CHAPTER 4

LARGE VS. SMALL FIRMS

There are a number of ways in which the relative power of small and large firms can be assessed. Four have been chosen here: Number of plants, capital structure, size of margins, and changes in concentration ratios.

A. NUMBER OF PLANTS

Data on the number of plants reveal that the overall number of plants in the industry has been steadily declining a full 17 percent from 1963 to 1972 (table 6).12 How is this overall decrease reflected in the various size categories? Apparently, the largest decrease has occurred in the smaller plant categories, while the number of plants in the larger categories has remained the same or increased slightly. Tables 6 and 7 show data for the number of both small and large plants by number of employees and by size of annual slaughter.

TABLE 6.-TOTAL MEATPACKING PLANTS BY NUMBER OF EMPLOYEES, 1963, 1967, AND 1972

Source: Census of Manufactures, Industry Series: Meat Products, 1963, p. 11; 1967, p. 10; 1973, p. 11, U.S. Bureau of the Census.

TABLE 7.-TOTAL EXCLUSIVE CATTLE PLANTS BY SIZE OF ANNUAL SLAUGHTER, 1970, 1972, AND 1973

Source: "A Descriptive Analysis of the Federally-Inspected Livestock Slaughtering Industry," Allen J. Baker, p. 46 (unpublished).

There are some difficulties with both sets of data, however. The divergence between the number of plants shown for 1972 (2,475 vs. 320) points to two problems in particular: The Census of Manufactures data probably includes many plants whose output does not consist exclusively of cattle; yet the Packers and Stockyards survey

13 Ibid., 1963, p. 11; 1967, p. 10; 1972, p. 11.

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probably does not include a number of extremely small firms which are included in the Census. Nevertheless, both surveys tend to show that the decrease in plants has been due predominantly to a decrease in the number of small plants. (The number of small plants in the Packers and Stockyards survey increased from 1970 to 1972 largely because of changes in reporting requirements.)

The number of plants alone, however, may not give an accurate indication of the domination of any one plant size category in an industry. More important in this regard is the total amount of sales (or value of shipments) accounted for by each segment of the industry. Examination of this criterion shows again an increasing percentage of sales made by larger plants within the industry. The Census of Manufactures for 1963 shows of the total shipments made, 43.2 percent were made by firms with fewer than 100 employees, while 56.8 percent of these shipments were made by firms with greater than 100 employees. By 1972, the balance had shifted to 38.5 percent shipped by the smaller firms and a full 61.5 percent shipped by the larger firms.13 Table 8 provides a more complete breakdown of the changes which have occurred over time.

TABLE 8. PERCENT OF TOTAL MEATPACKING INDUSTRY SHIPMENTS BY SIZE CATEGORY, 1963, 1967, AND 1972

Source: Census of Manufactures, Industry Series: Meat Products, 1963, p. 11; 1967, p. 10; 1972, p. 10, U.S. Bureau of

the Census

B. RELATIVE CAPITAL STRUCTURE

In recent years the beef industry has exhibited a trend toward increased capital development. This perhaps, may best be illustrated by the example of "boxed beef" or the fabrication process which was mentioned earlier. For the most part, investment in fabricating facilities seems to require large capital expenditures. It has therefore been only those firms leading the industry in volume of sales and of shipments which have the capital available to venture in any large way into the fabricated beef market. (See table 5 for Iowa Beef Processor's shift to fabrication.)

This trend toward capital intensiveness can be measured in a more systematic way by examining the average "value added" per employee and per man-hour during manufacturing. As tables 9 and 10 show, the value-added figure has increased greatly in all categories between 1967 and 1972, indicating that the capital-to-labor ratio has increased and that the industry has become more capital intensive. These increases have been especially pronounced for the larger firms within the industry, indicating that they are becoming even more efficient in terms of productivity than the smaller plants.

13 Ibid., 1963, p. 11; 1972, p. 11.

TABLE 9-VALUE ADDED PER EMPLOYEE BY SIZE OF PLANT, 1967 AND 1972

Source: Census of Manufactures, Industry Series: Meat Products, 1967, p. 10; 1972, p. 11, U.S. Bureau of the Census.

TABLE 10.-VALUE ADDED PER MAN-HOUR OF PRODUCTION, BY SIZE OF PLANT, 1967 AND 1972

Source: Census of Manufactures, Industry Series: Meat Products, 1967, p. 10; 1972, p. 11, U.S. Bureau of the Census.

The latter development is evidenced by the figures in table 11. The amount of average new capital expenditures per establishment increased 51.5 percent between 1963 and 1967, and 67 percent between 1967 and 1972.

TABLE 11.-AVERAGE NEW CAPITAL EXPENDITURES PER ESTABLISHMENT BY SIZE OF ESTABLISHMENT, 1963, 1967 AND 1972

Source: Census of Manufactures, Industry Series: Meat Products, 1967, p. 10; 1972, p. 11, U.S. Bureau of the Census.

Again, this demonstrates the increasing extent to which the beef industry is becoming mechanized, thus requiring greater and greater amounts of capital expenditures. It is important to note, however, that these increases are concentrated predominantly in the larger

plants of the industry. For firms with less than 100 employees, new capital expenditures have increased 65 percent from 1963 to 1972; for firms with more than 100 employees, the increase over the same time period was a full 151 percent.

The fact that a given size of plant is requiring more and more new capital investment may represent a growing barrier to entry into the industry. The fact that the number of establishments has been declining while new capital expenditures have been rising is cause for concern and further investigation.

C. COMPARATIVE MARGINS

Though the capital structure of an industry may reveal more than size of the plants, it still may be an insufficient basis for any definitive conclusions. A more telling measure of the extent to which larger firms dominate the beef industry may be the average gross margins of firms in each size category.

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Again, mention should be made of fabricated beef. According to a recent unpublished study by the Department of Agriculture, marketing channels which include fabrication of beef at points other than the retail store, result in high net margins for whomever does the fabricating. This is borne out by an analysis of the cost components of the farm-to-retail spread for choice beef. The margin for fabricating operations represents most of an 8.9-cent "unallocated" category in the wholesaling function.15 This comprises almost 20 percent of the total farm-to-retail spread-certainly a significant portion.

The significance of the potential margin for fabrication may be corroborated by the recent conviction of the Iowa Beef Processor's, Inc., officials for bribery of retail stores to market their fabricated product. Not only was the company willing to pay the bribe, but they were able to pay an estimated $1 million, or one-half cent a pound. Such a large pay-off per pound may point to an extraordinary potential margin for certain fabricated products.

While the Census of Manufactures does not provide information which could be used to estimate the comparative margins for carcass and fabricated beef, it does provide some interesting information about the approximate gross margins for the beef industry as a whole. By using a ratio of the "value added by manufacturing" and the "value of shipments" for each plant size category, a rough approximation of the percentage gross margin can be obtained (see table 12). These figures show that the average gross margin has declined (15.3 percent in 1963 to 12.9 percent in 1972), and that there is a distinct break in the pattern of margins for firms with more or less then 100 employees. For firms with up to 100 employees, the margins become steadily higher by size category in all three surveys. This may represent the increased market power of the larger firm, and its corresponding ability to maintain a higher margin because of productive efficiencies or other factors. It is significant, though, that the margin for each size category over 100 employees has declined since 1963. This may be a result of increasing tendencies to large capital expenditures (as explained in the previous section) and the corresponding attempt to make market shares as large as possible rather than to increase margins.

14 Tuma, Kropf, Erickson, Harrison, Trieb and Dayton, Frozen Meat-Its Distribution, Costs, Acceptance and Cooking and Eating Qualities. Agricultural Experiment Station, Kansas State University, Manhattan, Kansas, Research Publication 166, September 1973. 15 Distribution of the Food Dollar by Marketing Function and Expense Item, Marketing and Transportation Situation, Economic Research Service, November 1974.