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

Another family-held company that finds itself rebuffing numerous take over offers is McKee Foods, the maker of Little Debbie snack cakes. The company was founded in 1928 by a young couple named O.D. and Ruth McKee and is still owned by the McKee family. With $855 million in sales last year, McKee is the leading snack cake maker in the U.S.

“They get offers all of the time, and they send out a form letter letting them know that this is something they’re not interested in,” says McKee spokeswoman Ruth Garren, who adds that the industry consolidation has not changed the company’s strategy.

“We have a lot of loyal consumers and a niche that we’ve been established in for a long time. We have not been that affected by the other companies,” Garren says.

McKee Foods, the McIlhenny Company and other privately held heavyweights like Mars Inc. and Schwan’s Sales Enterprises (see sidebar) may have managed to thrive as independent entities, but analysts say other companies might not be so lucky.

David Vs. Goliath

“My own belief is that the two types of companies who are going to survive are the very big and the very small,” says David Donnan, vice president with A.T. Kearney.

“The very small have niche products that they can focus on and a strong, loyal, passionate following. The ones in the middle are going to have a real tough time,” says Donnan.

So why bother trying to stay independent at all? For many companies, retaining their independence is a matter of pride. Others might worry about ruining their brand image if they’re acquired by a large multinational, says Donnan, who compares the situation to that of independent booksellers’ struggle against giants like Amazon.com.

“They can’t compete on price and they can’t compete on national distribution, so they have to compete on differentiation and uniqueness,” Donnan says.