More food companies will be bought out this year

More food companies will be bought out this year and the latter half of 2010 could mark the beginning of consolidation in the grocery industry, Kantar Retail Americas Chief Executive Ken Harris said at the Reuters Food and Agriculture Summit in Chicago on Monday.

"It's not about making a big acquisition, but you'll see some smart acquisitions starting to happen over the next six to 12 months," said Harris, who advises food manufacturers and retailers on their business models and acquisition strategies.

"There is a lot of deal flow going on right now ... there are a lot of high-quality companies in the $3 (billion) to $5 billion range," Harris said.

Kraft Foods Inc's (KFT.N) recent $18.4 billion acquisition of chocolatier Cadbury Plc should be a catalyst for more deals in the industry, Harris said, particularly as financing conditions have improved considerably since Kraft first made its offer public last September.

Those improved conditions could also bring out more buyers for food brands that were gobbled up over the past several years by private equity players who are now ready to sell those assets, he said.

Kantar, which works with potential buyers to find out how retailers feel about a company or brand that might be bought, has seen such activity increase 30 to 45 percent in some areas, Harris said.

Even in terms of larger deals, the fact that Kraft was able to acquire Cadbury, despite the Cadbury board's initial resistance, could be a harbinger of other deals, he said.

"Market dynamics are much more favorable now than when Kraft started this last year," Harris said.

The U.S. grocery market has too many supermarkets and this is likely the year that healthy players, particularly privately held operators like Wegmans and Publix, could begin to swallow smaller or struggling operators.

"The dynamics are right for retailers to consolidate and you're going to see acquisitions in the back half of 2010," he said.

This may also be the year that consumers start buying more expensive food and nationally branded products after sticking to strict budgets for nearly two years, Harris said.

"If it were to happen, it would be in the fourth quarter," Harris said.

WORKING TOGETHER

The retail industry as a whole may have benefited from consumers eating more at home in order to save money during the recession, but within the industry, individual retailers are battling more to attract consumers looking for value.

At the same time, manufacturers are working more with retailers to develop product offerings that will attract consumers who otherwise might shop just for the lowest price.

"There have been very few times in history that I can think of when the retailers and manufacturers need each other more than they do now," Harris said.

Those collaborations include using different technologies to decide how people react to different items in the store and more deeply mining frequent shopper card data for information on consumer behavior.

But some manufacturers may not be able to come up with retail partners to share such data and will find themselves at a disadvantage, Harris said.

For retailers, the model for the store of the future could be something smaller than shoppers are used to now.

"There are already many pilots on smaller-footprint stores," Harris said, adding that retailers are trying to figure out how to get the most sales volume and profit out of those stores. That could lead to changes in the supply chain to accommodate those stores, he said.

"Manufacturers do not have the exclusivity on innovations, retailers are pushing themselves to come up with different ways of doing things, different experiences," Harris said.