Heinz And Kraft To Marry

It was just announced that puppet master Warren Buffett connected some of his favorite companies to create the third-largest North American food company by merging H.J. Heinz Company, Brazilian private equity firm 3G Capital, and Kraft Foods Group , Inc. in a $46 billion deal.

Mega-mergers are not new in the highly competitive world of consumer packaged goods. Consumers are exceedingly price sensitive. The success rate of new products is very low, resulting in little opportunity for organic growth. The search for cost savings and efficiencies is constant. Acquisition is the natural (and sometimes only) option to grow revenue and increase margins.

The Heinz/Kraft merger reportedly expects to save about $1.5 billion in annual costs by the end of 2017. 3G has a reputation for introducing aggressive cost cuts and improving efficiencies at other portfolio companies including Anheuser-Busch. Its corporate culture is supposedly one of no-frills. Never mind a corporate jet. 3G execs reportedly travel coach, even internationally.

Kraft has been performing poorly, to a large degree because its products like macaroni and shelf-stable cheese are off trend in that they are neither fresh nor particularly healthy. Analysts say success lies in new product innovation but absence of success in that arena hasn’t been for the lack of trying. Across the entire category of major food manufacturers, there are shockingly few case studies of successful new product introductions, despite billions of dollars spent on R&D.

Kellogg was recently crucified in a Bloomberg article for not taking action on consumers’ anti-carb crusades when their portfolio was disproportionately carb-based. General Mills has fared better than their mega-CPG competitors, including purchase of Berkeley, California–based Annie’s, Inc., one of largest natural and organic packaged food companies, for $820 million last year.

CPG brands shuttle between owners over time, with most consumers oblivious to those changes. For example, pet food brands Kibbles ’n Bits, Snausages, and Pup-Peroni were once owned by Quaker Oats. In 1995 Quaker sold its pet food division to Heinz. Del Monte Foods bought those very same brands from Heinz seven years later. In 2013, Del Monte Foods sold its fruit and vegetables company and renamed itself Big Heart Pet Brands, which still includes in its portfolio Kibbles ’n Bits, Snausages, and 9Lives cat food, among other brands. Just this week, Big Heart Pet Brands was officially acquired by J.M. Smucker Company. On the short list of underperforming public CPG companies, Smucker’s is rumored to be a candidate for acquisition, as well…not impossibly by the new Heinz, meaning 20 years and a scenic detour later, those brands could be back under the same owner. Loyal consumers buying a specific dog food for the last 30 years with the memory of dogs jumping over each other chanting “Kibbles ’n Bits, Kibbles ’n Bits… I gotta get me some Kibbles ’n Bits,” and more importantly, lots of high-value coupons and BOGOs, will be none the wiser.  The Kraft team is familiar with these sojourns, once under the umbrella of Philip Morris International, then the transition to Kraft, recently living through the spin-off of Mondelez International, and now as 49% of a new entity with Heinz and 3G.

Most of the equities and personalities of iconic CPG brands were established years ago when manufacturers consistently invested millions in advertising campaigns. Those brands are now competing against store brands of comparable quality at a lower price and often a third, organic or otherwise healthier option. Couponing and/or in-store discounting is often required to make previously loyal shoppers buy national brands. This price sensitivity, fueled by high-quality competitive store brands, is a major component driving manufacturers to find efficiencies wherever they can, including consolidation. These consumer-based challenges, combined with pressures on the manufacturing, distribution, and retailing fronts, fuel the need for decisions that led to the Heinz, Kraft, 3G deal announced today, the CPG reconfigurations before it, and many to come.

Imagine the combination of two old-school CPG companies like Heinz and Kraft is like a late-life marriage with Warren Buffett officiating the wedding. The result is a large blended family composed of once highly successful child stars who haven’t done much lately. CEO Bernardo Hees is the new Brazilian stepdad who isn’t going to let them live in the basement anymore without paying rent. Everybody’s eager to see how it’s going to work out and Dr. Phil is on speed dial.