Seventy-eight years ago, Eskimo Pie Corp. virtually invented the chocolate ice-cream bar.
Today, with a bare $63.5 million in annual revenue and a 1 percent net income margin, the Richmond-based company--which makes frozen desserts under the Oreo and Welch's names as well as its own--admits it has been licked.
Last week, Eskimo Pie put itself up for sale, and yesterday it announced that it would pay no dividend for the third quarter of this year. Reason: It wants to use the surplus to attract a potential suitor.
It's a sad story for one of the household names in the food business. Nonetheless, it faithfully mirrors the script being written for the entire food industry.
Stagnant food prices and increasing marketing costs are forcing food companies to contemplate mergers as a means to cut costs and pry a bigger share of grocery purchases out of an increasingly powerful group of top food retailers.
Although Bestfoods of Englewood Cliffs, N.J., maker of Hellmann's mayonnaise and Skippy peanut butter, on Wednesday denied widespread reports that it was in merger talks with Pittsburgh-based H.J. Heinz Co., Wall Street says such mergers are inevitable.
"We have been expecting mergers for a long time now," said Terry Bivens, packaged-foods analyst at Bear, Stearns & Co.
According to analysts, candidates ripe for mergers--apart from Heinz and Bestfoods--include Campbell Soup Co., Kellogg Co., Nabisco Biscuit Co., and beverage manufacturers Cadbury Schweppes PLC and PepsiCo Inc.
"If [as a food company] you are not number one or number two, you get squeezed," said Richard Joy, industry analyst at S&P Equity Group.
The pressure to consolidate begins at the cash register. In the past four years, the annual growth in food prices--as reflected in the consumer price index--has come down from 3.3 percent to 2.1 percent. But other costs such as manufacturing and selling expenses--which make up 80 percent of the product cost--have been going up.
To make matters worse for food makers, retailers have been consolidating, increasing their bargaining leverage with food producers. Today, the top five retailers--Kroger Co., Wal-Mart Stores Inc., Albertsons Inc., Safeway Inc. and Ahold USA--account for 40 percent of all grocery sales.
Just five years ago, it would have taken 20 supermarket chains to produce a 40 percent market share. But since then, nine of the top 20 operators have been acquired by competitors. According to the Food Institute in New Jersey, there were 21 acquisitions in the supermarket category alone in the first half of this year.
"Growing retailer clout is putting pressure on food manufacturers to merge too," said Brian Todd, vice president at the Institute.
Given its size, Eskimo Pie is just a dollop in the frozen-desserts industry straddled by giants such as Unilever NV, Nestle SA and Nabisco. "The company hasn't been able to build critical mass for its brands," said Michael Serruya, co-chief executive of Yogen Fruz World-Wide--the single largest shareholder (17 percent) in Eskimo Pie and a potential buyer for some of its assets.
With its big competitors getting bigger, Eskimo has had to cede higher profit margins to retailers to retain shelf space. Besides, it does not have a wider product portfolio that could either subsidize marketing costs or cushion the reduction in margins.
"To survive, you need to be part of a large conglomerate. So far Eskimo Pie had chosen to stay out," Serruya said.
Predictably, the list of potential buyers of Eskimo Pie includes its big competitors and their licensees. Industry experts believe the company will fetch more if parceled out in pieces than sold as a whole. "After all, Eskimo Pie is an American icon in frozen desserts," Serruya said.
But unfortunately for the brand, it stayed in the deep freeze for too long.
CAPTION: Eskimo Pie President David Kewer eats a pie in his Richmond office in 1997, shortly after taking office. Eskimo Pie is now up for sale.