‘90s Promise to Stir Up Food Industry

The food industry--the largest and traditionally one of the most stable industries in the United States--will face unprecedented change in the 1990s.

Some change will result from the brisk merger and acquisition activity begun in the past decade. Between 1979 and 1989, nearly 7,000 consolidations occurred in the industry in the United States alone. Today, the top 50 food companies represent 50% of U.S. sales, double their market share of 10 years ago.

Such consolidation probably will continue into the 1990s for several reasons. Because the expense of launching and building the reputation of a product can be enormous, buying an established company, with its own brand names, is often an attractive alternative for companies seeking to expand operations. In addition, newly acquired firms offer immediate sources of earnings and volume growth, and often open up new markets for the owner. As competition for market share increases--here and abroad--so also do the incentives to merge with other firms.

The benefits derived from consolidations are not without their price, however, and as mergers and acquisitions continue in this decade, their effect on the industry--for good and ill--will become more pronounced. As the surviving companies move to safeguard their market share, for instance, the number of barriers to entry will increase. Marginal competitors will be eliminated as they are bought up or pushed out.

And in an effort to ensure sufficient cash flow to service the debt incurred by a merger or acquisition, many companies will find themselves having to sacrifice long-term investments in such critical areas as capital equipment, personnel and research and development.

Such a sacrifice could prove costly in the long run, especially to an industry that already enjoys the dubious distinction of investing less in product research and development than any other industry and that is increasingly challenged by its consumers to develop new and complex products.

As they have been for more than three decades, consumers will continue as the most influential force affecting the industry. Today, two consumer demands in particular are shaping the industry: healthfulness and convenience. Satisfying these sometimes contradictory demands will require of the food industry considerable technological innovation in the 1990s.

Consumers want “natural,” healthy products, low in sugar and fat. But they are unwilling to sacrifice convenience or taste in return for health considerations. In addition, they require products that offer the convenience of an extended shelf life but whose packaging does not compromise either environmental or safety standards.

These complex consumer demands require that the industry develop and use new technologies--but as companies pare their R&D; budgets to ensure adequate cash flow, how will innovation be funded?

One answer is obvious: by suppliers. Of 9,000 U.S. food-processing patents issued over 10 years, 52% came from suppliers of ingredients, packaging equipment and instrumentation. As the need for technological solutions to industry problems grows, this relationship between supplier and producer is unlikely to change. If anything, the food industry will in the next decade grow increasingly dependent on suppliers for new technologies.

Another source of innovation is the foreign market. Europe has become a leader in packaging and food equipment technologies and Japan in the development of new ingredients. The American food industry has too often held that the American way is best, but if it wants to remain competitive in the 1990s, it will have to acquire foreign technology and nurture alliances between itself and academic research laboratories in the United States.

On the other side of the coin, European and Japanese food companies are increasingly looking to enter the U.S. market. During the last half of 1989, about one-third of all food industry acquisitions by European companies took place in the United States. This surge in international trade means that powerful global brands will emerge and heighten competition for products sold on a regional level.

The forces of the 1990s--industry consolidation, consumer demands, technological innovation and globalization--will not only reshape the food industry but will also encourage the development of new businesses. Among them are mail-order sales to consumers and home delivery of upscale meals and medical foods.

To meet the consumer demand for convenience and quality, manufacturers would be wise to form new cooperative ventures with retailers. More organized and powerful than in the past, retailers--with the help of new information technologies--have become sophisticated marketers, able to track consumer buying patterns. Together, manufacturers and retailers could leverage their resources and gain additional market share by developing mail-order food catalogues, home-delivery services and other convenient methods of bringing products to the consumer.

The prospects for medical foods, products that blur the distinction between food and drug, will be particularly promising in the decade ahead. Already, high-fiber cereals and other products with increased fiber have earned significant shares of their markets.

In addition, the introduction of such “prescription foods” as snack bars that incorporate a cholesterol-reducing drug will no doubt encourage joint ventures between the pharmaceutical and food industries. The impressive R&D; capabilities of one would be complemented by the extensive distribution channels of the other.