Month / June 2016

by Frank Maduri

Mega Makeover: Mondelez / Hershey Merger Proposal

The news this morning that sent the stock market surging was a proposed merger between the top two candy and snack manufacturing companies in the United States: Mondelez and Hershey. The news sent shares of Hershey dramatically upward, and shocked others in the food and beverage industry space.

The Wall Street Journal reports that the proposed deal is for $23 billion and the financial markets have responded with shares of Hershey at a 52 week high. The proposal, if approved by regulators, would create one company under the Hershey brand umbrella.

Mondelez split from Kraft Foods about four years ago and has largely struggled to gain brand recognition. The name, Mondelez, has been problematic for the company because the American consumer believes that the products are made in Mexico and other countries and shipped in to the U.S. marketplace (which is true in some cases and not true in others). This merger represents a potential makeover for Mondelez to set a whole new branding message around one of the quintessential American brands: Hershey. The fact that they are willing to pay megabucks for this acquisition represents the desperation they have in reinventing themselves.

I believe that what fascinates me and so many others who have worked in the food industry space and also have knowledge of the financial markets is that this deal is indicative of the nationalistic agenda that has been sweeping the world. The markets have been struggling due to the “Brexit” decision that many see as nationalism gaining a victory with Great Britain separating from the E.U. last week.

This proposed merger is all about nationalism as much as it is about consolidation of two large corporations to cut costs and maximize profit margins. The guys at Mondelez have an opportunity to market their brands with a whole new strategic shift under the Hershey name. They can tout that the company headquarters is now in Hershey, PA which is an iconic American destination, especially now in the height of the summer vacation season.

Mondelez International is headquartered in Deerfield, IL and employs over 100,000 people. They hold the brand rights to Oreo, Nabisco, Cadbury, Chips Ahoy, and Triscuit just to name a few of their billion dollar brand lines. The company generates tens of billions of dollars a year in revenue and this merger would make the combined entity a significant competitor to Nestle in the marketplace.

The branding and P.R. aspects of this merger are just one component of the scenario. Mondelez had grown essentially to their capacity and so M&A activity is the only other pathway to getting larger. The synergies between both companies are evident, as the combined entity would conceivable grow the confectionary brand lines through shared intellectual property and manufacturing technology techniques.

The new combined entity would have significant power in the negotiations for retail shelf space and most likely see cost savings from streamlined distribution operations as well. The combined company will most likely look to grow their market share in the cookie and cracker industry segment.

The cascading effect will be for the other food companies in the next tier beneath Nestle and the newly proposed Hershey, companies like ConAgra, Kellogg, and Campbell Soup. Those companies will be key players for the purchase of brands that both Mondelez and Hershey will potentially have to divest in order to satisfy regulatory boards for anti-trust reasons.

The proposed combination of Mondelez and Hershey would also have more sway over suppliers of food ingredients and could command a whole new system for doing business which would have a direct impact on the food ingredients market place in the way of cost cutting and potential consolidation of product submissions.

In the end analysis, the hurdles remain for this combined company to become a reality, but if it does gain approval it will be yet another example of American corporate largesse. It also represents the lengths a company will go in order to makeover their image in the court of public opinion. The impact on consumer perception is hard to tell until it occurs, but perception is reality and that concept is at the center of this latest merger in the American food industry landscape.

by Frank Maduri

Supermarket Shock: GMO Labeling & Consumers

Some of the major food companies such as Campbell’s and General Mills among others, have begun the process of labeling some of their products with disclosures relative to genetically modified ingredients. In your local grocery stores, depending on what state you live in, you may have also seen similar product labeling.

The label on the packaging will have a disclosure with a statement such as: “contains genetically engineered corn” or “made from genetically engineered soybeans”, or “contains genetically modified ingredients”. The surprising component to this scenario was that with all the reporting and commentary writing I have done regarding the subject of GMOs and the need for stricter food labeling, and knowing that this was actually going to appear on products on the shelves in stores: my wife, friends and colleagues, as well as myself all were still shocked by it.

We were all shocked by the appearance of the words on the box of cereal or the can of soup that we have purchased regularly over the years. The words, seeing them in print, make it that much more impressionable and have a pronounced impact. I wrote about this in a previous article on GMO labeling for the site known as Medium where I explored the potential consumer reaction and subsequent ramifications for the food industry.

One of the potential responses that was mentioned in other news coverage on GMO labeling of food products was most troubling to consumer packaged goods company executives: the shock value to the shopper. This shock factor with shoppers was also detailed in articles regarding the financial segment’s valuation of Campbell Soup Company stock after they determined that the consumer reaction would adversely impact product sales.
It is certainly a shock for many consumers to see the widespread presence of GMOs in the food supply. Then, there are other consumers who are more knowledgeable and shop at health food type stores and websites to obtain locally sourced, GMO free products.

There are still others, and that will encompass a huge group of consumers, that know and understand the fact that GMO corn, sugar beet, and soybean are the most prevalent supply in American domestic food products. We do not have much choice because of the expense of buying alternative products that are GMO free to feed multiple people or a family. The cost factor associated with removing GMO containing products from our respective diets is not feasible when coupled with other rising standard of living costs.

It is my opinion, and I am in agreement with the analysts’ data from the financial valuation on Campbell Soup, that there will be some shoppers that will be so shocked by the GMO labeling that they will put the product back on the shelf and make another product choice. Then there are other consumers who will see the label and purchase the product anyway in a state of resignation to the fact that GMOs are part of our current food supply chain.

The fact remains that the seed used to grow the staple crops such as corn, wheat, soybean, and sugar beet are genetically engineered. There is not enough non-GMO seed to support more than a fraction of the amount of food needed in production for our population. This is the inherent problem with sourcing sustainable “clean” food products.

The debate over whether the food labeling should be done federally or on a state-by-state basis will only cease when the federal authorities make a final determination. In the event that labeling guidelines become mandated by law, then this shopper shock will only become more intense because it will effect such a large amount of products in our stores.
In my own perspective, I have had the most difficulty with reading it on boxes of breakfast cereal. I think it is the understanding that for several years I have been eating cold cereal for breakfast, and that basically all of them contain some sort of genetically engineered ingredient. There is something very stark about coming to that realization.

In the end analysis, as the labeling of the GMO or genetically engineered ingredients becomes more commonplace I am interested to see whether this “shopper shock” will wear off, similar to the initial “sticker shock” we might get on a price of a higher ticket item. In many cases, over time, we become desensitized to many external factors within our human condition. I am interested to see if this will be another example of that type of behavioral response.

In the interim, we as consumers will continue to get jolted whenever we pick up a can of soup or a bottle of juice and find that it contains genetically engineered ingredients. We, as consumers, will continue to try to drive the progress towards the “right to know if it is GMO”. We will continue to have conversations with people we may have only just met, in one of the last places to do so in an increasingly isolative and online shopping obsessed society: in the aisle of the local grocery store. In that case, if nothing else, at least we are talking about something.

by Frank Maduri

Are We Headed for Another Recession?

On the heels of a negative May jobs report and some other economic data combined with warnings from financial industry experts the question kept turning in my head: are we heading for another recession?

This discourse included a stern warning from political talk show host, Mark Levin, at the end of last week regarding the impending economic downturn. I invite all those who are interested to check out that source material which made headlines throughout the mainstream media and internet news sites.

The Federal Reserve had a more muted commentary from their leader, Janet Yellen, last week where the overall state of the economy, the potential for a rate hike, and the status of the jobs market were all addressed. The criticism of Fed Chair Yellen is that she has been unclear about the future potential activity with regard to the state of the economy and rate increases.

The counterpoint being that the soft May jobs report had to have impacted the potential course for an interest rate change and some will argue that any major changes should be held off until there are at least one jobs report that shows a rebound in the labor force numbers.

Furthermore, there are others that would maintain that any rate change should be tabled until there are two solid months of jobs data to reinforce that uncertainty. Some economists have speculated that due to the weak May jobs report, the inflation trend data, and other factors including the recent terror incidents in the world that the Fed will not raise in rates in June; a decision that will be made on Wednesday.

That covers the short term immediate future, but looking further down the line, I remain undeterred from my initial doubts about the economy. The overall underemployment rate of people working multiple part time jobs at lower wages than they earned previously coupled with the growing data supporting the trend that so many Americans have simply given up looking for work is daunting.

All of these factors collide in a situation similar to the last tipping point where we had a major recession. In an election year that would be a major problem for our nation and shift the economy to an obvious priority status with the summer conventions for each major party just weeks away from taking place.

Conversely, the Fed will be under scrutiny to raise rates in the event that our economy does hit shallow water because they will have no other way to go if they need to drop the rate lower in future months. It is a very sticky situation. The decision will have far reaching implications for the Dow Jones and the other major indices in the near term as well.

The sheer volatility of the market recently has got to give the casual trader some cause for definite concern. The news last week of the lowest retail gasoline prices in the peak summer driving season in recent history also is an indictment on the glut of supply of crude oil globally and part of the readjustment in the supply/demand curve structure moving forward.

The overall picture for the global economy is certainly another aspect to consider and the general picture between the effects of the Zika virus in Brazil, the many issues in India, the contraction of overall productivity in China, and the volatility of the Russian economy marked by the fluctuations in energy markets all combines to make for a bleak outlook.

The impending vote of the United Kingdom with regard to their status within the European Union and whether they will exit that government body will have a dramatic impact on the economic outlook for that continent and for the entire world.

All of these contributing pieces lend credence to my initial assertion that I believe the U.S. is headed for another recession. In the interim it bears watching to see how the Fed will react and how the markets will, in turn, respond. The best way to weather a storm is to be prepared, and unfortunately, I think a storm is coming.

by Frank Maduri

Money Grab: Cobb County & Atlanta Braves New Stadium Deal

The report that NBC News ran on Monday about Cobb County not having enough money to fund the expansion of their public parks because of the huge sum the county has committed to the new baseball stadium for the Atlanta Braves ; served to conjure up some distinct emotions that I have had regarding this issue.

Cobb County, under the terms of the stadium agreement, will pay $400 million toward the cost of constructing the Braves new stadium, which will be called Sun Trust Park (because Sun Trust Bank purchased naming rights to the facility) which will be located on a parcel of land near the confluence of several freeways in that area about 15 miles outside of downtown Atlanta.

The Braves will be moving out of downtown Atlanta for the first time in the history of the team which now spans 50 years. The team will leave their current ballpark, Turner Field, which is just a 20 year old facility that was created by retrofitting the Atlanta Olympic Stadium used in the 1996 Summer Games held there. That setup was never ideal from the nexus of the plan and the team has cited the increased costs that they have had to shoulder in maintenance on a facility that was not built specifically for baseball as one of the primary reasons for the move.

I must preface all of this by stating that I grew up a Braves fan watching all of their games back when I was a boy on TBS when they were the main TV broadcast outlet for the team. I remember when Tom Glavine, John Smoltz, and Chipper Jones (among many others) came up through their early years and through the prime years of their outstanding respective careers with the Braves. Hank Aaron was, and remains to this day, as my favorite player of all time.

It has not always been easy being a fan of that team and living in New Jersey, but so many other people I know in the Northeast became Braves fans for similar reasons at that time period in the mid to late 1980s because the Phillies were a last place team at that time, the Mets moved all their games to the old Sports Channel platform (which was an added cable charge that my parents would not pay for) and I do not know why but I just could not attach myself to the Yankees. I preferred the National League and so I gravitated to the Braves because I could see all of their games on TBS and I could not be a fan of a team I could not watch on a regular basis.

Whenever the Braves would come to New York or Philadelphia I would try to go to at least one game per season, and in 2006 I was able to attend a game at Turner Field during the 40th anniversary season of the team being in Atlanta. That game and the tour I took of the stadium beforehand remains one of the best sports related memories I have in my life.

However, in recent years I have become very busy writing and covering different sports which overlap with the baseball season. I have been involved in writing extensively about the NBA, the New Jersey Devils and the NHL Stanley Cup Playoffs, and the New York Red Bulls soccer team which has the same regular season as baseball from March to October. It became very difficult to follow the Braves every day and keep up with all of my other responsibilities.

Then I received the news of the stadium deal in Cobb County and I saw it from the day it was announced as being a money grab by everyone involved. The team did not truly “need” a new facility with Turner Field being just 20 years old, and the location chosen in Cobb County is far from the downtown area where the team has all of their history.

Moreover, the site selected in Cobb County is going to create a traffic nightmare and has very limited access to public transportation. The move out of the downtown area is going to create very difficult conditions for fans of limited economic means to be able to attend a game. The team seemingly neglected to consider all of that in a move to the suburbs which has been extremely polarizing for residents in the Atlanta metro area.

The counterpoint to this situation is that the Braves have always felt that they have played “second fiddle” to Atlanta’s NFL team, the Falcons, who recently leveraged the city into a sweetheart deal on a brand new stadium downtown. The Falcons are moving out of the Georgia Dome which was also built for the 1996 Olympic Games into a state of the art retractable roof facility that was recently awarded by the NFL to host a future Super Bowl.

The Braves took the city government’s reluctance to help finance a new stadium or even help improve Turner Field and the accessibility to that facility as a “slap in the face” and made the deal with Cobb County very quietly behind closed doors. The almost secretive nature of the decision to move the team to Cobb County set the stage for some residents in the area to become very upset about the decision.

Furthermore, at the center of that situation was the fact that the area residents felt that they had no input in the decision which has a huge impact on the quality of life in Cobb County. The first issue is the increased traffic on game days and evenings. The ancillary issues came to light much later such as public funding shortages in areas such as education and the parks and recreation maintenance. These are all issues that continue to plague the public perception of the new stadium deal. It is because the move was made due to the influence of greed driven activities.

The Braves took this opportunity in a greed motivating way as well to get a brand new stadium in where they have labeled “a more desirable location for our fan base” which I will allow you to draw your own conclusions from that statement. It was not a necessary move for the team to leave Turner Field and downtown Atlanta at this point, while I do recognize that location had issues too with limited access to public transportation and a bad traffic flow from the parking areas to the freeways. However, the team management will now take this opportunity to increase the prices for tickets, parking, and concessions at the new facility.

The officials in public office in Cobb County have announced that they will have to raise taxes on residents in order to cover the costs of the maintenance of public parks. This is the central issue of what I know upsets me the most about this situation. I have covered the business side of sports for a while now, and I have investigated or detailed the reporting of new stadiums/arenas or proposed new stadiums/arenas for professional teams across all of the major leagues.

Here is the issue I have: in all of that reporting I do not recall any other project that was done at the detriment to other public services or public works to a community such as this one particular deal with the Braves and Cobb County. It is an absolute disaster because it is a short sighted agreement which focuses on greed for both of the key parties involved.

The new stadium is nearing completion at this point but the disappointment I have for the Braves organization after years of being a loyal fan still remains. The manner in which they went about making this deal and the cascading effects from the greed driven nature of this agreement with regards to the residents of Cobb County will be the residue in which the situation will be ultimately judged. In the end, time will tell whether this bold new project will serve to help the organization take a turn toward being a championship caliber team again, or whether it will serve to completely alienate and galvanize their fan base.