While many industries in Europe are consolidating and restructuring, one of the largest and most fragmented sectors—the manufacture of food and drink—has been relatively untouched. Indeed, the top ten food-and-drink producers in Europe’s leading countries still account for only about 14 percent of the market—a low level compared with industries such as grocery retailing (42 percent) and pharmaceuticals (35 percent). Meanwhile, the proportion of the industry’s market capitalization involved in merger-and-acquisition activity remains one of the lowest (Exhibit 1).

McKinsey research, however, suggests that consolidation could create more than $100 billion in net present value for industry participants, making an imminent restructuring almost inevitable. To quantify the benefits of consolidation and category leadership, we examined the financial performance of the main companies in each of four categories: beer, confectionery, spirits, and yogurt. Our analysis covered the world’s largest food-and-drink markets for which adequate data existed: France, Germany, Italy, Spain, the United Kingdom, and the United States. Almost all categories are more fragmented at the European level than they are in the United States, whose markets are also less fragmented than those of typical European countries.

The scatter graphs of Exhibit 2 display the result of our investigations. In any category, a dot represents a particular company in a particular country. The horizontal axis shows each company’s market share in a country compared with its market leader; thus, the national category leader is always plotted, horizontally, at 100 percent. The vertical axis shows a company’s return on sales, indexed to the average for the category in each country, because structural factors can make margins vary from one to another.

These graphs suggest that the category leader in any national market typically earns margins up to twice those of competitors half its size. Even a relatively modest increase in concentration could therefore easily add a percentage point to the category’s overall profitability. Apply this to the European food-and-drink industry’s more than $1 trillion turnover, and the net present value at stake from consolidation could be higher than $100 billion, generated by economies of scale in almost every function, from sourcing and manufacturing to customer management, marketing, and administration.

To be sure, national category leadership isn’t the only winning strategy in the food-and-drink business. Most of the outlying points on the graphs (companies with low category shares but high profitability) represent successful niche strategies. Strong brands or positions in high-margin subcategories (such as Bacardi’s in spirits) can be very profitable. In some categories, geographic niches, such as Birra Forst’s in the beer market of northern Italy, remain attractive as well.

Aiming for pan-European leadership may also prove a successful strategy, but as yet the data are hard to interpret. Although there are few clearly established pan-European category leaders, those few—like Nestlé in instant coffee, Kellogg in cereals, and Coca-Cola in carbonated soft drinks—tend to earn high returns. But for many companies, the advantages of leadership in one or two countries are canceled out by poor performance in others. Nonetheless, experience suggests that multinational leadership can create value in many or even most categories.