Amazon’s Grocery Threat Could Ramp Up Food M&A

A spoiled advertising deal between Campbell Soup Co. and an unnamed retailer — likely Wal-Mart Stores Inc. — warns of a looming price war in the grocery sector that may galvanize packaged-food giants to more seriously explore acquisitions, even if it means paying bloated valuations.  

Campbell announced late last month that it had been not able to reach an agreement with a large customer over a promotional plan for the upcoming “soup season.” Said client is widely speculated to be Wal-Mart, which accounts for 20 percent of Campbell’s revenue, and thus the information helped send the $14.5 billion firm’s shares tumbling. It is hard enough for Campbell to captivate food shoppers, given its heavy reliance on canned soup — a product which, let us face it, is really only enticing when you have a cold, an empty fridge, or even the Seamless app is down. Something like this only makes it worse.

However, the drawback may not be Campbell’s alone. Instead, it might be an early sign of big retailers’ willingness to exert more pressure on food providers in the face of escalating competition from Inc., which obtained Whole Foods Market Inc. on Aug. 28. Amazon has already begun slashing Whole Foods’ costs, and although Wal-Mart remains much more economical (roughly 50 percent more economical based on a recent Bloomberg News survey), there’ll be pain for Amazon’s inaugural contests. These grocers will take it out on providers — especially ones like Campbell that get prime real estate in the middle grocery stores but are not doing enough to justify their existence that is omnipresent.

All the largest packaged-food makers — Kraft Heinz Co., General Mills Inc.. , Kellogg Co., Mondelez International Inc., etc. — are already contested in shielding shelf space. Products once considered attempted and true are falling from favor with shoppers, especially the health-and-convenience-seeking millennials that seem to function roiling every aspect of the retail sector. Take cereal: The class is in decline, which signifies Kellogg and General Mills need to act more rapidly to diversify their merchandise.  

What is fascinating is that despite the evident growth hurdles which have led to this trend, Big Food has managed to maintain strong profit margins, together with cost-cutter extraordinaire Kraft Heinz leading the way. Margins down the chain at the retailer level are considerably flatter. If, as appears likely, one of the consequences of Amazon buying Whole Foods is that Wal-Mart and others are forced to cut into providers’ margins longer, this will heighten the demand for Campbell, Kraft Heinz and others to produce their particular acquisitions for revenue growth and price economies. Just a week, Target Corp.. Announced price cuts on thousands of items such as cereal, another sign it’s getting real.

I have speculated on a number of the potential merger situations before, such as Kraft Heinz purchasing Campbell or even any of its peers. That said, Warren Buffett — whose Berkshire Hathaway Inc. provided funding for 3G Capital to weld Kraft Foods and H.J. Heinz together a couple of years ago — includes downplayed talk of the firm going after Mondelez or comparable targets next. One candidate outside the food area that Kraft Heinz could look at, though, is Colgate-Palmolive Co..  

Hain Celestial Group Inc.. , the maker of organic and better-for-you foods, is another goal that will make sense for any of those aforementioned buyers. However, the risk in a deal for Hain and most other targets out there’s currently overpaying. Larger targets are overpriced and smaller ones do not produce enough of an impact on the bottom line. And then you will find candidates such as J.M Smucker Co. and Hershey Co. which are controlled by insiders who won’t be keen to market unless the takeover offer is outlandish.  

Any meals mergers will be coming from a position of weakness, so investors shouldn’t get overly excited about the notion of a deal rush. However, for food shoppers and M&A bankers, it could be a banquet. Bon appetit.

This column does not necessarily reflect the opinion of its owners and Bloomberg LP.

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