Food supply chain management for sustainability

Food supply chain management for sustainability —Empirical study on the food industry— 21 September 2013 Masahiro MIYAZAKI1 Abstract

Multinational corporations have a social responsibility to contribute to sustainable development. This study investigated the relationship between sustainable supply chain management (SSCM) practices and financial performance. The study found a positive correlation between the food industry’s SSCM practices and their sales. It also found that SSCM may lead to higher sales and higher sales may promote SSCM. However, this study found no relationship between their SSCM practices and operating income. Finally, this study recommended that the food industry should drastically increase purchases of certified sustainable agricultural products and support small-scale farmers in adopting sustainable agriculture in developing countries.

Key words: sustainable supply chain management, retailer, food, sales, profits

1. Introduction Due to the progress of economic globalization since the 1990s and the growing need to promote sustainable development in developing countries, multinational corporations (MNCs) have been expected to upgrade social and environmental performance in their supply chains as their corporate social responsibility (CSR). To achieve this, internationally accepted initiatives and standards such as Global Compact and ISO 26000 have been encouraging MNCs to adopt and promote voluntary codes of conduct for their suppliers. In particular, since the food industry has been a target of criticism by NGO and consumers, some companies are implementing sustainable supply chain management (SSCM), including purchasing certified sustainable agricultural products (e.g. Fairtrade certified) and supporting sustainable agriculture in developing countries. Sustainable agriculture is vital for developing countries to reduce poverty, improve people’s living conditions and protect their environment. The demand for certified agricultural products has been expanding in developed countries since the 2000s, when major supermarket chains began to purchase those products as mainstream products. However, there have been questions regarding whether those retailers’ CSR practices and their corporate profits can coexist. 1

Professor of Atomi University, Faculty of Management and Graduate School of Management

1-9-6, Nakano, Niiza, Saitama 352-8501 JAPAN. E-mail: [email protected]

1

This study investigated the relationship between SSCM practices and corporate profits, focusing on the food industry. For this purpose, this study chose top world food retailing and manufacturing companies, quantitatively evaluated their SSCM practices by adopting tentative indicators and then examined the relationship between those SSCM scores and their corporate financial performance, focusing on their sales and operating income data.

2. Food supply chain and its sustainability Food productions in developing countries are playing a vital role for their sustainable development. However, since many farmers, in particular small-scale ones, are in an extreme poverty, and in some cases, uses child labour, their unsustainable agricultural practices may worsen their living conditions and harm the environment. Therefore, various certification programs such as fair-trade have been promoted by the initiatives by ethical consumers or NGOs. However, due to the higher price of sustainable certified products, their market share is still low. The food industry depends on food production in developing countries as their source of raw materials. Sustainable agriculture in developing countries may be in compliance with their long-term economic interests. Large-scale food retailers (e.g. Wal-Mart, Carrefour, Metro Group and Tesco) have been expanding their supermarket or hypermarket chains to emerging economies and extending their supply chains globally for the last decade. Consequently, they have obtained enormous economic power that affects their suppliers through their purchases of large quantities of products in the global competitive market as well as their consumers in developed countries through the creation of their own private brands, leading to consumer trust and loyalty. For example, Wal-Mart has a formidable history of providing greater value to consumers than its competitors, in part due to its innovative supply chain management (Grewal et al., 2009). As a consequence of growing retailers’ power, supermarkets are coming to determine what is produced, where [it is produced], to what standards [it is produced] and where it is to be sold (Burch and Lawrence, 2007). Reflecting this development, food retailing industry has emerged as a fascinating choice for researchers in the field of supply chain management, because of advances in computing capabilities and information technologies, hyper-competition in the retail industry, emergence of multiple retail formats and distribution channels, an ever increasing trend towards a globally dispersed retail network and a better understanding of the importance of collaboration in the extended supply chain (Agrawal et al., 2009). In recent years, sales of certified sustainable products (e.g. Fairtrade certified) have been increasing in developed countries. Some of supermarkets have been playing leading roles in the promotion of those products. For example, while the Co-op was the early pioneer for promoting Fairtrade certified products, real volume progress could not be made 2

without engaging the big four multiple retailers—Tesco, retailers Tesco, Asda, Sansbury’s and Morrisons—who dominate UK food retailing and together account for 75 % of the grocery market (Bowes, 2011). Orlitzky et al. (2003),, considering that the relationship between corporate social performance and corporate financial performance are inconclusive in the previous studies studies, conducted a meta-analysis analysis of 52 studies, studies which resulted in their findings that corporate virtue in the form rm of social responsibility and, to a lesser extent, environmental responsibility is likely to pay off. Castaldo et al. (2009) found that socially oriented companies can successfully leverage their reputations to market products with high symbolic values, but concluded that searching for a direct link between CSR performance and financial performance may be impossible. This study is the first to examine the link ink between SSCM and financial performance performance. It is based on the author’s assumption that a study focusing on a specific industry may enable a clearer comparison among companies, despite its disadvantage of having a smaller number of samples.

3. Study framework 3.1 The scope of the study

Typical food ood supply chain starts from farmers, trading companies (transportation), food manufacturers, retailers and ends with consumers. This study focused on SSCM of food manufacturers and retailers (Figure 1). 1)

Figure 1 Food supply chain 3.2 Definition of SSCM

Carter and Rogers (2008) defined SSCM as ‘the the strategic, transparent integration and achievement of an organization’s social, environmental, and economic goals in the systemic coordination of key interorganizational business processes for improving the lon long-term economic performance of the individual company and its supply chains’. chains This definition is controversial because it focuses on the long-term long term economic benefit 3

for corporations as an ultimate goal, without mentioning any contribution to sustainable development. Therefore this study slightly changed the definition by Carter and Rogers (2008) adopted the following definition: ‘the strategic, transparent integration and achievement of an organization’s social, environmental, and economic goals in the systemic coordination of key interorganizational business processes for improving the long-term economic performance of the individual company and its supply chains, as well as contributing to the sustainable development’ (Italics part was added by the Author). 3.3 Model

There are a few previous studies of the relationship between SSCM and economic performance. Cater (2005) found no direct relationship between purchasing social responsibility (PSR) and costs; however, organizational learning and supplier performance act as key, mediating variables between PSR and costs, with PSR leading to organizational learning, improved supplier performance and, ultimately, reduced costs. Halldorsson et al. (2009) commented that the relationship between the SSCM concept and economic performance is not well documented in either research or practice. Mefford (2011) identified several possible mechanisms of sustainable supply chain practices leading to higher profits and increased stock valuation. Regarding marketing channels, he explained that ‘if [the firm’s supply chain] practices are sustainable, they can lead to consumer preferences for the firm’s products and services and higher brand equity. This can increase sales and may make the firm’s demand curve less price elastic, allowing it to raise prices (or at the least do less discounting). The higher revenues that result from greater sales and higher prices increase the firm’s profits, leading to a higher stock market valuation’. However, Mefford admitted that these linkages are theoretical and by no means are certain to occur in a sustainable supply chain. This study, therefore, will focus on the first channel of Mefford’s (2011) model. It will examine this channel by analyzing in the following sections empirical data of food retailers and manufacturers. This study does not examine the relationship between SSCM and stock prices, since stock prices may fluctuate due to unexpected factors including speculations. It may be difficult to empirically examine the link between them in this study. This issue may be addressed in future research.

4. Food retailers’ SSCM and financial performance 4.1. Method

To examine the first channel of Mefford’s (2011) model, this study collected data and information on SSCM practices of food retailers as well as data on sales and operations profits mainly from those retailers’ sustainability and financial reports, which were disclosed 4

on their homepages. Then, it considered indicators to quantitatively evaluate SSCM practices of food retailers and suggested 11 tentative indicators (Table 1). These indicators were defined on the basis of the UN Global Compact’s (2010) supply chain sustainability guide and the author’s interpretation of good SSCM practices for retailers. This study identified 55 food retailers from the 100 biggest retailers on the world top retailers list (in terms of sales based on annual data including June 2010), disclosed by Deloitte Touche Tohmatsu Limited (2012). The third column of Table 1 shows the percentage of companies satisfying these indicators. Table 1: SSCM indicators and practices of food retailers Indicators Percentage (%) Commit to engage in SSCM as their business strategy (e.g. supply chain risk management, efficient use of natural 61.8 resource and development of sustainable products and services). Commit to Establish their vision and target for SSCM (e.g. internal adopt and policy on management for sustainability, procurement of implement 63.6 sustainable products and/or services and fair trade with SSCM suppliers). Establish an expectation for supplies (e.g. supplier code of conduct), in which human rights, labour safety and working 54.5 conditions are provisioned. Communicate its expectation from SSCM with suppliers, monitor or audit their activities and correct them if necessary, so that suppliers comply with the code of conduct.

Promote suppliers’ efforts for Support suppliers’ capacity building, including their sustainability contributions to capacity building of local communities. Cooperate with other companies and organizations for SSCM Purchase sustainable products, for which social and environment impacts on the local community are mitigated in developing countries. Reduce greenhouse gas emission in their supply chain, Improve including participation in the carbon footprint project. supply chain Reduce water use in their supply chain, including sustainability participation in the water footprint project. Reduce waste including targeting on zero wastes to landfill. Publish a sustainability report. Source: the Author

49.1

38.2 69.1

32.7

16.4 14.5 18.2 65.5

5

This study then identified 32 food retailers (Table 2), for which financial data are available for the last 6 years, at the least. These were used as samples for further study on the link between SSCM and financial performance. When selecting retailers, this study excluded those whose head offices are not located in OECD countries. The author assumed that non-OECD countries such as Russia and South Africa may have different market conditions, for example, less consumer pressure on sustainability.

Region Europe

North America

Country UK France Germany Other European Countries US Canada

Asia-Pac Australia ific Japan

Table 2: Selected Retailers Retailers Tesco plc, J Sainsbury plc, WM Morrison Supermarkets plc, Marks & Spencer Group plc,John Lewis Partnership plc. Carrefour S.A., Casino Guichard-Perrachon S.A. Metro AG, REWE Group Koninklijke Ahold N.V. (The Netherland) , Delhaize Group SA (Belgium) , Coop Group (Switzerland), ICA AB (Sweden) ,S Group (Finland), Kesko Corporation (Finland）. Wal-Mart Stores, Inc., The Kroger Co., Costco Wholesale Co., Target Co., Safeway Inc., Publix Super Markets, Inc., Macy’s, Inc. Loblaw Companies Ltd., Empire Company Ltd., Metro Inc., Shoppers Drug Mart Co. Woolworths Ltd. Aeon Co., Ltd., Seven & i Holdings Co., Ltd. , UNY Co., Ltd. , The Daiei, Inc., Takashimaya Company, Limited.

Source: the Author 4.2 Relationship between SSCM and sales of retailers

This study quantitatively evaluated SSCM practices of these 32 retailers by allocating one score each for the 11 indicators and summing up scores (maximum score is 11). Next, it analyzed the relationship between these SSCM scores and their sales levels (in US million dollars) in 2010 (Figure 2).(1) The correlation analysis revealed that retailers’ SSCM practices and their sales levels have a weak positive correlation (R = 0.289), which is statistically significant with 89% confidence (p = 0.1081). Although this correlation does not imply which one is cause and the other is effect, due to a logical thought, this finding can be interpreted to suggest that retailers with higher sales could afford to advance SSCM practices due to available internal resources obtained from their economies of scale. They may have an incentive to minimize higher risk of being targeted by non-governmental organizations (NGOs) that criticize MNCs for their unsustainable corporate behaviours, such as the use of child labour in their supply chain. 6

Annual Sales (MM US $)

500000

50000

5000 0

2

4

6

8

10

12

SSCM scores

Figure 2: SSCM and sales level of retailers This argument may point to the following hypothesis assumptions: (1) Higher sales levels may lead to SSCM advances. (2) Higher SSCM may lead to higher sales. The second hypothesis is not likely because higher sales are results of business activities of the past many decades while SSCM scores are results of the past decade or so. Therefore, this study aimed to try the first hypothesis, and analyzed the relationship between SSCM scores and sales levels by inventing the following regression model: Y = β0 +β1LogX + β2DEU + β3DUS + β4DJP + εi Where Y is SSCM score of retailers and X is annual sales. DEU, DUS and DJP are dummy variables that are 1 if a retailer’s head office is located in EU, US, Japan, respectively, and are zero if it is not, considering that SSCM may be different among EU, US and Japanese companies. By using the data of 32 retailers, this study obtained the following result (R= 0.794).

LogX DEU DUS DJP

Coefficient

Standard error

t-value

p-value

3.64 3.0 -2.73 -2.31

1.16 1.20 1.47 1.44

3.13 2.54 -1.85 -1.61

0.004 0.017 0.075 0.119

7

The result indicated that higher sales may be the cause of higher SSCM scores. In addition, this result shows that among country Dummy, DEU is statistically significant with 95% confidence, DUS is also statistically significant but with 90% confidence, which means that EU retailers are more advancing SSCM and US retailers are less advancing SSCM than other companies. It can be said that Japanese retailers seems to be less advancing than EU companies but almost the same level with US companies. However, this result does not imply a possibility that a higher SSCM may cause any impact on their sales. Therefore, to try to clarify such a possibility, this study examined the relationship between SSCM scores and changes in sales levels in retail companies (Figure 3). The annual sales data were obtained from annual reports of those 32 companies. The average annual sales changes were calculated using sales data of the past 6 years from 2006 to 2011. Those sales data were adjusted by the Consumer Price Index (CPI) of their head offices’ home countries to remove differences caused by inflation rates varying by country. Annual Sales Change (%) 14 12 10 8 6 4 2 0 -2 -4 -6 0

2

4

6

8

10

12

SSCM scores

Figure 3: SSCM and sales changes of retailers The result of this correlation analysis revealed that both SSCM scores and sales changes of 32 retailers had a moderately positive correlation (R = 0. 4930), which is statistically significant with 99% confidence (p = 0.0056). This finding suggests that SSCM practices of retailers can lead to higher sales by improving their reputation with consumers. This is in agreement with Mefford’s (2011) theoretical research. If there is no relationship between SSCM and retail sales, the correlation should be close to zero, which was not the case in this study. However, there are possible arguments against this interpretation. First, there must be other important factors, which may affect sales changes; for example, consumers’ spending in host countries, corporate marketing strategy, and the 8

opening of new stores in some market. Ideally, it would be desirable to establish an economic model to explain what factors, including SSCM, influence their sales changes, and then analyze to what extent SCCM practices affect sales changes of each firm. Gomez et al. (2004) developed a model to empirically examine the relationship between customer satisfaction and the retail performance of supermarkets in the US. It employed control variables such as changes in customers’ average age, household size, new store opening and major remodel or expansion. It concluded that it is possible to identify important linkages between customer satisfaction and store sales performance. In this article, ethical issues affecting their supply chain were not included as a customer satisfaction factor. However, since such ethical matters are becoming important for many consumers when choosing the store to buy from, it can be understood that an ethical matter such as SSCM is a factor in consumer satisfaction. Therefore, it is possible to assume that SSCM practices have an impact on their sales changes. Therefore, this study developed the following regression model to analyze how much SSCM contribute to their financial performance by adopting retailers’ SSCM scores and real consumer spending in their home countries as main explanatory variables: Y = β0 ＋ β1CP + β2SSCMS + β3D + ε where Y is annual sales change (5-years average, %) of retailers adjusted by consumer price index (CPI) of their home countries, CP is annual change (5-years average, %) of real consumers’ spending in their home countries, SSCMS is SSCM score of retailers, and D is a dummy variable. This study tried several choices of dummies in terms of home countries, such as Europe, US, or Japan, any of which did not prove to be statistically significant. Then, this study considered a possibility that retailers who started CSR earlier may have different corporate strategy toward ethical matter than others and it may lead to different financial performance. Therefore, this study adopted this as dummy variable, which means‘1’ if retailers published their first CSR reports before 2002, and ‘zero’ if this is not the case. Then, the study analyzed 30 retailers by using this regression model, and obtained the following result (R = 0.724). Coefficient

Standard error

t-value

p-value

CP

1.27

0.509

2.51

0.0186

SSCMS

0.654

0.146

4.46

0.0001

D

-3.75

1.351

-2.78

0.0100

The result suggests that SSCM practices contributed to the increase of sales and one point progress of SSCM score may increase retailers’ annual sales by 0.654 % point. It was also found that the dummy variable of early starters of CSR was negative, which is statistically significant with 99% confidence (p = 0.01). It can be interpreted that the early starters may have a corporate philosophy emphasizing more ethical matters than economic considerations, while late starters, after witnessing early starters’ performance and consumers’ 9

response, may have more advantageous ground to pursue a sustainable strategy with much emphasis on financial performance. Another possible argument is that sales changes themselves may affect SSCM practices. Similar to a discussion on the relationship between SSCM and sales level, retailers with expanding sales may have higher risks of losing reputation and eventually, damage their economic performance if criticized for misconduct in their supply chain by NGOs. Therefore, the expanding retailers may have more incentive to initiate SSCM practices to mitigate any risk of criticism by NGOs. Also, expanding retailers that increase their purchasing power may have much influence on their suppliers, eventually enabling them to more aggressively implement SSCM. Furthermore, expanding retailers may possess greater internal resources than shrinking retailers, providing opportunities to effectively implement SSCM. However, it is empirically accepted that corporate misconduct such as child labour in a supply chain will lead to reputation loss, resulting in decreasing sales. For example, Nike’s sales decreased to US$ 8,779 million in 1999 (8.1% down) from US$ 9,553 million in 1998, due to child labour issues in developing countries. Such facts support the assumption that SSCM practices can lead to sales change. However, this does not disprove the possible relationship that sales changes may affect SSCM progress. To clarify this argument, it may be advisable to conduct an analysis with time series data of SSCM practices and financial data, although this may be very difficult to conduct. In conclusion, it would be safe to say that both sales level and annual sales changes of a retail industry have a moderate positive correlation with their SSCM practices. It can be concluded that retailers’ SSCM practices and sales may affect each other. In addition, since there are two aspects of SSCM practices, environmental factors and social factors, this study analyzed which factors, social or environmental, are more relevant regarding impact on economic performance. Therefore, it examined the relationship between SSCM scores that exclude environmental indicators (this reduces the maximum score from 11 to 8) and sales changes. The result revealed that both have a more positive correlation (R = 0. 4201) than that of the previous result. This can be interpreted as suggesting that socially responsible behaviours of retailers have relatively higher influence on sales changes than environmentally responsible behaviours. This result is similar to the findings of Orlitzky et al. (2003), which examine the relationship between CSR and financial performance and concluded that its meta-analytic findings suggest that corporate virtue in the form of social responsibility and, to a lesser extent, environmental responsibility is likely to pay off. 4.3 Relationship between SSCM and operating income changes of retailers

This study examined the relationship between SSCM scores and corporate operating income changes and found that there is no correlation (R = 0. 1400) between the two (Figure 4).

10

Operating Income Change (%) 20 15 10 5 0 -5 -10 -15 -20 0

2

4

6

8

10

12

SSCM Scores

Figure 4: SSCM and operating income changes of retailers This result suggests that although retailers who increase sales by advancing SSCM practices can reduce their costs via higher sales, such cost savings may be offset in some ways. For example, implementing SSCM requires expenditures for monitoring or auditing suppliers’ practices, that is, whether they comply with the codes of conduct, provide training for staff who conduct monitoring or auditing, assist in capacity building for suppliers and purchase large amounts of certified sustainable products (which are sometimes more expensive than those without certification). It is reasonable to assume that cost savings from higher sales may be offset by the increasing costs of implementing SSCM practices.

5．Food manufacturers’ SSCM and financial performance 5.1 Status quo of food manufacturers’ SSCM

The food manufacturing industry is currently experiencing several health and safety challenges, many of which have major supply chain implications. Experience indicates that food manufacturing companies are prime targets for public concern over perceived supply chain CSR deficiencies (Maloni and Brown, 2006). For food manufacturers, qualitatively and quantitatively securing supply is vital for their daily business and long-term competitiveness. In recent years, some major food manufacturers adopted a strategy to improve their sustainable supply chains by purchasing certified sustainable agricultural products and supporting sustainable agriculture in 11

developing countries, mainly to respond to criticism by NGOs and consumers. This study surveyed CSR reports of the top 100 food manufactures listed by Food Engineering (2012) and investigated what certified sustainable agricultural products they are purchasing. The outcome of this survey appears in Figure 5. 0

2

4

6

8

10

12

14

Palm oil Cacao Coffee Soy Tea Sugar Corn Banana Hazelnuts Fruits Fish Sunflower oil Rapeseed oil Cashew nuts Potato

Figure 5: Agricultural products purchased by food manufacturers The Roundtable for Sustainable Palm Oil (RSPO) established a sustainable palm oil production standard and is implementing its certification program. This study found that 13 companies out of the top 100 in the food manufactures purchase palm oil and that, of these, eight expressed their commitment to change all their purchases to certified products by 2015 or later. This palm oil certification scheme seems to be successful. However, there have been the following criticisms of the environmental effects of this program. Laurance et al. (2010) criticized RSPO on several points: its membership that is dominated by industry, no blanket ban on destruction of peat forests, widespread non-compliance by members, no substantial capacity to monitor the behaviour of its members, the ease of becoming a member and members’ climate impacts caused by the destruction of peat forests and rainforests. Edwards et al. (2011) reported that abundances of imperilled bird species were 60 times lower in fragments and 200 times lower in oil palm than in contiguous forest. He urged the roundtables for oil palm, soy, sugarcane and cacao to go beyond the current high conservation value (HCV) guidelines on forests and adopt a stricter standard for forest conservation, to avoid perverse outcomes wherein crops produced at great harm to biodiversity nonetheless receive certification as sustainable. A Malaysian NGO member supported the principles of the RSPO but criticized the 12

conduct of the members for not following the dispute settling process of RSPO, but instead going to the courts on land disputes in the area of violation of communities’ customary rights.(2) These criticisms on RSPO suggest that purchasing certified sustainable products alone is not enough for food manufacturers’ SSCM. 5.2 Status quo of coffee or cocoa companies Coffee and cocoa are economically important agricultural products for many tropical developing countries. However, most coffee or cocoa producers, in particular cocoa small-scale farmers, live in extreme poverty. Also, the use of child labour has been a serious problem with cocoa farms since the 2000s. Due to their environmentally and socially unsustainable production of coffee or cocoa in developing countries, various sustainability certification programs such as Fairtrade, Rainforest Alliance, UTZ Certified, 4C Association and Organic have been introduced to ensure their sustainability. Recently, although the sales of the certified sustainable coffee or cocoa products have been increasing, the problems have not yet been solved. Coffee and cocoa companies in developed countries are expected to upgrade their SSCM so that they will further contribute to sustainable agriculture in producing countries. Therefore, this study decided to focus on coffee or cocoa companies and examined the relationship between their SSCM practices and financial performance. Many coffee or cocoa companies are purchasing certified sustainable products and directly supporting farmers in developing countries so that they can adopt sustainable agriculture practices. 5.3 SSCM and sales of coffee or cocoa companies To evaluate SSCM practices of coffee or cocoa companies, this study adopted nine indicators (Table 3). These indicators were invented on the basis of the author’s interpretation of good practices of SSCM by food manufacturers. This study identified 15 coffee or cocoa companies (Table 4) from the top 100 food companies listed by Food Engineering (2012). The third column of Table 4 shows the percentage of coffee or cocoa companies that satisfied these indicators. The majority of food firms purchase certified sustainable agricultural products, have developed supplier codes of conduct and support sustainable agriculture in developing countries. However, they are reluctant to disclose the results of their supplier audits. Few firms disclosed the outcomes of their support of sustainable agriculture in developing countries. Therefore, it is difficult to decide whether these coffee or cocoa companies are contributing to the sustainable development of developing countries through their SSCM practices.

13

Table 3: SSCM indicators and practices of food manufacturers Indicators

Percentage (%)

Purchase certified sustainable products. Purchase Fairtrade certified products. Disclose the current quantity of certified products Purchase certified purchased or its ratio to the total products sustainable products. purchased. Set and disclose the target amount or ratio of certified products purchased with specific deadlines. Establish suppliers’ code of conducts that include Establish and human rights and labour conditions, etc. implement suppliers’ Disclose that it had audited for their compliance code of conducts. with code of conducts (e.g. number of suppliers audited). Support farmers to introduce sustainable agricultural practices. Support farmers to Support small-scale farmers to introduce introduce sustainable sustainable agricultural practices. agricultural practices. Disclose that its support for farmers’ sustainable agricultural practices brings about substantial benefit to the farmers. Source: the Author

73 47 53

53

60

7

80 47

13

Table 4: Selected coffee or cacao companies Europe Nestle, Unilever, Ferrero, Barry Callebaut, Tchibo US Mars, Kraft Foods, Archer Daniels Midland Company, Cargill, General Mills Inc., Sara Lee Corporation, The Hershey Company, The JM Smucker Company, Ralcorp Holdings Japan Meiji Holdings Source: the Author This study first investigated the relationship between SSCM practices and 2011 food sales levels, disclosed by Food Engineering (2012). It found that SSCM practices and sales levels have a positive correlation (R = 0.554), which is statistically significant with 95% confidence (p = 0.0321) in Figure 6. It was found that those companies can be categorized into the following three groups. Group A companies’ sales are relatively large and their SSCM scores are higher than other companies. On the other hand, Group B companies are those with lower sales levels and lower SSCM scores than other companies. 14

Annual Sales (MM $) 90,000 Group A

80,000 70,000 60,000 50,000 40,000 30,000

Group C

20,000 10,000

Group B 0 0

1

2

3

4

5

6

7

8

SSCM Scores

Figure 6: SSCM and sales levels of the food manufacturers Both Groups A and B indicate that a company’s sales level may be an important factor determining SSCM practices. This may be due to the tendency of larger companies to have a greater risk of being targeted by NGOs, and because they can afford to allocate internal resources for implementing SSCM due to their economies of scale. On the other hand, Group C companies comprise those with sales that are less than those of Group A, but can advance SSCM practices. The study found that these companies sell coffee or cocoa with their own private brands and coffee or cocoa is one of their main businesses. It can be understood that these companies, despite their size, may be willing to engage in SSCM. Perhaps securing sustainability of raw materials is vital for those food companies to maintain consumers’ confidence and continue to obtain raw materials in the future. Although the promotion of purchasing certified products is recommendable for food manufacturers to be more sustainable, most certification schemes, except Fairtrade, may exclude small-scale farmers. This is because small-scale farmers are less capable of covering certification costs than large-scale farmers. Therefore, it is not enough for food firms to purchase certified sustainable products; it is necessary for them to support sustainable agricultural practices of small-scale farmers, if the food industry claims that they have established sustainable supply chains. NGOs have been criticizing food manufacturers regarding their unsustainable conduct in their supply chains; therefore, from NGO’s viewpoint, the food companies’ reputation is still low. For example, Oxfam (2013) surveyed 10 large-scale food and beverage companies on their policies for women, small-scale farmers, farm workers, water, land, climate change and transparency. Oxfam concluded that the companies have neglected to use their enormous 15

power to help create a more fair food system. In addition, although sales of certified sustainable agricultural products are increasing, their market share is too low to bring about substantial improvement in the living conditions of small-scale farmers in producing countries. For example, certified coffee amounted to approximately 4% of global green coffee exports in 2006 (Giovannucci, 2008). Therefore, it is recommended that the food industry should drastically increase their purchase of certified sustainable agricultural products. 5.4 SSCM and financial outcomes of food manufacturers This study examined the relationship between SSCM scores and sales change using a four-year average of sales changes of 11 food companies, for which financial data are available from the annual reports of each firm. Since some of the firms have undergone mergers and/or acquisitions (M&As) in recent years, it was difficult to obtain serial financial data. Therefore, this study made some modifications when preparing financial data. For example, Nestle had some M&As in recent years and disclosed sales data from organic growth, which seems better for this study to use as financial data. Therefore, this study chose to use them. Another example is Meiji Holding, which was established in 2009 by merging two related companies. This study adopted sales data summarizing the financials of the two preceding companies as serial annual data. The outcome of this analysis is presented in Figure 7. It shows that SSCM and sales changes of the food manufacturers have a positive correlation (R = 0.547), which is statistically significant with 90% confidence (p = 0.0812). Annual Sales Change (%) 12

10

8

6

4

2

0 0

1

2

3

4

5

6

7

Figure 7: SSCM and sales changes of food manufacturers 16

8

SSCM scores

This study examined the relationship between SSCM scores and operating income change (4-year average) of nine food manufacturers (Figure 8), the financial data for which are available from their annual reports. The outcome revealed no relationship between the two (R = 0.00316). Annual Operating Income Change (%) 20 15 10 5 0 -5 -10 -15 -20 -25 0

1

2

3

4

5

6

7

8

SSCM scores

Figure 8: SSCM and operating income changes of food manufacturers These food manufacturers’ results indicate that there is the same relationship between their SSCM practices and financial performance as those of food retailing firms. Therefore, this study concludes that both SSCM and sales of the food industry (manufacturers and retailers) have moderately positive correlations. It can be assumed that SSCM practices and sales of the food industry may affect each other. On the other hand, there is no relationship between SSCM and the operating income of the food industry.

6．Conclusion This study is the first to empirically examine the link between SSCM practices and financial performance. It examined whether SSCM practices lead to higher sales and profits and, by conducting empirical study on the food industry, resulted in the following outcome. The relationship between SSCM practices and sales changes of the food industry have a positive coefficient. Therefore, it can be concluded that their SSCM practices may lead to higher sales through creating a responsible reputation. At the same time, higher sales of the 17

food industry may lead to the advancement of their SSCM practices. Therefore, it can be interpreted that SSCM practices and sales of the food industry may affect each other. However, this study found that there is no relationship between the SSCM practice of the food industry and their operating income. This may implys that the food industry could reduce their operation costs from sales increases by implementing SSCM. However, such cost savings may be offset by cost increases for implementing SSCM, for example, by purchasing certified sustainable products with higher prices than unsustainable products as well as by supporting sustainable agriculture of small-scale farmers in developing countries. This result indicates that SSCM of the food industry may lead to higher sales, as theoretically suggested by Mefford (2011). However, their SSCM did not lead to higher operating income, which is not consistent with Mefford’s (2011) theory. Mefford (2011) explained that one of the reasons why SSCM can lead to higher profit is that SSCM may enable suppliers to adopt lean production methods that would motivate their employees to upgrade their production efficiency. However, current SSCM activities by the food industry have been focusing on monitoring or auditing suppliers with higher risks regarding whether they comply with the suppliers’ code of conduct. Therefore, it can be understood that an urgent issue for future SSCM practice is to help suppliers adopt lean production methods and motivate their employees to upgrade their production efficiency, to make the whole supply chains more efficient and sustainable. In addition, it is recommended that the food industry should drastically increase their purchase of certified sustainable agricultural products, since the current purchase of certified sustainable products is still low. A further recommendation is that they also support small-scale farmers in adopting sustainable agriculture in developing countries to make tangible contributions to the living and working conditions of the rural population in those countries. However, since it is unlikely that private companies alone can change unsustainable agricultural practices to sustainable ones, it would be necessary for them to collaborate with local governments, development aid agencies and NGOs, among others. Notes: (1) Sales data are presented in US million dollars and were obtained from the Deloitte Touche Tohmatsu Limited (2012). (2) Presentation by Won Meng Chuo, Institute for Development of Alternative Living (IDEAL), Malaysia, on the seminar ‘Borneo Forest Now’ organized by the Friends of the Earth (FoE) Japan on 8 June 2013 in Tokyo. The details of this dispute can be found in Colchester et al. (2011).

References Agrawal, N. and Smith, S.A. (eds.) (2009) Retail Supply Chain Management: Quantitative Models and Empirical Studies, Springer. Bowes, J. (ed.) (2011) The Fair Trade Revolution, Pluto Press. Burch, D. and Lawrence, G. (eds.) (2007) Supermarkets and Agri-food Supply Chain: Transformation in the Production and Consumption of Food, Edward Elgar Publishing. Castaldo, S., Perrini, F., Misani, N. and Antonio Tencati, A. (2009) The missing link between corporate 18

social responsibility and consumer trust: The case of fair trade products. Journal of Business Ethics 84(1): 1–15. Colchester, M., Jalong, T. and Chuo, W. M. (2011) Sarawak: IOI-Pelita and the Community of Long Teran Kanan, Pre-Publication Text for Public Release, September 2012. Deloitte Touche Tohmatsu Limited (2012) 2011 Top 250 Global Retailers, http://www.stores.org/2011/Top-250-List (accessed on 15 July 2013). Edwards, D.P., Fisher, B. and Wilcove, D. S. (2012) High conservation value or high confusion value? Sustainable agriculture and biodiversity conservation in the tropics, Conservation Letters 5(1): 20–27. Food Engineering (2012), Top 100 food & beverage companies, Food Engineering p.94. Gomez, M. I., McLaughlin, E.W. and Wittink, D.R. (2004) Customer satisfaction and retail sales performance: an empirical investigation, Journal of Retailing 80(4): 265–278. Giovannucci, D., Liu, P. and Byers, A. (2008) Adding value: Certified coffee trade in North America. In: A. Byers, D. Giovannucci, and P. Liu. (eds.) Value-adding Standards the North American Food Market—Trade Opportunities in Certified Products for Developing Countries, Rome. Food and Agriculture Organization. (http://mpra.ub.uni-muenchen.de/17174/) (accessed on 15 July 2013). Grewal, D., Krishnan, R., Levy M. and Munger, J. (2009) Retail success and key drivers. In: M. Kraft and M. K. Mantrala (eds.) Retailing in the 21 Century: Current and Future Trends, 2nd Edition, Springer. Halldorsson, A., Kotzab, H. and Skjott-Larsen, T. (2009) Supply chain management on the crossroad to sustainability: a blessing or a curse?, Logistics Research (2009) 1:83–94. Laurance, W. F., Koh, L. P., Bulter, R., Sodhi, N. S., Bradshaw, C. J. A., Neidel, D., Consunji, H. and Vega, J. M. (2010) Improving the performance of the roundtable on sustainable palm oil for nature conservation, Conservation Biology 24(2): 377–381. Maloni, M. J. and Brown M. E. (2006) Corporate social responsibility in the supply chain: An application in the food industry, Journal of Business Ethics 68(1): 35–52. Mefford, R. N. (2011) The economic value of a sustainable supply chain, Business and Society Review 116(1): 109–143. Orlitzky, M. Schmidt, F. L. and Rynes, S. L. (2003) Corporate social and financial performance: A meta-analysis, Organization Studies 24(3): 403–441. Oxfam (2013) Behind the brands: Food justice and the ‘Big 10’ food and beverage companies, 166 Oxfam Briefing Paper, 26 February 2013. UN Global Compact (2010) Supply chain sustainability: A practical guide to continuous improvement, United Nations. http://www.bsr.org/reports/BSR_UNGC_SupplyChainReport.pdf

(accessed on 15 July 2013)

This research was co-funded by the Promotion and Mutual Aid Corporation for Private School of Japan and Atomi University.

19