What The Mars-Kellanova Deal Will Really Cost Consumers

Two of the world’s largest snack food companies are going to make Big Food even bigger.

Privately-held Mars, Inc. has entered into a definitive agreement to acquire Kellogg’s snack spinoff Kellanova for almost $36 billion, or over a 16X EBIDTA multiple. But while shareholders are surely salivating at such a profitable deal, consumers will be paying a much higher price for a long time to come.

The transaction includes all of Kellanova’s brands, assets and operations, including family favorites such as Pringles, Cheez-It, Pop-Tarts, Rice Krispies Treats, NutriGrain and RxBar. Mars owns many brands in complementary categories, including Snickers, M&M’s, Twix, Dove and Extra, along with some crossover in snack and breakfast bars, such as KIND and Nature’s Bakery. Kellanova employs over 23,000 people and had over $13 billion in sales in 2023. Mars employs over 150,000 people and had 2023 sales of over $50 billion. The combination would make Mars-Kellanova among the top 5 packaged food and beverage conglomerates in the world, significantly larger than rivals Kraft Heinz, Mondelez, Campbell’s and General Mills and trailing only Unilever, Nestle and Pepsico.

The recent consumer trends in Mars’ and Kellanova’s categories have not been pretty.

Overall snack food category volumes are down 1%, while sales only continue to climb due to price increases. According to NIQ data, the category unit volumes have declined 6-8% since 2019. Candy, cookies, crackers and salty snacks are each up over 40% in retail price, well over the food industry price inflation of 30% since 2019. The increase in consumer prices has correlated strongly with record profits for many manufacturers and retailers. CPG executives readily admit their role in price inflation, as passing price hikes to consumers helped pad bottom lines above and beyond their supply chains’ cost increases. “Consumers are getting more used to these prices,” Steve Cahillane, the chief executive of Kellanova told analysts and investors on a recent earnings call, echoing similar statements going back to 2022 regarding consumer resilience in the face of price hikes. Investors have likewise incentivized and rewarded such pricing power, feeding a “price-profit” spiral that pushed inflation higher.

Snacking categories are also highly concentrated.

The top 3 companies, including General Mills, Mars and Kellanova, own over 60% of snack bar sales, making the acquisition a potential antitrust concern. The top 4 companies, including Kellanova, own around 60% of cookie and cracker sales. Likewise, the top 3 companies, including Mars, own over 80% of candy sales.

Category concentration means that when companies send down price increases to customers, there are few major competitors other than store brand private labels that can undersell them. According to Alex Turnbull, a commodities analyst, “When you go from 15 to 10 companies, not much changes. When you go from 10 to 6, a lot changes. But when you go from 6 to 4 – it’s a fix.” The Mars-Kellanova merger ensures one less dominant CPG player among the fray, making such de-facto price coordination even easier.

The deal will also make it simpler for brands to aggregate retailers’ fees across portfolios, including expensive slotting fees and marketing, digital placement, ad buys and in-store media expenditures. In the grocery industry, scale begets scale. Big grocers can more efficiently work with fewer, bigger brands that they can pump for more revenue and lean on for more data. This includes so-called category captain arrangements, where leading brands provide consumer insights in exchange for prime shelf placement and promotional priorities. It is no wonder that big CPG brands dominate so much of the shelf space at mass merchants like Walmart, Target, Kroger and Albertsons, and that emerging start-up brands have sky-high attrition rates, especially in snack categories. Category concentration on shelf is typically self-reinforcing.

This also means that true innovation, from diverse brand owners marketing new food trends, will be that much harder to establish on shelf.

Investors will remain hesitant to throw money at new brands struggling to gain a foothold among retail and CPG monopolies. Most grocers put limited resources into new product innovation, since emerging brands can’t generate the same level of sales and profitability per square inch of shelf space as incumbents and private labels. There are independent and cooperative grocers that buck these trends, like The Wedge, Fairway Markets, Earthfare or Mom’s Organic Market. But the handful of chains that control over 70% of all packaged food sales, (i.e. Walmart, Kroger, Albertsons, Target, Ahold-Delhaize, Publix, etc.) will likely be happy to just sell container loads of Pringles-flecked M&M’s and Cheez-It-Snickers nougat nuggets as “innovation”.

White collar and blue collar layoffs are also an inevitable result of such mergers.

With unit volumes down, the snack food giant will be looking at production, operational and administrative efficiencies. Mars-Kellanova will own brands with significant category crossover in snacking and breakfast bars, including NutriGrain, Rice Krispies Treats, Nature’s Bakery and possibly even Pop-Tarts and Kind. Unless they can find a way to boost unit volumes, or antitrust regulators force divestments, they will have to cut costs to hit profit targets, combining staff and manufacturing facilities. Recent layoffs due to Kellogg’s RxBar acquisition and Campbell’s closure of Pacific Foods facilities illustrate this.

The acquisition may also help Mars de-risk its supply chains against existential threats such as climate change, higher cocoa prices and the increasing use of GLP-1 agonists such as Ozempic.

The highest costs of the merger, though, will be borne by consumers.

Neither Mars nor Kellanova can claim that a majority of their products are healthy or nutrient dense. A recent study documented that over 70% of 11,000 products made by Kellanova, Unilever, Nestle, Kraft Heinz and General Mills were unhealthy. While Kellanova may have RxBar and Mars may have KIND, the portfolios of each snacking behemoth are primarily ultraprocessed foods (UPFs). UPFs have attracted significant concern and criticism, with study after study presenting damning evidence. A dozen countries such as France, Mexico and Columbia have passed labeling and taxation regulations to curb their distribution and consumption as more and more consumers around the globe suffer from epidemic levels of obesity, heart disease, high blood pressure, diabetes, cancer, and other non-communicable, diet-related illnesses. Such externalized costs do not factor either into the shelf prices of UPFs or the share price of this food conglomerate merger.

The UN FAO recently calculated that these externalized costs add up to over $10 trillion a year, backing up a previous study from The Rockefeller Foundation. These hidden costs are the economic dark matter of the food system, 70% of which are “driven by unhealthy diets, high in ultra-processed foods, fats and sugars”. In the USA, these health-related costs add up to $1.3 trillion a year, nearly 30% higher than the combined sales of the entire grocery industry.

In other words, including health-related externalities means that the grocery industry is worth a negative $300 billion dollars.

If social and environmental costs are included, such as wage theft, forced labor, soil loss, pesticide runoff and climate impacts, the grocery industry deficit grows to negative $550 billion.

Processed food manufacturers are not going to change course of their own accords. And investors could instead be underwriting cash-starved and innovative start up brands, healthy food manufacturing infrastructure, publicly owned supply chains and fresh food concepts that meet consumers’ needs for convenience, ethical sourcing, satiety and nutrient density. But a $36 billion packaged food deal presents a much quicker upside, externalities be damned.

The Kellanova-Mars deal underscores that 75% of the American diet still remains calorie-dense, craveable UPFs. It will take an enormous effort to change that. As CPG executives encourage stressed, exhausted and cash-strapped consumers to eat junk food for dinner, Mars’ $83.50 share price for Kellanova is a shareholder’s gold mine, like Robin Hood in reverse, with profits swiped right out of consumers’ pockets. A windfall that will be subsidized by price inflation, Ozempic prescriptions, high blood pressure and higher insurance premiums for decades to come.