economy (Durand 2007, p 402)

On this dialectical notion between retailing and the wider economy see Ducatel & Blomley (1990), p 214: ‘If retail capital is, as we argue part of a larger entity, we should expect that broader systemic contradictions are both expressed within it, and that these contradictions are themselves functional in reshaping its specific historic expression.’

28_{See McMichael and Friedmann (2007), p 294: ‘The changes wrought by supermarkets are larger than the}

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largest retailers have not achieved dominance in every country, and have experienced some serious setbacks in their expansion paths, most have now become active in a dozen of countries and the phenomenon of a global retail corporation is likely to stay.29 Such important actors should not be taken for granted, but deserve to be thoroughly studied. It is my hope that this thesis can make a small contribution to that.

1.5.1 The four companies under analysis

In order to make the thesis both workable and meaningful, a selection of four companies has been made that most tellingly represents the concept of a global retailer. The choice for selecting these four cases (Walmart, Carrefour, Ahold and Tesco) as the focus of the analysis in this thesis was based on a number of criteria which will be summed up soon after. In the end, all these reasons are in some ways related to size (or scale), a feature which make them increasingly influential not just economically but also socially and politically. Although influence is not always derived from size or the possession of crucial resources, many (resource, relational and structural) power based theories have these qualities at their basis. The four selected cases all are the largest retail companies in their home country, with very dominant market shares (between around 20 percent for Carrefour and Walmart, and around 30 percent for both Ahold and Tesco).30 This also make them large companies compared to corporations in other sectors. It is estimated that of every eight pounds a British citizens spends in shops, one ends up in a counter of Tesco’s. For Americans spending at Walmart, this figure is believed to be 1 of every twelve dollars (Seth & Randall 2005, p 162). Furthermore they are also (one of) the largest employers in their home countries. As their home countries comprise not only of some of the largest economies of the world but also the largest and most developed retail markets in the world, and these companies have been in operation for several decades at least, it comes as no surprise that Walmart and Carrefour have thus become the largest retailers in the world based on sales.31 Whereas Ahold once held the third position, internal problems ended its big international adventure in 2003. However, because it was such a prominent actor during the most important stages of internationalization, it has been included in the analysis. Over the years

29

Since 1990s there has been an upward trend in: the number of retailers which operate internationally; the number of countries in which they are active; the market shares of global retailers; market concentration ratio.

30

The latest figures state domestic market shares of 20,5 % for Carrefour (Reuters 13-05-2014); 33,8 % for Ahold (Distrifood Nieuws 16-01-2014); 21 % for Walmart (Environmental Leader 17-10-2013) and 28,7 % for Tesco (The Guardian 11-03-2014)

31_{Although some developing countries have a much larger economy than these nations, traditional wet}

markets and small family chains are still dominant factors in food provisioning, leaving the modern retail sector companies in China with a market share of around 20 per cent, though with high growth rates. See Reardon (2005), pp 2-3; 2007 pp 403-404

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Tesco has come to take over third position and is not unlikely to take over the second position from Carrefour in the near future.

All of the companies have retail activities in a large number of foreign countries, spread over several continents. According to several classifications, this makes them the only real global retail corporations and the absolute leaders of the internationalization dynamic.32 This position has enabled them to have become one of the largest global sourcers in the world and thus left them with an extensive global trading network. Lichtenstein (2012, p 13) claims that more than half of all containers, and value of trade moving from East Asia to the major Western countries are ordered by the major global retailers. All this added up, has led me to believe that when books and articles write on the globalization of food or big box retailers, retailer power, or structural changes in field of commodity distribution and logistics, it is especially and increasingly (though not exclusively) these companies that go behind these processes, or at least are heavily involved in them. A final argument is of a more practical nature. As these companies become more and more visible, simply most attention is given to them. They feature dominantly in case studies; they attract most media coverage and as publicly listed corporations, more information is available about them compared to private companies such as Auchan, Casino and Aldi.

1.5.2 Description of the four companies

All of these companies through their large scale in product volumes and negotiating power over suppliers are able to sell commodities at a much lower price than neighborhood shops or smaller rivalling chains. Furthermore, they have restructured the supply chain, by cutting out middlemen such as wholesalers, dissolving commodity sport markets and binding fixed supplier firms through contractual agreements. But although one might be inclined to see the previous facts as the defining characteristics of a retailer, these companies differ in many ways in their strategies, worldviews, values, corporate governance models and the particular aspect of the retail business that they have found their competitive advantage in. This has resulted in the tendency among scholars to see these companies as representing a particular business or even the political-economic model of their home country/ headquarter state. The four cases consist of the French Carrefour; the American Walmart; the Dutch Ahold and the British Tesco.

32_{See Seth & Randall (2005), Dawson et al (2006), Wrigley & Lowe 2007, Coe & Wrigley 2007. Although}

Walmart has a much lower percentage of international sales (around 29 %) than Ahold (around 65 %) Carrefour (around 50 %), and even Tesco (over 30 %) its sheer size means that Walmart international on its own (without the US market) is even bigger than Carrefour (including France)! See company Annual Reports 2013

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Carrefour

The second largest retailer in the world has been a pioneer in the process of international retail expansion. Founded in 1960, it already opened its first foreign store within its initial 10 years. Between 1965 and 1971 it had sales growth of over 50 per cent per year (Bell at al. 2004, p 289). Between 1992 and 2006 its sales growth rate was still an impressive 13 per cent, meaning a 5 times

multiplication (Durand 2007, p 3). It currently has annual sales of over 100 billion euro and employs more than 350,000 staff member in more than 10,000 stores worldwide (Carrefour website). The company went public in 1970, but most of its early foreign expansion was driven by a policy of expansion through the self-funding of other stores in that country. It therefore only opened only a dozen stores in Brazil until 1985 (Bell et al. 2004, p 291).

Carrefour’s competitive advantages and business model

Its competitive advantage is believed to within the front end of its operations, the store format and its produce sold. Although very common nowadays, back in its early days, the Hypermarket store was considered something revolutionary in a time when supermarkets were small and consumers had to go to a large number of shops for their daily groceries. Time pressures, as women entered the labour force, the luring opportunity to buy all goods under one roof, and the increased ability to do so because of wide car ownership and new cooling technologies that didn’t require daily shopping, made the hypermarket very appealing and well resonating to the needs of that time. Carrefour was also the first company to induce own brand products, as early as 1976 (Carrefour website) . By internalizing part of the production process, higher earnings could be achieved as large famous brand manufacturing companies could not accrue part of the surplus made.33 Carrefour was the first major contemporary retailer to operate abroad on such a large scale. Its early entry has given it the label of being a pioneer. The advantages it gained in being the first in markets with weaker competitors should not be ignored. Carrefour’s competitive advantages, however, are easy to copy,

33_{See Lichtenstein (2012) and Ducatel & Blomley (1990). This strategy erases the identity of big brand food}

manufacturers and thus the loyalty tie between consumers and their products, commodities their products into mass products, shuts out manufacturers from the division of the surplus value, which correspondingly ends up to a great extent with the retailer.

Figure 2: Total Sales Carrefour

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and thus one may ask the question whether it would have been able to achieve the same status, had it not been a pioneer. In fact, the hypermarket model has been used extensively by competitors as Tesco, Ahold, Auchan and Casino in their foreign operations. At times these companies have outperformed Carrefour using its own weapon. Own brand products are also no longer the exclusive terrain of Carrefour, and especially Tesco has become very active in it. Carrefour is often credited with being able to adapt to the peculiarities of foreign markets. This is thought to have been an important factor of its success. It had a relatively loose, not highly centralized organizational structure, with a high level of local managerial autonomy. Stores were only loosely linked together, and most purchases were done locally. Some have termed this the 'Latin model’ or a confederation model34. However, it also comes with certain disadvantages. Carrefour has been described as a technological laggard, and this together with its decentralized buying practices hinder the development of supply chain efficiency, the back end of retailing.35 Although moves have been made into ICT upgrading, the formation of a buying alliance with a group of other retailers, and a more centralized organizational structure, it is still considered to be far behind in ICT and supply chain efficiencies compared to its biggest competitor in global markets, Walmart (Dawson at al 2006, pp 106-100).

Carrefour’s expansion path

Because of French laws restricting domestic growth and its successful Hypermarket format that seemed to fit the needs of the zeitgeist of mass consumption and car ownership, Carrefour expanded to neigbouring countries in which it was thought similar conditions existed as early as 1969.36 Expansion into more (mostly Mediterranean) European countries followed during 1970s, 1980s and early 1990s, the exceptions being the entries into Brazil (1975), Argentine (1982) and Taiwan (1989). By 1994, when its global expansion phase took off, the company was already active in 12 countries, far ahead of any other domestic or foreign grocery retail company. But its phase of greatest expansion still had to come and from 1994 to 2002 it entered 23 countries, some of which through its acquisition of domestic rival Promodes in 1999. Over the following period the number of countries in which it was active remained stable, other increasingly the company exited from markets in which it was active. Recently the companies has faced many challenges. Its financial

34_{See Dawson at all (2006), p 107; Burt (1986), p 68} 35

See Seth & Randall (2005), p 47

36

Example of legislative restrictions on size is the Loi Royer of 1973, Loi Galland of 1996, Loi Raffarin of 1996 in France. In Germany and the UK similar restriction were in place, see Wortmann 2004, p 4; Revised Planning Policy Guidance (PPG) in the UK and Ley de Ordenancio del Commercio in Spain (Wrigley 2000, p 301) Until the 1980s retail power was further contained by ‘retail price maintenance’ laws which inhibited price differentialisation, and trade restrictions and tariffs on products (Lichtenstein 2012, pp 16, 17; Ducatel & Blomley 1990, p 221)

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position has deteriorated, the Eurocrisis has negatively affected consumer spending in markets in which it has most of its presence, its domestic lead position has come under attack and rival French firms have also challenged its position in a number of foreign markets.37 The strategy under its current CEO is focused on protecting its core markets, and divesting from the rest. This means that an expansion into new markets, and thus a broadening of its presence in the world, in the near future is highly unlikely.

Figure 3: Carrefour active in number of countries.

37_{Carrefour’s retail market share in France fell from 28 % in 2001 to 20,5 % in 2014, behind it is Leclerc with 20}

% (Dawson et al 2006, p 95; Reuters 13-05-2014). It has lost its leader position in Brazil to Casino, and Auchan has taken over most of its Eastern European possessions. Carrefour under threat, see Dawson et al 2006, p 167, Seth & Randall (2005), p 149

0 3 6 9 12 15 18 21 24 27 30 33 36 39 A ct iv e in # o f co un tr ie s Year

Carrefour S.A.

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Walmart

The biggest retailer and even the biggest corporation in the world on sales and employment started its operations in 1962.38 In 1992 it started operations in food, which have since become the dominant driver of their sale growth (Burt and Sparks 2006, p 28). Sales have gone up from $ 1 billion dollars a year in 1979, to $ 1 billion a day in 2001, while its annual growth rate between 1992 and 2006 was 15 % per year, meaning sales

multiplied nearly eight times over that period. (ibid p 27, Durand 2007, p 3). The company went public in 1972.

Walmart’s competitive advantages and business model

Its main strategy is to draw customers by offering them the lowest prices on products, through its Ever Day Low Pricing (EDLP) offer. In order to be able to do so, cost reduction has become a top priority. Many emphasize its extensive use of information and communication technology in streamlining distribution and logistics. Examples include ‘Retail Link’, and electronic data interchange (EDI) to share information between itself and its suppliers and its radio-frequency identification (RFID), which closely follows every movement in the supply chain to eradicate inefficiencies. These systems are even clamed to dwarf those of the Pentagon (Burt and Sparks 2006, p 29).39 Walmart has its own distribution centres, from which it supplies its shops and an extensive global sourcing program. Walmart’s competitive advantage thus lie in the back end operations of retailing, creating efficiencies in its supply chains. It has not been a major innovator in creating new store formats or formula’s as Carrefour has done. All this requires a high level of control and centralization, which makes the company look rigid, ethnocentric and less able to adapt to different circumstances.40 More critical views debunk a narrow focus on efficiency and emphasize Walmart’s ability to shift costs and risks to external parties, and obtain all sorts of tax breaks and subsidies from (local)

38_{Since 2002 Walmart has several times ranked nr 1 in the Fortunes 500 list of the largest global corporations,}

including the current year 2014. It has also been among the top ten largest corporations based on market capitalization as ranked in the Financial Times top 500 since 1998, although it was outside the top 10 during parts of the 2005-2010 period.

39_{According to some observers, Walmart’s investments in IT are higher than NASA’s (Colla & Depuis 2002, p}

106)

40_{See for example Christopherson (2007); Gereffi & Christian (2009); Durand (2007); Bell at all. (2004);}

Oosterveen (2012); Seth & Randall (2005)

Figure 4: Total Sales Wal-Mart.

Reflections on the role of finance capital in the internationalization of supermarket chains : the cases of Walmart, Carrefour, Tesco and Ahold

Reflections on the Role of Finance Capital in the

Internationalization of Supermarket Chains

The Cases of Walmart, Carrefour, Tesco and Ahold

07-09-2014

UvA Graduate School of Social Sciences

MA Politicologie

Thomas Geels

0307785

Research Project: Food Production and Natural Resources Use:

Current and Future Decision-making

in the Context of Globalization

Supervisor: Dhr. Dr. R.J. Pistorius

2nd Reader: Dhr. Dr. J.M.J. Doomernik

Reflections on the Role of Finance Capital in the Internationalization of

Supermarket Chains

The Cases of Walmart, Carrefour, Tesco and Ahold

Foreword

Table of Contents

Figures

Introduction

?

?

CHAPTER 1

The Globalization of food

Retail Companies

1.1 The rise of the modern food retailing company

1.2 The effects on other actors in the food chain

1.3 The global dimension of leading food retailers

1.4 The retail internationalization process, the focus of this thesis

1.5.1 The four companies under analysis

1.5.2 Description of the four companies

Carrefour

Carrefour S.A.

Walmart