Breaking News: H.J. Heinz and Kraft Foods Mega-Merger Portend Additional Tremors Across CPG Supply Chains
This morning, financial headlines reveal the rather stunning but not unexpected news that H.J. Heinz will merge with Kraft Foods Group in a combined public company that will be named Kraft Heinz Company. According to The Wall Street Journal, this deal will likely top $40 billion in valuation with the combined entity having revenues of approximately $28 billion. It would create what is expected to be the world’s fifth largest food and beverage company featuring many well-known consumer brands.
From the lens of this blog, this development reinforces a clear message to other traditional consumer product goods supply chains that business-as-usual is no longer acceptable, and that further industry changes and developments are inevitable.
This Heinz-Kraft deal is backed by infamous private equity firm 3G Capital Partners, and the financing of Warren Buffet’s Berkshire Hathaway, which are each contributing $5 billion in financing. The terms call for Heinz shareholders to hold 51 percent stake in the combined company while Kraft shareholders will hold a 49 percent stake. Once more, existing Kraft shareholders will receive a special, albeit hefty cash dividend of $16.50 per share representing a 27 percent premium over yesterday’s closing stock price.
Management of the combined company will consist of Alex Behring, current chairmen and managing partner at 3G Capital, as the new chairmen, and Bernardo Hees, current CEO of Heinz, assuming the CEO role. John Cahill, the relatively new chairmen and CEO of Kraft will assume the vice-chairmen role. Cahill assumed the Kraft CEO role in late December with a mandate to speed-up business change, after Kraft reported flat annual sales and declining profitability. Indeed, in a mere 3 months, business change has occurred and will accelerate. As has been the case with prior 3G Capital actions, the combined company’s management focus will solely be that of 3G.
In its briefing to Wall Street analysts, 3G Capital executives indicated that the strategic intent for the combined company is to leverage product innovation and international reach. However, cost-trimming is indeed part of the agenda with $1.5 billion or above in potential cost synergies being identified as likely opportunities.
Readers may well recall 3G’s prior track record with its prior acquisitions of AB In-Bev, Burger King and H.J. Heinz. The firm actively practices a zero-based budgeting approach and every single year, 3G managed firms have to justify their cost and resource needs. In the situation of Heinz, the original goal of $600 million in cost savings amounted to near $1 billion in savings. Expenses were aggressively cut and production facilities were soon closed. Thousands of jobs have been shed among all of 3G’s prior acquisitions. In a Supply Chain Matters January commentary we echoed UK blogger David Weaver’s commentary on supplier bullying tactics occurring in Europe that specifically named 3G Capital managed companies such as AB In-Bev and Heinz’s practices for delaying payments to suppliers in some cases up to four months.
Once this latest mega-deal is consummated 3G will likely place an emphasis for expanding current well-known North American Kraft food brands to more global offerings among emerging markets while shedding other considered non-performing or non-strategic brands. Product innovation will indeed be the emphasis but more in the context of product formulation. Have you tasted Heinz ketchup of late? From this author’s taste buds, it is far sweater and sugary in composition.
The irony here is that Kraft was once a food, beverage and snacks company with global aspirations. Activist pressures precipitated the 2012 breakup of Kraft into two companies, Mondelez International and Kraft Foods Group. The declared strategic intent of the split was to create two smaller consumer products companies focused on different growth objectives, one being international snacks and convenience foods and the other, North American cheese and food brands Post split, Mondelez continues to struggle with sales and profitability growth after considerable cost cutting actions that impacted supply chain operations. An activist investor recently garnered a Mondelez board seat.
In a September 2013 Supply Chain Matters commentary related to Kraft’s supply chain profile at that time of the split, we outlined the significant business process and systems challenges that the Kraft supply chain team inherited. We were tremendously impressed with the leadership of its integrated supply chain team at the time, as well as its direction, but now, more change can be anticipated. That indeed is the initial takeaway from today’s mega-merger announcement.
Our Supply Chain Matters Predictions for Global Supply in 2015 called for continued CPG industry turbulence because consumers are demanding healthy choices in foods and our shunning traditional brands that emphasize processed foods. Compounding this trend has been activist investors seeking accelerated shorter-term shareholder value, along with the shadow of 3G Capital and its track record of wholesale cost-cutting. The announced Heinz-Kraft deal obviously sends yet another troubling message to the consumer products sector, namely that financial engineering is a more preferable method of approach vs. continuous improvement.
Expect and anticipate more industry change to occur in 2015 and beyond. The emphasis is now focused on product innovation, doing more with less and market agility.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
It seems as though the U.S. west coast port disruption as well as the recent holiday period provided positive benefits for some global carriers. Earlier this week FedEx reported rather rosy fiscal third-quarter financial results reporting a 53 percent surge in earnings as a result of a highly successful holiday shipping season as well as significantly lower fuel costs.
Total reported revenues were up 4 percent to $11.8 billion and operating income nearly doubled from the year-earlier period. Total profit for the quarter increased to $580 million, 53 percent higher than year earlier period.
In briefing analysts, executives pointed to reduced costs as a significant contributor to earnings growth. Higher volumes across all transportation segments and improved yields at FedEx Ground and FedEx Freight were reported as key drivers of operating results.
According to its recent quarterly filing, average per-gallon fuel costs for ground vehicles have dropped from $3.69 per gallon in fiscal Q1 to $2.71 in the latest quarter. Similarly, average FedEx per gallon costs for jet fuel have dropped from $3.08 per gallon in fiscal Q1 to $2.07 per gallon in the latest quarter. A significant restructuring undertaken in the largest segment Air Express division resulted in the buyout of 3600 employees while fleet modernizing and route optimizations contributed to reduced costs.
Further noted was that the January introduction of dimensional pricing has already provided positive financial benefits with average revenue per package increasing 3 percent from the combination of base rate increases and new pricing. One important statistic shared by FedEx CEO Fred Smith was that about 85 percent of shipments from the top three online e-commerce shippers average less than 5 pounds in weight. That, by our lens is another indication of the magnitude of change implied by dimensional pricing on carriers and eventually on online shopping practices.
FedEx’s Freight division nearly doubled operating income from the year earlier period.
Executives additionally forecasted revenue and earnings growth to continue into the fourth quarter of 2015, driven by ongoing improvements in the results of all transportation segments.
So while FedEx impresses Wall Street, is the same perception shared by shippers large and small, as well as industry supply chains?
Today’s front page headline article of The Wall Street Journal, Weaker Euro Ripples Around the World, reflects far deepening foreign currency headwinds for producers whose supply chain costs and operations are weighted in U.S. dollars. For senior supply chain, procurement and sales and operations planning (S&OP) process leaders, it is further compelling evidence that existing supply chain cost and product sourcing strategies will come under enormous scrutiny and pressures in the weeks and months to come.
Supply Chain Matters has already called reader attention to recent corporate quarterly financial results reflecting substantial impacts to earnings as a result of the strengthening U.S. dollar against major foreign currencies. B2C and consumer product goods companies are especially impacted, but so are many other industries as well. The headwinds are strong and concerning.
To cite but a few examples, Procter & Gamble recently reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Foreign exchange pressures had the effect of reducing net sales by a significant 5 percentage points. Mondelez International recently reported that foreign currency headwinds delivered a $149 million hit to its operating income in its prior quarter, in spite of recently rising prices across the board. Conversely, globally diverse CPG firm Nestle was able to sustain a 4 percent organic sales growth in that company’s first-half.
The European Central Bank (ECB) has embarked on its own form of quantitative easing, similar to what the United States embarked on after the severe global economic crisis that began in 2008-2009. The ECB is prepared to print upwards of €1 trillion to buy the bonds or assets of various Eurozone countries to boost their economies and keep European interest rates low. The immediate result is that value of the Euro against the U.S. dollar reportedly has declined by more than a fifth since June, and has now reached its lowest point since 2003. That is obviously good news for European manufacturers and service providers, as well as other foreign based producers not pegged to U.S. dollar costs. This situation is expected to continue for many more months.
Companies whose supply chain and operational costs as well as product pricing is anchored in U.S. dollars now face considerable financial headwinds, motivating some U.S. based firms to quickly raise prices within foreign markets. Many U.S. based manufacturers have upwards of half of existing revenues stemming from export markets.
The compounding effect is added costs and potentially lower export sales as foreign based manufacturers take advantage of a pricing advantage within their export markets. According to the WSJ, business leaders, economists and policy makers are becoming convinced that the Euro’s drop is helping to turn the tide in Europe’s favor. There is further concern that the U.S. Federal Reserve will have to ultimately raise interest rates as well.
For procurement, supply chain and sales and operations planning process leaders, the current financial challenge to the business requires that various planning scenarios and subsequent options be developed to ascertain ways and means to reduce costs or mitigate currency impacts in cost of goods sold (COGS) or in back-up sourcing strategies that are anchored in other than the US dollar. Teams need to able to assess various options to meet quickly and considerably changing sales and product margin goals. Without such plans and subsequent supply chain actions, previous cost and productivity savings efforts can be neutralized.
As to how long this current challenge continues it very much an individual industry or corporate decision. One thing is clear, however. This is a period where analytical and data-driven decision-making capabilities will prove to be rather important.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Supply Chain Matters provides added rather important data point concerning the ongoing significant business challenges associated with many large consumer packaged goods providers and their associated supply chain teams. Multiple U.S. based food producers continue to serve up grim financial and operating news from their latest quarter. Most all of these ongoing challenges are attributed to the industry’s abilities to adapt to fundamental shifts in consumer tastes, changes in previous market growth assumptions and now, the added significant financial implications related to foreign currency effects.
This week, the largest globally focused food manufacturer by revenues, Nestle SA, reported its slowest annual sales growth since 2009 and 2015 will likely provide added challenges. Nestle’s organic sales growth for all of fiscal 2014 was reported as 4.5 percent, a number that perhaps most other large CPG producers would relish at this point. But, that number fell below Nestle’s declared growth target of five to six percent organic growth. Real internal sales growth was noted as 2.3 percent while operating profit was up 30 basis points in constant currencies but 10 basis points in net. In terms of quantification, Overall sales in 2014 were down 0.6 percent and Nestle executives indicated that negative foreign exchange shaved that number by 5.5 percentage points, which is a very significant amount.
From a geographic perspective Nestle’s organic growth was described as broad-based and included 5.4 percent for the Americas, 1.9 percent in Europe and 5.7 percent in Asia, Africa and Oceania. Business media noted that growth in developed and emerging markets is moderating. The CPG producer indicated the need to adapt with the fast-changing expectations of the Chinese consumer. In fact, throughout its earnings release, there is a constant theme of continuous product innovation, re-formulation and re-launching, which all impact the underlying supply chain.
Other noteworthy financial numbers were that Nestle’s cost of goods sold (COGS) fell by 30 basis points driven by product mix and pricing actions along with savings generated by Nestle’s Continuous Excellence program which more than offset increases in raw material costs. Distribution costs were up 10 basis points. The global CPG producer has further established a Nestle Business Excellence initiative at the executive board level in an effort to aggregate line-of-business support services. Thus, the pressure on costs, added efficiencies and productivity continue along with needs for continuous innovation and resiliency to global market changes
Campbell Soup also reported financial results this week, along with added plans for a multi-year zero-based cost focused initiative to slash costs and restructure certain operations. CEO Denise Morrison provided another profound quote: “We are well aware of the mounting distrust of so-called Big Food, the large food companies and legacy brands on which millions of consumers have relied on for so long” and further noting that changing consumer tastes remain a key challenge for the industry. Campbell’s has plans to re-organize its businesses by product category as opposed to geographic regions. According to reporting from The Wall Street Journal, Campbell’s has hired Accenture, the same consultancy that assisted 3G Capital with its efforts to consolidate the operations of HJ Heinz, ant those of Mondelez International, to assist in the Campbell initiative.
Supply Chain Matters reiterates that rapidly shifting industry markets and consumer preferences imply a critical need for increased product innovation and quicker introduction of new products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. Volatile and rapidly changing global markets require that Sales and Operations Planning (S&OP) teams be more responsive and anticipate such changes. The focus clearly turns toward an outside-in perspective, allowing the supply chain to quickly sense changes in product or regional demand and respond as quickly as possible to market opportunities or threats. Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
During this period of earnings announcements for the December-ending quarter, a new and significant headwind, the effects of the U.S. dollar, has appeared for industry supply chains with operations anchored in the United States. That was significantly delivered to Wall Street by yesterday’s earnings announcement from Procter and Gamble, which currently has nearly two-thirds of its revenues coming from outside of the U.S. Procter and Gamble was not alone, even the likes of Apple encountered the same headwinds.
P&G reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Net income dropped nearly a billion dollars from the year earlier quarter. According to business media reporting, foreign exchange pressures reduced net sales by 5 percentage points. Once more, P&G indicated that these currency effects will continue to be a drag within 2015, potentially cutting net earnings by 12 percent or in excess of another billion dollars.
The implications are obvious including a continued selloff of underperforming brands and businesses. One published financial commentary report by The Wall Street Journal implied the continuance of “ruthless cost cutting” and a continued slim-down of brands. P&G has further undertaken ongoing efforts to source more production among emerging global regions, and those efforts are likely to accelerate in momentum.
The strong headwinds of currency were not just restricted to consumer product goods. Today’s WSJ reports that it is now evident that:
“The currency effects are hitting a wide swath of corporate America- from consumer products giant Procter and Gamble Co. to technology stalwart Microsoft Corp. to pharmaceutical company Pfizer Inc.. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping-up with dollar-based costs.”
Further cited was a quote from the CEO of Caterpillar indicating: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” The obvious fears for investors and economists alike is that the U.S. dollar’s explosive gains will backfire for U.S. based companies by reducing the price attractiveness of goods offered in foreign countries as well as reducing the value of foreign-based revenues.
The implications to U.S. centered industry supply chains are the needs for yet further shifting of strategies and resources. The existing momentum for U.S. manufacturing may well moderate with these latest developments. Initiatives directed at supporting increased top-line revenue growth now have the added challenges for more flexible, global-wide sourcing of production and distribution needs. Operations, procurement and product management teams that believed that they could get a breather from draconian and distracting cost-cutting directives will once again face the realities of having to cut deeply into domestic focused capabilities and resources.
We often cite the accelerated clock speed of business as a crucial indicator for agility and resiliency for industry supply chain strategy. Here is yet another example where perceptions of a booming U.S. economy quickly change to the overall business and supply chain implications of the subsequent currency effects.
The merger and acquisition churn involving consumer product goods producers continues, and with that CPG supply chains must continue to adapt to such changes. Today’s announcement from Post Holdings is yet another example of the constantly changing challenges for CPG focused supply chains having to adapt to both rapidly changing end-market as well as internal industry forces.
Today, Post Holdings, a self-termed a consumer packaged goods holding company operating in the center-of-the-store, active nutrition, refrigerated and private label food categories, announced that it had agreed to acquire privately-held MOM Brands Company for a reported $1.15 billion. This deal brings together both the No. 3 and No. 4 players in cereal based on dollar sales value. Together, they are expected to have an 18 percent share of the U.S. cold cereal market measured by revenue. Post currently has an 11 percent share.
Under the terms of this announcement, St. Louis Missouri based Post will pay MOM $1.05 billion in cash and issue MOM stockholders 2.45 million shares of Post stock. The deal is expected to close by the third quarter.
According to the announcement, MOM Brands is noted as a leader in the ready-to-eat (“RTE”) cereal value segment, with over 95 years of experience in providing high quality RTE and hot cereal products, strategically targeting the value segment in branded RTE cereal, private label, and hot wheat and oatmeal. Various business reports indicate this deal will provide Post a presence in the growing bagged cereal and hot cereal businesses, two of MOM Brands’ strongholds. MOM Brands now joins Post’s other brands of Honey Bunches of Oats®, Grape-Nuts Cereal®, PowerBar® Raisin Bran Cereal®, and a larger variety of other brands.
The acquisition announcement was timed with Post’s better-than-expected financial outlook issued for its December-ending quarter.
Supply Chain Matters has highlighted today’s announcement since the history of Post Holdings provides a pertinent example on the continuous changing state of CPG focused supply chains.
The Company’s web site provides an historic capsule upon which we have extracted important milestones:
“Post is over 115-year old with (to borrow a phrase) “a new birth of freedom1.” Post traces its heritage to C. W. Post who introduced Grape-Nuts®, the first natural ready-to-eat cereal marketed to enhance health and vitality, in 1897. Our history serves as a reflection of strategy, marketing, finance and governance during much of the 20th century. C. W. Post invented a cereal and a drink at a time when brands were beginning to resonate with the American consumer. His son-in-law, E. F. Hutton, saw the value of bringing together several brands under one corporate owner and General Foods Corporation was born.”
“General Foods was acquired by Philip Morris in 1985. Subsequently, Philip Morris purchased Kraft and merged it with General Foods…..Kraft sold Post to private-label manufacturer Ralcorp. Post was spun off into a separate, independent company on February 3, 2012.”
Ralcorp itself was acquired by ConAgra Foods in January 2013.
Since its spinoff as an independent company, Post has been an active acquirer of small and larger producers. Acquisitions have included peanut butter producers American Blanching Co. and Golden Bay Foods, eggs and diary producer Michael Foods, snack foods producers PowerBar and Musashi Brands. The Michael Foods acquisition was reported to have exceeded $2.4 billion.
A published report from the Minneapolis Star Tribune reports that the 95-year-old MOM Brands has grown steadily over the past 15 years, particularly capturing share in the low-price or “value” segment of the cold cereal business. That report indicates that MOM will continue to operate as a separate business under Post.
As is often the case in CPG deals, the Post acquisition comes with the usual expectations of added cost synergies, specifically $50 million in run-rate savings by the third year, including sharing of administrative services, infrastructure, sales and marketing. The Star report points out that MOM Brands employs 251 at its Lakeville corporate office and that some jobs there might be in jeopardy, as they often are in post-buyout cost cuts. We would not be all surprised if cost synergies are further applied to supply chain related input costs, functions and services. Such acquisitions often burden the acquirer with added debt or stock dividend expectations which, in-turn, fuel the need for additional cost savings.
While Post continues with its acquisitions spree, the top two producers in this cereal category, namely General Mills and Kellogg have each declared multi-year cost cutting or capacity consolidation initiatives. Supply Chain Matters has provided a focused commentaries on General Mills, the latest being September of last year. In early January, this producer announced the closure of two of its Pillsbury dough factories, adding to the elimination of another 500 jobs over the more than 1000 job cuts announced last year. In 2013, Kellogg announced a billion dollar Project K cost-savings plan that would extend over four years shedding an estimated 2000 supply chain jobs.
CPG supply chains do indeed have their own unique set of challenges. Producers riding the wave of consumer changing tastes and demands for healthier products must continue to innovate or grow or be consumed themselves by producers needing to fuel market growth expectations.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.