The lessons for entrepreneurs in the Kraft and Cadbury deal: Gottliebsen

Watch out supermarkets – the food and confectionary makers are fighting back. For the past decade or so supermarkets have made brand owners miserable by using the marketing power of large chains of stores combined with house brands to slash manufacturing margins.

Owners of the great brands were once seen as growth companies. Much of that glamour has swung to supermarkets as life for the owners of brands has become much tougher – unless they are big enough and own brands that the supermarkets simply must have on their shelves.

All global suppliers to supermarkets have seen the enormous power of Coca Cola when it comes to supermarket negotiations. In Australia – and many other global markets – Cadbury is also one of those “must have” brands for supermarkets.

Similarly, Kraft’s Maxwell House is a ‘must have’ brand in many markets, but not Australia.

In Australia, no supermarket would be without Kraft’s Vegemite, Arnott’s biscuits, Kellogg’s cereals and Nestlé’s Nescafe coffee.

We have seen Nestlé gradually increase its strength in dealing with the supermarkets by buying key brands and now Kraft, with its bid for Cadbury, wants to enjoy the same kinds of benefits.

But disastrous drug company mergers have shown us that while these mega deals can help the short-term performance, they can also be long-term disasters (Our culture vultures, August 3). In the short-term, the CEOs of the victorious companies promise huge cost cuts and the institutions celebrate every time that the merged company announces that they have achieved the cost reduction targets.

But in this brutal process life can be wrung out of the combined operation and, in the case of the drug companies, their research thrust failed and they went into decline. They are now hoping to save themselves with even more mergers.

If Kraft and Cadbury combine and the acquisition price is pushed too high then there is a danger that the required cost reductions will strangle the combined company. The supermarkets fear these food giants – as we saw with the merger of Foster’s and Southcorp – will try and encourage rivals by giving them discounts and buying strength.

But there is a limit to this process. What we are seeing is the food and beverage makers returning the supermarkets’ fire.

This article first appeared on Business Spectator.