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Combined Forces: Five Consolidating Industries

consolidating thumbnailIndustry consolidation, which is characterized by acquisitions of smaller- or similar-sized companies by a larger company, has become a crucial strategy through which major companies have expanded annual revenue. Consolidation activity usually signifies that an industry has reached maturity, as established operators acquire competitors to strengthen their market position when organic sources of growth are no longer viable. The rationale for consolidation includes greater negotiating power with suppliers and customers, access to new technology and practices and the expansion of product lines. IBISWorld has identified five industries that are poised for continued consolidation in 2016.

Pesticide Manufacturing in the US

The Pesticide Manufacturing industry produces household and agricultural pest control chemicals to manage pests and diseases. Industry products include pesticides and agricultural chemical products such as herbicides, insecticides, fungicides and insect repellents. IBISWorld expects the industry to grow at an annualized rate of 3.4% over the next five years, generating $14.8 billion in 2016. The industry has a high market share concentration, with the top five companies, Syngenta AG, The Dow Chemical Company, Monsanto Company, Bayer AG and E.I. du Pont de Nemours and Company (Du Pont), accounting for an estimated 82.6% market share in 2016.

Consolidation among the industry’s top five companies has significantly altered the industry landscape. The Dow Chemical Company announced its merger with Du Pont in 2015, with the acquisition likely to complete in the third quarter of 2016.  Once combined, the two intend to split into three separate public companies with one focusing solely on the industry-relevant pesticide and seeds business. Similarly, in February 2016, China National Chemical Corp. (ChemChina) announced its offer to purchase Syngenta AG; this deal is expected to help Syngenta increase its presence in China and other developing markets. Furthermore, Bayer AG announced its intention to acquire Monsanto in May 2016. Should all of these deals go through, the industry will be composed of three major companies potentially controlling a market share greater than 80.0% next year. Consolidation among major players has significant synergies in terms of cost, research and development (R&D) and supply chain logistics.

The industry is sensitive to changes in the price of crops and crude oil and farm income, all of which have declined over the past three years. This is because the industry’s largest companies are also leading players in the agricultural seeds business, in which they manufacture genetically modified (GM) seeds that have delinked in demand over the past five years. Consolidation in this industry will align the seeds and the pesticides businesses for the same operators, leading to greater standardization of the supply chains of each respective business. Critics of this consolidation have pointed out an emergence of an oligopolistic environment in the multibillion dollar agricultural seeds and pesticides industries, which could potentially lead to higher prices for seeds and pesticides. Moreover, it may deteriorate the already troubled relationship between farmers and these companies.

Internet Service Providers in the US

The Internet Service Providers industry uses wired infrastructure to provide household and commercial clients with internet access and other services such as web hosting, web page design and hardware consulting. Industry revenue is expected to grow at an annualized rate of 4.8% to $96.5 billion  over the five years to 2016, but the bulk of this industry’s growth is the result of massive expansion in the size and the services offered by the industry’s largest internet service providers (ISPs). The five largest ISPs is expected to generate 70.0% of industry revenue in 2016 and continue to acquire smaller providers at a rapid rate.

Beyond providing simple internet access to their customers, industry operators have expanded their range of services to create a comprehensive services package catering to the needs of individuals and households. Residential internet, fiber-optic internet access, broadband cable, landline telephone service, home security service and over-the-top television content have all become staples of major ISPs’ range of services. Merger and acquisition activity has largely facilitated the size and scope of the industry’s product and service offerings. AT&T, the industry’s largest company, purchased DirecTV for $48.5 billion in 2014 to enter the television space. Comcast Corporation’s intense acquisition activity culminated in 2009 with the acquisition of NBCUniversal and its NBC, Universal Pictures, NBC Sports and other entertainment subsidiaries. Verizon completed a $4.4-billion cash acquisition of AOL in 2015 to pursue additional revenue from the mobile video and advertising marketplace in a strategic shift that will be bolstered even further upon completion of Verizon’s $4.8-billion acquisition of Yahoo and its portal, search, directory and media assets. The massive size of the industry’s deals represents the Internet Service Providers industry’s continued efforts to generate additional revenue through purchases rather than organic subscriber growth. The range of industries in which these few dominant companies operate has ballooned to include the Satellite TV Providers industry, the Cable Providers industry, the Television Broadcasting industry, the Wired Telecommunications Carriers industry, the Search Engines industry, the VoIP industry and other secondary industries, thereby transforming its strongest performers from simple internet access providers to mass media and communications conglomerates.

consolidation chart

Lighting Fixtures Manufacturing in the US

The Lighting Fixtures Manufacturing industry produces electric lighting fixtures, nonelectric lighting equipment, lighting fixture components and lampshades made of metal, paper or textile for businesses and consumers. Industry revenue is anticipated to have increased at an annualized rate of 1.7% over the five years to 2016 to total $11.6 billion. Increased use of energy-efficient products has largely fueled industry growth. The Energy Independence and Security Act, which was signed into law in 2007, seeks to increase US energy efficiency by phasing out the sale of incandescent light bulbs. The final phase of the law (enacted in 2014) ended the production of 40- and 60-watt light bulbs.

Although the Lighting Fixtures Manufacturing industry does not produce light bulbs, the switch to energy-efficient bulbs has spurred demand for new fixtures. The industry experienced massive consolidation despite its recent revenue growth, as larger companies such as General Electric Company (GE), Cree Inc. and Acuity Brands Lighting Inc. have consolidated to expand their product portfolios. Consequently, the number of industry operators has remained fairly steady, reaching 961 operators in 2016, up from 960 in 2011.

To meet demand for more energy-efficient products, GE, Cree Inc. and Acuity Brands have all purchased companies that focus on or offer a wide selection of light-emitting diode (LED) fixtures. Improvements in LED technology have allowed it to achieve some of the highest efficiency for white light sources, according to the US Department of Energy. Consumers and businesses view LED products as highly energy efficient; LEDs have filled much of the demand for new lighting fixtures as incandescent bulbs continue to be phased out of use. By acquiring LED manufactures, industry operators benefit by taking full advantage of the phase out, increasing their product portfolios to provide a variety of options to customers and also positioning themselves as market leaders for energy-efficient products.

Breweries in the US

The Breweries industry primarily produces alcoholic beverages made from malted barley and hops such as beer, malt liquor and nonalcoholic beer. The increasing popularity of small-scale microbreweries and brewpubs has yielded a new competitive threat from the Craft Beer Production industry. Longstanding major US brewers and multinational producers in the Global Beer Manufacturing industry have also pursued aggressive merger and acquisition activity to expand growth in revenue and profit margins.

The United States has represented an area of waning interest for international brewing companies over the past five years, particularly as craft brewers continue to capture a wider share of the region’s sluggish alcoholic beverage consumption. With per capita expenditure on alcohol anticipated to grow only 0.3% in 2016 and the Craft Beer Production industry expected to generate an additional 6.2% in revenue the same year, major international brewers Anheuser-Busch InBev and SABMiller have chosen to consolidate rather than compete for the region’s eroding profit margins. In October 2015, AB InBev entered a bid to acquire its rival SABMiller in a deal estimated to reach $107.0 billion. SABMiller operates in the United States through its MillerCoors joint venture with the Molson Coors Brewing Company. Together, AB InBev and SABMiller generate 53.3% of the Breweries industry’s total revenue. Although the merger is not yet complete, their consolidation would represent the culmination of over a decade of major international alcoholic beverage purchases, which have also been the primary method of revenue growth for the largest producers in the Global Spirits Manufacturing industry and the Global Wine Manufacturing industry. Projected stalls in alcoholic beverage consumption throughout North America will likely encourage additional mergers from international producers, as regions such as Africa, South America and Asia present greater opportunities for organic sales growth over the next decade.

Sporting Goods Stores in the US

Sporting goods stores retail exercise, fitness and camping equipment, apparel, footwear, bicycles and other goods and accessories. Economic recovery and growing leisure time have benefited the Sporting Goods Stores industry, which, over the five years to 2016, has experienced annualized revenue growth of 2.1% to $46.5 billion. Intensifying external competition has constricted revenue growth and forced out many smaller operators, despite an annualized 1.0% increase in the number of operators over the period.

Larger retailers have struggled in recent years, in particular, Sports Authority Inc., which announced bankruptcy in March 2016 and subsequently closed four months later in July of this year. Having previously engaged in major acquisition activity with the purchase of Oshman’s Sporting Goods in 2003, among others, Sports Authority garnered an expected 5.2% market share in 2016. Major player Dick’s Sporting Goods, which leads the Sporting Goods Stores industry with an estimated 16.6% market share, acquired Sports Authority’s customer database, intellectual property and remaining brick-and-mortar locations following the company’s bankruptcy filings. As specialized operators continue to enter the industry, the number of operators is anticipated to grow an annualized 0.4% through 2021. However, the closure of Sports Authority may represent the beginning of increased merger and acquisition activity among general sporting goods stores, whose failure to cater to specific customer needs will render them largely obsolete in comparison with massive companies such as Dick’s Sporting Goods. The looming threat of online sporting goods retail will pose a growing threat to physical storefront locations over the next five years.

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