- The Washington Times - Sunday, October 28, 2001

Sara Lee Corp. acquired Earth Grains Co., making it the second-largest U.S. fresh bread maker (behind Kansas City-based Interstate Bakeries Corp.).

PepsiCo bought Quaker Oats, joining two major makers of soft drinks, cereal and snack foods. Among supermarkets, Kroger has joined with Fred Meyer and Albertsons with American Stores. Companies in the nutrition industry are getting gobbled up by mainstream food companies for example, Nestle's acquisition of PowerBar and Kraft's of Balance Bar. In 2000, 48 nutrition companies were acquired, up from 16 in 1997, according to Nutrition Business Journal.

These examples point up what has been called merger mania in the food industry. The trend is firing up disputes about how it affects consumer prices and choices, whether potentially monopolistic conditions might inspire profiteering, and whether the intense competition for market percentage leads competitors to engage in unethical measures to retain or augment their cut of the pie.

These questions circulated around the proposed $10.1 billion purchase of Ralston Purina, the largest U.S. pet food company with brands such as Puppy Chow and Meow Mix, by Swiss giant Nestle, which ranks as the second-biggest pet food-maker in the U.S. market with brands such as Alpo and Friskies.

To find answers, start with the drive among supermarkets in the 1980s to gobble each other up as a way to grow without building new stores. In turn, manufacturers have felt the need to get bigger as well to provide the merchants with sufficient quantities and services. Then, retailers get further motivation to extend their size.

To make a complicated situation more so, companies are engaging in joint ventures, partnerships, contracts and other agreements. Suiza Food in eight years has become the largest U.S. fluid milk processor by purchasing some 40 dairy firms in eight years. It also entered a joint venture with the cooperative Dairy Farmers of America, which gave the two concerns 70 percent of the fluid milk processing and distribution in 13 Northeastern states.

Agribusiness interests say concentration enables efficiencies of scale that keep the lid on prices. Nestle, for instance, expects to save $260 million in manufacturing costs through acquisition of Ralston Purina. Moreover, "consumers have more choice than ever before," said Gene Grabowski, vice president, communications, Grocery Manufacturers of America. Retailers and manufacturers alike rebuff claims of excess concentration by pointing to the diminishing share of the consumer dollar that goes for food 11 percent to 12 percent compared with 30 percent in the 1930s.

Retailers, for their part, say they must compete not only other groceries but also fast-food eateries and similar places where consumers now spend almost half their food money.

Merger opponents draw a different picture of the effects. Albert Foer, antitrust lawyer and president of the American Antitrust Institute, sees consumer choice declining, particularly because of the relatively new arrival of the category captain a company representative who oversees a category of food (such as pet food or canned soup) for the retailer and, from the records obtained, recommends brands the store should carry. "If a unified Nestle is the category captain for all pet food and has the ear of most retailers and is giving them planograms for what to put on their shelves, new entrants will be Nestle's," Mr. Foer told a consumer meeting last spring.

In opposition to the proposed Nestle-Ralston merger is an alliance of farmer and consumer organizations as well as the American Antitrust Institute. They argue that Nestle would control the cat- and dog-food markets, especially dry products with 70 percent of dry cat food and almost 50 percent of dry dog food.

"Even the most pro-merger observers concede there is a point beyond which concentration gives rise to monopoly power power that boosts profits without benefiting consumers," the Consumer Federation of America wrote in comments asking the Federal Trade Commission for thumbs-down on the pet food deal. Furthermore, it is argued, Nestle control of pet foods will depress prices for livestock and other ingredients, a strong reason why farmers have joined this fight.

Surprisingly, no one seems to have the numbers to prove food prices escalate because of mergers. "I have searched in vain among studies on concentration for consumer numbers. I never find enough to satisfy me," said Art Yaeger, associate director, CFA. "We did tables looking at food prices over the last 10 years. The increases have been very moderate. I was surprised. We looked at 37 items. Not an insignificant number of those 37 were cheaper in 2001 than in 1990. When you adjust for inflation, which we also did, almost all were cheaper than in 1990.

"So you have all these mergers taking place, and there is not a smoking gun that I have found on price increases."

Amid the uncertainties about food industry merger mania, one fact is clear: The stakes are huge pet food rings up $7 billion a year, for instance.

Some observers believe companies fearful of a behemoth in their market might engage in dirty tricks, as has been alleged in the pet-food situation.

According to sources, a company standing to lose from the proposed merger apparently tried to create a front group having the semblance of a consumer organization. Dubbed Coalition of Concerned Consumers and Pet Owners, it died aborning largely by trying to hide its source of funding. (Rumor has fingered M&M Mars, maker of Kal Kan and possibly a big loser from the proposed merger.)

Members of the media who sought more information about the coalition were put off for weeks. Prospective coalition members did not get straight answers, so did not join.

Despite these activities, reports suggest the Nestle-Ralston merger will get the go-ahead. And there will be more mergers to come, especially in the global economy. Among them, M&M Mars has announced its intention to acquire European manufacturer RoyalCanin, assuring its dominance overseas. And Dutch giant Royal Ahold, owner of Giant Foods and Stop & Shop grocery chains, said Sept. 5 it will acquire Alliant Foodservice Inc. and Bruno's Supermarkets Inc. in the United States. All in all, while food industry mergers apparently do not have a drastic impact on consumers, shareholders do stand to gain revenues.

Goody L. Solomon is executive editor of Food Nutrition Health News Service.

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