In 1963, when Procter & Gamble, the nation's largest food conglomerate, bought the Folger Coffee Co., the number of coffee roasting companies large enough to be counted by the Census Bureau was 261.
Last year, there were an estimated 100 to 120.
In 1970, when Philip Morris, another conglomerate, and the second-largest firm in the cigarette industry, bought Miller Brewing, there were 92 beer producers.
Last year, there were 41.
As P&G and PM see it, it was hard competition that felled their rivals -- firms less able to divine consumers' wants and to satisfy them with quality products at attractive prices. "It's the consumers and not the roasters who decide which companies will succeed and which companies will fail," a P&G representative said.
But critics of the new American merger wave of which the P&G and PM acquisitions are a part see in the coffee and beer industries disturbing illustrations of what can happen to competition when small and medium firms suddenly find themselves competing with a large conglomerate.
The effects are "chilling," says Michigan State University economist Walter Adams. The smaller firms know the conglomerate can outbid and outspend them. They also know, he says, that the conglomerate can "outlose" them -- that it can cut prices and absorb large losses for as long as it may take to force them out of business.
The conglomerate argument that outbidding, outspending and outlosing is merely "hard" competition reminded former representative Emanuel Celler (D-N.Y.), he once said, of the pronouncement made by an elephant dancing among the chickens: "Every man for himself."
How the coffee and beer industries were restructured by dancing elephants was disclosed in 1978 and 1979 at hearings of the Senate antitrust and House small business subcommittees. Similar stories have been told about other industries, including bread, but few have been so dramatically laid out.
Folger had operated mainly west of the Mississippi River when P&G (1978 sales: $8.1 billion) acquired it 17 years ago. The Federal Trade Commission demurred at the transaction for a time, for fear that it would prove anticompetitive, but finally settled for a consent decree.
In 1972, after the decree expired, P&G moved in earnest to try, as a former P&G executive was quoted as saying, "to become a national coffee business, and after initial objectives are met, to become the No. 1 coffee brand in the categories in which it competes."
Starting in the Cleveland area, it began its so-called "march to the sea" -- the Atlantic -- by invading a series of bastions of Maxwell House, the market leader.
Thus P&G and Maxwell House, which had set up a "Folger's defense team," and which is made by General Foods (1978 sales: $5.4 billion), became two warring elephants. They danced among the little roasters.
In the Philadelphia area in 1973, according to an advertising agency official, P&G launched its Folger offensive with a saturation advertising campaign on television -- daytime and nighttime. It sent "six-ounce samples to 1.5 million homes and 25-cents-off coupons to 1 million more. Additional coupons [were] running in full-page four-color ads in Sunday newspaper supplements," the official said. A smaller roaster said, "We're all bleeding to death."
In Pittsburgh, a price war broke out, says the University of Wisconsin's Willard F. Mueller, a former FTC chief economist. "Breakfast Cheer Coffee Co., a $12 million Pittsburgh company, saw its market share dwindle from 18 percent in 1971 to 1 percent in 1974," Mueller said. "Breakfast Cheer was forced to sell out because, in the words of James Deilly, formerly with the company, 'We were raped.'"
The price war spread, reaching Syracuse in 1974. At one point, discounts to supermarkets and coupons to consumers dropped the retail price of a pound of Folger's to about 50 cents. This was half the price charged by the Paul de Lima Coffee Co., a family-owned firm started in 1916. Folger also got prominent supermarket shelf space.
To survive, de Lima cut prices below the break-even point and bought TV ads -- costly for a small firm -- for the first time. But its market share fell from 15 percent in 1974 to less than 7 percent in 1977 -- and to less than that since then. De Lima is still hanging in there.
In some cities, the retail prices of Folger's and Maxwell House were under those for green coffee beans.
A year ago, when GF paid a reported $3 or $3.10 for two pounds of raw coffee and about 25 cents for the can, its wholesale price in Chicago was a remarkable $3.48.
But while consumers in some cities were winners in this competition, coffee drinkers elsewhere were losers; they helped pay the bill.
Only 150 miles away, in Indianapolis, GF was charging 66 cents more than in Chicago. In Washington, where Maxwell House had about two-thirds of the brand-name market, the price was 90 cents above Chicago's.
Such patterns show "predatory" behavior by GF and P&G, Mueller alleged. In restructuring the market to get a major share, P&G made "casualties of many smaller regional coffee companies," he testified.
In 1978, for the first time, Folger took the lead in regular coffee, winning a 26.5 percent national share as against 22.3 percent for Maxwell House. Thus the two brands together had 48.8 percent of the whole, up 2.5 percent from 1977 and 3.3 points from 1976.
Whether the coffee drinker benefits over the long term is, of course, disputed.
In Syracuse, coffee and other food prices were normally lower than in New York City. After the price war there ended, however, a survey by the Consumer Affairs Office in Syracuse found prices to be higher there than in New York.
But P&G, in materials submitted to the Senate antitrust subcommittee, said that its expansion eliminated a historic "premium" of 2 percent to 3 percent in the average retail price of coffee in Eastern markets as compared with Western markets, where Folger's traditionally had competed.
P&G also said that it used none of its non-coffee operations to subsidize Folger, that one-third of its new Eastern business came from additional consumption of coffee encouraged by Folger's entry, and that it engaged in no "predatory" conduct. The company said it looked upon below-cost promotions as "introductory tools" and an "investment" to be repaid over a long period.
In the beer industry, Miller Brewing began to grow big hooves and tusks quickly after its acquisition by PM (1978 sales: $5 billion) a decade ago. Miller president John A. Murphy has said: "We have one simple objective: to be No. 1. That's what we are after, and that's what we'll do."
To get to that point, PM brought to beer "many programs from cigarettes that were successful," a spokesman said in New York. He mentioned "certain consistencies of style."
For one thing, Miller spent massively on advertising. Its 1976 outlay of $3.90 per barrel was more than twice that of Anheuser-Busch's $1.68 and Schlitz's $1.80.
In a 1977 blitz for Lowenbrau, a domestic "import," Miller spent $18.80 per barrel -- 34 cents per six-pack, and about 25 percent of the wholesale price before excise taxes.
Miller's television outlays were particularly heavy. Regional breweries usually can't afford TV time, particularly for top sporting events attracting national audiences.
Miller also abandoned its non-premium brands and, as is common in the cigarette industry, added new brands -- all selling at premium prices, Indeed, Miller "Lite," which has less raw material and is cheaper to brew than regular beer, was originally priced above premium in most markets.
Miller thus became a major factor in the growth of the market for beers sold for premium and super-premium prices. These beers had 30 percent of the market in 1970 and 60 percent in 1978, when the extra cost to consumers was an estimated $400 million. Foreign beers accounted for about 2.5 percent. w
Beer drinkers must judge for themselves whether they've been helped by all of this. So far as PM is concerned, it has merely given them what they want. In buying "Lite," are they paying more for less? PM's spokesman said they obviously "wanted a low-calorie product" and "perceived a value added in that product. If they didn't," he said, "they wouldn't buy it, no matter what the price."
To meet the demand it was creating, Miller, immediately after being acquired, began to spend hundreds of millions of dollars to build new plants and undertake other capital expansion.
Despite the expense of these and other programs, the PM spokesman said, Miller operated in the black except for only one year, when it had a "very modest" negative operating income of $2.4 million. He said he based this statement on PM's consolidated annual reports.
After examining these same reports, economist Mueller said that Miller had taken heavy losses that were subsidized by PM's cigarette and other operations. In the years 1971 through 1975, he estimated, Miller lost between $17 million and $30 million a year, for a total of $120.3 million, but made "modest profits" in 1976 and 1977.
Similar estimates were made by security analysts and F. X. Matt II, vice president of the family-owned West End Brewing Co. in Utica, N.Y. As they and Mueller read the annual reports, Miller had incurred large interest and corporate expenses attributed to the parent company. In the 1971-1975 period -- when Miller was building new plants -- PM recorded interest expenses alone of $306 million.
The ranks of small regional brewers already had been thinned.Of those that survived Prohibition, 758 were operating in 1940 and 380 in 1950.
In the late 1960s, after Anheuser-Busch, Schlitz and other "nationals" had engaged in selective price-cutting, many regionals went under, despite efficient plants and methods.
Thus there was a seeming long-term trend toward concentration -- a trend that, for all anyone knows, might have persisted even if Miller had remained independent.
By 1978, after PM's acquisition of Miller, only 44 brewers remained. The 39 regionals among them had a mere 29 percent share of the market despite prices often several dollars a barrel lower than those of the nationals -- Anheuser-Busch, Miller, Schlitz, Pabst and Coors.
In 1972 the nationals had 54.9 percent of the market, in 1978, 72.7 percent.
But the principal beneficiaries of the shift to nationals were the two bigest elephants among them. Miller's share of the total increased from 4 percent to 18.9 percent. Anheuser's from 19.9 percent to 25.1 percent. The shares projected for them in 1983 are still larger: Miller 31.8 percent, Anheuser 32.6 percent.
The leftover share for all of their competitors -- some of which may try to merge in self-defense -- would be 35.6 percent.
As beer-buyers know, an increase in brands has accompanied the decrease in brewers. This is the result of the emulation by each of several brewers of PM's obviously successful strategies of segmenting the market and introducing and promoting brands for each segment.
In addition to competition, the merger wave, which began in 1975, has, for better or worse, affected other key areas of the economy, including efficiency, invention and innovation, international trade and managerial competence.
Here are some findings: EFFICIENCY
One group of researchers studied 765 mergers that occurred over a decade in seven countries: Belgium, France, Germany, Holland, Sweden, Britain and the United States.
They found no overall improvement in efficiency, they reported last September. Moreover, they told a conference in Berlin sponsored by the coordinator of their project, the International Institute for Management and Administration (IIMA), the mergers had systematically increased neither sales volume nor profits.
These findings, set out in a forth coming book edited by Prof. Dennis C. Mueller of the University of Maryland, may have particular significance for the United States.
Here, Supreme Court antitrust rulings since 1963 have virtually halted mergers of the kind that often have the greatest potential for efficiency.
These mergers, called horizonal, unite a firm in one line of business with another in the same geographic area that engages in the same or a similar line.
Furthermore, horizontal mergers can achieve the economies of scale -- the size at which maximum efficiency in production and distribution becomes attainable.
By contrast, conglomerate mergers join firms in unrelated lines of business.
Gulf + Western operates in no fewer than 105 industrial categories -- from auto parts to zinc. Beatrice Foods is in 92, International Telephone and Telegraph in 81, U.S. Industries in 77, Teledyne in 71.
Inherently, the efficiency potential in conglomerate mergers is less than in either horizontal mergers or vertical ones, which join firms to customers or suppliers.
So the IIMA study's particular significance for the United States lies in this: here, in the great merger waves of the late 1960s and late 1970s, conglomerate acquisitions -- those with the lowest efficiency potential -- predominated. In Europe, meanwhile, horizontal mergers predominated. Yet even these didn't improve efficiency.
Thus the study raises a question: does the conglomerate merger wave strengthen the economy of the United States or its ability to compete abroad? INVENTION AND INNOVATION
U.S. industrial technology leads the world and is much feared in Europe, especially in France, says William James Adams who heads the University of Michigan's Center for Western European Studies.
The French government, in a defensive manuever, has promoted mergers in the belief that only larger companies can do the research and development (R&D) that will enable French industry to compete effectively, over the long pull, against U.S. firms.
Adams studied the results of the French effort and came away unimpressed. "Bigness is not a prerequisite for progressiveness," he wrote in an analysis in the Quarterly Journal of Economics.
As for the United States itself, there's a good deal of evidence on the relationship between company size and the environment for invention and innovation. A sampling:
With only 3.5 percent of federal R&D dollars, a Commerce Department study found, very small business was responsible for more than half of all important scientific and technological inventions in the first two-thirds of the 20th century.
Between 1953 and 1973, the Office of Management and Budget found, firms with fewer than 1,000 employes produced nearly 50 percent of all major U.S. innovations. As compared with larger firms, they produced four times as many innovations for each R&D scientist or engineer on the payroll.
In the same 20-year period, the National Science Foundation concluded, firms with up to 1,000 employes produced four times as many innovations per R&D dollar as firms with 1,000 to 10,000 -- and 24 times as many as firms with more than 10,000.
One of the truly revolutionary inventions of the 1970s was the microprocessor, a tiny silicon chip that, in its first version, processed as much data as 5,000 transistors. Marcian Hoff of Intel Corp. of Santa Clara, Calif., made the invention in 1971, three years after Intel was founded -- with 14 employes.
Few are better positioned to address the issue than William C. Morris, who has been in both acquired and acquiring companies. He started Control Data Corp., built it into one of the nation's 200 largest industrial corporations, and is Control Data's chairman and chief executive officer.
"Bureaucracy in large companies drives away the innovators," Morris says. INTERNATIONAL TRADE
Sen. Adlai E. Stevenson (D-Ill.) and Donald I. Baker, former head of the Justice Department's Antitrust Division, are among those who warn against restrictions on conglomerate mergers.
Stevenson, expressing a view of the so-called University of Chicago "school," told the Senate antitrust subcommittee last year that such laws could"reduce the ability of U.S. firms to compete in world markets with foreign conglomerates and with known brand names and worldwide marketing systems."
Baker, testifying for the National Association of Manufacturers, emphasized that other nations "are attempting to increase the ability of their industries to compete more effectively in the international marketplace by encouraging the growth of mergers and cartels and by otherwise subsidizing their domestic industries."
By contrast, the University of Michigan's Adams says such advice reveals unfamiliarity with economic realities in Europe and Japan. He said in a phone interview:
"There are very few industries in which the largest firms are not American.
And yet we hear complaints that it is the size of American firms that jeopardizes the American position in world markets. If that is so, it must be because our firms are too large and sclerotic, rather than because they are too small."
Agreeing, Kenneth M. Davidson, deputy assistant director of the Federal Trade Commission's Bureau of Competition asks, "How much bigger does General Motors or Ford need to be to compete with Volvo or Toyota?" In 1978, GM's sales were $63.2 billion, Ford's $42.8 billion, Volvo's $4.2 billion, and Toyota's $12.8 billion. Troubled Chrysler's were $16.3 billion. MANAGERIAL COMPETENCE
Mergers are "an important device for disciplining incompetent managers," the University of Chicago's Richard A. Posner told the antitrust subcommittee. This view is supported by business groups including the National Association of Manufacturers, for which Posner testified, and doubtless by certain specific cases. But its importance is questioned by some executives responsible for major acquisitions and by profit data.
When United Technologies Corp. picks a target, UTC chairman Harry J. Gray said in a 1978 interview, "we want it to be a market leader and profitable No. 1, 2, maybe 3 in the market . . . we'd like to have a competent management. And so far, in every one of the acquisitions we've made, that has been the case."
Similarly, Mobil's senior vice president for finance, James Q. Riordan, has testified to "looking for companies that were well managed . . . The purpose of our acquiring Marcor . . . was not because we thought we would make Montgomery Ward dramatically more efficient." In fact, Mobil retained Marcor's management.
Companies that are bought up tend -- predictably -- to be profitable ones.
The FTC's Alfred F. Dougherty Jr., head of the Bureau of Competition, cites profit data for the 80 companies bought for at least $100 million each in 1978.
Past profitability records were available for 57 of the firms. They show a 1977 average net return on stockholders' equity of 13.9 percent. That is one point higher than the composite for the Fortune magazine 1,000 industrials plus the 50 leaders in each of five other categories: commercial banking, diversified finance, retailing, transportation, and public utilities. For 35 of the firms, the 13.9 percent return was larger than in 1975.