Center store managers: Heinz-Kraft merger ain’t no big deal
The big news in the CPG and grocery retailing business this week was the announced deal by 3G Capital and Warren Buffett’s Berkshire Hathaway to acquire a controlling interest in Kraft Foods Group and Heinz and merge the two food giants.
While much of the speculation has centered around whether the deal will lead to further consolidation in the CPG space (many seem to think that’s likely), RetailWire has found category managers and buyers who deal with the companies on a day-in and day-out basis are generally neutral to pessimistic about what the new Kraft Heinz Company will mean for them.
To a person, category managers and buyers who agreed to speak with RetailWire on the condition that they were not identified, said it was too early to know for sure what the deal would mean for them. They did say, however, that based on previous mergers one likely outcome is that the number of direct sales and field support representatives from the two companies would be reduced as the two companies consolidate operations.
As a category manager with a top wholesaler told RetailWire, "Vendors always tell you they will maintain or improve service as they cut bodies, but you know they won’t. They wind up putting people in new categories that they know nothing about and expect them to add those to the ones they’ve been managing for years without any drop-off. There’s always a drop-off."
Grocers who spoke with RetailWire gave both companies, especially Kraft, high marks for consumer insights and account service, although almost all said it was difficult to get either company, particularly the bigger brands, to add promotions or make other adjustments if they did not fit with corporate plans. A buyer with a regional grocery chain said, "It’s hard to think they’ll suddenly become more responsive now that they’re even bigger. I’m sure they’ll still be on the case when Walmart and Kroger call, but we’re not Walmart or Kroger."
One of the major selling points of the deal is its implications for international expansion.
"They (Heinz) generate 60 percent of their sales outside of North America including 25 percent in emerging and developing markets," Erin Lash, a senior equity analyst of consumer packaged goods at Morningstar, told CNBC. "So I think one of the intentions will be to utilize Heinz’s global distribution platform to extend the sales and reach of Kraft’s domestically based products."
As it stands now, the plan is for the two companies to be "co-headquartered" in their current locations in Northfield, IL and Pittsburgh. Some question how long this will last based, in particular, on 3G’s history of cost cutting.
"Mature businesses look for cost cutting. 3G takes cost cutting to a different level," Bob Goldin, executive vice president at Technomic, told Reuters.
The other reality is that both Kraft and Heinz are major players in mature categories with low growth expectations in the U.S. While both companies have dipped their toes in the fast growing organics segment, neither is a major force at this point in that area.
- H.J. Heinz Company and Kraft Foods Group Sign Definitive Merger Agreement to Form The Kraft Heinz Company – Kraft Foods Group
- Kraft, Heinz to Merge, Forming Food Giant – The Wall Street Journal (sub. required)
- Heinz deal for Kraft expands food larder for Buffett, 3G – Reuters/Yahoo! News
- More Kraft-Heinz mega mergers on the way? – CNBC
- Heinz, Kraft merger would build food giant – Pittsburgh Post-Gazette
Discussion Questions
What do you think the merger of Kraft and Heinz will mean for the grocery retailers and wholesalers the companies supply? Will Kraft Heinz be a better trading partner than Kraft Foods Group and Heinz were individually?
This merger will cut jobs for the two companies for sure, and the service levels for the stores that actually still see a sales rep will dry up. All deals will be controlled through the warehouses, and my concern is getting a good deal to compete on the key items they sell. Walmart, Costco, Kroger and the dollar store chains will get their way, and many regional suppliers will begin to get squeezed out of the extra deals and promotional monies they were getting in the past.
There will be the occasional buy-in during key holidays, but if we go on past mergers, this will make center-store buys very difficult to get year round, and that is my concern. There is nothing we can do, as mergers create problems for smaller stores, and it will force us to rethink our shelf space we give to certain products. I am hoping this is not the case, but after half a century in this business, it will get tougher to stay competitive. Employees of these two giants are already wondering who is going to get chopped for sure.
I just hope China doesn’t get their hands on any of these huge food suppliers like they did with Smithfield, because they will control the flow of goods, and I personally am against it.
It will have absolutely no effect on retailers and wholesalers. We are just moving the deck chairs on this deal. This is a financial deal to generate liquidity for the G3 and BH, because liquidity brings higher valuations.
Won’t be better, just bigger.
Seems to me that Tony’s inside perspective is right on target. How can the smaller companies get anything good from this merger?
Brand acquisition is nothing new for CPG companies. General Foods, Colgate-Palmolive, Proctor & Gamble and Lever Brothers were all built on acquiring companies. The problem with these large CPG companies is they think they know everything and don’t change with the times. Coffee was owned by two brands and today Green Mountain is setting the direction. Beer was owned by three brands and today micro-brewers are setting the direction. The list goes on. The acquisition of Kraft by Heinz will increase the perceived power versus the retailer and wholesaler. Unfortunately, the combined company will never have the power to dictate terms to distributors. The days of ’70s and ’80s will not be returning. Kraft was the stronger company in understanding consumer and distributor needs. This could help Heinz depending on the makeup of the final field sales organization.
Big yawn …
More of the same, just fewer sales people. TPRs, rollers, scans and end-caps with a bit more muscle and mediocre line extensions. Then, after the Great Rationalization of 2017, more spin-offs of the “smaller” brands and a focus on cost cutting. How do you spell “innovation”? Sorry, not K-R-A-F-T.
My guess is that there will be somewhat less in the way of ad and promo dollars as the 3G model is reported as, “every dollar of marketing spend needs to be justified.”
The issue is consumer acceptance. The products aren’t as important to the home cooked meal as they once were. Time for some totally new recipes maybe.
Consolidation, consolidation, consolidation. That is why it is called a merger! With companies this large, it will depend on who eventually rises to the top to lead the conglomerate, and what shape it will take as the company better defines its goals, vision, and mission. They both speak to very similar consumers (sometimes), so the potential to reduce costs, while increasing branding and awareness, both in store and in the consumer’s mind, is tremendous. As with all mergers, only time will tell.