Whats Next For Critics Of Industry Consolidation?
October 1, 2006
What's Next For Critics Of Industry Consolidation?
As a magazine editor, I know why I cringe over rampant industry consolidation. It changes the way I do my job by forcing me to find different approaches in covering the food industry. Guess what? My trepidation means not a whit in the grand scheme of things. Since I can’t stop that fast-moving train, best I can do is buy a ticket and get onboard.
That seems a more prudent idea than ever, now that USDA’s Economic Research Service (ERS) in its recent study release, has confirmed what the industry’s forward thinkers started preaching a decade or so ago — when buying-and-selling transactions increased dramatically.
Basically the study contends that acquired plants are more likely to survive than non-acquired plants; labor productivity is higher for acquired plants; and relative labor productivity removes inflationary biases. The study concludes that firms buy efficient plants and improve their labor productivity.
Study findings indicate that between 1976 and 1992, labor productivity rose by 50 percent to 300 percent in seven food industries, including meat packing, cheese making, fluid milk processing, flour milling, feed processing, wet corn milling and soybean processing.
This is by no means the final word on the matter however, as this business model can’t help but have downsides. Critics undoubtedly soon will uncover some.
Based on the latest data generated by The Food Institute, backed by 25 years of tracking food-industry mergers and acquisitions activities, more than 320 mergers and acquisitions closed in 2005, and an additional 70 or so were announced.
After analyzing Census data, ERS and U.S. Census Bureau researchers established that processing plants in eight major food industries were highly productive before they changed ownership and, moreover, showed significant improvements in labor productivity (defined as output per worker) afterward.
To pinpoint productivity growth, researchers used plant-level Census of Manufacturers data to evaluate efficiencies over 10-year periods – 1977 to 1987 and 1982 to 1992.
Industry consolidation long has been a source of tension within the U.S. food industry, especially the animal protein manufacturing sector. Critics charge that mergers reduce the numbers of firms thereby increasing industry concentration and make it easier for firms to increase output prices and lower wages and input prices.
I recently heard talks by former President Bill Clinton and former House Speaker Newt Gingrich. Their divergent political views aside, both acknowledged that to grow, progressive economies need to frequently introduce new job-creating enterprises. The same old, same old just won’t do it. America needs fresh ideas and new businesses.
Consolidation seems to be the carrageenan for industry efficiency. It is all about jelling.