Proposed Merger between Heinz and Beech$-$Nut Scrutinized

OVERVIEW OF THE BABY FOOD MARKET

Four million infants in the United States consume $80$ million cases of jarred baby food annually, representing a domestic market of $$865$ million to $$1$ billion. The baby food market is dominated by three firms, Gerber Products Company $($Gerber$),$ Heinz and Beech Nut. Gerber, the industry leader, enjoys a $65$ percent market share while Heinz and Beech Nut come in second and third, with a $17\mathrm{.}4$ percent and a $15\mathrm{.}4$ percent share respectively. Gerber enjoys unparalleled brand recognition with a brand loyalty greater than any other product sold in the United States. Gerber's products are found in over $90$ percent of all American supermarkets.

By contrast, Heinz is sold in approximately $40$ percent of all supermarkets. Its sales are nationwide but concentrated in northern New England, the Southeast and Deep South and the Midwest. Despite its second place domestic market share, Heinz is the largest producer of baby food in the world with $$1$ billion in sales worldwide. Its domestic baby food products with annual net sales of $$103$ million are manufactured at its Pittsburgh, Pennsylvania plant, which was updated in $1991$ at a cost of $$120$ million. The plant operates at $40$ percent of its production capacity and produces $12$ million cases of baby food annually. Its baby food line includes about $130$ SKUs $($stock keeping units$),$ that is$,$ product varieties $($e$.$g$.,$ strained carrots, apple sauce, etc.$).$ Heinz lacks Gerber's brand recognition; it markets itself as a "value brand" with a shelf price several cents below Gerber's.

Beech Nut has a market share $(15\mathrm{.}4\%)$ comparable to that of Heinz $(17\mathrm{.}4\%),$ with $$138\mathrm{.}7$ million in annual sales of baby food, of which $72$ percent is jarred baby food. Its jarred baby food line consists of $128$ SKUs. Beech Nut manufactures all of its baby food in Canajoharie, New York at a manufacturing plant that was built in $1907$ and began manufacturing baby food in $1931.$ Beech Nut maintains price parity with Gerber, selling at about one penny less. It markets its product as a premium brand. Consumers generally view its product as comparable in quality to Gerber's. Beech Nut is carried in approximately $45$ percent of all grocery stores. Although its sales are nationwide, they are concentrated in New York, New Jersey, California and Florida.

At the wholesale level Heinz and Beech Nut both make lump sum payments called "fixed trade spending" $($also known as "slotting fees" or "pay to stay" arrangements$)$ to grocery stores to obtain shelf placement. Gerber, with its strong name recognition and brand loyalty, does not make such pay to stay payments. The other type of wholesale trade spending is "variable trade spending," which typically consists of manufacturers' discounts and allowances to supermarkets to create retail price differentials that entice the consumer to purchase their product instead of a competitor's.