Kellogg's to Buy Pringles: A Quick Glance at the Snack Industry Market Structure

One of the top cookie and cracker makers in the country is planning an acquisition of another favorite American snack food item: chips. Earlier this morning food giant Kellogg and Procter & Gamble (P&G) announced the newest expansion to Kellogg’s snack division. P&G will sell its Pringles product line to cereal-maker Kellogg for $2.7 billion. Kellogg’s was able to snag the deal after the original deal with Diamond Foods feel apart because of accounting problems and changes in executive leadership.

The deal between P&G and Diamond Foods was announced in April of 2011 to be a $1.5 billion deal. With speculation on the deal rising and the replacement of Diamond Foods CEO and CFO following an investigation of improper payment accounting for walnut growers, Diamond stocks their ability to finance the deal slid through the cracks. However, it seems the worst is not over for Diamond Foods. If the deal had occurred it would have not only made Diamond Food’s the largest snack maker in the nation following PepsiCo Inc. but it would have also been the company’s largest acquisition. Instead, Diamond Foods might have to pay a $60 million breakup fee to Procter & Gamble, up to $6 million in related costs, as well as restating two years of financial results in relation to the results of the investigation.

P & G publically disinvested in the deal last week as it stated the Pringles was "attract[ing] considerable interest from other outside parties." Because snacks account for about 30% of Kellogg's sales, it makes sense for Kellogg’s to take advantage of this failed deal. Kellogg’s purchase of Pringles will complement its growing snacks division, which includes Keebler, Cheez-it, and Special K crackers. With PepsiCo under criticism for moving away from its soda line toward healthier snacks like Quaker granola bars and baked Frito-Lays potato chips and Kraft increases its snack markets, it is a great time for Kellogg’s to take advantage of the market growth. "Pringles has an extensive global footprint that catapults Kellogg to the number two position in the worldwide savory snacks category, helping us achieve our objective of becoming a truly global cereal and snacks company," Kellogg President and CEO John Bryant said in a statement.

There are millions of buyers and sellers in today’s marketplace. In economics there are four types of market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. The three market structures most often seen in the U.S. are monopolistic competition, oligopoly, and monopoly.

If one product is too expensive, a buyer can choose to get another product. The cereal industry is a great example of this premise in action. The Kellogg’s deal in reference to the emerging growth of snack industry is best seen as monopolistic competition. There are many firms, products are heterogeneous, barriers to entry/exit are low, and the information in the industry are good. While PepsiCo, Kellogg’s, and Kraft are recognized brands they do not exclusively hold market shares. If these three companies continue to acquire others the snack industry will quickly move to an oligopoly.