In the history of mergers and acquisitions, there have been both many successes and failures. In 2015, the union of Kraft Foods Inc. and H. J. Heinz Company created Kraft Heinz. The brands that the company currently owns are indeed icons for several generations of American families (Kraft Foods Inc. was founded in 1903, H. J. Heinz Company-in 1869) (Hammond & McCracken, 2015). The combined company was to become the fifth-largest food and beverage company in the world. Berkshire Hathaway and 3G Capital invested $10 billion in the combined company known as the Kraft Heinz Company (Hammond & McCracken, 2015). At that time, Kraft was worth $6 billion, producing Velveeta cheese and meat products under the Oscar Mayer brand (Food Ingredients 1st, 2015). Heinz is famous all over the world for its ketchup and other sauces. The combined companies were expected to generate about $28 billion in annual revenue.
Today, Kraft Heinz is one of the largest food companies globally; its brands are known worldwide: Kool-Aid, Heinz, and others. But it just so happens that the company’s focus is not the healthiest products (and they are very popular with Americans) – all kinds of fast food sets, sweets, sauces, ketchup, sugary drinks, and so on. And now, as you know, healthy food is increasingly becoming fashionable and organic. Since 2015 (when the merger took place), Kraft Heinz (ticker KHC) shares have been worth more than twice as much as they are today (Food Ingredients 1st, 2015). Who could have predicted such a result, because behind this merger were none other than Warren Buffett and Jorge Paulo Lemann (Jorge Paulo Lemann) – the richest Brazilian and one of the wealthiest people on the planet.
Buffett’s company Berkshire Hathaway and Lehmann 3G Capital received a 51% controlling stake in Kraft Heinz – at that time, the third-largest food company in the United States and the fifth in the world. Investment firm Lehmann 3G Capital is known for taking control of companies (such as Anheuser-Busch InBev and Restaurant Brands International, including Burger King, Tim Hortons, and Popeyes Louisiana Kitchen) and dramatically cutting costs to boost profits (Yan, 2015). They are famous for using so-called zero budgeting-that is, every quarter, managers start with a clean slate. They must prove the need for any expenses-this significantly reduces unnecessary spending and leads to increased profits. But in the case of Kraft Heinz, this led to lower advertising costs and the introduction of new products into the range, just as the trend towards healthier eating began to change. This led to sales starting to decline, and this was reflected in the share price.
Warren Buffett admitted that it was not the best investment due to the fact that the merger was made at an unprofitable price-that is, overpaid. This is obvious now, and then, almost five years ago, even the most astute investor on the planet in alliance with the most successful businessman in Brazil did not think so. Nevertheless, Buffett does not intend to get rid of this investment and expects that it will more or less pay off over time, although, of course, far from the way it was initially expected.
The main problem that Kraft Heinz faced last year was the change in consumer tastes. A healthy lifestyle has become fashionable, so interest in ketchup, cheese, and pasta has fallen. This negatively affected sales: at the end of 2019, Kraft Heinz lost about $1.3 billion in revenue (Yan, 2015). At the beginning of 2020, the pandemic and the economic crisis came to the fore. The regime of self-isolation and falling consumer incomes led to a decrease in consumer demand. The reduction in customers’ flow inevitably affected the leading operational and financial indicators, including food producers.
Lehmann 3G Capital company is famous for using so-called zero budgeting. Every quarter manager starts with a clean slate and must prove the need for any expenses-this significantly reduces unnecessary spending and leads to increased profits. But in the case of Kraft Heinz, this led to lower advertising costs and the introduction of new products into the range, just as the trend towards healthier eating began to change. This led to a decline in sales, and this was reflected in the share price.
Now the company is planning to launch a new corporate strategy to reduce its expenses. The costs are expected to decrease by $2 billion over five years, which is estimated to lead to an increase in adjusted earnings per share by 4-6% (The Compound Investor, 2019). By doing this, the Kraft Heinz aims to restore is financial positions and expects to increase its revenue; however, the culture of healthy lifestyle which is widely promoted worldwide is still an impediment.
|Element||Kraft Culture||Heinz Culture||Culture Adopted|
|Recruitment||Keeping workplaces for existing employees||Massive recruitment of new staff||Massive recruitment of new staff from diverse countries|
|Production||Coffee, chocolate, cookies, crackers, etc.||Ketchups, sauces, etc.||Wide range of the listed products|
Yan, S. (2015). Kraft and Heinz merger to create food giant. CNN Business. Web.
Hammond, E., & McCracken, J. (2015). How Kraft merger with Heinz was put together in speedy 10 weeks. Web.
Food Ingredients 1st. (2015). Kraft Heinz merger successfully completed. Web.
The Compound Investor. (2019). Kraft Heinz: The current state of play. Web.