The food industry apparently has a huge appetite for mergers. In the past few weeks Philip Morris has announced its intention to buy Nabisco Holdings for $14.91 billion, and Unilever has said it plans to pay an estimated $20.3 billion to acquire Bestfoods, the maker of Knorr soups and Skippy peanut butter. In a relatively smaller but still significant transaction, ConAgra has agreed to take over International Home Foods—the maker of Chef Boyardee pasta products and Bumble Bee seafood products—for $1.6 billion plus the assumption of debt. What is behind this sudden hunger for acquisitions? Huge egos, the Internet, cost savings through economies of scale, and a drive to regain dominance over retail distribution channels are feeding the frenzy, according to industry watchers—and the end isn’t here yet. More mergers—possibly involving smaller food companies—could be on their way.

But the fast-paced M&A activity also has some industry watchers asking whether the strategy is worth the price. If the mergers don’t work out as the executives driving them hope, a lot of companies could end up with severe cases of indigestion.

"Many companies cite savings as the driving force behind mergers," according to David J. Reibstein, who teaches marketing at Wharton. "Food industry giants contend that they’re trying to reach economies of scale in areas like distribution and advertising, and they’re also looking for efficiencies by reducing headcount in administration, sales and other areas. But the mergers we’re seeing may be at least partly attributed to the ego of top management, which sometimes views expansion as a kind of trophy."

Reibstein adds that while claims of cost reduction through the elimination of duplicate services may be justified, the savings may not be as great as the companies hope. "For example, some of the proposed mergers may not even clear anti-trust reviews," he points out. "Those that do may find that at some point, their ability to realize economies of scale will run up against limits and they may turn back to specialization in both their divisional and corporate structure."

Newly merged companies also hope to employ their clout against another threat—private label goods. Reibstein outlines the issues involved, noting that, "In a private label approach, a retailer sells products under its own name or a name it owns. A private label brand, which may be manufactured by a third party, is often available only at the retailer and is almost always priced below national brands, representing a further challenge to branded manufacturers."

Market forces are also playing a role in pushing food manufacturers to pursue M&A strategies. "We’ve observed some consolidation in the retail channel," notes Reibstein. "Companies like Wal-Mart, which is expanding and gaining strength, and Royal Ahold, a global chain, are stealing some power from manufacturers, who used to be able to dictate contract terms. There’s a fierce fight for shelf space, and manufacturers are trying to regain some power. I don’t think we’ve seen the end of the merger activity in the food industry."

George Day, a Wharton marketing professor and director of the Huntsman Center for Global Competition and Innovation, agrees. He believes that the current round of mergers is the end result of a lengthy power struggle that saw food manufacturers lose ground to retail giants like Wal-Mart and Royal Ahold. He compares the sudden merger activity to a seismic shift. "Pressures for change build up over a period of time, like pressure on the Earth’s teutonic plates, and then there’s a sudden shift," he says. Why now, though? "First, there’s the growing power of powerful, well-funded retailers. You need clout to stand up against powerful, well-funded retailers."

Additionally, he says, since the food industry is mature, without a great deal of room for sales growth, some companies are trying to pump up their revenues through acquisitions.

"The most effective mergers occur when each party brings something to the table that other party doesn’t have, like access to market or technology," he notes. "In the Philip Morris-Nabisco combination, for instance, both parties possess well-known brand names, although any gains the two firms might realize may be overshadowed by concern over potential tobacco liabilities." So in some cases, at least, the odds may be stacked against food manufacturers that choose to merge or to be acquired.

Some companies are trying other strategies, including using the Internet to create their own virtual marketplace. Among them: Transora, a consortium that officially launched June 14 with some $250 million in seed capital from 49 of the world’s largest food, beverage, and consumer product manufacturers, and the Grocery Manufacturers of America. The manufacturers’ organization, which includes such companies as Coca-Cola, Unilever, and Procter & Gamble, is dedicated to "…creating a new, open, electronic marketplace that would be accessible to all supply chain players and could connect to other exchanges in the future." While the exchange is likely to begin with the procurement of materials, supplies and services, the effort could eventually include other processes that will allow the supply chain to improve the value it delivers to consumers. Some analysts have speculated that with some tweaks, the exchange might eventually sell directly to consumers, negating the clout of retailers by bypassing them entirely.

Nestlé, for example, already offers its branded espresso, Nespresso, to consumers over the Internet. The company also recently partnered with the Danone Group, another food manufacturer, to launch, an online business-to-business marketplace. In a foreshadowing of what may yet develop, Franck Riboud, Chief Executive Officer of France’s Groupe Danone Group—who had teamed up with Cadbury Schweppes to try and acquire Nabisco before Philip Morris snapped it up—notes that while the new venture is a significant step forward in the process of enhancing the companies’ purchasing efficiency, "it is also part of our overall business-to-business and business-to-consumer Internet strategy."

Groupe Danone sees North America as a significant market and has been making its own acquisitions. In January, the company announced its $1.1 billion purchase of McKesson Water Products Co. of Los Angeles, which elevated it to the No. 2 position in bottled water in the U.S., behind Nestle.

Food manufacturers are thus experimenting with a variety of options as they try to regain leverage in the shelf display and distribution process. The ball has been passed once already, to the side of the big-box stores. Manufacturers are now trying to force it back to their side of the food court.