Sausage Wars: What do they see?

3 Jun

The battle for Hillshire Farms might be looked at from a number of different perspectives. One train of thought is that this is simply a battle to increase scale and market presence and that Tyson simply is looking to increase its market power with its dominant customers: i.e. Walmart and others. The other more interesting strategic reason behind this potential acquisition, is the need for companies like Tyson to see their scale on the raw material side increase, with the possible coming squeeze in retail margins. For years, companies like Tyson and others migrated from pure processed and fresh food manufacturers to predominantly marketing entities. They were able to do so, as the price of the underlying commodity (chicken, pork, beef) stayed relatively stable. The move towards more value added, processed product did smooth out some of the inherent volatility in these various protein markets however. It is our feeling that a large part of the impetus to merge is being driven by what todays Central Bankers so desperately want:namely inflation, although these producers would call it margin erosion. Scale at the farm-gate level would allow these producers to have a greater handle on costs and thus margin, with growth in new markets as only an added side benefit. Food costs are one area which has seen a marked increase this year, and as such we think this move towards consolidation in the foods sectors is not coincidental.

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