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Kraft-Heinz Merger Affect Retailers

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DEAL SUMMARY

The recently announced merger between Kraft and Heinz will create the fifth-largest food company in the world and the third-largest in the U.S. when the deal is finalized, which will likely be some time close to the end of the year. Deals of this size typically take many months to complete because they are subject to a series of legal and regulatory processes before they are officially done. The public perception of the deal so far seems positive and Kraft’s stock price shot up by over 30% the day the deal was announced.

Some of the things this big merger could affect are who really controls the company, potential layoffs, changes in the amount and placement of shelf space Kraft Heinz gets for its products in retail grocery stores, prices, and maybe even putting a dent in the private label part of the grocery business. All of these things have the potential to affect bottom line profits for Kraft Heinz and for grocery retailers. They also could affect retail employees through a trickle down effect if grocers start to give up some of their profits to the new Kraft Heinz behemoth.

Who’s Really Taking The Lead?

Some people may look at this merger as what looks like two near-equals. The way the deal is structured, current Heinz owners will own 51% of the combined company and current Kraft shareholders will own 49% of the company. But, the senior management team of the new company tells the real story.

The two investor groups that own Heinz are Brazilian private-equity firm 3G Capital and famous American investor Warren Buffet’s Berkshire Hathaway. 3G is notorious for cost-cutting and other slash and burn tactics when it acquires companies and there is no reason to believe that this won’t be a part of the changes that take place once this deal is done.

At the very highest levels of the company, Kraft will have one seat at the table, with current Kraft Chairman and CEO, John Cahill slotted to be the new company’s Vice Chairman of the Board. Heinz will have its current Chairman Alex Berhing as Chairman of the new company and its Current CEO, Bernardo Hees, will become CEO of the new company. With big deals like these, people tend to travel in teams, meaning people in senior positions usually bring their own teams with them.

The Heinz management team has been running Heinz for its current owners, who will now own controlling interest in the new company, for years and they have obviously done a job their ownership is happy with. This is not a tough one to figure out. It’s more of an acquisition than a merger, regardless of what they are calling it.

How Will These Major Brands Impact Retail?

Kraft and Heinz are both huge companies on their own, but once they are combined they will have an interesting array of holdings under one parent company umbrella. The combined company will have eight brands that produce more than $1 billion in annual revenues and another five brands that combined generate between $500 million to $1 billion. Some of the iconic brands the company will have under its umbrella include Kraft, Heinz, Oscar Mayer, Ore-Ida and Philadelphia (think cream cheese). There are many more, too many to list, but these are some of the best known in the company’s portfolio.

Take a look at this infographic to get a quick idea of just how many big brands are owned by Kraft and Heinz.

http://static3.businessinsider.com/image/5512a4cbecad044523adc587-1700-2200/0001ur-1.png.

This older infographic shows many more of Kraft’s brands: http://www.huffingtonpost.com/2012/04/27/consumer-brands-owned-ten-companies-graphic_n_1458812.html.

Although the second infographic is a bit outdated it paints a better picture of how many recognizable brands Kraft owns.

Private Labels

How will the strength of all these brands under one roof translate to retail? What will it do to private labels and those retailers who rely heavily on private label revenues?

This merger of such huge and well-known brands comes at a time when private label groceries are experiencing a growth spurt. In 2013, white label packaged goods accounted for over $100 million in sales for grocery chains in the U.S. and in 2014 private label sales grew by approximately 2.5% industry-wide according to Private Label Manufacturers Association (PLMA) figures. At large grocery chains almost one quarter of items and 20% of dollar sales come from private label, store-branded grocery items.

The growth in private label sales is happening beyond grocery store shelves, too. Large drug store chains, and dollar stores are experiencing similar shifts in their product mix. Think of the brands you saw the most the last time you were in a Trader Joe’s, Aldi or Dollar General and it becomes apparent that strengthening of national brands could have a negative impact on private label sales volume. That translates to even smaller profits for retailers, since private label products have higher profit margins than national brands.

JUST WHAT DO THEY MEAN BY SYNERGIES?

When big companies start throwing around the word synergy, it can potentially mean many things. Most people worry most about layoffs, but for retailers one of the big synergies that will impact them is increased leverage when negotiating for shelf space and Wall Street analysts believe this will lead to Kraft Heinz taking some of retailers profit margins to increase their own.

Grocery store margins are already small. Operating profit margins of 2% to 3% are typical, but looking at what is typical or average does not convey the whole picture. The industry is not made up of all average companies and stores. Some make higher profit margins than others and those who already have higher profit margins may be better positioned to weather a storm of hard negotiations when Kraft Heinz comes knocking to get more shelf space and higher prices for its products. Some of the companies mentioned above have never carried national brands and they have a strong and loyal following among their customers. They may be least likely to be affected.

Technology Improvements

One of the major areas Kraft Heinz will look to use more to increase its sales and profits is technology. Much of the technology improvements the company will look to implement will be things that go on behind the scenes, so the public will be mostly unaware of these changes. However, there are other technologies that are customer-facing that could come into play. Just one example of this type of technology is Amazon’s new Dash button. It is a piece of hardware that is a stand-alone button. Yes, it is a physical button that consumers can push to reorder products from home. The button will be connected to the internet and place orders for products that will be fulfilled by Amazon. Goodbye brick and mortar store revenue every time a consumer presses a button. Major manufacturers, like Kraft and Heinz, have agreements with Amazon that cut grocery stores out of the equation altogether. It’s too early to tell if this technology will take off, but once someone has a button they can literally push to get more Kraft macaroni and cheese, it becomes tougher to sell that customer macaroni and cheese when they are shopping in your store. I use Kraft macaroni and cheese for this example, by the way, because it is one of the products prominently featured on Amazon’s Dash button website. This is not hypothetical, folks, it is being rolled out and tested.

COST CUTTING AHEAD

The management teams for Kraft and Heinz have announced publicly that they intend to wring over $1.5 billion in costs out of the combined company by 2017. While some of these cost cuts may come from improved technology, purchasing power and other factors, it would be naïve to assume that a big portion of those dollars will not be cuts in payroll from layoffs. Big companies like to use other terms like downsizing or right-sizing to avoid negative perception, but at the end of the day it means lost jobs. The current Heinz management team, who will run the new company, has been responsible for cutting about 4% of its workforce since it was acquired by 3G.

How will downsizing at these companies affect retailers? It is quite possible it could negatively affect the service levels grocery chains see, which has a trickle-down effect that could impact customers. And, when customers are not happy, they often vote with their dollars and shop elsewhere.

No industries are immune from change and neither are workers. The best way to position yourself to benefit from any changes in the industry is to be one of those employees your employers would be crazy to let go. By keeping your skills sharp, always learning and having a great attitude you can do a lot to keep yourself among those who benefit when big companies get bigger. If you pay attention, there are many opportunities to hone your skills and to add new ones. Whether your company offers training opportunities or not, there are always ways to improve. You don’t have to wait for an annual review to assess your strengths and weaknesses.

Honestly assess yourself against your peers and compared to what employers look for in a person that holds your job. If you need help assessing what skills you could improve upon, get with a recruiter who knows your skillset and get to know them. They stay up-to-date on what the market demands and they can help you get a good picture of your areas of strengths and opportunities for improvement. 

TAGS: retail, retail brands, mergers and aquisitions,
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