International Relations/Trade, Marketing,

Handy, Charles R.

English

Research Papers in Economics

Multinational Food Marketing:
Competitive Strategies of U.S. Firms
by
Charles R. Handy
Economic Research Service
U.S. Department of Agriculture
Introduction
There is a tremendous interest by
researchers, policy oftlcials, and food industry
participants in issues of globalization of the food
system and in factors causing structural change in
food marketing industries world-wide, In fact, I
participated in an Organization for Economic Co-
operation and Development (OECD) in October
1992 to discuss establishing a permanent working
group to monitor, analyze, and identify the policy
implications of “structural adjustment in the
OECD agro-food sector. ” Hopefully, this OECD
activity will become a valuable source of data for
researchers.
This audience is well aware that firms use
a mixture of strategies for accessing and serving
foreign markets. Strategies include: exporting;
licensing; joint-ventures; alliances; and wholly-
owned foreign afilliates, In this paper I will focus
on exports and foreign direct investment (FDI).
Very little data is available on licensing and joint-
ventures. More specifically, the objectives of this
paper are to:
l Examine the role of U.S. multinational firms
in world trade of manufactured food and
beverages
c Set foreign direct investment in the context of
alternative strategies to access foreign markets
c Quantify U.S. out-bound and in-bound foreign
direct investment in food manufacturing
industries
l Explore sources of strategic advantage in
foreign direct investment
World Trade in Manufactured Food
According to United Nations trade data, the
value of world trade in manufactured food and
kindred products (U.S. Standard Industrial Code
20) reached $206 billion in 1990 @able 1).
Exports account for about 14 percent of the total
value of world-wide production of manufactured
foods. World trade in manufactured foods is
about three times the value of world trade in
unprocessed agricultural commodities. In real
1987 dollars, world processed food trade grew an
average of 9.4 percent from $48 billion in 1962 to
$181 billion in 1990.
Trade in processed food is highly concen-
trated among the industrialized economies. Japan
is the largest importer of processed food account-
ing for 12 percent of world imports in 1990.
West Germany accounted for 11.8 percent, fol-
lowed by the United States (11.7%), France
(8.6%), and the United Kingdom (8,6%). Nearly
90 percent of all imports are accounted for by just
19 countries.
February931page60 Journal of Food DistributionResearch‘1’ilhle1. World Trade in hlimut’actured Foods and Beverages,
1962-1990 (million US$)
Year Nominal Value Value in 1987 Dollars
1962 16,219.9 49,749.7
1967 21,973.3 62,496.5
1972 38,033.8 88,801,3
1977 89,084.7 133,083.6
1982 120,838.7 132,318.4
1987 167,916.1 167,916.1
1990 205,955.6 181,298.9
Table2: US Exports and Imports of Manufactured Foods, l988-l992.
Exports Imports
Year (million $) (million $)
1988 16,414.2 19,399.9
1989 17,111.7 19,681.8
1990 18,585.5 20,876.7
1991 20,084.4 20,806.7
1992E 22,500.0 21,100.0
Exports are also highly concentrated. In
1990, France was the leading supplier of pro-
cessed foods with a 9.8 percent share of world
exports. In second place was The Netherlands
with a 8.9 percent share, followed by the United
States (8.5%), West Germany (6.7 %), and the
United Kingdom (4.3 %). Contrary to what many
believe, the United States’s share of world exports
has remained relatively constant over the past 30
years--declining slightly from 8.8 percent in 1962
to 8.5 percent in 1990 (Figure 1, right hand verti-
cal axis), Figure 1 also shows that the dollar
value of U.S. exports declined during the early
1980s after rising rapidly during the 1970s, and
then resumed their rapid growth during the late
1980s and early 1990s.
In terms of a trade balance, Table 2 shows
that U.S. processed foods exports have grown
much faster than imports. U.S. exports grew at
an annual rate of 12.4 percent from $16.4 billion
in 1988 to $20.1 billion in 1991. Exports are
estimated to grow another 14 percent in 1992 to
$22.5 billion. In contrast, imports grew slowly
from $19.4 billion in 1988 to an estimated $21.1
billion in 1992. This will result in a trade surplus
in 1992 for the first time in many years. We now
turn to the role of U.S. multinational firms in
exporting processed food products.
Journal of Food DistributionResearch February 931page61n
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u)Table 3. Processed Food and Beverage Exports of U.S. Firms with Foreign Affiliates
1988 1991
Share of U.S. Share of U.S.
Firm EXDOItS shiDments ExDorts shiI)ments
Philip Morris/
Kraft General Foods
Archer Daniels Midland
ConAgra
Anheuser Busch
Chiquita Brands
Tyson Foods
Coca Cola
General Mills
Procter + Gamble
Hershey Foods
Universal Foods
H. J. Heinz
Mars
PepsiCo
Sara Lee
Total, 34 U.S. Firms
Mi~ion $ ‘% Mi~ion $
264
979
215
282
86
153
94
74
124
39
36
61
45
21
38
2,912
Source: Company reports and ERS estimates.
1.5
16.5
3.0
3.5
3.6
4.4
2.6
2.2
4.3
2.0
5.5
2.0
1.0
0.4
.7
2.6
1,324
925
726
561
223
187
163
148
142
128
127
121
120
111
104
5,810
‘%
5.8
14.0
4.5
5.9
10.6
4.9
4.0
2.3
4.0
5.0
17.1
3.3
2.0
1.2
2.2
4.1
Exportsby MultinationalFirms
The Economic Research Service, U.S.
Department of Agriculture, maintains a data base
on over 70 U.S. food processing firms--34 of
these firms are multinational corporations (MNCS)
on which we have consistent data between 1988
and 1991. I first discussed MNCS and exporting
at the FDRS meetings in Houston five years ago.
There have been big changes since then.
Export propensities of MNCS are still rela-
tively low, but are rising. For example, Table 3
shows that, for all 34 U.S. MNCS, exports aver-
aged 2.6 percent of sales in 1988. By 1991,
Journal of Food DistributionResearch
export propensity for these firms rose to 4.1
percent of sales--a huge increase. In dollars, ex-
ports rose from $2.9 billion to $5.8 billion, up
100 percent. These 34 MNCS accounted for 29
percent of U.S. 1991 exports of processed food.
Each of the firms listed separately in Table
3 had over $100 million in exports. Kraft General
Foods, owned by Philip Morris, was the largest
exporter in 1991, replacing Archer Daniels
Midland, the largest exporter in 1988. Universal
Foods had the highest export propensity in 1991,
again replacing number one Archer Daniels
Midland in 1988. ADM was also the only firms
that experienced a decline in exports.
February 93Jpage63
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*m ml-Table 4. Sales By Foreign Affiliates of U.S. Food Manufacturing Fk-ms
1988 1991
Share of U.S. Share of U.S.
Firm Ex~orts shiuments EXDOIIS shit)merits
Philip Morris/
Kraft General Foods
Coca Cola
Mars
CPC International
PepsiCo
H. J. Heinz
Kellogg
Sara Lee
Quaker Oats
ADM
Campbell Soup
Ralston Purina
ConAgra
Castle & Cook
Borden
RJR Nabisco
Total, all 34 firms
Million $
8,556
4,319
2,295
2,656
2,030
2,192
1,762
1,740
1,584
184
1,503
1,140
331
917
1,480
2,981
39,635
Source: Company reports and ERS estimates.
%
33.2
54.0
34.0
56.5
24.9
41.8
40.5
23.9
35.1
3.0
26.5
24.1
4.4
40.4
27.5
30.2
25.8
Million $
9,297
7,401
4,000
3,891
3,572
2,379
2,376
2,211
1,868
1,855
1,774
1,700
1,687
1,436
1,351
1,200
52,089
At the other end of the spectrum, 9 of the
34 MNCS had very low exports (less than 2% of
sales). In fact four of these firms had exports
below one percent of sales (Quaker Oats,
Campbell Soup, RJR/Nabisco, and Clorox).
These large, brand-oriented firms obviously use
strategies other than exporting for accessing for-
eign markets.
Foreign Direct Investment
The Bureau of Economic Analysis, U.S.
Department of Commerce, publishes aggregate
industry-wide data on U.S. investment abroad and
Journal of Food DistributionResearch
%
28.8
61.4
40.0
62.7
28.6
39.3
41.0
31.3
34.0
21.9
28.6
36.2
9.5
48.4
25.4
18.6
27.0
on foreign direct investment in the United States.
The latest available data is for 1990. Figure 2
shows that sales from U.S. aflliates abroad grew
from $39 billion in 1982 to $75 billion in 1990.
Seventy-five percent of U.S. aftliate sales abroad
are concentrated in Europe, Canada, and Japan.
This figure also shows that sales from foreign-
owned aftlliates in the United States are smaller
than sales from U,S.-owned affiliates abroad.
Sales from foreign-owned food processors in the
United States (such as Pillsbury or Carnation),
grew from $15 billion in 1982 to $45 billion in
1990--an average growth rate of 25 percent.
February 931page65Turning again to the Economic Research
Service data for the 34 U.S. MNCS, we see that
these large firms received 27 percent of their sales
from their foreign afilliates, up slightly from 25.8
percent in 1988 Table 4). Foreign affiliates sales
grew from $39.6 billion in 1988 to $52.1 billion
in 1991. Thus, sales from U.S.-owned aftliates
abroad were 9 times larger than their U.S. exports
($52. 1 billion compared to $5.8 billion). Table 4
lists the 16 of 34 U.S. MNCS with over $1 billion
in sales from their foreign affiliates. Two firms
(Coca-Cola and CPC International) received over
60 percent of their sales from their foreign affili-
ates. Another 7 firms received over 30 percent of
sales from their aftlliates.
Location of Afiliates
While U.S. foreign direct investment is
targeted largely to developed countries, the num-
ber of U.S. aftlliates in developing countries is
growing rapidly. In 1991, 42 U.S. MNCS in the
ERS database had 802 food manufacturing plants
abroad. About one-third, or 284, of these plants
were in developing countries. At least 187 plants
were in Latin America--mostly Brazil, Mexico,
and Venezuela. Another 43 food processing affili-
ates were located in Asia and 23 in Africa.
The U.S, is also leading the way to
becoming a major investor in food processing in
Central and Eastern Europe. At least 9 U.S.
firms had over 22 aftliates in this area as of
1992. Sara Lee acquired Compack Trading,
Hungary’s third largest food manufacturing firm.
Gerber acquired Alima SA, Poland’s largest infant
food and juice firm and plans to greatly increase
its production capacity. Kellogg is building a
RTE cereal plant in Latvia.
TradeLinkx with AfWiates
First we look at trade links between the
United States and its aftlliates abroad. In 1989,
the United States exported $2.2 billion of pro-
cessed food to its foreign aftlliates. This
accounted for 13 percent of total U.S. exports of
processed food. U.S. imports of processed food
from its foreign affliates, on the other hand,
accounted for only $900 million--or 4.6 percent of
total imports. Furthermore, U.S. foreign afllliates
exported on average only two percent of their
sales to the United States. Therefore, U.S. par-
ents do not maintain affdiates abroad primarily as
export platforms to the United States.
Most of the trade with affiliates is intra-firm
trade, That is, most U.S. exports to affliates
($1.7 billion, or 71%) are shipped by U.S. par-
ents. Likewise, most U.S. imports from aftlliates
abroad ($760 million, or 85%) go to U.S. parents.
Similar trade links exist between foreign-
owned firms (FOFS) in the United States and their
parents abroad. Foreign-owned food processors
in the United States exported $2 billion, or 5
percent of their 1989 sales. This accounted for 12
percent of total U.S. exports. These FOFS also
imported $2.7 billion or 6.5 percent of their sales,
accounting for 13.7 percent of U.S. imports.
Again, most of this trade is intra-firm, Of
the $2 billion exported by FOFS in the United
States, nearly one-half went to their foreign-based
parents. And of the $2.7 billion imported into the
United States, by FOFS, 58 percent came from
their parents.
FDI as a StrategicResponse
In this section we examine available data to
determine to what extent foreign direct investment
is a strategic response to perceived profit opportu-
nities. Dennis Henderson and the NC-194 core
group at Ohio State University compiled data for
this analysis from company annual reports com-
piled. A panel of 144 food processing firms from
around the world was constructed. Of these 144
large firms, 70 are U.S. and 74 are non-U.S.
firms. Annual reports provide data on net income
as a percent of assets for all 144 firms.
Table 5 shows net income as a percent of
assets for MNCS versus non-MNCs for the com-
plete sample of firms as well as for the 74 non-
U.S. firms and the 70 U.S. firms. For each
group of firms, MNCS have lower profit rates
than non-MNCs. For example, for the full sam-
ple profit rates for the 26 non-MNCs was 6.6
percent of assets compared to 5.7 percent for the
118 MNCS. Since data from Table 5 suggest that
firms that follow FDI strategies receive lower
February 931page66 Journal of Food DistributionResearchprofit rates, this raises the issue of motivation for
FDI in food manufacturing.
Table 5. Earnings of Leading
World Food Manufacturing Fmms,
198911990
Net Income as % of
Assets. Total for Grot.m
All 144 Firms 5.79
118 Multinational firms 5.74
26 Firms w/o foreign operations 6.61
All 74 Non-US firms 5.91
68 Multinational firms 5.88
6 FiTms w/o foreign operations 7.92
All 70 US Firms 5.63
50 Multinational firms 5.55
20 Firms w/o foreign operations 6.36
Source: Original data
Table 6. Earnings of Leading
Multinational Food Manufacturing Firms,
1989/1990
Net Income as % of
Assets. Total for Group
All Multinational firms
35 Foreign-oriented firms 8.08
83 Home-oriented firms 4,42
Non-US multinational firms
22 Foreign-oriented firms 6,03
46 Home-oriented firms 5.79
US Multinational firms
16 Foreign-oriented firms 10.67
34 Home-oriented firms 3.69
But further sub-dividing the MNCS into
“foreign-oriented” and “home-oriented” classifi-
cations reveals a different story (Table 6).
Foreign-oriented MNCS have higher than average
shipments from their foreign afilliates; while
home-oriented MNCS have lower than average
sales from their afllliates, For each group of
MNCS, foreign-oriented MNCS have higher profit
rates than do home-oriented MNCs--the difference
is particular y pronounced for the U.S. MNCS
(10.7% versus 3.7%). MNCS with relatively low
levels of foreign operations are less profitable than
eitherMNCS with very large foreign operations or
food processors with no foreign operations (non-
MNCS). The implication is that for foreign direct
investment to be profitable, firms must invest
aggressive yin their foreign afilliates--they cannot
just dabble in foreign direct investment and be
successful.
Summary and Conclusions
l
l
l
l
l
l
For large food manufacturers, foreign direct
investment is by far the dominate strategy for
accessing and serving foreign markets.
World-wide, sales from foreign aftlliates are
three times larger than processed food
exports. But for U.S. multinational food
processing firms, foreign afilliates sales are
nine times larger than exports,
From 1988 to 1991, however, exports by
U.S. MNCS have grown much faster than
sales from their foreign aftlliates.
In general, foreign aftlliates are not export
platforms: most sales go to the host country.
Multinational corporations with high levels of
foreign direct investment are more profitable
than either non-MNCs or MNCS with low
levels of foreign investment.
In the final analysis, we still have very little
empirical data or conceptual models to help
explain why firms choose a particular strategy
or combination of strategies for accessing
foreign markets. The Economic Research
Service and Agricultural Canada are currently
developing a joint research project to further
explore this topic.
Journal of Food DistributionResearch February 931page67
-—.-——.——February 931page68 Journal of Food DistributionResearch

MULTINATIONAL FOOD MARKETING: COMPETITIVE STRATEGIES OF U.S. FIRMS

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