The Good and Bad of Industry Consolidation

The past several years has seen consolidation occur in many industries: airlines, banking, and department stores just to name three. Many forces lead to the consolidation of firms in an industry: high costs, plateauing demand, and overcapacity are frequent drivers of consolidation. In many cases, mergers among firms in an industry is seen as the best option for long-term profitability and ultimately, survival.

The candy industry recently experienced consolidation among its members. Iconic gum marketer Wrigley has agreed to be acquired by candy marketer Mars, which has the backing of Warren Buffett's Berkshire Hathaway. The merger creates an industry giant that will give the combined companies more resources to compete than either one could on its own.

So, who should be worried when consolidation like the Wrigley-Mars deal occurs? All of the smaller players in an industry. Small firms do not have the economies of scope that a Mars-Wrigley would have. It is almost impossible to compete on price; the distribution and selling efficiences a large firm enjoys are almost impossible to replicate in smaller businesses. Value must be added in other ways: superior product features or benefits, unique user experience, or outstanding customer service. There is always a market for firms that can excel in these ways.

Link: Brandweek "Small Candy Makers not Sweet on Consolidation"