The Kraft-Heinz merger, creating the fifth-largest food and beverage company in the world, is putting Kraft in uncharted territory, at the discretion of Heinz and its zero-based budgeting under 3G Capital.
While the deal was announced in March, Kraft shareholders approved the vote Wednesday, to be completed Thursday after market close, under the new stock symbol $KHC.
Food Dive spoke with Kelly O’Keefe, a branding expert and professor at Virginia Commonwealth University, on the implications of the merger.
"It’s hard to be optimistic if both of these companies continue on their current trajectory, which is not a good one," he said. He later clarified, "I have high hopes for this combined company if it can get its act together, but it’s only gonna be able to generate value and growth if it starts to change the recipe."
Timeline of Kraft and Heinz MergerMarch 25
Announcement of the merger sends the industry into a flurry of speculation about job cuts, what this means for the companies’ “junk food” brands, and the potential for other large mergers and acquisitions. It would create the fifth-largest food and beverage company in the world.Read more April 6
Heinz CEO says “Change is never easy” in a video to Kraft employees:Read more April 10
Merger proxy details pour out, including the speed of which the deal came togetherRead more April 28
Kraft reports profit slump, EPS riseRead more May 18
Kraft’s CEO John Cahill could receive a nearly $20 million parachuteRead more June 2
Date set for shareholder voteRead more June 10
Canadian antitrust regulators approve dealRead more June 18
Berkshire Hathaway becomes Heinz majority stakeholderRead more July 1
Kraft shareholders approve mergerRead more
While clearly signature brands like Kraft's macaroni and cheese aren't going anywhere, that may not be true for all brands.
"Kraft is going to be selling mac and cheese for a long time, don’t get me wrong, but they’re facing stiff competition from healthier alternatives," he said. Among them? Locally sourced alternatives, smaller brands like Annie’s (acquired by General Mills), and consumers throwing macaroni in a pan themselves. Kraft recently announced it would be tweaking its macaroni and cheese recipe.
He also said that Warren Buffett doesn't need the companies to grow in order to see profits, perhaps explaining why these "junk food" brands are a part of his portfolio.
"If you have declining sales, but you can take costs out of the company faster than the sales decline, you can still grow profits ... I don’t think that’s the future that these companies should be building toward," he added.
As for shedding brands, he said companies like Mondelez and Unilever could swing in and pick up one of them, though changing parents won't necessarily change the fate of declining brands. New ad campaigns won’t save brands — it’s about changes in recipes that will appeal to today’s consumer.
- Heinz: Starkist, Weight Watchers, T.G.I. Friday's, Wyler's
- Kraft: Oscar Mayer
"I would say that you’re going to see some shedding of brands within the next 12 to 18 months," he said.
As for the company moving forward without a CMO, there’s some good news and bad news there:
- Good news: "The closer that marketing leadership is to their product lines, the more likely they are to be paying attention to consumer trends."
- Bad news: "These have been brands that, like a lot of consumer brands ... that are more independent brands than brands that are connected to any particular organization," he said.
This means people are betting on a company more necessarily than a specific brand.
The financials of the deal
Dave Novosel, an analyst, predicts flat revenue for Kraft-Heinz in 2015, according to The Pittsburgh Post-Gazette. Each company had falling revenue last year, as the packaged food industry continues to lose favor with consumers seeking healthier options.
Independent corporate bond research service Gimme Credit said the new company’s debt will be approximately $32 billion.
With 3G Capital’s zero-based budgeting strategy giving many the boot at Heinz, it looks like Kraft will face similar cuts. The real question is how many jobs are set to go and when, though if the absence of Kraft leadership at the helm of the combined company, it’s bad news for employees — especially since they’ll be heading into an in-flux food industry.
Impact on industry
O’Keefe said more mature industries see mega-consolidation, like in banking, insurance, and automotive, and now it’s happening in food.
“That will be contrasted with a significant rise in fortunes of smaller, more local, more healthy brands who are really gaining market share right now,” he said.