Consolidation, streamlining and brand strengthening continue to punctuate activity among the world's top food and beverage companies as they vie for competitive advantage.

U.S. food processors had a difficult year--continued invasion of private label brands, a mature food market, the continued economic setbacks in Asia, Russia and Latin America, mediocre stock market performance and unusual or devastating weather all contributed to an uphill battle for growth. In Europe, a new marketplace influenced by trade in the Euro, the increasing power of global retailers and a year plagued with consumer safety issues provide the backdrop for strategic planning as top food companies enter the 21st century.

Bigger is better

According to the Food Institute's Food Business Mergers and Acquisitions report, the first half of 1998 saw a record 393 food and food-related mergers and acquisitions, up almost 33 percent over the same period a year earlier. Dean Foods is one company that knows the value of acquiring companies that have complementary lines and objectives. The Illinois-based dairy processor and marketer acquired eight dairies, one pickle and one specialty operation in 1998 and sold its vegetable division, including the Birds Eye brand, to Agrilink Foods.

"I would say most of the growth in the future for us would come through acquisitions," said Dean Foods CEO Howard Dean. "Because the U.S. consumer can eat so much and drink so much in the way of food products and the population is only growing at one or two percent--to grow more than that you've got to take the business from somebody else."

The first half of 1999 was also busy for ConAgra on the acquisition front. ConAgra acquired businesses including GoodMark Foods, maker of the Slim Jim brand and other processed meats and grain snacks. The company also acquired Nabisco's margarine business which includes the Parkay, Blue Bonnet and Fleischmann's brands as well as Fernando's Foods, a manufacturer and marketer of frozen Mexican foods for the foodservice industry.

Campbell Soup also experienced a far-reaching portfolio reconfiguration this past year. The company spun off its Vlasic Foods International company, divested non-strategic businesses and sold its can-making assets in the U.S. In turn, Campbell Soup acquired Leibig, the leading wet soup brand in France, and Stockpot, the brand leader in the U.S. premium refrigerated soup market. Campbell Soup also acquired full ownership of Australian biscuit company Arnotts.

Restructuring and divesting unprofitable lines or divisions can also warrant significant long-term growth. Since the end of 1997, Quaker Oats shed seven businesses that had produced over $400 million in combined revenues, but virtually no operating profit, according to Quaker Oats chairman and CEO Robert S. Morrison. "...[Quaker Oats] had been structured as three separate companies--Food, Gatorade and Food Service--with a lot of duplication and virtually no coordination among these divisions," said Morrison. "Today we're structured as one company to create synergy and to take advantage of best practices across all of our businesses."

Heinz followed suit, selling its Weight Watchers International classroom business and following up its Project Millennia restructuring objective with Operation Excel. "Project Millennia began the essential process of realigning the company around global categories. Our emphasis on categories and geography, rather than exclusive reliance on unaligned autonomous affiliates, was the stimulus for Operation Excel and is one of the keys to delivering superior future performance," said Heinz CEO William Johnson.

Hershey Foods also sold its U.S. pasta business to New World Pasta in order to focus exclusively on its confectionery and related grocery and foodservice businesses. The transaction involved its pasta brands including Ronzoni and San Giorgio, along with six manufacturing plants.

The Euro and its consolidating effect

Merger and acquisition activity in Europe continued as food and beverage companies leverage themselves against larger retailers and deal with the effects of the Euro on the marketplace.

One company that has been particularly active is United Biscuits, whose strategy is to focus on developing its international biscuit and snacks business. The company has instructed Morgan Stanley Dean Witter to begin discussions with selected trade and financial buyers for the purchase of its frozen and chilled foods. This decision follows hot on the heels of the merger of United Biscuits' frozen seafood business, Young's, with the Bluecrest seafood business.

According to Leslie Van de Walle, United Biscuits Group CEO, the company's "strategy is to enhance shareholder value by focusing on developing our international biscuits and snack business and it is now appropriate to review [our] frozen and chilled foods future role within the group."

Nestl?the world's leading food group, is looking to grow by concentrating on the development of its company branding through packaging, marketing and increasing activity in key business areas. "We look for the right balance between focusing and healthy diversification without becoming a conglomerate," said Peter Brabeck-Lemathe, who has taken over from Helmut Maucher as CEO. "Nestl?as a broad product line based on food and a presence in a great number of countries. This helps to reduce the sensitivity of our profit performance to some of the short-term fluctuations of markets."

Development of a recognized Nestl?randing is being pursued throughout the company's portfolio in a bid to raise its leading profile with consumers as well as the financial community. Products using the Nestl?orporate brand now generate about 40 percent of total sales with most other products carrying a Nestl?eal of guarantee.

Nestl?enefited from its emphasis on leading brands and core businesses such as Perrier Vittel, which saw the successful integration of the Italian San Pellegrino group last year. Its launch of Nestl?ure Life, a purified water with added minerals, is expected to play a key role in the development of the company's bottled water market presence.

Likewise, Nestl? ice cream operations have experienced a year of acquisitions. In August, Nestl?.S. entered into a joint venture with Pillsbury Company, part of Diageo. Their combined activities include Nestl?.S.' novelty ice cream and Haagen-Dazs' frozen dessert business and create a significant $600 million operation in the U.S. ice cream market.

This is not the only deal Pillsbury has struck, as parent company Diageo also gears up its support of core businesses following the first complete year of trading in its new guise (The merger of Guinness and GranMet was completed in December 1997). In the summer, Pillsbury also agreed with Unilever to buy the Australian frozen pastries unit of Van Den Bergh Continental Bakeries.

"During the year, Diageo has concentrated on its priority brands and markets to achieve profitable organic growth," said Sir Anthony Greener, chairman of Diageo. The company is focusing on four key areas: wine and spirits (UDV); packaged food (Pillsbury); beer (Guinness) and quick service restaurants (Burger King). Overall, Diageo expects to enjoy ongoing merger synergy benefits in the region of £135 million for the year, and anticipates £210 million by June 30, 2000.

Like Nestl?Danone is concentrating on corporate branding. This process began in 1994 with the adoption of the Danone name for the company in reaction to the increasing concentration in the market, the growing power of the retailer and the progress of store brand products. Its aim to achieve maximum sales with as few brands as possible appears to be paying off. Danone's strategic business lines saw a rise in sales of 5.6 percent for the year; including an 8.2 percent rise in beverages; 5.2 percent rise in dairy products and 3.6 percent rise in biscuits.

"Our growth rate for 1998 has doubled that of the previous year, with business outside Western Europe providing much of the momentum," said Franck Riboud, chairman and CEO of the Danone Group. Despite the prevailing economic problems in the areas, main targets for Danone's international development remain emerging markets in Asia, Eastern Europe and Latin America.

Weathering the storm

The past year has been a difficult time for all companies with a presence in regions such as Asia, Russia, Eastern Europe and Latin America. This made investing in foreign markets daunting, even for the largest multinationals. But some food and beverage processors found growth despite economic downturns. Bestfoods' 1998 operating income from Latin America was up 15 percent. Bestfoods' chairman and CEO C.R. Shoemate attributes the company's success in international markets to well-established brands, long-term experience in fluctuating economic environments and local managers with a deep knowledge of local cultures and cuisine.

"I think the advantage we have is that we either have very experienced management or local managers in those environments, such as in Latin America or Asia, or we have quickly built the capability, such as in Central Europe and in Russia," said Shoemate. "The best possible advantage you can have when you have economic turmoil is to have local managers who have the skill to deal with the particular events."

Many food and beverage processors including Quaker Oats have taken corrective action and restructured to reduce their operating losses in these volatile regions. "In our tiny Asian food business, which represented about $20 million in sales in 1998, we showed virtually no progress," said CEO Morrison. "It became clear to us that our infrastructure in Asia was too complex and lacked integration." Although Quaker Oats may be pulling out of some markets in Asia, they have not given up on the entire region and are focusing their resources to establish flagship brands such as Gatorade in China.

Many processors believe that once you establish yourself in a corner of the world, it is easier to stay and ride out the economic hardships rather than pull out and start over somewhere else. Despite a tough year including highly published recalls in Europe, one company that knows the value of worldwide established brands is Coca-Cola. "The way we see it, we would much rather manage a business for nearly 200 countries than try to build a business in nearly 200 countries," said M. Douglas Ivester, chairman and CEO of Coca-Cola. Coca-Cola invested heavily in marketing and infrastructure in many parts of the world, including India, the Philippines and Brazil.

"Europe is not where the glittering prizes lie," said Niall Fitzgerald, chair-man of Unilever. "Mexico, Brazil, Argentina, Poland, Turkey, India, South Korea, Indonesia, Thailand, Malaysia, Singapore, Vietnam, China, Hong Kong and Taiwan -- these are countries whose gross domestic product is already increasing two or three times faster than those of developed European countries."

Although overall sales for Unilever were up 3 percent over last year, the company's food sales have been hard hit over the past year by economic problems, particularly in Russia and Latin America. In the first half of 1999, Unilever saw overall European sales declining by 2 percent due to the lower demand in Eastern Europe as well as portfolio pruning in its food businesses. "The recovery in East Asia could be countered by continuing difficulties in Latin America and Eastern Europe," said Unilever's Fitzgerald. "We remain committed to Russia as a long-term opportunity for Unilever, provided free market conditions continue."

Brabeck-Letmathe, Nestl? CEO, has echoed these thoughts. "While the situation in Asia was predictable, the collapse of the monetary system in Russia toward mid-1998, and the effect felt in other countries, came as a surprise." In Russia, which accounted for about one third of Nestl? turnover in 1997, the company was helped by sales of ice cream and confectionery, which it manufactures locally. This compared more favorably with Nestl? coffee exports to Russia which, as imported goods, were hit by reduced consumption as a result of the ruble devaluation.

Heineken boosted its presence in Central and Eastern Europe by capitalizing on dry summer weather in 1998 to increase sales. In Poland, it became market leader in a growing market, and increased its interest in the Zywiec Brewery to 75 percent, which was followed by a merger of Zywiec with Brewpole, Poland's largest brewing group.

Facing the retailer giant

Retailer consolidation is also having a dramatic effect on the food industry. Many see growth through acquisition as a way to leverage themselves against escalating demands and expanding distribution requirements of larger and more powerful retailers. According to the U.S. Trade & Industry Outlook, these strategies are leading to an increased concentration of manufacturing and marketing in the hands of fewer and more powerful multinational companies.

Although retailer consolidation is nothing new in Western Europe, a few industry-shaking deals, including Albertson's acquisition of American Stores and Kroger's acquisition of Fred Meyer, has brought the issue to the forefront of the U.S. food industry. "As a result of all this [merger/acquisition] activity, the top ten supermarket chains will account for nearly half of the nation's total grocery store sales of $365 billion," said Brian Todd, senior vice president of The Food Institute. Food companies are reacting by increasing their focus on top brands and core operations, establishing closer relationships with their customers and benefiting from consequential increased category management.

Most executives at top food and beverage companies see retailer consolidation as a positive trend. "There is no doubt that on a short-term basis, retail consolidation, especially in the drug store and grocery store area, causes some disruption of our product flow to these customers, and ultimately to consumers," said Kenneth L. Wolfe, CEO of Hershey Foods. "In the longer term, however, we feel it will also benefit us because the consolidators are, generally speaking, better operators and have a keen appreciation of the confectionery category's ability to deliver a lot of cash as a result of its relatively high turnover rate."

"We believe that manufacturers which sell strong brands, constantly nurturing their brands' equity by maintaining excellent quality and value, as well as providing the required, innovative merchandising and advertising programs, will prevail over the longer term," added Hershey's Wolfe. "The consumer will demand these products, and private label will find it difficult to establish a beachhead if we are able to maintain a disciplined approach to pricing, that is, keep our costs low and price accordingly."

Howard Dean of Dean Foods sees real growth possibilities in dealing with fewer, larger customers. "As retailers and food service people consolidate, [our strategy for growth] is to team up with the large retailers and large food service people and try to get more growth through them," said Dean. "[Retailer consolidation] is going to cause more growth for [food] companies because they're going to pick up new business just because the type of customer they're going to be serving in the future is going to be larger and more aggressive."

Bestfoods CEO Shoemate noted that the keys to success in dealing with retailer consolidation include brand power, product innovation and differentiation and "aggressive" application of ECR (Efficient Consumer Response) principles to reduce costs for customers and the companies themselves. "Big, 'must have' brands are absolutely essential to working effectively with the trade, including reaping the benefits of category management," said Shoemate.

H.J. Heinz CEO Johnson concurs that better category management and dedication to strong brands are the ways to capitalize on the opportunities that retail consolidation brings. "The most significant consequence of trade consolidation and its concomitant issues of margin compression and potential private label proliferation will be the need to refocus and simplify business relationships. It will also require nurturing partnerships and continued substantial cost reduction to support a rededication to strong brands," said Johnson. Heinz is reacting to this consolidation by tightening its own operations. The Pittsburgh, PA-based company is consolidating its five U.S. companies into a single $4 billion entity in order to build stronger relationships with retail customers.

Kraft Foods has also taken measures to deal more effectively with their larger customers. "Over the last two years, we consolidated our distribution process to provide improved service through an innovative network of 14 regionally-located field distribution centers," said Kraft Foods president and CEO Robert A. Eckert. "It's a new world of distribution for Kraft, helping us leverage our scale and capabilities while more effectively meeting our customers' current and future needs."

Meanwhile, in Europe, retailer consolidation continues its feverish pace. French retailers Carrefour and Promodes are finalizing their plans to join forces. Their merger would create combined sales of Euro 50.6 billion. Carrefour currently ranks sixth in the world and Promodes ninth. Their merger would make them the world's largest retail group after Wal-Mart, with outlets in 26 countries.

Brand strength the building block to success

Many top executives at food and beverage companies agree that brand strength is the anchor that holds their company ships down when storms such as retailer consolidation, economic downturns and other unfavorable market conditions occur. "Brand strength is absolutely essential when economies of scale run into trouble, or currency comparisons are unfavorable, or the retail trade consolidates, or private label begins making inroads in a category," said Bestfoods Shoemate.

Top food companies have reason to worry about private label brands making more of an impact at the retail level. Statistics released from Information Resources Inc. (IRI), the market research firm that compiles information for the Private Label Manufacturers Association's (PLMA) Industry Yearbook, reveal that many large national brand companies are losing market share. According to the IRI/PLMA, store brands outpaced national brands across all three primary retail channels in 1998, growing at an overall rate of 5 percent for supermarkets, drug chains and mass merchandisers combined, achieving a record $43.3 billion in sales.

With an 82 percent market share of the U.S. sports beverage category and $1.7 billion in worldwide sales, Quaker Oats' Gatorade is an example of how national brands are fighting back. According to Quaker Oats CEO Morrison, Gatorade's revenue makes up approximately 35 percent of the company's total sales and 37 percent of their operating income. Morrison believes product innovation provides the drive for his company to stay on top. "Innovation is the lifeblood of profitable growth. Leading brands possess great long-term value only if they can evolve over time to respond to the tastes and needs of new generations," said Morrison.

Campbell Soup is also looking to contemporize its traditional soup brands to reach the tastes of new generations. "Innovation is critical to our growth agenda," said Dale F. Morrison, president and CEO of Campbell Soup. "We are making our brands more contemporary, more relevant and more convenient to consumers of all ages." Campbell Soup is doing this through new soup varieties and packaging formats such as its Campbell's ready-to-serve tomato soup in resealable plastic containers and Campbell's Soup To Go in microwavable single-serve bowls.

Kraft Foods, no stranger to the power of strong national brands, agrees that companies must continually bring innovative and meaningful products to consumer's tables. "We need to put the days of incremental growth by line extensions behind us, and we must move into the age of innovation," said Kraft Foods CEO Eckert. "If we want to succeed, it's critical to create the products, packaging and promotions to become relevant to people's lives and get them back into the stores and choosing products that they will prepare and eat at home."

Many of the large food players have entered into the health and functional food segment by offering products that boast lower fat, salt, or sugar than more traditional products. H.J. Heinz and ConAgra continue their success with breakfast items, desserts and frozen meals under their Weight Watchers and Healthy Choice labels, respectively, while Campbell Soup has its "Healthy Request" line of canned soups. Kellogg also introduced its Ensemble line of functional foods containing psyllium and oats, which claim to lower cholesterol.

New product introductions are critical to General Mills' long term growth strategies. In recent years, an average 27 percent of General Mills' volume has come from products five years old or less. To accelerate the flow of innovative and creative products, General Mills' operating divisions now focus at least 25 percent of total resources on new products and new business ideas. "Our fiscal 2000 plans call for higher levels of new product innovation across our U.S. businesses," noted Stephen Sanger, CEO of General Mills. An example of this effort is to appeal to current consumer lifestyle trends. General Mills has done this with Yoplait Go-Gurt, a portable yogurt snack in a flexible squeeze tube that is ready to eat refrigerated or frozen. General Mills has also tapped into the growing organic food segment with Sunrise, the first certified organic cereal from a major manufacturer.

'Net'ting in new consumers

Food and beverage companies are also experiencing more top-line growth by exploring new distribution outlets to reach consumers via discount merchandisers, club stores, convenience stores and the Internet. For companies such as General Mills, these non-traditional retail channels represent a growing share of food sales. According to General Mills' Sanger, the company's efforts to reach consumers in alternative retail channels with its snack brands netted a 12 percent volume gain in 1998.

Campbell Soup is following consumer's dollars out of their homes with its new Campbell Away From Home business segment. According to CEO Morrison, Campbell Soup is accelerating its plans to extend and grow its flagship Campbell's brand as well as other soup brands through quick-service restaurants, convenience stores, university dining halls, and eventually to other high traffic areas such as airports, sports arenas and shopping malls.

The Internet and increased e-commerce capabilities also offer new marketing and sales opportunities. Shoemate of Bestfoods plans to consider the Internet for sales, if that is where his customers lead him. "I think the bottom line for us is we're going to go where our customers are, and if [the Internet] is where they want to order their products, we'll be there."

When asked what the food landscape will look like in ten to 20 years, Heinz's CEO Johnson thinks the Internet and e-commerce will be a major factor in food company's growth strategies. "Trust in products and brands will be communicated much faster around the world. In my view, Heinz must use the Net to extend its branded name advantage directly to consumers," said Johnson.

Success in the face of economic failure Most food and beverage companies in the eastern part of the world have been, and continue to be, affected by economic recession. Japan itself is still in deep recession and many food companies watched sales fall again. One notable exception, Japan's Asahi Breweries, has seen sales rise due to its highly successful Asahi Super Dry brand, capturing the largest share of the domestic beer market. Asahi's flagship beer increased 8 percent to approximately 184 million cases. The company estimates that Asahi Super Dry now ranks as the third best-selling beer in the world.

Although this past year Asahi overtook Kirin to become the largest brewer in Japan, Kirin remains the largest food and drink company in the region, thanks to its $2 billion U.S. beverage operations. The company also has significant soft drink interests and is the third largest whiskey distiller in Japan. "Rapid growth is unlikely in Japan's mature beer market and what consumers want in a beer is changing," said Kirin President Yasuhiro Satoh. "I believe that brewers can no longer satisfy all customer needs with a single brand. In response, Kirin is determined to build a solid operating base by increasing management efficiency and reorienting its product line based on its multi-brand strategy."

Due to the economic environment, there is a prevailing trend towards lower-priced, high-quality food and beverages in Japan. Among alcoholic beverages, "foaming beer" and "Chu-hai" are increasing in popularity. "In 1998 these foaming beer beverages increased 133 percent in consumption compared with 1997 and by May this year, we had already seen a 50 percent growth on the previous year," said Kirin's Satoh. In response to the popularity of these foaming beers, Kirin launched Tanrei Nama foaming beer. "Our foaming beer, Kirin Tanrei Nama, has become a big hit item," said Satoh. "The reasons are a combination of low price and good taste. The former because of the ongoing poor state of the Japanese economy."

Kirin's involvement in foreign markets, particularly China, has been limited due to the tremendous price differential between local and foreign beers. "Presently foreign brands are two or three times as expensive as local beers and for us this has been the main obstacle in China," said Satoh. As for Japan's economy, Satoh sees light at the end of the tunnel. "We expect our economy to bottom out in the first half of the year 2000 and then we expect an upturn," Satoh commented.

Kiyoko Kubomura, a food industry consultant based in Toyko, contributed to this feature.