Final Report Summary - FOODIMA (EU Food Industry Dynamics and Methodological Advances)
The FOODIMA project aims to develop a concise set of methodological tools suitable for a systematic economic assessment of the EU food chain. These tools will provide an evaluation of the structural changes and economic performance of selected food sectors in representative countries of the enlarged EU, along with a detailed description of the entire European food chain. Specifically, the objectives of the FOODIMA project are the following:
1. to provide a consolidated and solid methodological framework suitable for applying in food chain analysis;
2. to generate a descriptive analysis and a concise outlook of the entire EU food industry;
3. to explore the dynamics of the food industry and assessing the effects of the productivity patterns and the level of integration on the economic performance of the food chain;
4. to analyse the competitiveness and strategic interactions of the food industry, particularly the influence of mergers and acquisitions activity;
5. to model technology adoption and R&D incentives in the EU food supply chain;
6. to evaluate the regulatory environment and the most significant causes of change in the food industry, with particular emphasis placed on the influence of policy measures on food quality, standardisation, and labelling;
7. to assess the interactions and integration of the food industry and the agricultural sector and to demonstrate its contribution to the development of rural areas;
8. to generate policy recommendations for EU and national officials.
Work performed
The objectives of the project were fulfilled through the implementation of the following work packages (WPs):
WP1. State of the art in food industry analysis: Main characteristics of food supply chain and the regulatory environment
WP2. Strategic interactions and sectoral competitiveness: An analysis of mergers and acquisition (M&A) activity in the EU food supply chain
WP3. Market performance and welfare evaluation: Technology adoption and R&D incentives in the EU food supply chain
WP4. Market and welfare effects of purity standards in food labelling laws
WP5. Assessment of the economic performance of the food supply chain
WP6. Analysis of the socio-economic effects of the food supply chain in remote rural areas
WP7. Demonstration and dissemination of the results
WP8. Project management and assessment.
End results
The project's deliverables have been completed without major deviations from the work plan. In the following paragraphs the main end results of the research are presented.
Strategic interactions and sectoral competitiveness: Analysis of M&A activity in the EU food supply chain (WP2):
- Level of merger activity in the EU food industry is neither random nor unpredictable. Instead it follows a cyclical pattern which is determined by cyclical movements in the business and capital markets.
- Trends in manufacturing and retailing mergers are not uniform throughout EU countries. The cyclical pattern of mergers in these two sectors varies from country to country and this may be due to distinct national characteristics. This may be due to the fact that the industry is at different stages of development in each country but the variations also depend on cultural and national regulatory differences.
- The increased merger activity in the retailing may be caused by similar activity in the manufacturing which in turn stresses the strategic interdependence along food supply chain sectors. This further implies that mergers may have contributed to jump of food prices caused by structural changes in the market.
- A merger among food manufacturers is desirable from a welfare point of view, only when it takes place in a market which is neither sufficiently concentrated nor it changes significantly the degree of the market' s concentration. In all other cases, the antitrust authorities should not allow the mergers to go through even though they lead to efficiency gains.
- The antitrust authorities should be more sceptical towards mergers in the food retailing sector than towards mergers in the food manufacturing and processing sector. The mergers of food manufacturers / processors could generate efficiency gains and end up, under certain conditions, leading to an improvement in welfare.
- Whether merger activity in the European food supply industry should be further encouraged or discouraged (or left alone) will depend to a considerable degree upon (i) whether the industry is considered excessively concentrated or not, and (ii) whether merger activity will generate increases in productivity and efficiency perhaps through placing resources in more capable hands.
- When merger cases in the food industry are being examined, the examination should encompass some forward looking analysis that takes into account that one merger would be followed by another.
Market performance and welfare evaluation: Technology adoption and R&D incentives in the EU food supply chain (WP3):
- An increase in the competition among food manufacturers, captured as an increase either in the number of food manufacturers, in product substitutability or in the product variety, has a negative impact on the wholesale prices, and subsequently on the final prices. In contrast, an increase in the market size and in the concentration of the food retailing sector tends to lead to an increase in the wholesale prices charged by food manufacturers.
- The food industry tends to perform better in terms of consumer and total welfare when it is characterised by increased competition both in the food manufacturing and the food retailing sectors, by strong product differentiation, as well as by high product variety and economies of scope. However, when entry in the food manufacturing sector is endogenous, higher product variety decreases the manufacturers' entry incentives, and thus, it leads to an increase in the upstream concentration. The opposite holds when goods become more differentiated, the economies of scope get stronger and the food retailing sector becomes more competitive.
- When the competition among food manufacturers gets stringer, due to either an increase in the number of food manufacturers or an increase in their products' substitutability, the incentives for investments in product variety and in process innovation decrease. Instead, when the number of food retailers increases food manufacturers undertake higher investments both in product and process innovation.
- An increase in the competition of the food industry tends to increase both the consumer and the total welfare. However, an increase in the number of food manufacturers could lead to decrease in total welfare when the upstream market is not sufficiently concentrated.
- An increase in product differentiation (e.g. better product labelling in both primary and processing sectors) creates incentives to innovate.
- Education, training and diffusion of information about new technologies in the processing sector are important factors contributing to innovation adoption.
- Bureaucratic procedures hinder response to new consumer trends developing worldwide (health versus convenience, functional foods).
- Market research can help identifying new products that take into account changing demographics in most European cities.
- EU policies aiming at enhancing the adoption and diffusion of new technologies in farm sector should include the following actions:
(i) provision of public extension programs that will be directed to peer farms in pure rural areas with professional farming activities that are highly educated between 40-50 years of age with big profitable farm operations;
(ii) farmers with these characteristics were found to be the more influential ones among rural population generating an important informational cascade among farmers in the area;
(iii) provision of agricultural practices seminars that will be directed to young farmers with high level of education and professionals big-sized farms, who were found to be the most innovative characters among rural population;
(iv) provisions of subsidies during the initial stages of adoption, since later their effects on farmers' adoption decisions are reduced.
- EU policies aiming at enhancing the adoption and diffusion of new technologies in processing and retailing sector should include the following actions:
(i) provision of public extension programs that will be directed to big-sized multinational firms that undertake high R&D activities. Firms with these characteristics were found to adopt more easily product and process innovations creating at the same time significant information spillovers; provision of funding sources to processing and retailing firms directed to R&D expenses, which were found to be the most decisive factor in adopting new technologies;
(ii) provision of appropriate motives to enterprises and public institutions for the development of cooperation actions between them. In general, public institutions were found to create an important spillover to the market enhancing adoption decisions for both processing and retailing firms;
(iii) development of appropriate measures which will enable information cascades developed during innovative activities. Such measures would enhance mainly the adoption in retailing sector.
Market and welfare effect of purity standards in food labelling laws (WP4):
The market and welfare effects of increased adventitious presence (AP) thresholds are shown to be case specific and dependent on the relative magnitude of the associated cost and utility effects. Under certain circumstances (i.e. high cost effect and / or low utility effect), it is possible to improve the welfare of all consumers through a more liberal AP threshold for non-genetically modified (GM) foods.
- A change in the AP threshold can create winners and losers not only among the consumers but also among the suppliers of the two products. The identity of these winners and losers is determined by the relative cost and utility effects. The very same group could either support or oppose an increase in AP thresholds depending on the particular market conditions (that determine whether such increase would lead to gains or losses). This finding provides some rationalisation of seemingly 'irrational' behaviours in the marketplace.
- At low AP thresholds, even small changes in these thresholds could have large welfare and distributional effects. This finding can help explain the strong disagreements that have been observed in EU negotiations for seemingly minute shifts in AP thresholds.
- The common belief that an 'as low as technically feasible' threshold corresponds to maximum consumer welfare is not always correct. Under certain circumstances (a high cost effect and a low utility effect), it is possible to improve the welfare of all consumers through a reduction in purity standards.
Assessment of the economic performance of the food chain (WP5):
- There is evidence that technical progress is favouring larger farms. If this direction of technical progress continues, a large number of small farms are likely to disappear. If a reversal of the trend of farms becoming fewer and larger is desirable, then policy makers should stimulate R&D for technical innovations that are appropriate for small farms.
- In the food processing sector, an increase in demand for the food industry product is necessary to sustain its future productivity growth. Production of highly processed (e.g. ready-made) food and directing output to developing countries are two ways for the industry to increase its productivity growth.
Analysis of the socioeconomic effects of the food supply chain in remote rural areas (WP6):
- The food sector remains important in regional economies and the loss of employment caused by its demise would be difficult, if not impossible, to compensate. Furthermore, the food sector can act as a stabilising sector during periods with negative demand shocks (recent financial crisis). The end results of the project totally fulfil the project's objectives and reach the two primary targets, namely the analysis of the food chain and food industry in the EU and the development of quantitative and qualitative tools, methods and models for the analysis of this industry. Indeed, the results have drawn via various methodological approaches. Recognising that there is not a unique methodological approach to provide a reliable and complete analysis as well as the existing methodologies have their own limitations, work performed provided several novel and solid methodological approaches suitable for the analysis of the food chain.
1. to provide a consolidated and solid methodological framework suitable for applying in food chain analysis;
2. to generate a descriptive analysis and a concise outlook of the entire EU food industry;
3. to explore the dynamics of the food industry and assessing the effects of the productivity patterns and the level of integration on the economic performance of the food chain;
4. to analyse the competitiveness and strategic interactions of the food industry, particularly the influence of mergers and acquisitions activity;
5. to model technology adoption and R&D incentives in the EU food supply chain;
6. to evaluate the regulatory environment and the most significant causes of change in the food industry, with particular emphasis placed on the influence of policy measures on food quality, standardisation, and labelling;
7. to assess the interactions and integration of the food industry and the agricultural sector and to demonstrate its contribution to the development of rural areas;
8. to generate policy recommendations for EU and national officials.
Work performed
The objectives of the project were fulfilled through the implementation of the following work packages (WPs):
WP1. State of the art in food industry analysis: Main characteristics of food supply chain and the regulatory environment
WP2. Strategic interactions and sectoral competitiveness: An analysis of mergers and acquisition (M&A) activity in the EU food supply chain
WP3. Market performance and welfare evaluation: Technology adoption and R&D incentives in the EU food supply chain
WP4. Market and welfare effects of purity standards in food labelling laws
WP5. Assessment of the economic performance of the food supply chain
WP6. Analysis of the socio-economic effects of the food supply chain in remote rural areas
WP7. Demonstration and dissemination of the results
WP8. Project management and assessment.
End results
The project's deliverables have been completed without major deviations from the work plan. In the following paragraphs the main end results of the research are presented.
Strategic interactions and sectoral competitiveness: Analysis of M&A activity in the EU food supply chain (WP2):
- Level of merger activity in the EU food industry is neither random nor unpredictable. Instead it follows a cyclical pattern which is determined by cyclical movements in the business and capital markets.
- Trends in manufacturing and retailing mergers are not uniform throughout EU countries. The cyclical pattern of mergers in these two sectors varies from country to country and this may be due to distinct national characteristics. This may be due to the fact that the industry is at different stages of development in each country but the variations also depend on cultural and national regulatory differences.
- The increased merger activity in the retailing may be caused by similar activity in the manufacturing which in turn stresses the strategic interdependence along food supply chain sectors. This further implies that mergers may have contributed to jump of food prices caused by structural changes in the market.
- A merger among food manufacturers is desirable from a welfare point of view, only when it takes place in a market which is neither sufficiently concentrated nor it changes significantly the degree of the market' s concentration. In all other cases, the antitrust authorities should not allow the mergers to go through even though they lead to efficiency gains.
- The antitrust authorities should be more sceptical towards mergers in the food retailing sector than towards mergers in the food manufacturing and processing sector. The mergers of food manufacturers / processors could generate efficiency gains and end up, under certain conditions, leading to an improvement in welfare.
- Whether merger activity in the European food supply industry should be further encouraged or discouraged (or left alone) will depend to a considerable degree upon (i) whether the industry is considered excessively concentrated or not, and (ii) whether merger activity will generate increases in productivity and efficiency perhaps through placing resources in more capable hands.
- When merger cases in the food industry are being examined, the examination should encompass some forward looking analysis that takes into account that one merger would be followed by another.
Market performance and welfare evaluation: Technology adoption and R&D incentives in the EU food supply chain (WP3):
- An increase in the competition among food manufacturers, captured as an increase either in the number of food manufacturers, in product substitutability or in the product variety, has a negative impact on the wholesale prices, and subsequently on the final prices. In contrast, an increase in the market size and in the concentration of the food retailing sector tends to lead to an increase in the wholesale prices charged by food manufacturers.
- The food industry tends to perform better in terms of consumer and total welfare when it is characterised by increased competition both in the food manufacturing and the food retailing sectors, by strong product differentiation, as well as by high product variety and economies of scope. However, when entry in the food manufacturing sector is endogenous, higher product variety decreases the manufacturers' entry incentives, and thus, it leads to an increase in the upstream concentration. The opposite holds when goods become more differentiated, the economies of scope get stronger and the food retailing sector becomes more competitive.
- When the competition among food manufacturers gets stringer, due to either an increase in the number of food manufacturers or an increase in their products' substitutability, the incentives for investments in product variety and in process innovation decrease. Instead, when the number of food retailers increases food manufacturers undertake higher investments both in product and process innovation.
- An increase in the competition of the food industry tends to increase both the consumer and the total welfare. However, an increase in the number of food manufacturers could lead to decrease in total welfare when the upstream market is not sufficiently concentrated.
- An increase in product differentiation (e.g. better product labelling in both primary and processing sectors) creates incentives to innovate.
- Education, training and diffusion of information about new technologies in the processing sector are important factors contributing to innovation adoption.
- Bureaucratic procedures hinder response to new consumer trends developing worldwide (health versus convenience, functional foods).
- Market research can help identifying new products that take into account changing demographics in most European cities.
- EU policies aiming at enhancing the adoption and diffusion of new technologies in farm sector should include the following actions:
(i) provision of public extension programs that will be directed to peer farms in pure rural areas with professional farming activities that are highly educated between 40-50 years of age with big profitable farm operations;
(ii) farmers with these characteristics were found to be the more influential ones among rural population generating an important informational cascade among farmers in the area;
(iii) provision of agricultural practices seminars that will be directed to young farmers with high level of education and professionals big-sized farms, who were found to be the most innovative characters among rural population;
(iv) provisions of subsidies during the initial stages of adoption, since later their effects on farmers' adoption decisions are reduced.
- EU policies aiming at enhancing the adoption and diffusion of new technologies in processing and retailing sector should include the following actions:
(i) provision of public extension programs that will be directed to big-sized multinational firms that undertake high R&D activities. Firms with these characteristics were found to adopt more easily product and process innovations creating at the same time significant information spillovers; provision of funding sources to processing and retailing firms directed to R&D expenses, which were found to be the most decisive factor in adopting new technologies;
(ii) provision of appropriate motives to enterprises and public institutions for the development of cooperation actions between them. In general, public institutions were found to create an important spillover to the market enhancing adoption decisions for both processing and retailing firms;
(iii) development of appropriate measures which will enable information cascades developed during innovative activities. Such measures would enhance mainly the adoption in retailing sector.
Market and welfare effect of purity standards in food labelling laws (WP4):
The market and welfare effects of increased adventitious presence (AP) thresholds are shown to be case specific and dependent on the relative magnitude of the associated cost and utility effects. Under certain circumstances (i.e. high cost effect and / or low utility effect), it is possible to improve the welfare of all consumers through a more liberal AP threshold for non-genetically modified (GM) foods.
- A change in the AP threshold can create winners and losers not only among the consumers but also among the suppliers of the two products. The identity of these winners and losers is determined by the relative cost and utility effects. The very same group could either support or oppose an increase in AP thresholds depending on the particular market conditions (that determine whether such increase would lead to gains or losses). This finding provides some rationalisation of seemingly 'irrational' behaviours in the marketplace.
- At low AP thresholds, even small changes in these thresholds could have large welfare and distributional effects. This finding can help explain the strong disagreements that have been observed in EU negotiations for seemingly minute shifts in AP thresholds.
- The common belief that an 'as low as technically feasible' threshold corresponds to maximum consumer welfare is not always correct. Under certain circumstances (a high cost effect and a low utility effect), it is possible to improve the welfare of all consumers through a reduction in purity standards.
Assessment of the economic performance of the food chain (WP5):
- There is evidence that technical progress is favouring larger farms. If this direction of technical progress continues, a large number of small farms are likely to disappear. If a reversal of the trend of farms becoming fewer and larger is desirable, then policy makers should stimulate R&D for technical innovations that are appropriate for small farms.
- In the food processing sector, an increase in demand for the food industry product is necessary to sustain its future productivity growth. Production of highly processed (e.g. ready-made) food and directing output to developing countries are two ways for the industry to increase its productivity growth.
Analysis of the socioeconomic effects of the food supply chain in remote rural areas (WP6):
- The food sector remains important in regional economies and the loss of employment caused by its demise would be difficult, if not impossible, to compensate. Furthermore, the food sector can act as a stabilising sector during periods with negative demand shocks (recent financial crisis). The end results of the project totally fulfil the project's objectives and reach the two primary targets, namely the analysis of the food chain and food industry in the EU and the development of quantitative and qualitative tools, methods and models for the analysis of this industry. Indeed, the results have drawn via various methodological approaches. Recognising that there is not a unique methodological approach to provide a reliable and complete analysis as well as the existing methodologies have their own limitations, work performed provided several novel and solid methodological approaches suitable for the analysis of the food chain.
