Nearly three years after spinning off its snack and candy brands to new entity Mondelez International, Kraft Foods took another major step toward growing its food and beverage cred through a late-March merger with H.J. Heinz Co.
When the deal closes in the second quarter of this year, the resulting “powerhouse” company—The Kraft Heinz Co.—will be the third-largest food and beverage company in North America, behind PepsiCo and Nestle, and the fifth-largest in the world.
“Since Kraft launched as an independent company, the entire industry has faced headwinds, and change has been continuous. To address these challenges head on, we’ve talked about accelerating the pace of change in the fast-evolving food and beverage landscape,” Kraft chairman and CEO John Cahill said. “In essence, we believe this transaction will allow us to accomplish our goals much faster than Kraft can on its own.”
With Heinz, Kraft will almost immediately improve its international reach, giving the company a new level of scale to drive savings and sales.
“Scale is as important in North American food as it’s ever been,” Cahill said, “and the [merger] represents a continuation of Kraft’s original mandate: to create a scaled and stable food powerhouse in North America, with the added benefit of an enviable international portfolio.” A healthy 61% of Heinz sales mix in international, illustrating the overseas opportunity for Kraft’s brands, which sell better in North America.
Meanwhile, for Heinz, the deal represents increased occasions for product combinations or pairings.
“The new Kraft Heinz North American foodservice platform will have over $3 billion in sales with particular strength in advantaged front-of-the store offerings, meaning products the customers see and recognize as branded products, such as a bottle of Heinz Ketchup or a jar of (Kraft’s) Grey Poupon,” said Alex Behring, chairman of Heinz and managing partner of Heinz owner 3G Capital. “This scale will give us increased relevance in a category and an opportunity to bring our brands to more consumers in more places across North America.”
Also key: new avenues of product innovation based on the variety of brands the deal brings together, including eight over $1 billion and five brands worth $500 million to $1 billion, including Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia.
“Together with Heinz, we’ll make bigger and bolder bets on innovation based on real fact-based consumer insights,” Cahill said.
Added Bernardo Hees, chief executive officer of Heinz, “We have refocused our strategic vision on innovation. In the past, innovation has been too diffused and diluted, introducing lots of products to see what works with no focus on profitability. Our goal is to [enact] industry-leading innovation in the consumer-food space. And we’ll aim to deliver on this goal by focusing on big, bold bets.”
For convenience retailers, the hope is that the combined company can become a leader in foodservice, partnering on a level beyond just condiments and consumer packaged goods.
“The best thing that could happen, in my eyes, is if they can become my foodservice solution; that would be ideal,” says Sam Odeh, president of Elmhurst, Ill.-based Power Mart, a five-store chain in the Chicago area, echoing thoughts heard from other retailers. “We need something other than more consumer products; that’s not where we’re going. We’re getting deeper into foodservice.
“Kraft has reinvented itself over the years and brought new products to us. Unfortunately, I still only have six spots on my shelves that I can fit them on.”
Other retailers expressed concern that as the primary player in condiments, Kraft Heinz might raise its prices to retailers.
“Really, the only option it leaves us is private label,” said Frank White, owner of White Knight Marketing, “and that’s got its own challenges.”
Of course, as with any merger, cutting costs and increasing profits is a key focus. In this case, executives anticipate synergies that will cut $1.5 billion in annual costs by 2017, while also improving revenue.
“The complementary nature of the two brand portfolios presents substantial opportunity for synergies, which will result in increased investments in marketing and innovation,” the companies stated.
“By bringing together these two iconic companies through this transaction,” Behring said, “we are creating a strong platform for both U.S. and international growth. Our combined brands and businesses mean increased scale and relevance both in the U.S. and internationally.”
Not to be ignored in the deal is the role played by mega-investor Warren Buffett, chairman and CEO of Berkshire Hathaway, which encouraged the merger and is providing an equity investment to get it done.
“I am delighted to play a part in bringing these two winning companies and their iconic brands together,” Buffett said. “This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.”
The combined company will maintain co-headquarters in both Pittsburgh, home to Heinz, and the Chicago area, Kraft’s home turf.
When the transaction closes, Behring will become the chairman of The Kraft Heinz Co. Cahill will become vice chairman and chair of a newly formed operations and strategy committee of the board of directors. Hees will be appointed CEO of The Kraft Heinz Co.
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