Food marketers' power struggle feeds mergers

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Consolidation in the retail environment has sent food marketers scrambling for shelf space. Now, the industry's largest marketers are riding a consolidation wave of their own.

General Mills last week revealed it is in merger talks with Diageo for its Pillsbury unit, and speculation is rife that Kellogg Co., Campbell Soup Co. and Quaker Oats Co., among others are all interested in playing what one analyst called "the mating game."

The pairings began early in June with Unilever's $24.3 billion proposed acquisition of Bestfoods, then continued with Philip Morris' proposed $14.9 billion buy of Nabisco Holdings and is showing no signs of abating.

LOSING THEIR VOICE

"Manufacturers have been losing their voice for the past decade as retailers have consolidated, and this wave of consolidation allows them to regain that voice at retail," said Jeff Kanter, food analyst at Prudential Securities.

While trade spending costs are likely to continue to rise, the scale of the newly merged food behemoths will help marketers navigate the new landscape, said Credit Suisse First Boston analyst Dave Nelson.

"Assuming that companies spend 15% of sales on trade spending, the new Kraft/Nabisco will spend in the neighborhood of $6 billion, and that's a powerful checkbook to carry to retailers for end-cap displays," Mr. Nelson said.

The power pendulum recently has swung more toward retailers, many of which have consolidated buying, moving responsibility to corporate headquarters from a host of divisional offices. In Kroger Co.'s case, a merger with Fred Meyer Inc. last year led to centralized buying in Cincinnati for all its 2,300 stores.

"Our buying power is so much greater that we can negotiate much better prices for our customers," one Kroger executive said. The influx of food retailing by mass merchandisers, including Wal-Mart Stores and Kmart Corp. has added to the shift toward national buying.

REVAMPING SALES TEAMS

Marketers have reacted by reorganizing sales teams by retailer rather than by region. With a larger cache both of dollars and brands, the consolidated marketers likely will carry more clout.

"When you are bigger, you have more access to top executives and key decisionmakers," said David Vermylen, president of Keebler Co.

But while at a senior level the size of a marketer may matter, said Ken Harris, a partner at consultant Cannondale Associates, "Whether you're . . . Bestfoods or Bestfoods' part of Unilever, it's all about investing in branding. And if that doesn't happen," he said, "you're going to lose distribution."

PRODUCT, MARKETING MATTER MOST

Not surprisingly, retailers agreed wholeheartedly.

"Although there is weighted value given to who the manufacturer is, that's minute compared to what the item is, what the marketing plan is," said Mike O'Neill, VP-marketing and merchandising for Certified Grocers Midwest, who added, "[unless] it's really going to bring life to the category or to the brand, we're probably going to say no."

Keebler over the years has acquired companies such as Sunshine and Presidents Baking. And, while Mr. Vermylen said the Keebler name has opened doors, real growth has come from marketing investments and from access to Keebler's extensive distribution system.

Cheez-It, acquired with Sunshine in 1996, has grown from $130 million to more than $350 million as a result of investment both in advertising and what Mr. Vermylen termed "in-store theater." Famous Amos, acquired in 1998 with Presidents, has grown more than 20% to more than $100 million.

COMBINING MAGIC AND SKILL

In the case of the pending General Mills/Pillsbury merger, analysts have said the upside of the deal would be an infusion of marketing to bring Pillsbury's sluggish top-line growth back on track.

"If [General Mills] could apply their new-product magic and bring skills at marketing health wellness and wholesomeness, they could stimulate some growth in the Pillsbury portfolio," Mr. Nelson said.

General Mills invested $482 million in measured media in 1999, spreading the wealth among agencies DDB Worldwide, Chicago; Saatchi & Saatchi, New York; and Campbell Mithun and Bozell Kamstra, both Minneapolis. Pillsbury meanwhile spent $159 million, split among agencies Leo Burnett USA, Chicago; D'Arcy Masius Benton & Bowles, New York; and Dye, Van Mol & Lawrence, Nashville.

CRITICAL MASS

Though analysts cite a lack of overlap between General Mills' portfolio and brands such as Progresso soup and Haagen-Dazs, expectations are that the combined company could leverage its nearly $2 billion worth of refrigerated products as well as its baking items to build growth at retail.

Some, however, believe the marketer consolidation comes far too late. Retailers already have so much size and scale--with the top 10 global retailers revving up to control 50% of sales within the next 10 years--that marketers hardly can hope to build the critical mass necessary, said Burt Flickinger, managing director of Reach Marketing.

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