Protecting the Brand Name in High-End Markets
Our first hypothesis expects brand-name companies to voluntarily introduce new product and process standards and tighten existing ones if selfregulation increases the market value of their products. This particularly holds for companies that operate in high-end markets where product prices are above average, consumer controls are tight, and companies perceive each other as competitors in the same reference market. A comparison within the automotive and the food retail sectors helps us empirically assess whether brand-name firms targeting high-end markets are more likely to compete as regards tightening regulation of products and production processes. On the side of our explanatory factors, we vary brand-name high-end market firms with non-brand-name low-end market firms by scrutinizing the aspects of product price, customer control, and perceived competitors. In order to assess the outcomes—that is, the strictness of firms’ self-regulation—we evaluate the degree of obligation of self regulation, the degree of precision, the degree to which a regulation is demanding and the scope of the regulation applied by firms. In addition, we take into account the resources allocated for the implementation of the regulation. Policies may either be developed in-house or delegated to third-party certification schemes.
Food retail sector
The food retailing sector in South Africa allows us to explore the extent to which high-end brand-name companies are likely to engage in a regulatory race to the top.
In this sector we compare food retailers that cater to different market segments, ranging from comparably high-priced market segments to those catering to the mass market. At the same time, we also compare companies with a strong brand to those with less established brands. We expect that companies catering to high-priced markets and therefore having a clear interest to protect their brand-names will also engage in higher self-regulation in terms of environmental standards. By contrast, firms catering to lower price segments will pay considerably less attention to regulating environmental impacts.
Woolworths is a food retailer that mostly caters to the high-priced market segment, which amounts to about 5 to 10 percent of the South African households. In recent years, the growing black middle class, who constitutes up to 40 percent of the consumer base, has become more and more important. Woolworths has been able to achieve a premium for its products by paying higher attention to product quality and production standards; responding to an emerging demand from consumers, it has introduced self-regulation on organic food as well as ethical retail in general. In the absence of any South African legislation in this area, Woolworths is clearly viewed as the forerunner in this segment.
In order to assure the quality of its products, Woolworths employs a variety of self-regulatory measures along the food value chain, regarding the products themselves as well as packaging and transport. For example, the company has developed packaging that is easy to recycle, avoids genetically modified organisms, and decreases water usage during production. Like its other self-regulatory activities, packaging is audited against the standard set by the Global Reporting Initiative (GRI). The regulatory targets require the company to continually work with its suppliers on maintaining product quality and closely monitors adherence to internally set standards. Woolworths introduced an organic product labeling scheme in order to communicate product qualities to customers. Their organic food is strictly governed by international organic standards and independent certifying bodies. Next to enhancing the quality of its products, Woolworths also seeks to reduce the carbon footprint of its production. This is to be achieved by cutting trans?port and relative electricity usage by up to 30 percent, making carbon-neutral sourcing decisions and helping with the setup of carbon-friendly production sites. For the voluntary tightening of both product and process-regulation, the company received the Responsible Retailer of the Year award in 2008. The company’s market share grew by 25 percent in 2007.
The frontrunner strategy is likely to pay even more in the future since the sales of organic food is expected to rise significantly over the next three years, with a growth rate of up to 30 percent expected over the next five years. As a result, some of the larger competitors in the food retailing sector started to capitalize on the rising popularity of organic and ethically produced food both at the national and the global level. Pick&Pay is probably the closest follower and has increased the range of organic products on offer by 50 percent over the last years, which supports the company’s overall commitment to social responsibility as part of their overall strategy. Shoprite as well as Massmart have also undertaken significant efforts to improve the environmental footprint of their products by working with their suppliers; still, their corporate engagement is less consistent and concerted than the self-regulation of Woolworths (Reichardt 2008). Also in the area of organic food, their activities are still rather limited. By contrast, companies catering to the 45 percent of South Africans, whose purchasing power is limited because they still live in more or less severe poverty, seek to capitalize on high sales volumes with relatively low margins rather than enhanced product quality. They impose comparably less stringent requirements on their suppliers. There also appears to be a difference between those retailers specializing in branded product versus those selling mostly bulk products, such as rice or maize (mealie).
In sum, the evidence from the South African food retail sector shows that brand-name food retailers engage in self-regulation to increase the market value of their products and that competing firms targeting the same type of market tend to follow suit. Among those companies targeting low-end markets, however, the tendency to self-regulation is much less developed.
The automotive sector of South Africa corroborates the importance of brand-name and high-end markets as major incentives to engage in selfregulation. The sector is dominated by seven international brands that operate production sites in South Africa: BMW, Ford, General Motors, Nissan-Renault, Mercedes Benz, Toyota, and VW. Generally speaking, two to three out of these seven brands—BMW, Mercedes Benz, and Toyota—are brands targeting a premium segment of the automotive market. Ford, General Motors, Nissan-Renault, VW, and Toyota produce cars for a middle-class mass segment. Toyota is in many ways an exception as its strategy is the most comprehensive of all automotive producers. The company strives for market dominance in all market segments and is thus listed as a mass and a premium segment producer.
To validate our claim, we compare two firms targeting a premium segment of the consumer market to a firm that focuses on the mass market with respect to average prices, consumer control, and perception of competitors in the same reference market. The difference in the target market is reflected in the fact that the firms aiming at the premium market sell their products at higher average prices than the one firm targeting a mass market (Kirmani et al. 1999). Managers of the two high-end-market firms stated that they rely less on economies of scale than other automotive firms and are able to add markups to end prices. The difference in the target market is further reflected in the importance of consumer control. The latter plays a more important role in the case of the two luxury brands, less so in the case of the mass- market firm. Especially as regards quality, the two high-end-market firms are faced with much higher consumer expectations than the mass-market firm. Hence, they are more vulnerable in this respect. Moreover, the high-end- market producers stated that they do not perceive themselves as competitors of the low-end-market firm. That is, they do not operate in the same consumer markets.
How do these differences in target markets impact upon the selfregulatory endeavors of the three firms? As expected, we find a variation in the extent of self-regulation of the three automotive producers. The differences, however, occur at a relatively high level of regulation: All three automotive manufacturers apply high levels of self-regulation as regards strictness of rules and the resources allocated to implement these rules. All three firms operate ISO 14001 and ISO 9001 certificated management systems. These systems come to bear within a firm and within the supply chain. All three producers request both kinds of management systems from their first- tier suppliers: ISO 14001 is an environmental management system; ISO 9001 is a quality management system with environmental components. The two certification schemes demand high-level standards, such as independent legal compliance audits and certificates. Since South African environmental legislation is quite demanding as regards formal provisions (even though implementation is not satisfactory) this means that the environmental policies of the three manufacturers are quite strict. Moreover, the implementation of self-regulation is subject to an auditing process and systematic control. Noncompliance is sanctioned by noncertification. In other words, the certification schemes not only provide for monitoring, but also for enforcement.
Beyond these similarities in the application of ISO-certified management systems, there are also some differences in the self-regulation of the three firms. The high-end-market producers operate, in addition to the ISO management systems, particularly strict and demanding in-house environmental and quality management systems. These systems are company-specific and prescribed by their global headquarters. As regards the degree to which rules are demanding, their scope and strictness, they go beyond both the standards of the ISO management systems and of South African legislation. In fact, these specific in-house systems require full compliance with all relevant European environmental process and product regulation, and go even beyond European legislation. The mass producer, in addition to the ISO-certified systems, also provides its own in-house policies. These policies are, however, less strict when compared to the premium producers. Moreover, the mass producer’s practice focuses almost exclusively on quality standards, rather than requiring more stringent environmental self-regulation.
In sum, the self-regulatory standards of the mass producer are less demanding than those of the premium producers. This difference, however, only exists with respect to in-house self-regulation. Self-regulation with respect to the supply chain is very similar in all three firms: all automotive manufacturers only require ISO-certified management systems from their first-tier suppliers.
One possible explanation for this finding partially disconfirming our first hypothesis is that a similar and standardized approach in the supply chain guarantees “vertical compatibility” (Farrell 2007, 378). It reduces the degree to which large automotive buyer firms are dependent on specific suppliers, thereby reducing the risk of becoming victims of “hold ups” and excessive rent-seeking behavior in their relationship with suppliers (Heritier et al. 2009; Farrell 2007).