Full text of DOI:10.1111/1467-7679.00187

Development Policy Review, 2002, 20 (4): 515-528
Regional Market Strategies of Supermarkets
and Food Processors in Extended MERCOSUR
∗
Walter Belik and Roseli Rocha dos Santos
This article examines regional actions among supermarket chains and food
manufacturers (second-stage processors) in the extended MERCOSUR. It
highlights the emergence of ‘regional multinationals’ operating in this
market, which compete and sometimes co-operate with ‘global
multinationals’. The harmonisation of customs regimes, the reduction of
trade barriers such as tariffs and quotas, and the deregulation of foreign
direct investment, have allowed multinationals – regional or global – to
step up their regional activities. They increasingly undertake regional
marketing strategies, are increasing their investment in the region’s
markets, and are causing new regional procurement systems to emerge.
Other articles in this volume examine in detail the development of the supermarket and
food processing sectors in Argentina, Brazil, and Chile. This article looks at the
emergence of regional actions and strategies in the extended MERCOSUR region as a
whole (the economic group of Argentina, Brazil, Paraguay and Uruguay, plus Chile as
part of a political extension of MERCOSUR). The process includes the growth in scale
of the participating firms, and the shift towards the agrifood industry in a market with
regional strategies. This process started in the 1980s and intensified with the
establishment of MERCOSUR with the signing of the Treaty of Asunción in 1991.
In the next few years the reduction in import tariffs among the member countries is
supposed to be finalised, in spite of problems of macroeconomic co-ordination. This
will make the region a fully free trade area with a combined GDP of more than US$1
trillion and a population of more than 200 million. The lure of this regional market is
driving leading agrifood firms to formulate their business strategies for a regional
market.
From the strategic viewpoint, the market of the four member countries of
MERCOSUR is a single market for food manufacturers and retailers. Regional trade in
agrifood goods and services increased by 400% – from US$5 to nearly US$20 billion
from 1990 to 1997-8 – and then dropped by 25% when recession set in in 1999-2001.
More than half of Brazil’s imports from its neighbours come from agriculture or
agroindustry. This is related to the fact that both domestic and multinational firms are
making investments in the improvement of food distribution systems.
A key point of this article is that, since the founding of MERCOSUR, various
‘
regional multinational’ firms have emerged. They share the market with what we shall
call the ‘global multinationals’ (to distinguish multinationals with headquarters in North
America, Europe, or Japan) and seek to co-ordinate production and warehouse logistics
∗
Walter Belik (belik@eco.unicamp.br) and Roseli Rocha dos Santos are at Universidade de Campinas and
Universidade Estadual do Paraná, Brazil, respectively.

Overseas Development Institute, 2002.
Published by Blackwell Publishers, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

516 Walter Belik and Roseli Rocha dos Santos
and product distribution over the MERCOSUR region. A regional-level logistical
system is beginning to develop as an underpinning of the regional activities of both the
regional and global multinationals. These firms are linking local production to the
regional market by means of constant movement and juggling of product inventories
and location of plants.
Supermarket chains (global-multinational or domestic) are also reorganising
themselves regionally, to occupy market territory in the region. A series of mergers and
acquisitions reveal a strategy of capturing new territory, to obtain strong market share in
the region as a whole. This is an extension of the process of retail internationalisation
which up to the 1980s was concentrated in only a few regions, such as US retailers
entering Canada, European retailers entering other European countries, or Asian
retailers expanding in the Pacific region. Today the supermarket chains, what are now
the global-multinational retailers, are crossing oceans, sourcing and selling globally,
driven by the strong competition in domestic markets and retail consolidation in the
1
980s.
To analyse these trends in the context of the extended MERCOSUR, we begin with
a general discussion of the themes and then examine the data on the regional strategies
of food manufacturers (second-stage processors) and then supermarket chains.
Regional strategies of food firms – historical and conceptual
perspective
The quest for scale and reduced transaction costs
North and Wallis (1994) note that there is a permanent tendency for processing costs to
fall but for transaction costs, such as supervision, management, marketing and, with
physical expansion of markets, transport costs, to rise. It becomes crucial for firms to
reduce transaction costs by means of access to information. With market expansion,
there is a reduction in production costs because of economies of scale, and there is an
intensive quest to reduce transaction costs.
Chandler (1987) identified the commercial and transport revolution that occurred in
the mid-1800s in the United States as a key driving force in industrial development. The
introduction of railroads and the opening of transport canals in the Great Lakes region
of North America increased market size and reduced distribution costs – crucial from
the perspective of North and Wallis. The ensuing market expansion was both cause and
consequence of firms’ developing regional production, distribution, and marketing
strategies. Beyond simply reducing transaction costs, investment in regional logistics
systems is justified by requirements of scale and scope of production to be able to
compete at a regional level.
The factors, in Latin America as in other regions, that today drive scale are
logistical systems based on computers and telecommunications, trucks and cold-chains,
and distribution centres to reduce inventory costs. These systems require tight co-
ordination between suppliers and processors and retailers.
Supporting the development of logistical systems is organisational change – in
particular the innovations in types of associations of firms that are being used to seek
synergies and competitive advantages. These are treated in the literature on supply-

Transformation of Agrifood Systems with MERCOSUR
517
chain management. These new structures – such as joint ventures and strategic alliances
combine chain co-ordination with flexibility. The chain co-ordination aspect allows
–
the leading firms to know and co-ordinate the actors along the supply chain, from
producers to processors to distributors. But the co-ordination is undertaken with
flexibility, and with information-sharing along the chain. The objectives are to reduce
‘
down time’ in the system, improve quality, and reduce production and transaction
costs.
There has been a shift over time, in particular marked by the shift from ‘pre-
globalisation’ to the globalisation period starting in the 1990s, in the frequency and
intensity of use of the new organisational forms, particularly by global multinationals
seeking to enter regional markets. We turn next to the general organisational strategies
and determinants of global multinationals’ entry into regional economies as the context
for the subsequent discussion.
Determinants of global-multinationals’ entry into developing regions
Chesnais observes an organisational difference in global-multinational entry strategies
before globalisation and with the start of globalisation (roughly in the late 1980s to
early 1990s, depending on the region):
What is new is that firms use combinations of international investments, commerce and
international cooperation between firms in strategic alliances, to assure their
international expansion and rationalize their operations. The international strategies of
the past, based in production for export, gave rise to new strategies, that combine a
series of activities that cross borders: exports, foreign investments, and international
alliances. (1996: 27)
Oman et al. (1988) note that multinationals tended to start in the 1980s with a strategy
of sub-contracting suppliers and forming alliances with local distributors.
Gonçalves (1991) comments that according to traditional theory the decision of
multinational firms to operate in a given country depends on: (i) the comparative
advantages of property (licence concessions, risks and uncertainties, value of the
technology to be transferred, and so on) and (ii) locational factors such as institutional
conditions, taxes, and market policies. Add to that (iii) the eventual lack of suppliers of
intermediate goods or the necessity to internalise knowledge of production techniques
and product ingredients because of the risks that can arise with respect to local firms
imitating opportunistically. (iv) The recent expansion of multinationals in developing
countries was analysed by Oman and his colleagues (1988), Green (1989) and Rama
(
1992), who noted that the main motivation for entry was the size and growth rate of the
consumer market (especially relative to stagnation in the home market).
However, in developing countries there are additional determinants of multinational
entry: (v) the need to become more familiar with the local market, which can be
accomplished by merger with or acquisition of local firms; (vi) the absence or relative
lack of competition because of the weak local financial capacity for local firms (due to
scarce own capital and weak banking sectors); local firms with strong participation in
the market and good growth prospects become easy targets for their multinational
competitors who can easily mobilise international capital and undertake leveraged buy-

518 Walter Belik and Roseli Rocha dos Santos
outs; and (vii) the low technical level of local managers, not only in the production
field, but also in marketing (brand, presentation, promotions) as well as the logistics
linked to distribution.
MERCOSUR context and agrifood firm strategies
With the creation of MERCOSUR and the establishment of a legal and institutional
space for doing business, local firms were able to take a step forward, as they were able
to reduce costs by using commercial information, packaging, and marketing techniques.
In other words, the creation of the common market with reduced fiscal and tariff
barriers favoured the firms already in the region, putting them on an equal footing with
foreign firms that had already done business outside their borders. Although foreign
firms operating in MERCOSUR continued to enjoy access to financing from their
parent firms, as well as global brands and the ability to launch new products more
rapidly, regional firms did well, despite the fact that the competition became far tougher
and it seemed to many that the global multinationals would easily dominate.
The strategy of the global multinationals in MERCOSUR, which in any case did
not differ greatly from the strategies they pursued in other regions, was as follows. Up
to the 1980s, these firms operated in a relatively isolated way, using their own suppliers
and with their expansion determined by whether there was a market for their product,
cheap labour, and monopolistic profits to be earned. This was the case with a number of
giant firms such as Parmalat, Nestlé, and Unilever. Early 1990s surveys in Brazil
observed that the Brazilian offices of these firms maintained direct contact with their
home headquarters, similar to that in other countries in Latin America. During the
1
990s, however, many of these operations were aggregated and command and co-
ordination started to be carried out at the regional level (Belik, 1995).
In the 1990s, there was a change in orientation. Many global multinationals, mainly
those in the agrifood domain, began to regard their markets as inter-linked. Although
product launching strategy was still defined by the home office and adapted to local
conditions, decisions on pricing policy, selection of suppliers, adaptation of production
to local raw materials, packaging, imports and exports were made by local offices.
These trends were partly interrupted by the crisis in MERCOSUR caused by
1
macroeconomic problems in Brazil in 1999 and 2000 and now in Argentina. Until the
mid-1990s a certain euphoria obtained among agrifood firms in the extended
MERCOSUR as there was a huge influx of FDI with concrete initiatives integrating/co-
ordinating supply systems. There then followed a sharp reduction of FDI in the agrifood
sector of MERCOSUR, which coincided with a general tendency in the private sector
globally, because of the North American recession. FDI in MERCOSUR fell by more
than 40% during 2000-2001. Latin America and the Caribbean received US$110 billion
in FDI in 1999, falling to US$80 billion in 2001 (United Nations, 2002).
With the devaluation of the Brazilian currency in January 1999, the Argentines
sought to protect themselves with selected surcharges, quotas and other barriers to the
now cheaper Brazilian exports. The Brazilians retaliated with a prohibition of the import
1
. From a juridical and institutional viewpoint, the crisis was aggravated by US insistence on the approval of
the FTAA (Free Trade Area of the Americas) in the short term and, more recently, the power given to the
US President to sign ‘fast-track’ bilateral agreements without the approval of Congress.

Transformation of Agrifood Systems with MERCOSUR
519
of Argentine beef because of foot-and-mouth disease. These actions constrained
probably only temporarily) the reduction of barriers to intra-regional trade and thus the
(
steady improvement of conditions for agrifood firms to work regionally.
In 2001, with the Argentine crisis, many Brazilian firms stopped their investment in
Argentina and a number of Argentine firms moved to Brazil to take advantage of
cheaper labour, fewer taxes, and a more favourable exchange rate. Even so, in bilateral
trade between the two countries, Argentina has a trade surplus of US$1.2 billion.
From the point of view of macro policy, the members of MERCOSUR marched
together up to the end of the 1990s, not because of explicit co-ordination but because
each government was pursuing its own structural adjustment programme. The
hyperinflation of the end of the 1980s was substituted by a long period of stability
anchored in a fixed exchange rate and parity with the dollar. This favoured revaluation
of the currencies, leading to external debt and a stronger integration with foreign capital.
But by the end of the decade there were divergences. In 1999, Brazil changed to a
floating exchange rate, forcing down the balance of trade of its neighbours. Around the
same time Argentina reduced its import tariffs (now among the lowest in Latin
America), thus favouring triangular operations which directly affected Brazilian
products such as milk. Argentina’s maximum tariff applied to products imported from
outside MERCOSUR is 22%, as compared with 70% in Brazil. The averages are 15%
and 21% for Argentina and Brazil, respectively. Despite Argentina’s lower tariffs,
surcharges are applied to chicken, sugar, and other Brazilian products. Brazil counters
with a surcharge on Argentine dairy products and imposes restrictions on Argentine
beef, citing foot-and-mouth disease as the reason.
Despite the challenges faced in the late 1990s, overall there have been significant
advances in MERCOSUR integration since 1991. There has already been significant
integration in transport and legislation. For example, the regulations regarding the
equivalence of systems of food inspection are already in place, based on international
standards such as WTO agreements and the directives of the Codex Alimentarius
Commission of FAO. Food products can therefore circulate in MERCOSUR using only
their local health certification which is now valid regionally.
Food processing firms in MERCOSUR: the emergence of
‘regional multinationals’
The food industry was the main target of mergers and acquisitions (M&A) in Brazil in
the 1990s. Viegas (2002) shows that there were 2,127 M&A between 1994 and 2000 in
Brazil, 269 of them (12%) in the agrifood sector and 57% by foreign firms. Several
studies reveal a preference for the agrifood processing sector in FDI (Belik, 1994, 1998;
CEBRAP, 1998). In general this can be explained by the anticyclical character of the
market and by its growth potential in the medium and long run (Rama, 1992).
Similar trends were occurring in other MERCOSUR countries. There were a
number of M&A in the food processing sector in Argentina (Viegas, 2002). The effect
of these on the Argentine economy was proportionally greater than in Brazil simply
because the food sector is the main industrial sector in Argentina, about 20% of
industry, whereas it is only 10% in Brazil. Both countries have experienced rapid

520 Walter Belik and Roseli Rocha dos Santos
growth in the food sector which is growing faster than overall industry (excluding
construction and mining) (see Table 1).
Table 1: Food production in Argentina and Brazil,1993-2001
Brazil
Argentina
Overalla
industry
Food except
beverages
Beverages
Overalla
All food and
beverages
industry
100.0
104.4
93.2
December/93
December/94
December/95
December/96
December/97
December/98
December/99
December/00
November/01
100.0
118.9
103.9
111.3
106.5
101.8
111.3
118.0
128.3
100.0
104.2
120.3
114.5
116.1
116.9
120.1
124.5
145.0
100.0
131.4
131.1
133.3
131.7
137.9
141.5
140.9
132.0
100.0
113.4
108.8
114.3
121.1
130.9
128.0
126.3
120.7
103.1
112.3
105.3
113.9
111.7
98.4
Note: a) Excluding construction and mining.
Sources: Central Bank of Brazil and Ministry of the Economy, Argentina.
A particularly interesting phenomenon is the rise of regional multinationals, a new
kind of processing firm in the extended-MERCOSUR countries. These are highly
visible in the trade press, but have been examined very little in the research literature.
With the rapid process of M&A in the 1990s, a number of firms (which eventually
emerged as regional multinationals) were large domestic firms buying smaller firms,
2
until they attained a large size. They then invested in other Latin American countries,
mainly in the extended MERCOSUR, but, as shown below, not limited to it. They have
thus become regional multinationals. Here, as illustration, is a brief profile of a few of
the new giants:
•
•
Companhia de Bebidas das Américas (AmBev) (www.ambev.com.br) is now
the third largest beer brewer in the world and the fifth biggest beverage
company, with annual earnings of US$5.73 billion. Before May 2002, the
Brazilian market accounted for 95% of its earnings, with only small operations
in Argentina, Uruguay, and Venezuela. In May 2002 it took a minority stake in
the leading Argentine brewer Quilmes Industrial S.A. (with US$1 billion sales
a year).
The Macri Group (www.socma.com.ar) has US$2.3 billion of annual sales, and
is based in Argentina and operating in Brazil and Uruguay as well. It has a
wide range of activities in construction, computers, and in the food sector, in
dairy, meat, and flour products.
2
. The top ten in MERCOSUR figure among the largest agribusiness firms in Latin America: Grupo Pão de
Açúcar (30), Bunge Brasil (53), Brahma (bought by AmBev) (82), Copersucar (152), Arcor (177),
Perdigão (225), Quilmes (251), Mastellone ( 279), Antarctica (bought by AmBev) (284), Molinos Rio de
la Plata (297) (Gazeta Mercantil, 2001a).

Transformation of Agrifood Systems with MERCOSUR
521
•
Arcor (www.arcor.com.ar) produces a range of sweets, biscuits, processed fruit
and vegetables, and flour products. It has subsidiaries in Brazil, Chile, Peru,
Mexico, Uruguay, Paraguay, Colombia, Ecuador, Bolivia and Florida. It has 31
plants, 25 in Argentina, 2 in Brazil, 3 in Chile, and 1 in Peru, and exports to
more than 100 countries. It had US$1.15 billion in sales in 1999.
Given their knowledge of local suppliers of raw materials, the regional culture, and
marketing channels, these regional multinationals have been able to expand rapidly,
although their presence outside their own countries is still weak compared with that of
the global multinationals.
The large domestic firms in the countries of the extended MERCOSUR invested in
other countries in the region as much in response to pull factors – to increase scale and
to take advantage of market opportunities and deregulation of investment – as because
of push factors – as a defensive measure to occupy market territory. Table 2 shows a
Table 2: Emergence of regional multinationals
Who
What
How
Where
Sancor (Argentina)
Mastellone
Dairy products
Dairy products
FDI in plant and own distribution
FDI in plant and own distribution
Brazil
Brazil
(Argentina)
Mikalt (Argentina)
Conaprole (Uruguay)
Sadia (Brazil)
Dairy products
Dairy products
Meats and feed
Acquisitions and own distribution
FDI
Brazil
Brazil
Partnerships for production, and
Distribution Centre
Argentina
Averama (Argentina)
Perdigão (Brazil)
Socma (Argentina)
Chapecó (Brazil)
Brahma (Brazil)
Meats
Meats
Plant, and local production of birds
Distribution Centre
Brazil
Argentina
Brazil
Meats
Building local plants
Meats
Distribution Centres
Argentina
Argentina
Brazil
Beverages
Beverages
FDI in production and distribution
Local plants
Malteria do Pacífico
(Chile)
Antarctica (Brazil)
Macri (Argentina)
Beverages
Distribution
Argentina
Brazil
Biscuits and meats
Acquisition of local plants for
production
Arcor (Argentina)
Sweets and biscuits
Installation of local plants and
marketing offices
Brazil and
Chile
Garoto (Brazil)
Mabel (Brazil)
Arisco (Brazil)
Algar (Brazil)
Sweets and biscuits
Sweets and biscuits
Vegetables
Distribution centre
Installation of plants
Argentina
Argentina
Argentina
Argentina
Brazil
Local processing and production
Local processing and production
Acquisition of local plants
Vegetables
a
IANSA (Chile)
Vegetables
Molinos Argentino
Grains, meat and
flour
Acquisition of local plants and
warehouses
Brazil and
Uruguay
(Argentina)
Ceval (Brazil)
Oils and cereals
Acquisition of local plants
Argentina
Note: a) They have a joint venture with the French Bonduelle.
Source: By authors based on the trade press and interviews

522 Walter Belik and Roseli Rocha dos Santos
selection of important recent FDI actions among firms in Brazil, Argentina, Uruguay
and Chile within the extended MERCOSUR region. Purely exports or imports of
products, or investments outside the area, have been omitted from the table. (Note,
however, that Mexico and Venezuela have a significant presence in the area.) There are
distinct levels of actions of the regional multinationals, varying from straightforward
alliances with local firms to distribute their products, all the way to FDI and the
installation of plants. In this sense, the approach of the regional multinationals does not
differ from that of the global multinationals. Moreover, there is a certain product
specialisation among their home countries. Argentina-based firms tend to deal in dairy
products and Brazil-based firms in poultry, a division which goes along with national
vocation and competitive advantages.
There are also important cases in the sector of canned foods, biscuits, and sweets.
Here there is an intense struggle among Brazilian and Argentine firms to invest in and
penetrate each other’s markets, all with an eye to defending territory and expanding in
the face of competition from the global multinationals. The struggle takes place during
the ups and downs of the two countries’ economies and policies (such as the exchange
rate and tariff or other trade barrier policies), without any change in their long-term
competitive strategies. The table shows many cases where a new competitor enters
through FDI or alliance with a local firm; most of these investments include the
establishment of distribution systems involving both raw and processed products
flowing between the subsidiary and the parent firm.
Table 3 shows similar types of activities, mainly M&A, carried out by global
multinationals in food processing in the extended MERCOSUR area. After
‘
prospecting’ the market, the firm starts a local operation either as FDI or a
straightforward takeover of a local firm with a strong presence in the local market and
good marketing channels. By far the main means of entry is M&A, since the
multinational wants an immediate response to competition and not the slow build-up of
an operation from scratch; even when one observes other strategies at a given moment,
examination of the earliest stage of its penetration usually reveals M&A as the first step
(
Martinelli Jr., 1999).
Recently, the devaluation of the Brazilian real in 1999, the overvaluation of the
Argentine peso, and the recession in Argentina led to migration of Argentine capital to
Brazil; this meant an acceleration in flows that were already occurring. CEBRAP (1997)
showed that between 1994 and 1996 the nationality of the firm most often acquiring
firms (subsidiaries or home firms) in the Brazilian food sector was Argentine. The
Macri Group of Argentina (see above), whose sales in Brazil amounted to 50% of its
total sales, had acquired the cold storage Chapecó in Brazil in 1999 and continued to
expand its business in Brazil, acquiring more biscuit firms in 2001 and planning
additional acquisitions at least to the end of 2005, and building new plants and
launching new products (Gazeta Mercantil, 2001b). Other Argentine processors that
crossed into Brazil include Perez Companc, to cite merely one leading firm. One
attraction was that the interest rate charged by the Brazilian Development Bank
(
BNDES) was only 3% per year compared with the going rate of 12% in Argentina.
The consequence of a decade of intense FDI on the part of the regional and global
multinationals was rapid consolidation of the food processing sector in the region. Jank
et al. (1999) note a rapid consolidation and high levels of concentration and
multinationalisation in the Brazilian agrifood products export sector, including

Transformation of Agrifood Systems with MERCOSUR
523
processed or semi-processed products, in the 1990s. The subsidiaries of global
multinationals are exporting or even assuming the role of distribution agents. In 1998,
4
5% of soy products exports, 40% of pork, 35% of chicken meat, and 20% of orange
juice were exported from Brazil by global multinationals. The latter benefited, in
comparison with Brazilian firms, from relatively easy investment and working capital
from their parent offices.
Table 3: Expansion of global multinationals in the
extended MERCOSUR
Who
What
How
Where
Parmalat
Foods,
general
Acquisition of local plants, joint ventures,
and distribution centres
Brazil, Argentina,
Uruguay, Chile and
Paraguay
(Italy)
Danone (France)
Bunge Group
Foods,
general
Acquisition of local plants, joint ventures,
and distribution centres
Brazil, Argentina
and Uruguay
Foods,
general
Acquisition of local firms and
reinforcement of trade and exports outside
the extended MERCOSUR
Brazil, Argentina
and Uruguay
(Argentina)
Cargill
US)
Meats and
grains
Export
Brazil, Paraguay and
Argentina
(
Dreyfus (France)
Grains
Export
Brazil and Argentina
Brazil and Argentina
Unilever
Foods,
general
Product launch in the region in joint
ventures
(
UK/Netherlands)
Philip Morris
US)
Sherbets and
chocolates
Product launch in the region
Brazil, Uruguay and
Argentina
(
Heublein (US)
Beverages,
general
Joint ventures
Brazil and Argentina
Moët & Chandon
Wines
Joint ventures
Brazil and Argentina
(France)
Source: By authors from the trade press.
But selling to the rapidly growing domestic markets, in order to establish a
presence in the local and regional markets, was more important than exporting in
attracting FDI to the region. The share of the global multinationals’ output that goes to
the domestic market usually far exceeds that exported outside the region. Exports of
coffee, soy, and sugar are only around 20% of total output in Brazil. The exception is
orange juice in that most of it is exported, but most of the oranges harvested are still
consumed fresh in the Brazilian market (Laplane and Sarti, 1999; Graziano da Silva,
2
002).
At the end of the 1980s and during the early 1990s, FDI was linked to the de-
verticalisation and sub-contracting of production, and its reduction due to the drop in
demand during the recession. With the beginning of the stabilisation policy in 1994, in
contrast, there was new investment to meet the demand of the rapidly growing domestic
market.

524 Walter Belik and Roseli Rocha dos Santos
Another important change was the rise of intra-firm trade. In the case of the global
multinationals, there was a substantial reduction in the flow from headquarters to the
subsidiary. Imports of products from parent firms to subsidiaries in Brazil dropped from
4
7.9% of the total of food industry imports in 1989 to 20.9% in 1997. In the case of
exports from subsidiaries to parent firms there was a fall from 5.7% of total exports of
the agrifood industry to 3.6% over the same period. This should be compared with the
rise of commerce between subsidiaries (of the same firm) intra-MERCOSUR from
2
.5% of food industry exports to 32.5% over the period 1987-97; the counterpart figures
for imports were from 6.2% to 14.4% (Laplane and Sarti, 1999).
Supermarkets in the region – rapid expansion by global
multinationals, modest emergence of regional multinationals
Until the 1990s, the supermarket sector in the MERCOSUR countries was mainly
financed by domestic capital, with limited operations in terms of geographic markets
(
local or city) and technical and organisational capacities. Despite a few innovations
such as installing bar-code readers at the cash registers, there were few incentives to
make important investments in logistics or information technology or in management.
This is key to understanding how supermarket chains functioned in Brazil at the time.
Inflation, which had reached 90% a month, enabled large profits to be made in the
financial market, providing an incentive for firms, among them supermarkets including
the global multinationals, to develop strategies compatible with this context (Belik and
Rocha dos Santos, 1997).
Starting in the 1990s, the deregulation of foreign investment and the stabilisation of
currencies completely changed the scenario for supermarket chains in the region. With
intense competition and profit reductions as well as increased legal restrictions in their
home markets, growth in scale for the large US and European retailers required
international expansion. The increase in mergers and acquisitions in MERCOSUR was
extremely rapid, as global retailers fought over the best positions in the market.
Despite the propitious structural conditions for the development and modernisation
of the retail sector in the countries of the extended MERCOSUR – such as high rates of
urbanisation, mass transport, urban food consumption habits, and the participation of
women in the workforce outside the home – the retail market remained fragmented and
relatively underdeveloped until the early 1990s. Like the food processing sector,
supermarket chains were protected from international competition by restrictions on
FDI. With the opening up of economies in the early 1990s, and on its heels the
monetary stabilisation, there was an influx of FDI in retailing in the whole region.
Global supermarket chains, with their economies of scale, logistics, and bargaining
power with global suppliers, took advantage of this situation.
The FDI took place directly, via the establishment of stores (by Carrefour (France),
Wal-Mart (US)), by the acquisition of local chains (by Sonae (Portugal), PROMODES
(
France), Royal Ahold (Netherlands)), or even by joint ventures with local firms (by
Casino (France)). Some were already in the region well before the 1990s, such as
Carrefour, which built its first hypermarket in Brazil in 1975 and in 1982 in Argentina.
But Carrefour, which until recently built only its own stores in Brazil, has now begun to
acquire local chains or part-ownership in them, as in the case of its purchase of 50% of

Transformation of Agrifood Systems with MERCOSUR
525
the shares of Eldorado de Supermercados. Via the firm Comptoirs Modernes, it bought
3 of Lojas Americanas stores, five of which changed their name to Carrefour and the
2
others to STOC. In 2001, however, Carrefour sold some of its STOC stores to Royal
Ahold and Sonae; the Sonae group bought various chains and also built hypermarkets in
Brazil. In the first half of 1999, the supermarket sector in Brazil was only behind that of
telecommunications, which was being privatised, in M&A. Recently Casino bought
2
3.98% of the stocks of the domestic chain Pão de Açúcar, and Royal Ahold bought the
domestic chain Bompreço in August 2000. Overall, in Brazil as in Argentina and
Uruguay and now Paraguay, there is an overwhelming presence of global supermarket
chains, especially those based in Europe.
Moreover, the rapid influx of global multinationals led to rapid consolidation of the
supermarket sector in the region especially after 1995, with the five leading chains
having 40% of the sector in Brazil and 57% in Argentina by 2000. In 1998, the 20
largest chains in Brazil experienced growth of 17% in sales relative to 1999, reflecting
an explosion of M&A that intensified at the end of 1997, with firms’ rankings changing
almost every month. Starting in 1998, for the first time the sales of the leading 20 firms
exceeded the sum of the other 280 chains in the list of ABRAS, the Brazilian
supermarket association (ABRAS, 2001). Farina (this volume) gives the rankings of the
top 10 firms in 2000, and six of them are global multinationals on their own or in joint
ventures with domestic firms. Gutman (this volume) shows that in 2000 the top seven
chains controlled 77.5% of the supermarket sector, and only two of them were financed
by domestic capital (with only 15% of the market between them). She notes that one of
the most important chains in the 1990s was Disco, formed in 1961 by Grupo Velox with
Uruguayan/Argentine capital, an early regional multinational set up before
MERCOSUR – but then acquired by Royal Ahold. She also notes that Jumbo, a Chilean
firm, has 5% of the Argentine market and is in the top seven, also a case of early FDI in
the region, from Chile into Argentina, before MERCOSUR.
Chile is the exception in the above process. Faiguenbaum et al. (this volume) show
that its supermarket sector is somewhat less concentrated, and is dominated by a
domestic chain (D&S, which also has investments in Argentina) with about 30% of the
sector; the nearest global multinational has only 10% of the sector. This is Santa Isabel,
which is part of the firms controlled by Royal Ahold in the extended MERCOSUR, in
Argentina (Disco), Paraguay, Peru, and Chile (Santa Isabel), and Ecuador. Among the
chains which are fully foreign there is only Carrefour with 1.7% of the supermarket
sector.
It is probable that the importance of regional multinationals is so much greater in
the processing than in the retail sector because of the size of domestic processing firms
before liberalisation, compared with the relatively weak and fragmented retail sector.
Moreover, while processing relies on strength in production processes which Brazil and
Argentina clearly had in their domestic firms (despite subsequent consolidation and
multinationalisation), retailing relies mainly on capacity to organise distribution
systems. Just as we noted above that railroads were once the key to success in such
systems, in modern commerce the key is logistical systems, management of inventories
(
(
such as the use of Electronic Data Exchange (EDI) and efficient consumer response
ECR)) and category management.
The global multinational retailers had strong advantages in the use of these systems,
in many of which they were either the inventors or leading innovators on a global scale.

526 Walter Belik and Roseli Rocha dos Santos
Their experience in other regions also gave them an advantage in marketing. The
installation of certain systems reassures the consumer and also acts to reduce co-
ordination costs in the supply system. An illustration is the use of quality certification.
Carrefour introduced a quality certification system for 10 products in Brazil and for all
its perishables. Any producer with the quality certificate can sell both in Carrefour
stores in Brazil and anywhere else in the world. Pão de Açúcar, historically a domestic
firm (now in a joint venture with Casino), has a certification line in meats and meat
products, visiting farms to control quality and controlling the reception points in its
stores. In 30 stores, the meat sold is controlled and verified from birth to slaughter in
order to receive the quality certificate.
Moreover, the global multinationals introduced important logistical and computer
systems. For example, Carrefour hypermarkets in France eliminated food stocks in
1
998, and the aim is for their stores in Brazil and Argentina to follow suit, with
warehouses cut down to a tenth of their current size. Carrefour constructed a centralised
distribution centre in São Paulo in order to cut costs of transactions with suppliers; this
centre is operated as a joint venture with the joint venture Cotia Trading (a Brazilian
wholesaler) and Penske Logistics (a logistics firm based in the US), serving 3 states
with 40 hypermarkets and 11 STOC supermarkets – Comptoirs Modernes). Distribution
centres are also planned for the northeast and the centre-west regions. The Sonae group,
which already operates distribution centres in Rio Grande do Sul and Paraná, is
planning to build a large centre in São Paulo.
Regional and global sourcing are also in the offing for the retail sector in the
region. Carrefour already uses a global sourcing network for its fruit producers in
Brazil. Casino, already present in Argentina, Uruguay, and in various Andean
countries, recently entered the Brazilian market. At present, its distribution centre
(
Leader Price) is in Argentina, and one of the goals of its joint venture with Pão de
Açúcar is to develop a line of retail brands (Gazeta Mercantil, 1999b). In return, Pão de
Açúcar will have access to global sourcing via Casino, principally in Asia.
Even the smaller supermarket chains are setting up buying associations to create
economies of scale to improve the management of logistics and sales in order to be able
to compete. The associations work with independent wholesalers, or with networks of
wholesalers such as the International Grocers Alliance (IGA of the US, see
www.iga.com), specialising in management technologies and the establishment and
management of small and medium-sized supermarket stores as franchise systems.
The objective of the logistics is to shorten the distances from suppliers to buyers
and to reduce stocks in hand. For the supermarket chain this means a presence (say in a
distribution centre) near the suppliers, and for suppliers it means meeting the needs of
the retailers rapidly. As the scale of purchasing by the supermarket chains increases
with multi-zone and then national and regional distribution centres and procurement
networks and sourcing systems, suppliers are working towards greater flexibility in
order to meet greater volume needs and quality specifications. Managing the sourcing
system using up-to-date computer systems is also a challenge for the supermarket
chains on a regional scale. A regional procurement system requires greater
standardisation of packaging, measures, labels, and even bar codes and inspection labels
that facilitate the use of EDI and ECR, both techniques to minimise the costs of stocks
in hand and transaction costs in general. Government policy harmonisation throughout

Transformation of Agrifood Systems with MERCOSUR
527
the region also plays a role here: the Argentine and Brazilian governments are currently
trying to create a common inspection label for meat to facilitate trade.
Although suppliers and retailers are working towards cross-border procurement
systems in the region, there is still little development of distribution centres designed to
serve various countries of the region at the same time, apart from Casino’s centre in
Brazil and its operations with Pão de Azúcar. However, some firms, such as Quaker and
Nestlé, are setting up large centres to supply various MERCOSUR countries
simultaneously. Again, to the extent that MERCOSUR governments reduce trade
barriers (including trade retaliation), it will be easier to set up such regional and even
continental procurement systems linking suppliers and retailers.
Conclusion
MERCOSUR, as a large and dynamic free trade area, has attracted large amounts of
FDI in the food processing and retail sectors both from big domestic firms (which in
turn became regional multinationals) as well as from global multinationals. These firms
were seeking economies of scale and scope, and in particular to tap into the rapidly
growing domestic market, as well as, to a much lesser extent, exporting outside the
region. In addition to FDI these firms brought technological and managerial change
(
with new logistical systems) as well as organisational change, including the setting up
of distribution centres to source their products from large areas at national level and
emerging systems at regional level, and the creation of joint ventures and strategic
alliances.
The development of new institutions at the MERCOSUR level, such as sanitary
regulations, common customs and tariff regimes, and other administrative impediments,
favours such regional developments by reducing transaction costs.
While this regionalisation has benefited large domestic and global firms, it presents
challenges to small firms as the new policy and competition context has brought rapid
concentration of processing and retailing in the region. To broaden participation by the
presence of smaller firms, it is necessary to have adequate public regulation of the
market, in order to counterbalance the negative effects of the consolidation and
globalisation processes.
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