Further consolidation within the European food industry is inevitable, and will lead to a duopoly emerging in the more well-defined markets, according to two new reports. But Europe still has some way to go perhaps even 50 years before it matches the US, where most key markets are in the hands of two players.
Richard Bowles, senior writer at specialist food industry research company Seymour-Cooke and author of Food Brands in Western Europe and Food Brands in North America, says that at present there are only two sectors of the European food industry where duopolies already exist. In petfood, Mars and NestlÃ© “virtually have the European market to themselves following the acquisition by NestlÃ© of Dalgety’s petfood interests in 1998”. In ice cream, NestlÃ© again is one of two dominant companies, this time alongside Unilever.
Bowles expects a duopoly to emerge in other sectors, but not in the short term. The process of mergers and acquisitions in the European food industry will continue, but in many sectors it will take 20, 30 or even 50 years for duopolies to form.
He suggests that two sectors which are prime candidates for duopolies are the instant coffee sector, where NestlÃ© and Maxwell House already have commanding shares, and the savoury snacks sector, where PepsiCo, through its FritoLay subsidiary, is likely to continue to buy local brands and integrate them globally, as it has done with Walkers in the UK.
Duopolies are far less likely to form in those food market sectors which are more highly commoditised, he suggests. In the bread sector, for example, most European countries bakery industries are highly fragmented, with much production in the hands of artisanal bakers. This is particularly true of France and Germany. The UK, with its highly concentrated bread industry, is unusual, he says.
According to the two reports, which cover 40 processed food categories in 18 different countries, the industry has a total annual worth of 7.2bn.
Western Europe accounts for one third of processed food production worldwide, but compared with North America the industry is still fragmented. Only four European food groups have sales of more than $10bn (6bn); this compares with ten North American groups with sales of $10bn(6bn) or more, and another dozen with sales of $5bn (3bn).
In several North American markets, such as baby foods, biscuits, breakfast cereals, chocolate confectionery and savoury snacks, the two largest suppliers have more than half the market between them. North American market shares are also extremely stable, changing little year on year, and there are huge entry barriers which discourage new competitors from setting up.
As Table 1 shows, the process of concentration is far more advanced in many North American markets compared with their European counterparts.
Bowles notes that in one industry, dairy products, similar trends are emerging on both sides of the Atlantic. In Europe, smaller dairies have woken up to the fact that economies of scale, and the need for long term investment in research and development, mean that consolidation is vital if they are to prosper in the next century, with the result that “national champions” are emerging.
Germany is a case in point: once the country with the most fragmented dairy industry in Europe, it has seen consolidation accelerating. It has been driven by the concentration within the German retail industry and the threat posed by the entry of major Dutch dairy groups into the German market. As a result, the beginning of 1999 saw the announcement of the merger of four German dairies Nordmilch, MZO, Bremerland Nordheide and Han-sano Milchhof which is likely to be completed by the summer.
Similar mergers are underway in Switzerland (where Toni and Santis have merged to form Swiss Dairy Food), Italy (where Parmalat has bought major rival Cirio, giving it 40 per cent of milk sales) and have already been seen in the Netherlands and Ireland.
In the North American dairy industry, the past two years have seen similar concentration. The first move began in 1998, with the formation of Dairy Farms of America. This was followed by the rapid acquisition-fuelled growth of two branded dairy food groups, Dean Foods and Suiza Foods, which each bought more than a dozen smaller rivals. They are now the second and third largest dairy companies in the US respectively.
Similar moves have been apparent in the Canadian market, while Italy’s Parmalat has now crossed the Atlantic, buying two Canadian companies in 1997 and four US companies in 1998.