How many times have you bought canned soup in the past five years?
That question from Chicago food-industry analyst Bob Goldin — and its underlying assumption that the answer is “none” from shoppers too squeezed to spend the money or too focused on buying fresh, organic and natural products — is at the heart of the merger announcement between consumer packaged goods icons Kraft Foods Group and H.J. Heinz.
Kraft Foods, based in north suburban Northfield and known for its Velveeta cheese, Oscar Mayer meats and Maxwell House coffee, said Wednesday it will merge with ketchup maker H.J. Heinz Co. in an estimated $48 billion blockbuster deal backed by Warren Buffett’s Berkshire Hathaway Inc. and Brazilian private equity company 3G Capital.
The combined Kraft Heinz Co., with co-headquarters in the Chicago and Pittsburgh areas, would rank as the third-largest food and beverage conglomerate in North America and the fifth-largest in the world, behind Nestlé SA, Mondelez International Inc., PepsiCo Inc. and Unilever Group, according to Euromonitor International Inc.
“It’s no secret that the packaged-goods industry is changing, and that many of these old, traditional, iconic companies with mature, big-share brands are not growing,” said Goldin, executive vice president at Technomic Inc., a food industry research and consulting firm.
Kraft had to find a way to grow and to improve the bottom line, he said.
Indeed, Kraft’s revenue last year was flat at $18 billion, and 40 percent of its products lost market share, with the rest staying flat, according to market data. Kraft cheese single slices saw market share dip to 1.4 percent in 2014 from 2.2 percent a decade earlier, for example.
Despite Kraft’s reorganization in 2012, when it spun off its snack business and brands such as Oreo cookies, Trident gum and Cadbury chocolate, the company kept running hard to stay in place, Goldin said. The snacks business became Mondelez, based in north suburban Deerfield.
Late last year, Kraft started overhauling its management team and has sought — to negligible effect — to heighten its reputation in “good for you” foods, analysts say. Kraft’s battle to have its cheese singles recognized with a “Kids Eat Right” designation prompted comedian Jon Stewart to joke about it on “The Daily Show.”
Kraft’s new CEO, John Cahill, promised big changes.
Whether the changes will work, including potential job cuts, brand sell-offs and $1.5 billion in expected cost savings by the end of 2017, is subject to debate. If the deal goes through in the second half of this year, Cahill would become vice chairman and head of an operations and strategy committee.
Neil Saunders, managing director of Conlumino, a New York-based retail and consumer analyst firm, said Wednesday that Kraft stands to benefit from Heinz’s expertise in international sales.
“Kraft isn’t that good at [selling in] international markets,” he said. “Heinz is very good at that. It is part of the attractiveness of the deal.”
Shareholders agreed, sending Kraft’s share price skyrocketing 35.6 percent to $83.17 on Wednesday.
But Goldin said he is not so sure consumers in China are yearning for Kraft cheese.
“Kraft had already been trying to do that for a while,” he said, noting the company’s shares had held up because the company paid out a healthy dividend.
In the merger deal, Kraft shareholders would get shares in the merged Kraft-Heinz Co. plus a special dividend of $16.50 a share.
Saunders said the two companies’ brands are “very valuable” and “make enormous amounts of money.” Eight of the combined companies’ brands generate more than $1 billion a year in sales.
The deal also prompted speculation late Wednesday that the food industry will experience more upheaval, with companies such as Mondelez, Campbell Soup and Pinnacle Foods plucking off new acquisitions.
