Can the Small Survive?

After months of back and forth, Kraft Foods has now reached a firm agreement to buy Cadbury. This may be a good thing for Kraft. Warren Buffett demurs due to the price. The jury is out. However, this merger may not be good for some of the other competitors in the industry. (See the Symptom & Implication, “The industry is consolidating through mergers and acquisitions” on In particular, some industry observers are pointing to the precarious position of Hershey. They note that Hershey will be a very small competitor in the global confectionary business. That may be, but I would not be so fast to write off Hershey’s chances of survival. Often the smaller firms are more profitable than the largest firms in the industry.

A few years ago, we analyzed 240 industries that had five or more competitors reporting line of business sales of at least $50 million. (See the Perspective, “Is Bigger Really Better” on In each of these industries, we studied the top four competitors measured in sales. We evaluated their market shares and their returns, looking for the benefits of natural economies of scale.

We calculated the percentage of time that a company ranked first in market share was also the leader in pre-tax return on assets. Pure chance would have seen the industry’s market share leader lead in returns 25% of the time. We found some economies of scale at work. In all of the 240 industries, we saw that the industry market share leader led the industry in returns on assets 29% of the time, only 4% more than random chance.

Surprisingly, the distant followers can sometimes be powerful competitors. In our study, the competitor ranking fourth in market share led its industry in returns 23% of the time, only 2% less than the 25% random chance.

So, Hershey is far from dead on arrival. This is not to argue that Hershey has an easy time of it. Quite the contrary. But it can survive, and even thrive, even in a more competitive confectionary market. (See the Perspective, “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” on To do so, though, it will have to be quite astute in its choice of product benefits and in its management of its smaller-than-average cost structure.

Posted 2/4/10