Announced mergers of Kraft Foods and Nabisco; General Mills and Pillsbury Co.; Georgia-Pacific Corp. and Fort James; and Unilever and Bestfoods in recent months potentially reduce eight major clients to four. But that may just be the beginning. Analysts expect industry consolidation to continue and possibly accelerate.
Also roiling the industry is IRI's lawsuit charging anti-competitive practices by ACNielsen. While a U.S. District Court in New York dismissed part of the suit last month, it cleared the way for pre-trial discovery that may include depositions of ACNielsen clients.
Recent consolidations are a mixed bag for ACNielsen and IRI. Georgia-Pacific and Fort James are ACNielsen clients competing mainly in the same categories, so the merger should allow them to consolidate some research.
In the cases of Kraft buying Nabisco, and General Mills merging with Pillsbury, the bigger partners are ACNielsen clients while the smaller ones use IRI -- so ACNielsen could gain an edge if accounts ultimately consolidate.
"There's no question that when two of our clients merge and there are overlapping categories that there will be some reduction in overall revenue," said Steven Schmidt, president of ACNielsen U.S.
But, he added, "We're growing our top line right now in the U.S. over 10%, and all this consolidation impact is maybe to the tune of 1%. At the end of the day, we're still going to have dramatic growth even after all the consolidations are done."
Mergers don't automatically void or trigger renegotiation of multiyear research contracts, but Mr. Schmidt said ACNielsen generally is accommodating.
"Any time these companies merge, ACNielsen will do what's right and work with the acquiring party to figure out what is the right package of services," he said. "It may not be immediately, but we'll get there pretty quickly after these companies have merged."
IRI declined comment on consolidation issues.
ACNielsen, like IRI, has been moving in recent years to reduce reliance on the large but at best marginally profitable retail measurement business, which is most vulnerable to consolidation pressures. Mr. Schmidt pointed to new products in such "value-added" areas as data analysis, analytical modeling and household panel research. Acquisitions in recent years of concept testing service Bases and in-market testing service Market Decisions and the launch last year of Internet measurement service eRatings also have broadened the business.
Still, retail measurement remains ACNielsen's biggest business, though Mr. Schmidt wouldn't specify the percentage.
And he acknowledged that retail measurement has become a loss leader of sorts used by ACNielsen and IRI to attract clients in hopes of selling other higher-margin analytical and testing services. But he said clients still care about speed and accuracy of scanner data and he doesn't believe they're taking any harder line on costs now than five years ago.
ACNielsen has had the upper hand of late, posting profits the past two quarters as IRI posted losses. ACNielsen's second-quarter U.S. sales were up 10.5% to $130.2 million, while IRI's second-quarter U.S. sales declined 4% to $101.4 million.
Overall, IRI lost $1 million on sales of $133.9 million in the second quarter, with a modest profit of $300,000 excluding restructuring charges. ACNielsen had second-quarter earnings of $10.5 million on revenues of $401.8 million, including restructuring charges of $11.8 million for its own Operation Leading Edge restructuring.
Analysts agree that consolidation impact should be minimal, since most of the higher-margin business in the industry is done on a brand-by-brand basis.
"If there would be a change it would be if there were cutback or consolidation in brands, and I think just the opposite is happening," said Edward Atorino of Wasserstein Perella.
"Unless you've got crossover brands and you intend to eliminate one, I don't think it will be an issue," agreed Lauren Fine, an analyst of Merrill Lynch & Co.
CLOUD OVER THE RIVALS
Litigation, however, may be a bigger cloud over the competitors, despite dismissal of part of IRI's suit last month after the court ruled that IRI's European subsidiaries must pursue claims separately against ACNielsen.
The ruling should eliminate some of the drag on ACNielsen's stock from the $350 million lawsuit, which could be subject to tripling should IRI win, Ms. Fine said in a recent report.
While ACNielsen and most analysts painted the dismissal as a partial victory and question the merits of IRI's case, IRI general counsel Monica Weed said it's unclear how much if any of IRI's $350 million in alleged claims will be affected. Either way, the ruling paves the way for discovery to begin later this year.
"Deposition of clients would clearly be in the cards," Mr. Schmidt said. "If it does occur, it will be because our competitor chose for that to happen . . . And, yes, I view that as a very delicate situation, anytime you have to depose clients. My hope is that it does not come to that, but it's not for me to say."
Ms. Weed said, "If we can avoid calling clients, we certainly will."
Ultimately, settlement is in the best interest of both parties, Ms. Fine said, and not only because it would eliminate uncertainty and legal costs.
"Should this case be amicably settled," she said, "we believe the companies conceivably could work together to decrease data collection costs -- the largest component of their respective cost structures."