Kraft Heinz Merger Corporate Strategy Essay
Introduction
The corporate strategy includes managers of a corporation formulate and come up with strategies for the firm to reach its goals (Oertwig et al. 2017). Managers often make decisions and initiative on behalf of the shareholders which may affect the profitability and the future of the company may be at stake (Oertwig et al. 2017). Heinz Foods and Kraft Foods are both companies manufacturing food products for quite a long time. The two companies decided to merge into one company in 2015. The new company was named Kraft Heinz Company which manufactures all the products that the individual companies manufactured before the merger. The following essay examines how the merger affected the two companies and how Heinz and Kraft Foods have responded to the change in their corporate structure due to the merger.
Background of event
The Heinz Company was established in 1876 by an American businessman. It began as a small company manufacturing ketchup. The company slowly grew into the biggest food production company in America. It became one of the highest-selling brands of food products during the 1930s. Since then, the company grew fast and it acquired several brands until in 2013 the company was bought by Berkshire Hathaway and 3G Capital. On the other hand, Kraft Foods began in 1909 as a cheese business selling different varieties of cheese. In 1969, Kraft Foods was acquired by National Dairy Products Corporation and then in 1988 by the Phillip Morris Companies. The company was then the sole owner of Kraft Foods Inc. which had shares on the share market as a public corporation. It produced brands such as Oreo, Planters, and Maxwell House and remained on the Nasdaq exchange as a publicly listed company before merging with Heinz in 2015 (Feslioglou 2019).
The merger between Heinz and Kraft Foods was agreed upon in early 2015 by the board of directors of the two companies (Feslioglou 2019). The merger was approved by the shareholders and the regulatory authorities after the decision was made. The new company was called the Kraft Heinz Corporation. It became the world's fifth-largest food and beverage company which is also the third-largest in North America. The new company held more than 200 brands and was expected to bring in a total of $ 25 billion of sales each year.
Since Heinz was a globally acclaimed company, the merger was aimed to increase the profits for the two companies by combining Kraft’s wide varieties of food products with the popularity of Heinz. The merger was also expected to reduce costs and gain better opportunities for the companies.
Characteristics of the merger
The merger took place in a systematic and orderly manner. The first most important step was to decide the ownership of the new company. The Kraft Foods Company was publicly-traded and hence the shareholders of Kraft held 49 % of the shares of the new company. The rest of the shares were to be sold to the general public. The shareholders were given the extra benefit of an additional dividend of $16.50 per share by the new owners of the new company 3G Capitals and Berkshire Hathaway (Kumar 2019). This led to an increase in the demand for the new shares since the investors expected the company to have reduced costs and higher profits after the merger. Berkshire Hathaway and 3G Capital also invested more than $ 10 billion in the new company which was expected to bring about profits of more than $26 billion annually (Kumar 2019).
The merger joined together two big brand houses such as Heinz and the brands that came under the Kraft Foods such as Oreo, Philadelphia, Oscar Mayer, and many more (Kumar 2019). The new company had 8 brands with a valuation of $1 billion each and 5 with a valuation of $500 million each. The combination of two big food production companies was expected to bring out a large number of advantages such as lower costs higher profits and thus higher investments (Kumar 2019).
The merger also aimed to bring more exposure to Kraft Foods’ brands which were just limited to North America. By utilizing Heinz’s global image, the brands under Kraft would gain international exposure. This was expected to be profitable for the two brands more so.
The two companies’ executives were asked to be the executives of the new post-merger company. The CEO for Heinz was asked to be the CEO of the newly formed Kraft Heinz Company and the CEO of Kraft Foods was asked to be the Chairman. This is something that most companies in the corporate world tend to do. The executives of the new company are often the former executives of the former pre-merger companies. This is done so that the experience and expertise of the former executives can be utilized in setting up the newly merged company (Trefis 2015).
The owners of the new company 3G Capitals had a previous history of acquiring and building iconic brands (Trefis 2015). They had a history of bringing about innovation and growth in the companies. They are known for doing this by expanding the exposure the companies get by giving them exposure from international resources (Trefis 2015). The company has collaborated with Berkshire Hathaway on various occasions in the past and has a history of a successful long-term partnership. The two companies were expected to build and sustain the Kraft Heinz Company in the food industry. After the merger, the Kraft Heinz Company was co-headquartered in Pittsburgh and Chicago. The new company was expected to sustain community relationships in the areas that they operate in. the new company was also expected to ensure climate change is kept in mind while operating and that their carbon emissions are at a minimum (Trefis 2015).
Impacts of the merger
After the merger, the companies were expected to gain several benefits from the event. The first major impact which was expected was that the new company would gain a large amount of international exposure. This is because Heinz gains around 60 % of its sales from countries other than the USA. This shows that Heinz is a global company. This was expected to work as an advantage for Kraft Foods because they made most of their sales from North America and not globally (Schilling 2018). The merger between Kraft Foods and Heinz was expected to give international exposure to Kraft’s brands. The sale of brands such as Oreo and Philadelphia outside North America was expected to increase the revenue for the newly merged company The Kraft Heinz Company (Creswell 2019).
The two companies had expected that they would save more than $1.5 billion in costs in the first 2 years of the merger (Creswell 2019). The two companies Heinz and Kraft Foods had expected this would happen because the two companies would face economies of scale in North America. This is because combining the production units of the two companies would save production costs. Also, the production of large amounts of food products would help to gain bargain process from the clients who included large restaurant chains and supermarkets. This was expected to improve the profit margins for the newly merged Kraft Heinz Company (Creswell 2019). The merger was also expected to reduce the debts of Heinz which had been a liability for the company for a long time. The improved profits and revenues were expected to reduce these debts. Since Kraft Foods had a better credit rating on the capital market, the new company was expected to borrow loans easily at a lower interest rate. These proposed actions were thought to improve the overall capital structure of the newly merged company (Insider 2015).
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The company had expected to reduce the costs by a zero-based budgeting policy. This was planned to reduce costs by reducing the number of employees, closing off inefficient offices and production facilities (Insider 2015). The planned budgeting strategy meant that managers would have to explain every piece of expense in the next year based on new research and not rely on the past years’ trends or historical costs. This was expected to lead to a stricter form of cost-budgeting for the newly formed Kraft Heinz Company. Hence the lower costs would lead to higher profits from the very beginning for the new company (Insider 2015).
But in reality, the Kraft Heinz Company was involved in reducing the costs that they forgot about market trends and what their main aim as a food production company should be which is to innovate and produce interesting food items for the people to purchase (La Monica 2019). In 2019, the Kraft Heinz Company gave a shock to their investors because of the high amounts of losses they had faced in the previous fiscal year. This led to them reducing the amount paid as dividends and an inquiry was launched into their accounting methods. The SEC had to look into the company's books to see where they were going wrong. Analysts had started speculating what is the thing which The Kraft Heinz Company did wrong and how could they have messed their corporate strategy given their strong backgrounds in the food production industry (La Monica 2019).
As soon as The Kraft Heinz Company began operating as one company, they had put all their focus on reducing the costs of operating the business. The company’s main aim was to increase its profits and reduce expenses. They were so positive about their corporate strategy after the merger that they had even planned on acquiring another company such as Unilever to increase their sales even further (La Monica 2019). But they had failed in doing so. Instead, the company faced large amounts of losses in the years following their merger. By 2019, The Kraft Heinz Company's shares prices had fallen by more than 60 % in the previous two years and had further gone down by 26 % in 2019.
A large number of analysts have said that the major mistake that the Kraft Heinz Company has made is that they were not responsive enough to consumer tastes (La Monica 2019). This is because the company was not quick enough to adapt to the tastes of the consumers which is very important for any business whether it belongs to the food production industry or not. In recent years consumers have started preferring organic and healthier food choices over others (Santeramo et al 2018). Fewer and fewer consumers now purchase processed foods such as cheese and junk food such as frozen fries (Kim 2019). If the Kraft Heinz Company had paid more attention to the changing consumer patterns, they would have not faced such losses.
Another reason for the merger of Kraft Foods and Heinz proving to be a failure is because there is a large amount of competition in the food industry. Bug food giants such as General Mills have started acquiring brands that are seen to be failing. An example of this would-be General Mills buying other brands such as Annie's. If the Kraft and Heinz Company aims to acquire companies producing organic food, it cannot do so because they have already been taken up by these big food giants (Kumar 2019).
In 2019, the Kraft Heinz Company faced severe losses and had to reduce its dividends. The company even had to reduce the value of its assets by $ 1.22 billion in 2019. The company was facing numerous lawsuits because of the mess it was in. the company also faced other issues such as the firing of numerous employees (Kumar 2019). In 2019, thousands of people had already been laid off after the merger took place and more were soon to be laid off. The deal which was expected to produce millions of profits for the 3G Capital and Berkshire Hathaway has proven to be a very big misstep. Even though these two firms have had a history of successful acquisitions that earned those lots of profits, the merger of Kraft Foods and Heinz has led to billions of dollars' worth of losses. To finance these losses 3G Capital sold more than 25 million of the shares of the Kraft Heinz Company which brought down their stake by 10 percent (Kumar 2019).
Another important reason for the disastrous impact of the merger on the company is said to be the zero-based budgeting which 3G Capital planned on following once the merger took place. Their main aim of reducing expenses, increasing profits, and improving revenue streams has led to them facing huge losses instead. This strategy is what 3G followed for all its past acquisitions but this time it proved to be a mess. Managers and employees had to waste their time estimating the cost of travel expenses of moving data from one office to another and the new research which was required (Rebellion Research 2020). This led to an additional cost of travel and excessive paperwork. To compensate for these costs, employees had to suffer (La Monica 2019). In 2015, once the merger was finalized more than 2500 employees were fired. More than 10 of the plants of the Kraft Heinz company were closed off by the end of 2015 (La Monica 2019). This led to further employees going out of work. Other employee benefits such as free office snacks and perks being offered to employees were also stopped. The work responsibilities of the employees significantly increased. Work such as market analysis deals with suppliers often fell unfairly on a single employee which led to a large number of employees being demotivated and losing job satisfaction (La Monica 2019). This led to the employees leaving their jobs out of stress and frustration. The level of discontent among the employees of the Kraft Heinz Company was so much that even outsiders came to know of it. This led to hiring new employees becoming increasingly difficult and tough because no one wanted to work at that company. At the management level, Kraft Heinz managers who had a large amount of experience were often replaced by 3G Capital managers who were inexperienced and knew nothing about the food production industry (La Monica 2019).
Another reason for the company's bad condition after the merger was their profit margins. The Kraft Heinz Company had higher profit margins as compared to their competitors such as Kellogg (La Monica 2019). The company is also failing to meet the consumer demands for organic foods which are very similar to what some other companies in the same industry are facing. There is also an increase in the competition because large retailers such as Walmart have started their food supply chains which often offer organic food choices for the consumers to choose from. Another retailer Target announced that they were planning on introducing a new line of organic food products which would increase their brand worth to more than multi-billion dollars.
As of 2020, The Kraft Heinz Company has learned its lessons and plan on improving. The company plans on returning to its former position of being the market leader by following a strategy of growth and cost reduction of inefficient aspects of their firm. They plan on reducing up to $ 2 billion in costs by the year 2024. They have decided to divide their products based on 6 broad platforms instead of looking at just their brands. This would help them to look at their inefficiencies concerning each category of food products and hence help them decide how to fix these inefficiencies. This would help them look at and address individual consumer demands and hence cater to them specifically in that food product category (Kumar 2019) The company plans on following the strategies of product line expansions and diversification by introducing new product lines and also introducing new variants for their existing product lines.
Recommendations
The Kraft Heinz Company has been defensive for quite some time and now it is time to be proactive and make quick decisions for themselves and how to improve the profitability of their business. Instead of focusing on how big their firm is and how to reduce costs, they should focus on meeting consumer demands. Since the pandemic hit in 2020, people have again started to cook and eat at home. People are nowadays looking for quick-cooking alternatives and ready-to-eat meals. The company should do some research into this area and hence improve sales here. One of the most profitable consumer segments for growth would-be students and young households. These people often look for food that is healthy while also tasty. The company should focus on this particular segment which could help them gain profits. (Health 2018)
The company managment should also improve its behavior towards its employees. The large amounts of layoffs that they carried out had a very bad impact on the company's reputation at the workplace. They should hire more employees and give benefits to the current employees so that job satisfaction increases. This would be beneficial because the higher the job satisfaction of employees the greater their productivity and the higher the profits for the company (Bharathi & Gupta 2017).
Conclusion
Based on the above essay it can be said that sometimes the business decisions can prove to be not as beneficial as the executives expect them to be (Kumar 2019). The example of The Kraft Heinz Company is one of those companies that faced severe losses because of the merger. This was because of their faulty policies and inefficient decision-making by the owners. If the company had followed a more strategic approach and followed a better policy of corporate strategy they would have done much better.
References
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Creswell, J 2019, ‘When Mac & Cheese and Ketchup Don’t Mix: The Kraft Heinz Merger Falters’ Nytimes.com. viewed 3 March 2021 https://www.nytimes.com/2019/09/24/business/kraft-heinz-food-3g-capital-management.
Feslioglou, I 2019, ‘Mergers and Acquisitions: The current state of the debate’.
Heath, KR 2018, ‘Assessing Adult Perceptions, Outcomes and Associations with Youth Nutrition and Activity Outcomes of Participants in the WeCook: Fun with Food and Fitness Program’.
Insider 2015, ‘MEGA MERGER: Kraft and Heinz combine to form the world's 5th-biggest food company’, Business Insider, viewed 3 March 2021 https://www.businessinsider.com/warren-buffett-and-a-private-equity-firm-are-combining-heinz-and-kraft-in-a-food-industry-mega-merger-2015-3
Kim, YH 2019, ‘Organic shoppers’ involvement in organic foods: self and identity’, British food journal.
Kumar, BR 2019, ‘Merger of Kraft and Heinz Company- Wealth Creation in the World’s Largest Mergers and Acquisitions’, pp. 79-84, Springer, Cham.
Kumar, BR, Kumar &Amboy 2019, ‘Wealth Creation in the World's Largest Mergers and Acquisitions’, pp 15-76, Springer International Publishing.
La Monica, P 2019, ‘What went wrong at Kraft Heinz’, CNN, viewed 3 March 2021 https://edition.cnn.com/2019/02/22/investing/kraft-heinz-stock-strategy/index.html
Oertwig, N, Galeitzke, M, Schmieg, HG, Kohl, H, Jochem, R, Orth, R & Knothe, T 2017, ‘Integration of sustainability into the corporate strategy’, Sustainable manufacturing, pp 175-200, Springer, Cham.
Santeramo, FG, Carlucci, D, De Devitiis, B, Seccia, A, Stasi, A, Viscecchia, R & Nardone, G 2018, ‘Emerging trends in Euroean food, diets and food industry’, Food Research International, 104, pp 39-47
Schilling, MA 2018, ‘Potential Sources of Value from Mergers and Their Indicators’, The Antitrust Bulletin, 63(2), pp 183-197
Trefis, T 2015, ‘Analysis of the Kraft-Heinz Merger’, Forbes, Viewed 3 March 2021 https://www.forbes.com/sites/greatspeculations/2015/03/30/analysis-of-the-kraft-heinz-merger/?sh=5fbb7469c9a8
