of beef and pork, broilers and eggs, product prices and the relatively seem amorphous. They have great ' and fluid milk, all items which are inflexible nature of the inertia, but at the same time they changed relatively little after they margin. The marketing spread for seem to evolve more rapidly than leave the farm, and have a rela­ the market basket of foods has other kinds of . In , tively high farmer's share. Costs increased in all but 2 of the past they are hard to define and for grading and packing fresh 20 years. This upward trend has analyze. fruits and vegetables range caused food prices to go up As a working definition, a con­ between 10 and 15 percent of the even when farm prices have glomerate is a very large (sales retail price. declined or changed relatively lit­ volume), multiproduct, and multi­ Transportation costs are rela­ tle as during the past several market firm. All three character­ tively high for fresh fruits and years. istics tend to be found together. vegetables because of their perish­ Several factors tend to explain Virtually all U.S. ability and the long distances they why marketing charges do not with over $1 billion in assets are must be shipped to market. Ship­ move up and down with farm-prod­ conglomerate enterprises, and ping costs for fall potatoes were uct prices. Changes in farm prices many with only a few hundred about 15 percent of the retail price are usually the result of increases million dollars in assets exhibit all in 1977 and they were about 20 or decreases in product avail­ the other characteristics as well. percent for lettuce. In contrast, ability. Relatively large changes By this rough $1 billion standard, shipping costs for meats, broilers, often occur in farm prices as a there are about 30 conglomerate eggs, and butter, items relatively result of small changes in supply, firms in food processing. Well over high in value, account for only 2 particularly among meats and half of all assets in the manu­ percent of the retail price. fruits and vegetables that are per­ facturing sector are now owned by Charges for wholesaling, ishable. However, when farmers' conglomerate firms. In 1929 less involving warehousing and local prices decline because of increased than one-fifth of all delivery to stores, range between 5 product availability, marketing sector assets were controlled by and 8 percent of the retail selling costs are not directly affected billion-dollar-plus firms, even after price for most food products. How­ because they are related to the adjusting for the effects of ever, such costs for bread, nor­ physical product rather than the (Mueller, 1977). mally delivered direct to stores dollar value paid to farmers, and Size alone does not make a firm from bakeries instead of moving to price trends in the economy as a a conglomerate, however. Among through retailers' warehouses, whole. food processing firms, Iowa Beef made up over a third of the retail For example, it takes the same Processors ranks among the 50 price in 1977. Wholesaling costs amount of labor to slaughter and largest, with 1976 sales of over $2 for milk were relatively high, too, process hogs whether they are sold billion. But Iowa Beef makes only because of high labor costs con­ by the farmer for 30 or 40 cents one very narrowly defined product, nected with delivery to retail per pound. Similarly, it takes fresh and frozen beef, in which it stores. essentially the same plant and is the leading U.S. . Iowa Retailing costs vary widely labor time to pack fruits and vege­ Beef is decidedly undiversified, among foods, reflecting the tables at a time when the value is both in a production and market­ amount of handling required of high as when it is low. These prod­ ing sense. Therefore, it is not products in stores, shelf space ucts also use the same trans­ definedas a conglomerate. occupied, special equipment needs portation space or shelf space in While there is no absolute agree­ such as refrigeration, and rate of the retail store. ment on the superiority of any par­ sales. In-store retailing margins ticular measure of horizontal diver­ range from 10 to 40 percent of the sification, most indexes are highly 1 retail selling price. But such mar­ correlated with one another. The gins made up less than 25 percent THE CONGLOMERATE number of industries in which a of the retail price for most items FIRM IN FOOD company participates, the propor­ except fresh oranges, potatoes, let­ PROCESSING: tion of company sales outside its tuce, and other perishable fruits AN OVERVIEW main , or some com­ and vegetables. The larger margin By John M. Connor* bination of the two standards are for these products is due to the rel­ all acceptable measures of cor­ atively large amount of store space Conglomerate firms are never porate diversification. They are which they occupy. easy to write about: They are real, but their nature is elusive. They 1ln this article, little is said about are to some extent organic, but yet vertical diversification of food firms Inflexibility of (that is, their movement into the pro­ Marketing Charges * Agricultural Economist with the duction of raw material s or inter­ The farmer's share of the food , , and Cooper­ mediate inputs or into wholesaling or atives Service of USDA and Adjunct retailing). It is the author's impression dollar often fluctuates over a Assistant Professor in the Department that changes in , period of several months or a year. of Agricultural Economics at the Uni­ except in the area of fast-food restau­ This results from changing farm- versity of Wisconsin-Madison. rants, have been unsystematic. 16 quite sensitive to the particular simi•lar to a small firm. It is (FTC, 1972). All these data on choice of breakdowns expected to manage its own pro­ profit centers were computerized used. duction and marketing affairs and were recomputed frequently, Multi product characteristics under the general direction of cor­ sometimes monthly. Profit results tend to go hand-in-hand with the porate headquarters. It must even were used to determine levels of multimarket ones. Conglomerate "pay" other profit centers in the executive compensation, firms make a wide range of prod­ same company for materials or investment, and advertising ucts, and often related products services provided; it may keep a expenditures. are targeted to a range of con­ portion of its net income for rein­ For all their attempts at har­ sumer income or taste classes. In vestment each year, but is "taxed" monization or centralization, con­ products such as beer, pet foods, by the center for or for glomerate firms generally fail to and yogurt, conglomerate firms purposes of corporate expansion in . develop into completely unified, strive to offer "premium" as well other areas. organic wholes. The extreme size as standard products. Sometimes A Federal Commission of conglomerates virtually ensures new products are introduced with study of nine large conglomerate some degree of heterogeneity, and the tastes of particular consumers firms found that detailed sales and it may be this feature that dis­ in mind: weight-conscious or profit data were kept on 361 profit tinguishes a conglomerate from a sports-minded individuals, for centers by the nine companies merely diversified firm. For exam- example. Another dimension of the multi­ market phenomenon is that of international production and mar­ keting. The early conglomerates were among the first to make their products nationwide and were thus among the first to be able to take advantage of national means of communication and advertising­ national magazines, network radio, and later, television. In more recent years, particularly since the end of World War II, geo­ graphic diversification has spilled over beyond our national borders. Typically, large food firms have first invested in Canada, with its nearly invisible cultural and politi­ cal frontier. This was followed by more intrepid leaps over the trade barriers in Latin American and Western European nations. Today some multinational food pro­ cessing companies do business in over 100 countries-including some that do business in the "Iron Cur­ tain" countries. Size, product diversity, and geo­ graphic spread have all compelled conglomerate firms to develop complex systems of internal data collection, commu­ nications, financial controls, and long-term corporate planning. The ... :. . main management tool employed �L.. · to cordinate corporate activities is . . : ...... I I the well-defined, relatively cohe­ a I sive "profit center." ---r--.L.. Built around a small group of related products, generally mar­ . . . . keted in one area or region, each . . . : ...... I •' profit center operates in a manner ...... 17 ple, the maintenance of a sense of 1950-71 period. His statistical anal­ largest food processing companies "belonging," or corporate identi­ ysis showed that increases in virtually began as the result of fication, becomes a constant con­ diversification were significantly mergers. Since 1950, this trend has cern for conglomerates, particu­ related to the slow growth and low intensified. A comprehensive study larly among middle-level profits of some companies around of all industrial mergers from 1948 managers. 1950. to 1968 found that food manu­ Newly acquired units are often Several food processing indus­ facturing ranked fifth out of the 21 left to operate semi-autonomously tries can be identified as "target major manufacturing groups in for 10 years or more. Some industries," that is, industries into terms of total assets acquired financial or retail operations may which the diversifying firms have through merger. (FTC, 1969). be left almost completely unin­ entered most frequently: frozen In a study of the 100 largest tegrated. The public image of the foods, bakery products, candy, oil food processing companies, it was company is often lost. That is, in products, canned fish, and snack found that fully 40 percent of the the minds of consumers the foods. These are generally mod­ 1975 assets of those firms were the of the company develop an iden­ erately or highly differentiated result of acquisitions made during tity of their own. Recently, though, products. 1950-75 (Connor, 1977). And final­ some conglomerate firms are con­ Like several other studies, ly, an examination of the pattern ducting advertising campaigns to Horst's found that the target of foreign investment by food relate their brands to the com­ industries were generally faster firms shows that before 1958 only pany. growing. Unlike other studies, 46 percent of all were however, he found that high rates acquired, whereas during 1958-67, of technological change appeared 72 percent were acquired rather The Origins of the to play no part in the food pro­ than being formed de novo. Food Conglomerates cessing diversification movement. The reasons for this strong pref­ Most diversification in the food He did discover that large firms erence for merger over in ternal processing sector has taken place enter industries with substantial growth are not difficult to discern in the last three decades. "Prior to scale barriers to entry. Thus, it (FTC, 1969). The acquisition of a 1950, only a handful, among them appears that target industries are going brings with it an General Foods and Standard' those in which a firm is most integrated set of physical assets, a Brands, found themselves spread likely to be able to establish a body of pretrained workers and across several important industri­ monopolistic position; that is, knowledgeable managers, and es" (Gort, 1962: 57). Those two those with substantial product dif­ often a valuable array of intan­ early food conglomerates were put ferentiation and barriers to entry. gible properties (e.g., credit worthi­ together by combining several Other than the meatpackers, ness, trademarks, and valuable smaller food processing compa­ ,only a few U.S. food companies patents or trade processes). Thus, nies, all of them with strong in vested abroad prior to 1950. merger is a means of avoiding the brands capable of being marketed They were generally medium-size, many costs and delays associated on a national scale. fairly specialized companies such with completely new enterprises. General Foods, for example, as H.J. Heinz, Carnation, and More importantly, the most was a originally consis­ Quaker Oats. Since 1950, however, recent merger wave has resulted in ting of Post Cereals, Maxwell there has been a substantial the disappearance of some inde­ House Coffee, Jell- O Pudding, increase in foreign expansion by pendent firms that had leading Minute Tapioca, Baker's Chocolate food firms. About 60 percent of all positions in their markets, markets and Coconut, Log Cabin syrups, foreign subsidiaries established by which were generally faster grow­ Calumet baking powder, Certo pec­ the largest food firms were estab­ ing than average. Mergers also tin, Diamond Crystal salt, Swans­ lished since 1950 (Horst, 1974). increase the opportunity for spe­ down cake flour, and Birdseye fro­ Moreover, the target industries cial forms of strategic business zen foods. Other than the use of abroad are much the same as the conduct not open to single-product direct sales forces, no heavy for­ domestic target industries. U.S. firms. Finally, there are often ward vertical integration into multinational food corporations many financial advantages to the warehousing or retail stores has have generally produced ".... highly merger route: various advan­ taken place. processed and advertised products, tages, rules, and fluctu­ Horizontal diversification has rather than basic foodstuffs" ating stock prices can all result in quickened its pace since 1950 and (Horst, 1974: 108). By 1970, the for­ increased profits for the acquiring has developed a great deal of eign sales of U.S. food companies firms or large incomes for the momentum. Horst (1974), in his had reached $7 billion. financial intermediaries involved. study of 25 large food processing A common feature of both prod­ Most all of these benefits, it firms, found that the proportion of uct and geographic diversification must be emphasized, are pecuniary company sales outside its two prin­ is the heavy reliance upon mergers ones: They lead to private gain but cipal industries more than doubled rather than internal company not necessarily to welfare benefits (from 18 to 43 percent) over the growth. Prior to 1950, most of the for society. There may be some

18 real, social gains as well. The TABLE 1. DIVERSIFICATION OF 25 LEADING FOOD PROCESSING main ones are the possibility of COMPANIES, 1950-75 management synergism and increased economies of scale in Number of I production, research, or marketing. grocery product industries 1950 1966 1975 It was the overall assessment of the FTC's (1969) report on cor­ Number porate mergers that, on balance, there were few if any real, eco­ 1-5 14 5 0 nomic benefits to the mergers of 6-10 8 14 13 1948 to 1968. One 11-20 3 6 9 where there probably were signifi­ cant efficiency benefits from merg­ Over 20 0 0 3 ers was the dairy industry over 1 1950-75 (Mueller, Hamm, Cook, Classified using the four-digit standard Industrial Classification (SIC) code. Sources: The National Commission on Food Marketing, The Structure of Food 1977). Manufacturing (June 1966) and Economic Information Services, Inc. For 1950 and 1966, only industries with $500,000 in sales by company are counted; for 1975, the Some Recent Trends cutoff was $1,000,000. Most reliable studies on the topic of the conglomerate have porate cash reserves, and direct marketing in 22 States and data bases which end before or depressed values Puerto Rico. around 1970 (FTC, 1969; FTC, have all combined to make con­ Over the years, farmers have 1972; NCFM, 1966; Horst, 1974). glomeration lucrative. During 1977 received about 40 percent of the More recent data suggest that no alone, a total of 524 mergers consumers' food dollar. The other plateau has yet been reached in involving food industry firms were 60 percent is marketing costs­ levels of product or geographic publicly announced, the largest labor, transportation, advertising, diversification and that the hiatus number ever recorded (Food Insti­ packaging, and profits. Direct mar­ in merger activity in the early sev­ tute' s "Weekly Digest," Febru­ keting provides farmers an oppor­ enties has come to an end. ary 11, 1978). About one-fourth of tunity to capture a larger share of Table 1 records the author's pre­ these acquisitions were by firms in the consumers' food dollar. liminary estimates of trends in completely unrelated industries; National studies of consumer product diversification for 25lead­ that is, they were conglomerate satisfaction with food products in ing food processing firms. The mergers. 1974 and 1976 show that many data clearly demonstrate a shift It is still rather early to tell shoppers are dissatisfied with the toward ever greater conglom­ whether the current spate of merg­ quality of fresh fruits and vegeta­ eration in 1950-75, even though ers will approach the pace of 1967 bles purchased in food stores. Also, these 25 companies were already to 1969, when over $32 billion in studies in Ohio, Missouri, and Lou­ among the most diversified firms industrial assets were acquired. isiana indicate that access to bet­ at the beginning of the period and But, if it does, the result will be the ter quality food is the major rea­ the number of possible grocery creation of several more "pure con­ son for direct market buying. In industries has remained about the glomerate" food firms. reaction to rising food costs, con­ same. Another source found that cern over food quality and whole­ the 200 largest U.S. food pro­ someness, and changing lifestyles cessing firms marketed over 6,000 DIRECT MARKETING­ and values, consumers may turn different branded consumer prod­ CONSUMERS' VIEW increasingly to alternative food ucts in 1975 (Connor and Mather, by Judith L. Jones, sources-home gardening, home 1978). Richard B. Smith canning and freezing, and buying From recent data collected by and Charles R. Handy food directly from the producers. the Department of Commerce, the To assess consumer interest in trend toward multinational Passage of the Farmer-to-Con­ using alternative direct market investment hardly appears to be sumer Direct Marketing Act of outlets, ESCS conducted a stalled. The stock of foreign direct 1976 reflects growing national national probability survey in the investment of food processing com­ interest in direct marketing of winter of 1978, questioning panies has increased from $1.7 bil­ farm products as a means of gain­ roughly 1,300 household food shop­ lion in 1966 to $5.1 billion in 1976 ing access to fresher, higher qual­ pers from different regions and (Survey of Current Business). ity foods at less cost for consumers social strata. The preliminary Finally, present business condi­ and as an alternative market to results show that about 58 percent tions appear to be conducive to yet increase farm income, particularly of the American households pur­ another wave of large mergers. for small farmers near population chased food during the past year Since 1974, low levels of centers. Under this Act, USDA from at least one of the five types investment, high profits, large cor- recently funded projects to support of direct markets studied. The 19