Kraft issued a voluntary recall for original flavor macaroni and cheese due to possible contamination of metal fragments. File photo courtesy of Kraft Foods GroupThe merger between Kraft Foods and H.G. Heinz further consolidates the global food production into the hands of about a half dozen companies. These six multinational powerhouse corporations can exert enormous power over the retail grocery channel, and by extension control the dynamics of a necessary area for all people: the access to food. These corporations represent an emerging monopoly in an area where competition is needed, arguably, more than just about any other industry in the world.
The merger between these two U.S. based food industry giants, each with a collective stable of some of the most revered and iconic branded food product lines in the industry, is just the latest in a wave of M&A activity to strike the industry over the past several years. It is, however, a huge transaction involving stock and a special cash dividend financed by a $10 billion investment by 3G Capital and Berkshire Hathaway, which are the two firms who combined forces to purchase Heinz in 2013 and transition it into a privately held company.
Under the terms of the merger agreement, Heinz will return to being a public traded entity with a 51% ownership stake in Kraft. The owners of Kraft stock will control a 49% portion of the new combined food industry titan. The prognosis for the future is interesting because while the magnitude of this merger transaction will preclude Heinz-Kraft from completing any further brand purchases in the near term; the newly minted company upon completion of the regulatory process will be well positioned to be able to make additional acquisitions of other competing food brands in the future.
Going Rogue
The rise of celiac disease and heightened awareness regarding food allergens combined with the wellness trends in the industry have given windows of opportunity to privately owned companies, especially in the natural foods area, to challenge the large scale food manufacturing companies.
A few examples of this scenario would be Chobani, Food for Life, Nature's Path, and until recently Enjoy Life. The Enjoy Life brands were purchased by Mondelez International (formerly Kraft's snack foods division) in a deal which demonstrates the value of allergen free product lines in the new American consumer consciousness.
These privately owned companies have entered the grocery store channel and competed rather well with the more established players evidenced in Chobani's ability to take market share from yogurt heavyweights Dannon and Yoplait (a General Mills business unit) which is not easy to do given the costs of refrigerated shelf space.
The exponential increase in gluten free food offerings will lead to more food industry consolidation as well as the approach used by General Mills. In order to compete with the smaller companies making high quality gluten free and allergen free products, General Mills launched their own offerings in those areas or rolled out line extensions of existing brands to include a gluten free option for the consumer. This method allows them to compete and capitalize on an emerging food industry trend without having to commit resources to an acquisition which is costly both in terms of time and financially.
Skyrocketing Costs
The skyrocketing costs for staple food products coupled with a shrinking middle class and further food industry consolidation is the formula for a very combustible situation. The average worker also has seen flat wages with little to no cost of living increases factored in, and the increased cost for even basic food items let alone the organic or health food options will lead to a rise in food insecurity. Many regions of the U.S. have already witnessed an increase in the demand for services from food pantries and other forms of assistance.
Moreover, the alarming component of the merger between Kraft and Heinz is the potential for their combined expertise as well as access to capital which will create conditions where these "rogue" privately owned companies will find it increasingly difficult to survive. The acquisition potential for Heinz-Kraft extends even to larger companies which are struggling such as Campbell's Soup Company, ConAgra, and cereal giant Kellogg.
The high costs associated with shelf space in the grocery store channel as well as the fact that the premium space is controlled by the big industry players means that a monopoly is not just likely, it is inevitable. The Federal Trade Commission was concerned decades ago with the Bell Telephone monopoly leading of course to the famous creation of the "baby Bells". More recently the anti-trust movement has been focused on airlines and the energy industry. However, a monopoly when it comes to the access to food products can be a dangerous scenario with far-reaching consequences.
The reliance of the food industry on globally sourced commodity products gives me pause when I realize that six or seven conglomerates will control the supply of finished products available to the masses. This is an area of self-interest for every American, and one in which I think our national, as well as global, discourse will be focused upon in the months ahead.
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