Case Study Final
Proposed Merger Between Heinz and Beech-Nut Scrutinized Summary This article shows examples of several topics discussed in class. There is clear oligopoly in the baby food market. The “players” in the domestic market are Gerber Products Company, Heinz, and Beech-Nut, with Gerber holding the majority of the domestic market share. Heinz, however, is the industry leader in the world market.
Beech-Nut, which has the lowest market share of the three, plays the game by trying o price match with Gerber and usually selling for a penny less.
Heinz and Beech Nut use payment strategies such as “fixed trade spending” and “variable trade spending” In order to get their product on the shelf and consumes lower the price so that the quantity demanded is higher. Heinz proposed a merger with Beech-Nut. This would create a duopoly with only two players, Gerber holding 65% of the domestic market and Heinz-Beech-Nut holding 32. 8%.
This would eliminate competition between the Heinz and Beech-Nut and make a huge barrier for any other competitors to enter the market.
Currently, at the whole sale level, Heinz and Beech-Nut price against each other and the merger would end that while lowering the price of their products as well as Grabber’s products. Heinz also claims that the merger will decrease their fixed costs which are predominantly the costs associated with slotting fees. Additionally. It would decrease their variable costs specifically, salaries and operating costs.
Beech- nut would see one of their largest variable costs, “variable conversion cost,” drop about 43%. The companies suggest that the quality of the products will Increase as ell, which would Increase the demand.
Different production techniques implemented by each company in the merger such as: better recipes for Heinz and better facilities for Beech-Nut, would increase the supply as well. The merger would also allow innovation that can compete with Gerber and increase their “All Commodity Volume,” or shelf presence. The firms must agree on a price and market share so neither company would be more dominant than the other.
With the merger of the companies there most likely going to be collusion between the two players in the market and price coordination. Questions: .
Who are the competitors in the jarred baby food market? What market share do they have? Is this industry concentrated? There are three primary competitors: Gerber, Heinz, and Beech-Nut. Gerber has market share of 65%, while Heinz has 17. 4%, and Beech-Nut has 15. 4%.
The Industry is considered very concentrated. This can be concluded by the fact that three firms represent nearly 98% of the market share. Furthermore, prior to the proposed ‘OFF merger, H Walt ten merger, ten HI would Increase Day 510 points In addition to being highly concentrated, this shows, by ample margin, that competition old lessen. . How do Heinz and Beech-Nut compete with one another? Heinz and Beech-Nut say they don’t necessarily compete with each other at the retail level although the case states that evidence suggests they do where both are present. Where in can’t be argued that they compete with each other is at the wholesale level.
“Fixed trade spending” and trade spending” are two competitive hot spots they deal with that Gerber doesn’t really deal with because of their name brand recognition. This wholesale level competition described is where they pay grocery stores to obtain shelf-space.
They do this because most grocery stores only carry one or two brands of baby food and Gerber is dominant. Therefore they are competing to be the second brand on the shelves. 3. Are the barriers to entry high or low for this market? What are they? The barriers to entry are high.
Supported by previously mentioned HI, additional evidence in the case suggests that no new competitor has entered the market for decades. Probably the greatest barrier to entry is the ability to get placement on supermarket shelves due to the challenges previously stated in the answer to question 2.
Without strong incentives, supermarkets will be unlikely to carry a new brand. Many other examples of barriers to entry include the development of a trusted brand, building of facilities, development of recipes, and creation of distribution channels. All this creates an industry that makes it very unlikely to have any competitors try to enter.
4. What efficiencies are likely to be gained by Heinz and Beech-Nut through the merger? Is a merger necessary to develop these efficiencies? Both Heinz and Beech-Nut see efficiencies being developed by a merger.
For Heinz, he superior recipes that Beech-Nut uses are a primary benefit of the merger. For Beech-Nut, the distribution network that Heinz has is an attractive plus to a merger. Additionally, Heinz and Beech-Nut would reduce production costs by consolidating facilities.
There is also significant potential to reduce administrative expenses. Heinz and Beech-Nut also state that the development and launching of new products would be more cost effective through the merger. Since the combined entity would have access to more supermarkets, a new product could get wider placement and eave the potential to make a greater return.
Although both companies could greatly benefit by the merger, they could both probably improve without it, although they probably view it as much more difficult. For example, the development of new recipes is not likely to be cost prohibitive. Additionally, Heinz having a strong distribution network is also evidence that Beech- Nut can develop good distribution network without a merger.
5. How could the merger be harmful to consumers? Yes, several factors coming together could potentially make it harmful to consumers.
With only two firms, there would be an incentive to coordinate prices and output with each other to achieve a higher return than if it was truly competitive. This is especially possibly when coupled with the high barriers to entry that make it very unlikely for competitors to see an opportunity there. Another issue is even if collusion were to De suspected, It would De Doolittle to Drill ten market Dacca to a competitive state.
When a merger is allowed it is difficult to force divestiture and bring additional competitors to the market.