PART II

The Causes of Export Failure

THE POSSIBILITIES FOR FARMERS to sell in international markets increased enormously everywhere over the nineteenth century, as world trade grew annually by 4 percent, twice that of GDP among the world’s leading sixteen nations. Rapidly falling freight rates produced by improved shipping and more efficient port infrastructure cut the cost of trade between countries. Tariffs on many products were reduced, at least until the 1870s. Inland transport was transformed by the railways and improved roads that linked producer regions to markets, and information costs declined with the development of the telegraph and rapid growth in the number and circulation of local newspapers. By 1914 there were few parts of the globe left untouched, but while both rich and poor regions exported goods, the demand for food and beverages was almost exclusively found in the rich markets of northern Europe and North America.¹ Britain was by far the country most dependent on international trade, importing the equivalent of almost 60 percent of its food and beverage needs on the eve of the First World War.² Over the century Britain’s population increased from about eleven to thirty-seven million; GDP per capita tripled; and by 1900 the urban population was about 80 percent of the total. Before wine tariffs were slashed in the early 1860s, British consumers already drank virtually all the fine sherries and ports produced, and an important quantity of the best clarets and champagnes. Significantly lower taxes and other market reforms now offered a huge potential market for Europe’s wine producers, as the British government tried to make wine competitive and a product of mass consumption.

The mechanics of collecting wine from many different vineyards, grading it, and delivering it in acceptable condition to consumers hundreds of kilometers away created plenty of problems for economic agents along the commodity chain. When consumers bought their wines from producers they did not know, reputable intermediaries were required to enforce contracts and reduce information costs. Fine wines were sold along the chain “by gentlemen to gentlemen,” and problems of asymmetrical information concerning product quality between producers and consumers were resolved by personal reputation and trust. The British wine trade in the early nineteenth century therefore consisted of a group of elite consumers paying exceptionally high prices for their wines. However, if merchants were going to exploit the lower taxes and transport costs to create a mass market for cheap wine among British consumers, they needed a different organizational structure to reduce marketing costs. In particular, retailing had to change from one that was information-intensive to one where consumers could easily and cheaply determine quality prior to the purchase of their bottles of wine from a retail outlet that was conveniently located near where they lived.³

The rise of the modern corporation and the major economies of scale and scope associated with the leading industries in the second half of the nineteenth century were matched by significant changes in distribution, as firms looked to sell their mass-produced goods to affluent urban consumer. In countries such as the United States and Britain, retailing was radically altered with the appearance of chain stores, consolidation of major brand names, and the introduction of mass-marketing techniques. Brands helped to reduce information costs for consumers by differentiating products, guaranteeing the good’s purity, and creating producer reputations.

Many of these brands associated with food and beverages were linked to buyer- rather than producer-driven commodity chains. The governance structures of the two were very different and resided in the location of the barriers to entry. Agricultural production was often very competitive and globally decentralized, with millions of producers and few barriers to entry, so buyer-driven chains were created with the control at the point of consumption. With the growing dependence of British consumers on the world’s food and drinks markets, a very small number of domestic wholesalers and retailers were able to control the chain. For example, the import of frozen meat reduced the need for skilled domestic butchers but required hygienic outlets for the “vast quantities of frozen and later chilled meat that were pouring into the United Kingdom.”⁴ By 1910 ten British firms between them had created a total of 3,684 retail branches,⁵ and it was these firms that controlled meat quality, established brands, and enjoyed scale economies in marketing. Likewise with coffee, the economies of scale found in roasting and packaging (especially after vacuum sealing was invented in 1900) encouraged a concentration in the number of firms in consuming countries, where a growing share of the value was added.⁶ By the end of the century the huge economies of scale found in processing, packaging, and distribution allowed firms such as Cadbury’s, Heinz, Kraft, and Lipton’s on both sides of the Atlantic to spend heavily on branding and advertising, thereby constructing high entry barriers to potential competitors. By contrast, producer-driven networks are controlled by core firms at the point of production and today include such products as aircrafts and computers. High entry barriers make it difficult for new firms to start production, and the large corporations can exert control through backward linkages with suppliers and forward control into retailing.⁷ Producer-driven chains are generally rare with regard to agricultural commodities, but the limited supply of top-quality land implied that a number of such chains existed among wine producers, including such well-known brands as Château Margaux and Moët & Chandon, as will be discussed in part 3.

Despite the growing opportunities to trade, both buyer- and producer-driven chains failed to increase wine sales to nonproducer countries such as Britain, so that although approximately 12 percent of the world’s production was exported in 1909–13, France accounted for nearly half of all imports. The next chapter looks at why exports to nonproducer countries were not greater, and why bulk importers were unable to brand wines as was being done with breakfast cereals, soups, and beer.

¹ In 1913 Europe and North America exported 53.5 percent and imported 82.1 percent of all food and beverages traded internationally (Yates 1959:64, 66).

² Turner (2000:224–25).

³ For a discussion on these two types of retailing, see Casson (1997:12–14).

⁴ Imported meat increased from 10 percent of total consumption in 1870 to 37 percent in 1896 (Jeffreys 1954:182, 190).

⁵ Ibid., 187.

⁶ Over three-quarters of the retail price of coffee in the grocery trade was added in consuming countries by 1935 (Topik 1988:60).

⁷ Gereffi (1994:104).