The U.S. Food and Tobacco Manufacturing Industries: Market Structure, Structural Change, and Economic Perfornnance John M. Connor United States Economics. Agricultural Department of Statistics, and Economic Agriculture Cooperatives Service Report No. 4 51 THE U.S. FOOD AND TOBACCO MANUFACTURING INDUSTRIES: MARKET STRUCTURE, STRUCTURAL CHANGE, AND ECONOMIC PERFORMANCE. By John M. Connor, National Economics Division; Economics, Statistics, and Cooperatives Service; U.S. Department of Agriculture. Agricultural Economic Report No. 451. ABSTRACT The major conclusions the National Commission on Food Marketing made in 1966 about trends in the industrial organization of the U.S. food manufacturing industries are still valid. Company numbers are declining, average market concentration is among the highest in the manufacturing sector and is rising, product diversification has risen, food advertising has more than doubled, and the profitability of very large firms has remained higher than that of smaller firms. Foreign investment is substantial and rapidly growing, most food media advertising is on TV, profit rates have risen by over 50 percent in the last 25 years, and the monopoly overcharge on processed foods is about 10 percent. Keywords: competition, food manufacturing, tobacco manufacturing. Industrial organization, market structure, performance, monopoly, oligopoly, conglomerate firms The names of proprietary firms and brand names are used in this publication to report facts on available data. The Department neither guarantees nor warrants these names and products and implies no approval of the products to the exclusion of others which may also be suitable. ACKNOWLEDGMENTS The author is indebted to Loys L. Mather for his help as co-author of the Directory of the 200 Largest U.S. Food and Tobacco Processing Firms 1975, from which much of the data on the roles of the largest companies were derived.* The collecting and coding tasks for those data were performed by three research assistants at the University of Wisconsin at Madison—Juan Morelll, Miguel Carriquiry, and Michael Pratzel. Charles Handy, Bruce Marlon, Gerald Grlnnell, and Russell Parker generously provided constructive criticism of early drafts of this report. The report was typed by Judith Peterson, Angela Moore, Karen Robinson, and Frances Yates. Tom Houser is thanked for his generous assistance with the programming that produced many of the tables. Debra Ritter edited the report. This report is published by ESCS in cooperation with the core research unit of NC-117, a North Central Regional Project on the "Organization and Control of the U.S. Food Production and Distribution System," University of Wisconsin. *See reference 16, page 73. Washington, D.C. 20250 March 1980 CONTENTS Page SUMMARY iv INTRODUCTION 1 Importance of the Processed Foods and Tobacco Industries • 2 Brief History of the Processed Foods and Tobacco Industries 7 INDUSTRY STRUCTURE TRENDS 8 Decl ine in Company Numbers ••••••... 9 Increasing Merger Activity 10 Increasing Concentration • • 10 Increasing Firm Diversification 14 Increasing Product Differentiation 24 INDUSTRY PERFORMANCE TRENDS 32 Increasing Profitability 32 Growth Rates 34 Labor Productivity •.. • 37 Prices 38 THE 200 LARGEST FOOD AND TOBACCO PROCESSING FIRMS 38 Data Sources on the Largest Companies 39 Size and Industry Characteristics 41 Diversification 48 Ownership Characteristics .. • • 52 Advertising ••..••.... 56 Research and Development . • • • • 63 Profitability 66 EVALUATION OF ALTERNATIVE DATA SOURCES 68 PUBLIC POLICY IMPLICATIONS 71 REFERENCES 73 APPENDIX .—Supplementary Tables and List of the 200 Largest U.S. Food and Tobacco Processing Companies, 1975 77 iii SUMMARY The 50 largest food manufacturing firms' share of that industry's total assets rose from 42 percent in 1963 to 63.7 percent in 1978, and could rise to 100 percent by the year 2000. This report confirms long-term structural trends in the food and tobacco manufacturing industries, as first identified by the National Commission on Food Marketing in its 1966 study. These trends, which reinforce the market power of the largest firms, include: . The number of firms is declining by about 3 percent per year, . The numbers of mergers, industry concentration, product diversification into and out of industries, and product differentiation are all increasing. The profitability of firms with assets over $100 million was higher than for smaller firms in most years. •Other trends identified by this report were: . Foreign investment in U.S. food and tobacco manufacturing firms is large ($1.8 billion in 1975) and is rising rapidly; investment by U.S. firms abroad ($4.7 billion) is rising less rapidly. TV advertising of food products accounts for over 50 percent of all media advertising, and is increasing. Profit rates for food and tobacco industries exceeded the rates for the rest of manufacturing for the first time during the early seventies. Wliolesale prices of food products are elevated an average of 10 percent by the oligopolistic structure of food manufacturing. • The 200 largest food and tobacco manufacturing firms account for two-thirds of industry sales, over four-fifths of industry assets, four-fifths of all media advertising, and over 96 percent of all research and development. iv The U.S. Food and Tobacco Manufacturing Industries: Market Structure, Structural Change, and Economic Performance John M. Connor * INTRODUCTION It has been 15 years since the National Commission of Food Marketing (NCFM) issued its final report and a series of oft-quoted technical studies on the industrial organization of several food subsectors and industries. This present report updates some of the data and examines the validity of some of the major conclusions of Technical Study No. 8 of that series, The Structure of Food Manufacturing. This report, like the ÑGFM study, focuses on those elements of industry structure t-hat affect ecoipmic performance: firm numbers and distribution, product and geographic diven^fication, and product differentiation. The structure of many of the food manufacturing industries has changed significantly since the early sixties. These changes were brought about by the enormous merger wave of the late sixties, the appearance of highly diverse conglomerate firms, and an acceleration in the multinat^ional investments of food firms. Thus, this report will examine changes in food industry organization during 1950-75, but especially the latter half oí that period, using data from two majo-r sources. The first group of sources is data collected by the Bureau of the Census, the Internal Revenue Service (1RS), the Federal Trade Commission (FTC), and other govern- ment ^Lgen'cies. The publication of the 1972 Census of Manufacturers, some parts of which'i^^re-5tily released in late 1977, is one occasion for this report. The second major data source is the Directory of the 200 Largest U.S. Food and Tobacco Processing Firms 1975 (16). This directory relied on published and purchased data to identify those companies, both domestic and foreign-owned, with the greatest sales of food and tobacco products processed in the United States in 1975. Because market structure data taÈe so long to generate, 1975 was chosen as the terminal year for this study to main- tain comparability among sources. By drawing on such a diverse set of data sources, this report assesses the particular strengths and limitations of the various sources and the extent to which they may complement one another. Focusing on the largest companies, the report examines how the structure and performance of many food industries are dominated by the operations of their leading firms. The report will also be useful to policymakers considering public policy options dealing with nodes of market power in the food system. * John M. Connor is an agricultural economist with ESCS and at the time the manuscript was completed was Adjunct Assistant Professor in the Department of Agricultural Economics c€ the Universi*€-y of Wisconsin at I^dison. Table 1—Selected indicators of the importance of the U.S. and tobacco manufacturing industries, 1975 [ The 51 four-digit SIC food and tobacco manufacturing Indus tries Indicators of 'Proportion of total U.S.* Proportion of importance manufacturing 'total United States Percent Value of shipments 17.3 — Value added 11.7 3.A Civilian employment 8.7 1.7 Capital investmenti.'^ 9-5 2.4 Energy consumption-2/ 7.4 Value of U.S. farm output utilized 68.0 Personal consumption expenditures 21.1 — = Not applicable. l^/ For manufacturing this item includes all capital expenditures involving new plant capacity, permanent additions or alterations, and new machinery or equipment; for the united States, this item is defined as total nonresidential, fixed, private investment. 1/ Energy consumption data is for 1974. Sources: (18, 25, 29). .Importance of the Processed Foods and Tobacco Industries The food and tobacco manufacturing industries account for a large portion of total manufacturing output. They purchase large amounts of raw agricultural products and other inputs, and receive a considerable share of household consumption expenditures (table !)• One way that the size of these industries was measured used data on value of shipments collected annually by the Bureau of Census (25). 1/ Values of shipments are defined as *'...the received or receivable net selling values, f.o,b. plant, after discounts and allowances, and excluding freight charges and excise taxes. However, in a few industries where large