Case Study Final
Cory Salmon
Scott Bilheimer
BUSEC 502
10/4/2014
Case Study #1 – Proposed Merger Between Heinz and Beech-Nut Scrutinized
Summary
This article shows examples of several topics discussed in class. There is clear oligopoly in the baby food market. The “players” in the domestic market are Gerber Products Company, Heinz, and
Beech-Nut, with Gerber holding the majority of the domestic market share. Heinz, however, is the industry leader in the world market. Beech-Nut, which has the lowest market share of the three, plays the game by trying to price match with Gerber and usually selling for a penny less. Heinz and
Beech Nut use payment strategies such as “fixed trade spending” and “variable trade spending” in order to get their product on the shelf and sometimes lower the price so that the quantity demanded is higher. Heinz proposed a merger with Beech-Nut. This would create a duopoly with only two players, Gerber holding 65% of the domestic market and Heinz-Beech-Nut holding 32.8%. This would eliminate competition between the Heinz and Beech-Nut and make a huge barrier for any other competitors to enter the market. Currently, at the whole sale level, Heinz and Beech-Nut price against each other and the merger would end that while lowering the price of their products as well as Gerber’s products. Heinz also claims that the merger will decrease their fixed costs which are predominantly the costs associated with slotting fees. Additionally, it would decrease their variable costs specifically, salaries and operating costs. Beech-nut would see one of their largest variable costs, “variable conversion cost,” drop about 43%. The companies suggest that the quality of the products will increase as well, which would increase the demand. Different production techniques implemented by each company in the merger such as: better recipes for Heinz and better facilities for Beech-Nut, would increase the supply as well. The merger would also allow innovation that can compete with Gerber
Scott Bilheimer
BUSEC 502
10/4/2014
Case Study #1 – Proposed Merger Between Heinz and Beech-Nut Scrutinized
Summary
This article shows examples of several topics discussed in class. There is clear oligopoly in the baby food market. The “players” in the domestic market are Gerber Products Company, Heinz, and
Beech-Nut, with Gerber holding the majority of the domestic market share. Heinz, however, is the industry leader in the world market. Beech-Nut, which has the lowest market share of the three, plays the game by trying to price match with Gerber and usually selling for a penny less. Heinz and
Beech Nut use payment strategies such as “fixed trade spending” and “variable trade spending” in order to get their product on the shelf and sometimes lower the price so that the quantity demanded is higher. Heinz proposed a merger with Beech-Nut. This would create a duopoly with only two players, Gerber holding 65% of the domestic market and Heinz-Beech-Nut holding 32.8%. This would eliminate competition between the Heinz and Beech-Nut and make a huge barrier for any other competitors to enter the market. Currently, at the whole sale level, Heinz and Beech-Nut price against each other and the merger would end that while lowering the price of their products as well as Gerber’s products. Heinz also claims that the merger will decrease their fixed costs which are predominantly the costs associated with slotting fees. Additionally, it would decrease their variable costs specifically, salaries and operating costs. Beech-nut would see one of their largest variable costs, “variable conversion cost,” drop about 43%. The companies suggest that the quality of the products will increase as well, which would increase the demand. Different production techniques implemented by each company in the merger such as: better recipes for Heinz and better facilities for Beech-Nut, would increase the supply as well. The merger would also allow innovation that can compete with Gerber