Description
In addition to trade in goods themselves, such as processed foods, there is a large volume of international exchange of capital and technology used for food manufacturing and distribution. Modern measures of a country's or a firm's international competitiveness incorporate sales from foreign affiliates of home-country firms in addition to international trade.
CHAPTER 3
Foreign Direct Investment in the
Processed Food Sector
The Concept and Scope of Foreign Direct Investment
In addition to trade in goods themselves, such as processed foods,
there is a large volume of international exchange of capital and
technology used for food manufacturing and distribution. Modern
measures of a country’s or a firm’s international competitiveness
incorporate sales from foreign affiliates of home-country firms in
addition to international trade (Horstmann and Markusen 1987,
Kravis and Lipsey 1992, Porter 1990). Foreign affiliation can occur
in various ways: license production to a foreign firm, franchise a
foreign firm to market products under the home firm’s trademark,
acquire a minority interest in a foreign firm, develop a joint venture
with a foreign partner, or obtain complete or majority ownership of
foreign operations.
For purposes of this report, foreign direct investment (FDI) refers to
investment in a foreign affiliate. The term “foreign affiliate” is used
to identify a foreign entity in which a parent firm holds a substantial
(but not necessarily majority) ownership interest. Parent firms are
referred to as multinational firms or corporations (MNC’s). U.S.
firms’ investing in production facilities in other countries is known
as outbound FDI, while foreign firms’ investing in facilities located
in the United States is known as inbound FDI. Foreign direct
investment is distinctly different from foreign portfolio investments
and other international capital flows such as bank deposits. Portfolio
investment takes a passive management role and does not seek
control over decisionmaking within the firm. Foreign direct
investment, by contrast, is defined as the ownership of assets in an
affiliate by a foreign firm for the purpose of exercising control over
the use of those assets. Since we are interested in the outcome of
investing in foreign affiliates, we use sales of foreign affiliates as
our primary measure of FDI. Using affiliate sales as an indicator of
Globalization of the Processed Foods Market 67
FDI facilitates comparing the relative size of FDI and trade as
strategies for accessing foreign markets. Using affiliate sales
instead of “foreign direct investment position” (essentially the book
value of assets) also avoids the problem of valuing assets of
different vintages.
The source of FDI data at the industry level is the U.S. Department
of Commerce, Bureau of Economic Analysis. The Department of
Commerce defines foreign investment as direct when a foreign firm
has a stake of 10 percent or more in a host country operation and no
other firm has as large a share. The 10-percent ownership threshold
reflects the notion that a foreign parent will normally have a strong
say in the decisionmaking of a firm even if that parent does not own
a majority stake. Other researchers have argued for a more
restrictive 50-percent ownership cutoff to define foreign direct
investment. But the difference in definition is minimized by the fact
that the vast majority of FDI is majority owned. In 1992, 84 percent
of U.S. food-processing affiliates in foreign countries were majority
owned; and conversely, 98 percent of foreign-owned affiliates in
the United States were majority owned by their foreign parents.
Furthermore, most FDI occurs by acquisition or merger rather than
by building new facilities (known as greenfield investment). The
country receiving FDI gains from the investing firm’s knowledge in
technology, marketing, management, finance, and information
services. The gain in employment and economic activity is most
obvious from greenfield investment. But even when FDI occurs by
acquisitions, the parent firm typically upgrades the acquired firm’s
production processes and equipment, quality and environmental
controls, procurement practices, packaging, and distribution
systems. If production capacity increases sufficiently, net
employment increases even with improved labor productivity.
FDI by acquisition does not necessarily increase employment,
technology, or product variety in the receiving country. Parent
firms frequently buy leading brands produced by a firm in the host
country. Motivations for the parent firm are to increase
international volume, increase growth rate, and achieve the
competitive advantages of owning a leading brand in a new market.
68 Globalization of the Processed Foods Market
In this situation the parent firm often gains new product and
marketing technology from the acquired firm. Thus technology
flows become two-way. By acquiring a leading firm or brand in the
host country, the parent firm avoids a major disadvantage of
greenfield FDI, by achieving immediate economies of scale.
Examples are Grand Metropolitan (UK) buying Pillsbury in the
United States and Philip Morris buying Jacob Suchard, one of
Europe’s largest confectionery firms.
Direct foreign investment can also be classified as vertical or
horizontal. An example of vertical FDI is a parent firm investing in
successive stages of production, either upstream (away from final
consumption) or downstream (toward final consumption). An
example of upstream FDI by a food manufacturer would be
investing in can manufacturing or in agricultural commodity
production. Downstream FDI would include a flour miller’s
investing in a wholesale baking operation or retail foodstores.
Tables 13 and 14 give an overview of the relative size of outbound
and inbound FDI as reflected by affiliate sales for the entire food-
processing sector and for the major industries within the sector.
Sales from outbound FDI remained slightly higher than sales from
inbound FDI throughout the 1982-93 period. Sales from all U.S.
food marketing affiliates abroad totaled $132.5 billion in 1993 (table
13), while sales from foreign-owned food marketing affiliates in the
U.S. were $124.3 billion (table 14).
The composition of outbound versus inbound FDI varies widely by
type of industry. Food-manufacturing affiliates account for 72
percent of sales of all U.S. food-marketing affiliates abroad. But
food manufacturing accounts for a much smaller 37 percent of total
foreign-owned affiliate sales in the U.S. food marketing sector. For
the food-retailing industry, just the opposite is true. Sales from U.S.
food-retailing affiliates abroad account for just 9 percent of total
affiliate sales abroad, while U.S. food-retailing affiliates of foreign
firms account for 42 percent of sales of foreign-owned
food-marketing affiliates in the United States.
Globalization of the Processed Foods Market 69
The next section examines factors that help explain or incentives
for firms to engage in FDI. This is followed by a more detailed
industry-by-industry review of the general trends in FDI discussed
above.
Factors Influencing
Foreign Direct Investment
FDI in Historical Context
Foreign direct investment is the dominant form of international
commerce in processed foods. This is in sharp contrast to global
commerce in agricultural commodities where trade dominates and
FDI is nearly invisible. It also contrasts sharply with neoclassical
international economic theory that does not reveal incentives for
FDI in a perfectly functioning world of free trade.
This section addresses factors that explain FDI. While theoretical
explanations for FDI tend to be eclectic, empirical observations of
incentives for firms to operate facilities abroad tend to be generally
consistent with the major strands of theory. Indeed, a number of
empirical studies of the determinants or motivations for FDI have
been reported. These reveal several consistencies that can be
viewed as empirical regularities. These empirical regularities form
the foundation for our contemporary understanding of what gives
rise to FDI in processed foods, and shed considerable light on why
Table 13—-Sales by U.S.-owned food marketing affiliates
abroad by industry, selected years, 1982-93
Industry 1982 1987 1992 1993
Share of
total
Million dollars Percent
Food manufacturing 39,023 50,067 89,159 95,782 72.3
Food wholesaling 6,172 9,206 14,388 15,783 11.9
Retail foodstores
}
11,930 9.0
8,691 9,674 21,169
Eating & drinking places 9,007 6.8
Total, all food marketing 53,886 68,947 124,716 132,502 100.0
Source: Dept. of Commerce, BEA.
70 Globalization of the Processed Foods Market
FDI is the preferred method of market globalization for these
products.
The balance between portfolio and direct foreign investments
changed markedly during the past century, with the United States
playing a major role. An examination of the change suggests the
underlying impetus of FDI and why FDI is particularly important
for processed foods.
Until the First World War, nearly all international investment was
portfolio; the United Kingdom supplied about half of the world’s
total, followed by France and Germany. Younger, rapidly expand-
ing economies, primarily the United States, Canada, Australia, and
Latin America, were the primary recipients. Yet, even before WWI,
outbound American investment was getting underway.
From the outset, U.S. investment was different. As described by
Södersten and Reed (1994, p. 468), “American investors seem to
have been of a more dynamic type, not content to reap a fairly
small interest-rate differential. Even before the First World War a
dominant share of U.S. capital exports consisted of direct
investments.” In short, from the beginning, Americans investing
abroad have shown a propensity to transfer know-how (or
intellectual capital), more so than financial capital.
Between the world wars, international investment declined. But, the
United States began to emerge as a major source, primarily of direct
Table 14—Sales by foreign-owned food marketing affiliates in
the United States by industry, selected years,1982-93
Sector 1982 1987 1992 1993
Share
of total
Million dollars Percent
Food manufacturing 14,847 22,862 46,799 45,765 36.8
Food wholesaling 7,039 13,953 18,984 21,734 17.5
Retail foodstores
}
24,312 48,159 51,537 41.5
18,758
Eating & drinking places 498 4,904 5,236 4.2
Total, all food marketing 40,644 61,625 118,846 124,272 100.0
Source: U.S. Department of Commerce, BEA.
Globalization of the Processed Foods Market 71
investments as American industrialists began to establish foreign
operations in the image of their pre-Depression home-market
successes. Following WWII, the United States became the primary
supplier of international finance, first in the form of official loans
and gifts, and second in the form of FDI as American firms made
major contributions to postwar industrial rebuilding. By 1960, the
United States was supplying about two-thirds of all international
investment. By the 1980’s, observing U.S. industrial success
throughout much of the free world, other countries—principally
those of the European Union and Japan—became more aggressive
in exporting their management technology through FDI, much of
which landed in the United States. By the 1990’s, with the fall of
Soviet communism and the liberalization of third-world economies,
FDI became the main instrument for global industrialization. As the
20th century ends, the nationality of multinational firms—the
organizational result of FDI—has blurred in many cases to the
point of being indistinguishable.
Profits that firms can earn in their international operations appear to
be a motivation for FDI. This is evident in a sample of 144
food-processing firms worldwide used by Henderson, Vörös, and
Hirschberg (1996) to compare profitability based on sales from
foreign affiliates. In that sample, sales from foreign affiliates
exceeded exports from home countries by a ratio of 5 to 1. For
firms with foreign sales equal to or exceeding 35 percent of total
sales, net income as a percentage of assets was higher than for
firms with foreign sales below 35 percent of total sales. In short,
FDI occurs because a firm has some advantage it can exploit in
foreign markets. In the food and agricultural sector, such advantage
is more often a feature of processed foods than of basic
commodities. The following analysis offers insight into why.
Determinants of FDI
Evolving developments in the theories of international economics
accommodate conditions of imperfect competition such as those
observed in processed food markets (product differentiation, for
example, and economies of scope, scale, and size). Theoretical
constructs help identify the motivations for firms to engage FDI.
72 Globalization of the Processed Foods Market
These developments have been joined by an expanding body of
empirical studies that reveal product, firm, industry, and/or country
idiosyncracies that are associated with observed configurations of
FDI. The major constructs and empirical findings reveal general
patterns that characterize the dominant forces behind FDI in
processed foods.
Theoretical Considerations
A number of theoretical developments contribute to our
understanding of the determinants of FDI. Early on, Vernon (1966),
in his work on the product-cycle hypothesis, advanced an
explanation for FDI based on product differentiation. The essence of
this hypothesis is, if a firm expands to a foreign market in early
stages of a product life cycle, it typically does so through exports.
But, as growth in production and sales expands, a firm finds it must
nurture increasingly-close working relationships with both suppliers
and distributors. The greater the product uniqueness
(differentiation), the more important these special relationships.
Firms often find that they can best manage such special
relationships in foreign markets with on-site facilities, thus they
engage in foreign production (outbound FDI). Subsequently, the
importance of product differentiation (and other unique, firm-
specific attributes) has become a central theme in theories of FDI.
Buckley and Casson (1976) extended Vernon’s construct by
emphasizing imperfections in the foreign upstream or downstream
markets. Where needed inputs or merchandising and distribution
methods (marketing services) are highly specialized, markets for
those supplies or marketing services may be difficult to organize.
This is particularly so in the presence of uncertainty over demand,
high investment costs, and the need for rapid exchange of
information, close coordination, and joint planning. Faced with
imperfect external markets, firms elect to internalize the supply of
these critical inputs or distribution and merchandising services, thus
entering into outbound FDI in vertically-adjacent sectors.
Caves (1982) posited that many of the attributes associated with a
firm’s unique product(s) are intangible (examples include, technical
Globalization of the Processed Foods Market 73
production or merchandising knowledge, brand names, trademarks,
team-specific management skills, special relationships with
suppliers and customers). Because they are intangible, it is difficult
for a firm in one country to sell them to a firm in another country.
Thus, the firm has an incentive to develop overseas operations to
capture the full earnings potential of these unique attributes in
foreign markets.
Synthesizing several conceptual strands, Dunning (1977) advanced
the OLI paradigm as an eclectic theory of FDI. OLI represents
ownership advantages, locational considerations, and
internalization gains. Ownership advantages are those firm-specific
assets, such as the intangible assets discussed by Caves, that give a
firm a competitive edge over both domestic and foreign rivals. Such
intangible assets are also considered to be a firm’s intellectual
property or intellectual capital. Locational considerations
encompass such things as transportation costs and import
restrictions that give a firm a cost advantage for operating in a
foreign market. Internalization gains concern factors that make it
more profitable to carry out transactions within a firm than to rely
on external markets (as in the Buckley and Casson construct,
above). Dunning’s theory holds that all three conditions are
necessary; together they are sufficient motivation for a firm to
invest in direct foreign production.
Ethier (1994) introduced refinements to the OLI paradigm that
reveal an expectation for the major flows of FDI between countries
with relatively similar economic conditions. In the presence of
ownership advantages (firm-specific assets) that can be emulated
over time, and a high ratio of international transportation to
host-country labor costs (locational consideration favoring
host-country production), a firm is motivated toward FDI in order
to internalize earnings accruing to ownership advantages, thereby
reducing the chance of copying by a host-country firm. However,
if, for example, host-country wages and salaries are sharply lower
than in the firm’s home country, a copycat host-country firm can
pose a credible threat to sustained earnings fromdirect entry by the
external firm. Knowing this, the external firmwill engage FDI in
the host country only if it believes that the wage difference is not
74 Globalization of the Processed Foods Market
great enough to offset copying costs (industrial intelligence) by a
host-country firm. Therefore, FDI partner countries are expected to
have different but not greatly different economic conditions (such as
labor costs).
Empirical Studies
Empirical studies of the determinants of FDI have been hampered
by two factors, a relative scarcity of detailed data on FDI, and
complexities in measuring a number of the variables that are
hypothesized to affect FDI in the various theoretical constructs
(such as firm-specific advantage). Nonetheless, enough studies have
been reported—some specific to processed foods—that stylized
facts, or empirical regularities, can be raised.
In an early study of the shares of affiliates of U.S. firms in the
outputs of Canadian and British industries, Caves (1974) found a
statistically significant positive relationship between these shares
and a set of factors taken to reflect firm-specific (ownership)
advantages (such as experience with multi-plant management,
expenditures on research and development (R&D), and advertising
intensity). Wolf (1977), in a study of the share of production by U.S.
firms accounted for by foreign operations, found this to be
positively associated with a firm’s technological expertise (as
measured by the proportion of engineers and scientists in a firm’s
workforce) and size of firm.
A number of other studies have documented similar findings.
Grubaugh (1987) reported results from an study of 300 U.S.-based
multinational firms that tie FDI directly to relative levels of firm
expenditures on both R&D and advertising. Handy and MacDonald
(1989), using cross-sectional data on 32 U.S. manufacturing
industries, also found positive impacts of R&D and home
advertising on FDI, as did Yu (1990) in another study. Dunning
(1981) cited evidence of a positive relationship between the value of
a firm’s intangible assets and FDI. Ray (1991), in a study of 32
manufacturing industries in five countries, found FDI positively
related to specialized human capital, managerial intensity, and share
of home market. In a study of 27 industries in 30 countries, Baldwin
Globalization of the Processed Foods Market 75
(1979) found that product differentiation, managerial intensity, and
home market share affect FDI.
Specific to processed foods, Connor (1983), using data on U.S.
food-manufacturing industries, documented positive impacts of
firm size, advertising, R&D, and home market share on FDI. Using
pooled, cross-section, time series data for 628 food manufacturers
in 16 countries, Henderson, Vörös, and Hirschberg (1996) found
intangible assets, product differentiation, firm size, and home
market share positively associated with FDI. Overend and Connor
(1994) examined factors influencing FDI patterns for a
cross-sectional sample of 33 U.S. food-manufacturing firms that
also do business in the UK. Their findings show a positive
relationship between a firm’s investment in foreign marketing
expertise and FDI. Ning and Reed (1995) examined factors
explaining the location of U.S. FDI for a sample of six developed
countries from 1983 to 1989. They found cultural linkage and
trading bloc memberships are major incentives for FDI abroad,
followed by a strong home currency, fast foreign market growth,
and low foreign income tax rates.
Regarding national characteristics, Veugelers (1991), in a
cross-sectional study of FDI patterns in OECD countries, found
positive effects on FDI of common borders and similarities in
culture, language, stage of economic development, labor costs, and
trade policies between host and home countries. For processed
foods, Handy and Henderson (1994) have shown that the same set
of economically advanced countries (the U.S., Canada, Japan, and
the countries of the European Union) account for nearly all of the
world’s FDI, both inbound and outbound.
Principal variables related to FDI are summarized in table 15.
When viewed in the context of the food and agriculture sector as a
whole, reasons for the relative importance of FDI to global
commerce in processed foods become clear. Processed foods are
highly differentiated products, the result of considerable effort by
food manufacturers, distributors, and food service firms to develop
a steady flow of new products and product innovations, and to
intensely merchandise these products through advertising and other
76 Globalization of the Processed Foods Market
means of promotion. Global commerce tends to occur primarily
among countries that are remarkably similar in overall economic
character, yet whose firms have sufficient differences in intellectual
property to differentiate their operations and products from those of
rival firms in both home and international markets. This stands in
sharp contrast to global commerce in agricultural commodities,
where the dominant pattern is international trade in undifferentiated
goods between fairly dissimilar countries.
Foreign Direct Investment
in Food Manufacturing
Investment Abroad by U.S. Food Manufacturers
Most large food manufacturers rely much more heavily on foreign
direct investment than on exports from their home country to access
foreign markets. In 1993, the latest year in which industry-level data
are available fromthe Bureau of Economics Analysis, 64 U.S.
multinational firms held at least 10 percent equity in 762 food
manufacturing affiliates in foreign countries. Figure 4 shows the
relative value of shipments from U.S.-owned food-manufacturing
affiliates abroad compared with the value of total processed food
exports from the United States. Foreign affiliate sales have long
exceeded the value of U.S. exports, but since 1985, the gap has
Table 15—Factors positively influencing sales by foreign
affiliates
Factor As measured by
Product and process innovation Expenditures on research and development
Product differentiation Advertising expenditures
Intellectual property Value of intangible assets
Managerial skill and intensity
Value added as a share of value of shipments;
employee educational level
Foreign Marketing expertise Foreign sales as a share of total sales
Home market success Market share
Economies of size, scale or scope Size of firm
Locational advantage
Transportation costs as a share of value of
sales; ratio of transportation to host-country
labor costs
Trade barriers Tariffs
Size of host market Growth in real GNP per capita
Globalization of the Processed Foods Market 77
widened. In 1982, sales from U.S. affiliates in foreign countries at
$39 billion were 3.5 times larger than U.S. exports of $11 billion.
Neither FDI nor exports grew in the early 1980’s. Since then, both
have recorded uninterrupted growth. From 1982 to 1993, sales from
U.S. affiliates abroad grew 145 percent to $95.8 billion, while U.S.
processed food exports increased 113 percent to $23.4 billion. By
1994, sales from foreign affiliates are estimated to have reached
$103 billion—4 times larger than U.S. exports of $25.8 billion.
Employment in U.S.-owned affiliates increased at a slower rate
than sales. The number of employees at U.S. affiliates in foreign
countries grew from 447,700 in 1982 to 550,500 in 1993, an
increase of 23 percent. Most U.S. affiliates abroad are
majority-owned by their U.S. parents. Of the total sales of U.S.
affiliates abroad, 83 percent ($79.9 billion) came from
majority-owned affiliates.
Source: Economic Research Service, USDA.
0
20
40
60
80
100
120
87 94 93 92 91 90 89 88
Sales from
foreign affiliates
of U.S. firms
U.S. exports
1982 83 84 85 86
U.S. exports and foreign affiliate sales of processed food
Figure 4
Billion dollars
78 Globalization of the Processed Foods Market
Location of Affiliates
U.S. foreign direct investment is concentrated in developed
countries (table 16). In 1993, European countries accounted for
$54.4 billion (57 percent) of total U.S. affiliate sales abroad. Within
Europe, the United Kingdom is by far the largest recipient of U.S.
FDI followed by Germany, Netherlands, and France. Adding
Canada and Japan to the European countries brings the share of U.S.
affiliate sales to about 73 percent. U.S. affiliate sales grew much
faster in Europe (187 percent) than in either Canada (107 percent) or
Japan (105 percent) during 1982-93. Sales from U.S. affiliates
declined in both South and Central America from 1982 to 1987, but
have grown rapidly since. From 1987 to 1993, sales from U.S.
affiliates in South America doubled and sales from U.S. affiliates in
Mexico increased 282 percent.
Further evidence of growing U.S.-owned food-processing
operations in developing countries is available from a data base of
over 75 large U.S. food-processing firms maintained by USDA’s
Table 16—Sales by U.S.-owned food processing affiliates
abroad, 1982-93
Country/
region
1982 1987 1992 1993
1993
share
Change
1982
-93
Million dollars Percent
Total, all 39,023 50,067 89,159 95,782 100 145.4
European countries 18,974 29,044 53,752 54,371 57 186.6
United Kingdom 5,696 7,124 12,214 11,579 12 103.3
Canada 5,258 5,522 NA
1
10,891 11 107.1
Asia and Pacific 5,432 8,559 13,712 14,411 15 165.3
Japan 2,363 4,442 4,055 4,844 5 105.0
South America 5,133 3,911 6,794 8,033 8 56.5
Argentina 630 758 2,040 NA NA NA
Brazil 2,535 1,869 2,874 3,431 4 35.3
Central America 2,951 2,176 5,163 NA NA NA
Mexico 2,556 1,596 4,460 6,093 6 138.4
NA= Not available.
1
Withheld by BEA to avoid disclosure.
Source
ept. of Commerce, BEA.
Globalization of the Processed Foods Market 79
Economic Research Service. In 1993, a subsample of 39 of these
firms operated over 860 food-processing plants in foreign
countries. Roughly one-third (about 295) of these plants were in
developing countries, with over 200 plants in Latin America. U.S.
firms are also increasing investments in Eastern and Central
Europe, the former Soviet Union, and China. According to data
compiled by ERS from media and company reports, at least 35 U.S.
food manufacturers had invested in over 70 food-processing
affiliates or joint ventures in these countries as of 1995. In China at
least 29 U.S. companies had invested in food-processing operations.
Specialized engineering, packaging, and food ingredient firms
facilitate foreign direct investment by making technology readily
available and mobile across national boundaries. With the help of
these specialty firms, food processors can pick and choose the best
technology for specific functions from throughout the world and
assemble it in a single factory whereever it is located—whether in
Zimbabwe, Malaysia, India, or Venezuela.
U.S. firms are continually reassessing and adjusting their foreign
direct investment position by buying or building new plants
overseas, consolidating existing plants, or divesting entire lines of
business. From the ERS firm-level data base, observations are
available on a constant sample of 32 U.S. multinational food
processors for the years 1988-93. The total number of
food-processing plants operated by these 32 MNC’s increased from
1,955 in 1988 to 2,078 in 1993. All the increase came from foreign
plants. The number of U.S. plants declined from 1,312 to 1,265 as
these firms consolidated U.S. production into larger plants. At the
same time, the number of majority-owned plants operated by these
firms in other countries increased from 643 (33 percent of the total
plants) to 813 (39 percent of the total). Nineteen of these 32 firms
increased their number of foreign plants, 8 firms had no change,
while 5 firms decreased the number of plants they operate abroad.
During this time, 7 firms withdrew entirely from one or more
foreign regions (such as the Middle East), while 8 firms entered
new foreign regions for the first time. The number of firms that had
at least 50 percent of their food-processing plants located in foreign
countries increased from 8 to 14. CPC International, manufacturer
80 Globalization of the Processed Foods Market
of Knorr, Hellmann’s, and Mazola products, had 95 of its 123 plants
(77 percent) located outside the United States in 1993. Philip Morris
(Kraft General Foods) had the largest absolute number of foreign
plants with 119 of its 251 plants located in foreign countries.
Destination of Affiliate Sales
In general, U.S. food-processing MNC’s do not establish affiliates
abroad for the primary purpose of exporting product to the U.S.
market (fig. 5). Of total U.S. affiliate sales abroad in 1993, 79
percent remained in the host country (local sales) while 21 percent
came from sales to other countries (BEA 1995A). But only 2
percent ($1,885 million) of affiliate sales were to the United States.
By comparison, U.S. non-food manufacturing affiliates abroad
exported an average of 14 percent of their total shipments back to
the United States.
Figure 5
Exported back
to the United States
(2%)
Exported to
other countries
(19%)
Local sales in
the host country
(79%)
Source: Economic Research Service, USDA.
Total sales by U.S. affiliates abroad $95.8 billion
Sales by U.S. owned foreign affiliates by destination, 1993
Globalization of the Processed Foods Market 81
Proximity of foreign affiliates to the United States plays a large role
in explaining their export behavior. Even though Canada accounts
for only 11 percent of U.S. affiliate sales worldwide, it accounts for
40 percent of affiliate exports to the United States. Likewise, Latin
America accounts for 16 percent of U.S. affiliate sales, but a much
higher 27 percent of affiliate exports to the United States.
Conversely U.S. affiliates in Europe have 60 percent of all affiliate
sales, but their share of affiliate exports to the United States is only
25 percent.
Intra-firm trade between U.S. parents and their affiliates is
substantial. While U.S. affiliates abroad export only 2 percent of
their sales to the United States, most of these exports (71 percent)
are shipped to their U.S. parents, with the remaining 29 percent
shipped to other firms in the United States. Exports from the United
States to its food-processing affiliates abroad were also relatively
small ($2,582 million) in 1993, but were still considerably larger
than imports from those affiliates. Again, U.S. parents accounted
for most (79 percent) U.S. exports to their affiliates.
Operations of Foreign Food-Manufacturing Firms in the
United States
A rapid increase of foreign direct investment into U.S.
food-processing industries was a phenomenon of the late 1980’s.
Foreign direct investment into the industry doubled between 1987
and 1992, and left 12 percent of the industry foreign-owned. The
United States received large capital inflows in 1989, especially
Table 17—Sales by foreign-owned food processing affiliates in
the United States, 1982-93
Country
of origin
1982 1987 1992 1993
Share,
1993
Change,
1982-93
Million dollars Percent
Total 14,847 22,862 46,799 45,765 100 208
Europe 10,527 17,967 32,994 31,159 68 196
Canada 2,218 3,174 5,113 5,208 11 135
Japan 564 612 5,131 5,737 13 917
Other 1,538 1,109 3,561 3,661 8 138
Source: Dept. of Commerce, BEA.
82 Globalization of the Processed Foods Market
when the UK’s Grand Metropolitan purchased Pillsbury. Japan’s
appearance in the U.S. food industry in the late 1980’s was also a
break from the past. While there were no megadeals in the U.S. food
industry in the early 1990’s, 1993 activities included UK’s
Cadbury-Schweppes’ acquisition of A & W Beverages and
Unilever’s (Netherlands) acquisition of Kraft Foods Ice Cream
Industries and Klondike. In 1994, Sandoz, a Swiss pharmaceutical
company, acquired Gerber Foods.
These foreign acquisitions made their impression on the U.S. food
industries through sales, employment, and foreign trade. Sales of
U.S. affiliates of foreign firms were $46.8 billion in 1992, triple the
level of 1982 ($14.8 billion). Sales declined slightly in 1993 to
$45.8 billion (table 17). Nearly all sales fromthese foreign-owned
plants remained in the United States, indicating that they were
targeting the U.S. market; only $2.2 billion (4 percent) of those sales
were exports (BEA 1995B). Moreover, only a third of the exports
from these plants were shipped to the foreign parent company. U.S.
affiliates of foreign companies imported more processed food
products ($3.2 billion) than they exported. And nearly half of the
imports to these affiliates came from the foreign parent group.
Foreign companies generally found it less expensive to locate
production of many high-value products closer to the U.S. market
than to the foreign source of the raw product. Foreign direct
investment in the United States was also one way to circumvent
some U.S. trade barriers.
European companies dominate as a source of inbound investment
and sales (table 17). Sales from U.S. affiliates of European and
Canadian companies grew during the 1980’s and early 1990’s, but
sales from U.S. affiliates of Japanese companies grew faster. Japan
raised its presence to 13 percent of the sales fromforeign firms in
the U.S. food industries, compared with Europe’s 68 percent.
Canada’s share declined over the decade to 11 percent in 1993.
There is some variation among countries in their choice of products.
Japanese companies have purchased or built plants that mostly
produce their ethnic foods such as noodles, surimi, soy sauce, sake
(a rice-based alcoholic beverage). They have also ventured into
Globalization of the Processed Foods Market 83
Mexican-style frozen dinners and wine. Food and feed additives are
also important Japanese investments, along with cutting-edge
biotechnology as it relates to food. Japanese investors were more
apt to start up new businesses than their European and Canadian
counterparts.
European companies are broader based. Wine, cheese, chocolate
products, and bottling plants are some of the enterprises of their
U.S. affiliates. Grain products, frozen and canned vegetables are
also included. Some chemical companies have also become
important producers of food and feed additives. Recent investments
of European conglomerates have cut across product lines.
Canadian investments are mostly in the U.S. distilled spirits
industry. In recent years they have expanded into wines, fruit
juices, and frozen foods. More recently, some Canadian companies,
acting as conglomerates, expanded their investments into many
nonfood areas, principally chemicals and entertainment.
There is a variation in the market share of the U.S. affiliates in
relation to their industries. Overall, the market share of foreign-
owned companies in U.S. food-processing industries is about 12
percent (BEA, 1995B). Foreign-owned companies have roughly
one third of the U.S. market share in cookies and crackers and
edible fats and oils. In comparison, foreign-owned distilled liquor
plants have one-half of the industry. Foreign-owned dairy products
and canned specialties comprise 10-15 percent of those industries.
In addition to geographic and market concentration, a number of
general observations can be drawn from the study of the
Department of Commerce data on FDI in U.S. food processing.
Most FDI is horizontal rather than vertical. Food processors invest
primarily in other food-processing facilities rather than in upstream
or downstream operations. Second, most FDI outlays are to acquire
existing facilities rather than to invest in newly constructed
operations.
Inbound foreign direct investment has brought jobs to the U.S. food
industries. U.S. food-processing affiliates of foreign companies
84 Globalization of the Processed Foods Market
employed 200,000 persons, who were paid nearly $5.5 billion, for
an average salary of about $27,500 in 1993. This compares with the
1982 employment of 126,000 persons who earned $2.5 billion
(nominal dollars), for an average salary of about $20,000. Employ-
ment in foreign-owned companies is nearly 12 percent of the total
employment of the sector, compared with 7.7 percent in 1982.
These trends show the importance of sales of affiliates of other
countries since 1980. Foreign direct investment will likely continue
to grow, and companies will be morely likely to expand their
markets through their foreign affiliates rather than through exports
and imports. World trade in food products has increased since 1980,
but sales of foreign affiliates has increased faster.
Foreign Direct Investment in Food Distribution
The food distribution industries include food wholesalers and
brokers, and food retailers. Both inbound and outbound investment
levels have grown steadily over the past decade.
Food Wholesaling
Sales from foreign affiliates of U.S. grocery wholesalers (outbound
FDI) increased to $15.8 billion in 1993, a 9.7-percent increase over
1992 and a 156-percent increase from 1982 (table 13). Sales from
U.S. grocery wholesale affiliates owned by foreign firms (inbound
FDI) increased to $21.7 billion in 1993, growing 14.5 percent from
1982 (table 14).
Many food wholesaling firms have expanded via joint ventures in
foreign markets. Sam’s Warehouse Club is the leading wholesale
club in the United States. Facing saturated markets in the United
States and unfulfilled demands globally, Wal-Mart, Sam’s parent
firm, has been particularly aggressive in this regard with expansion
plans for Asia and South America. As part of its first move outside
of the Western Hemisphere, Wal-Mart set up a Hong Kong joint
venture in 1994 as a foundation for further expansion into the Far
East. The joint venture is part of a plan to open Value Clubs as a
Globalization of the Processed Foods Market 85
stepping stone into China. Value Club is a joint venture with Ek
Chor Distribution System Co. Ltd., a Hong Kong subsidiary of
Bangkok-based C.P. Pokphand Co. Value Clubs are smaller
versions of the Sam’s Club membership warehouses. Plans called
for construction of two units in China in 1995. In addition to
expansion plans in Asia, plans called for an additional 10 to 12
warehouse clubs and 10 to 12 supercenters in Mexico. Wal-Mart
also plans to open Sam’s Clubs in Brazil, through a joint venture
with Brazil’s major retailer Lojas Americana, and Sam’s Clubs is in
the first phase of its expansion program in Argentina. Another
leading wholesale club, Price Company, went international for the
first time in 1993, opening units in the United Kingdom and
Mexico. Price/Costco, formed by a merger between the Price
Company and Costco Wholesale Club, opened 7 warehouses in
Canada during the first half of fiscal 1994. In early 1995,
Price/Costco Inc. agreed to acquire Price Enterprises’ stake in the
companies’ Mexican joint venture. Mexico Clubs operates 12 Price
Club membership warehouse stores in Mexico.
The king of foodservice distributors, Sysco Corp., has a company in
British Columbia called Sysco/Konings Wholesale. Another
leading foodservice distributor, Rykoff-Sexton, operates a Mexican
distribution center.
Food wholesaling industry-leader Fleming formed a joint venture
with Davids Holdings, the leading wholesaler in Australia. The
joint venture, Davids Investments Asia Plc. Limited, was formed to
establish full-line distribution centers in Asia. Fleming expects the
joint venture also to help with its exporting and importing activities.
Fleming has foreign affiliates in the Caribbean, Japan, Mexico,
Korea, and the former Soviet Union.
Food Retailing
Inbound Investment
Sales by U.S. food-retailing affiliates of foreign firms reached
$51.5 billion in 1993, according to the most currently available data
(table 14). Food-retailing affiliate sales amounted to 13.4 percent of
86 Globalization of the Processed Foods Market
total U.S. food store sales in 1993. The 5 largest U.S. food-retailing
affiliates of foreign firms were among the 30 leading food retailers
nationwide, generating sales of $39.5 billion in 1994 (table 18).
Fourth-ranked nationally Albertson’s (Boise, ID) was the largest
U.S. affiliate, with sales of $11.9 billion in 1994. U.S. affiliates have
grown both by building new stores and by acquiring other food
retailers. There are successful examples of both strategies among the
largest retailers. Both Albertson’s and Food Lion (eighth-ranked
nationally) have relied almost exclusively on internal growth
strategies. Ahold, USA, the U.S. subsidiary of Royal Ahold (The
Netherlands), and The Atlantic and Pacific Tea Company (A&P),
owned by Tenglemann (Germany), have grown by acquiring small
local and regional supermarket chains.
Most Americans could not identify these food retailers as foreign-
owned firms, for a variety of reasons. Foreign investment and
ownership can take a variety of forms, and most foreign firms
imitate marketing and merchandising practices of their domestic
counterparts. Store banners (names) are often maintained after
foreign acquisition. Products and services offered are little different
from those carried by domestic retail counterparts. Foreign parent
firms have thus far shown little interest in exporting retail products
to their U.S. operations. Although foreign investors and retailers
have introduced new concepts in the United States, their success has
varied.
Table 18— Sales of leading U.S. food retailing affiliates of
foreign firms, 1994
U.S. affiliate Foreign investor (country)
National
ranking
1994 sales
$Billion
Albertson’s Theo Albrecht (Germany) 4 11.9
Atlantic and Pacific Tea
Company
1
Tengelmann, AG
(Germany)
7 10.3
Food Lion
Delhaize, Le Lion
(Belgium)
8 7.9
Ahold, USA
2
Ahold (The Netherlands) 9 7.4
Shaw’s Supermarkets Sainsbury PLC (U. K.) 29 2.0
1
A&P, Waldbaums, Food Emporium, Super Fresh, Farmer Jack, Kohls.
2
Edwards, Mayfair, Finast, Giant Food Stores (Carlisle, PA), Martins, Tops, BI-LO.
Globalization of the Processed Foods Market 87
In the 1980’s, French retailers built very large stores in excess of
100,000 sq. ft. of selling area called hypermarkets, a European
retail concept. Early successes were not sustained, and in the
1990’s, a number of foreign-owned hypermarket firms such as
Carrefour and Leeds failed to generate breakeven sales volume,
resulting in their exit from the industry.
Not all European retailers have failed in efforts to transplant new
concepts to the United States, however. When Kings Supermarkets
was acquired by a British firm (Marks and Spencer), they
introduced high-quality, upscale private label food products (with
emphasis on store-prepared product lines) more typical of their
upscale European foodstores. Although the concept has been
successful, few, if any, domestic retailers have directly applied the
format elsewhere.
Outbound Investment
Foreign sales by U.S. food-retailing affiliates reached $11.9 billion
in 1993 (table 13). U.S. affiliates abroad generated an income loss
of $433.0 million in that year and employed 108,800 persons.
Safeway Inc., owns and operates 235 supermarkets in Canada,
accounting for sales of US $3.4 billion in 1994. In addition to
majority ownership, food retailers have used joint ventures,
franchising, and licensing as means to enter foreign markets. Circle
K, a convenience store operator, has joint venture and franchising
agreements in 19 countries, including Canada and the Pacific Rim
countries. Although technically not considered a foreign investor,
IGA, Inc. (Independent Grocers Alliance), a cooperative
supermarket operator, has licensed IGA foodstores in a number of
countries in recent years. IGA provides training, product
procurement, branding, and merchandising support for overseas
retailers. There were 385 foreign supermarkets located in 19
countries participating in the IGA program in 1994.
As the aggregate figures indicate, inbound and outbound foreign
investment by food retailers is disproportionate. The greater
involvement by overseas investors in U.S. food retailing is due to a
number of factors: (a) the U.S. market is quite large relative to
88 Globalization of the Processed Foods Market
many foreign markets, (b) the U.S. food distribution infrastructure is
probably the most highly developed relative to any other country,
(c) there are fewer restrictions to overseas investors than in many
other countries, (d) regulations related to the building of new stores
and support facilities are less stringent in the United States than in
many European countries, (e) overall growth prospects are more
favorable than in other industrialized economies, and (f) the political
and business environment is stable, contributing to lower investment
risk. The competitive environment of U.S. markets may not be fully
appreciated by overseas investors, however, as evidenced by the
failure of many hypermarket format stores opened during the 1980’s.
Recent overseas investment by U.S. retailers has tended toward
developing economies, especially those in the Pacific Rim region.
U.S. investment abroad is much smaller than that of many foreign
investors in U.S. food retailing. Although reasons for this pattern are
not yet fully understood, it is likely that investment risk in
developing countries is viewed as a barrier by U.S. retailers despite
opportunities for growth. The persistence of these conditions facing
U.S. food retailers overseas will likely result in inbound investment
continuing to exceed U.S. investment abroad.
Foreign Direct Investment in the
Food Service Industry
U.S. food service companies are moving into international markets
as they look to foreign countries for expansion. U.S. chains have
already penetrated foreign markets. Japan, Canada, Australia, and
Mexico are popular locations for many fast food chains. More
companies are scheduled to open additional units there and in other
countries around the world in the next several years.
Foreign firms are also gaining ground in U.S. markets by purchasing
U.S. firms and establishing affiliates here. Burger King and
Hardee’s, once U.S. owned, are now foreign-owned chains.
Globalization of the Processed Foods Market 89
Table 19—Top U.S. food service firms in foreign markets by
number and sales
Chain
1
Total
systemwide
units, 1994
Foreign units,
1994
Total
systemwide
sales, 1994
Foreign sales,
1994
- - - Number - - - Percent - - - $Million - - - Percent
McDonald’s 15,205 5,461 36 25,986 11,046 43
KFC 9,407 4,258 45 7,100 3,600 51
Pizza Hut 11,546 2,928 25 6,900 1,900 28
Subway 9,893 944 10 2,500 265* 11
Domino’s Pizza 5,079 840 17 2,500 415 17
Dairy Queen 5,542 628 11 5,542 300* 09
Wendy’s 4,411 413 9 4,277 390* 09
Church’s 1,171 233 20 590 125 21
Arby’s 2,789 168 6 1,770 74 04
Taco Bell 5,615 162 3 4,290 130 03
Little Caesar 4,855 155 3 2,000 70* 04
TCBY Yogurt 2,801 141 5 388 22* 06
Sizzler 600 119 20 858 230 27
A&W 671 104 15 236 68 29
Big Boy 940 90 10 1,130 100* 09
Denny’s 1,548 58 4 1,779 63 04
Popeye’s 772 48 6 584 35 06
Sbarro 729 41 6 384 22 06
Ponderosa 680 40 6 690 40* 06
International
House of
Pancakes
657 37 6 632 32* 05
TGI Fridays 314 37 12 897 114 13
Bonanza 264 30 11 267 32 12
Round Table
Pizza
576 29 5 351 15* 04
Carl’s Jr. 649 20 3 587 30* 05
Long John
Silver’s
1,456 16 1 938 6 01
Jack In The Box 1,224 16 1 1,050 23* 02
Whataburger 517 9 2 383 5* 01
Perkins 432 8 2 626 12 02
Showbiz Chuck
E. Cheese
332 8 2 370 7 02
Total 90,675 17,038 19 72,333 19,171 27
1
Includes U.S. company-owned and franchisee-owned establishments.
*Technomic Estimate.
Source:Restaurant Business, June 1994.
90 Globalization of the Processed Foods Market
U.S. Investment Abroad
In 1993, the latest year for which industry-wide data are available,
there were 10 U.S. food service firms with 78 foreign affiliates
(BEA 1995A). These affiliates had sales of $9.0 billion, 7 percent
above 1992 sales (table 13).
The figures given above came from industry-wide BEA data.
However, trade data were used to compile information at the firm
and chain level. As U.S. markets become saturated and U.S.
companies look for alternative markets, more fast food outlets are
showing up in other countries. Twenty-nine of the top 50 restaurant
chains operated a total of 17,038 units in other countries in 1994
(table 19). Seven of those chains accounted for 15,472 or 91 percent
of those units operating outside the United States (table 20). At the
beginning of the 1970’s, only 900 total units operated outside the
United States.
Asian/Pacific countries accounted for the largest share of these
units, 37 percent. Twenty-nine percent operated in European,
African, or Middle Eastern countries. Canada accounted for 24
percent of the units and Latin American countries, 10 percent.
Hamburger, chicken, and pizza chains dominate the international
market.
Table 20—Major U.S. food service chains operating outside of
the United States, 1994
Chain Asia/Pacific
Europe,
Africa,
Middle East
Latin
America
Canada Total
Number of establishments
McDonald’s 2111 2197 436 717 5461
KFC 2172 817 396 873 4258
Pizza Hut 910 1148 415 455 2928
Subway 115 31 62 736 944
Domino’s 232 160 203 185 780
Dairy Queen 125 36 16 451 628
Wendy’s 143 41 51 178 413
Total 5808 4430 1579 3595 15412
Source: Company annual reports.
Globalization of the Processed Foods Market 91
McDonald’s, KFC, Pizza Hut, Subway, Domino’s, Dairy Queen,
and Wendy’s are the top 7 U.S. restaurant chains accounting for the
largest number of foreign units (table 20). McDonald’s, the largest
single food service organization in the world, had 15,205 units
worldwide in 1994 and sales amounting to nearly $26 billion.
McDonald’s operates in 79 countries and accounts for the largest
number of units operating outside the United States, 5,461.
Thirty-six percent of McDonald’s total units operated outside the
United States compared with 34 percent in 1993. Most McDonald’s
units are franchised. McDonald’s also leads in foreign sales,
accounting for $11 billion in 1994. Major markets for McDonald’s
units include Japan, Canada, Germany, England, Australia, and
France. Foreign sales account for about 43 percent of McDonald’s
systemwide sales.
In 1994, McDonald’s opened its first restaurants in Bulgaria,
Bahrain, Kuwait, Latvia, Oman, United Arab Emirates, New
Caledonia, Romania, Egypt, Trinidad, and Saudi Arabia.
McDonald’s expects to open 900 to 1,200 restaurants around the
world in the next several years with two-thirds of those being
outside the United States. England, France, and Germany will be
popular locations.
The McDonald’s chain not only operates traditional restaurant units
but satellite stores as well—smaller units such as kiosks or mobile
carts—which serve simpler menus. McDonald’s expected to open
about 1,000 satellites around the world in 1995. They believe the
key to aggressive satellite programs is alliances with retailers and
oil companies that operate convenience stores. In 1994,
McDonald’s satellite units operated in 377 Wal Marts throughout
the United States, Canada, Mexico, and Puerto Rico. The United
States, Finland, Denmark, and Italy now have McDonald’s in
service stations.
KFC, a division of PepsiCo, Inc., has the second largest number of
units outside the United States, 4,258, which operate in 73
countries. Sales outside of the United States, $3.6 billion, accounted
for 51 percent of their systemwide sales in 1994.
92 Globalization of the Processed Foods Market
Forty-five percent of all KFC units are located overseas. One fourth
of KFC’s foreign units are in Japan, 11 percent in Australia, and 8
percent in the UK. Of the six largest restaurant chains, only KFC
and Pizza Hut operate units in Africa.
Pizza Hut, also a division of PepsiCo, Inc., has 11,546 units
operating in 82 countries. Twenty-five percent or 2,928 restaurant
units are located outside the United States. Pizza Hut chains are
located primarily in Australia, France, Spain, the United Kingdom,
and Trinidad.
Subway, a subsidiary of Doctor’s Associates, Inc., operated 9,893
units in 21 countries in 1994. About 944 of those restaurants were
located outside the United States. In 1994, Subway opened new
units in 11 countries including Mexico, China, Japan, Indonesia,
Philippines, Iceland, Slovenia, Cyprus, Kuwait, Saudi Arabia, and
Korea.
Domino’s, the second largest pizza restaurant chain, operates 840
franchised units in 37 countries. Japan and Canada are popular
locations. Domino’s future growth will depend more on
international expansion. They already have about 90 stores in the
UK and expect to grow in South America.
Dairy Queen, a subsidiary of International Dairy Queen, Inc., had
628 of its 5,554 units operating outside the United States in 1994.
Dairy Queen has opened new stores in Mexico, China, Slovenia,
Cyprus, Kuwait, Saudi Arabia, and Korea since 1993. Dairy Queen
operates in 16 countries.
In 1994, Wendy’s operated 4,411 units in 32 countries and
territories. Four-hundred thirteen of their units operate outside the
United States. Canada is the largest market for Wendy’s restaurants.
Nearly half of the units outside the United States are located there.
Other popular markets for Wendy’s restaurants are Japan, with 42
units, Philippines with 30, and Korea, with 29. Wendy’s plans called
for 100 new international units in 1995 to be concentrated in Latin
America, the Pacific, Western Europe, and Canada. Wendy’s
Globalization of the Processed Foods Market 93
anticipates a total addition of 550 new units abroad over the next 3
years.
Though fast food outlets paved the way into the international
market, family chains such as Denny’s, Big Boy, and International
House of Pancakes are following (table 19). Casual dinner house
restaurants such as TGI Fridays and grill buffets like Sizzler,
Golden Corral, and Ponderosa are also moving into the
international arena.
Table 21—Major foreign firms with U.S. food service
operations, 1994
1
Foreign investor/
location
U.S. chain Type
U.S.
sales
2
U.S.
units
2
Bil. dol. Number
Grand Metropolitan, PLC
London, England
Burger King Sandwich 7.250 6,090
Imasco Ltd. Hardee’s Sandwich 3.511 3,404
Montreal, Canada Roy Rogers Sandwich 0.460 530
Allied-Domecq, PLC Dunkin’ Donuts Snack 1.332 2,979
London, England Baskin-Robbins Snack 0.560 2,355
Compass Group , PLC
London, England
Canteen Corporation Contract 1.077 1,600
Onex Corporation LSG Lufthansa Catering 0.460 34
Toronto, Canada Services/Sky Chefs
Sodexho Sodexho USA Catering 0.435 490
Paris, France Gardner Merchant Catering 0.355 1,100
Food Services
The Albert Abela Group The Wood Company Contract 0.305 296
Paris, France
Total 15.745 18,878
1
Includes company-owned and franchisee-owned operations.
2
Projected.
Source: Nation’s Restaurant News, Aug. 1994.
94 Globalization of the Processed Foods Market
Foreign Investment in the U.S. Food Service Industry
Foreign-owned food service firms had 77 U.S. affiliates in 1993
according to industrywide data (BEA, 1995B). These U.S. affiliates
accounted for sales of $5.2 billion (table 14), and had 116,800
employees. Trade data were used to report information at the firm
and chain level. Trade sources report that food service sales in the
United States by major foreign investors amounted to $15.7 billion
in 1994 (including franchise sales), up 11 percent from 1993 sales of
$14.1 billion (table 21). The number of U.S. units operated by these
investors increased from 15,656 in 1993 to 18,873 in 1994.
Major foreign investors in the United States are Grand Metro-
politan, PLC, London, England; Imasco, Ltd., Montreal, Canada;
and Allied-Domecq, PLC, London, England. Grand Metropolitan,
PLC, owner of the Burger King chain, is the largest foreign investor
in U.S. food service operations. Grand Metropolitan acquired
Burger King in 1988 with the purchase of Pillsbury. Among the top
50 franchised chains operating in the United States, Burger King
was number two in 1994 with total worldwide sales of $7.5 billion.
Foreign sales accounted for only 19 percent of that total. Burger
King operated over 7,500 units worldwide with over 6,000 units
operating in the United States in 1994.
Imasco, Ltd., Canadian-based owner of the Hardee’s and Roy
Rogers chains, is the number two foreign investor. In 1989 the
Marriott Corporation sold most of its Roy Rogers restaurants to
Imasco. Imasco operates about 4,000 Hardee’s/Roy Rogers outlets
in the United States with 1994 sales amounting to nearly $4 billion.
Dunkin Donuts was acquired in 1990 by London-based
Allied-Domecq, PLC, the third largest foreign investor in U.S. food
service operations. Allied Domecq also owns Baskin-Robbins ice
cream stores. The firm operates 2,979 Dunkin Donuts outlets and
2,355 Baskin-Robbins outlets in the United States with combined
sales of $1.8 billion.
London-based Compass Group, PLC, made its initial debut into the
United States in April 1994 by buying the majority of Flagstar Cos.
Globalization of the Processed Foods Market 95
Inc.’s Canteen Corp. U.S. sales for Canteen total $1.1 billion.
Canteen operates 1,600 accounts in the United States.
Onex Corporation, the Canadian-based owner of Sky Chefs,
recently signed a deal with Lufthansa AG of Frankfurt, Germany,
that changed its signage to “LSG Lufthansa Service/Sky Chefs.
This agreement created a global catering company with combined
annual revenues of $1.3 billion.
Sodexho is a French contract catering company that has units in 60
countries and revenues in excess of $1.9 billion. In 1995, Sodexho
acquired Gardner Merchant Services Group, creating the world’s
leader in contract catering with 11,745 units worldwide. The
merger represents combined annual revenues of $3.65 billion. In
the United States, Waltham, MA-based Sodexho U.S.A. operates
490 units and reported $440 million in sales. Combined, Sodexho
and Gardner Merchant operated about 1,588 accounts in the United
States with total revenues of approximately $800 million in 1995.
Sodexho’s Gardner Merchant Services Group, which has been
operating in the United States for 15 years, recently bought two of
the catering segment’s biggest accounts. In 1994 the Trumbull,
Conn.-based division of London’s Gardner Merchant Services
Group, purchased from Morrison Restaurant Inc. the business and
education accounts of its Morrison Hospitality Group. This
acquisition increased Gardner Merchant’s U.S. portfolio to more
than 1,000 accounts and will nearly double its projected annual
revenues in the future.
Other major foreign investors in U.S. food service include
Kyotauru Co., Ltd., Tokyo, Japan (Acapulco, Charlie Brown’s,
Paragon Steakhouse); Nestlé (Stouffer Hotels, Top Restaurants,
Rusty Scupper); and Unigate PLC, London, England (Black-eyed
Pea, Dixie House, Taco Bueno, Casa Bonita, Crystal’s Pizza).
96 Globalization of the Processed Foods Market
doc_750974652.pdf
In addition to trade in goods themselves, such as processed foods, there is a large volume of international exchange of capital and technology used for food manufacturing and distribution. Modern measures of a country's or a firm's international competitiveness incorporate sales from foreign affiliates of home-country firms in addition to international trade.
CHAPTER 3
Foreign Direct Investment in the
Processed Food Sector
The Concept and Scope of Foreign Direct Investment
In addition to trade in goods themselves, such as processed foods,
there is a large volume of international exchange of capital and
technology used for food manufacturing and distribution. Modern
measures of a country’s or a firm’s international competitiveness
incorporate sales from foreign affiliates of home-country firms in
addition to international trade (Horstmann and Markusen 1987,
Kravis and Lipsey 1992, Porter 1990). Foreign affiliation can occur
in various ways: license production to a foreign firm, franchise a
foreign firm to market products under the home firm’s trademark,
acquire a minority interest in a foreign firm, develop a joint venture
with a foreign partner, or obtain complete or majority ownership of
foreign operations.
For purposes of this report, foreign direct investment (FDI) refers to
investment in a foreign affiliate. The term “foreign affiliate” is used
to identify a foreign entity in which a parent firm holds a substantial
(but not necessarily majority) ownership interest. Parent firms are
referred to as multinational firms or corporations (MNC’s). U.S.
firms’ investing in production facilities in other countries is known
as outbound FDI, while foreign firms’ investing in facilities located
in the United States is known as inbound FDI. Foreign direct
investment is distinctly different from foreign portfolio investments
and other international capital flows such as bank deposits. Portfolio
investment takes a passive management role and does not seek
control over decisionmaking within the firm. Foreign direct
investment, by contrast, is defined as the ownership of assets in an
affiliate by a foreign firm for the purpose of exercising control over
the use of those assets. Since we are interested in the outcome of
investing in foreign affiliates, we use sales of foreign affiliates as
our primary measure of FDI. Using affiliate sales as an indicator of
Globalization of the Processed Foods Market 67
FDI facilitates comparing the relative size of FDI and trade as
strategies for accessing foreign markets. Using affiliate sales
instead of “foreign direct investment position” (essentially the book
value of assets) also avoids the problem of valuing assets of
different vintages.
The source of FDI data at the industry level is the U.S. Department
of Commerce, Bureau of Economic Analysis. The Department of
Commerce defines foreign investment as direct when a foreign firm
has a stake of 10 percent or more in a host country operation and no
other firm has as large a share. The 10-percent ownership threshold
reflects the notion that a foreign parent will normally have a strong
say in the decisionmaking of a firm even if that parent does not own
a majority stake. Other researchers have argued for a more
restrictive 50-percent ownership cutoff to define foreign direct
investment. But the difference in definition is minimized by the fact
that the vast majority of FDI is majority owned. In 1992, 84 percent
of U.S. food-processing affiliates in foreign countries were majority
owned; and conversely, 98 percent of foreign-owned affiliates in
the United States were majority owned by their foreign parents.
Furthermore, most FDI occurs by acquisition or merger rather than
by building new facilities (known as greenfield investment). The
country receiving FDI gains from the investing firm’s knowledge in
technology, marketing, management, finance, and information
services. The gain in employment and economic activity is most
obvious from greenfield investment. But even when FDI occurs by
acquisitions, the parent firm typically upgrades the acquired firm’s
production processes and equipment, quality and environmental
controls, procurement practices, packaging, and distribution
systems. If production capacity increases sufficiently, net
employment increases even with improved labor productivity.
FDI by acquisition does not necessarily increase employment,
technology, or product variety in the receiving country. Parent
firms frequently buy leading brands produced by a firm in the host
country. Motivations for the parent firm are to increase
international volume, increase growth rate, and achieve the
competitive advantages of owning a leading brand in a new market.
68 Globalization of the Processed Foods Market
In this situation the parent firm often gains new product and
marketing technology from the acquired firm. Thus technology
flows become two-way. By acquiring a leading firm or brand in the
host country, the parent firm avoids a major disadvantage of
greenfield FDI, by achieving immediate economies of scale.
Examples are Grand Metropolitan (UK) buying Pillsbury in the
United States and Philip Morris buying Jacob Suchard, one of
Europe’s largest confectionery firms.
Direct foreign investment can also be classified as vertical or
horizontal. An example of vertical FDI is a parent firm investing in
successive stages of production, either upstream (away from final
consumption) or downstream (toward final consumption). An
example of upstream FDI by a food manufacturer would be
investing in can manufacturing or in agricultural commodity
production. Downstream FDI would include a flour miller’s
investing in a wholesale baking operation or retail foodstores.
Tables 13 and 14 give an overview of the relative size of outbound
and inbound FDI as reflected by affiliate sales for the entire food-
processing sector and for the major industries within the sector.
Sales from outbound FDI remained slightly higher than sales from
inbound FDI throughout the 1982-93 period. Sales from all U.S.
food marketing affiliates abroad totaled $132.5 billion in 1993 (table
13), while sales from foreign-owned food marketing affiliates in the
U.S. were $124.3 billion (table 14).
The composition of outbound versus inbound FDI varies widely by
type of industry. Food-manufacturing affiliates account for 72
percent of sales of all U.S. food-marketing affiliates abroad. But
food manufacturing accounts for a much smaller 37 percent of total
foreign-owned affiliate sales in the U.S. food marketing sector. For
the food-retailing industry, just the opposite is true. Sales from U.S.
food-retailing affiliates abroad account for just 9 percent of total
affiliate sales abroad, while U.S. food-retailing affiliates of foreign
firms account for 42 percent of sales of foreign-owned
food-marketing affiliates in the United States.
Globalization of the Processed Foods Market 69
The next section examines factors that help explain or incentives
for firms to engage in FDI. This is followed by a more detailed
industry-by-industry review of the general trends in FDI discussed
above.
Factors Influencing
Foreign Direct Investment
FDI in Historical Context
Foreign direct investment is the dominant form of international
commerce in processed foods. This is in sharp contrast to global
commerce in agricultural commodities where trade dominates and
FDI is nearly invisible. It also contrasts sharply with neoclassical
international economic theory that does not reveal incentives for
FDI in a perfectly functioning world of free trade.
This section addresses factors that explain FDI. While theoretical
explanations for FDI tend to be eclectic, empirical observations of
incentives for firms to operate facilities abroad tend to be generally
consistent with the major strands of theory. Indeed, a number of
empirical studies of the determinants or motivations for FDI have
been reported. These reveal several consistencies that can be
viewed as empirical regularities. These empirical regularities form
the foundation for our contemporary understanding of what gives
rise to FDI in processed foods, and shed considerable light on why
Table 13—-Sales by U.S.-owned food marketing affiliates
abroad by industry, selected years, 1982-93
Industry 1982 1987 1992 1993
Share of
total
Million dollars Percent
Food manufacturing 39,023 50,067 89,159 95,782 72.3
Food wholesaling 6,172 9,206 14,388 15,783 11.9
Retail foodstores
}
11,930 9.0
8,691 9,674 21,169
Eating & drinking places 9,007 6.8
Total, all food marketing 53,886 68,947 124,716 132,502 100.0
Source: Dept. of Commerce, BEA.
70 Globalization of the Processed Foods Market
FDI is the preferred method of market globalization for these
products.
The balance between portfolio and direct foreign investments
changed markedly during the past century, with the United States
playing a major role. An examination of the change suggests the
underlying impetus of FDI and why FDI is particularly important
for processed foods.
Until the First World War, nearly all international investment was
portfolio; the United Kingdom supplied about half of the world’s
total, followed by France and Germany. Younger, rapidly expand-
ing economies, primarily the United States, Canada, Australia, and
Latin America, were the primary recipients. Yet, even before WWI,
outbound American investment was getting underway.
From the outset, U.S. investment was different. As described by
Södersten and Reed (1994, p. 468), “American investors seem to
have been of a more dynamic type, not content to reap a fairly
small interest-rate differential. Even before the First World War a
dominant share of U.S. capital exports consisted of direct
investments.” In short, from the beginning, Americans investing
abroad have shown a propensity to transfer know-how (or
intellectual capital), more so than financial capital.
Between the world wars, international investment declined. But, the
United States began to emerge as a major source, primarily of direct
Table 14—Sales by foreign-owned food marketing affiliates in
the United States by industry, selected years,1982-93
Sector 1982 1987 1992 1993
Share
of total
Million dollars Percent
Food manufacturing 14,847 22,862 46,799 45,765 36.8
Food wholesaling 7,039 13,953 18,984 21,734 17.5
Retail foodstores
}
24,312 48,159 51,537 41.5
18,758
Eating & drinking places 498 4,904 5,236 4.2
Total, all food marketing 40,644 61,625 118,846 124,272 100.0
Source: U.S. Department of Commerce, BEA.
Globalization of the Processed Foods Market 71
investments as American industrialists began to establish foreign
operations in the image of their pre-Depression home-market
successes. Following WWII, the United States became the primary
supplier of international finance, first in the form of official loans
and gifts, and second in the form of FDI as American firms made
major contributions to postwar industrial rebuilding. By 1960, the
United States was supplying about two-thirds of all international
investment. By the 1980’s, observing U.S. industrial success
throughout much of the free world, other countries—principally
those of the European Union and Japan—became more aggressive
in exporting their management technology through FDI, much of
which landed in the United States. By the 1990’s, with the fall of
Soviet communism and the liberalization of third-world economies,
FDI became the main instrument for global industrialization. As the
20th century ends, the nationality of multinational firms—the
organizational result of FDI—has blurred in many cases to the
point of being indistinguishable.
Profits that firms can earn in their international operations appear to
be a motivation for FDI. This is evident in a sample of 144
food-processing firms worldwide used by Henderson, Vörös, and
Hirschberg (1996) to compare profitability based on sales from
foreign affiliates. In that sample, sales from foreign affiliates
exceeded exports from home countries by a ratio of 5 to 1. For
firms with foreign sales equal to or exceeding 35 percent of total
sales, net income as a percentage of assets was higher than for
firms with foreign sales below 35 percent of total sales. In short,
FDI occurs because a firm has some advantage it can exploit in
foreign markets. In the food and agricultural sector, such advantage
is more often a feature of processed foods than of basic
commodities. The following analysis offers insight into why.
Determinants of FDI
Evolving developments in the theories of international economics
accommodate conditions of imperfect competition such as those
observed in processed food markets (product differentiation, for
example, and economies of scope, scale, and size). Theoretical
constructs help identify the motivations for firms to engage FDI.
72 Globalization of the Processed Foods Market
These developments have been joined by an expanding body of
empirical studies that reveal product, firm, industry, and/or country
idiosyncracies that are associated with observed configurations of
FDI. The major constructs and empirical findings reveal general
patterns that characterize the dominant forces behind FDI in
processed foods.
Theoretical Considerations
A number of theoretical developments contribute to our
understanding of the determinants of FDI. Early on, Vernon (1966),
in his work on the product-cycle hypothesis, advanced an
explanation for FDI based on product differentiation. The essence of
this hypothesis is, if a firm expands to a foreign market in early
stages of a product life cycle, it typically does so through exports.
But, as growth in production and sales expands, a firm finds it must
nurture increasingly-close working relationships with both suppliers
and distributors. The greater the product uniqueness
(differentiation), the more important these special relationships.
Firms often find that they can best manage such special
relationships in foreign markets with on-site facilities, thus they
engage in foreign production (outbound FDI). Subsequently, the
importance of product differentiation (and other unique, firm-
specific attributes) has become a central theme in theories of FDI.
Buckley and Casson (1976) extended Vernon’s construct by
emphasizing imperfections in the foreign upstream or downstream
markets. Where needed inputs or merchandising and distribution
methods (marketing services) are highly specialized, markets for
those supplies or marketing services may be difficult to organize.
This is particularly so in the presence of uncertainty over demand,
high investment costs, and the need for rapid exchange of
information, close coordination, and joint planning. Faced with
imperfect external markets, firms elect to internalize the supply of
these critical inputs or distribution and merchandising services, thus
entering into outbound FDI in vertically-adjacent sectors.
Caves (1982) posited that many of the attributes associated with a
firm’s unique product(s) are intangible (examples include, technical
Globalization of the Processed Foods Market 73
production or merchandising knowledge, brand names, trademarks,
team-specific management skills, special relationships with
suppliers and customers). Because they are intangible, it is difficult
for a firm in one country to sell them to a firm in another country.
Thus, the firm has an incentive to develop overseas operations to
capture the full earnings potential of these unique attributes in
foreign markets.
Synthesizing several conceptual strands, Dunning (1977) advanced
the OLI paradigm as an eclectic theory of FDI. OLI represents
ownership advantages, locational considerations, and
internalization gains. Ownership advantages are those firm-specific
assets, such as the intangible assets discussed by Caves, that give a
firm a competitive edge over both domestic and foreign rivals. Such
intangible assets are also considered to be a firm’s intellectual
property or intellectual capital. Locational considerations
encompass such things as transportation costs and import
restrictions that give a firm a cost advantage for operating in a
foreign market. Internalization gains concern factors that make it
more profitable to carry out transactions within a firm than to rely
on external markets (as in the Buckley and Casson construct,
above). Dunning’s theory holds that all three conditions are
necessary; together they are sufficient motivation for a firm to
invest in direct foreign production.
Ethier (1994) introduced refinements to the OLI paradigm that
reveal an expectation for the major flows of FDI between countries
with relatively similar economic conditions. In the presence of
ownership advantages (firm-specific assets) that can be emulated
over time, and a high ratio of international transportation to
host-country labor costs (locational consideration favoring
host-country production), a firm is motivated toward FDI in order
to internalize earnings accruing to ownership advantages, thereby
reducing the chance of copying by a host-country firm. However,
if, for example, host-country wages and salaries are sharply lower
than in the firm’s home country, a copycat host-country firm can
pose a credible threat to sustained earnings fromdirect entry by the
external firm. Knowing this, the external firmwill engage FDI in
the host country only if it believes that the wage difference is not
74 Globalization of the Processed Foods Market
great enough to offset copying costs (industrial intelligence) by a
host-country firm. Therefore, FDI partner countries are expected to
have different but not greatly different economic conditions (such as
labor costs).
Empirical Studies
Empirical studies of the determinants of FDI have been hampered
by two factors, a relative scarcity of detailed data on FDI, and
complexities in measuring a number of the variables that are
hypothesized to affect FDI in the various theoretical constructs
(such as firm-specific advantage). Nonetheless, enough studies have
been reported—some specific to processed foods—that stylized
facts, or empirical regularities, can be raised.
In an early study of the shares of affiliates of U.S. firms in the
outputs of Canadian and British industries, Caves (1974) found a
statistically significant positive relationship between these shares
and a set of factors taken to reflect firm-specific (ownership)
advantages (such as experience with multi-plant management,
expenditures on research and development (R&D), and advertising
intensity). Wolf (1977), in a study of the share of production by U.S.
firms accounted for by foreign operations, found this to be
positively associated with a firm’s technological expertise (as
measured by the proportion of engineers and scientists in a firm’s
workforce) and size of firm.
A number of other studies have documented similar findings.
Grubaugh (1987) reported results from an study of 300 U.S.-based
multinational firms that tie FDI directly to relative levels of firm
expenditures on both R&D and advertising. Handy and MacDonald
(1989), using cross-sectional data on 32 U.S. manufacturing
industries, also found positive impacts of R&D and home
advertising on FDI, as did Yu (1990) in another study. Dunning
(1981) cited evidence of a positive relationship between the value of
a firm’s intangible assets and FDI. Ray (1991), in a study of 32
manufacturing industries in five countries, found FDI positively
related to specialized human capital, managerial intensity, and share
of home market. In a study of 27 industries in 30 countries, Baldwin
Globalization of the Processed Foods Market 75
(1979) found that product differentiation, managerial intensity, and
home market share affect FDI.
Specific to processed foods, Connor (1983), using data on U.S.
food-manufacturing industries, documented positive impacts of
firm size, advertising, R&D, and home market share on FDI. Using
pooled, cross-section, time series data for 628 food manufacturers
in 16 countries, Henderson, Vörös, and Hirschberg (1996) found
intangible assets, product differentiation, firm size, and home
market share positively associated with FDI. Overend and Connor
(1994) examined factors influencing FDI patterns for a
cross-sectional sample of 33 U.S. food-manufacturing firms that
also do business in the UK. Their findings show a positive
relationship between a firm’s investment in foreign marketing
expertise and FDI. Ning and Reed (1995) examined factors
explaining the location of U.S. FDI for a sample of six developed
countries from 1983 to 1989. They found cultural linkage and
trading bloc memberships are major incentives for FDI abroad,
followed by a strong home currency, fast foreign market growth,
and low foreign income tax rates.
Regarding national characteristics, Veugelers (1991), in a
cross-sectional study of FDI patterns in OECD countries, found
positive effects on FDI of common borders and similarities in
culture, language, stage of economic development, labor costs, and
trade policies between host and home countries. For processed
foods, Handy and Henderson (1994) have shown that the same set
of economically advanced countries (the U.S., Canada, Japan, and
the countries of the European Union) account for nearly all of the
world’s FDI, both inbound and outbound.
Principal variables related to FDI are summarized in table 15.
When viewed in the context of the food and agriculture sector as a
whole, reasons for the relative importance of FDI to global
commerce in processed foods become clear. Processed foods are
highly differentiated products, the result of considerable effort by
food manufacturers, distributors, and food service firms to develop
a steady flow of new products and product innovations, and to
intensely merchandise these products through advertising and other
76 Globalization of the Processed Foods Market
means of promotion. Global commerce tends to occur primarily
among countries that are remarkably similar in overall economic
character, yet whose firms have sufficient differences in intellectual
property to differentiate their operations and products from those of
rival firms in both home and international markets. This stands in
sharp contrast to global commerce in agricultural commodities,
where the dominant pattern is international trade in undifferentiated
goods between fairly dissimilar countries.
Foreign Direct Investment
in Food Manufacturing
Investment Abroad by U.S. Food Manufacturers
Most large food manufacturers rely much more heavily on foreign
direct investment than on exports from their home country to access
foreign markets. In 1993, the latest year in which industry-level data
are available fromthe Bureau of Economics Analysis, 64 U.S.
multinational firms held at least 10 percent equity in 762 food
manufacturing affiliates in foreign countries. Figure 4 shows the
relative value of shipments from U.S.-owned food-manufacturing
affiliates abroad compared with the value of total processed food
exports from the United States. Foreign affiliate sales have long
exceeded the value of U.S. exports, but since 1985, the gap has
Table 15—Factors positively influencing sales by foreign
affiliates
Factor As measured by
Product and process innovation Expenditures on research and development
Product differentiation Advertising expenditures
Intellectual property Value of intangible assets
Managerial skill and intensity
Value added as a share of value of shipments;
employee educational level
Foreign Marketing expertise Foreign sales as a share of total sales
Home market success Market share
Economies of size, scale or scope Size of firm
Locational advantage
Transportation costs as a share of value of
sales; ratio of transportation to host-country
labor costs
Trade barriers Tariffs
Size of host market Growth in real GNP per capita
Globalization of the Processed Foods Market 77
widened. In 1982, sales from U.S. affiliates in foreign countries at
$39 billion were 3.5 times larger than U.S. exports of $11 billion.
Neither FDI nor exports grew in the early 1980’s. Since then, both
have recorded uninterrupted growth. From 1982 to 1993, sales from
U.S. affiliates abroad grew 145 percent to $95.8 billion, while U.S.
processed food exports increased 113 percent to $23.4 billion. By
1994, sales from foreign affiliates are estimated to have reached
$103 billion—4 times larger than U.S. exports of $25.8 billion.
Employment in U.S.-owned affiliates increased at a slower rate
than sales. The number of employees at U.S. affiliates in foreign
countries grew from 447,700 in 1982 to 550,500 in 1993, an
increase of 23 percent. Most U.S. affiliates abroad are
majority-owned by their U.S. parents. Of the total sales of U.S.
affiliates abroad, 83 percent ($79.9 billion) came from
majority-owned affiliates.
Source: Economic Research Service, USDA.
0
20
40
60
80
100
120
87 94 93 92 91 90 89 88
Sales from
foreign affiliates
of U.S. firms
U.S. exports
1982 83 84 85 86
U.S. exports and foreign affiliate sales of processed food
Figure 4
Billion dollars
78 Globalization of the Processed Foods Market
Location of Affiliates
U.S. foreign direct investment is concentrated in developed
countries (table 16). In 1993, European countries accounted for
$54.4 billion (57 percent) of total U.S. affiliate sales abroad. Within
Europe, the United Kingdom is by far the largest recipient of U.S.
FDI followed by Germany, Netherlands, and France. Adding
Canada and Japan to the European countries brings the share of U.S.
affiliate sales to about 73 percent. U.S. affiliate sales grew much
faster in Europe (187 percent) than in either Canada (107 percent) or
Japan (105 percent) during 1982-93. Sales from U.S. affiliates
declined in both South and Central America from 1982 to 1987, but
have grown rapidly since. From 1987 to 1993, sales from U.S.
affiliates in South America doubled and sales from U.S. affiliates in
Mexico increased 282 percent.
Further evidence of growing U.S.-owned food-processing
operations in developing countries is available from a data base of
over 75 large U.S. food-processing firms maintained by USDA’s
Table 16—Sales by U.S.-owned food processing affiliates
abroad, 1982-93
Country/
region
1982 1987 1992 1993
1993
share
Change
1982
-93
Million dollars Percent
Total, all 39,023 50,067 89,159 95,782 100 145.4
European countries 18,974 29,044 53,752 54,371 57 186.6
United Kingdom 5,696 7,124 12,214 11,579 12 103.3
Canada 5,258 5,522 NA
1
10,891 11 107.1
Asia and Pacific 5,432 8,559 13,712 14,411 15 165.3
Japan 2,363 4,442 4,055 4,844 5 105.0
South America 5,133 3,911 6,794 8,033 8 56.5
Argentina 630 758 2,040 NA NA NA
Brazil 2,535 1,869 2,874 3,431 4 35.3
Central America 2,951 2,176 5,163 NA NA NA
Mexico 2,556 1,596 4,460 6,093 6 138.4
NA= Not available.
1
Withheld by BEA to avoid disclosure.
Source
ept. of Commerce, BEA.Globalization of the Processed Foods Market 79
Economic Research Service. In 1993, a subsample of 39 of these
firms operated over 860 food-processing plants in foreign
countries. Roughly one-third (about 295) of these plants were in
developing countries, with over 200 plants in Latin America. U.S.
firms are also increasing investments in Eastern and Central
Europe, the former Soviet Union, and China. According to data
compiled by ERS from media and company reports, at least 35 U.S.
food manufacturers had invested in over 70 food-processing
affiliates or joint ventures in these countries as of 1995. In China at
least 29 U.S. companies had invested in food-processing operations.
Specialized engineering, packaging, and food ingredient firms
facilitate foreign direct investment by making technology readily
available and mobile across national boundaries. With the help of
these specialty firms, food processors can pick and choose the best
technology for specific functions from throughout the world and
assemble it in a single factory whereever it is located—whether in
Zimbabwe, Malaysia, India, or Venezuela.
U.S. firms are continually reassessing and adjusting their foreign
direct investment position by buying or building new plants
overseas, consolidating existing plants, or divesting entire lines of
business. From the ERS firm-level data base, observations are
available on a constant sample of 32 U.S. multinational food
processors for the years 1988-93. The total number of
food-processing plants operated by these 32 MNC’s increased from
1,955 in 1988 to 2,078 in 1993. All the increase came from foreign
plants. The number of U.S. plants declined from 1,312 to 1,265 as
these firms consolidated U.S. production into larger plants. At the
same time, the number of majority-owned plants operated by these
firms in other countries increased from 643 (33 percent of the total
plants) to 813 (39 percent of the total). Nineteen of these 32 firms
increased their number of foreign plants, 8 firms had no change,
while 5 firms decreased the number of plants they operate abroad.
During this time, 7 firms withdrew entirely from one or more
foreign regions (such as the Middle East), while 8 firms entered
new foreign regions for the first time. The number of firms that had
at least 50 percent of their food-processing plants located in foreign
countries increased from 8 to 14. CPC International, manufacturer
80 Globalization of the Processed Foods Market
of Knorr, Hellmann’s, and Mazola products, had 95 of its 123 plants
(77 percent) located outside the United States in 1993. Philip Morris
(Kraft General Foods) had the largest absolute number of foreign
plants with 119 of its 251 plants located in foreign countries.
Destination of Affiliate Sales
In general, U.S. food-processing MNC’s do not establish affiliates
abroad for the primary purpose of exporting product to the U.S.
market (fig. 5). Of total U.S. affiliate sales abroad in 1993, 79
percent remained in the host country (local sales) while 21 percent
came from sales to other countries (BEA 1995A). But only 2
percent ($1,885 million) of affiliate sales were to the United States.
By comparison, U.S. non-food manufacturing affiliates abroad
exported an average of 14 percent of their total shipments back to
the United States.
Figure 5
Exported back
to the United States
(2%)
Exported to
other countries
(19%)
Local sales in
the host country
(79%)
Source: Economic Research Service, USDA.
Total sales by U.S. affiliates abroad $95.8 billion
Sales by U.S. owned foreign affiliates by destination, 1993
Globalization of the Processed Foods Market 81
Proximity of foreign affiliates to the United States plays a large role
in explaining their export behavior. Even though Canada accounts
for only 11 percent of U.S. affiliate sales worldwide, it accounts for
40 percent of affiliate exports to the United States. Likewise, Latin
America accounts for 16 percent of U.S. affiliate sales, but a much
higher 27 percent of affiliate exports to the United States.
Conversely U.S. affiliates in Europe have 60 percent of all affiliate
sales, but their share of affiliate exports to the United States is only
25 percent.
Intra-firm trade between U.S. parents and their affiliates is
substantial. While U.S. affiliates abroad export only 2 percent of
their sales to the United States, most of these exports (71 percent)
are shipped to their U.S. parents, with the remaining 29 percent
shipped to other firms in the United States. Exports from the United
States to its food-processing affiliates abroad were also relatively
small ($2,582 million) in 1993, but were still considerably larger
than imports from those affiliates. Again, U.S. parents accounted
for most (79 percent) U.S. exports to their affiliates.
Operations of Foreign Food-Manufacturing Firms in the
United States
A rapid increase of foreign direct investment into U.S.
food-processing industries was a phenomenon of the late 1980’s.
Foreign direct investment into the industry doubled between 1987
and 1992, and left 12 percent of the industry foreign-owned. The
United States received large capital inflows in 1989, especially
Table 17—Sales by foreign-owned food processing affiliates in
the United States, 1982-93
Country
of origin
1982 1987 1992 1993
Share,
1993
Change,
1982-93
Million dollars Percent
Total 14,847 22,862 46,799 45,765 100 208
Europe 10,527 17,967 32,994 31,159 68 196
Canada 2,218 3,174 5,113 5,208 11 135
Japan 564 612 5,131 5,737 13 917
Other 1,538 1,109 3,561 3,661 8 138
Source: Dept. of Commerce, BEA.
82 Globalization of the Processed Foods Market
when the UK’s Grand Metropolitan purchased Pillsbury. Japan’s
appearance in the U.S. food industry in the late 1980’s was also a
break from the past. While there were no megadeals in the U.S. food
industry in the early 1990’s, 1993 activities included UK’s
Cadbury-Schweppes’ acquisition of A & W Beverages and
Unilever’s (Netherlands) acquisition of Kraft Foods Ice Cream
Industries and Klondike. In 1994, Sandoz, a Swiss pharmaceutical
company, acquired Gerber Foods.
These foreign acquisitions made their impression on the U.S. food
industries through sales, employment, and foreign trade. Sales of
U.S. affiliates of foreign firms were $46.8 billion in 1992, triple the
level of 1982 ($14.8 billion). Sales declined slightly in 1993 to
$45.8 billion (table 17). Nearly all sales fromthese foreign-owned
plants remained in the United States, indicating that they were
targeting the U.S. market; only $2.2 billion (4 percent) of those sales
were exports (BEA 1995B). Moreover, only a third of the exports
from these plants were shipped to the foreign parent company. U.S.
affiliates of foreign companies imported more processed food
products ($3.2 billion) than they exported. And nearly half of the
imports to these affiliates came from the foreign parent group.
Foreign companies generally found it less expensive to locate
production of many high-value products closer to the U.S. market
than to the foreign source of the raw product. Foreign direct
investment in the United States was also one way to circumvent
some U.S. trade barriers.
European companies dominate as a source of inbound investment
and sales (table 17). Sales from U.S. affiliates of European and
Canadian companies grew during the 1980’s and early 1990’s, but
sales from U.S. affiliates of Japanese companies grew faster. Japan
raised its presence to 13 percent of the sales fromforeign firms in
the U.S. food industries, compared with Europe’s 68 percent.
Canada’s share declined over the decade to 11 percent in 1993.
There is some variation among countries in their choice of products.
Japanese companies have purchased or built plants that mostly
produce their ethnic foods such as noodles, surimi, soy sauce, sake
(a rice-based alcoholic beverage). They have also ventured into
Globalization of the Processed Foods Market 83
Mexican-style frozen dinners and wine. Food and feed additives are
also important Japanese investments, along with cutting-edge
biotechnology as it relates to food. Japanese investors were more
apt to start up new businesses than their European and Canadian
counterparts.
European companies are broader based. Wine, cheese, chocolate
products, and bottling plants are some of the enterprises of their
U.S. affiliates. Grain products, frozen and canned vegetables are
also included. Some chemical companies have also become
important producers of food and feed additives. Recent investments
of European conglomerates have cut across product lines.
Canadian investments are mostly in the U.S. distilled spirits
industry. In recent years they have expanded into wines, fruit
juices, and frozen foods. More recently, some Canadian companies,
acting as conglomerates, expanded their investments into many
nonfood areas, principally chemicals and entertainment.
There is a variation in the market share of the U.S. affiliates in
relation to their industries. Overall, the market share of foreign-
owned companies in U.S. food-processing industries is about 12
percent (BEA, 1995B). Foreign-owned companies have roughly
one third of the U.S. market share in cookies and crackers and
edible fats and oils. In comparison, foreign-owned distilled liquor
plants have one-half of the industry. Foreign-owned dairy products
and canned specialties comprise 10-15 percent of those industries.
In addition to geographic and market concentration, a number of
general observations can be drawn from the study of the
Department of Commerce data on FDI in U.S. food processing.
Most FDI is horizontal rather than vertical. Food processors invest
primarily in other food-processing facilities rather than in upstream
or downstream operations. Second, most FDI outlays are to acquire
existing facilities rather than to invest in newly constructed
operations.
Inbound foreign direct investment has brought jobs to the U.S. food
industries. U.S. food-processing affiliates of foreign companies
84 Globalization of the Processed Foods Market
employed 200,000 persons, who were paid nearly $5.5 billion, for
an average salary of about $27,500 in 1993. This compares with the
1982 employment of 126,000 persons who earned $2.5 billion
(nominal dollars), for an average salary of about $20,000. Employ-
ment in foreign-owned companies is nearly 12 percent of the total
employment of the sector, compared with 7.7 percent in 1982.
These trends show the importance of sales of affiliates of other
countries since 1980. Foreign direct investment will likely continue
to grow, and companies will be morely likely to expand their
markets through their foreign affiliates rather than through exports
and imports. World trade in food products has increased since 1980,
but sales of foreign affiliates has increased faster.
Foreign Direct Investment in Food Distribution
The food distribution industries include food wholesalers and
brokers, and food retailers. Both inbound and outbound investment
levels have grown steadily over the past decade.
Food Wholesaling
Sales from foreign affiliates of U.S. grocery wholesalers (outbound
FDI) increased to $15.8 billion in 1993, a 9.7-percent increase over
1992 and a 156-percent increase from 1982 (table 13). Sales from
U.S. grocery wholesale affiliates owned by foreign firms (inbound
FDI) increased to $21.7 billion in 1993, growing 14.5 percent from
1982 (table 14).
Many food wholesaling firms have expanded via joint ventures in
foreign markets. Sam’s Warehouse Club is the leading wholesale
club in the United States. Facing saturated markets in the United
States and unfulfilled demands globally, Wal-Mart, Sam’s parent
firm, has been particularly aggressive in this regard with expansion
plans for Asia and South America. As part of its first move outside
of the Western Hemisphere, Wal-Mart set up a Hong Kong joint
venture in 1994 as a foundation for further expansion into the Far
East. The joint venture is part of a plan to open Value Clubs as a
Globalization of the Processed Foods Market 85
stepping stone into China. Value Club is a joint venture with Ek
Chor Distribution System Co. Ltd., a Hong Kong subsidiary of
Bangkok-based C.P. Pokphand Co. Value Clubs are smaller
versions of the Sam’s Club membership warehouses. Plans called
for construction of two units in China in 1995. In addition to
expansion plans in Asia, plans called for an additional 10 to 12
warehouse clubs and 10 to 12 supercenters in Mexico. Wal-Mart
also plans to open Sam’s Clubs in Brazil, through a joint venture
with Brazil’s major retailer Lojas Americana, and Sam’s Clubs is in
the first phase of its expansion program in Argentina. Another
leading wholesale club, Price Company, went international for the
first time in 1993, opening units in the United Kingdom and
Mexico. Price/Costco, formed by a merger between the Price
Company and Costco Wholesale Club, opened 7 warehouses in
Canada during the first half of fiscal 1994. In early 1995,
Price/Costco Inc. agreed to acquire Price Enterprises’ stake in the
companies’ Mexican joint venture. Mexico Clubs operates 12 Price
Club membership warehouse stores in Mexico.
The king of foodservice distributors, Sysco Corp., has a company in
British Columbia called Sysco/Konings Wholesale. Another
leading foodservice distributor, Rykoff-Sexton, operates a Mexican
distribution center.
Food wholesaling industry-leader Fleming formed a joint venture
with Davids Holdings, the leading wholesaler in Australia. The
joint venture, Davids Investments Asia Plc. Limited, was formed to
establish full-line distribution centers in Asia. Fleming expects the
joint venture also to help with its exporting and importing activities.
Fleming has foreign affiliates in the Caribbean, Japan, Mexico,
Korea, and the former Soviet Union.
Food Retailing
Inbound Investment
Sales by U.S. food-retailing affiliates of foreign firms reached
$51.5 billion in 1993, according to the most currently available data
(table 14). Food-retailing affiliate sales amounted to 13.4 percent of
86 Globalization of the Processed Foods Market
total U.S. food store sales in 1993. The 5 largest U.S. food-retailing
affiliates of foreign firms were among the 30 leading food retailers
nationwide, generating sales of $39.5 billion in 1994 (table 18).
Fourth-ranked nationally Albertson’s (Boise, ID) was the largest
U.S. affiliate, with sales of $11.9 billion in 1994. U.S. affiliates have
grown both by building new stores and by acquiring other food
retailers. There are successful examples of both strategies among the
largest retailers. Both Albertson’s and Food Lion (eighth-ranked
nationally) have relied almost exclusively on internal growth
strategies. Ahold, USA, the U.S. subsidiary of Royal Ahold (The
Netherlands), and The Atlantic and Pacific Tea Company (A&P),
owned by Tenglemann (Germany), have grown by acquiring small
local and regional supermarket chains.
Most Americans could not identify these food retailers as foreign-
owned firms, for a variety of reasons. Foreign investment and
ownership can take a variety of forms, and most foreign firms
imitate marketing and merchandising practices of their domestic
counterparts. Store banners (names) are often maintained after
foreign acquisition. Products and services offered are little different
from those carried by domestic retail counterparts. Foreign parent
firms have thus far shown little interest in exporting retail products
to their U.S. operations. Although foreign investors and retailers
have introduced new concepts in the United States, their success has
varied.
Table 18— Sales of leading U.S. food retailing affiliates of
foreign firms, 1994
U.S. affiliate Foreign investor (country)
National
ranking
1994 sales
$Billion
Albertson’s Theo Albrecht (Germany) 4 11.9
Atlantic and Pacific Tea
Company
1
Tengelmann, AG
(Germany)
7 10.3
Food Lion
Delhaize, Le Lion
(Belgium)
8 7.9
Ahold, USA
2
Ahold (The Netherlands) 9 7.4
Shaw’s Supermarkets Sainsbury PLC (U. K.) 29 2.0
1
A&P, Waldbaums, Food Emporium, Super Fresh, Farmer Jack, Kohls.
2
Edwards, Mayfair, Finast, Giant Food Stores (Carlisle, PA), Martins, Tops, BI-LO.
Globalization of the Processed Foods Market 87
In the 1980’s, French retailers built very large stores in excess of
100,000 sq. ft. of selling area called hypermarkets, a European
retail concept. Early successes were not sustained, and in the
1990’s, a number of foreign-owned hypermarket firms such as
Carrefour and Leeds failed to generate breakeven sales volume,
resulting in their exit from the industry.
Not all European retailers have failed in efforts to transplant new
concepts to the United States, however. When Kings Supermarkets
was acquired by a British firm (Marks and Spencer), they
introduced high-quality, upscale private label food products (with
emphasis on store-prepared product lines) more typical of their
upscale European foodstores. Although the concept has been
successful, few, if any, domestic retailers have directly applied the
format elsewhere.
Outbound Investment
Foreign sales by U.S. food-retailing affiliates reached $11.9 billion
in 1993 (table 13). U.S. affiliates abroad generated an income loss
of $433.0 million in that year and employed 108,800 persons.
Safeway Inc., owns and operates 235 supermarkets in Canada,
accounting for sales of US $3.4 billion in 1994. In addition to
majority ownership, food retailers have used joint ventures,
franchising, and licensing as means to enter foreign markets. Circle
K, a convenience store operator, has joint venture and franchising
agreements in 19 countries, including Canada and the Pacific Rim
countries. Although technically not considered a foreign investor,
IGA, Inc. (Independent Grocers Alliance), a cooperative
supermarket operator, has licensed IGA foodstores in a number of
countries in recent years. IGA provides training, product
procurement, branding, and merchandising support for overseas
retailers. There were 385 foreign supermarkets located in 19
countries participating in the IGA program in 1994.
As the aggregate figures indicate, inbound and outbound foreign
investment by food retailers is disproportionate. The greater
involvement by overseas investors in U.S. food retailing is due to a
number of factors: (a) the U.S. market is quite large relative to
88 Globalization of the Processed Foods Market
many foreign markets, (b) the U.S. food distribution infrastructure is
probably the most highly developed relative to any other country,
(c) there are fewer restrictions to overseas investors than in many
other countries, (d) regulations related to the building of new stores
and support facilities are less stringent in the United States than in
many European countries, (e) overall growth prospects are more
favorable than in other industrialized economies, and (f) the political
and business environment is stable, contributing to lower investment
risk. The competitive environment of U.S. markets may not be fully
appreciated by overseas investors, however, as evidenced by the
failure of many hypermarket format stores opened during the 1980’s.
Recent overseas investment by U.S. retailers has tended toward
developing economies, especially those in the Pacific Rim region.
U.S. investment abroad is much smaller than that of many foreign
investors in U.S. food retailing. Although reasons for this pattern are
not yet fully understood, it is likely that investment risk in
developing countries is viewed as a barrier by U.S. retailers despite
opportunities for growth. The persistence of these conditions facing
U.S. food retailers overseas will likely result in inbound investment
continuing to exceed U.S. investment abroad.
Foreign Direct Investment in the
Food Service Industry
U.S. food service companies are moving into international markets
as they look to foreign countries for expansion. U.S. chains have
already penetrated foreign markets. Japan, Canada, Australia, and
Mexico are popular locations for many fast food chains. More
companies are scheduled to open additional units there and in other
countries around the world in the next several years.
Foreign firms are also gaining ground in U.S. markets by purchasing
U.S. firms and establishing affiliates here. Burger King and
Hardee’s, once U.S. owned, are now foreign-owned chains.
Globalization of the Processed Foods Market 89
Table 19—Top U.S. food service firms in foreign markets by
number and sales
Chain
1
Total
systemwide
units, 1994
Foreign units,
1994
Total
systemwide
sales, 1994
Foreign sales,
1994
- - - Number - - - Percent - - - $Million - - - Percent
McDonald’s 15,205 5,461 36 25,986 11,046 43
KFC 9,407 4,258 45 7,100 3,600 51
Pizza Hut 11,546 2,928 25 6,900 1,900 28
Subway 9,893 944 10 2,500 265* 11
Domino’s Pizza 5,079 840 17 2,500 415 17
Dairy Queen 5,542 628 11 5,542 300* 09
Wendy’s 4,411 413 9 4,277 390* 09
Church’s 1,171 233 20 590 125 21
Arby’s 2,789 168 6 1,770 74 04
Taco Bell 5,615 162 3 4,290 130 03
Little Caesar 4,855 155 3 2,000 70* 04
TCBY Yogurt 2,801 141 5 388 22* 06
Sizzler 600 119 20 858 230 27
A&W 671 104 15 236 68 29
Big Boy 940 90 10 1,130 100* 09
Denny’s 1,548 58 4 1,779 63 04
Popeye’s 772 48 6 584 35 06
Sbarro 729 41 6 384 22 06
Ponderosa 680 40 6 690 40* 06
International
House of
Pancakes
657 37 6 632 32* 05
TGI Fridays 314 37 12 897 114 13
Bonanza 264 30 11 267 32 12
Round Table
Pizza
576 29 5 351 15* 04
Carl’s Jr. 649 20 3 587 30* 05
Long John
Silver’s
1,456 16 1 938 6 01
Jack In The Box 1,224 16 1 1,050 23* 02
Whataburger 517 9 2 383 5* 01
Perkins 432 8 2 626 12 02
Showbiz Chuck
E. Cheese
332 8 2 370 7 02
Total 90,675 17,038 19 72,333 19,171 27
1
Includes U.S. company-owned and franchisee-owned establishments.
*Technomic Estimate.
Source:Restaurant Business, June 1994.
90 Globalization of the Processed Foods Market
U.S. Investment Abroad
In 1993, the latest year for which industry-wide data are available,
there were 10 U.S. food service firms with 78 foreign affiliates
(BEA 1995A). These affiliates had sales of $9.0 billion, 7 percent
above 1992 sales (table 13).
The figures given above came from industry-wide BEA data.
However, trade data were used to compile information at the firm
and chain level. As U.S. markets become saturated and U.S.
companies look for alternative markets, more fast food outlets are
showing up in other countries. Twenty-nine of the top 50 restaurant
chains operated a total of 17,038 units in other countries in 1994
(table 19). Seven of those chains accounted for 15,472 or 91 percent
of those units operating outside the United States (table 20). At the
beginning of the 1970’s, only 900 total units operated outside the
United States.
Asian/Pacific countries accounted for the largest share of these
units, 37 percent. Twenty-nine percent operated in European,
African, or Middle Eastern countries. Canada accounted for 24
percent of the units and Latin American countries, 10 percent.
Hamburger, chicken, and pizza chains dominate the international
market.
Table 20—Major U.S. food service chains operating outside of
the United States, 1994
Chain Asia/Pacific
Europe,
Africa,
Middle East
Latin
America
Canada Total
Number of establishments
McDonald’s 2111 2197 436 717 5461
KFC 2172 817 396 873 4258
Pizza Hut 910 1148 415 455 2928
Subway 115 31 62 736 944
Domino’s 232 160 203 185 780
Dairy Queen 125 36 16 451 628
Wendy’s 143 41 51 178 413
Total 5808 4430 1579 3595 15412
Source: Company annual reports.
Globalization of the Processed Foods Market 91
McDonald’s, KFC, Pizza Hut, Subway, Domino’s, Dairy Queen,
and Wendy’s are the top 7 U.S. restaurant chains accounting for the
largest number of foreign units (table 20). McDonald’s, the largest
single food service organization in the world, had 15,205 units
worldwide in 1994 and sales amounting to nearly $26 billion.
McDonald’s operates in 79 countries and accounts for the largest
number of units operating outside the United States, 5,461.
Thirty-six percent of McDonald’s total units operated outside the
United States compared with 34 percent in 1993. Most McDonald’s
units are franchised. McDonald’s also leads in foreign sales,
accounting for $11 billion in 1994. Major markets for McDonald’s
units include Japan, Canada, Germany, England, Australia, and
France. Foreign sales account for about 43 percent of McDonald’s
systemwide sales.
In 1994, McDonald’s opened its first restaurants in Bulgaria,
Bahrain, Kuwait, Latvia, Oman, United Arab Emirates, New
Caledonia, Romania, Egypt, Trinidad, and Saudi Arabia.
McDonald’s expects to open 900 to 1,200 restaurants around the
world in the next several years with two-thirds of those being
outside the United States. England, France, and Germany will be
popular locations.
The McDonald’s chain not only operates traditional restaurant units
but satellite stores as well—smaller units such as kiosks or mobile
carts—which serve simpler menus. McDonald’s expected to open
about 1,000 satellites around the world in 1995. They believe the
key to aggressive satellite programs is alliances with retailers and
oil companies that operate convenience stores. In 1994,
McDonald’s satellite units operated in 377 Wal Marts throughout
the United States, Canada, Mexico, and Puerto Rico. The United
States, Finland, Denmark, and Italy now have McDonald’s in
service stations.
KFC, a division of PepsiCo, Inc., has the second largest number of
units outside the United States, 4,258, which operate in 73
countries. Sales outside of the United States, $3.6 billion, accounted
for 51 percent of their systemwide sales in 1994.
92 Globalization of the Processed Foods Market
Forty-five percent of all KFC units are located overseas. One fourth
of KFC’s foreign units are in Japan, 11 percent in Australia, and 8
percent in the UK. Of the six largest restaurant chains, only KFC
and Pizza Hut operate units in Africa.
Pizza Hut, also a division of PepsiCo, Inc., has 11,546 units
operating in 82 countries. Twenty-five percent or 2,928 restaurant
units are located outside the United States. Pizza Hut chains are
located primarily in Australia, France, Spain, the United Kingdom,
and Trinidad.
Subway, a subsidiary of Doctor’s Associates, Inc., operated 9,893
units in 21 countries in 1994. About 944 of those restaurants were
located outside the United States. In 1994, Subway opened new
units in 11 countries including Mexico, China, Japan, Indonesia,
Philippines, Iceland, Slovenia, Cyprus, Kuwait, Saudi Arabia, and
Korea.
Domino’s, the second largest pizza restaurant chain, operates 840
franchised units in 37 countries. Japan and Canada are popular
locations. Domino’s future growth will depend more on
international expansion. They already have about 90 stores in the
UK and expect to grow in South America.
Dairy Queen, a subsidiary of International Dairy Queen, Inc., had
628 of its 5,554 units operating outside the United States in 1994.
Dairy Queen has opened new stores in Mexico, China, Slovenia,
Cyprus, Kuwait, Saudi Arabia, and Korea since 1993. Dairy Queen
operates in 16 countries.
In 1994, Wendy’s operated 4,411 units in 32 countries and
territories. Four-hundred thirteen of their units operate outside the
United States. Canada is the largest market for Wendy’s restaurants.
Nearly half of the units outside the United States are located there.
Other popular markets for Wendy’s restaurants are Japan, with 42
units, Philippines with 30, and Korea, with 29. Wendy’s plans called
for 100 new international units in 1995 to be concentrated in Latin
America, the Pacific, Western Europe, and Canada. Wendy’s
Globalization of the Processed Foods Market 93
anticipates a total addition of 550 new units abroad over the next 3
years.
Though fast food outlets paved the way into the international
market, family chains such as Denny’s, Big Boy, and International
House of Pancakes are following (table 19). Casual dinner house
restaurants such as TGI Fridays and grill buffets like Sizzler,
Golden Corral, and Ponderosa are also moving into the
international arena.
Table 21—Major foreign firms with U.S. food service
operations, 1994
1
Foreign investor/
location
U.S. chain Type
U.S.
sales
2
U.S.
units
2
Bil. dol. Number
Grand Metropolitan, PLC
London, England
Burger King Sandwich 7.250 6,090
Imasco Ltd. Hardee’s Sandwich 3.511 3,404
Montreal, Canada Roy Rogers Sandwich 0.460 530
Allied-Domecq, PLC Dunkin’ Donuts Snack 1.332 2,979
London, England Baskin-Robbins Snack 0.560 2,355
Compass Group , PLC
London, England
Canteen Corporation Contract 1.077 1,600
Onex Corporation LSG Lufthansa Catering 0.460 34
Toronto, Canada Services/Sky Chefs
Sodexho Sodexho USA Catering 0.435 490
Paris, France Gardner Merchant Catering 0.355 1,100
Food Services
The Albert Abela Group The Wood Company Contract 0.305 296
Paris, France
Total 15.745 18,878
1
Includes company-owned and franchisee-owned operations.
2
Projected.
Source: Nation’s Restaurant News, Aug. 1994.
94 Globalization of the Processed Foods Market
Foreign Investment in the U.S. Food Service Industry
Foreign-owned food service firms had 77 U.S. affiliates in 1993
according to industrywide data (BEA, 1995B). These U.S. affiliates
accounted for sales of $5.2 billion (table 14), and had 116,800
employees. Trade data were used to report information at the firm
and chain level. Trade sources report that food service sales in the
United States by major foreign investors amounted to $15.7 billion
in 1994 (including franchise sales), up 11 percent from 1993 sales of
$14.1 billion (table 21). The number of U.S. units operated by these
investors increased from 15,656 in 1993 to 18,873 in 1994.
Major foreign investors in the United States are Grand Metro-
politan, PLC, London, England; Imasco, Ltd., Montreal, Canada;
and Allied-Domecq, PLC, London, England. Grand Metropolitan,
PLC, owner of the Burger King chain, is the largest foreign investor
in U.S. food service operations. Grand Metropolitan acquired
Burger King in 1988 with the purchase of Pillsbury. Among the top
50 franchised chains operating in the United States, Burger King
was number two in 1994 with total worldwide sales of $7.5 billion.
Foreign sales accounted for only 19 percent of that total. Burger
King operated over 7,500 units worldwide with over 6,000 units
operating in the United States in 1994.
Imasco, Ltd., Canadian-based owner of the Hardee’s and Roy
Rogers chains, is the number two foreign investor. In 1989 the
Marriott Corporation sold most of its Roy Rogers restaurants to
Imasco. Imasco operates about 4,000 Hardee’s/Roy Rogers outlets
in the United States with 1994 sales amounting to nearly $4 billion.
Dunkin Donuts was acquired in 1990 by London-based
Allied-Domecq, PLC, the third largest foreign investor in U.S. food
service operations. Allied Domecq also owns Baskin-Robbins ice
cream stores. The firm operates 2,979 Dunkin Donuts outlets and
2,355 Baskin-Robbins outlets in the United States with combined
sales of $1.8 billion.
London-based Compass Group, PLC, made its initial debut into the
United States in April 1994 by buying the majority of Flagstar Cos.
Globalization of the Processed Foods Market 95
Inc.’s Canteen Corp. U.S. sales for Canteen total $1.1 billion.
Canteen operates 1,600 accounts in the United States.
Onex Corporation, the Canadian-based owner of Sky Chefs,
recently signed a deal with Lufthansa AG of Frankfurt, Germany,
that changed its signage to “LSG Lufthansa Service/Sky Chefs.
This agreement created a global catering company with combined
annual revenues of $1.3 billion.
Sodexho is a French contract catering company that has units in 60
countries and revenues in excess of $1.9 billion. In 1995, Sodexho
acquired Gardner Merchant Services Group, creating the world’s
leader in contract catering with 11,745 units worldwide. The
merger represents combined annual revenues of $3.65 billion. In
the United States, Waltham, MA-based Sodexho U.S.A. operates
490 units and reported $440 million in sales. Combined, Sodexho
and Gardner Merchant operated about 1,588 accounts in the United
States with total revenues of approximately $800 million in 1995.
Sodexho’s Gardner Merchant Services Group, which has been
operating in the United States for 15 years, recently bought two of
the catering segment’s biggest accounts. In 1994 the Trumbull,
Conn.-based division of London’s Gardner Merchant Services
Group, purchased from Morrison Restaurant Inc. the business and
education accounts of its Morrison Hospitality Group. This
acquisition increased Gardner Merchant’s U.S. portfolio to more
than 1,000 accounts and will nearly double its projected annual
revenues in the future.
Other major foreign investors in U.S. food service include
Kyotauru Co., Ltd., Tokyo, Japan (Acapulco, Charlie Brown’s,
Paragon Steakhouse); Nestlé (Stouffer Hotels, Top Restaurants,
Rusty Scupper); and Unigate PLC, London, England (Black-eyed
Pea, Dixie House, Taco Bueno, Casa Bonita, Crystal’s Pizza).
96 Globalization of the Processed Foods Market
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