Reardon_et_al_Supermarkets_august_2005.doc

Large to middle to small cities and then even to

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large to middle to small cities and then even to rural towns, and from upper to middle class and then even to the poor. For example, in most of the first wave, and part of the second wave countries, and starting even in some of the third wave countries, supermarkets have penetrated beyond the food markets of the middle class into those of the urban poor. 2.2. Diffusion Driven by Demand Factors and by FDI and Procurement System Change What factors drove the rapid diffusion of supermarkets? Reardon et al. (2003) examine the demand and supply side of supermarket services in developing regions. First, demand by developing country consumers of supermarket services was and is driven by factors predictable from a services demand function with arguments including incentives and capacity variables that are similar to those that drove this demand in Western Europe and the US: (a) urbanization (with the consequent entry of women into the workforce outside the home and increased opportunity cost of women’s time and their incentive to seek shopping convenience and processed foods to save cooking time), coupled with increased demand for processed foods with rise in per capita incomes; (b) price reduction by supermarkets (relative to traditional retail) first of processed products and later of perishables (with cost reductions made possible by symbiotic evolution of technologies and procurement systems by supermarkets and processing firms); (c) real mean per capita income growth; (d) reduction of transaction costs via access to or acquisition of private or collective capital that reduced the costs to access supermarkets (rise in ownership of refrigerators, growing access to cars and public transport). Second, supply in developing countries of supermarket services was driven by several important factors that led to supermarkets spreading far faster in developing regions than they had in Western Europe and the US. Two factors stand out. On the one hand, a dramatic force for the sudden rise of supermarkets especially in the mid-late 1990s was the liberalization of foreign direct investment (FDI) 5 followed by an avalanche of 5 Reardon and Timmer 2005 argue that FDI liberalization is a more powerful component of globalization affecting farmers than is trade liberalization. 3
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retail FDI, entering first in the first wave countries and then second and then third waves. In the 1990s and after, foreign direct investment (FDI) was crucial to the take-off of supermarkets. Domestic chains had been growing slowly before the waves of FDI, and thereafter the surviving domestic chains great much faster in order to keep pace with foreign chains. The incentive to undertake FDI by European, U.S., and Japanese chains, and chains in middle-income developing countries, was due to saturation and intense competition in home markets and much higher margins to be made by investing in developing markets. When these chains entered in the 1990s, it induced an “investment war” among foreign chains and domestic chains, driving relentlessly market penetration as noted above, and driving consolidation and multi-nationalization.
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