Growth Strategies in the Food Industry
Weston, J. Fred, Chiu, Susan, Business Economics
The U.S. food industry is the largest individual manufacturing sector of the economy. Its basic growth determinant is the underlying 1 percent per annum U.S. population growth. The share of personal consumption of expenditures for food and beverages has been dropping. Nevertheless, surviving food companies have demonstrated growth rates in revenues and returns to shareholders higher than the market as a whole. Growth has been achieved by a high rate of new product introductions, promotion methods to develop brand strengths, expansion into international markets, and by acquisitions and divestitures. Before 1980, a substantial portion of food company acquisitions were in nonfood industries. During the 1980s, nonfood divestitures returned food companies to their core food product lines with some exceptions. In general, the response of financial markets was positive to mergers and acquisitions that moved food companies closer to their core food activities.
This is a study of strategic growth in the food industry. The processed food and beverage industry (SIC 20) is the largest individual manufacturing sector, with a value of industry shipments in 1993 of over $400 billion. M&A activity has been high for many decades. The industry provides rich case materials for testing propositions about strategies for growth. Our central aim is to relate performance among companies in the food industry to acquisition and divestiture strategies.
ECONOMIC CHARACTERISTICS OF THE FOOD
The economic characteristics of the U.S. food industry raise important strategic issues. Its basic growth determinant is the underlying I percent per annum U.S. population growth to which the food industry is tied. Thus it is a 1 percent growth industry in a world in which firms strive for growth rates of 10 percent or more in order to attract high quality managerial capabilities and other critical resources. This is the challenge faced by food industry firms.
Consumer Spending Patterns
Shifts in consumer spending patterns have aggravated the food industry's ties to demographics. The U.S. population is aging and average household size is declining. Both trends negatively influence the food industry. For example, the share of personal consumption expenditures (PCE) for food and beverages dropped from 18 percent in 1982 to about 15 percent in 1993 [Brown and Garten, U.S. Industrial Outlook, 1994, p. 34-11]. Because of the pressure on real incomes, consumers have become more price sensitive; they have become "hard nosed" bargain hunters [Economist, 1993].
Demand for Product Variety
Real growth rates in the lower value-added sectors, such as meat, poultry, and the fats and oils industry, have actually declined in recent years. A basic strategy to overcome these unfavorable influences is to shift to higher value-added products, such as frozen and canned fruits and vegetables, jellies, ice cream, and roasted nuts, for which growth has been at about a 2 percent real per annum rate. But such actions alone would not substantially lift the growth rate of food companies.
Consumers demand variety. A high rate of introduction of new products is required to maintain a firm's competitive position. But high growth rates for a product class rarely persist for more than five to ten years, and sharp reversals may occur. A study of growth in sixty-eight food and beverage classes reflects rapidly shifting consumer preferences with related price adjustments [Connor, 1988].
Promotion and Distribution
Because of the rapid rate of new product introductions, promotion and advertising are required to inform potential customers of their availability. As with other industries with high rates of product introduction, promotion and advertising expenditures are in the range of 25 to 35 percent of sales. The aim is to establish strong brand images. A strong brand requires attractive products plus substantial outlays on promotion. …