Food Companies’ Fight Spills Into Aisles

Some food for thought the next time you’re in a supermarket: Those items in your basket are survivors in a ferocious battle roiling the food industry.

Just ask Joe Weller. As chief executive of Nestle USA, the domestic arm of the Swiss food colossus, Weller wages a daily fight for supermarket shelf space with the other giant providers of branded foods, including Procter & Gamble Co., H.J. Heinz Co. and RJR Nabisco Holdings Corp.

And because that struggle has sharply intensified in recent years, the whole U.S. food industry now finds itself in upheaval.

Restructuring is rampant in the food business. All the companies are reshaping their operations to cut costs, boost earnings and, if possible, gain market share at a time when their industry is under pressure from many forces: slow sales growth, fierce competition and supermarket mergers--such as Kroger Co.’s acquisition of the parent of Ralphs Grocery Co. last week. Add to that the growth of private-label goods and the presence of new technologies that measure shoppers’ capricious tastes more precisely than ever.

“The industry is changing so quickly, and you have to constantly be looking at how you’re going to accommodate that change,” Weller said during a recent interview at Nestle USA’s Glendale headquarters.

Weller just brought Nestle through its second major restructuring in five years, one aimed at lifting sales of its familiar brands, such as Nestle candies and baking chocolates, Stouffer’s frozen dinners, Friskies cat foods and Buitoni pastas.

He can’t afford to stand still. Consider what his peers are doing:

* Procter & Gamble (Folgers, Jif, Crisco) is reorganizing for the second time in three years. Among the changes: Its empire will be split by product lines, with items carrying a single, global price for each retailer. Giant retailers such as Wal-Mart Stores Inc. pressed for the change to accommodate their own global expansions.

* Quaker Oats Co. is merging its once-independent sales forces to gain more marketing clout with ever-growing supermarket chains. And to exploit the rise of private-label goods, it’s shifting more resources to its stable of inexpensive knockoffs of major cereal brands.

* Campbell Soup Co. (Prego, Pepperidge Farm) sold its can-making operations and spun off its Swanson frozen food and Vlasic pickle lines. The cost savings will be poured into advertising and marketing for its soup, sauce and biscuit groups.

* Sara Lee Corp. (Hillshire Farms, Ball Park, Jimmy Dean) has a novel restructuring in which it’s shedding much of its manufacturing base, outsourcing that production and redirecting its cash to marketing and new-product development.

Why is all this necessary? The answer mainly lies with the supermarkets.

Years ago, most major food companies were much bigger than any supermarket chain, and there were lots of chains in each part of the country.

Those days are gone. A wave of supermarket mergers in recent years not only reduced the number of chains, it’s also turned the surviving chains into grocery behemoths. The chains often dwarf the food companies and increasingly call the shots about what products consumers will--and will not--see in their aisles. Kroger will have annual sales of $43 billion after it completes its purchase of Fred Meyer Inc., which owns Ralphs, Hughes and Food 4 Less. That’s five times Nestle USA’s annual sales of $8 billion.

Further churning the waters is Kmart Corp. The big discount chain has reportedly discussed a possible merger with American Stores Co. and Albertson’s Inc. to increase its presence in food retailing.

“There’s fewer and fewer chains to put your products in,” said Patrick Schumann, a food analyst at investment firm Edward D. Jones & Co. in St. Louis.

Also, the supermarkets are merging because overall grocery sales are growing slowly, and profit margins are notoriously thin. That’s forcing the remaining supermarkets to stick only with food brands that quickly move out the door.

And these days, private-label goods--which usually cost less than branded items--are selling, and so the supermarkets are giving them more shelf space.

The upshot: Food companies must have a top-selling product if they want shelf space, and so their restructurings are aimed at focusing their attention and resources on those best-selling brands.

“If you’re the No. 3 brand [in a category], you’re history,” said one retired executive of a big supermarket chain, who asked not to be identified.

And there’s no confusion about which brands lead the pack because of today’s computerized checkout and inventory technologies. Supermarkets “have the information and know more about the customers” than ever before, the executive said.

The food companies’ challenge is even greater if they want to sell to the burgeoning new players in grocery sales--the big mass-merchandisers such as Wal-Mart--because by nature those stores carry a more limited food selection than the supermarkets do.

The impact on consumers? The upheaval helps keep retail prices down, Schumann said, because supermarkets don’t want to pay higher prices for products and it’s difficult for the food companies to push through price hikes in the face of low inflation and private-label foods.

Meantime, though, shoppers’ choices are being limited, he said. “We are losing opportunities to see new products out there” because “the manufacturers and the retailers or both can’t take the chance” of having new products fail, Schumann said.

Nestle, for one, believes its latest restructuring enables the company to take that chance.

Its overhaul more closely aligns Nestle USA’s divisions with the global operations of its parent. That’s helped Weller more efficiently take Nestle products that are popular overseas and, with a bit of tweaking for American tastes, sell them to U.S. supermarkets.

Nestle therefore doesn’t incur the costs of developing new foods from scratch--or risk seeing those costs nullified if the product flops. “Now we can take full advantage of the resources we have worldwide,” Weller said.

Example: Stouffer’s new Skillet Sensations, a frozen dish that was launched in Britain and France a few years ago. “The [U.S.] demand is beyond what we can manufacture and supply,” Weller said.

That’s why Nestle USA’s sales are up more than 5% this year, or “double the industry rate,” said Weller, though Nestle doesn’t break out its U.S. financial results any further.

Weller can’t rest easy, though. Long before it became mandatory for foods to be No. 1 or 2 in their markets to survive, it was mandatory at Nestle--no matter where its products are sold.

To achieve that, “there is a constant pressure [for us] to continue to be as efficient as possible,” Weller said. If he fails? Expect another big restructuring.