GLOBAL October 2019
Mega Kraft Heinz merger that could end into a mega-disaster
In 2015, the world saw a mega merger happening between Kraft and Heinz that led to the formation of one of the world’s largest food conglomerate with a combined sales revenue of US$28 billion.
Eversince that merger, the consolidated group has experienced continuous crisis in terms of sales and profits. Some analysts have blamed growing consumers’ desire for healthier organic food as one of the main cause for this crisis, while others accused the company of falling behind in terms of R&D to compete with newer and smaller establishments, and lagging behind others in capitalising on the growing plant-based movement.
Currently, this company known for generations for its Heinz ketchup and Kraft cheese, is dealing with multiple issues from low sales, shareholder lawsuits to layoffs amongst others. After taking a US$15.4 billion write-down in February (making its brands less valuable than before the merger), and slashing its dividend by a third, the company reduced the value of its assets by an additional US$1.22 billion recently. Securities regulators are also looking into its dubious accounting.
For major investors like 3G Capital and Warren Buffett’s Berkshire Hathaway, the deal on Kraft-Heinz is an extremely costly mistake with billions in dollars of paper losses. Much of the blame was placed on its shareholder 3G and its use of ‘zero-based budgeting’ strategies that focuses more on cutting costs than creating new products. Before the merger, Kraft allocated US$149 million on R&D. In 2017, the combined Kraft Heinz spent US$93 million.
3G’s zero-based budgeting requires managers to justify every expense on an annual basis, not just build on the previous year’s budget. A Credit Suisse analyst commented, “We are actually in a higher cost of growth environment, where constant reinvestment is necessary. You can’t cut your way to prosperity.”
Apart from the cost-cutting blunders, the company also faces competition from giant retailers like Walmart that have their own private label brands.
Kraft Heinz laid off 2,500 employees representing 5% of its total workforce a month after the merger. Many senior Kraft personnel were replaced by 3G leaders, some some of whom had virtually no experience in the consumer packaged goods industry.
Shareholders, on the other hand, blamed the company for falling behind in the market for plant-based meat, which has drawn a surge of consumer interest and investment from major food companies as well as from new smaller start-ups. It seems like these companies are slowly eating into Kraft Heinz share.
As of now, the only chance for Kraft Heinz to stage a comeback depends on its new Chief Executive, Miguel Patricio who just joined the company in June this year.



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