Some Smaller Food Firms Thrive Despite Consolidation

The spate of mergers that has gripped the food industry recently is of little concern to Paul C.P. McIlhenny.

The president and chief executive officer of the McIlhenny Company, maker of Tabasco hot pepper sauce, says frequent overtures from acquisitive suitors hasn’t tempted the family-owned company to sell out.

Founded in 1868 by Edmund McIlhenny, the Avery Island, LA-based company had estimated sales of $120 million in 1998, a growth of nine percent over the previous year according to Hoover’s Online. With the company’s Tabasco sauce sold in over 110 countries, McIlhenny says the company has enjoyed close to double-digit sales growth for the past 20 years, a rarity in the notoriously slow-growing food sector.

“The fact that we are growing and growing profitably and paying more dividends to our family shareholders is the secret to staying independent,” says McIlhenny.

At a time when food company mergers seem to be a weekly occurrence and even hippie holdouts like Ben & Jerry’s Homemade Inc. succumb to the overtures of multinational conglomerates, the McIlhenny Company seems to be one of the rare holdouts amid the consolidation trend.

Tabasco Sales Hot

General Mills Inc.’s purchase of Pillsbury, Philip Morris Companies Inc.’s acquisition of Nabisco Holdings Corp. and Unilever’s purchases this year of Ben & Jerry’s, Slim-Fast and Bestfoods have all reflected food companies’ need to consolidate in order to deal more effectively with large retailers.

With the top five supermarket chains in North America garnering almost 40 percent of the industry’s total sales, larger food manufacturers are often at an advantage when battling for precious shelf space. Large companies with many popular brands can negotiate with retailers more effectively, while retailers prefer to stock their shelves with products that have heavy promotional spending behind them.

Although McIlhenny admits that the competitive retail environment has made it more difficult to get some of Tabasco’s newer products onto store shelves, he says consolidation among manufacturers hasn’t hurt sales since there aren’t many products that rival Tabasco’s popularity.

“Tabasco is extremely famous both in the U.S. and around the world, so that pride in ownership accounts for some of the propriety spirit,” says McIlhenny.

The Challenge

But while the competitive environment can be daunting for smaller food companies, industry watchers say there is still some room for key players to carve out a niche for themselves.

“I don’t see the disappearance of the independent food company,” says John Zealley, partner at Anderson Consulting’s global food and consumer packaged goods practice. “There will always be a vibrant independent sector based on innovation or the priorities of the founders or individual management.”

Those companies that do survive need to offer unique products that are very popular with consumers and be flexible enough to anticipate customers’ needs, says Lisa McCue, spokeswoman for the Grocery Manufacturers of America, a Washington, D.C.-based association of food, beverage and consumer products companies.

“They have to stay relevant to the Wal-Marts of the world and they have to look at their product and make sure it’s relevant to the consumer,” says McCue.

Little Debbie Stays Solo

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