A battle is being fought in the US baby food market. Heinz and Beech-Nut have sought a merger to challenge Gerber’s dominance, but the Federal Trade Commission is blocking the deal on the grounds it could facilitate anti-competitive behaviour. Pam Ahlberg finds an unexciting market where the major players have little incentive to innovate.
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A quick trip to the grocery store pretty much tells the story of the US baby food market. Within the mere 20 feet of aisle space dedicated to baby food at my local market, there are four available brands: Gerber, Tender Harvest, Earth’s Best and Beech-Nut. Traditional Gerber products, including juice, cereal and jarred food, fill 50% of the available shelf space. The organic baby food section, comprised of Gerber’s Tender Harvest brand and Earth’s Best, fills the middle 20%. Beech-Nut brands take up the rest. Missing from this example is Heinz, whose market share is about the same as Beech-Nut’s but whose baby food products are sold primarily in the middle part of the country. Beech-Nut is sold on both coasts.
But no matter the geographical location, product variety in the US baby food category is slight, product offerings are duplicated, and price differences among similar categories are non-existent. For example, at my store both Gerber’s and Beech-Nut’s 4 oz. jar of peach puree sells for 45 cents, or US$1.80/lb. The same is true for strained vegetables and entrées. Within the organic category, Earth’s Best’s 4 oz. apple/apricot and Tender Harvest’s apple/mango/kiwi cost 59 cents, or US$2.36/lb. Ditto the vegetables and entrées. In addition to the 30% price difference, the organic products are distinguished by fancier graphics and less common ingredients. Otherwise, the whole section is a blur of sameness.
Jarred baby food in the US is a US$800m-a-year industry, with just three companies controlling over 95% of the market. Gerber, a unit of Novartis AG of Switzerland, has long held a monopoly position with more than 70% market share.
Beech-Nut, owned by St. Louis-based Milnot Holding Corp., and Heinz, trail significantly behind Gerber with about 14% share each.
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Earth’s Best, which began as a Colorado-based independent, organic baby food maker, was acquired by Heinz in 1996. Hain Celestial Group (previously The Hain Food Group) now owns the name and trademark after Heinz acquired 19.5% of the natural food leader in 1999.
It is within this market milieu that a baby food battle simmers.
Just over a year ago Heinz announced plans to purchase Milnot Holding for US$185m. The merger was announced with great fanfare, with both CEOs saying the combination of the number 2 and number 3 baby food makers would create stronger competition for Gerber and lead to greater innovation and ultimately better products for American babies.
“Although we will still be a distant second to Gerber, a combination of Heinz and Beech-Nut will provide the critical mass to make the US baby food market more competitive, innovative and dynamic,” said Heinz president and CEO William Johnson.
Scott Meader, president and CEO of Milnot Holding Corporation, called the transaction, “the start of a new era of competition, innovation and growth” in the US baby food market.
Not everyone agreed. Five months after the announcement, the US Federal Trade Commission (FTC) voted 3-2 to mount a legal challenge to block the merger.
The FTC claimed the deal would change the market from a three-player to two-player arena and give Heinz and Gerber the chance for “coordinated anticompetitive interaction.” The commission argued that the US baby food market is already highly concentrated and would become more so with the merger. In addition, entry barriers in the US baby food market are high, with no significant new players entering the market for more than 60 years.
Heinz, however, defended the deal in the courts, arguing that a strong number-two competitor is clearly better for consumers than two smaller companies facing a monopoly.
Heinz’s director of Corporate Nutrition David Yeung said: “American babies have for too long been denied the new ideas, great nutrition and exceptional taste in formulated baby foods enjoyed by Europeans. Heinz is a leading baby food company in Europe and, with the efficiencies and increased reach of a Heinz/Beech-Nut combination, will leverage its global expertise in child nutrition and R&D for the benefit of American babies.”
Innovation slows after the major players eliminate or ingest what little competition there is |
The courts ruled in favor of Heinz, citing “powerful evidence in the record about the efficiencies realized by the merger, and about the enhanced prospects of the merged entity to introduce innovative products to compete with Gerber.”
But the FTC did not back down. Less than a month later, the commission asked the US Court of Appeals to overturn the lower court’s decision. The current status of the case is that the court has granted the FTC a stay while it considers the appeal.
It is uncertain how long this process will take. But whether the Heinz/Beech-Nut deal goes through or not, it seems unlikely that US baby food aisles will be changing any time soon. Innovation, like the introduction of organic baby food or the elimination of GMOs, slows after the major players eliminate or ingest what little competition there is. But when you have a comfortable 95% market share combined, why knock yourself out?
By Pam Ahlberg, just-food.com correspondent
Pam can be reached by e-mail at: pahlberg@bellatlantic.net
