Ketchup on hotdogs

US food giant Heinz is to merge with Kraft Foods Group, creating the third-largest food and beverage company in the US. Heinz shareholders will own 51% of the combined company with Kraft shareholders owning a 49% stake. The “mega deal” will create the world’s fifth-largest food and beverage company.  Its brands will include Kraft, Heinz, and hotdog maker Oscar Mayer, with combined sales worth some $29bn and a portfolio that includes eight $1 billion-plus brands.  Regulators and shareholders from Kraft still need to approve the deal, but the boards of both companies have unanimously approved it. It is expected to close by the end of 2015. The new company will be called The Kraft Heinz Company and will have joint headquarters in Pittsburgh and Chicago.

The combined firm, Kraft Heinz Company, expects to make annual cost savings of $1.5bn by the end of 2017. Alex Behring, chairman of Heinz and the managing partner at 3G Capital, said: “By bringing together these two iconic companies through this transaction, we are creating a strong platform for both US and international growth.”

By uniting Kraft with Heinz, 3G intends to follow a familiar approach: Take ownership of iconic brands, aggressively cut costs and expand internationally. This model succeeded at Anheuser-Busch InBev, the world’s largest brewer, which 3G created by taking over Anheuser-Busch in 2008. The group then acquired Burger King in 2010 and last year merged it with the Canadian doughnut chain Tim Hortons to form a new company, Restaurant Brands International. In 2013, 3G and Mr. Buffett teamed up to buy Heinz, taking the ketchup maker private. Since then, its sales have grown steadily. Now, by combining Kraft and Heinz, 3G and Mr. Buffett are betting that this recipe will work with some of the biggest names in packaged and processed foods, including Kool-Aid, Velveeta and Lunchables.

Brands and product lines

The company will be the world’s fifth-largest food and drink company. Its brands will include Philadelphia, famous for soft cheese, and frozen potato-product company Ore-Ida. Many product lines seem to be complementary, such as Heinz mustard  or ketchup on Oscar Mayer hot dogs. However, the firm is likely to cut, or divest, overlapping lines. In 2010, Kraft took over chocolate maker Cadbury, but in 2012 spun the firm off as part of its global snacks business Mondelez, which includes brands such as Oreo biscuits and Trident gum.

The figures behind the Kraft deal

Jorge Paulo Lemann

• Ranked as Brazil’s richest man by Forbes
• Co-founded global investment firm 3G Capital in 2004
• Owns controlling stake in Anheuser-Busch InBev and Burger King

Warren Buffett

• Ranked as one of the world’s richest men by Forbes
• Owns companies ranging from car insurance to jewellery
• Joined forces with 3G to buy Heinz in 2013

Cost savings and synergies

There are various ways in which the management hopes to leverage the synergies that the combination of these two large food companies should provide.

There certainly will be cost savings through redundancies in finance, marketing and IT after the merger. Berkshire Hathaway and 3G have cut thousands of jobs worldwide at Heinz since buying the company in 2013.  Some 350 jobs disappeared at Tim Hortons’ corporate offices after 3G merged the coffee chain with Burger King last year.

Cost synergies will come from higher economies of scale in the North American market. Having larger volume of sales will help the company drive better bargains with clients such as large retail outlets and specialty food stores and restaurants. This will improve operating margins of the company and also give it an advantage in getting more shelf space in retail outlets. Other savings will come from a rationalisation of product lines.  Indeed, the main challenge facing the new company is revitalising its product lines and marketing. Packaging isn’t innovative, and the product range has not taken advantage of consumer interests, such as health. The merger reflects increasing demand for fresher, more convenient food and this will be a focus as it seeks to modernise its offering worldwide.

Heinz has a global footprint. It derives 60% of its sales from regions other than North America. Emerging economies contribute 25% of its sales. Kraft, on the other hand, derives 98% of its sales from North America. This provides scope for the combined entity to sell Kraft’s brands in international markets and gain cost savings through international economies of scale.

IB Style Questions

1. Distinguish between a merger and a takeover.

2. Explain the differences between internal and external growth.

3. Using examples from the Heinz/Kraft product ranges, examine how Porter’s generic strategies may provide a framework for building competitive advantage.

4. Evaluate the relative merits of small versus large organisations.