The Supermarket Revolution in Developing

Countries: Policies to Address Emerging

Tensions Among Supermarkets, Suppliers and
Traditional Retailers

THOMAS REARDON and ROSE HOPKINS

Supermarkets (short for all modern retail) are spreading quickly in

developing countries. The take-off occurred as recently as the early to
mid-1990s, driven by an avalanche of foreign direct investment (FDI)
sparked by retail FDI liberalisation. A decade on, the power and
dominance of supermarkets is already felt in the food markets of many
developing countries, and tensions between supermarkets and traditional
retailers, and supermarkets and their suppliers, are emerging as key policy
and political debates. This paper analyses those tensions. It then reviews
the US and Western European history and current experience in designing
policies (regulations and support programmes) to address those tensions. It
ends with an analysis of emerging policy approaches to the supermarket
sector and the tensions its growth is creating in developing countries, and
recommendations.

Les supermarches (terme adopte pour tous les modes de distribution

modernes) setendent rapidement dans les pays en developpement. Le
decollage a eu lieu au milieu des annees 1990, conduit par une
avalanche dIDE suscites par la liberalisation dans le commerce de detail.
Une decennie plus tard, la puissance et la domination des supermarches est
deja` ressentie sur les marches alimentaires de nombreux pays en
developpement, et les tensions entre supermarches et detaillants
traditionnels, entre supermarches et fournisseurs, sont en train de
devenir des elements cles dans les debats politiques et dans les choix de
politiques economiques. Larticle analyse ces tensions. Il retrace ensuite
lhistoire des Etats Unis et de lEurope de louest dans ce domaine et traite
de lexperience actuelle dans la definition des politiques (regulations et
programmes dappui) pour prendre en compte ces tensions. Il se termine
par une analyse des nouvelles approches du secteur de la grande
distribution, des tensions creees par sa croissance dans les pays en
developpement ainsi que par des recommendations.

Thomas Reardon is Professor at Michigan State University, East Lansing, Michigan, USA. Rose Hopkins
is a Masters student, also at Michigan State University.

The European Journal of Development Research, Vol.18, No.4, December 2006, pp.522545
ISSN 0957-8811 print/ISSN 1743-9728 online
DOI: 10.1080/09578810601070613 q 2006 European Association of Development Research and Training Institutes
THE SUPERMARKET REVOLUTION 523

INTRODUCTION

Over the past decade there has been a supermarket revolution in developing
countries. While there were domestic supermarket chains occupying a tiny retail
niche among upper-income consumers in large urban areas in many developing
countries before the early 1990s, it was not until the early to mid-1990s that the
supermarket sector took off to grow meteorically since then. The areas most
advanced in this trend, such as South America, Mexico, South Africa, East Asia
outside China, parts of Southeast Asia such as Thailand, and much of Central
Europe, already see supermarkets moving to dominate the food sector, displacing
traditional retail. For example, the share of supermarkets in food retail in South
Korea, Thailand, and Taiwan, Brazil and Mexico, and Poland and Hungary, is
already at 50 per cent or higher, and Brazil and Argentina have reached 60 70 per
cent, coming close to Western Europes 70 85 per cent. At the same time, there has
been rapid consolidation and multi-nationalisation of the supermarket sectors in
developing countries (Reardon et al., 2003).
There is emerging evidence that with this meteoric rise of supermarkets have
come growing tensions between: (1) supermarkets and traditional retailers; and
(2) supermarket chains and their suppliers. These tensions tend to be slight
when supermarkets are still just tiny niche players (before or in the early stage
of supermarket development take-off) but grow as supermarkets grow to
dominate the food market. The inflection point appears to be roughly at the
intermediate stage when the supermarket share in total food retail is roughly
one-third to one-half, where for example Argentina was five years ago (when
there was explosive conflict between supermarkets and suppliers), and where
Chile, Costa Rica, Colombia, Mexico, Poland, Indonesia, and Thailand are now
to name several countries now in the throes of major and heated policy
debates based on emerging tensions between supermarkets, their suppliers and
traditional retailers.
Witness for example the declarations and policies of Thailand in recent years to
first stiffly control and then decontrol and then re-control foreign hypermarkets.
Illustrating the emergence of conflict, on 4 October 2006, the following news came
out of Thailand:
In a dramatic turn of events in Thailand, the military-backed government has
threatened larger retailers, mostly foreign-owned groups, with prison terms of
up to three years or fines of up to THB6 million (USD156,193), in a bid to
slow down expansion plans and protect smaller stores. Karun Kittisataporn,
the commerce ministrys secretary general, said it had drawn up guidelines
banning big supermarkets from selling goods at unfairly low prices and
giving too-large discounts to shoppers. If giant retailers fail to comply with the
guidelines, they could face either jail terms for company representatives or
fines or both, Karun said (CIES Food Business Forum, 2006a).
Policy-makers, supermarkets, traditional retailers, wholesalers and suppliers
in developing countries are fervently searching for policy solutions to these tensions
524 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

in particular in countries where the share of supermarkets in food retail has

reached a third to a half, what Reardon and Timmer (forthcoming) call the first and
second wave countries in the spread of supermarkets. This search is spurred by the
social, political and economics costs of these tensions.
That search follows in the path of a similar search over the decades for policy
solutions to these issues in developed countries. We in fact draw on and briefly
review literature on the policy approaches taken in several developed countries.
However, our working hypothesis is that a distinct and new debate is needed on the
appropriate policy approaches in developing countries simply because the
situation in the latter is, in some important ways, different.

1. The retail transformation has been much more of a sudden large shock in
developing countries. Starting from a base of traditional retail (small shops,
wetmarkets), supermarkets it spread very slowly in the US and Western
Europe over roughly the past five to eight decades. By contrast, supermarkets
spread some five times faster in todays developing regions; for example,
Brazil did in two decades what took eight in the US, catapulted by intense
foreign direct investment (FDI) in retail FDI that had been by comparison
nearly absent in the US and Western Europe for much of their retail
transformation.
2. The food supply sector (farms and processing firms) had much longer to
make adjustments to the transformation of retail and wholesale in the US
and Western Europe, and arguably were much better equipped through
public sector support and basic capitalisation. By contrast, the great majority
of suppliers in most developing countries are very small farms and firms,
often under-capitalised, and in a context comparatively bereft of public
support.
3. Developed country regulatory systems are administered by relatively strong
governmental infrastructure in developed countries, with budgets and
personnel to handle legal complaints, monitor contracts, and so on. By
contrast, most developing countries today, with a few exceptions, have far
weaker governmental/administrative capacities.

Yet despite the emerging debate, and the difference of the developing country
context, there has as yet been no systematic linking of analysis of the sources and
nature of these tensions in developing countries to policy alternatives to resolve
them. This paper aims to make a contribution to filling that gap.
We proceed in three steps. First, we analyse the sources of those tensions in
developing countries, drawing on recent evidence. Second, we draw on experience
(and current context, as tensions continue) in developed countries (using US and UK
as examples) regarding policy approaches to addressing those tensions. Third, we
analyse, drawing on various evidence and then focusing on examples of Argentina
and Mexico, the policy approaches that are very recently emerging in developing
countries. We conclude with recommendations.
THE SUPERMARKET REVOLUTION 525
THE SPREAD OF SUPERMARKETS IN DEVELOPING COUNTRIES AND
EMERGING CONFLICTS WITH TRADITIONAL RETAILERS AND SUPPLIERS

The Spread of Supermarkets and Conflicts with Traditional Retailers

The supermarket revolution in developing countries took off only in the early to
mid-1990s. Before that, supermarket diffusion had been proceeding very slowly and
only in tiny niches (largest cities, richest domestic consumers and expatriates). That
take-off was created by a confluence of income growth and urbanisation that had
been under way for several decades, plus the liberalisation of foreign direct
investment (FDI) that brought an avalanche of retail FDI into developing countries
from the mid-1990s onward. The latter is treated further in the section called
Emerging Policy Measures in Developing Countries.
The ensuing spread of supermarkets (a term we use as a convenient shorthand
for all modern retail formats, such as hypermarkets, supermarkets, discount stores
and chain convenience stores) took place in three waves. The first wave was
primarily in South America, northern Central Europe, and East Asia outside Japan
and China; the food retail share of supermarkets grew from roughly 5 10 per cent
in the early 1990s to 50 60 per cent by 2004. The second wave was primarily in
Mexico, Central America, South Africa, much of Southeast Asia, and
south-Central Europe, with the share going from roughly 5 10 per cent in the
mid- to late 1990s to 30 50 per cent by 2004. The third wave is primarily in India,
China and Eastern Europe, starting in earnest only in the late 1990s and early
2000s and reaching a share of some 5 10 per cent today, but growing very fast.
Other areas such as Eastern/Southern Africa and other South Asia countries appear
to be in an emerging fourth wave.
Moreover, within a given country, the diffusion of supermarkets also occurs in
waves, from large cities, to intermediate cities, thence to small cities and even rural
towns, and from richer consumer groups to the middle class, thence to the lower
middle class and the working poor in urban areas. In the first and second wave
countries supermarkets have already spread beyond the middle class into the food
markets of the urban poor and the rural towns. This spatial diffusion path roughly
parallels that which occurred decades earlier in Western Europe and the US.
Finally, the penetration of supermarkets into product markets happens first in
processed food products and non-food products, then in semi-processed products
like dairy products, and finally in fresh meats, fish and produce. Again, this pattern is
similar to that which occurred in the US and Western Europe. Partly this is because
the cost advantages of economies of scale and scope are earliest capturable in those
stages, but also because the habit of local, daily purchase of fresh foods gives way
only slowly to less frequent purchase and storage in refrigerators. Even then only
half of fresh produce is bought in supermarkets in places like France and Italy where
shops, farmers markets and wetmarkets in town squares still thrive (Reardon, 2005a;
Reardon and Timmer, forthcoming).
The mirror image of the spread of supermarkets is the decline of the traditional
retail sector. The fastest decline in the traditional sector is small general stores
526 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

selling broad lines and processed foods and dairy products, while fresh produce
shops and wetmarkets hold out longer. Several examples follow:

1. In Indonesia, sales of supermarkets rise 15 per cent a year, those of traditional

retail decline at 2 per cent a year; while nearly all Indonesians except a tiny
pocket of rich consumers and expatriates shopped only in small shops and
wetmarkets in 1990, by 2005, 30 per cent of overall food is bought in
supermarkets, and 15 per cent of produce (Natawidjaja et al., 2006).
2. In urban Chile between 1991 and 1995, there was a disappearance of 15,777
small shops mainly in Santiago, a city of four million a decline of 21 22 per
cent of general food, meat and fish small shops, 25 per cent in deli/meat shops
and dairy product shops, but only a 17 per cent decline in fruit/vegetable shops
(Faiguenbaum et al., 2002).
3. In urban Argentina, Gutman (1997) notes that from 1984 to 1993, in the most
intense period of the take-off of supermarkets, there was a decline of small food
shops from 209,000 to 145,000 roughly 64,000 went out of business. She
estimated that during the 1990s, four out of ten neighbourhood shops turned into
self-service stores, another four survived but with drastic drops in sales, and two
closed. Rodriguez et al. (2002) note that while general-line small shops folded
quickly, those in a specialised niche, in particular bakeries, fresh fish and meat,
and fruit and vegetable shops, disappeared less quickly.

There are several focal points of the competition between supermarkets and
traditional retail.

Price War
Supermarket chains trend towards charging lower prices to consumers than do
traditional retailers. This trend is correlated with the stage of diffusion of
supermarkets, the type of product (supermarket prices of processed products are
typically competitive much earlier than fresh foods), and degree of modernisation of
the chains procurement system (which modernisation drives down costs). The main
elements of that procurement system modernisation include:

1. a shift from store-by-store procurement to centralised procurement via

distribution centres; this tends to increase the geographical market-shed of
procurement first to the country, then the region, then globally; the centralisation
of procurement tends to reduce coordination costs and congestion diseconomies
substantially, a gain that swamps increases in transport costs; this also allows
purchase at mass scale, allowing stronger bargaining power with suppliers and
reduction of per unit fixed costs of transaction; and
2. a shift from spot market procurement in traditional wholesale markets gradually
toward procurement via specialised dedicated wholesalers and direct purchase
THE SUPERMARKET REVOLUTION 527

from growers or grower associations; this increases efficiency in the supply chain
and cuts costs from wholesaler margins.

The pace of this modernisation is sharply correlated with:

1. the wave of the country (so far mainly occurring in first and second wave
countries where competition in the supermarket sector spurs technology change
in retail);
2. the size of the chain, with larger leading chains being the main modernisers as
they have the capacity to do so;
3. situations where the wholesale sector represents a drag on development of supply
chains to supermarkets (in many countries) and there is thus incentive to skirt the
traditional system (Reardon et al., 2003).

Examples of supermarkets charging lower prices include the following. A recent

study in Chile, a first wave country (LatinPanel study for 2004, reported in Camara
Nacional de Comercio, 2005) shows that supermarkets, by charging lower prices for
food compared to traditional retailers, reduced the cost of the food consumption
basket of the lower and middle income consumers in Chile. DHaese and Van
Huylenbroeck (2005) found that supermarket prices were well below the prices of
small shops in South Africa (a second wave country) in particular for the processed
foods and staples that accounted for the top ten consumer purchase items
(of rural town/village areas) as well as bulk produce items such as cabbage and semi-
processed items such as dairy. Neven et al. (2006) show in Nairobi, Kenya (a third
or perhaps fourth wave country) that supermarket prices are lower than
traditional shops for processed foods and non-food items, but not in general for
fresh produce.
The price war is an important point of conflict between supermarkets and
traditional retailers in developing countries. Lower prices based on lower costs from
procurement modernisation and economies of scale are an object of tension with
small traditional retailers who cannot match those economies of scale except in the
rare buying club or via franchise arrangements that then bring the small shops into
the formal and thus modern retail sector. The riposte of the supermarkets is that the
traditional retail sector does not have to incur costs associated with formality (such
as registration), the normal infrastructure of large stores such as the building and
parking lots and signage, and often is below radar of inspectors regarding hygiene
regulations which impose further operating costs.
Moreover, controlling for the factor of relative costs of procurement,
supermarkets are sometimes charged, by traditional retailers or competition
authorities, with selling at unfairly low prices (below cost, subsidised by other
earnings, either in one-off events such as promotions or in longer marketing
campaigns) in order to capture market share from traditional retailers. The riposte by
supermarkets is that wetmarket stall owners and small shops in the informal
sector usually do not pay taxes or registration fees and thus have unfairly low prices.
528 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

This exchange of charge and counter-charge fuels the inte-segment conflicts in the
retail sector.

Convenience War
Supermarkets and traditional retailers in developing countries also compete on
convenience specifically a set of transaction costs that consumers face, which
condition the overall cost of the food consumption basket bought from retailers.
The first of these is the cost of a households acquiring (search, transport,
purchase) its full set of (consume-at-home) food items, its food consumption
basket. This in turn is a function of several things: the distance of the store from the
home; the number of trips needed to get all the items in the basket; the variety of
items available at a given store; the hours of the store and thus the ability of the
consumer to minimise the opportunity cost of a trip to the store; and the shelf life of
the product.
The comparison of the modern and traditional retail sectors is complex along the
lines of these costs because, as we noted, our use of the term supermarkets
simplifies what is a diversely-formatted modern retail sector. Thus, while large
modern retail stores (supermarkets and hypermarkets) are typically more costly in
terms of transport to visit than small traditional shops in the consumers
neighborhood, modern convenience store and hard discount chains are typically
inserted into dense neighborhoods and easy to access. Large modern retail stores
also tend to have a far wider assortment of products than a small shop, and thus one
trip to a large store would be equivalent to many trips to a variety of small shops.
In general, and mirroring the product market penetration of supermarkets noted
above, the supermarkets in developing countries have tended to best small shops in
the conveniences of wider assortments and longer hours, in particular for processed
and semi-processed products that can be bought less frequently than daily, and/or for
consumers with high opportunity costs of time (the urban middle class), motorbikes
or cars or easy access to buses, and refrigerators. For example, supermarkets have
been rapidly gaining ground over small dairy products shops in Chile (Faiguenbaum
et al., 2002), Russia (Dries and Reardon, 2005) and China (Hu et al., 2005) due to far
wider assortment combined with lower prices.
Modern retailers (particularly the retail multinationals) have pushed these
advantages by having multiple formats (convenience stores, small urban
supermarkets, hypermarkets, discount stores, hard discount shops), having longer
hours and locating as close to the urban dense centres as real estate and zoning
regulations (see below) allow. By contrast, small shops and wetmarkets have used
the advantage of their location in inner cities, their offering of fresh foods and
personalised service to compete on convenience. The upshot is that, just as in
developed countries, store location and hours have been key battle grounds in the
regulatory debates we discuss below.
A final note on transaction cost competition is consumer credit and other
services combined with retail. The conventional image is of the corner shop offering
consumer credit and thus being more attractive to the lower income consumer
compared to the supermarket where cash must be paid. But the reality is more
THE SUPERMARKET REVOLUTION 529

complex. With urbanisation and population mobility, there is emerging evidence of

a decline in small shops offering consumer credit; for example, Alvarado and
Charmel (2002) note that small shops offer only ten per cent of their clientele any
consumer credit, and estimate that in Costa Rica only four per cent of consumers get
consumer credit from small shops. By contrast, supermarket chains have recently
made a heavy push to provide credit cards and even banking services; Gutman
(2002) notes that supermarket chains made important gains during the economic
crisis in Argentina because they actually increased credit card supply while small
shops had to cut back. PlanetRetail (2006a,b,c) shows that Carrefour in Brazil and
Wal-mart in China recently started banking and credit card services (following a
trend among retailers in developed countries). This meshes with a general pursuit of
one-stop shopping convenience for customers, as supermarkets in developing
countries have also recently appended filling stations, fast-food stores, and
pharmacies to their stores. Just as in developed countries, pharmacy chains, credit
card companies, and banks have fought this trend, often politically.

Quality and Safety War

There are two dimensions of quality/safety assurance: the retailer assuring that there
is quality and safety in the product via supply chain management; and the retailer
assuring the consumer of that quality/safety via signalling. The supermarket chain
has certain advantages over traditional retailers in both dimensions, and those
advantages in turn create competition and tension in developing countries.
First, while both supermarkets and traditional retailer segments can access high-
quality and safe sources of fresh and processed products, the supply chain
coordination which the retail chains buying power and procurement modernisation
facilitate increases the ability to assure correct post-harvest handling along the
supply chain. The signalling to consumers of that safety assurance procedure can
and is used as a strategy of supermarkets against traditional retailers. Supermarket
chains reinforce the coordination, and the signalling of it, via use of private
standards (Reardon, 2005b). For example, in Vietnam, modern retailers signalled to
consumers their supply chain assurance procedures during and after the avian flu
crisis, which won many consumers in Ho Chi Minh City to supermarkets away from
wetmarkets (Phan and Reardon, 2006). There is emerging evidence that the
supermarket chains safety claims are seen by consumers as more credible than
those of the informal sector, as for example in the case of vegetable safety in
Vietnam (Figuie, 2004) and Thailand (Posri and Chadbunchachai, 2007). The
implicit or explicit signalling is a source of growing tension between retail segments
as wetmarket and small retailer associations resent and resist any signalling, implicit
or explicit, in this regard (for example in Indonesia, see Natawidjaja et al., 2006).
Second, modern retail, by definition the formal segment of the retail sector, is the
object of liability laws, product expiry regulations and other regulations attending
the formal retail sectors interface with the consumer. This is a commonly signalled
(to consumers) advantage of modern retailers over informal sector shops, such as in
the dairy market in Russia (Dries and Reardon, 2005). Even the occasional
530 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

enforcement of erring supermarket chains reinforces the image in the public mind
that at least this formal segment can be policed and being policed. 1
In sum, there are various sources of tension and conflict between supermarket
chains and traditional retailers in developing countries. Those sources are partly
simply in the nature of conflicts between natural competitors with different
advantages and disadvantages, and partly from strategies taken by each side to
increase its advantage. The consequence is that beside the normal commercial
competition between the two retail segments, there is also organised political, as
well as spontaneous local, conflict between supermarket chains and small shops and
wetmarkets, and the associations representing them.

The Modernization of Supermarket Procurement Systems and Conflicts with Suppliers

We posit that the emergence of tensions and conflicts between supermarkets and
suppliers are correlated with the modernisation of retail procurement systems.
Abstracting now from heterogeneity (over products, countries and chains), we
explore some emerging points of conflict.
First, there are what can be called structural tensions between supermarkets and
suppliers. The modernisation of procurement systems by supermarkets (which
traditionals generally do not do, as they continue to source only from the spot-
wholesale market), combined with the demands of the formal sector such as formal
registration and invoicing from suppliers, translates into increasingly demanding
requirements from suppliers with respect to volumes, consistency, quality, costs and
commercial practices. These represent substantial threshold investments and
relation-maintenance costs for supermarket suppliers. As the supermarket sector
consolidates, the bargaining power of the retailer shifts toward oligopsonistic power,
and along with it, the power to impose requirements on suppliers.
Recent studies show that as a consequence of these demanding requirements,
several patterns of participation by suppliers in supermarket supply chains are
emerging:

1. Supermarket chains tend to source from medium and large suppliers where they
are available; this typically means a tendency toward sourcing from larger meat
and dairy products and other processed food companies.
2. Supermarket chains also tend to source, where possible, fresh products from
medium/large farmers; however, this is rarely possible in most developing
countries, except for a few products like bananas and other export sectors where
large and medium farms have developed in produce.
3. Most of the time supermarket chains thus source only indirectly, through
wholesalers and processors, from small farmers. The latter tend to be the upper
stratum of small farmers in terms of capital assets (organisation, equipment, and
training), infrastructure access, and size (Reardon and Timmer, 2007).
4. Where the small farmers are bereft of the needed assets, but the channel must still
rely on them, it is common for the proximate intermediary to assist with training,
THE SUPERMARKET REVOLUTION 531

credit, and so on (for the case of dairy in Poland, see Dries and Swinnen, 2004;
for produce in Central America, see Berdegue et al., 2005). in Central America,
see Berdegue et al., 2005).

Hence, the smallest and least capitalised farmers are typically not part of
supermarket channels, indirectly or indirectly, except where the chains are still
relying on spot markets of wholesale markets, or where they are prepared to help
capitalise the small farmers. There is at present little evidence of tensions between
political associations of small farmers and supermarket chains due to this process of
avoidance. Only in some of the advanced stage countries, like Mexico, have there
been explicit political tensions between small farmers/peasants unions and
supermarket associations or chains; the National Peasant Confederation (CNC)
confronted retailers, leading to a political agreement recently (see Poy, 2005).
By contrast, the more substantial tensions are present, and will probably grow
(barring policy solutions), between supermarket chains and their suppliers. It is
probable that this will continue to be the main source of supply side tension, as the
types of producers that are excluded from modern markets (very small and
undercapitalised farmers and processors, hinterland producers) tend (with some
exceptions of course) also to be those with the least political voice in their respective
societies.
Second, there are what can be called behavioural tensions between
supermarkets and their suppliers. We say behavioural because they are beyond
the consolidation and competition forces noted above, and are discretionary
practices of individual chains that affect their suppliers. There are a number of
complaints made by suppliers concerning supermarket chains that we have
encountered in many developing countries.
Supermarkets often pay with a substantial lag, compared to traditional
wholesalers who pay on the spot. For example, Gutman (2002) and Brom (2002),
for Argentina, note that in the late 1990s the highly delayed payments by retailers to
suppliers were the retailers method of financing their expansion with negative
working capital using the suppliers as de facto lenders. By 1999/2000,
supermarkets were paying suppliers in the very long period of 60 120 days (versus
either 0 days of consumer payment to supermarket or up to 25 days for credit card
payment), compared with the 30-day limit imposed by the law enacted in 2001 (see
below).
Supermarkets impose a series of regular fees on suppliers such as slotting
allowances and promotion fees, as well as fees and discounts imposed for special
events such as store openings. (See for example Dries and Reardon (2005) for Russia
dairy sector illustrations.)
Supermarkets require a range of post-harvest services from suppliers (special
packaging, product delivery, and so on).
Supermarkets require suppliers meet stringent quality and sometimes safety
standards which can require a high degree of asset-specificity. Suppliers also
occasionally accuse supermarkets of changing the standards when it suits them
commercially. (See Berdegue et al., 2005.)
532 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

Supermarkets in developing countries usually use only implicit/de facto

(unwritten) contractual relations (listing) in most of the produce categories, with
the occasional formal contract with a large company. In these implicit contracts
(Hueth et al., 1999) and relations, suppliers complain that there is scope for
ambiguity which acts to transfer risk to the supplier.
However, supermarket chains in developing countries also complain about their
suppliers practices. Chief among these complaints include: suppliers often do not
comply with contracts, selling to brokers who visit the farms at harvest and offer
better prices or immediate payment or both for an Indonesian example see
Natawidjaja et al. (2006); inconsistent quality and volumes; lack of counterpart-
investment in supply chain logistics, such as cold chains and vehicle and package
design that can efficiently interface with the distribution system of the retailer for
a Mexican example see for example Berdegue et al. (2006).
The above tensions, charges and counter charges have costs for the system. As
competition among chains heats up, it is then common for a contradiction to take place
where supermarket chains, trying to cut costs in their supply chains to lower consumer
prices and to create a war chest for competition with other retailers, lengthen the delay
in payment, increase fees but at the same time expect more and more in quality,
packaging and services from suppliers. The suppliers begin to see a drop in profitability
in selling to the modern market channel, at the same time the set of buyers is shrinking
(due to retail consolidation) and they are expected to make more investments. This can
be considered a crisis point for both suppliers and retailers. Brom (2002) describes a
situation in Argentina where many suppliers began at that point to bankrupt, and for
supply chains to retailers to begin to fail. It is at that crisis point that governments and
retail and supplier associations turn to regulations and codes of conduct to address the
issues, and it is to those policy approaches that we now turn.

POLICY MEASURES TO ADDRESS TENSIONS: CONCEPTUAL FRAMEWORK

AND TAXONOMY

The policy approaches are conceptually categorised in this section, and then in the
following two sections, reviewed and analysed in the experiences of the US and
Western Europe as comparative context on one hand, and the developing countries
as our prime subject, on the other.
A policy or programme aimed at the conflicts realised or potential among
supermarkets, traditional retailers and supermarket suppliers, can be identified as a
block in the below three-dimensional matrix (with the x axis being the sources of
conflict, the y axis being the policy foci or targets, and the z axis being the policy-
functional axes).
First, there are two basic sources of conflict between the supermarkets on one
side, and the traditional retailers and the supermarket suppliers on the other:

(1) inequality of power (based on concentration, scale and the technologies and
commercial practices made possible by that scale);
THE SUPERMARKET REVOLUTION 533

(2) practices and strategies that make use of that power (magnification of initial
advantages through supermarket practices of pricing, quality, location,
payment and contracting).

Second, there are several basic policy foci to address the above two sources of
conflict:

(1) limit the growth of the supermarkets power through competition policy that
limits concentration and collusion (such as through the Federal Trade
Commission in the US and the Office of Fair Trading and the Competition
Commission in the UK);
(2) limit the application of the power through limiting supermarkets diffusion and
market penetration as well as convenience (such as through zoning and hours
regulations);
(3) limit the use of supermarket power through policies focused on the practices
which make use of their power (pricing regulations that keep supermarkets
from pricing under cost to consumers (such as La Loi Galland in France);
prompt-payment regulations (such as that enacted in the US in 1994)
(4) balance the supermarkets power through strengthening traditional retailers and
supermarket suppliers (through technology and practice upgrading, organis-
ation, and capital asset transfer) and enable those not yet able to supply
supermarkets to do so through the same actions;

Third, the above policy approaches can take place on two policy-functional axes:

(1) Public regulation versus private codes of conduct;

(2) General policies that affect all businesses (without specifying retailers or
other types of businesses) versus policies specific to retailers and their
suppliers.

This conceptual model can be used to characterise the clusters of tensions and
policies extant in a given country and time (and as the issues often differ over
sectors, such as perishables versus processed products) over sectors. We will use
these categories to motivate our discussion below.

POLICY MEASURES: US AND WESTERN EUROPEAN COMPARATIVE

EXPERIENCE

In the US and the UK since the 1920s, and the rest of Western Europe soon
thereafter, supermarkets have spread, and, with them, conflicts with traditional retail
and supermarket suppliers. That conflict and the regulations and codes that have
evolved over the decades are still important points of debate today, simply at a stage
that is beyond the current debate in developing countries but not much further
beyond the debate emerging in the first and second wave developing countries.
534 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

The context of the US and Western Europe might be of particular interest to readers
from developing country.

United States
Public regulation (rather than private codes) has been the overarching approach to
regulating relations among retailers, consumers and suppliers. The legal base was
established in the first third of the twentieth century, just following the start of a
major wave in the late 1800s of concentration in food manufacturing, and in the
1910s in food retailing, as well as the creation of nationwide food and agricultural
product markets.
First, a body of regulations dealing with the interface of food producers (of
processed and perishable products), retailers as intermediaries, and consumers
starting with the Food and Drug Act of 1906, there have been a series of laws
focused on product labelling and food safety practices in food manufacturing
(Levenstein, 1988), and continuing through a series of laws to the most recent, the
Food Quality Protection Act (1996). These laws were a two-edged sword in terms
of competition between large-scale food companies and small-scale traditional
enterprises: the laws levelled the playing field so that any company had to meet the
new requirements but those requirements were hard to meet for small informal
sector actors, which led to a huge exit of the latter in the 1910s and 1920s with the
advent of the laws (Levenstein, 1988).
Second, there has been a series of public regulations of the relation between
producers, wholesalers and retailers. The Federal Trade Commission Act of 1914
regulated general business practices. There were additional regulations specifically
for food and agricultural commerce. As grain, meat and produce markets developed
into major national commodity markets from the late 1800s, conflicts arose among
producers, transporters, wholesalers and retailers regarding quality standards,
contract enforcement and dispute resolution. The measures to address these
emerging conflicts in the early 1900s were a mixture of private codes and state-level
regulations (Lebhar, 1963). During the 1920s and 1930s these conflicts were
partially addressed by regulations that induced voluntary codes of grades and
standards. A key regulation was enacted in 1930, the Perishable Agricultural
Commodities Act of 1930 (PACA). To the present day, it regulates quality claims,
provides a dispute resolution institution to strengthen contracts, requires compliance
of contracts on the part of suppliers and buyers, requires PACA licensing of
transacting parties, and regulates payment periods by buyers from sellers to ten days
except by mutual consent, and then only to 30 days. PACA is administered by the
Agricultural Marketing Service of the USDA and has remained the bedrock for
public regulation of supermarket-supplier relations since 1930. PACA has evolved
somewhat, with a major amendment in 1995 that mainly clarified several issues (for
example making lawful promotion fees charged suppliers by supermarkets), adding
the requirement of written complaints but assuring anonymity of the complainer,
and adding monetary fines to give PACA teeth (www.ams.usda.gov). Dimitri
(2003) notes that the increasing concentration of the retail sector in the late 1990s
THE SUPERMARKET REVOLUTION 535

and 2000s adds the very significant threat of delisting of a supplier due to contract
non-compliance a fine that far exceeds a PACA monetary fine.
Third, the US has had a series of public regulations of business competition and
concentration, starting with the Board of Corporations (1903), and followed by the
Federal Trade Commission Act (1914) (Winerman, 2003) and the Clayton Act of
1914. The FTC regulates competition in the retail sector at a national level. The
Clayton Act forbade anti-competitive practices, such as discriminatory pricing, both
above normal levels to a subset of a retailers customers, or under cost so as to
destroy local retail competition. (This latter is equivalent to the Loi Galland in
France enacted in 1996 to prevent hypermarket chains from undercutting small local
shops see www.premier-ministre.gouvernement.fr, 2005.)
In the 1920s and 1930s, encouraged by the traditional retailer lobby, many states
applied a higher tax rate to supermarkets, in particular to chains, than to small
individual shops, in order to limit their spread. Sixty national regulations were
passed limiting supermarket spread between 1923 and 1941. However, small
retailers themselves started shifting toward forming chains to capture economies of
scale, and consumers became familiar with the benefits of supermarkets (low prices,
diverse products, convenient). Thus political pressure slowed: between 1941 and
1950, over 75 per cent of the anti-supermarket regulations lapsed or were overturned
as unconstitutional by the US Supreme Court (Lebhar, 1963).
However, there was still a further wave of strong regulation in the 1950s to
1970s: the Celler-Kefauver Act of 1950 strengthened the Clayton Act to forestall
anti-competitive mergers. From the late 1950s to the 1970s the statute had a very
considerable impact on on the structure. . .of the US food retail industry (Wrigley,
1997: 1141). In fact, concentration in US retail hardly shifted at all between the late
1950s and mid-1990s (and was then still very low by, for example, UK standards)
due to the stiff regulation and the holding back of consolidation by financial re-
engineering in the 1980s. Then a surge of concentration took place in the late 1990s;
Wrigley (2002) attributes this dramatic change to regulatory change in the second
half of the 1990s (relaxation and then retightening right at the end of the decade), a
critical period of deleveraging during the early 1990s, and of the scale-related
pricing power/operating margin advantages of the major multi-regional operators.
He also links the surge in concentration to the response of the leading chains to the
rapid incursion of an unusually powerful new market entrant Wal-Mart. He notes
that the traditional dominance of the food manufacturers in the food system was
shifted to the retailers as channel captains only in this period, more than a decade
after the shift to retail dominance had occurred in for example the UK and the
Netherlands.
Furthermore, states and municipalities had and have zoning and opening-hours
regulations. There is a history over the past 20 years at the state level of attempted
food retail mergers that is stronger than the Federal Trade Commission would have
agreed to (Wrigley, 1999). Zoning regulations at the municipality level have also
affected chain location, such as has occurred in the case of restriction of entry of
Wal-Mart supercenters in several locations in California (CNN, 2004). Price
regulations (against under-pricing, flex-pricing) were an important part of regulation
536 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

of supermarkets in the US in the first half of the 20th century, such as the Robinson-
Patman Act of 1936 (which reinforced the Clayton regulations concerning predatory
pricing and thus levelled the playing field for small retailers). The price regulations
have not been significantly developed since (Seth and Randall, 1999). Part of the
reason for their decline was the difficulty of, and frequent lack of proof of, unfair
pricing (Cooper, 2003).
In sum, there has been a substantial body of public regulation of the retail sector
in the US in the past 80 years, and its extent may surprise developing country readers
who assumed that the US has always been supermarket-friendly. Instead, the
history is of sharp conflict. Wrigley and Lowe (2002) conclude that, in fact, the body
of competition law in the US from the 1930s to the 1980s (FTC, Clayton, Robinson-
Patman) tended to slow considerably the retail consolidation that was allowed to
progress much faster through laxer competition laws in the UK; the upshot was that
the retail sector in the US was nationally fragmented but regionally concentrated by
the end of the mid-1990s.

UK
A mix of public regulation and private codes of conduct (rather than just public
regulation as in the US) has been the overarching approach to regulating relations
among retailers, consumers and suppliers in the UK. Private codes of conduct are
also used in other West European countries such as Spain.
First, as in the US, there has historically been a body of food laws related to the
quality and safety of food products from processors and farmers sold by retailers to
consumers. An example is the Food Safety Act of 1990 (Food Standards Agency,
2004).
Second, there have been, and still are, various regulations concerning store
location/zoning and hours (Wrigley and Lowe, 2002). An early one was the Shops
Act of 1950, implemented by local governments, which effectively resisted Sunday
trading for 35 years, until repealed in the 1980s.
Third, there has been a series of public regulations plus voluntary codes focused
on competition governing the relation between producers, wholesalers and
retailers. Wrigley (1992) argues that the competition laws in the UK were on balance
(until the late 1990s) significantly laxer than in the US, permitting far more rapid
consolidation of the retail sector. There has been a certain regulatory integration of
competition regulations (regarding competition practices among retailers) and fair
trade practices (toward suppliers). The primary competition regulation in the UK
during most of the post-war period was the Fair Trading Act of 1973 which created
an independent agency to regulate competition law. Since its inception into law, the
Act was amended several times, keeping its original purpose intact; it is now
superseded. Following from the Act, several investigations of the retail sector were
undertaken (1981, 1985 and 1998). The latter focused on the increasing power and
market dominance of the leading retailers in the UK. The 1998 OFT investigation
resulted in a full referral of the modern retail sector to the Competition Commission
and to the famous Supermarkets Inquiry report of 2000 by the Commission. Now,
THE SUPERMARKET REVOLUTION 537

in 2006, the food retail industry is once again the subject of a full Competition
Commission Inquiry, as a result of competitive concerns since 2000.
Wrigley and Lowe (2002) note that the 1998 investigation took place in a general
context of introduction of strong legislation in continental Europe in the mid-1990s
restricting the power of modern retailers (such as the Loi Galland in France noted
above, and the Ley de Ordenacion del Comercio in Spain), regulating relations
between retailers and suppliers, restricting selling at a loss to undermine
competitors, and strengthening the position of smaller supermarkets to compete
with hypermarkets.
While the UK Competition Commission (2000) in the report of the
Supermarkets Inquiry did not find a need for new competition regulations, it did
find that there had been, over the 1990s, a deterioration of the relations between
supermarkets and their suppliers. The upshot was that they put in place a Code of
Conduct in March 2002, and applied this to the largest retailers (any chain with eight
per cent or more of the market) (Office of Fair Trading, 2004). However, as in the
US (Dimitri, 2003), it is challenging to externally regulate supermarket-supplier
relations in a situation where there are a small number of buyers (in a concentrated
retail sector), with whom suppliers (wishing and needing to stay listed) must stay
in good grace in order to stay listed. After the application of the code there was
significant difficulty in getting suppliers to in fact lodge complaints against large
retailers in the UK (Namnews, 2006).
The upshot of the above review of the US and the UK experience is that, while
the economic advantages of supermarkets tend, over time, to work against
traditional retailers and to increase demanding requirements of suppliers,
competition and trading regulations play definite roles in determining the speed,
nature and outcomes of the retail transformation. Economics and policies count.
With that historical (and current internationally comparative) context and lessons in
mind, we turn to developing regions.

EMERGING POLICY MEASURES IN DEVELOPING COUNTRIES

The Importance of FDI Policy as Retail Policy

A fundamental and central difference between the retail transformation and the policy
and regulatory issues surrounding it in developing countries today versus the US and
UK and other countries in Western Europe during the emergence of supermarkets is
that the take-off of supermarkets in developing countries has been driven mainly by
the immense shock of foreign direct investment (FDI) liberalisation in the early to
mid-1990s. The latter was part of structural adjustment programmes, multi- and
bi-lateral free trade agreements and WTO accession requirements.
For example, in Mexico, Brazil and Argentina, this liberalisation started in 1994.
In Central and Eastern Europe (CEE), this occurred in the early to mid-1990s.
In Asia, for example in China, partial liberalisation of retail trade occurred in China
in 1992, with full liberalisation of the sector only by the end of 2004. Indonesia
liberalised in 1998. India partially liberalised in 2000 and is in 2006 debating further
538 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

liberalisation. Thailand liberalised in 2000 with the Foreign Business Act

(Manalili, 2005). The Philippines government enacted the Retail Trade Liberal-
ization Act in 2000.
The lateness of some of these liberalisations (relative to the initiation of trade
liberalisation in their countries or regions) explains some anomalies in the
relationship between socioeconomic (demand-side) variables and pace of
supermarket diffusion. For example, supermarket take-off occurred later in places
like China and Russia than a number of countries with similar incomes and
urbanisation rates. This is due to only very recent FDI liberalisation, and other policy
reforms, in those countries, which led to a late start in the diffusion of modern
retail (but for which they are aggressively making up now by having far faster
diffusion rates now than is the norm). We expect the same of India as it appears to be
moving to a much greater degree of retail FDI liberalisation; the debate in India
concerning the latter is currently at high pitch (with strong concern expressed for the
impacts on traditional retailers (see PlanetRetail, 2006d).
The ingress of FDI, plus the competitive investments made by domestic chains in
response to the avalanche of FDI, then becomes the central policy and business
strategy response that affects the path of the diffusion of supermarkets. The policies
that regulate competition and behaviour within the retail sector are then simply
structures built on that basic policy edifice of FDI liberalisation. Retail policy
becomes foreign policy and vice versa.
The Philippine case is illustrative of the political aspects of the link between
retail policy and foreign policy. Cabochan (2005) notes that the Philippine retail FDI
liberalisation of 2000 had been resisted before that time. This sequence was fairly
typical in the Asia region and reflected similar sequences in other regions in terms of
the political economy of the liberalisation:
Prior to the passage of this law, some sectors of the local retail trade together
with a broad coalition of non-government organizations argued that this will
put local retailers and small and medium enterprises in a disadvantageous
position in terms of resources. The opposition to the measure though not
successful was effective in delaying the signing of the proposed bill into law.
This enabled local retailers to consolidate their position and strengthen
competitiveness (Cabochan, 2005:1).
FDI and competitive local investment has led to rapid consolidation and multi-
nationalisation of the supermarket sectors in many developing countries over the
past decade. The multi-nationalisation of the sector is illustrated in Latin America
where global multinationals constitute roughly 70 80 per cent of the top five chains
in most countries (Reardon and Berdegue, 2002). The tidal wave of FDI in retail was
mainly due to the global retail multinationals, such as the current top five (Wal-Mart,
Carrefour, Ahold, Metro Group and Tesco) (PlanetRetail, 2005), and smaller global
chains such as Casino and Makro, and regional multinationals such as Dairy Farm
International (Hong Kong) and Shoprite (South Africa).
The rapid consolidation of the sector in those regions mirrors what is occurring in
the US and Europe. For example, in Latin America the top five chains per country
THE SUPERMARKET REVOLUTION 539

have 65 per cent of the supermarket sector (versus 50 per cent in the US (Kinsey,
2004) and 72 per cent in France). The consolidation takes place mainly via foreign
acquisition of local chains and secondarily by larger domestic chains absorbing
smaller chains and independents. This is done via large amounts of FDI: for
example, in the first eight months of 2002, five global retailers (British Tesco,
French Carrefour and Casino, Dutch Ahold and Makro, and Belgian Food Lion)
spent 6 billion bhat, or $120 million, in Thailand (Jitpleechep, 2002). In 2002, Wal-
Mart spent $660 million in Mexico to build new stores. Supermarket-sector
consolidation is correlated with the wave stage, with the more advanced-stage
countries having supermarket sectors that are more consolidated.
These trends of multi-nationalisation and consolidation reflect the fact that
multinationals have access to investment funds from their own liquidity and to
international credit that is much cheaper than is the credit accessible by their
domestic rivals. (Shwedel (2003) estimates that multinationals can obtain credit
three to four times cheaper than domestic rivals.) Where domestic firms have
competed, they have had to make similar investments; these firms either had to enter
joint ventures with global multinationals (as for example Brazils CBD did with
Frances Casino in 2005), or had to get low cost loans from their governments (e.g.
the Chinese government made credit policy part of retail policy, making cheap loans
available to its dragon head retail chains such as the Shanghai-based national
chains) or commercial banks (in the case for example of D&S, the leading Chilean
chain; Faiguenbaum et al., 2002).

The Importance of Domestic Policies Both Regulations of and Support for

Supermarkets
There was a further set of institutional and policy factors in the domestic markets
that conditioned supermarket diffusion either by magnifying or dampening it
and the conditions of its competition with traditional retail.
First, various developing countries have policies designed to spur the spread of
supermarkets. These de facto retail modernisation policies are another key
difference between developing countries now and the US and the UK in their early
periods of supermarket diffusion. Examples include the following.
One set of examples is that municipal and state governments have policies
promoting supermarket development as part of commercial modernisation.
Municipal governments in China support chains based in their cities. For example,
top Chinese chains today, Lianhua, Hualian and Nonggongshang, are mixed
private/public firms and are managed by the municipal government of Shanghai, and
at the same time are profit-oriented enterprises competing with fully private firms.
State-sponsored companies get easy access to credit, cheap real estate and other
benefits factors in the ability of domestic chains to compete with foreign chains
(Hu et al., 2004). Similarly, various municipal and state governments in the
Republic of Korea provide incentives for supermarket location in their areas (Lee
and Reardon, 2005); the same can be said for Russia (Dries and Reardon, 2005).
Another set of illustrations is that active government policies exist in several
countries to pressure wetmarkets either out of existence or into much reduced roles.
540 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

A famous case is that of Chinas current efforts to convert informal wetmarkets to

supermarkets in order to modernise retail. The policy is called nonggaichao
(literally, changing farmers markets into supermarkets). The policy started in mid-
2003 and is being undertaken over the next three to four years in various large
Chinese cities (Beijing, Hangzhou, Shanghai, Wuhan, Dalian, Qingdao, nine cities
of Fuzhou province, Zhengzhou in Henan in the central region, and others).
Wetmarkets are auctioned to supermarket chains. A typical example is the city of
Hangzhou, where 250 wetmarkets are due to be converted to supermarkets by the
end of 2007 (Zhejiang Daily, 2003). This is simply an extreme version of the
Chinese governments policies countering wetmarkets, which they view as
problematic because it is hard to collect taxes from them and they are considered
unhygienic. The central government decreed in 2002 that there would be no new
construction of wetmarkets in urban areas. Moreover, the municipal governments in
a number of large and medium cities have banned morning street wetmarkets (zao
shi) to reduce traffic congestion. This reduces the former ease and convenience of
getting to wetmarkets (Hu et al., 2004). This is an increasingly common policy in
other parts of Asia, as well as in other regions (Reardon, 2005b show this in the case
of Mexico, for example).
Second, by contrast, various developing countries have regulations, similar to the
zoning and opening-hours regulations we described in the historical context of the
US and UK, and arising from similar political pressures by traditional retailer
associations, that impede supermarket diffusion, often in particular that of
hypermarkets. Hypermarkets are often associated with foreign chains, giant local
presence, low prices, and particular competition with small stores. Thailand and
Malaysia for example have regulations in particular on hypermarket diffusion,
perceived as most competitive with traditional retail.
The intensity of the regulation in these strong regulator countries has in fact
varied considerably over the past five years (the emergent regulation period). For
example, in Thailand, such regulation first rose (in 2003) then relaxed (in 2004/5),
and in 2006 has risen again (see PlanetRetail, 2006c, 2006e). In Malaysia as well
there was fluctuation, first a rise and then a relaxation.
While this is mere speculation, it is possible that in the longer run, these
regulations will undergo the same decline as they did in the US and UK, perhaps for
similar reasons (consumer pressure, changes in the traditional retail sector, perhaps
pressure by large suppliers), but also for reasons specific to the developing country
experience. As noted above, in a sense, retail policy is now tantamount to foreign
policy and the same kinds of external pressures (sticks and carrots) that led to
trade and investment liberalisation in the first place, continue to act to slowly pry
open the retail markets. This can simply be seen, taking a birds eye view, of the
succession of FDI liberalisations, and of the impact of WTO on retail liberalisation
in countries such as China.

Emerging Regulations of Supermarket Relations with Suppliers

One can generalise to say that most developing countries undergoing rapid retail
transformations do not have strong regulations and implementation systems in place
THE SUPERMARKET REVOLUTION 541

for buyer-seller relations, such as the PACA regulation in the US. As noted above,
the relatively sudden and extremely rapid rise of supermarkets has tested the
commercial law system and shown it wanting. That has been at the base of the
various crises in supermarket-supplier relations discussed earlier.
While it would be instructive to present an exhaustive inventory of current
attempts to put in place regulations to reduce conflicts between supermarkets and
retailers in developing countries, we believe that the recent experiences of Argentina
and Mexico are a fascinating microcosm of the emergence of these measures. These
cases are discussed in detail for Argentina in Brom (2002, 2006), and for Mexico in
Galindo (2006), Secretaria de Economia (2006), and Saldana and Ortega (2006). We
summarise the key points here.
In both Argentina (circa 2000/01) and Mexico (circa 2005), a crisis emerged in
terms of relations between supermarkets and their suppliers, essentially due to the
various tensions and conflicts that we discussed above. In Argentina, the Competition
Commission (calling on a legal foundation of three laws, Truth in Trading, 1983,
Consumer Protection, 1993 and Competition Law, 1999) said that it would promulgate
a national law to closely regulate supermarkets and their relations with suppliers if the
retail, wholesale, processor and farming sectors did not formulate and implement a
private code of commercial conduct. This is similar to the private sector code also
encouraged by the Competition Commission in the UK in 2002 (which later became
mandatory). The Argentine (and foreign FDI firms such as Carrefour) private sector
responded to this stick policy, and in July 2001 retailers and suppliers signed a Code
of Good Commercial Practices, the first of its kind in Latin America, and probably the
first in developing countries (Brom, 2002). It was complemented by public regulation to
strengthen it further, with the promulgation of Decree 1/2002 in March 2002 to limit the
payment period to suppliers of perishable goods (to 30 days, in many cases much faster
than current payment periods), basically similar to the payment period provisions of the
PACA law in the US.
The terms of the private code were in essence four, and tend to be the main elements
of most regulations elsewhere: (1) compliance with contracts by both retailers and
suppliers; (2) equal treatment among suppliers; (3) prompt payment; and (4)
cooperation in logistics development. There is evidence that the conflict resolution
mechanism accompanying the code has been effective (Brom, 2006). Apart from the
last element, the private code is in essence similar to the public regulations in the US,
such as the PACA and its amendments, but formulated and implemented by the private
sector. Brom (2006) argues that in many developing countries a private code may well
be the most practical and useful approach in the short-medium run, in that it harnesses
private sector interest, will and resources, and can be implemented in situations where
commercial laws and institutions are still in the development stage.
Variants of the Argentine code have proven attractive rapidly in Latin America,
as it spread to Colombia (signed in 2005) and to Costa Rica (where it is under
discussion) and Mexico (signed in June 2006).
The striking similarity of the Mexican process illustrates the attraction of the private
code to supermarkets and their suppliers. Galindo (2006) notes that in late 2005 and the
first half of 2006, there was intense debate in congress and the competition commission
542 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH

concerning potential stringent public regulation of retailers and their suppliers. By May
that had been defeated, as the retailers and major suppliers did not want directive
regulation by the government, but preferred self-regulation. Supplier organisations
such as CONCONACA noted that they would press for public regulation if the private
code was not rigorously enforced and adhered to. The new code is in essence similar to
the Argentina code and to the PACA regulation in the US. Its implementation system is
being put in place at the time of our writing.

Public and NGO Assistance to Suppliers and Traditional Retailers to Upgrade

For the sake of completeness of treatment of the elements of our conceptual framework,
we briefly mention the emerging importance of policies and programmes to assist
supermarket suppliers to upgrade and to link to modern market channels; to assist
traditional retailers and wholesalers to upgrade both to compete with supermarkets and
to form an alternative to supermarket channels; and to assist small farmers in forming
the capacity to pursue successful strategies of portfolios of participation in the various
market channels. This is treated in more detail in Reardon (2005a).

CONCLUSIONS

This paper emphasises the rapid spread of supermarkets in developing countries, and
the powerful economic advantages of supermarkets (economies of scale, ability to
coordinate supply chains, diversity of formats and products, convenience). This has
emerged as a major challenge to traditional retailers, and a challenge and
opportunity to suppliers. A heated debate has recently emerged, as the supermarket
revolution has reached a critical point in the past few years, as to what policy
measures are best in order to reduce tensions and conflicts among the players and
provide the greatest equal opportunity to the competitors.
The historical and current comparative context of the US and the UK and other
Western European countries provides some perspective and lessons for developing
countries engaged now in this debate. The importance of commercial regulations
whether public or private codes, concerning contract compliance by both retailers
and suppliers, payment periods by retailers, and competition-based pricing are
crucial. The regulatory context affects the speed and nature of the modernisation of
the food economy. That regulation need not yet be only public regulation, as the new
private codes in Argentina, Colombia and Mexico suggest. Commercial practice and
regulatory approaches emphasising contract compliance and fair commercial
practices offer the greatest hope of moving through the current intense period of
conflict and adjustment toward beneficial development of retail and supply in
developing regions.

ACKNOWLEDGEMENTS

We are grateful for comments from Jack Allen, Tilman Altenberg, Fernando Brom,
Andrew Mold, Neil Wrigley and an anonymous referee on earlier versions of the
paper.
THE SUPERMARKET REVOLUTION 543

NOTE

1. It is interesting to note that historically in the US, large food companies actually pushed for the
passage of strict food laws, such as that of the 1906 Food and Drugs Act; they were aware that they
were much more capable of fulfilling strict requirements than were the small informal sector
companies, and more capable of signalling that fact via large advertising budgets to the consumers. It
was an effective strategy. See Levenstein, 1988.

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