Executives at General Mills Inc. (GIS) knew the company was wasting money on empty truck miles between production and warehouse facilities in the Midwest and the East Coast. So last year, the Minneapolis food manufacturer teamed up with 16 competitors to launch an e-commerce network. Members go online to find carriers with extra cargo space and then piggyback their loads.

This year, with industry growth flat at 2%, Internet exchanges have become one of many strategies food businesses are using to cut costs. After a year of consolidation involving multi-billion dollar takeovers--Kellogg's (K) purchase of Keebler (KBL), Unilever's (U) of Bestfoods (BFO), and, most recently, Pepsi's (PEP) of Quaker Oats (OAT)--companies are now looking at strategic divestitures. Underperforming units are being jettisoned, while faster-growing brands are being positioned to bolster the bottom line. A sign of things to come: Sara Lee Corp.'s (SLE) spin-off of Coach luggage and food-service giant PYA/Monarch Inc.

About the only big merger candidates left are H.J. Heinz Co. (HNZ) and Campbell Soup Co. (CPB)--and analysts say they won't be surprised to see them in play. On the supermarket side, consolidation has also slowed. That's because the top five chains in the U.S., led by Cincinnati-based Kroger Co. (KR) and Boise-based Albertson's Inc. (ABS), have grabbed 40% of overall grocery sales. With so few big chains left to buy, there were only eight major deals last year, down from 19 in 1999. Kroger and Albertson's are expected to round out their holdings in coming months, but smaller regional acquisitions are the likely targets.

VULNERABILITY. But even the big chains are facing serious competition now that mass merchants have jumped into the grocery fray. "If Supervalu (SVU) doesn't have the best prices, people will just go to a Wal-Mart Supercenter," says John P. Hughes, an analyst at Dain Rauscher Inc. in Minneapolis. Cost-conscious shoppers--and there are going to be more than ever as the economy slows--want bargains. "There's going to be a lot of pressure on retailers, and that comes from consumers," notes Hughes.

Indeed, the biggest wild card in 2001 is Wal-Mart Stores Inc. (WMT) Last year, the retail giant continued its full court press into the grocery business. In a little over a decade, the Bentonville (Ark.)-based company has zoomed to the No. 1 position, unseating Kroger, with almost 10% of the market. Not only are there plans to open as many as 180 Supercenters--bringing the total to more than 1,000--but the company is also planning to open another 20 Neighborhood Market stores, which sell traditional grocery items such as meat and produce. "They're relentless," says Tim Carroll, director of corporate finance at Arthur Andersen.

Meanwhile, both food producers and grocers are fending off competition from the restaurant industry. Restaurant sales in 2001 are forecast to rise 2.7%, after inflation, to $399 billion--just slightly lower growth than last year. And such fast food favorites as coffee bars, bagel shops, and doughnut and cookie shops are projected to grow at twice that rate. "Consumers want to put more convenience into their lives," says Prudential Securities Inc. food analyst John M. McMillin.

The only way to beat the trend is to cater to it. So from pop-tops on cans of Campbell's soup to pre-cut mixed salad, "fast and easy" has become the food marketers' value-added mantra. Another popular growth area: ready-to-serve entrees such as roasted chicken.

Grocers are also increasingly looking to private label products, which now account for more than $40 billion in sales--up 25% in five years. These products once were simply cheap generics. But with spiffed up packaging and improved quality, they now help cement customer loyalty. If you like Stop'n'Shop's cookies, there is only one place to find them. In short, profits may be thinning, and food getting "faster," but the shopping carts are still full.

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