Preserving Entrepreneurship in a Merger Crazy World

July 24th, 2016 11:30 am Category: Optimization, by: John Hughes

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I recently read 2 separate articles about recent mergers in the Consumer Package Goods (CPG) market that seem to reach contradictory conclusions: and this has gotten me thinking about just who is right. The two items that I’m referring to are “With Competition in Tatters, the Rip of Inequality Widens” (In the New York Times of July 13), and “Invasion of the Bottle Snatchers” (The Economist magazine July 9th). Both of these touch on the pending merger of Anheuser-Bush InBev (AB) and SABMiller into a single organization.
The Times article states that the beer merger will restrict the ability of a whole slew of small craft brewing companies to distribute their products through AB’s ubiquitous distribution network. This was a service that I certainly was never aware that AB provided to small companies. The Times feels that this is simply a continuation in the decline of competition and entrepreneurship in the American economy with negative impacts on a whole range of social and economic problems.
The Economist is much more sanguine about the consolidation in the CPG industry. They point to the fact that generally speaking, the giant CPG companies are quite slow and lead-footed in responding to consumer tastes. Small, entrepreneurial firms on the other hand are very adept at using various aspects of the internet such as social media, and online reviews to get their message out and build brand loyalty. Building distribution channels can be accomplished through online sales. And if a consumer is willing to pay more for a product it probably will not be for a traditional big brand: in a survey by Deloitte one-third of American consumers said they were willing to pay at least 10% more for the “craft” version of a particular good. The Economist article clearly feels that entrepreneurship is alive and well: I would add that the stream of new consumer products regularly on display on the television show “Shark Tank”
So who’s right and what can be done to preserve ‘the little guy’ and foster entrepreneurship? I suppose they’re both correct. I think the key is that when regulators consider a proposed corporate merger, they must be aware of ALL the markets that will be affected in order to minimize any “collateral damage” to the economy. It is not enough to look at only ways in which the candidate companies directly compete, but rather all of the markets that they service and all of the other organizations that will be affected in a post-combination world. So if large companies like AB do in fact provide services to smaller firms, then regulators need to incorporate the impact of a proposed merger on the larger economy as a whole when deciding whether the new combination should be allowed to proceed.
Something like this already happens frequently. In the case of the pending (as of mid-2016) Dow/DuPont merger for example, the proposal would actually create at least 2 new independent companies and not just 1 single behemoth: this so as to insure competition in particular markets. So in the AB/SABMiller situation, regulators should include its impact on the craft brewers when determining their legal position. And such calculations should be made part of the regulatory decision making process for any future consolidations of CPG companies and anywhere else in the larger economy.

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