Scale, Scope

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Scale, Scope Specialization Effects on
Retailers Procurement Strategies Evidence
from the Fresh Produce Markets of São Paulo Brazil

• Denise Mainville (Virginia Tech)
• Thomas Reardon (Michigan State)
• Elizabeth Farina (USP)

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Introduction

• Emergence of large retailers in agrifood markets
  worldwide has introduced new competitive norms
• How have smaller retailers adjusted?
• In many cases marginalized
• In Brazil, smaller retailers, both chains and
  independents, have seen variation but largely
  held their own in recent years

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• Research has tended to either focus on large
  firms as drivers of change, or sought to
  determine how smaller firms have emulated large
  firms strategies
• Lack of research into how underlying
  characteristics of firm affect strategies
• Paper addresses question focusing on how scale,
  scope specialization affect retailers fresh
  produce procurement strategies

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Empirical Context

• Sao Paulo
• City of 18 million residents
• Most produce grown in green belt surrounding city
• Retailers reflect diversity of characteristics
• Large supermarket chains
• Small medium supermarkets
• Discount green grocers
• Open-air fair vendors
• Tomato lettuce focus
• Account for different nature of product and
  supply chain

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Conceptual Model

• Retailer must choose a procurement strategy that
  minimizes cost of acquiring vector of quality
  attributes (given merchandising decisions)
• Procurement costs are sum of
• Purchase costs for intermediate input
• Transaction costs
• Transformation costs
• Different strategies involve
• Tradeoffs among costs, both wrt total costs and
  fixed vs. variable costs

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Conceptual Model

• Procurement strategy includes choice of
• Organization of procurement
• centralized
• decentralized
• Sources
• wholesale market
• growing region
• Governance of transactionrelationship quality
  standards
• informal
• formal

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• Three variables hypothesized to influence
  procurement strategy
• Scale
• Total throughput volume of fresh produce measured
  by total floor area to produce
• Scope
• Number of different produce items
• Specialization
• revenue from produce

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Methods Data

• Data from survey of 33 retailers in Sao Paulo
  Brazil, focused on procurement strategies for
  lettuce tomato
• Two methods of analysis
• Cluster analysis to identify patterns of
  procurement strategies used by retailers
• Analysis of individual components of procurement
  strategy (organization, source, governance) wrt
  hypothesized variables
• Descriptive statistics with tests for
  significance

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Hypotheses
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Procurement Strategy Patterns

• Two procurement strategy patterns dominant for
  tomato
• Centralized, grower, formal (21)
• Decentralized, wholesale, informal (79)
• Scale and scope both positively correlated with
  reliance on centralized strategy
• Two strategies dominant for lettuce, but only
  source different
• Both decentralized, informal
• Grower (59), Wholesale (41)
• Larger scale retailers purchased from grower
• Less specialized retailers purchased from grower

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Results Procurement Strategy Components

• Tomato
• As in pattern, scale and scope positively
  correlated with centralization grower purchases
• Specialization only significantly related to
  governancehighly specialized firms heavily
  reliant on informal governance

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Results Procurement Strategy Components

• Lettuce
• Scale positively correlated with purchases from
  growers and formal governance, but no significant
  effect on organization
• Scope only significantly correlated with reliance
  on formal governance
• Increased specialization correlated with reliance
  on wholesale and informal governance

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Discussion

• Specialization hypothesized to be positively
  correlated w/decision to source from growing
  areas
• By theory, would suppose retailers are behaving
  sub-optimally
• Alternative explanation is that sunk investments
  in fixed capital e.g. social capital makes this
  option more efficient

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Discussion

• Scope expected to be negatively correlated
  w/reliance on formal governance, but found to be
  positively correlated for both tomato and lettuce
• Difficult to explain, but can be b/c co-linear
  w/scale (which is positively correlated), so
  cant treat separately?

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Discussion

• No a priori expectation, but specialization
  negatively correlated with governance for both
  tomato and lettuce
• Perhaps highly specialized firms have large
  investments in social capital, so that informal
  governance is effective

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Conclusion

• Significance of scale, scope specialization in
  procurement strategies indicates that smaller
  retailers divergence from large firms
  strategies can be argued to exist on efficiency
  grounds
• Significance differs, as expected, given nature
  of product and supply chain

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Conclusion

• Role for further research to
• Examine performance differences by procurement
  strategy, holding scale, scope specialization
  constant
• Model and estimate interaction among variables

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Scale, Scope Specialization Effects on
Retailers Procurement Strategies Evidence
from the Fresh Produce Markets of São Paulo Brazil

• Denise Mainville (Virginia Tech)
• Thomas Reardon (Michigan State)
• Elizabeth Farina (USP)

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Scale, scope and specialization effects on
procurement strategy for tomato
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Scale, scope and specialization effects on
procurement strategy for lettuce
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Tomato
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Lettuce
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Conclusion

• Hypothesis testing for effects of scale, scope
  specialization found to be mixed
• Suggests that other factors, perhaps related to
  other capital holdings (e.g. social capital) may
  be significant
• Need for analysis that can hold different
  variables constant (econometric) for more formal
  testing and to shed light on ambiguous results