mergers and the food industry structure* - agecon...

Mergers and the Food Industry Structure*

by

Daniel L. PadbergProfessor

Department of Agricultural EconomicsTexas A&M University

Thomas L. SporlederProfessor


Ernest E, DavisLivestock Marketing Economist


Abstract

The structure of industries changes in twomajor ways. Mergers, acquisitions, and divesti-tures are considered external factors. In addi-tion, the firm rate of internal growth willinfluence market concentration. If the firmgrows slower than the market, concentrationwill go down, etc. These two factors may workin concert or pull in opposite directions. Theauthors investigate the trends and effects ofmergers on the food marketing system. A cleartrend of increasing merger activity from 1982through 1986 is apparent. It is not clear whathas happened after 1986, although accountssuggest a continued high level of mergeractivity, The cumulative result of these mergersis even more pronounced when combined withthe growth trends in each sector.

Introduction

An extensive merger movement is at workwithin the food industries. Each of the majorfood groups--food manufacturing, food whole-saling and food retailing- -are affected as aremany other sectors of the economy. The conse-quences of this pattern of change will include amore clearly defined conglomerate structure infood manufacturing and greater market con-centration in parts of the food sector. In addi-

tion, there are indications that some industries(meat packing and processing) are becomingmore vertically integrated [Ward]. Takentogether, significant restructuring activity isoccurring in the food industries,

The purpose of this paper is to 1) pre-sent data describing observable changes overtime in food industry structure, 2) discusscauses and prospects for continuation of thesechanges and 3) assess the likelihood and extentof public or business problems associated witha more consolidated U.S. food industry. Theassessment of consequences is an identificationof generalities which reflect the judgment ofthe authors based on years of experience study-ing the food industry structure and behavior. Itgives an overview. This overview may not pre-cisely relate to conditions in a particularindustrial grouping, but rather reflects the gen-eral tendency across most industrial groups.The behavior and performance in a particularindustry can be special or different for manyreasons.

Measuring Industrial Structure Change

The nature and magnitude of mergeractivity is extensively documented (Tables 1, 2and 3). A clear trend of increasing activityfrom 1982 through 1986 is apparent (Table 3).

*Technical Article Number 24800 of the Texas Agricultural Experiment Station.

Journal of Food Distribution Research February 89/page 109

Table 1

Food Marketing Mergers and DivestituresCosting More than $100 Million, 1985 and 1986’

PriceBuyer Seller (Million do llars) TY~e2

1985

Phillip Morris CompanyKohlberg, Travis, Roberts,

& co.R. J. Reynolds Ind., Inc.Pantry Pride, Inc.Procter & Gamble CompanyCheesebrough-Ponds, Inc.PepsiCo, Inc.Private GroupCastle & Cooke, Inc.Private GroupPillsbury CompanyCoca-Cola Company

Procter & Gamble CompanyNational Distillers & Chemical

Corp.Sandoz Ltd.-SwitzerlandCircle K CorporationKroger CompanyPepsiCo, Inc.USA CafesWhirlpool CorporationWesray/Capital CorporationPrivate GroupPullman CompanyPrivate GroupUnilever NV-Netherlands

1986

SS1Holdings CorporationUnilever NV-NetherlandsRalston Purina CompanyCoca-Cola CorporationPrivate GroupCoca-Cola Corporation

PepsiCo, Inc.

Quaker Oats Company

General Foods Corporation 5,965Beatrice Foods Corporation 5,362

Nabisco Brands Inc. 4,906Revlon, Inc. 1,639Richardson, Vicks, Inc. 1,611Stauffer Chemical Company 1,218M.E.I. Corporation 683Household International Inc. 645Flexi-Van Corporation 559Ralston Purina Co. (Foodmaker, Inc.) 450Diversifoods, Inc. 388Embassy Communications, Inc.

& Tandem Productions 365Monsanto Company 300Reliance Group Holding, Inc. 225

Martin Marietta Corp. (subsidiary) 190Shop & Go, Inc. 167Hook Drugs, Inc. 161Alleheny Beverage Corp. 160Ponderosa, Inc. 154Dart & Kraft, Inc. (Kitchen Aid) 150PepsiCo, Inc. (Wilson Sporting Goods) 150Swift Independent Corporation 140Peabody International Corp. 127I.C. Industries (P.P.C. Food Markets) 125Anderson Clayton & Company 113

Safeway Stores, Inc.Chessebrough-Ponds Inc.Union Carbide CorporationJTL CorporationBeatrice CompaniesBeatrice Cos. (US & Canadian

bottling operations)RJR Nabisco, Inc.

(Kentucky Fried Chicken)Anderson Clayton Company

4,1983,0921,4201,4001,250

1,000

850804

;2

;112211

February 89/page 110 Journal of Food Distribution Research

Table 1 Cent’dPrice

13uver Seller (Million dollars) Tvt)e 2

1986

LLC CorporationNational Distillers &

Chemical CorporationBritish Petroleum Co.

PLC, United KingdomMarriott CorporationPrivate GroupPrivate Group

Revlon Group Inc.IC Industries Inc.Borden Inc.Private Group

Peiroleos De Venezuela,Venezuela

Great Atlantic & Pacific Tea Co.Quaker Oats CompanyPrivate GroupPepsiCo Inc.Private GroupPrivate GroupRowntree Mackintosh

United KingdomCadbury Schweppes PLC

United KingdomCoca-Cola CompanyPrivate GroupBruno’s Inc.National Distillers &

Chemical Corp.John Labatt Ltd.-CanadaDean Foods CompanyGreat Atlantic & Pacific Tea Co.CPC International Inc.Private GroupSara Lee Corporation

Shaklee CorporationAmerican Brands Inc.

Tyson Foods Inc.Revlon Group Inc.

‘Completed or pending.

Amalgamated Sugar CompanyEnron Corp.

(Enron Chemical Co.)Ralston Purina Co.

(Purina Mills Inc.)Saga CorporationBeatrice CompaniesForstmann Little & Co.

(Dr. Pepper Co.)Beatrice CompaniesOgden CorporationBeatrice CompaniesMariott Corp. (four Saga

Corp. restaurants)

Southland CorporationWaldbaum Inc.Golden Grain Macaroni Co.Beatrice CompaniesPhillip Morris CompaniesPhillip Morris Inc.Ponderosa Inc.-Rem 81%

Sunmark Inc.RJR Nabisco Inc.

(Canada Dry, Sunkist)Merv Griffin EnterpriseIU International Corp.Delchamps Inc.Union Texas Petroleum

Holdings Inc.DA Squale Food CompanyLarsen CompanyLucky Stores, Inc.Arnold Foods CompanyHolly Sugar CompanyNicholas Kiwi Australasia Ltd. -

Rem 74% AustraliaRJR NabiscoNSS News Agents PLC-

United KingdomLane Processing Inc.Figitonics, Inc.-

21 = Divestiture, 2 = public seller, 3 = private seller.

SOURCE The W. T. Grimm & Co., MergerstatChicago, 1987, pp. 13-31.

685

575

545500480

416375320315

300

290287250250246240231

230

230200200161

185165164155145140

130123

120115111

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Review, 1985 & 1986, 135 South LaSalle St.,


Table 2

Food Processing Mergers, by Rank Among All Industries and Foreign Activity,1981-86

U.S. purchasesRank among Foreim buvers gf foreism firms

Year Value all industries Number Value Number Valuea-- million $-- -- million $-- -- million $--

1981 3,800 135 521982 4,952 : : 131 ; 1541983 2,712 9 253 6 1051984 7,948 : 8 2,994 5 961985 12,854 8 257 101986 8,432 : 13 1,246 9 ;;

‘Includes only those mergers in which the value of the transaction was recorded.

SOURCE U.S. Department of Agriculture, Food Marketing Review, A.E.R. #590, EconomicResearch Service, Washington, D.C., 1987.

Table 3

Food Marketing Mergers

Year Process irm Wholesaling Retailing Food Service Total

--------------------------- number ----------------------------

1982 250 38 3771983 225 38 :: :: 3721984 242 37 60 78 4171985 291 64 52 4801986 347 65 91 :; 584

SOURCE: U.S. Department of Agriculture, Food Marketing Review, A.E.R. #590, EconomicResearch Service, Washington, D.C., 1987.


It is not clear what has happened after 1986,although anecdotal accounts suggest a continuedhigh level of merger activity. The cumulativeresult of these mergers is even more pronouncedwhen combined with the growth trends in eachsector.

Food Manufacturing

The data available for describing thechanging structure of food manufacturing ispoor. Census data from 1947 to 1982 (Table 4)show patterns in Standard Industrial Classifica-tion (SIC) groupings. These data show little ofthe effects of the current merger movementbecause most of the action has occurred since1982. In addition, the SIC groupings are arather antiquated industrial definition for thefood manufacturing industry.

Large food manufacturing firms haveemerged as multi-output producers, in the sensethat they operate in numerous four-digit SICindustries (Table 5). The modern food con-glomerate operations are diversified within thefood and kindred products industries (thosewhose SIC numbers begin with 20). The largestfifteen food processing companies operate in anaverage of ten four-digit SIC industries (Table5). The least diversification among the topfifteen is Pepsico, Inc. and Coca-Cola Co.,operating in only four four-digit industries.The most diversified is RJR Nabisco, Inc.which operates in twenty-one of the forty-ninefood and kindred products categories.

The cost concepts of traditional economics(single product) cannot easily be extended toexplain the distribution o! industries a firmoccupies. Economies of siz+ and technologicalor market factors provide re~onable explana-tions for observed size of plants and firmswithin an industry, but not conglomerate dis-tributions. Panzar and Willig recently havesuggested economics of scope as an alternativeexplanation for diversified Organization offirms. This appears to be particularly cogentwhen a transaction cost approach, embracingrisk concepts, is the framework for analysis[MacDonald].

Probably the most important dynamic atwork in the food manufacturing structure isstrategic competition in selling nationallybranded products, Large conglomerate firmsare leaders here [Padberg and Rogers]. Many ofthe mergers relate to this firm type and aremotivated by the powerful scope economiesassociated with this “strategic group.” SIC datado not effectively describe changes in con-

glomerate firms. Concentration ratios based onSIC classifications do not reflect ownershippatterns of the modern diversified food manu-facturing firms, as evidenced in Table 5.

There is probably a significant trendtoward consolidation on the part of food manu-facturing specialized toward advertised foodproducts. Data in Table 4 for Breakfast Cereal(SIC 2043), Roasted Coffee (SIC 2095),Macaroni and Spaghetti (SIC 2098) and FoodPreparations (SIC 2099) suggest such a patternalong with increased share of business for thelargest fifty firms (Table 6). Aside from thispattern, some SIC groups are increasing whileothers are decreasing, providing little basis forgeneralizations.

Market shares for meat packing asreflected in the livestock buying market, haveincreased significantly (Table 7). In 1972, thetop four firms in steer and heifer slaughtercontrolled 26 percent of that slaughter. Thosetop four firms included American Beef Process-ors (ABP), Armour, Iowa Beef Processors (IBP)and Swift. ABP quit business in 1976, whileArmour and Swift were both acquired byConAgra. In 1987, the top four firms controlled64 percent of the steer and heifer slaughter.Those firms included IBP, ConAgra, Excel andNational Beef. Most of the large increasebetween 1982 and 1987 resulted from mergersand acquisitions.

Today’s “Big Four” represent the greatestconcentration in the meat packing industry sincethe 1920 Consent Decree was imposed on the“Big Five” firms consisting of Armour, Swift,Morrell, Wilson and Cudahy. At that time, the“Big Five” were found to be slaughtering about70 percent of all livestock slaughter in interstatetrade [Fowler]. At that time this was consideredto be monopolistic control which suppressedcompetition.

Food Retailing

The available data for food retailing isconsiderably stronger than for food processing.A longer pattern is available and the measuredcategories more convincingly capture the “bigbusiness” aspects of the industry. Nationalfour-firm and eight-firm market shares from1919 to 1985 show no alarming trend (Figure 1and Table 8). The effects of three waves ofmergers are apparent in these data the 1920sand early 1930s, the 1950s and earl y 1960s andthe current 1980s. Market shares have increasedduring the merger periods and have declinedduring other periods [Padberg and Rogers]. The


Table 4

Number of Firms, Four Firm and Eight Firm Concentration,Selected Food Manufacturing Industries, 1947, 58, 67, 77, and 82

Industrv S.I,C. 1947 1958 1967 1977 1982

Meat Packing

Prepared Meats

Poultry Dressing

Creamy Butter

Cheese Nat. & Proc.

Ice Cream

Fluid Milk

Canned Fruits & Veg.

Frozen Fruits & Veg.

Cereal B-fast Food

Mixes & Doughs

Cookies & Crackers

Chocolate & Cocoa

Roasted Coffee

Macaroni & Spaghetti

Food Preparation

2011

2013

2016

2021

2022

2024

2026

2033

2037

2043

2045

2052

2066

2095

2098

2099

LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # off irms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # off irms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # off irms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # off irms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # off irms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # O! firms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:LGST 4, % of salesLGST 8, % of salesTotal # of firms:

4154

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SOURCE: U.S. Census, Concentration Ratios in Manufacturing Industry. 1958, Part 1. Committeeon the Judiciary, U.S. Government Printing Of fice~ 1962, T-able 2 and later Census ofManufacturing.


Table 5Distribution of the Largest Food Manufacturing Companies’ Operations

By Four-Digit SIC Within Food and Kindred Products, 1985-1987

Sausage * * * *Poul. Proc. ** * * *Butter *Cheese * * * *Dairy Prod. * *Ice Cream * * * ● * **Milk * * * * *Can Spec. * * * * *

an. F&V * * ** ** * *Dried F&V * ● * * *Sauces * * ** * ** *Frozen F&V * * * *Frozen Spec. * * ** ** * *Flour * * * *Cereal * * * * *Rice Mill * *Prep. Flour * * *Corn Mill *Dog/Cat Food * * * *Feed *Bread ** * ** * **Cookies * * * *Frozen Baker. * * *

u~ar. Ex. Ref.Sugar Ref.Beet SugarCandy * * * * ** * *Chocolate *

ewimz Gurn *Nuts *Cottonseed OilSoybean OilVegetable OilAnimal FatShortening * * * *Malt Bev. *MaltWines *’Liauo sSoft Drrinks * * *Flavoring * **Canned Fish * ** *Prep. Fish * **Coffee * * *Snacks *IceMacaroniFood Pretx ** * *** ** ** * * *

1 PMC Philip Morris Cos. ABC Anheuser-Busch COSKLG: Kellogg Co. RN1 RJR NabiscoSLC Sara Lee Corp. CNG. ConAgra, Inc. PEP Pepsico, Inc. BDN Borden Inc.GMI General Mills, Inc. CCC Coca-Cola Company ULR: Unilever N.V. HJH H. J. Heinz Co.KFT Kraft, Inc. CSC Campbell Soup Co. RPC Ralston Purina Co.

SOURCE: Annual Reports, 1985 through 1987.


Table 6

Aggregate Concentration in Food Marketing, Census Years, 1963-1982

Share of market controlled by top firms----------------------------------- ------ .-------- ----------------- -----

Top 50 ToP 50 Top 20 Top 50processing wholesaling retailing foodservice

Year firms firms mms.

firms

---------------------- percent ----------------------

1963 NA NA 34.0 NA1967 35.0 NA 34.4 NA1972 38.0 48.0 34.8 13.31977 40.0 57.0 34.5 17.81982 43.0 64.0 34.9 20.2

NA = not available

SOURCES U.S. Department of Agriculture, Food Marketing Review, A.E.R. #590, EconomicResearch Service, Washington, D.C., 1987.

Table 7

Four Firm Concentration Ratios for Steer and Heifer Slaughter,Boxed Beef Production, Hog Slaughter, and Sheep and Lamb Slaughter,

Selected Years, 1972-1987

Steer & Heifer Boxed Beef Hog Sheep & LambYear Slawzhter Production’ Slaughter SIaurzhter

1972 26.0 NA 32.0 54.71977 26.9 NA 33.7 52.91982 41.4 59.1 35.8 43.61987 64.0 82.3 56.0 65.9

NA = Not Available

‘Data series for boxed beef began in 1979.

SOURCE: Packers’ and Stockyards Administration, U.S. Department of Agriculture, Selectedyears.


Figure1. Local and National Concentration in FoodRetailing,Selected Years, 1919-1985.

Concentration Ratio70

60

50

40

30

20

10

0

. ...............................................................................................................................!.. ...................................... ....................,..,..4.

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.

1916 1926 1936 194S 1966 1966 1976 1985

Years

— 4 Firm (National) + 8 Firm (National

~ 4 Firm Local Markets

Journal of Food Distribution Research February89/page 117

Table 8

Four and Eight Firm National Concentration for Food Retailing,1919- 1985, Selected Years

Year 4 Firm 8 Firm 1 Year 4 Firm 8 FirmI

1919 4.4 NA I 1935 23.8 27.51920 NA I 1939 22.6 25.81921 ::; NA I 1948 20.1 23.71922 I 1954 20.9 25.41923 ;:; ;:: I 1958 21.7 27.51924 9.3 10.4 I 1963 20.0 26.61925 10.9 12.9 I 1967 19.0 25.71926 12.8 14.8 I 1972 17.5 24.41927 16.2 18.7 I 1977 17.4 24.41928 19.3 22.3 I 1982 16.1 23.61929 23.1 26.7 I 1985 19.0 25.21933 27.1 31.6

NA = Not Available

SOURCE: NCFM #7 Appendix Tables 13-14 for 1919 to 1939 and U.S. Department of Agricul-ture, Food Marketing Review, A.E.R. #590, Economic Research Service, Washington,D.C., 1987.

Table 9

Number of Food Marketing Companies and Establishments,Census Years, 1963-1982

------------------------- Year -------------------------

J?stablishment Tv~e 1963 1967 1972 1977 1982

ProcessingCompanies 32,617 26,549 22,171 20,616 16,800Establishments 37,521 32,517 28,193 26,656 22,130

WholesalingCompanies 35,666 33,848 32,053 31,670 31,290Establishments 41,890 40,005 38,531 37,960 38,516

Food ServiceCompanies NA 221,883 226,421 198,088Establishments 334,~8? 271,182 359,524 368,066 379,444

RetailingCompanies 218,320 200,486 198,815Establishments 319,:3; 294,?4; 267,352 252,853 241,737

TotalCompanies 494,427 478,590 444,993Establishments 733,;2; 637,;4? 693,420 685,135 684,084

NA = Not Available

SOURCE U.S. Department of Agriculture, Food Marketing Review, A.E. R. #590, Economic ResearchService, Washington, D.C., 1987.


essentially “local” nature of this business and thegrowth patterns over most of this century makea strong point that internal growth of the largestfirms typically does not keep pace with marketgrowth.

Data for local markets are available from1954 through 1982. The market and firmdefinitions are good and the data quality isstrong. Local market shares have increased verysubstantially during this period (Figure 1).Most of the increase occurred before 1958 andafter 1972.

Table 10

Sales of Top 25 Wholesale Food Companies, 1985

Com~a vn Sales.- million $--

Super ValuFleming Companies, Inc.Wetterau, Inc.Sysco CorporationMalone and Hyde, Inc.

Wakefern Food CorporationScrivner, Inc.Certified Grocers (CA)CFS Continental, Inc.PYA Monarch, Inc.

Associated WholesaleGrocers (KC)

Super Food Service, Inc.Roundy’s Inc.Spartan Stores, Inc.McLane Company

Rykoff-Sexton, Inc.Kraft, Inc.Richfood, Inc.Twin County Grocers, Inc.Springfield Sugar & Products

Gateway Foods, Inc.Associated Grocers (Seattle)Nash Finch CompanyCertified Grocers MidwestAlfred M. Lewis, Inc.

5,5895,5112,9152,8002,682

2,5002,1661,8741,7001,500

1,4751,3971,3801,3121,001

1,000917870858850

800757715700687

SOURCE: U.S. Department of Agriculture,Food Marketing Review, A.E.R.#590, Economic Research Service,Washington, D,C., 1987.

Journal of Food Distribution Research

Food Wholesaling

The number of food wholesaling com-panies over the last couple of decades has beendeclining (Table 9). The largest 25 independentwholesale food companies range in size fromless than $1 billion in annual sales to over $5billion (Table 10). Most wholesaling is done bythe food chains. Their market share growth hasleft less market for independent wholesalers.

Food Service

Food service is growing rapidly in numberof establishments but with fewer companies(Table 11). The number of establishments hasbeen increasing since the late 1960s and thelargest firms show a continued growth pattern.The “fast food” chains are among the largestfirms nationally,

Regional Concentration

The relevant market for producers sellingcommodities is often a region rather than theentire national market. Buyer concentration ina particular region is the most importantdescription of the selling choices available. Thesheep and lamb industry has long had concernfor maintaining a viable market for slaughterlambs. The slaughter numbers have declinedsteadily since 1940 adding to the problem.

Five regions have been defined as impor-tant in the sheep and lamb industry (Figure 2).The location of slaughter plants by regions in1987 follows a pattern of acquisitions in the lastcouple of years, giving farmers and ranchersfew choices for selling lambs. The CentralRegion, accounting for about 25 percent ofnational slaughter, is best with four independ-ently owned plants (Figure 2). In each of theWestern and Plains Regions there are only twofirms operating through a pattern of multipleplants. Those regions combine to produce 60percent of industry output. The smaller pro-duction regions of East Central and Easterneach have one plant. While the national four-firm concentration is 66, the regional market isconsiderably more concentrated.

Competition among so few buyers is aproblem. Farmers and ranchers feel the lack ofselling alternatives works against them. Whilethe lamb industry is an extreme case, the rapidincreases in concentration in livestock slaughtermay point to a more general problem.

Causes of Structural Change

February 89/page 119

Table 11

Sales of Top25 Service Operators, 1984-1985

Com~anv

McDonald’s CorporationPillsbury Restaurant Grp.Pepsi Cola Foodservice Div.Marriott CorporationKentucky Fried Chicken

Wendy’s InternationalUSDA, Food & Nutrition Ser.ARA Services, Inc.Imasco U.S.A.Trans World Corporation

Holiday CorporationInternational Dairy QueenDenny’s, Inc.Saga CorporationSheraton Corporation

Domino’s PizzaGeneral Mills RestaurantW. R. Grace Restaurant Grp.Service America CorporationShoney’s Inc.

Collins Foods InternationalHilton HotelsU.S. Navy FoodserviceArby’s Inc.Southland Corporation

---------- 1985 ---------- ---------- 1984 ----------Rank Sales Rank Sales

-- million $-- .- miIlion $--

11,000 10,006; 5,538 ; 4,3643 3,671 4 3,1594 3,394 6 2,9215 3,100 3 3,328

67

:10

1112131415

16

::1920

2122232425

2,6942,6712,3801,9361,815

1,6221,6041,2801,2541,162

1,0841,0501,0361,000

985

895881852811810

75

108

11

912131415

3216211917

2320182237

2,4233,0321,9602,2001,712

2,0201,4231,2371,1301,095

6261,080

771980932

752790873756508

SOURCE U.S. Department of Agriculture, Food Marketing Review, A.E.R. #590, EconomicResearch Service, Washington, D.C., 1987.


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Several interesting questions relate to thecauses of structural change. Unfortunately,they get little attention. Is structural change aby-product of other events, or is it a majorstrategic goal? Are events of competition whichchange industry structure driven by expectedeffects on cost or on market power? Howimportant are changes in other markets, such asindustry maturity or consumer preference, inexplaining structural change in food manufac-turing and retailing? These questions are givenspecial importance by the anti-trust laws whichfrequently attach significance to ‘intent.” Studyof the causes of structural change will nevergive a complete identification of a competitor’sintent, but it is useful.

Food Manufacturing

Firms which specialize in advertisedbrands of food products, such as those sum-marized in Table 5, are large conglomeratefirms. They are among the largest advertisers inthe United States. These firms have an enor-mous capability for developing new products,shaping a positive consumer image for theproduct and introducing the product into dis-tribution. The cost of this capability can onlybe profitably borne when sales volume is high.It is often argued that this marketing overheadis spreadable across different product lines --justifying a conglomerate structure.

This industry segment seems to experiencehigh internal growth rates. Aside from mergers,the larger firms tend to have faster growth ratesthan do other firms. This leads to increasingconcentration. But in addition, there are a highnumber of mergers and acquisitions amongthese firms. Both the internal and externalpatterns of growth are probably driven by thecost advantages of large size--scope economies[Panzar and Willig].

At the same time, mergers may beencouraged by forces external to the industry.The complex and expensive stock transfersand/or leveraged buyouts involved in industrialfirm mergers give business opportunities for thesecurities industry. It is argued that some firmsget accounting advantages from the transitionalchaos created in the joining or splitting up oflarge complex organizations. For these reasons,mergers have a dynamic of their own [Brilloff].Perhaps these factors result in merger activityoccurring in “waves” or “movements,” Similar toan intense pattern of mergers in the 1950s and1960s, we are experiencing such a mergermovement currently [Connor].

These observations support the followinginferences concerning “intent”: a) Motivationconcerning cost savings is an important factor inthe emerging pattern of higher concentration inthe “advertised brand” sector of the food manu-facturing industry; and b) External influencesencourage mergers for mergers sake, especiallyin the merger wave periods.

Aside from these patterns influencingmost food manufacturing industries, there seemsto be a special set of events in the meatindustry. After a long trend to lower nationaland regional concentration, meat packing hasbecome more concentrated over the last severalyears [Ward]. These changes are a part of amajor repositioning in the meat industries. Theexpected emergence of processor brands in freshbeef may be a cause or a result. In turn, thesechanges may precipitate major changes in “pricediscovery” mechanisms and/or governmentrules.

Food Retailing

Food retailing is an interesting and specialcase within the food industries. National con-centration has increased noticeably during mer-ger patterns and declined otherwise. Theinternal growth rates of large firms have typi-cally been so slow that they lose ground to thecollective growth patterns of smaller firms.This suggests that there is no serious “costadvantage” to larger size and therefore no costsaving motivation in individual mergers.

Local market concentration is quite adifferent matter. Local market concentration isrising rapidly (Figure 1). That is significantbecause of the local nature of retail competition.

A major cause of changes in local marketconcentration is change in store size. Initialsupermarket introduction caused significantimpact on local market concentration. In 1948,supermarkets (in the early small definition) hadonly 25 percent of industry sales. That went to60 percent by the early 1960s--a decade and ahalf. Naturally, that was a period of increasingmarket concentration.

The size of supermarkets did not changeso much year to year until after 1970, In theseearly years, most supermarkets looked alike andhad selling areas of 10,000-12,000 square feet.After 1970, supermarkets were being built intosaturated markets and each year’s model was alittle bigger. Between 1972 and 1982, totalindustry square feet of selling area increased by30 percent [USDA]. By the end of that period,


few “conventional” supermarkets were beingbuilt. Most new openings were either on thesuperstore (60,000 square feet or so) end of sizeclassification or were among the rapidlyincreasing numbers of convenience stores. Theopening of large stores, each of which replacesseveral smaller ones, has resulted in the currentrising local market four-firm concentration.

There may be many patterns of strategyand intent as local market competitors makedecisions about store openings, closings,acquisitions and divestitures. We may neverobserve or understand them. Yet, when storesize goes up, fairly straightforward arithmeticrequires market concentration to rise. Con-sumer acceptance is an important limitation onstore size. The superstore was introduced in themid- 1960s but failed. Industry maturity andmarket segmentation may be more importantinfluences in the evolution of store size andmarket concentration than choices taken bycompetitors.

Wholesaling

Independent (non-chain) wholesalers havehad an up and down pattern. The general sta-tistics show that they have lost ground tochains- -not the largest chains, but the aggregateof all chains. This really means that the growthdynamics in the “smaller chain” category havebeen the source of strength, because repeatedlywe observe the largest chains being only able togrow through acquisition. The irony of this isthat group wholesalers frequently show statis-tical losses when their more successful retailcustomers open their own warehouse- -theybecome a chain,

This results in an apparent weaknesswhen, in fact, these groups are frequently com-petitively strong and effective. They enable thegrowth among their retail customers, whichleads to the splitting off of small chains. Whilethe market share of independent wholesalers isdeclining, this category contains several strongand successful businesses.

Food Service

The dynamics in the “food service” cate-gory is the chain and franchise fast food busi-ness. The number of firms goes down as thenumber of establishments goes up. The chain/franchise business replaces some old lineindependent restaurants and finds some growthopportunities from changes in lifestyles.

Prospects for the Future

There is no way to forecast how long thispattern of consolidation will continue or to whatextent market concentration will be increased.Clearly market concentration has proceededfurther than shown in the 1982 Census of Busi-ness statistics, because the main pattern of con-solidation has occurred since 1982.

In past merger cycles, most of the activitywas completed within a decade, In that frameof reference, the pace of merger may slow inthe next two to three years.

It has also been observed in other mergercycles that public concern has been translatedinto increased antitrust activity and mergerbans. The 1960s ban on mergers involving sev-eral food chains is an example. It is difficult toassess the importance of governmental signalsand antitrust activity in the tapering off ofmergers.

We expect merger activity to subside withor without major policy intervention. On theother hand, the parts of the food industryexperiencing significant structural change--theconglomerate manufacturer of branded foodproducts and local retail grocery stores--areinfluenced by other important factors. It islikely that consolidation and growth in industryconcentration will continue in these areas. Meatpacking also seems to be driven by an industrytransition which may continue toward a sig-nificant y different structure.

Consequences

The emergence of large conglomeratefirms and increasing market concentration sug-gests concerns about monopolizing strategies andinsensitivity to consumers. Sorting out theseprospects and concerns must be done on a “caseby case” basis and in considerable detail. Studyof these issues over the years provides somegeneralities which may enable forming usefulexpectations and interpretations.

Consumer Concerns

Much has been written about an expecta-tion that high market concentration and/or largeconglomerate manufacturers will invite reducedcompetition among manufacturers and result inpoor performance as seen by consumers. Cer-tainly these are serious questions and deserveconstant surveillance. At the same time, it iseasy to over-represent these concerns for thefollowing reasons: 1) private label products


provide an economic alternative to most highvolume food products; 2) the largest firms tendto seek consumers’ attention through productdevelopment competition. This type of rivalrygenerally leads to independent activity ratherthan a tendency toward collusion. It is also“expansive,” rather than restrictive, as oneexpects from monopolistic behavior.

These two conditions apply unevenlyacross the different product groups in the foodindustry. In addition there are other importantquestions about performance to consider. As ageneralization, these two conditions seem to beimportant factors explaining why we get gener-ally good performance from the consumer’sperspective in the food manufacturingindustries. Not everyone shares this view.Other analysts have calculated “monopoly over-charges” which they identify as evidence ofpoor performance [Parker and Conner]. Thesecosts are generally the higher public and privatecosts required for developing and introducingnew and special products or giving old productszest or status [Marion and Grinnell]. The avail-ability of a consumer choice between advertisedbrands and economy private label or genericproducts is the key in assessing the appropriatemeaning of monopoly overcharges.

Food retailing has very little “valueadded.” For the most part, costs are associatedwith fixed facilities and a good bit of fixedpersonnel costs. With all of these fixed costs, itis not surprising that volume of business power-fully determines total costs and, therefore, prof-its. This is the driving relationship that isinvolved in studies of the effect of marketstructure (concentration) on consumer levelperformance (prices or margins).

As a practical matter, economies of size orscope are confounded with concentration. It isa tough measurement problem to separate outthe effects that economies of concentration haveon price. Firms with high store volume havehigh concentration and significant economies.This leads to the often reported positive rela-tionship between market concentration andprofits. Retail price data are difficult toaggregate and compare. One study made claimsbased on an analysis of meager data [Marion,Mueller, Cotterill, Geithman and Schmelzer].Obvious flaws have been identified in the anal-ysis and inferences concerning the price dataused [Padberg]. New evidence by Kaufman andMacDonald indicates that concentration is not asignificant factor in explaining prices amongretail stores when controlling for cost differ-ences among stores. New research by Kaufman

and MacDonald, and Kaufman and Handy sug-gests that occupancy costs and greater storeservices had a statistically significant positiveimpact on price.

Probably the greatest factor affectingfood retailing competition is entry conditions.On this frontier, the frequent tendency to opennew malls and shopping centers beyond theneeds of most communities creates a large sup-ply of unused retail real estate. Owners ofunused sites work intently to get a competitor inplace--often with a significant subsidy. Thismakes for more intense competition for con-sumer patronage. This condition, though wide-spread, is not uniform from one region toanother. It probably gives a better signal con-cerning the vigor of retail competition thanlevel of market concentration. The observationthat total food retailing selling space is increas-ing rapidly leads us to feel that the likelihoodconsumers will be adversely affected by changesin the retail structure is small, especially incommunities where retail real estate is devel-oped and abundant.

Market for Agricultural Commodities

When the structure of the food marketingchannels becomes more concentrated, the farmproducer as well as the consumer may beaffected. Agriculture has long been charac-terized by the “thin market problem.” Fromearly days, many conditions have emerged inwhich farmers did not have a market at all fortheir commodities. In even more situations,there has been concern for the quality of com-petition within the markets that emerged.

These trends in industry concentrationwill undoubtedly rekindle this debate. Thesmaller number and higher market shares offirst-handlers, together with the trend towardfewer and larger farmers will lead us to recon-sider some of our fundamental patterns of pricediscovery. It may be a time to develop newprice setting machinery for highly concentratedbut geographically dispersed industries[Sporleder]. These problems continue in eggsand broilers and seem likely to worsen in thered meat industries. Grains have the influenceof stabilizing central markets. Specialty cropswill also be affected. All of these concernsincrease the incentive for vertical integration.Affects on intermediate markets may be themost significant consequence of the restructur-ing currently under way in the food industries.

Conclusions


The restructuring of the food industriescurrently occurring through mergers andacquisitions will get careful attention over thenext decade. Each industry will be affecteddifferently. Yet, we can generalize that fre-quently the outcome will be to give the con-sumer more choices--whether for products orshopping space. At the same time theseindustry changes will give the farmer lesschoice. Dealing with the results of thesechanges will involve fundamental reconsidera-tions of the markets for farm commodities.

References

Billoff, A. J, “Financial Motives forConglomerate Growth,” Economics ofConglomerate Growth, edited by LeonGaroian, Ag. Research Foundation,Oregon St. U. 1969, pp. 81-87.

Connor, John M. Food Processing: AnIndustria! Powerhouse in Transition(Lexington, Mass.: D. C. Heath & Co,,1988).

Economic Research Service, USDA. FoodMarketing Review, 1986, AER #565, Feb.1987.

Fowler, Stewart H. The Marketing of Livestockand Meat, Second Edition (Danville, Ill.:Interstate Printers and Publishers, Inc.,1961).

Kaufman, Phillip R. and Charles R. Handy.“Determinants of Supermarket Prices andPrice Differences Results From aNational Survey,” paper presented at theAmerican Agricultural EconomicsAssociation Meetings, Knoxville, TN,August 1988.

Kaufman, Phillip R. and James M. MacDonald.“Competition, Location, and SupermarketPricing,” paper presented at the SouthernAgricultural Economics Association Meet-ings, Washington, D.C., September 1987.

MacDonald, James W. “Economies of Scope,Contestability Theory, and EconomicEfficiency,” in Kilmer and Armbruster,eds., Economic Efficiency in Agriculturaland Food Marketing (Ames, IOWXIowaState University Press, 1987), pp. 154-76.

Marion, D, R. and G. Grinnell. “Estimates ofConsumer Loss Due to Monopoly in theU.S. Food Manufacturing Industries:Comment,” AJAE, vol. 66, no. 4, pp. 520-23.

Marion, B. W., W. F. Mueller, R. W. Cotterill,F. E. Geithman and J. R. Schmelzer. TheFood Retailing Industry--MarketStructure, Profits and Prices, Journal ofConsumer Affairs 15 (1981} 180-86.

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Padberg, D, I. Book review (F, W. Mueller, R.W. Cotterill, F. E. Geithman and J. R.Schmelzer, The Food Retailing Industry--Market Structure, Profits and Prices),Journal of Consumer Affairs 15 (1981):180-86.

Padberg, D. L and R. T. Rogers. “The CyclicalNature of Politics and the U.S. FoodSystem,W Journal of Food DistributionResearch, forthcoming.

Panzar, John C. and Robert D. Willig.“Economies of Scope,” American EconomicReview 71 (1981): 268-72.

Parker, R. C. and J. M. Conner. “Estimates ofConsumer Loss Due to Monopoly in theU.S. Food Manufacturing Industries,”AJAE, NOV. 1979, pp. 626-39.

Sporleder, Thomas L. “Implications ofElectronic Trading for the Structure ofAgricultural Markets,” American Journalof Agricultural Economics 16 (1984) 15-21.

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U.S. Department of Commerce, Bureau of theCensus. Census of Manufacturers andCensus of Retail Trade, various censusyears, U.S. Government Printing Office.


Ward, Clement E. “Market Structure Dynamicsin the Livestock-Meat SubsectorxImplications for Pricing and PriceReporting,” Key Issues in LivestockPricing: A Perspective for the 1990’s(Blacksburg, VA: Research Institute on~i~tock Pricing, December 1987), pp.

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