Some Smaller Food Firms Thrive Despite Consolidation

July 25, 2000 -- The spate of mergers that has gripped the food industry recently is oflittle concern to Paul C.P. McIlhenny.

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

Founded in 1868 by Edmund McIlhenny, the Avery Island, LA-based company hadestimated sales of $120 million in 1998, a growth of nine percent over theprevious year according to Hoover’s Online. With the company’s Tabascosauce sold in over 110 countries, McIlhenny says the company has enjoyedclose to double-digit sales growth for the past 20 years, a rarity in thenotoriously slow-growing food sector.

“The fact that we are growing and growing profitably and paying moredividends 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 evenhippie holdouts like Ben & Jerry’s Homemade Inc. succumb to the overturesof multinational conglomerates, the McIlhenny Company seems to be one ofthe rare holdouts amid the consolidation trend.

Tabasco Sales Hot

General Mills Inc.’s purchase of Pillsbury, Philip Morris Companies Inc.’sacquisition of Nabisco Holdings Corp. and Unilever’s purchases this year ofBen & 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 40percent of the industry’s total sales, larger food manufacturers are oftenat an advantage when battling for precious shelf space. Large companieswith many popular brands can negotiate with retailers more effectively,while retailers prefer to stock their shelves with products that have heavypromotional spending behind them.

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

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

The Challenge

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

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

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

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

Little Debbie Stays Solo

Another family-held company that finds itself rebuffing numerous take overoffers is McKee Foods, the maker of Little Debbie snack cakes. The companywas founded in 1928 by a young couple named O.D. and Ruth McKee and isstill 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 lettingthem know that this is something they’re not interested in,” says McKeespokeswoman Ruth Garren, who adds that the industry consolidation has notchanged the company’s strategy.

“We have a lot of loyal consumers and a niche that we’ve been establishedin 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 heavyweightslike Mars Inc. and Schwan’s Sales Enterprises (see sidebar) may havemanaged to thrive as independent entities, but analysts say other companiesmight not be so lucky.

David Vs. Goliath

“My own belief is that the two types of companies who are going to surviveare the very big and the very small,” says David Donnan, vice presidentwith 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 areal 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 aboutruining 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 nationaldistribution, so they have to compete on differentiation and uniqueness,”Donnan says.