Rightsizing food oligopolies
The new oligopoly doesn't just acquire. It also gets rid of non-strategic assets. These are sometimes acquired by mistake in a belief the acquisition can be turned around or add extra value; sometimes it's matter of winnowing after a big purchase that brings along less desirable operations. Often this chaff is made of perfectly good products or lines of business, but ones that don't fit in with the business model or the strengths of the company. Obviously, someone else has to think it is a worthwhile business for another company to take it off the first company's hands (pick up the discard).
A perceptive article in the Wall Street Journal ("Retailers' Appetite for Top Sellers Has Food Firms Slimming Down", 10/28/2001) hits on this issue as well as some other basic principles of oligopoly. The article is a reaction to Kraft's (Altria) recent announcement that it will sell off its Life Savers and Altoids product lines.
Both products, acquired in 2000 when Nabisco was bought, remain popular. In fact, Altoids is still the #1 selling mint. But both products are declining and they are both outliers in Kraft/Nabisco's product line. The products are sold along with confectionary (candy) products and gum, usually next to the cash register in supermarkets, convenience stores, gas stations, and so on. Kraft has a big problems here: because it is a relatively minor player in the confectionary market, it tends not to get prime shelf space for its products.
As the WSJ article points out,
Bulking up back then seemed like the best way to get leverage with Wal-Mart and other big retailers. But these mammoth sellers care mainly about moving large volume and have become ruthless about the brands they will stock and the display they will give them. Anything but the top brands can end up on the bottom shelf….The big food companies don't want to be in categories where they are relegated to the worst display, and they're finding they can't always manage the vast array of brands they've collected. So they're selling.
Among the potential buyers for the products are those focused more on selling candy and gum, such as Wrigley, Hershey, Cadbury Schweppes, Mars, and Nestle. These companies, thanks to the popularity of their wide range of products in these categories can use their power to leverage these products, it is thought. These companies have strong sales forces dedicated to these shelves, something Kraft lacks. Kraft is more at home in the sections where cookies and crackers, cheeses, and lunch meats are sold.
The strategy behind major food industry acquisitions of the last decade (for example, Kraft buying Nabisco, General Mills buying Pillsbury or Unilever buying Bestfoods) was a territorial imperative. As the article puts it, "The more brands they owned, companies reasoned, the more leverage they would have in securing good display and ample space for their products."
But overall size is not enough; the key is domination of category, and it is the largest vendor in any field that gets to be category captain. #1 or #2 have input on how to allocate space on the shelves, #3 and below are at their mercy. "Even Kraft, the country's biggest food company, can't always throw its weight around. What really matters is how big you are in a particular category, and being a star in one aisle doesn't guarantee respect in another."
The category captain role is, in the end, hurtful for smaller players. Even though the idea is that the captain will be objective in assigning spaces, the article notes that "[w]hat results is a relationship in which a supplier walks a fine line of providing objective information to a retailer, but all in the service of helping his employer sell more product. The favored relationships between retailers and suppliers raise at least the appearance of anticompetitive activity, according to retail and food executives." Even popular products get subtly pushed to the side if they don't have a powerful defender.
Other companies have done much the same in selling off marginal products. Nestle and Unilever, for example, have sold off scores of brands over the past few years to simplify their portfolios and concentrate their efforts on real strengths.
And the article mentions that Kraft is considering what to do with its Post cereal brand, which comes in as a weak #3 against General Mills and Kellogg. As those companies use their power to grab shelf space, Post is suffering. Note that the same principle is at work outside the food industry as Cendant plans to sell off its mortgage business, as Siemens sells its solar energy business to Shell, or as UCB sells off its chemicals division to Cyrtec, just to name a few.
"Rightsizing" (if we can take away its connotation as a euphemism for layoffs) is the key. Being big in general is not the point; being big at each point of competition is the key. Products and services that are #3 or below in their category suck up the energy of the company and rarely have a future. For that reason, de-acquisitions are almost as popular as acquisitions.
Update 11/15/04: Wrigley, the chewsing gum company, won the bidding. Altoids and Life Savers will join Wrigley's gum at the check-out counter.
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