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Royal Ahold Adds to Its Grocery List
Subject Economies of Scale
Topic Production and Costs
Key Words World market, dominant firms, take over, supplier, subsidiaries, leverage, manufacturers, supply chain, consumers, investors
News Story

A struggle for dominance of the world grocery retail market is going on. Wal-Mart, the French company Carrefour, and Kroger, are the dominant firms. However, a Dutch company, Royal Ahold, currently sixth, is on the prowl for companies to take over. For example, in the U.S. it has purchased Giant Food Co., U.S. Foodservice (which is the second-largest restaurant supplier), and the on-line grocery Peapod, although it continues to allow its subsidiaries to operate under their original names and have local control. The established market leaders are not sitting back, however. Wal-Mart has set up stores overseas and has acquired others. Carrefour has bought Promodes, making it the largest retailer in Europe.

One rationale for growth is that the retailers are looking for leverage in their dealings with grocery manufacturers. For example, Royal Ahold companies in 23 countries each buy coffee from Columbia. It makes sense for there to be a global supply chain to create savings that can be passed on to the consumer. That in turn will please investors.

(Updated January 1, 2001)

Questions
1. a) What are economies of scale?
b) How does Royal Ahold anticipate reaping economies of scale?
2. Draw a diagram relating Royal Ahold's cost per unit to output per period. Add a long-run average cost curve for the firm.
a) Show the range of output over which economies of scale can be earned.
b) What happens beyond this range?
c) Is there any indication in the news story that the company is seeking to avoid this problem?
Source Martha McNeil Hamilton, "Global Food Fight," The Washington Post, November 19, 2000.

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