As the EU considers a planned merger between Bayer and Monsanto, campaigners are questioning whether such deals are good for ethics, innovation or the environment. By David Burrows.
In September 2016, German pharmaceuticals firm Bayer and US seed producer Monsanto announced a “definitive merger agreement”. The $66 billion (£50 billion) deal would provide “significant and lasting benefits for farmers: improved sourcing and increased convenience to higher yield, better environmental protection and sustainability”, they said.
But a new analysis published last week by Imperial College London suggests the deal will squeeze farmers, freeze innovation and increase prices (both on the farm and at the shelf). Meanwhile, a two-year study of mergers and acquisitions (M&A) activity in the agri-food sector at large, published by the International Panel of Experts on Sustainable Food Systems (IPES-Food) this month, concluded that the dominant agri-food firms have become “too big to feed humanity sustainably”.
If food companies continue to merge “we’re going to see higher prices coming out at the retail end”, warned Olivier De Schutter, IPES-Food’s co-chair and a former UN special rapporteur on the right to food. “Farmers will face … anywhere from 1.5% to 5.5% increases in seed prices, if you follow the pattern of mergers,” he told the Thomson Reuters Foundation.
So why are more and more firms merging, and are the new behemoths that these mega-deals create beautiful or beastly?
Food businesses are always striving to keep a lid on price rises, but it’s becoming increasingly difficult. Figures released by the Office for National Statistics last week showed that the consumer price index climbed 3% in September – the biggest jump in five years. Food prices and “a range of transport costs” were to blame, the ONS said.
This explains why bigger is currently viewed as better. “A lot of the M&A activity we’re seeing is trying to drive out cost in the supply chain,” explained Ashley Clarkson, a specialist in the food and beverage group at accounting and consultancy firm Grant Thornton. “This activity won’t drive prices down; rather, it’s a response to manage cost inflation.”
Expansion into new markets is also appealing, especially for those looking to tempt private equity firms into a purchase. Many firms are looking to strengthen their position in the supply chain, Clarkson said, which explains why the Tesco-Booker deal makes sense. And since Brexit there has been “no let-up” in the quality or quantity of deals. “UK businesses have become 15 to 20% cheaper and they’re seen as good value at the moment,” he said.
It’s worth noting that, having fought off a bid by Kraft-Heinz earlier this year, Paul Polman, the chief executive of Anglo-Dutch firm Unilever, called for “a level playing field” and questioned the strength of the UK’s takeover code. The government has since promised proposals to better protect the country’s key brands, but these have been delayed, according to reports in the Financial Times last week.
Changes in consumer preferences have also fuelled M&A activity in the food sector. The focus is on “fresher and healthier” products, the IPES-Food report noted, but some of the large packaged food processors have “struggled to adapt quickly and stay relevant. Most large food processing companies have responded by revamping their portfolios, adding new brands or acquiring brands that are perceived as ‘healthy’, ‘natural’ and ‘organic’.”
Whether this is good news or bad depends on how you look at it. A multinational gobbling up a trendy sustainable brand – think Unilever and Ben & Jerry’s, Coca-Cola and Innocent, or Cadbury (now Mondelez) and Green & Black’s – provides the latter with the marketing muscle to become mainstream.
Innocent’s co-founder Richard Reed recently said: “Doing a deal with Coca-Cola meant money in to do the things that we’ve always cared about, which is to get as many healthy products to as many people and places as possible, to build a supply chain that leaves the world a little bit better, and then to give 10% of profits to charity.”
On the other hand, the ethos on which the company was founded can just as easily be chewed up and spat out by the new owners. Sausage brand Debbie & Andrew’s is a case in point. The founders sold the company to JJ Tranfield, which was then bought by Vion. They stayed involved but became increasingly disillusioned with how things were going.
“We were poles apart in terms of how we wanted to do things,” Debbie Keeble told me back in 2011. “We tried for years to make it work but we were working with a product we didn’t even like any more and I think customers were being misled.” (It’s worth noting that on the first day as owner of Whole Foods, Amazon cut prices by as much as 43%).
Big on trust
Whether the organic cookie crumbles or not depends on the deal in place and the businesses involved. Still, faith in the smaller, ethical brand can quickly erode if consumers feel it has succumbed to its new corporate paymasters or they feel misled over ownership.
Trust is certainly an issue at the core of the mega-merger debate. Monsanto, for one, is never far from a scandal, but trust in big agri-food companies has been falling away. A poll in September by NFU Mutual discovered that 25% of UK shoppers don’t trust big corporations, while 19% lack trust in the supply chain as a whole. Thirty-three percent are also less trusting of products and retailers than they were five years ago, with high-profile cases such as the horsemeat scandal in 2013 the most common cause of reduced confidence, at 46%.
“Retailers are well aware that their customer safety and trust is at risk,” said Helen Dickinson, the chief executive of the British Retail Consortium. “Anything that damages that can have a significant commercial impact on their business.”
Campaigners didn’t believe a word of that Bayer-Monsanto statement in September last year. Hannah Lownsbrough, the executive director of consumer group SumOfUs, said it would be “an extremely risky consolidation of corporate power, not to mention a serious threat to food supplies and farmers around the world. It’s the worst corporate merger you’ve ever heard of.”
Thirteen months on and – unluckily for those involved – that particular merger has become major news. The deal should have been wrapped up by Christmas, but the champagne is on ice thanks to an “in-depth” investigation launched by the European Commission. “We need to ensure effective competition so that farmers can have access to innovative products, better quality and also purchase products at competitive prices,” said Margrethe Vestager, the EU competition commissioner.
David versus Goliath?
Vestager is a tough cookie. In recent months she has been happy to take on Starbucks, Apple and Google in what profilers have referred to as her “fight for fairness”. This is a commissioner “with guts” who, as the Observer put it recently, “has been quietly asserting her understanding that the political battles of the present and the future should not be among nations, but between democracies and globalised corporations, which for too long have had things their own way”.
But does she have the power to stop the Baysanto deal? Imperial’s investigation suggests so, but others are less sure. “These companies are pushing at an open door,” Angela Wigger, an associate professor at the department of political science at Radboud University in the Netherlands, told EUobserver last month. “My perception is that it will go through. If these companies can’t form cartels, they simply merge.”
Her conclusion is drawn from research she has conducted on the European Commission’s record on merger proposals: 0.4% of applications in the past 27 years have been rejected. “The commission has legitimised its pro-concentration stance by referring to synergy effects, such as lower costs and thus lower prices for consumers, product innovation and the displacement of inefficient management structures,” Wigger concluded.
Freeze on innovation
Both Imperial and IPES-Food question how much longer the commission can hold on to this argument. Should the Baysanto deal be given the green light, the resulting company would be one of only three (the others being ChemChina-Syngenta and DuPont-Dow) that would own and sell about 64% of the world’s pesticides and 60% of the world’s patented seeds, according to Imperial’s research.
The result? Competition would constrict further. “This high level of concentration will undoubtedly lead to price rises for seeds and pesticides, the increase of the technological and economic dependence of farmers on a few global integrated one-stop shop platforms, the reduction of independent centres of innovation activity in the industry and consequently of innovation, due to reduced competition,” the authors explain.
Mergers further up the food chain can also come with similar challenges. “Too much control can drive out niches and leave one homogenised shelf of food – but at the moment people are looking for something different,” said Clarkson.
That all sounds pretty bad, but it gets worse: within this “tight oligopoly … the likelihood of collusion may also increase”, suggest the experts at Imperial. We don’t know this will be the case, of course, but the world’s largest food companies have hardly covered themselves in glory in recent years. Monsanto is mired in a scandal about glyphosate, while the likes of Coca-Cola, Pepsi, Lidl and Birdseye have been accused of selling inferior versions of well-known brands in eastern European markets for years.
Mergers can be a good thing, of course, creating excitement and innovation where once there was none. Back in July, David Read from Prestige Purchasing wrote excitedly for Footprint about M&A activity in the foodservice sector. New deals, inspired by “disrupters”, were “blurring the lines between market verticals in our sector”, he noted, and the possibilities are almost endless. “How long will it be before the dots are joined up and we start to see home delivery of hot food using supermarket restaurants as a host? Will a major drinks player enter the home delivery market?” he wondered.
But let’s not get carried away, he warned – change is happening fast and governments are struggling to keep up with the gig economy. “In this new and more fragile environment we need to ensure that strong leadership delivers these changes in a sustainable and environmentally acceptable way,” Read warned.
De Schutter has just written to Vestager to ask for a meeting to discuss just how to achieve this. His letter paints an ugly picture of today’s food systems and the chances of feeding the world if the “rampant consolidation” continues. “Not a single new species has been introduced into the European food system since the era of large-scale mergers began,” he wrote. This runs contrary to the need for “greater innovation in the species and varieties of crops and seeds offered to farmers” so they can adapt to climate change.
Whether such mergers create more sustainable food systems is a moot point. “Instead of more planet-wrecking industrial farming, we need a major shift towards a greener and fairer food system,” says Mute Schimpf, a food campaigner at Friends of the Earth Europe, which commissioned Imperial’s research.
But this isn’t something Vestager will be considering. “All the environmental and health issues get pushed to one side,” explained Mark Jones, a food and drink expert at Gordons solicitors. “A huge amount of market analysis will be done, but the crux is whether [the deal] will dilute competition and will that increase the price of food. All competition law is founded on whether the consumer gets a good deal.”
Campaigners have argued that they won’t, but they have also urged Vestager and her team to extend the scope of their investigation into the Baysanto deal to “ensure that we retain the possibility to move agriculture onto a sustainable and resilient footing to help counter climate change and halt biodiversity loss”.
IPES-Food is trying to ring similar alarm bells. “The high and rapidly increasing levels of concentration in the agri-food sector reinforce the industrial food and farming model, exacerbating its social and environmental fallout and aggravating existing power imbalances.”
At £50 billion the mega-merger between Monsanto and Bayer is a big deal, but it’s much more than that – in an era of rampant consolidation within the food sector it could represent the defining moment.