the new food economy: consumers, farms, pharms, and … kinsey eoi... · the new food economy:...

Amer. J. Agr. Econ. 83 (Number 5, 2001): 1113–1130Copyright 2001 American Agricultural Economics Association

General Sessions

The New Food Economy: Consumers,Farms, Pharms, and Science

Jean D. Kinsey

“Most of the change we think we see in lifeis due to truths being in and out of favor.”Robert Frost in The Black Cottage (1914)

The new food economy is bigger, broader,faster, and more demanding. It is a kalei-doscope of foods, firms, consumers, coun-tries, contracts, and agreements that provideus with a dizzying vision of moving targets.We have witnessed the food and agriculturalindustry move from a set of independent pro-ducers and marketing firms to a set of inte-grated and highly managed supply chains. Wehave witnessed the development of demandchains as consumers and retailers demanddifferentiated products, identity preservationand special food attributes. And now, we arewatching linear demand and supply chainsmorph into webs of activities and tasks thatare undertaken not by well-defined or self-contained firms or households, but by multi-ple parties up and down the food chain.At least half of the Presidents of this Asso-

ciation since 1990 spoke from this podiumabout new, broader definitions of agricul-ture and about the creativity of (us) agricul-tural economists in finding new questions toask and economic agents to analyze (John-ston, Houck, Armbruster, Schmway, Antle).Warren Johnston likened us to black-footedferrets who continually find new ecologi-cal niches within which to thrive (Johnston,p. 1115). Our former presidents saw the new

Presidential Address.Jean Kinsey is professor in the Applied Economics Departmentand Co-Director of the The Food Industry Center, University ofMinnesota.Presidential Address delivered at the AAEA annual meeting

(Chicago, IL, August 2001). Invited addresses are not subjectedto the Journal’s standard refereeing process. A note of apprecia-tion to Vernon Eidman, Benjamin Senauer, Brian Dietz, HamidMohtadi, and Frank Busta for their earlier comments and sug-gestions. They bear no responsibility for this final draft. To BrianDietz a special thank you for data searches and the econometricanalysis that make figure 2 possible.

food economy coming; we are mighty fortu-nate to have had leaders with such foresight.My goal is to further expand our collective

appreciation and enthusiasm for new intel-lectual niches, for the scope of food andagricultural industries and how they fit intothe overall economy. By expanding the sizeof the envelope that contains “agriculture,”and examining the speed and complexity ofits people, products, firms, distribution chan-nels, consumers and social policies, we shouldfind vast reservoirs of research challengesand educational opportunities, as well as newpartners with whom to work.I will ask you to tilt your heads and peer

through some different lenses at the foodindustry in all of its complexity and trends,and to ponder the challenges it presents toour ways of thinking and analysis. I will startby defining the new food economy and sug-gest its state of development. Then I willturn to the concept of “clockspeed” to seewhat we can learn about the dynamics of thefood sector and the trajectory of some of itscomponents. Finally, I will unlock the sup-ply/demand chain to expose a web of tasksand actors that cut across the links as weknow them.

The New Food Economy

First, the “food economy” is defined as theentire food chain from the laboratories thatslice, dice and splice genes in everything fromour crop seeds, pharmaceuticals, and ani-mals, to the cream cheese we spread on ourbagels. It includes all the familiar agriculturalinput industries and farm production enter-prises that we have studied for decades. Itincludes a large number of firms that developingredients and flavors for the food manu-facturers and the two main streams of activ-ities in manufacturing plants, namely food

1114 Number 5, 2001 Amer. J. Agr. Econ.

for retail stores and food for foodserviceestablishments. It includes a complex trans-portation and distribution system that sitsbetween food manufacturers and retail out-lets. Retail food stores and foodservice estab-lishments are supplied by separate sets ofwholesalers and distributors. Consumers arethe end game of this supply chain. The nar-rower arrows in figure 1 indicate the tradi-tional flow of product from farm to fork.Consumers are the beginning of the demandchain, which is depicted by the wider arrows.These arrows indicate the flow of informationabout food preferences back through retail-ers, manufacturers and others to farmers andeven scientific laboratories.A food system operates within the cul-

ture of its community, the economy of itsnation, and a market that extends aroundthe world. It includes natural resource andenvironmental issues, labor and marketingpractices, waste disposal and recycling prac-tices, and public policies that are impor-tant to participating firms, consumers, citizensand even tourists. It includes the industriesthat service the food chain like the finan-cial sector, labor unions, government agen-cies, and educational institutions. It is a vastand complicated industry and one in which itis not obvious who is leading and who is fol-lowing on any given day.The food and agricultural sector of our

economy, not counting its auxiliary services,makes up more than 9% of gross domesticproduct. The food, fiber, and agricultural sec-tor employs almost 15% of all nonfarm pri-vate employees, down only a fraction of apercent since 1980 (table 1). Almost 13% of

Figure 1. Supply and demand chain for the food system in the United States

Table 1. Percent of Private Nonfarm Em-ployment in the Food, Fiber, and Agricul-tural Sector of the U.S. Economy

Years 2000 1990 1980

Nonfarm Sectors

Food, Fiber, Ag.: Total 14�9 15�6 15�4Food, Fiber 13�6 14�6 14�4Agriculture 1�1 1�0 1�0

Manufacturing % of all 16�6 20�9 27�4Food, Fiber, Ag. % of all 2�3 3�0 4�1F&A % Manuf. 10�1 9�7 11�4Fiber % Manuf. 6�3 9�1 10�4

Wholesale % of all 6�3 6�8 7�1Food & Ag. % of all 1�3 1�3 1�3F&A % Wholesale 21�3 19�2 18�2

Retailing % of all 21�0 21�5 20�2Food & Ag.a % of all 11�3 11�2 9�5Food & Ag. % Retailinga 53�9 52�2 48�9

Add Farming Employment

Percent of Self-Employed 12�9 13�6 19�0Percent of all employedincluding self-employed 1�0 1�4 1�9

Food, Fiber, Ag. & FarmingPercent of all employed 14�7 15�6 15�7

aAll gains are in retailing and most of those gains are in eating anddrinking places with small gains in agricultural services.

self-employed people and one percent of allemployed people (including self-employed)are in farming, down from 19% of self-employed and 1.9% of all employed in 1980.Employment in retailing, especially foodser-vice, has risen whereas employment in foodmanufacturing and wholesaling has declined.Almost 54% of all retail employees work in

Kinsey The New Food Economy 1115

the food business. Almost one-fourth of alldollars spent in retail establishments is forfood or beverage. This makes the food sectorthe largest single retail sector in the economyincluding automobiles. Food and agriculturecomprise about 5% of the value of U.S.imports and 8% of exports (U.S. Departmentof Commerce, 1999). We participate in oneof the most dynamic and critical industries inthe country and the world.

The New Economy

The food and agricultural sector operates inthe context of the so-called “new economy.”In the last two years, well over 500 arti-cles in academic and trade literature haveaddressed the concept. A selective readingof these articles revealed common themesabout what the new economy is and is not.It is not about dot.com companies, the stockmarket, the Internet per se, or the death ofbusiness cycles. It is not some new virtualeconomic sector in cyberspace. It is abouta fundamental change in the way businessis conducted, organizations are formed, andassets are valued. “At its heart, it is a movefrom an economy based on the production ofphysical goods to an economy based on theproduction and application of knowledge.”(L.Summers: quoted in Rauch)Thurow (1999, 2000) claims that the new

economy is a manifestation of the thirdindustrial revolution. In this revolution, theassets of an enterprise are increasinglyknowledge-based and intangible. Companieswill still produce and make profits on thesame products they always have, such as oil,automobiles, milk, and butter but they doit more efficiently. Profits and competitive-ness depend less on land, raw materials, andcheap labor, and more on consumer demand,employee knowledge-base, intangible assets,and flexibility. Thurow is quoted as sayingthat “this is about the first time in history thatyou can get rich by controlling knowledgeas opposed to controlling natural resources”(Thurow 1999).Owning and controlling the precious asset

“knowledge” have been made possible, andperhaps necessary, by the discovery andapplication of two powerful new scien-tific and technological breakthroughs, namelybiotechnology with genetic engineering anddigital computing combined with the Inter-net. They are interdependent developments.Digital capacity made genetic mapping faster

and the adoption of genetically modified foodproduction encouraged further investment indigital tracking technologies. Both are revo-lutionary in their impact on the organization,productivity, and responsiveness of virtuallyevery industry one can name.Driven by larger, more demanding, and

more savvy customers, industries in the neweconomy have become “consumer centric”(Hammer). Driven by the network effects ofinformation technologies and its impact oneconomies of scale, industries have becomemore concentrated. Driven by the need fornew technology experts and expensive andexpansive knowledge, companies are forcedto build partnerships with parties outsidetheir own walls. Armed with a synergistic setof new technologies, each of which enhancesthe productivity of the other, the accelerationof almost everything is palpable. It is as if thespeed limit has been raised for product inno-vation, proliferation and demise, for organi-zational structures and partners, for supplychain management, and for consumer deci-sions.Recent studies disagree about whether the

adoption of communication and computer(information) technologies in the early 1990sare the main reasons for notable increasesin output and labor productivity in the late1990s. One study finds that two-thirds of thespeed-up in actual labor productivity since1995 was due to the adoption of informa-tion technology (Oliner and Sichel). Anotherstudy finds that the long-term trend inmultifactor productivity growth was actuallynegative outside of the production of com-puters themselves (Gordon). Robert Gordon,the author of the trend study, also questionswhether computer/Internet technology willchange lives and improve human welfare suf-ficiently to qualify as the third industrial rev-olution. He points out that although surfingthe Internet may be fun and informational,it basically replaces other forms of informa-tion and does not increase our standard ofliving as much as did electric light bulbs orgasoline engines. Others point out that ifthe organizational complements to computertechnologies are considered, their contribu-tion to economic growth is proportionatelyhigh compared to their share of capital stockor investment. Organizational complementssuch as new business practices, new skills, andnew industrial structures are consistent withthe claim that the new economy brings aboutfundamental changes in the way business is


conducted. It emphasizes the “growing rolesof new products, new services, quality, variety,timeliness, and convenience” (Brynjolfssonand Hitt).In the new economy, the product cycle is

reversed (OECD, Rauch). In old industrialand agrarian models, newly introduced prod-ucts were expensive and rare and in due time,with marketing and distribution efforts andconsumer acceptance, they became cheapand common. Think of handheld calcula-tors, microwave ovens, kiwi fruit. In the oldeconomy, the familiar cobweb model thatestablishes an equilibrium price depends onthe constraints of supply and demand. Inthe new economy, the process of distribu-tion and communication tends to come first;products come later. Additional capacity cas-cades inexpensively onto the market mak-ing supply constraints less relevant. Thinkof the microchip, cell phones, e-mail, genet-ically modified seed. In effect, the clock-speed of firms, industries, and even nationaleconomies has accelerated.

Lower Volatility of Growth

Although the speed of change appears tohave accelerated, the volatility of overalleconomic activity in the United States hasleveled out. Two central bank economists,McConnell and Perez-Quiros (2000), ana-lyzed the actual change in gross domes-tic product (GDP) between 1953 and 1999and found a turning point in GDP volatil-ity in 1983. This turning point and the subse-quent reduction of GDP volatility were foundto be due to a leveling-off of the volatil-ity of durable goods orders and a lining-up of inventory shipments with retail sales.This is precisely the type of efficiency thatthe employment of new information technol-ogy in retail supply chains is supposed toachieve. It lends credence to the hypothe-sis that increased productivity and growth isbeing facilitated by new information tech-nologies.McConnell and Perez-Quiros (2000) found

another turning point in GDP in 1990; itwas related to nondurable goods behavior.This led to questions about whether the foodeconomy, with its traditionally high volatil-ity, mimicked or lagged behind the changesin the overall economy. Examining severaldata series related to the food sector revealedsome evidence that the food economy didindeed have a change in volatility between

1967 and 2000 that roughly matches thatfound by McConnell and Perez-Quiros (1999,2000). First, using chain-weighted GDP data,McConnell and Perez-Quiros’ results werereproduced. Then the same analytic meth-ods were used to test for structural changesin the volatility of growth in the consumerprice index for food-at-home, and food-away-from-home, and the value of total inven-tories for food manufacturers. Volatility ismeasured as the change in the standarddeviation of growth rates.1 Tests for struc-tural change in volatility involve assumingthe same autoregressive relationship that wasused by McConnell and Perez-Quiros (2000).Equation (1) was estimated for each dataseries.

�yt = �+��yt−1+�t�(1)

where

Var�t= �2�

The residuals from this specification wereused to test the stability of the Mean(�), the slope (�), and the variance (�2)using CUSUM and CUSUM of squares tests(Brown, Durbin, and Evans) and Nyblom’sL test (Hansen). Results of the Nyblomtests on the CPI for food-at-home, food-away-from-home, and value of total invento-ries of food manufacturers show that therewas a significant change in the mean andthe variance over the period 1967–2000(see tables 2–5). Volatility decreased in thesethree food related data series that roughlymimics what happened in the overall econ-omy. Figures 2–5 illustrate the dampeningof volatility that appears to start in about1984 for food manufacturers and after 1991for food prices. This provides further evi-dence that something fundamentally new isgoing on.Leadership in the adoption of information

technologies has been uneven across foodfirms and over time (Kinsey and Ashman,Kinsey 2000, 2001). In 1972, the food indus-try led the development of standards for thenow ubiquitous bar codes. The first retail

1 Following McConnell, et al. (1999, p. 6), the volatility ofgrowth is measured as the standard deviation of quarterly growthrates over a particular period of time. The standard deviation ofgrowth—which is measured in percentage points—is the squareroot of the variance of growth. The variance of growth is theaverage of the squared deviations of individual quarterly growthrates from the average growth rate over the particular timeperiod.


Table 2. Nyblom’s L Test for the Stabilityof Chained GDP Growth: 1967:2 to 2001:1

Specification: �yt = �+��yt−1+�twhere

var�t= �2

Estimate LC CV(5%)

� 2�29 0�08 0�47� 0�34 0�10 0�47�2 15�06 1�13 0�47Joint LC 1�31 1�01

Note: Nyblom’s L test as described in Hansen (1992). �yt is chained GDPgrowth. LC is the test statistic for a break point in each of the coefficientslisted in the first column. CV (5%) is the 5% critical value for the nullhypothesis of no break.

scanner was introduced in a grocery storein Troy, Ohio in 1976, but food stores didnot exploit the power of the data they werecollecting until very recently (Walsh). Cloth-ing and general merchandise retailers beganto use scanner data for inventory control inthe 1980s. They even shared sales data withtheir vendors developing a “quick response”system of ordering and delivery. This typeof a just-in-time distribution system is onlynow being fully explored by the largest super-market chains using the Internet and newbusiness-to-business e-commerce networks.

New Economy Consequences

What are the economic and social conse-quences of these new economic realities? Canweadjust?Dowewant to?Are theredark sidesthat are yet to be revealed? The most widelyapplauded phenomena over the past decade isthe longest recorded economic expansion in

Table 3. Nyblom’s L Test for the Stabil-ity of the Value of Total Inventories inthe Food Manufacturing Sector: 1967:2 to2001:1


var�t= �2

Estimate LC CV(5%)

� 3�37 0�71 0�47� 0�33 0�19 0�47�2 49�26 1�28 0�47Joint LC 1�75 1�01

Note: Nyblom’s L test as described in Hansen (1992). �yt is the growthof the value of total inventories in the food manufacturing sector. LC isthe test statistic for a break point in each of the coefficients listed in thefirst column. CV (5%) is the 5% critical value for the null hypothesis ofno break.

Table 4. Nyblom’s L Test for the Stabil-ity of the CPI for Food at Home: 1967:2 to2001:1


var�t= �2

Estimate LC CV(5%)

� 2�41 0�66 0�47� 0�50 0�29 0�47�2 18�48 1�18 0�47Joint LC 1�44 1�01

Note: Nyblom’s L test as described in Hansen (1992). �yt is the growthof the price index for food purchased for at-home consumption. LC isthe test statistic for a break point in each of the coefficients listed in thefirst column. CV (5%) is the 5% critical value for the null hypothesis ofno break.

United States history and increased produc-tivity at the national level that allowed usto sustain low unemployment without infla-tion. The average economic expansion is50 months long; the current one has lasted113 months and counting (NBER). Reces-sions last an average of 6–16 months (TheEconomist). The most recent economic slow-down reminds us that business cycles arealive and well.A skewed distribution of the aggregate

benefits from the new economy concerns pol-icy makers and scholars alike. Zappala arguesthat there will evolve a new wage (digital)divide with the rich, who are adept at usinginformation and new technologies on oneside, and the poor, who cannot or wouldnot use new technologies, on the other. Therapid penetration of information technolo-gies into homes, schools, offices, jobs, andfarms cushions this concern. In 2001, theInternet had penetrated into 57% of U.S.

Table 5. Nyblom’s L Test for the Stabil-ity of the CPI for Food away from Home:1967:2 to 2001:1


var�t= �2

Estimate LC CV(5%)

� 0�79 0�62 0�47� 0�84 0�07 0�47�2 2�76 1�43 0�47Joint LC 2�38 1�01

Note: Nyblom’s L test as described in Hansen (1992). �yt is the growthof the price index for food purchased for away-from-home consumption.LC is the test statistic for a break point in each of the coefficients listed inthe first column. CV (5%) is the 5% critical value for the null hypothesisof no break.


Figure 2. Growth of chained GDP—1967:2 to 2001:1

households with computers found in 63% ofU.S. households (Angwin). Computer equip-ment and use in most elementary schools, andthe skills it is building virtually assure thattomorrow’s adults will expect and demandcomputers as part of their lives.Many Americans are falling behind com-

pared to the upper twenty percent of earn-ers relative to their own income status inthe 1980s (Goozner). In 1998, the top 20%of households earned 49.2% of the national

Figure 3. Growth of prices of food eaten at home—1967:2 to 2001:1

income compared to 46.6% in 1990 and43.7% in 1980 (U.S. Census Bureau). In sim-ilar fashion, the wealth of the top 20% ofhouseholds stood at 83.4% in 1998, com-pared to 81.3% in 1983. Wealth in everygroup in the bottom 80% of households fellsince 1983 largely because of rising householddebt. Unequal income distribution will likelypersist, but it will probably not be a functionof access to electronic technology.


Figure 4. Growth of prices of food eaten away from home—1967:2 to 2001

Although the average person between ages18 and 34 holds 9.2 jobs in the U.S. (BLSa),the new economy has not decreased jobtenure. The median tenure for workers age25 and older was 4.7 years in 1998, about thesame as in 1983 (Deavers). There has beensome trend towards shorter tenure for menand longer tenure for women but more work-ing men (34%) than women (30%) who areover the age of 25 had been with their currentemployer ten years or more in February 2000

Figure 5. Growth in the value of total inventories in the food manufacturing sector—1967:2to 2001:1

(BLSb). Although there is little evidenceof faster turnover in employment markets,the heartache and financial distress to thoserequired to leave a job and retrain in midlifeis real. The heartache of those who lose theirmain street businesses or family farms to big-ger, faster, and more efficient firms is real.The adjustments in rural communities canbe profound. Some disappear, some becomebedroom communities for commuters, and


some have to change the whole nature oftheir commerce and culture.The fundamental dynamics of connecting

communities to commerce and commerce toconsumers has repeated a familiar refrainthroughout the twentieth century. Early on,the development of department stores killedoff many main street businesses; in the 1970s,department stores had to fight to surviveagainst shopping malls and deep discoun-ters; in the 1980s and 1990s, shopping mallsand discounters were threatened by categorykillers and big-box superstores. In this mil-lennium, all of these store formats are threat-ened by Internet selling. At each juncture,the ability to move goods more efficiently,be it by railroad, truck, car, or air, served tolower the cost of goods, increase inventoryturns, increase economies of scale, and lowerconsumer prices (Jennings and Haughton).At each juncture, retail products and sellingformats that better served consumers’ needsand saved them time came to dominate thelandscape.Economic theory provides us with some

powerful, fundamental principles of marketbehavior and entrepreneurship, but it failsto predict or explain some common trendsin consumer and firm behavior, in the speedof change in the relationships between firms,and the apparent reversal of product cycles.New and useful research about the dynamicsof change needs to focus on the transactionsbetween firms, on the boundaries betweentasks within a firm, and the interaction withtasks being out-sourced to other firms or tocustomers. As Michael Boehlje pointed outin the Waugh Lecture in 1999, “We cannotbe confined by our traditional disciplinaryframeworks and empirical tools” (Boehlje, p.1040).In this spirit, let us explore the activi-

ties and ramifications of the new food econ-omy with a concept called “clockspeed.”It refers to how fast an industry or setof economic agents changes their products,processes, and/or their organization. Rapidincreases or turnover in products, processesor organization increase the clockspeed of afirm or industry segment. The concept is pre-sented in detail by Charles Fine of MIT in a1998 book entitled Clockspeed. Fine was ona seven-year project to study the impact ofsupply chain strategy on competitive advan-tage in the automotive industry. He wantedto learn how choices at every stage in the

supply chain affected firms and industry per-formance. However, documenting change inthat industry was, in his words, like “watch-ing glaciers advance” (Fine, p. 5). So headopted a methodology used by biologicalscientists, namely studying the behavior ofthe Drosophila (fruit fly), whose clockspeedis fast and easy to replicate. In the indus-trial world in the 1990s, the fruit flies werecomputer manufacturers and the suppliersof semiconductors. By documenting changesin the products, processes, and organizationsof several industries with fast clockspeedsFine was able to identify strategic evolu-tionary patterns in industrial organization, inresponse time to consumers/customers, andin the processes of forming supply chain part-nerships.For us, the questions are: What are the

clockspeeds of products, processes and orga-nizations in the food and agricultural supplychain? How fast are they changing? Are theclockspeeds of the various links in the chainabout the same? Can we discover the clock-speeds? How does the concept relate to eco-nomic theories we understand? To explorethese questions, changes in products, pro-cesses and organization will be examined atselected links in the food chain. There isnot enough time and space to cover all thepossibilities here, but some of the obviousand well-known developments will illustratethe point and open up further questions forothers to explore with their own intellectualtools.

Clockspeed of Consumers

One of the lessons from Fine’s observationsis that the consumers/customers are likely tohave faster clockspeeds than the producers.So we will start by looking at changes in con-sumer preferences, lifestyles, and demands.It is well known that consumers are moreinformed and demand more differentiatedfood products than ever. The preparation andcooking of food has been pushed farther backinto the food chain with many Americansunwilling or unable to cook even the sim-plest of recipes. John Antle, in his presiden-tial address two years ago, attributed most ofthis to the expected result of rising house-hold income and greater income elasticitiesfor higher quality and safer foods (Antle).Household economic theory also tells us thatconsumers will demand more leisure and will


purchase more of their personal and house-hold goods ready-to-use, or in the case offood, ready-to-eat. Ironically, in the pursuitof freedom from cooking and washing dishesand in the pursuit of leisure time consumershave accepted many tasks formerly delegatedto paid labor. For example, many of us nowscan and bag our own groceries. We fill ourown plates in buffet lines, pump our owngasoline, print documents on our own print-ers, make our own airline reservations, andarrive at airports an hour ahead of flight time,to say nothing of typing our own manuscriptsand correspondence, in real time. One has toquestion whether consumers are really sav-ing time and gaining leisure or simply trad-ing tasks with the commercial world. Thiscould simply be an illustration of the princi-ple of comparative advantage. By performingmore tasks for themselves, consumers avoidthe disutility of waiting time. They performthese new tasks because, with new technol-ogy, skill, and knowledge their marginal pro-ductivity is greater than the value of theirtime and greater than the cost of purchasingsomeone else’s labor. If it is relatively moreefficient for consumers to do these tasks, thensociety realizes greater total output. In addi-tion, consumers gain control and speed in theperformance of selected tasks. Their quest tostay connected and informed, and the elec-tronic gadgets that accommodate that quest,have all increased the clockspeed of individu-als. This might help explain why The HarriedLeisure Class (Linder) of the 1970s becamethe Type A, multitasking, nonleisure class ofthe 1990s and beyond (Gleick).In the clockspeed framework, this swap-

ping of tasks between firms and consumersamounts to a change in the process bywhich products and experiences are pro-duced. There is also a significant change inhouseholds’ organization over the past twodecades. Average household size continuesto decrease, with almost 60% of householdsnow having two or fewer persons and morethan one quarter containing only one per-son. The percent of households made up ofmarried couples declined to just over 51%between 1990 and 2000. Nonfamily house-holds increased 23% whereas family house-holds increased only 11%. The proportion ofwhites in the population dropped five per-centage points from 80% to 75% in thelast ten years. In 1999, 63% of householdswith earners, had two or more earners (U.S.Census Bureau). In households, where both

husband and wife were in the labor force,25% of the wives earned more per yearthan their husbands (Winkler). These orga-nizational changes in the household changethe products they produce and the processby which they conduct business. In general,households are becoming less vertically inte-grated, more horizontal and more modular.

Clockspeed of Firms

The clockspeed of a firm in an industrydepends on how production tasks are per-formed and who controls the quality of theinputs. If products are produced in a modu-lar fashion, they can be assembled from manypieces that can be made elsewhere, like acomputer, an automobile or a potluck dinner.If products are constructed from whole clothby a single firm, then they are called inte-gral products. Every input and step is con-trolled, monitored, and tracked to ensure theintegrity of the final output. For example, thewriting of a Ph.D. dissertation produces ahighly integral product. There is little oppor-tunity to outsource pieces of the work, atleast not in a credible fashion. The knowl-edge and the capacity to produce a dis-sertation are endemic in the student withimportant, but modest, input from profes-sors, computer support personnel and printshops. Similarly, the production of brandedproducts like Wheaties at General Mills Co.or french fries at McDonalds requires con-trol of all the processes and inputs. Theproducer of an integral and proprietary prod-uct identifies the right genetic structure ofthe raw material, and specifies the growingtime, soil conditions and pesticides. The deliv-ery dates, price, and quantities are negoti-ated between the food manufacturer and thesupplier of raw products well in advance.The entire food production process from lab-oratory to consumer is set in place beforeany product is produced. Integrated prod-ucts tend to be produced by organizationsthat are vertically controlled whether throughownership, contracts, or alliances. They tendto produce branded, consistent, and reliableproducts. However, this type of organiza-tion is vulnerable to competition from nicheplayers, complex management, and organiza-tional rigidities (Fine). When these rigiditiesinhibit progress or get in the way of com-petitive advantage, vertical integration starts


to dissolve and firms begin to operate with amore horizontal structure.Horizontal structures are more flexible,

tend to have faster clockspeeds, with less con-trol over the final quality of the consumerproduct or experience. They are, howevervulnerable to technical progress in that theyoften do not have internal expertise to rec-ognize or adopt leading-edge technologies.They are vulnerable to the market power oftheir suppliers who may take over the iden-tity of the product for which they are supply-ing parts. This destroys the unique asset valueof the original product’s brand. Examples areIntel inside every computer, Coca Cola atevery retail store, or Pioneer on every farm.The computer assembler, the retail store, orthe farmer can hardly avoid using or sellingthese well-known supplier’s brands, but theycan hardly claim the branded componentsgive them a unique market advantage. Finecautions firms to beware of the “Intel inside.”The lesson is from IBM who, when facedwith competition from Apple Computer inthe 1970s, chose a modular product architec-ture and outsourced the microprocessor toIntel and the operating system of their com-puters to Microsoft. “The dominant productwas no longer an IBM computer, but theIBM-compatible computer” (Fine, p. 45) Itdestroyed the unique integrity of an IBMcomputer and changed the industry from onethat was vertically organized into one thatwas horizontally organized. Horizontal indus-tries are also likely to have lower profit mar-gins than those with proprietary knowledgeor asset specificity. Any one or all three ofthese vulnerabilities may drive a horizontallyorganized firm towards more vertical integra-tion (Fine).The transition from a horizontal organiza-

tion with modular products and processes toa vertical organization with relatively inte-gral products and processes and back again,is dynamic and predictable behavior. Borrow-ing further from the biological sciences, Finepictures this idea as a double helix aroundwhich industries, or firms within industries,are constantly moving as the nature oftheir products, competition, and opportuni-ties change. Thus, the locus of control in thesupply chain can shift in unpredictable waysthat will determine the fate of companies andprofits.

The Modular Retail Food Store

The consolidation of retail food companiesover the past four years provides a goodexample of firms moving from horizontal andmodular organizations to vertical and inte-grated organization. There is hardly a moremodular business than a retail food store.It is a large building with shelves, refrigera-tors and freezers, filled with products man-ufactured by someone else. In some cases,the owners of the branded products come inand organize their products directly on theretailer’s shelves. In some cases, the brandedproducts are owned by the manufactureruntil they are scanned at the point-of-sale tothe final consumer. Food manufacturers trackthe sales of their products in great detail withthe help of data aggregators like Informa-tion Resources, Inc. (IRI) and A.C. Nielsen.This knowledge gives them an advantagewhen negotiating with retailers. Moving to amore vertically organized and consolidatedretail structure helps to balance the nego-tiating power and leads to further retailconsolidation. The advent of new informa-tion technologies that allow for retail chainsto control the knowledge about what sells,when, and to whom increases their advantagein the asymmetric information game. How-ever, new business-to-business e-commercemodels that advocate cooperative forecast-ing and sharing of data between retailersand manufacturers presents both opportuni-ties and threats in the ongoing power strugglein the food system. The observed profitabil-ity of large concentrated chains with propri-etary management information systems suchas Wal-Mart, led many supermarket chains tomove from a horizontal to a vertical structurein the 1990s. Concentration ratios of the topfour retail food chains stand at 37% and havegrown at 15% per year since 1995. This rapidchange in the organization of the retail foodindustry is a major public policy concern andthe subject of great debate about the impacton consumers’ well being. So far, the cost sav-ings realized by more efficient supply chainmanagement seem not to have raised foodprices and have arguably brought a largervariety of products to many smaller commu-nities. The long-run impact of this trend iswide open for analysis.As of yet, the integrated structure of

Wal-Mart has not been threatened into amore modular operation by niche players ororganizational rigidities. They apparently can


handle the complexities of all dimensions oftheir business. They more than balance thenegotiating strength of their suppliers. Theyare even integrating the analysis of sales dataand not sharing it with outside data aggre-gators. Their annual rate of growth between1990 and 1999 was 21% in store units and17% in sales (Foley; IGD). During the lastfive years of this growth period, the totalnumber of supercenters (stores with at least180,000 square feet) also grew 20% per year,considerably faster than the total number ofstore units across the top four retail foodchains (11.8%) (IGD).Another way in which food retailers have

diminished the power of their suppliers isto produce and sell products under theirown brand name. These products are posi-tioned as better values, superior in qualityto national brands, and unique to a partic-ular store. It is a way to build customerloyalty and combat the dangers of the mod-ular model, where they look just like everyother store. In the vertical retail chain, thestore’s identity becomes the brand name. Inthe U.K., about 46% of food products in thelarge chains are “private labels” (IGD). Inthe U.S., private labels have been growing atabout 1.5% per year, standing at about 16%of sales and 20% of products in 1998 (PLMA;Food Industry Review, p. 153).

Horizontal to Vertical in Meats

Closer to the beginning of the food chain,we have seen the poultry and hog indus-tries move from modular and horizontal tointegral and vertical. Here, some of theforces causing this evolution include technicaladvances in breeding, feeding, and process-ing. Science played a major role in devel-oping the genetics for leaner and healthieranimals. Science and engineering developedmachinery, buildings, and computer systemsto enable continuous growing conditions. Sci-ence also played a major role in developingmethods to deal with waste that threatensto pollute water supplies or foul the air innearby communities. These agricultural sec-tors, like many to follow, discovered thatadding value to raw commodities increasedboth sales and profits. They were respond-ing to a demand pull. By 1987, more thanhalf the chickens sold were deboned andcut up; by now almost 90% are sold inthis form to meet the demands for conve-nience by consumers and foodservice estab-lishments (Ollinger). Being in a position to

realize profits from owning proprietary infor-mation and technologies, and from usingstandardized, bar-coded packages pushed thisindustry into becoming more vertically inte-grated. The concentration ratio of the topfour (CR4) slaughtering companies for chick-ens rose from 14% in 1963 to 41% in 1992,but the concentration ratio for poultry pro-cessing firms showed no trend, ranging from52 in 1963 to 46 in 1992 (McDonald et al).The CR4 for slaughter firms was actuallygreater in the cattle industry (71 in 1992)but their rate of consolidation (clockspeed)between 1972 and 1992 (9% per year) closelymatched that of the chicken industry (8.58%per year). According to Rogers, the CR4ratio for all food and tobacco processingindustries increased from 51% in 1967 to69% in 1992 with an average rate of growthof 1.3% per year.

Industrial Organic Food

Observing food firms moving around thedouble helix of organizational structurebrings to mind the organic foods niche.Two decades ago, producers of organic foodswere small, passionate, and loosely orga-nized. Most of their products were sold inretail food cooperatives or farmers markets.They were poised to be profitable becausethere was a demand for their product andthey had a proprietary system that was notreadily duplicated. Demand for consistent,high quality products from private retail com-panies like Whole Foods and manufactur-ers like General Mills pressured the nicheproducers of organic food to become largerand more integrated. Meanwhile, profitabil-ity drew in more and larger producers whocontracted with buyers or added value to rawproducts, thereby integrating manufacturingand marketing into their farming enterprise.They made cereals, breads and pasta andcorn chips. At all levels of the food chainthose who produced and sold organic foodwere perceived as a strong niche which com-peted successfully with mainline food com-panies. The reaction from larger integratedcompanies was not to fight them but tojoin them. Major manufacturers like Gen-eral Mills wanted part of this supply chainand, in 1999, they purchased Small PlanetFoods already a miniconglomerate of Cana-dian and California organic food compa-nies (Pollan 2001b). Wholesalers sprung upto handle organic foods and retailers every-where began to carry lines of food designated


“organic.” Producing and selling organic foodis no longer a unique competitive advantage.In a consumer shopping survey by the

Food Marketing Institute (2001) 69% ofshoppers reported having access to organicor natural foods in their primary retail foodstore. In a consumer shopping survey con-ducted by The Food Industry Center atthe University of Minnesota2, 20% of shop-pers expressed a particularly strong pref-erence for organic or natural foods (Kat-saras, et al.). In the Supermarket Panel con-ducted by The Food Industry Center in 2000,35% of stores in a nationwide representa-tive sample reported selling organic food;8% considered it a key competitive advan-tage (King). In the 2001 Supermarket Panel,51% of retail food stores reported sellingorganic foods, a 20% increase in one year.Not surprisingly, with this type of marketgrowth, large farm producers have adoptedorganic methods and integrated their opera-tions into a secure buying chain. By now, fivefarms control half of the organic fruits andvegetables sold in California. This industry’ssales have grown at an annual rate of 20%since 1990 (Pollan, 2001a,b). This clockspeedwas achieved through new products and neworganizational arrangements.

Science and the Food Industry

Science has contributed mightily to the his-toric and current development of the foodand agricultural economy. A meta-analysisof rates of return to investment in agricul-tural research estimated average returns of81% and median returns of 44.3% over thepast five decades. The rate of growth inpublic research expenditures for agriculturalresearch was 3.6% between 1971 and 1991.Although there is a large variation in theseestimates, there is no evidence to supportthe idea that returns have declined over time(Alston et al.). What has changed is the vari-ety of crops and crop characteristics that arebeing discovered. As a result, we are in awhole new era of scientific discovery withgenomics and biotechnology. A well-knownapplication is the genetic modification of corn

2 Formerly “The Retail Food Industry Center.” This Centeris funded by the Alfred P. Sloan Foundation to document andstudy how the food industry works, its contribution to theeconomy and well being of consumers, employees and citizens,(http://trfic.umn.edu).

to resist pests and soybeans to resist herbi-cides to cut production costs and/or increasesyields. The rate of increase in global acresplanted in bioengineered seeds since 1996 hasbeen 119.6% per year. The rate of growthin sales of transgenic crops over that timehas been 89% per year (Clive). Contrast-ing the adoption rates in the U.S. of double-cross hybrid seed corn introduced in the early1930s and transgenic corn introduced in 1996shows that in the areas for which it wastailored to grow, hybrid corn may actuallyhave been adopted faster. By 1940 (abouteight years after introduction) 90% of Iowacorn land was planted in hybrid corn whereasfour years after the introduction of transgeniccorn, 25% of U.S. corn crop is from trans-genic seeds (USDA-NASS). The clockspeedfor the agricultural sector of this industryhas been surprisingly fast and has produceda ripple effect that is amplified as it movesdown the supply chain toward the consumer.By now, 103.4 million acres or one-third ofthe world’s crop land (69% of it in the U.S.)are used to grow genetically modified seed(Pardey) and about 70% of the foods on theretail food store shelves are said to containsome form of GMO ingredient. As Neil Harlis quoted as saying, “The genie is already outof the bottle” (Barboza).

Food and Pharms

The clockspeed of truly new food productsresulting from genetic science is still ratherslow. It involves the merging of food andmedicine to provide opportunities for betterhealth, for greater strength and vigor, andhuman resistance to disease. Pharms refers toboth the production of pharmaceuticals foruse in and with food and the use of agricul-ture to produce substances that can be usedas medicine. Most of the new food productsthat promise extreme health on the markettoday are not the result of genetic engineer-ing, but the discovery of herbal medicinesand substances to treat chronic health con-ditions such as high cholesterol. In 1995, wehad not yet heard about functional foods ornutraceuticals. Now, expenditures on func-tional foods in the U.S. are over $16 billiona year or about 3.7% of total annual expen-ditures on food eaten at home (GAO). Thisis only slightly more than expenditures ondietary supplements ($14.7 billion) and overtwice as much as expenditures on organicfoods ($7.7 billion) (Pollan 2001a). Herbal


products and food supplements are largelyunregulated unless sold as a food. They illus-trate one pattern of supply chain design. Thatis, clockspeed amplifies as technologies movedown the food chain toward the consumer(Fine). High profits at the retail end increasethe rate of development of new consumerproducts, but the scientific development ofsubstances that, when combined with food,promise to enhance the health and longevityof people, moves slowly.Take for example the introduction of

Benecol into retail stores. This alternativefor butter and margarine has been sold inFinland since 1994. Its active ingredient, plantstanol ester, lowers blood cholesterol and isderived from pine trees. It was brought intothe United States in 1999 by the McNeilConsumer Health Care Division of Johnsonand Johnson (a pharmaceutical company)(Sharpe). The FDA prohibited Benecol frombeing sold as a dietary supplement because,by definition, a food supplement is intendedto be ingested as a pill, capsule, tablet, or inliquid form and not represent a conventionalfood (FDA). Benecol was, however, allowedto be sold as a food with an FDA approvedhealth claim that it will lower cholesterol. Ina little over one year, from the time it wasbrought into the U.S., it was in retail markets.

Common Themes

Common themes and behavior patterns areemerging as we explore the behavior of thevarious sectors of the new food economy inthe context of the clockspeed model. Withthe exception of households, most economicagents are moving from modular, horizon-tal organizations to more integrated, verticalorganizations. This should not be a surpriseto us. Ten years ago, Tom Urban alertedus to the “industrialization of agriculture”(Urban). Identifying the forces and dynam-ics that motivate firms in the food indus-try to change their products, processes, andorganization is a necessary step in clock-speed analysis. Identifying ways to measurethe speed of change and finding appropriatedata are greater challenges. One way to sum-marize the clockspeed of various segments ofthe food economy might be to look at theannual rate of growth in particular activitiesover a relevant time period. In mathemati-cal terms, this is the same as measuring thecompound rate of interest. In various sec-tions earlier, the annual rates of growth for

selected activities in various parts of the foodchain are reported. Table 6 summarizes theannual rates of change in various products,organizational, and process arrangements. Itis offered only as an example. It showsthat rapid annual rates of change are spreadacross the food chain. It is, however, dan-gerous and unfair, to draw any conclusionsabout speed from this cursory look at growthrates because they represent various stagesof product/process development from newstart-ups to mature operations. Nevertheless,it seems that concentration and the adop-tion of new technologies happened soonerat the production and processing end ofthe food chain. Consolidation and adoptionof technology at the retail end appears tobe faster and later in time. This is consis-tent with the hypothesis that supplier powerinduces downstream, horizontally organizedfirms into more integrated organizations andthat the pace accelerates as it gets closer tothe consumer.

From Chains of Agents to Websof Activities

A characteristic of the new economy is thedevelopment of processes and relationshipsfirst, and products later. This seems to typifymuch of the race around the double helix oforganizational structure. Emphasis is on howto get a task done, how to facilitate the sale ofproducts, how to guarantee safety and qual-ity, and how to deliver the attributes and ser-vices being demanded in the most efficientand profitable way. After all these decisionsare made, the cooperating parties decide onthe actual products and who is in the bestposition to perform the task. As economistswe would ask what is the most efficient wayto organize? Who has the comparative orcompetitive advantage in performing whichtask?We have typically focused our analysis

along the supply or the demand chain asdepicted in figure 1. It is a nice linearmap that helps us think clearly about eco-nomic agents, firms, and consumers. It sim-plifies public policy analysis and deliverybecause it provides a target for regulationand identifiable beneficiaries for public wel-fare programs. But in real life, these eco-nomic agents rarely perform neatly packaged


Table 6. Clockspeed—Growth Rates in Various Time Periods

Compound Growth in Percent

Activity Periods

1967–92 1978–93 1990–2000 1995/96–2000

Production/ProcessingGlobal sales of transgenic crops 89�0Global acres in transgenic crops 119�6Percent of farm value under contract 8�1Change in CR4 ratio in:Chicken slaughter 2�5Cattle slaughter 4�9Poultry processing 0�0All processing firms 1�3

Retailing/ManufacturingPatents by top 25 food manufacturers (92–98) −3�0Sales of organic foods 20�0Sales of dietrary supplements (93–99) 10�6Change in CR4 ratio in:Retail food stores—all

Wal-Mart store numbers 21�0Wal-Mart sales 17�0All superstores numbers 20�0No. of retail food store units—top 4 chains 7�6Retails food store sales—top 4 chains 11�8Private label penetration—U.S. food retail (90–98) 1�6

tasks or buy and sell in linear demand chan-nels. Their relationships zigzag across multi-ple partners, countries, and consumers. “Thefocus (of their strategic plans) is on thefunction performed, not on the firm or theeconomic agents that perform it” (Boehlje,p. 1127, parentheses mine).With this in mind, I propose that we

begin to think about the new food econ-omy less as a chain and more as a web withfood consumption at its center. In figure 6,each of the vectors radiating from the cen-ter represents a set of tasks or activities thatmust be performed for food products to beproduced, delivered, and consumed. Twelveessential activities are identified; surelymore could be added. The twelve activitiesare: (1) Adding value to raw commodities(cleaning, packaging, manufacturing, cook-ing). (2) Aggregating and storing products forfuture sale. (3) Monitoring of product safetyand quality. (4) Waste management, envi-ronmental preservation, and recycling. (5)Managing and training labor. (6) Technologyadoption. (7) Collecting, interpreting, trans-mitting, and analyzing information aboutconsumer/customer demands. (8) Basic sci-ence and technology. (9) Providing financing

and credit. (10) Overseeing and facili-tating the integrity of the market, thewelfare of producers, workers, and con-sumers. (11) Growing crops and raising ani-mals. (12) Transporting products from pointA to point B.The parts of the web that tie these rays

together are the relationships and strategicalliances between people, firms, and institu-tions that perform these activities. These taskperformers are positioned in a set of con-centric circles around the rays of the web.Consumers (C) are closest to the center ofthe web. They commonly perform eight ornine of the twelve tasks. They could growtheir own food, transport it, add value to it,aggregate and store it, monitor its quality andsafety, handle its waste, recycle its packag-ing, manage and train their own labor, andadopt many new technologies. Retail foodcompanies (R) generally perform all twelveactivities except farming, basic science, andmarket oversight. Foodservice (FS) establish-ments perform all the tasks that food retail-ers do except they do less aggregating andstorage and they are behind in analyzing andusing information technology. Foodservice ismore active in finance and credit than food


Figure 6. Web of activities, economic agents in the food system

retailers; franchise stores are more commonin foodservice. Wholesalers (W) aggregate,store, and transport products; they monitorquality and safety, and handle waste disposal.They have built rather sophisticated infor-mation processing systems and they providefinancing and credit to their customers. Foodmanufacturers (M), ingredient manufacturers(I) and most first stage handlers (H) per-form all these tasks with the exceptions offarming, overseeing the market, and provid-ing financing, though with scan-based trad-ing, food manufacturers also extend creditto retailers. Ingredient and final manufactur-ers are heavy users of science and technol-ogy and data about consumer preferences.Farmers (F) obviously grow the crops andraise the animals, handle lots of waste prod-ucts and control their environment. If theybecome an integrated value-added operation,then they would perform all the tasks of first-stage handlers and food manufacturers. Someof them even become retailers. The seed andfeed companies (S) now often called life-science companies, are heavily involved inscience and technology, technological devel-opment and adoption, and in environmen-tal controls. Government agencies (G) do thetasks of science and research, informationgeneration, waste and environmental control,monitor safety and quality, and more thanany other party, oversee the integrity of themarketplace and the welfare of consumersand producers. The media (TV) also has animportant informational and oversight role.

Universities (U) and science laboratories (L)get involved in monitoring the integrity ofthe market, science and technology, and dataanalysis. On the finance and credit ray, wealso have institutions like banks (B), govern-ment credit agencies, commodity exchanges,and the stock market (X) who are largelydivorced from other tasks in this industry.All the tasks are necessary and they may

be integrated within a firm or outsourceddepending on a strategic plan and compara-tive advantage of potential partners. A firmthat is vertically integrated through owner-ship, say a food manufacturer, would inter-nalize all tasks and operate (almost) totallyon the circle around the web that connectsthe M’s. If they begin to contract with otherfirms to supply proprietary products or ser-vices, then they are beginning to operate in amore modular fashion, but can retain controlof the quality of their product through con-tracts and alliances or the acquisition of newtypes of businesses. These connections can beexpected to change with new science, tech-nology, and product demands. Figure 7 illus-trates how the connections of the web mightchange if a food manufacturer outsources alltransportation and storage to a wholesaler,labor training to educational institutions, sci-entific research to government agencies anduniversities and all credit functions to banks.The point is that the activities involved in

creating and transporting food from farm tofork can be performed by any number ofeconomic agents even if they are controlled


Figure 7. Hypothetical web of outsourcing relationships for one manufacturer

by a few. The pattern of the web dependson how integral or how modular productionprocesses are, and which is the most effi-cient form of organization for the entire sys-tem. Changes in the web’s pattern can changethe quality of food products, the bargainingpower in the supply and demand relation-ships, and the returns to investment in infor-mation, technology, and labor. The closer toa set of neat concentric rings we see, themore vertically integrated is the organizationof any set of economic agents. The more inte-gral the organization, the more proprietaryis information and technology, the more vul-nerable are they to niche players and theharder it is to move quickly. When thesecircles break up into complex modules withever-changing sets of alliances and contracts,entering the market may be easier for thesuccessful and lucky entrepreneur, but muchharder for the small and timid seller. Trackingfood safety, quality, raw product source, andprices becomes harder. The control pointsand profit margins tend to shift from sellersto buyers, from those who produce to thosewho analyze, from those with hard assets tothose with the best market intelligence.The “market” that we know, love, and

teach about, is a relatively friendly and demo-cratic place. Anyone with a product to sellcan enter and leave with their profits if theircosts are right and there is sufficient con-sumer demand. However in this evolving webof short-term contracts and long-term prop-erty rights, price discovery is difficult and

entry is often by invitation. It is akin to ade-democratizing of the market-place. Theimplications for us as applied economists areawesome. We need to rethink how our workapplies to the new food economy, to the neworganizational structures, to their rapid evo-lution, and to their impact on public welfare.As we witness a rapid acceleration towardefficiency, let us remember that efficiency isnot conducive to congeniality. It is the prod-uct of thoroughly left brain activity unbal-anced by the right brains’ creativity, intuition,and compassion.In balancing our approach to the new food

economy, we can start by recognizing thatproduction agriculture always has and alwayswill perform most essential tasks in the webof the food and agricultural industry. It isa consumer of new technologies, bioscience,and information about demand. It is a sup-plier to food manufacturers, retailers, andconsumers. It is an essential industry in itself,but it does not exist unto itself. Before us isan opportunity to study, analyze and inter-act with the entire new food economy asan integrated and evolving system in what-ever dimension or environment we choose.If we can peer through the kaleidoscope offood, firms, consumers, countries, and con-tracts and identify the behavioral patterns ofthe Drosophila of the food industry and mea-sure their clockspeed, we can employ ourown vast intellectual arsenals to study theactivities we observe. By asking whole-brainquestions we will build better models, and be


more relevant to our peers, our students andour public.In the words of an ancient Chinese sage,

Chung-tse, “a well-frog cannot imagine theocean, nor can a summer insect conceive ofice....(each) is restricted by its own learning”(B. Hoff, “The Tao of Pooh” as reprintedin Jennings and Haughton). Let us not berestricted by our own learning!

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