Corso di Laurea magistrale In Economia e Gestione delle Aziende (Classe LM-77) Curriculum International Management Tesi di Laurea Local and Multinational Companies in the Agrifood Sector: Case Studies Relatrice Ch.ma Prof.ssa Maria Bruna Zolin Laureanda Francesca Michelon Matricola 816306 Anno Accademico 2013 / 2014 Index 1. Introduction - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 3 2. Food and beverage sector at international level - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 7 3. Public support in the agricultural sector - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 23 3.1 European Union public support to the agricultural sector - - - - - - - - - - - - - - - - - - - - - - - - p. 31 3.2 USA public support to the agricultural sector - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 40 4. Globalization and Regionalism - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 44 4.1 The World Trade Organization and the Agreement on Agriculture - - - - - - - - - - - - - - - - - - p. 44 4.2 Regionalsim and the Free Trade Agreements - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 51 5. Local and Multinational companies in the food and beverage sector: case studies - - - - - - - - - - p. 55 5.1 Cargill Inc. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 55 5.1.1 Brief history - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 55 5.1.2 Characteristics- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 62 5.1.3 The Multinational Business Model - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 65 5.1.4 The Guiding Principles - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 71 5.1.5 Cargill S.r.l.: the Italian subsidiary expression of the multinational business model p. 73 5.1.5.1 Cargill S.r.l. mergers and acquisitions - - - - - - - - - - - - - - - - - - - - - - - - - - p. 75 5.1.5.2 Cargill S.r.l. organizational structure - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 77 5.2 Veronesi Holding S.p.A. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 85 5.2.1 Brief history - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 85 5.2.2 Characteristics - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 88 5.2.3 The Local business model - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 98 ! 1 5.3 Rigoni di Asiago S.r.l. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 104 5.3.1 Brief history - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 104 5.3.2 Characteristics - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 108 5.3.2.1 Rigoni di Asiago S.r.l. in the world - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 112 5.3.3 The Local business model - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 121 5.4 Ditta Bortolo Nardini S.p.A. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 125 5.4.1 Brief history - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 125 5.4.2 Characteristics - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 127 5.4.3 The local business model - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 136 6. Concluding remarks - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 139 References - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - p. 147 ! 2 1. Introduction The analysis of the global food and beverage sector (explained in chapter 2) illustrates a paradoxical composition of the companies operating in this sector, as on the one hand there is a few very large Multinational Companies (MNCs), of which 10 MNCs (Associated British Foods (ABF), The Coca-Cola company, Danone, General Mills, Kellogg’s, Mars, Mondelez International, Nestlé, PepsiCo and Unilever) are extremely powerful, internationally widespread and able to satisfy a large amount of the global food demand (named the Big 10 according to Oxfam). These latters in turn are influenced by the activities of other multinational companies, the so called Commodity Traders (mainly the ABCDs, among which excels Cargill Inc.). On the other hand there is an enourmous amount of Local companies, that respond to a small demand of food through a limited offering, compared to the multinational ones. The companies composition of the global food and beverages sector so, even though seems to be characterized by the preponderance of an oligopoly of tremendously powerful multinational companies, dominated by the Commodity Traders, as they are benefited by a great amount of strenghts (first of all the vertical integration of an astonishing number of activities), is characterized at the same time by a lot of local companies, that thanks to the strong points presented, they are able to stand on the market, be competitive and offer an economic sustainable alternative to the multinational business models. The defintion of the two business models, Multinational and Local, have been determined relatively the location where their production processes take place, where production processes means the sum up of primary activities1 of the value chain, where according to Porter’s definition, they are crucial for the companies as they generate competitive advantages towards competitors, if the company perform them more cheaply or better than its competitors (Porter M. E., 1985). A multinational company so, stands for a company that conducts its production processes in a number of countries outside the nation of origin, having furthermore a great amount of other facilities abroad, (Bannock G., Manser W., 2003), whereas a local company undertakes its production process not only internally the company, but also circumscribed in a limited, relatively adjacent geographical area. In order to have a broad image of the food and beverages sector and to verify the co-existence of these two business models, four case studies of family-based companies of the food industry have been analyzed, Cargill Inc. (the largest family based company of the US and the largest commodity trader in the world) as example of multinational company (described in chapter 5.1), and Veronesi Holding S.p.A. (see chapter 5.2), Rigoni di Asiago S.r.l. (see chapter 5.3) and Ditta Bortolo Nardini S.p.A. (see chapter !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 These primary activities (Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales and Services), must be sustained by 4 support activities: Firm Infrastructure, Human Resource Management, Technology and Procurement, that together with the previous 5 makes the company achieve a competitive advantage (Porter M. E., 1985). ! 3 5.4), that despite they are gathered under the same business model (the local one), each of them presents peculiar characteristics operating in different market segments. Veronesi Holding S.p.A. is one of the largest italian company of the food and beverages sector, according to the total turnover generated at the end of 20132 (in line with other giant players of this sector, such as Ferrero S.p.A and Barilla G. e R. Fratelli S.p.A. in turnover terms) that through its offering operates in both the animal feed sector and in the food sector of meat and egg markets, on the other side Ditta Bortolo Nardini S.p.A. stands for a small-sized3 enterprise that operates in the beverages sector of the spirits, whereas Rigoni di Asiago S.r.l. is an interesting case of local company working in the jams market, that stands in the middle of the others two. This selection of the local case studies allows so to have a relatively wide portrait of the local companies’ environment. The in-depth analysis of the four case studies has been: empirical, through a direct contact with the companies (questionnaires sent to the companies, companies visits and interviews both telephonic as through emails), literal (in order to define the two business models through the literature, adapting the literature to the case studies) and analytical (through the examination of companies balance sheets as of other financial reports). Strenght points have been defined finally for these three local business models (clearly expressed in chapter 6), in order to confirm that despite the several advantages that benefit multinational companies (according to the case study examined, such as Cargill Inc.), these local companies could not only co- exist in the food industry (that seems to be ruled by an oligopoly of MNCs), but also thanks to their competitive advantages they could be economically sustainable, by promoting themselves as alternatives models to the multinational ones. Furthermore, in order to have an in-depth analysis of the global food industry it is essential to understand the crucial role play by the agricultural sector as this latter represents the inputs supplier of food and beverages sector, and so to have a clear contextualization of them in the whole agribusiness. The agricultural sector represents a crucial industry of global economy, characterized by a long history of regulation and supports. Despite the phenomenon of globalization, that allowed trade, transactions, people, capital, investment and knowledge to interact more freely in the worldwide scenario, the agricultural sector still represents nowadays one of the most protected sectors of the economy. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2 Data available on the Aida database, balance sheets are updated at the 31 December 2013. 3 Ditta Nardini Bortolo S.p.A. is a small-sized company as it roughly satisfies the two parameters established by the European Commission recommendation 2003/361/CE, such as: less than 50 employees and less than 10 millions of turnover generated. ! 4 The World Trade Organization tried to establish an international tool in order to regulate the agricultural sector between its Member States, the Agreement on Agriculture, but despite this global policies support framework, it appears that also other organizations established rules and policies to regulate this sector. For example the Organisation for Economic Co-operation and Development (OECD), that roughly represents the most developed countries of the world, that defines several indexes in order to evaluate agriculture supports within its Member States (such as Producer Support Estimate and Consumer Support Estimate) and make comparison with other developing countries (outside OECD) (chapter 3 is addressed to the support to agriculture in both OECD as developing countries). Furthermore, two of the main supporters of the agriculture in the world are the European Union (EU) and the USA (supports regimes are illustrated respectively in chapter 3.1 for the EU and in chapter 3.2 for the USA). The regionalism phenomenon, that undertook to a proliferation of a great number of Free Trade Agreements between two or more countries since the early 1990s, contrasting the globalization, demonstrated that not only the agricultural sector is monitored and supported, but that the whole food industry is subject to accurate regulation, through the establishment of specific clauses inside these Free Trade Agreeements, as the whole agribusiness is affected by a complex conflict of interests (chapter 4 is addressed to the explanation of the concept of agricultural support in both contexts of globalization and regionalism phenomena). ! ! ! ! ! ! ! ! ! ! ! 5 Key Words: • Agricultural sector: together with the mining industry represents the primary sector of the economy. It collects a big variety of activities realized by the human beings, which are all set in a context of natural fields, and that can be gathered into three main categories. At first, all those activities linked to the farm of different plant species, as well as the exploitation of plant resources addressed mainly to food purposes. Secondly the livestock of numerous animal species (also fishery activities), and at last all the activities of forestry. Feed mills activities are collected inside this sector. • Food sector: or food industry, is that market sector composed by companies that through activities of processing and transformation, take the production from the agricultural sector, as well as semifinished products, in order to offer finished food products to consumers. The activities carried on by the companies of the food sector as part of the food industry are characterized of a series features, such as: standardized mass-production; machinery use or mechanical systems linked together with production lines; activity subdivision inside the company in order to have different departments able to respond to specific tasks (such as administration, purchasing, commercial, R&D, logistic and other departments) and the presence inside the company of systems of movement and transport of the goods. The final purpose of such companies so, is to process commodities or semi-finished products to offer ready to consume products to the final markets and to respond to the mass consumption needs. The food sector gathers different types of industries, according to the type of material or product used to produce the final goods. ISTAT drafted a classify in order to create some macro-groups of companies within this sector (based on the market segment) such as: meat and meat-based products; fish and shellfish; fruits and vegetables; milk and milk-derived products; corn seeds, grains and starches; and many others. • Agrifood/ Agribusiness: is the “macro-sector” that groups both agricultural and food sector. It represents the whole business of agricultural production from the “farm to the fork”, so from activities of farmers assistance to activities of distribution and marketing in order to make the products available to customers. Agribusiness collects both activities directly linked to the agricultural production, such as crop production and harvesting, as well as complementary activities, such as agrichemicals, breeding and feed animal, farming and contract farming, processing, farm machinery, distribution, marketing and sales. ! 6 2. Food and beverages sector at international level The food sector, or food industry, gathers a great amount of companies addressed to the food processing, as they are committed towards the transformation of raw materials or semi-finished products into finished products to offer to the market for intermediate or final consumption (Treccani.it, 2015). On the global food demand side it appears that it is changing due to several factors that influence agribusiness as the global economy: • The world population today is affected by a big paradox: the co-existence of obesity and hunger4. If on the one hand 1.5 billion people are obese or overweight, on the other hand 805 million people are undernourished. This paradoxical situation takes to have 29 million people that perish each year due to excess of food’s deseases, whereas 36 million people die as they suffer of undernourishment and famine in the world (this means that for each malnourished person in the world, correspond two people obese or overweight) (Fondazione Barilla Center for Food & Nutrition, 2014). Due to this opposite trend in the food demand, the agribusiness must satisfy several challenging topics: food security5 for all the humanbeing (assuring market access to everybody), food safety6 (that can offer great opportunities to food companies, in terms of product differetiation and added value activities carried on, such as compliance with food safety regulations) and market transparency (being transparent relatively the Global Value Chain and of small-scale farmers eventually involved in the production process) (FAO, 2012). !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4 This paradox represents the first of the three paradoxes that the Barilla Center For Food & Nutrition has stressed in the Milan Protocol in order to determine concrete actions addressed to achieve the sustainability inside the food system worldwide, through the the Protocol sign of governments, international organizations and civil society. The other two paradoxes highlighted are: biofuels and animals feed production that exploits one third of the global harvests, even though people worldwide are starving and are affected by food access difficulties, the second paradox is linked to the food waste, as 1,3 billion of tonnes of edible food are wasted every year (by doing this the global community wastes one third of the global production of food, and four times the quantity necessary to nourish the 805 million of malnourished people of the world) (Fondazione Barilla Center for Food & Nutrition, 2014). 5 Food Security means that all the people in the world can satisfy their global food requirement in an adequate and informated way, able so, to take free decisions about their food choices. Furthermore it also stands for a sustainable food supply, as food producers are able to make a living decently, through a production that is environmentally and socially sustainable. Food Security foresees so, a sustainable food system able to satisfy the global food requirement by offering healthy food accessible to all. 6 Food safety stands for a scientific discipline thought to prevent foodborne illness through the definition of specific standards in order to handle, prepare and storage food in both a correct and a safe way. Food safety takes into account also the origins of food, through practices of food labelling, food hygiene, certification systems for both food processing (through International Organization for Standardization standards, such as ISO 22000, and Hazard Analysis and Critical Control Points, HACCP) and for food products, guidelines for the management of governmental inspections of import and export and much more. ! 7 • Income distribution changed across sectors and population, developing countries since the early to the mid-1990s saw a growth in both income terms and urban population (that moved from the countryside), taking to an increase of both the food demand and a major request of high quality food and agricultural products, offered at a affordable price. Furthermore income growth took also to a change in terms of food and agricultural products bought from consumers, as there has been a shifting from primary basic products (such as cereal and grain based products, like bakery products or pasta) to a bigger consumption of dairy products and meat. Agribusiness companies should adapt themeselves to these changes by increasing the added value of their manufacturing activities, in order to offer added value finished products to the market. Developing countries have been benefited also by the availability of niche segment food products, such as tropical and other local products, that stimulated the development of local agricultural and food companies (such as small-scale producers) in order to satisfy the global demand of these niche products (FAO, 2012). • Standards over food and agricultural products (such as products or process certifications7) keep on gaining importance in shaping the global trade of such products, as consumers are willing to pay for specific products’ characteristics, especially for those that depend on the added value offered by peculiar production processes (FAO, 2012). Consumers so, have a tremendous power in order to reshape the organization of food chains and food sector as a whole. • Increased number of large retail stores, both in developed and in developing countries, characterized of having a tentacular presence throughout the world, that have been able to move competition towards quality (along with prices) (FAO, 2012). The enourmous power and influence that large retail stores could play in the world (just think Wal-Mart Stores that according to fortune 500 rank, it represents the largest company in the world in terms of revenues), allowed them to promote standards setting over food and agricultural products, standards that became key variable in the production chain and in the production firms. Furthermore timeless and standardized products availability became crucial elements in order to be competitive for these retailers. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 7 Food Product certifications guarantee that a food product is in compliance with the producer specifications and furthermore assure that specific quality, producing and origin standard requirements are satisfied. These certifications are undertaken in order to highlight the peculiarity of the food product offered and the added-value that it can offer to customers. Examples of Food Product certifications are: Gluten Free, Organic, Denominazione di Origine Protetta (DOP), Indicazione Geografica Tipica (IGT) and Specialità Tradizionale Garantita (STG). Food Process certifications on the other hand, guarantee the company capability to offer products that satisfy specific quality requirements through peculiar production processes. Examples of the main food processes certifications are: Hazard Analysis Critical Control Point (HACCP), International Organization for Standardization (ISO- ISO 9000-9001) and International Food Standard (IFS) (Cinganotto M., 2013). ! 8 • On the other hand, an increased number of local and regional modern retail stores started establishing on the market in order to be more sensitive to local market circumstances by selling local food and agricultural products at a lower costs and respecting the seasonal products offering (FAO, 2012). This increasing trend of local and regional retail stores can be explained through the localism8 phenomenon, as this term explains the creation of an alternative and more sustainable food networks, characterized by a “proximity system” of a locally grown food, local processing, regional trading associations, local currency and local control over politics and regulation (Kloppenburg et al., 2000). Through this small-scale retailing producers and consumers are usually linked with face-to-face relationships in order to create a social cooperation between the two parties, inserted so in an ethical framework of food production-consumption. On the supply side, companies operating in the food sector base their activities over inputs supplied by companies operating in the agricultural sector (sector that gather several activities such as: cultivating land, raising crops, feeding and breeding livestock, farming, fostery and fishing), where together with mining they represent the primary sector of the economy. Companies operating in the food sector can be divided into two main categories according to the processing phase that they carry on9 (Treccani.it, 2015): • First processing companies, addressed to process commodities or raw materials, such as for example: sugar, cereals, grains, oilseeds and so on; • Second processing companies, which transform the semi-finished products supplied them by the first processing companies and offer finished products to the customers. Examples of second processing food products are: ice-cream, dairy products such as cheese, bakery products, and so on. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8 Localism is a school of thought developed worldwide, that embraces several political philosophies which are focused on the concept of local: local production and consumption of goods, local government control, local culture, identity and history. Localism is usually seen as the antithesis of the globalization and some academics have embraced the localism philosophy as solution to the problems of the global industrial agriculture. Localism became the cornerstone of alternative food movement activists all over the world, these movements believe in a stronger connection between the localization of food systems to environment sustainability and social justice, as outlined in US food activist discourses. In Europe, localism became fundamental in order to develop rural governance, to improve rural livelihoods and conserve the environment and heritage of the rural areas from the potentially negative consequences of international agricultural trade liberalization (Du Puis E. M., Goodman D., 2005). 9 Despite this categorization, there are a few companies operating in the food sector that verticalized both these processing phases just barely expressed, as they are big and developed enough to internalize a lot of production phases. They operate as Commodity Traders in the food sector, and they are illustrated later on in this chapter. ! 9