Private versus public standards
The previous section has discussed the profound changes in consumer requests that have taken place over the last decade regarding product and process quality of food products.
This development has induced adjustments in public standards at national and multilateral level. But even more, it has led to an increasing prevalence of private food standards at different stages of the supply chain (Hammoudi et al., 2009). The former are concerned with issues of liability and include requirements regarding the characteristics of the final product (e.g., maximum residue limits) and/or of processes in the food chain (e.g., HACCP;
traceability) with a focus on food safety issues. The latter aim to secure the enforcement of public standards by providing more rigorous control measures and often are more stringent than public regulations for the same objective. In addition, private standards reach into areas such as environmental, social and ethical aspects of agri-food production, increasingly requested from consumers and so far not yet, or hardly covered, by public regulation (Fulponi, 2006). The central purpose of public as well as private standards in the agri-food sector is to communicate credible information on product and process characteristics,
thereby easing coordination between actors in the chain across space and time (Henson and Humphrey, 2008).
Private standards are distinct from public ones in that no government force for compliance exists, thus making them from a legal perspective voluntary for businesses in the food chain. In addition, all key functions such as setting, assessing conformity and enforcing the standards are undertaken by private bodies (Henson and Humphrey, 2008).
Despite this clear distinction, there exists a continuum between public and private modes of regulating the agri-food sector. Though legally mandatory standards fall in the domain of public institutions, several private standards have become de facto mandatory. This occurs if compliance with private standards becomes a precondition for market entrance of firms.
Given the purchasing power especially of large retail chains in the food sector there is often no longer a freedom of choice whether or not to adopt private standards such as the British Retail Consortium Global Standard for Food Safety (BRC), the International Food Standard (IFS) or the Safe Quality Food (SQF). For actors who want to stay in the (global) market those standards are de facto compulsory despite their de jure voluntary nature (Fuchs et al., 2009). At the same time, governments increasingly implement standards that allow
‘freedom of choice’, such as the ‘Label Rouge’ for chickens in France or standards referring to organic production in the EU (Henson and Humphrey, 2008). In addition, it is not uncommon for standards to change their domain. For example, private voluntary standards can develop to legally mandated ones if adopted by state actors and authorized with legal power. Moreover, standards, originally implemented as public voluntary standards, might need re-classification as private voluntary ones if they are subsequently acquired by private bodies (Henson and Humphrey, 2008).
There is, however, not only a continuum between public and private standards but also a close connection as will be shown below. As standards not only influence the attributes of the final product and the processes within firms but also affect the organization of supply chains and the distribution of profits along the supply chain, they can have a pronounced impact on inter-organizational relationships in the food sector (Hammoudi et al., 2009).
Standards and inter-organizational relationships
Private standards in the agri-food sector follow two main objectives: risk management and product differentiation. Depending on the objective, standards have quite different implications for inter-organizational relationships in food supply chains.
Risk management standards
There are three main reasons for the implementation of private standards that are oriented at reducing risks. One is to close perceived gaps in the regulatory system, either because this is considered inadequate regarding its requirements (level of public minimum quality standards too low) or because the monitoring and enforcing system is too weak, or both.
Accordingly, one important motivation for private standards is to ‘top up’ public standards that are considered to be insufficient (Codron et al., 2005b; Henson and Reardon, 2005).
With high-profile food scares having led to an erosion of consumers’ faith in government safety controls in many industrialized countries, firms have implemented additional guarantees regarding the safety of food to regain consumer confidence. Companies that are successful in supplying products that consistently meet high food safety and quality
requirements are able to maintain or increase their market reputation, ‘the key asset for current and future earnings flows’ (Fulponi, 2006, p. 6). In this sense, private risk management standards can be considered as a powerful tool for the protection of brand capital (Henson and Humphrey, 2008). Thus, the results of Fulponi (2006) based on a survey of 16 leading international retailers is not surprising. Her findings reveal that 85% of retailers require higher and 50% request even significantly higher food safety standards compared to governmental regulation. Besides regaining consumer confidence and increasing firm reputation, these higher standards aim at ensuring a margin of defence in court6 in the case of a food hazard incidence (Codron et al., 2005b; Henson and Reardon, 2005; Fulponi, 2006).
Even more than at the national level, private standards have gained importance in enforcing non-enforced or non-existent public standards in LDCs or in overcoming the problem of heterogeneous public standards even between the industrialized countries, thus easing international trade. In this respect, private standards help to coordinate supply chains by standardizing product as well as process requirements covering suppliers from many countries of different parts of the world, thereby enhancing efficiency and lowering transaction costs (Henson and Reardon, 2005; Reardon et al., 2007). The trend towards global sourcing has increased the need for private standards as a tool to harmonize requirements (Fulponi, 2006). However, this development has considerable implications for inter-organizational relationships. For example, when looking at the implementation of private standards in developing countries this is in general linked to a shift from
‘fragmented, decentralized procurement to a centralized supply system, from reliance on traditional wholesalers and spot markets to specialized/dedicated wholesalers and preferred suppliers operating under de facto contracts’ (Henson and Reardon 2005, p. 245).
Food scares as well as the emergence of new sources of food anxiety have not only increased the relevance of private standards but, at the same time, resulted in an extension of the scope and rigour of the regulatory system over the last decade which also provided impetus to the evolution of private standards. Stricter public regulations are not only associated with tighter maximum residue limits (e.g., regarding pesticides) but they have induced a shift from more traditional product and process controls towards management-based approaches to secure food safety by making meta-systems such as hazard analysis and critical control point (HACCP), good agricultural practice (GAP) and traceability mandatory in the whole food chain in most of the developed world (Henson and Humphrey, 2008; Trienekens and Zuurbier, 2008; Codron et al., 2005a).7 Such systems provide ‘codes of conduct’ on how product and process attributes are to be achieved and increasingly play a central role in governing agri-food chains. To comply with those public standards farmers, processors and retailers had to adjust their production processes and improve coordination along the chain (Hammoudi et al., 2009). Thus, a second central role of private risk management standards is to provide a level of assurance that the food fulfils minimum product and/or process requirements as requested by regulation. Hence, they serve as a tool to achieve and demonstrate compliance with regulation and/or to reduce
6 Retailers want to secure an acceptable proof in a court of law. Thus, they set higher standards than those set by governmental regulation so that in court they can prove that they have undertaken all possible precautions to ensure food safety (Fulponi, 2006).
7 Examples are the European regulation 178/2002 concerning food safety and traceability.
compliance costs linked to legal requirements (Hammoudi et al., 2009; Henson and Humphrey, 2008).
In addition, governments have progressively shifted the primary legal responsibility for ensuring food safety to the private sector, making suppliers legally liable for the safety of the food they supply. For example, in the UK the only defence in the case of a food safety incidence specified in the 1990 implemented Food Safety Act is that of ‘due diligence’. As private standards such as GlobalGAP and the BRC Global Standard provide such a due diligence defence, the shift in legal responsibility has been a third important motivator in increasing the prevalence of private risk management standards (Henson and Humphrey, 2008; Fulponi, 2006; Mondelaers and van Huylenbroeck, 2008). This development has further gained in importance with the increasing relevance of private retail labels as those place full liability for product quality and safety on the retailer even outside the UK (Codron et al., 2005b).
Private risk management standards have not only induced adjustment in intra-organizational policies and in vertical chain management but also in horizontal coordination at various chain stages as the following example shows. While prior to 1998 British retailers had their own internal food safety schemes, the implementation of the British Retail Consortium Global Standard for Food Safety led to the establishment of a single food safety scheme for the UK. In the meantime, retailer alliances evolved from a national or regional to a global level. This resulted in the BRC becoming a leading global standard supported by major retailers throughout the world and adopted by over 10,000 food businesses in more than 96 countries. With the Global Food Safety Initiative (GFSI)8 emerging in 2000 this development has reached a further step. Though the GFSI does not seek to create a single food safety standard at the global level, it nevertheless aims at benchmarking existing food safety schemes with GFSI requirements that are considered to be fundamental in managing food safety.9 Besides the BRC Global Standard, the IFS, the SQF and the Dutch HACCP also have been approved to be in compliance with the GFSI requirements (Fuchs et al., 2009). According to Fulponi (2006), almost all leading international food retailers are members of the GFSI. Those retailers taking part in her survey state that 75–99% of the food they sell is certified against the GFSI-benchmarked standard (Fulponi, 2006; Fuchs et al., 2009). Setting ‘global’ private standards considerably influences the ‘evolution of the global food system, determining how food is grown, processed and delivered’ (Fulponi, 2006, p. 11). This development imposes new challenges for public governance at the local and global level (Fulponi, 2006).
The motivation for the emergence and dissemination of those collective standards is two-fold. As food safety crises have negative repercussions beyond the ‘failing’ firm, there is a collective rationality to cooperate with competitors to prevent or reduce the chance of the occurrence of such incidences (Hammoudi et al., 2009). However, there is also an individual rationality as collective standards help retailers to reduce the costs of governing food safety along their supply chain (Henson and Reardon, 2005; Trienekens and Zuurbier, 2008; Mondelaers and van Huylenbroeck, 2008). Being of a collective nature they expand the population of suppliers from which retailers can procure. Since such standards make
8 The Global Food Safety Initiative was created 2000. It is managed by the Consumer Goods Forum, an international food business association working with retailers and manufacturers from around the world.
9 Another example is the Global Partnership for Good Agricultural Practice that was known until 2007 as EurepGAP, an initiative originally developed by European retailers.
suppliers interchangeable, they simultaneously reduce the need for vertical cooperation and thus the necessity to invest in long-term relationships (Schulze et al., 2007). However, as suppliers are now certified to a standard that is also available to competing firms, buyers sacrifice product differentiation.
Product differentiation standards
In contrast to risk management standards, product differentiation standards, by their very nature, aim to differentiate the firm and/or its products from (those of) competitors with the aim to increase profit by gaining market share and/or secure price premiums (Henson and Reardon, 2005). While risk management standards are tightly interconnected with public (food safety) regulations, product differentiation standards primarily focus on product (e.g., added health and nutritional value of a product) and process attributes (e.g., worker rights, environmental protection and animal welfare) of interest to buyers that are not yet regulated. However, this division is far from being static. It can be expected that attributes that serve today as a means of differentiation evolve over time to basic product attributes while the focus of product differentiation standards will shift to other attributes where there is still scope for differentiation.10 Overall, the evolution in product differentiation standards reflects the trend towards quality as a mode of competition in agri-food markets (Henson and Humphrey, 2008).
While most of the risk management standards are business-to-business approaches and thus not directly visible to consumers, product differentiation standards are used to communicate information to consumers via labels or emblems and thus help them to evaluate the quality of the product as well as the characteristics of the production process (Hammoudi et al., 2009; Mondelaers and van Huylenbroeck, 2008; Schulze et al., 2007).
The main drivers of these standards are in general producers or producer groups. Being successful in attracting consumers’ preferences for those labelled standards provides producers with some kind of countervailing market power, despite the leading role of retailers, forcing the latter to source those products. However, retailers also use individual company standards on their own private-label products (e.g., Tesco’s Nature’s Choice or Carrefour private-label beef in France) (Henson and Humphrey, 2008; Codron et al., 2005a). Private product differentiation standards require the management of a trade-off between, on the one hand, the identification of attributes that allow distinguishing one’s self from competitors in a way that is difficult and costly to imitate and, on the other hand, managing the implied transaction costs. In contrast to risk management standards which are increasingly of a collective nature, private differentiation standards require strong coordination between actors along the food chain thus fostering vertical cooperation and long-term inter-organizational relationships.
10 For instance, while social standards serve at present as a means to differentiate from competitors, it might be that with child labour and workers’ protection gaining in relevance, the further development of the Social Accountability 8000 (SA8000) standard and similar initiatives will lead over time to setting some kind of minimum social requirements (Schmid, 2007).