NEWS ANALYSIS: Packaging a Wallop

Blockbuster acquisitions are swinging the power pendulum back toward manufacturers.

Marketers joke about supermarket consolidation shrinking the universe to one huge retailer and one huge supplier.

The punchline is getting serious.

In a two-day period in June, ConAgra announced its purchase of International Home Products for $1.6 billion, and Kraft Foods parent Philip Morris unveiled its purchase of Nabisco Group for $14.9 billion. The resulting mergers will create two giants controlling $68.4 billion in U.S. supermarket sales – 14.5 percent of the total pie – and an estimated $10.3 billion in trade promotion.

Add a surprise shift at Procter & Gamble, which named A.G. Lafley president-ceo as Durk Jager retired amid shaky stock performance, along with Unilever’s recent shopping spree, and it could be the grocers who’ll face seismic changes for once.

When the deal closes in October, Philip Morris will merge Nabisco with Kraft, then make an initial public offering in early 2001 for up to 20 percent of the new company.

Retail consolidation has shaped Kroger, Albertson’s, Safeway, and Royal Ahold into formidable players. Now the pendulum swings back to manufacturers, whose burgeoning brand portfolios give them even more clout and – for Kraft at least – some compelling combinations. “After all, what better combination is there than Kraft cheese and Ritz crackers?” posits Philip Morris chairman-ceo Geoffrey Bible.

Bible says Kraft’s biggest opportunities are in “brand line extensions and the exploitation of large-scale cross-merchandising opportunities and consumer promotions.” Clearly, Kraft has its eye on the end-aisle display more than ever. That’s likely to mean intense bargaining for merchandising support – and even more formidable competition for smaller manufacturers.

As CPG consolidation continues, watch for broader umbrella promotions, more elaborate co-marketing (including joint strategy-setting), more corporate-exclusive FSIs, (like Kraft’s food & family), and intensified territorialism as CPGs stake out whole sections of the supermarket – Kraft in the snacks aisle, Unilever in frozen foods.

THOROUGHBRED BRAND STABLES

Buying Nabisco gives Kraft 73 brands with $100 million-plus in sales (55 from Kraft, 18 from Nabisco) and seven mega-brands ($1 billion or more): Kraft, Nabisco, Oscar Mayer, Maxwell House, Post, Philadelphia, and Jacob Suchard.

ConAgra picks up six $100 million-plus brands to add to its 27, which include Healthy Choice ($1.5 billion), Hunt’s, Wesson, and Orville Redenbacher. Its purchase of International Home (including such brands as Bumble Bee, Chef Boyardee, Gulden’s, and Pam) will have less impact at retail than Kraft/Nabisco, because ConAgra’s decentralized operations gives it less power with grocers. The merged companies also have fewer obvious brand synergies.

“It’s a good example of a Tale of Two Cities,” says Jack Ryder, president of marketing consultancy Cannondale Associates, Westport, CT. “Kraft has done a very nice job packaging itself and leveraging best-in-class resources through their economies of scale. ConAgra is very decentralized and not perceived by retailers to be as strong, despite their size.”

Ryder sees three benefits to consolidation. Manufacturers get more clout with grocers if they leverage scale with smart planning. They can afford better back-room resources, including research, sales, and information technology. “More volume justifies more funding for such infrastructure,” he says. Lastly, consolidation creates the scale needed to move into high-growth areas – as Kraft will do with snacks.

“Today, Kraft has a six-percent share of snacking. Tomorrow, that share will grow to nearly 20 percent, providing us with a superb platform to accelerate Kraft’s top-line growth,” Bible said in a June 26 press conference. The snack category hit $50 billion in 1999, up four percent – twice the growth rate of overall food sales. Cookie/cracker sales rose 4.4 percent, and Nabisco’s brands hold a 44.5-percent share. That’s a great jump-start for Kraft.

Another big asset for Kraft is Nabisco’s direct-store delivery (DSD) system. Kraft will start by putting Balance Bar items on Nabisco trucks, and outsiders speculate Post cereals may be next. Kraft knows how valuable DSD can be – especially having drivers in stores to control shelf sets. “Our pizza business is DSD, and it’s very powerful,” says Kraft president Betsy Holden.

MUCH ADO?

Some observers contend that CPGs can’t fully leverage scale in the current environment. “The system is set up to appeal to the broadest segment of consumers, but the audience is changing,” says Jon Kramer, president of agency J. Brown/LMC Group, Stamford, CT. “Our population is evolving into the haves and the have-nots, two very distinct shopping audiences, and one brand can’t be appropriate to both. Plus, there’s more ethnic diversity – minorities with different kinds of food experiences and brand loyalties. The system can’t be about broad-scale efficiencies anymore. It has to be about top-line [sales] growth.”

That’s the next mountain P&G has to climb as Lafley takes the reins. Early returns on P&G’s ambitious Organization 2005, including new-product development, reflected poorly on earnings – and therefore on Jager, who abruptly resigned under the cloud of having tried to change too much too quickly. Lafley’s challenge is to balance growth of P&G’s core brands with the company’s trademark innovation, which sets the industry standard for new products and new marketing. P&G’s food sales totaled about $4.4 billion in 1999, compared with $11.5 billion each in laundry/cleaning and paper goods, and $7.1 billion in health and beauty care products.

Like Kraft and ConAgra, Unilever is buying its way up the food chain, having acquired Bestfoods, Slimfast, and Ben & Jerry’s last spring. A minimal player in the food business five years ago, Unilever has beefed up on ice cream and frozen foods, and continues to expand.

What should retailers do? Watch their dance cards, suggests Ryder. “Just as manufacturers look to define their `power customers,’ now retailers have to decide who’s in it for the long haul, and with whom they wish to align.” His picks: Kraft, Unilever, Nestle, ConAgra.

Despite marketers’ growing clout, retailers still control the real estate. There has even been speculation that retailers might complain to the Department of Justice that Kraft/Nabisco will control too much shelf space.

“I’m not sure retailers need to climb in bed with Kraft as much as Kraft needs to climb in bed with Kroger,” adds Ryder. “Retailers won’t have to react to the same degree manufacturers have had to react to retail consolidation.”

The joke stops here.