Competition and supplier loyalty: Lessons from the Brazilian tobacco industry

This paper aims to identify both the level and the reasons of the decreasing loyalty in the transactions between tobacco growers and tobacco processors in Brazil. The theoretical approach relies on Transaction Cost Economics. Semi-structured interviews were held with growers and companies’ directors, and a structured questionnaire was used to obtain data from a sample of 381 tobacco growers in Brazil. Indicators of loyalty were created and analyzed. Based on the Euclidean distance, an original method to measure the level of loyalty is provided. It was found that 55% of growers were yet loyal. The number of non-loyal growers was increasing due to increasing competition among processors. Processors´ procurement strategies disturbed the traditional hybrid governance structure, which was based on loyalty, introducing uncertainty, higher costs and unknown consequences to competitiveness. The article brings empirical evidence on how sector competitiveness can be threatened by competition for suppliers. There are lessons for business managers and for anti-trust authorities. Key words: Tobacco, buyer-supplier relations, coordination, contracts, competitiveness, Brazil.