Kraft Heinz takeover bid shakes up big food and its slow growth

Business Sunday 19/February/2017 15:15 PM
By: Times News Service
Kraft Heinz takeover bid shakes up big food and its slow growth

New York: Competitors relieved that Kraft Heinz snubbed them for Unilever may want to skip the celebration.
Campbell Soup, General Mills, Kellogg and Mondelez International were top potential acquisition targets for Kraft Heinz, and even though the company appears to have moved on, more consolidation could be on the menu. Whether or not the maker of Kraft Mac & Cheese can persuade Unilever to form the world’s second-biggest food company, struggling US giants still face pressure to break their years-long sales malaise.
"They’re probably breathing a sigh of relief, but then it becomes a question of what’s next,” said Brittany Weissman, an analyst at Edward Jones. "Sales aren’t getting better and at some point the cost cuts are going to run out.”
Unilever spurned Kraft Heinz’s $143 billion offer Friday, saying the $50-a-share proposal was too low. A merger would unite Unilever products Dove soap, Axe deodorant, Lipton tea, Hellman’s mayonnaise and Breyers ice cream with Kraft Heinz staples Velveeta, Maxwell House coffee and Oscar Mayer processed meats. Only Nestle would be bigger.
Corporate culture
When it comes to corporate culture, Kraft Heinz and Unilever seem at first blush to be at loggerheads. Unilever Chief Executive Officer Paul Polman has emphasised sustainability at the Anglo-Dutch company, and argued that profit and social responsibility are company goals. For Kraft Heinz’s managers, 3G Capital, it’s all about a relentless focus on the bottom line.
In 2013, 3G joined Warren Buffett’s Berkshire Hathaway to take H.J. Heinz private. In less than two years, 3G’s managers produced industry-leading margins at the ketchup maker. They slashed thousands of jobs, shuttered factories and eliminated employee perks.
In 2015, Buffett and 3G orchestrated the $55 billion merger of Heinz and Kraft Foods, promising to cut annual expenses $1.5 billion by 2018. Kraft’s earnings before interest, taxes, depreciation and appreciation had consistently hovered around 20 percent of revenue pre-acquisition. The combined company’s margin now is 30 percent. Kraft Heinz is ahead of schedule on cost cuts and recently boosted its target to $1.7 billion, increasing speculation that a major food deal will come this year.
Deal partner
But Unilever wasn’t the rumored deal partner. Conjecture focused on large US companies that have struggled to increase sales amid changing consumer tastes. If Unilever says yes, US competitors will be forced to reckon with a global behemoth. That could prompt General Mills, Kellogg, Campbell and Mondelez to seek deals of their own, according to Asit Sharma, an analyst at Motley Fool.
"They would have tremendous scale that they could put to work in terms of lowering costs and increasing margins,” Sharma said. "If you’re a smaller player, it will be very difficult to compete.”
Mondelez has already anticipated a possible Kraft Heinz takeover bid. In June, the maker of Oreo cookies made a $23 billion offer for Hershey Co. to strengthen its defenses. Hershey rejected the offer and rebuffed a higher bid before Mondelez ended the talks.
Big Food continues to struggle to grow. The rising tide of foodie culture has consumers seeking out less-processed products, and they’re rejecting longtime grocery staples for brands from upstart companies promising more natural ingredients. Innovation is notoriously slow at large food companies, a problem in a digital age where consumer trends move faster than ever.
3G’s deal for Kraft put rival companies on notice: cut costs or risk being the next takeover target. And while the large US food makers have been improving margins, in some cases speeding up their own cost-cutting initiatives, the benefits of reduced expenses go only so far. That means Big Food will ultimately have to figure out how to do something that has so far proved elusive — develop new products that reignite sales.
"They all have real serious problems on their hands,” said Erich Joachimsthaler, CEO of branding firm Vivaldi. "It’s a frustrating world right now. They can’t figure out how to innovate.”