Not so long ago, the antitrust laws would have made it impossible for Philip Morris--the owner of giant General Foods, which has $9 billion in annual sales of such products as Maxwell House and Sanka coffee, Jell-O pudding and Oscar Mayer cold cuts--to buy Kraft, with its nearly $10 billion in sales of cheeses, mayonnaise and barbecue sauce.
The law would have objected on grounds of size alone, as General Foods itself learned in 1966 when it bought S.O.S. scouring pads but was forced to divest it by the Federal Trade Commission on grounds that GF was too big to grow by acquisition. The thinking then, according to “The Federal Antitrust Laws,” a 1965 book by Jerrold Van Cise, was that the laws “generally oppose the expansion of a substantial corporation through acquisition of another substantial corporation.”
But that view changed to bigger is better as global markets created opportunities for larger, international companies. That’s an arena in which Philip Morris, the $27-billion (sales) company that gets 53% of its revenue and 80% of its profit from cigarettes, will become the biggest player if it succeeds in its Monday offer for Kraft. The resulting $37-billion sales giant will rank as the world’s largest food company, passing Europe’s Unilever and Nestle.
Philip Morris’ Chairman Hamish Maxwell said on Monday that he anticipates no legal challenge to the Kraft acquisition because coffee and cold cuts don’t compete with cheese and mayonnaise. Still, Philip Morris rushed to make the offer before the election brings a new Administration with different antitrust ideas--even a Republican one--to Washington.
Established Brands Valuable
The question is not whether cheese competes with cold cuts but whether the market power of a gigantic company threatens consumer interests. The potential problem lies in the emerging pattern of a few giant companies owning the major brand names in a time when the number of supermarkets, and therefore available shelf space for merchandise, is shrinking.
That shrinkage has made established brands extremely valuable--which is why Kraft, with $5.5 billion in total assets, gets a buyout offer of more than $11 billion. Philip Morris knows it’s buying proven value in Kraft’s brands--which include Velveeta, Parkay and Miracle Whip--and an increase of its already considerable clout in the supermarkets.
If a Philip Morris company brings out a new product, it will get scarce shelf space because of the prominence of the firm’s other brands--from Marlboro cigarettes and Miller beer to Bird’s Eye frozen foods. But if a smaller company brings out a new or lower-priced product, will it get shelf space? The answer--as consumers may suspect--is that it will be hard, or expensive, for it to get into the store at all, and if it does, its space won’t be the most accessible.
Which is why continued big mergers in the food business are likely sooner or later to raise questions of antitrust--a body of laws intended from the beginning, in the Sherman Act of 1890, to advance consumer welfare. Antitrust emphasizes competition to ensure that consumers get the broadest possible range of price and quality.
But so far in the consolidation of food retailing industries, antitrust objections have been limited to forcing companies owning two supermarkets in a neighborhood to sell one. Larger questions of products and pricing have not been addressed even though the last four years have seen Nestle buy Carnation, RJR (the old Reynolds Tobacco) buy Nabisco, Britain’s Grand Met make an offer for Pillsbury and, of course, Philip Morris buy General Foods.
And now the Philip Morris-Kraft combination will probably go through as well without legal questions, but with loud cheers from Wall Street, which sees Philip Morris further decreasing its reliance on tobacco. The conventional wisdom is that tobacco companies must get out of cigarettes because it’s a declining business. But that’s only partly true. Yes, cigarette smoking is declining in the United States. But overseas it is growing 2% a year and accelerating rapidly in developing nations, where the cigarette is often the first luxury purchase.
And of all the U.S. tobacco companies, Philip Morris is the most international--which is why its cigarette business continues to grow faster than its food or beer businesses. Since Philip Morris bought General Foods in 1985, its tobacco sales have grown 29% while food has grown only 7.6%. Moreover, the profit growth is almost all on the tobacco side because cigarette makers have been able to raise prices (their customers being addicted, after all) while their costs are declining--thanks, ironically, to restrictions on their advertising, and also to falling tobacco prices and new, efficient plants.
But there are further ironies. One reason the tobacco industry’s food subsidiaries fare less well is that the cigarette companies are typically so bloated or distracted that they don’t take full advantage of their market power. For example, size hasn’t helped General Foods’ Post cereals in the fight with smaller, but focused Kellogg Co. So the belief that bigger is better--probably no boon for consumers--may not be such a hot idea for the business either.