DALLAS (Reuters Breakingviews) - As millennials became old enough to hang out in bars some 15 years ago, the likes of Budweiser and Miller started to taste flat. Fancier drinks and craft beers cut into the brewing giants' market shares. A gusher of mergers followed, culminating in last year's $103 billion acquisition of SABMiller by Anheuser-Busch InBev. Kraft Heinz's $143 billion bid for Unilever last week, although quickly aborted, is a sign that millennials' attention, and the potential for M&A, have shifted to the food industry.
There's another connection, too. The beer push was initiated in Latin America by Jorge Lemann, a founder of private-equity firm 3G Capital – the same group that's behind Kraft Heinz, alongside Warren Buffett's Berkshire Hathaway. Lemann’s Brazil-based brewer Ambev then merged with Belgium's Interbrew in 2004. It went on to down Anheuser-Busch, becoming AB InBev, and Mexico's Modelo.
Meanwhile rival SABMiller went on its own spree, buying Bavaria and Fosters and then forming a partnership with Molson Coors – also the product of a merger. The deals made sense. Companies needed to cut costs to keep profit growing as sales came under pressure. AB InBev, under the sway of 3G's founders, was a ready acquirer. Others had little choice but to follow.
Fast forward, and the food business is in a similar bind. Between 2002 and 2016, global packaged-food sales grew at a modest 4 percent a year, according to research by Natixis. No single company has more than 3 percent of the $2 trillion global market. Kraft Heinz – the product of a 2015 merger with Heinz, itself acquired by 3G and Berkshire two years earlier – has shown the way in cost cutting. Its operating margin jumped to 23 percent last year from 14 percent in 2015. Major competitors only managed 16 percent or less in their most recent financial years.
Like SABMiller, some may seek to consolidate before the $130 billion Kraft Heinz swallows them. Unilever is the largest by market cap, followed by Mondelez International, which last year launched a bid for Hershey that went nowhere. Kellogg and General Mills could fit together given their strong cereal roots.
In any such deals, antitrust regulators may force asset sales. Managers and governments can react badly, too, as they did with Unilever. Some targets, like Kellogg, Campbell Soup and Hershey, have voting blocks that make takeovers tough. Still, Kraft Heinz has started the grocery carts rolling.