Local Competitive Advantage
Most discussions of the competitive advantage, employing phrases like “going to scale,” assume that larger scale automatically increases economic performance. Were this really the case, local food and the small CFEs involved in it might seem like guaranteed economic losers. In fact, economists have long argued that steady increases in scale sooner or later lead to poorer economic performance. The returns to scale inevitably diminish, and then they can even become negative. The relationship between scale and efficiency surrounding CFEs is far more complex and interesting than is widely understood.
Generalization about the competitiveness of literally hundreds of thousands of foodstuffs and food services is, of course, inherently imperfect. How does one compare— literally—not just apples to oranges but Macintoshes to Granny Smiths? Moreover, how do these comparisons shift for consumers who are committed to triple bottom line businesses, who are comparing not only price but value? There are, nonetheless, some broad observations one can make about the competitiveness of CFEs in the United States.
First, we know that competitive CFEs are possible in every category of small-scale food business. Why? Because well-performing small businesses—nearly all of which are locally owned—appear in every one of 100 food categories of the North American Industrial Classification System (NAICS) mentioned earlier. In fact, in most of these categories, small businesses account for most of the jobs and output. But even if there were only one successful small business in a given category, it would be relevant. As the economist Kenneth Boulding once said, “Anything that exists is possible.” A smart community interested in localizing its food system should look for examples of small-scale success, study the key elements of these business models, and replicate them.
Second, even if one looks at the average size of a business in each food category, some categories actually have seen increasing localization in recent years. For example, between 1998 and 2002, the average business in “food and beverage stores” and “beverage and tobacco product manufacturing” became smaller. Some food categories have seen the average business become bigger too, but even here, there are many explanations that have nothing to do with their underlying competitiveness. United States public policy, for example, subsidizes larger businesses, from large farms to large exporters. Securities laws have made it largely unaffordable for 98% of the American public to invest in CFEs. Antitrust laws that once might have restrained the power of larger food businesses, such as Walmart or Tyson, have been largely unenforced. Indeed, given the degree of this unequal playing field, what seems most remarkable from the NAICS data is the extent to which CFEs have largely held their own in an era of globalization.
These arguments are relevant in a global context as well. If an entrepreneur eager to create a CFE looks for relevant models of success not just in the United States but globally, the pool of intriguing ideas expands dramatically. Because so many changes in the world economy have occurred over the past two decades—Chinese competition, the Internet, rising oil prices, the shrinking U.S. dollar, skyrocketing populations—every nation’s economy has witnessed enormous upheaval. Old assumptions are crumbling, and with them many established businesses. Newer CFEs are learning how to deploy available labor, technology, and capital in just the right way for their scale. Whatever the competiveness of CFEs today, smart CFEs everywhere on the planet will be able to increase their competitiveness in the years ahead because of number of trends. Consider five:
- Distributional Inefficiency: While the production costs of food can be brought down by moving farms and factories to low-wage regions with few regulations, global distribution of food is becoming increasingly inefficient. Economist Stewart Smith of the University of Maine, for example, estimates that a dollar spent on a typical foodstuff item in the year 1900 wound up giving 40¢ to the farmer, with the other 60¢ split between inputs and distribution. Today, about 7¢ of every retail food dollar goes to the farmer, rancher, or grower, and 73¢ goes toward distribution. Whenever the distribution cost towers over the production cost, there are opportunities for cost effective localization. Not just in the United States but worldwide, local distribution offers strategies for reducing the need for, and expense of, every component of distribution, including transportation, refrigeration, packaging, advertising, insurance, and middlemen.
- Rising Energy Prices: The distributional component will become more costly still when, as most analysts expect, global oil prices begin to rise again. Adding to these market forces, political pressures in many countries will mount to tax carbon based fuels in order to slow global climate disruption. Because foodstuffs have a relatively low value per unit weight (except for a few products like expensive wines and spices), they are disproportionately vulnerable to rising energy prices.
- Homeland Security: Global concerns about terrorism have focused the attention of security officials on scenarios where food supplies could be contaminated or destroyed. They are recognizing that the shorter supply lines and community self reliance that come with local food can greatly reduce these security risks. At a minimum, this will translate into a recalibration of government policies to assist CFEs and higher insurance premiums imposed on global food producers.
- Telecommunications: The spread of the Internet, affordable computers, and mobile phones provide CFE entrepreneurs with information about market opportunities that once was only available to larger companies.
- Local Finance: One of the most formidable barriers to the expansion of CFEs is the relative unavailabilityof local capital. The financial crisis of 2008, caused by global banks and investment funds that hid the high levels of risk in their securities, has given many people worldwide a powerful incentive to move their savings into local banks and credit unions and their investments into local business. Internet based tools like Prosper.com and Kiva.org, which are connecting local lenders with CFE borrowers, will soon be joined by local stock exchanges connecting local investors with CFEs.
All these factors set the stage for potentially explosive growth of CFEs in the years ahead. Whether this really happens depends on how prepared existing CFEs are to expand and would be CFE entrepreneurs are to seize new local food business opportunities. Key to their success is a roadmap of sorts that identifies models of success, and successful strategies for overcoming significant obstacles. That’s where this report fits in. Greater awareness of the strategies pioneering CFEs are using can help entrepreneurs, economic developers, and community planners everywhere increase their chances of success.