The Food Scout

In the 1990s, it was nearly impossible to keep track of all the food company mergers that were blending and combining top brands in an elaborate shell game of consolidation and buy-outs designed to offset shrinking margins and increasingly modest stock growth.

Now America’s most prominent food companies are cleaning house en masse. And when it comes to keeping the ship on course these days, it is clear that nothing is sacred anymore, not even flagship brands or categories. Sluggish category? Toss it out! Unhealthy image? Off with her head! Increased competition? Sell the whole company!

In a headline that sounds like it could have been invented only by editors at The Onion (www.theonion.com), Wendy’s International announced in June that it was shopping its flagship Wendy’s restaurant chain to buyers. Also in the past year, Wendy’s has pawned its Tim Horton’s, Baja Fresh, and Cafe Express properties, presumably to please investors and analysts.

And then in July, with the kind of intrigue found only in celebrity gossip columns, we learned that PepsiCo had been jilted (after some preliminary merger talks) by the evidently “sparkling” Nestle brand for being too unhealthy (never mind the fact that PepsiCo has Quaker, Aquafina, and Tropicana, while Nestle has Stouffer’s, ice cream novelties, CoffeeMate and NesQuik in its product portfolio).

Other companies, like Kraft Foods (also a token in the tobacco industry’s diversification and divestiture cycles), are expected to dump some American icon brands like Maxwell House coffee and Post cereals in coming months, to keep the overall portfolio performing to stockholders’ quarterly expectations. In the recent past, Kraft has let go of some orphans like Cream of Wheat/Rice, Minute Rice and Milk-Bone. There was even speculation in a July 10 “Financial Times” article that Kraft (like Wendy’s) might get out of the cheese business in the near future! Is this the end of the food world as we know it?

Campbell Soup Co., is said to be letting go of brands like Godiva whose image isn’t “healthy” enough for its portfolio (despite chocolate’s link to functional benefits). Similarly, Sara Lee Corporation has been applying some business focus as well, shedding nonfood businesses in the recent past such as Coach and Hanes.

The latest sell-off news and refocusing reminds me of the ‘70s and ‘80s when food manufacturers had collectively thought it was a good idea to get into the retail restaurant business — General Mills with Red Lobster et al., Pillsbury with Baker’s Square, Quaker with Magic Pan, and Pepsi with Taco Bell, et al. — and then collectively decided to spin off these businesses a few years later.

But what’s most disturbing about some of the investment/divestment news I read today is that an increasing portion of it is being driven by a new breed of activist, called the “activist investor.” PETA has been buying a whopping 65 shares of various food company stocks in recent years, including McDonald’s, Panera, Burger King, Wendy’s, Safeway, and SuperValue, and then filing proposals to try and use their shareholder leverage, though miniscule, to affect specific policy changes within these target organizations they’ve often picketed.

Likewise, there are so-called activist investors like Nelson Peltz, who is acting as a company’s worst nightmare of an armchair quarterback, using his minority 3% share in Kraft Foods to pressure management to follow his outsider’s advice on how to best run a mega corporation more efficiently.

The Queen of Hearts seems an increasingly fitting image to describe the atmosphere food companies find themselves operating in today in trying to strike a balance between protecting a company’s best interests while addressing those of its shareholders.