Grier, Kevin

English

Research Papers in Economics

Page 1 of  4
August 22, 2000
What is the Impact of Manufacturer Consolidation 
on the Grocer Sector?
A Special Report
Kevin Grier, Senior Market Analyst
The wave of massive mergers and acquisitions in the food manufacturing industry, including the
Unilever purchase of Bestfoods and the Phillip Morris purchase of Nabisco were driven by a variety
of reasons.  Slow growth, the need to generate greater earnings, economies of scale are just a few.
Ironically another reason for the mergers in the manufacturing sector is the wave of mergers that took
place in the grocery sector over the last two years.  Manufacturers needed to get bigger in order to
deal with larger buyers.
Manufacturer consolidation in the food industry is going to serve up a multitude of new challenges to
Canadian grocery retailers.  It will be prudent for Canadian food manufacturers to be aware of these
challenges.  By being aware of the grocer’s challenges and concerns, a manufacturer can both help
to solve these issues or alternatively, can take advantage of the situation.
None of those challenges is more important than the effect of being shuffled into a manufacturer’s
global deck of customers.  The shuffling of the deck will determine the outcome of each Canadian
retailer’s position for prioritizing of issues and opportunities.  Manufacturing consolidation will increase
the size of market that a retailer competes in to get an expected level of service from manufacturers.
The newly consolidated manufacturers will be taking a close look at their regional policies and
business practices.  It is likely that current regional policies and practices will be globalized by the
manufacturers as they look to maximize the synergies of their purchases.  Retailers for years have
tried to sway the marketing efforts of the likes of the tobacco companies, as well as Proctor & Gamble
and Nabisco.  From their perspective they see little result for their efforts.  Retail grocers are already
expecting that the situation will now be more difficult given the much larger size of these new global
manufacturers. 
Despite those expectations, manufacturer business plans are not going to be set up to intentionally
lose out on micro-economic opportunities.  Nevertheless, as with every budget or plan there is
rounding off.  That may be the first threat to satisfying the needs of the Canadian grocer and the
ultimate decision maker, the consumer. Smart retailers will be looking to meet early and often with
these consolidated manufacturers to be close to any changes.  These grocers will be seeking to have
the opportunity for input to preserve regional disparities that are small yet important. 
Category management will be further threatened by this trend towards manufacturer consolidation.
That is because meaningful category management requires an action plan that is general enough at
the top level and yet workable in all markets.  To some degree many models are information
overloaded or not designed to be managed at store level for interpretation and execution. Page 2 of  4
Canadian grocers are not yet able to provide excellent mass execution of a general strategy like Wal-
mart.  Thus with larger global manufacturers at the other end of the table, category management could
become even more disjointed between the strategy and the execution. 
Another huge issue is going to be control label or retail brand product.  Most large national brand
manufacturers never really went after this business.  Furthermore, what little control label that they
did have was typically by default rather than due to aggressive pursuit of the manufacturing
opportunity.  The fact that manufacturers are now even larger should make them less willing to pursue
this business. 
It can also be argued that these consolidated manufacturers will see their new power as an
opportunity to slow control label sales.  It is well known that as a result of the growth of control label,
retailers and manufactures have become silent competitors.  They compete with each other through
national brands versus private label while still trying to partner-up around procurement issues.  These
relationships have evolved into secret agendas for both parties.  This in turn is likely the primary
reason for the slow progress of meaningful advancements with ECR initiatives.  Thus, it should not
be surprising that these consolidated manufacturers will not operate with the best intentions of
continued retailer brand growth.
Choking Out Private Label
Private label strength in the market and its product quality is typically compared to the national (now
global) brand.  Profitability of private label verus the national brand is a specific measure.  It is this
point of measure that will become clouded for both manufacturers and retailers.  This will result from
the fact that manufacturer marketing managers will now manage much larger portfolios of products.
As a consequence, the economic models of manufacturing profit can be altered to the point where
key national brands may never be knocked off (ie. duplicated in form of a private label product) to the
same extent as in the past.
With the consolidation of manufacturers, the product portfolios for the marketing departments has
increased significantly.  More brands and skus are contributing to their bottom line.  In the past, some
manufacturers in key categories adjusted the economic requirements on selected brands to slow the
growth of the competitive retailer private label brand.  This practice was limited by just how much pain
the manufacturer’s profit line could take and by what additional profit the other skus and brands could
contribute. Leading grocers assert that P&G, Nabisco, Kraft, and Coke have relied heavily on this
mixing ability.  
The premise now with consolidation, is that with a larger portfolio of products and with fewer
competitors, and the need to show early positives in these new organizations, key brands and skus
will be and can be, protected like never before.  In other words, now more than ever, the grocer has
to consider the bigger manufacturer’s ability to fund a profit from a portfolio of hundreds of other
brands. 
Lets examine this concept further.  As noted, the strength of a retailer brand is how it performs when
compared to the key-off national brand.  It is also measured against how it performs in the category.
One point of measure is profitability as defined by the average retail price less the average dead net
procurement cost of the item.  The retail price assigned to the retailer brand is determined by the retail
price on the key-off national brand.  In most cases, the retailer brand is much lower than the key
brand.  The ability to generate the needed category profit is then a procurement cost differential.  That
is, the retailer brand has to be at least that much lower in cost as related to the national brand toPage 3 of  4
generate the same net cents profit as the national brand.  Of course, the same profit should be a
minimal expectation of the retailer brand.
So if profit is a point of measure, then one strategy by a manufacturer is to take that away from the
retailer private label brand.  This can be accomplished a few ways.  One less likely and perhaps too
public (but it has been done before) is to fund a price war on the key national brand between
retail/grocer competitors.  The result can be severely depressed retails on the control label item
reducing its ability to generate tonnage and/or profit.  
Another approach as noted above is to utilize the expanded balance of the manufacturer’s portfolio
of products to fund cost declines on the key national brand.  That will result in squeezing the control
label point of difference.  One primary reason for a retailer brand is that the brand generates a greater
profit opportunity than found with national brands.  If this is taken away then there will be a reduction
in the core control label listing bases. Manufacturer marketing managers will find it hard to resist this
tactic.
Consolidated manufacturers could also have an impact on the availability of technology and the cost
of product development.  As consolidated entities, these manufacturers will have an increased ability
to now affect competitive costing and sourcing of retail brands.  This  could choke out many core retail
brands.  
How is all of this possible?  One way to economically challenge the control label brand is at its
sourcing.    Much like a retail buying group which can procure a product at a lower cost because of
the size of the purchase order, these larger manufactures can dominate the availability of low cost raw
materials to the extent the smaller manufacture cannot.  This has happened in the past with many raw
materials so it will not be a new trend.  Nevertheless, in this regard, consolidation provides a much
larger opportunity  to negatively affect the core economics of control label. 
There is also product formulae and raw materials that can be better managed by the larger
international manufacturing groups.  These can be effectively out of reach by retailers.  The result
could be inferior retail brands that do not meet consumer expectations.  
The same would hold true for product innovations.  In the past a retailer could partner up with a
number two or three brand and put a strategy together to take on the number one brand as they
shared common goals. Sometimes this partnership may have involved the actual manufacturing of
the retailer’s private label brand.  This in turn would aid the economics of the partnered
manufacturers’s brand.  Now these much larger consolidated manufacturers will be able to limit the
availability of that opportunity.  They may also make any such opportunity much more costly for the
retailer and partnered national brand manufacturer.  Furthermore and quite simply, with fewer
manufacturers, grocery procurement staff will be less able to generate a need with one of them to
build the retail brand (and often the manufacturer’s own brand) as they try to partner up against more
dominant national brands.  
For example, the ability now of Kraft to mix back a profit or manage a product cost has been greatly
increased by its new product portfolio if nothing else. So grocers are going to be asking themselves:
Just who do I partner up with in the cheese category that will result in a meaningful impact against
Kraft with cheese?Page 4 of  4
Streamlining Operations
The cloud attached to the point of measure then becomes one of finding the truth: the true costs,
ingredients and margins for comparison to the key national brand. 
For those retailers that are less concerned about regional listing bases and satisfying every consumer,
these consolidations will benefit them through further sku rationalization.  With sku rationalization
comes efficiencies that both retailer and manufacturer will be naturally attracted to.    
The rationalization of variety versus duplication will take place, and is taking place now, in all
manufacturing companies.  P&G, Campbell, Heinz, Nabisco, and Kraft, to mention a few, have been
actively globalizing their brands and formulations.  As these organizations purchase others, the trend
will continue.  In fact, the trend is partially being fuelled by large retailers asking for the same as they
too search for the synergies of fewer skus. 
With consolidation of these groups and growing access to new more global markets, manufacturers
will challenge themselves to create single skus that work over large markets, if not globally. The new
economics of this may force regional de-listings.  At first the duplications, due to size, flavour and
performance, will be challenged by some retailers.  At present full service retailers in Canada feel
obligated to carry all these duplications and varieties due to consumer pressure.  When the
manufacturers rationalize, the more global listing base and new economics of manufacturing will mean
that the likelihood of maintaining wide distribution of these peripheral skus is not high. 
As a caveat, it should be noted that while consolidation is very visible and closely watched by
governments, consumers and purchasing agents around the world,  it may not be the dominant threat
to the business as usual model.  The new formation of manufacturing strategic alliances or B2B
partnerships will likely have a more profound affect on present day procurement practices in retail not
to mention the actual cost of goods that are offered.
This article originally appeared in the July issue of Grocery Trade Review, published by the George
Morris Centre.  Grocery Trade Review is a monthly food industry report that examines issues of the
trade between food manufacturers and retailers.  Grocery Trade Review is used by executives
throughout the food industry as a source of analysis and news.  If you would like a sample copy of
Grocery Trade Review, please contact Kevin Grier at the George Morris Centre, 519-822-3929x202.

WHAT IS THE IMPACT OF MANUFACTURER CONSOLIDATION ON THE GROCER SECTOR

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Research Papers in Economics