Since the announcement earlier this week, business and other media has generated a lot more background regarding the mega-merger of HJ Heinz and Kraft, and specifically the prime players behind this merger.
Reports indicate that the talks began in January when 3G Capital approached Kraft. This reports indicated that Kraft management was quite receptive to a potential merger or takeover, and the mutual talks moved swiftly leading to a Kraft board discussion in late February leading to the decision to sell the company. As occurred when 3G acquired HJ Heinz, Warren Buffet’s Berkshire Hathaway was brought in for financial backing.
The merger’s ramifications are already stark. The Wall Street Journal indicated that this merger promises to reshape the food industry and “could send rivals scrambling to shore themselves up with tie-up of their own.” In our Supply Chain Matters initial commentary, we pointed to additional tremors for consumer goods supply chains.
Further amplified has been 3G Capital’s current track record for aggressive cost-cutting, which sends further tremors among industry players. Since assuming operations management of HJ Heinz, upwards of 7000 jobs were eliminated in a 20 month span. New CEO Bernando Hees ultimately cut a third of the staff at Heinz’s headquarters including 11 of the company’s top 12 executives. Obviously, under 3G, there is little need for cross-functional collaboration. Readers can garner one descriptor of the 3G cost cutting methodology but viewing a Reuters / Chicago Tribune article, Pack up the peanuts: Kraft’s party is ending. Other CPG players will likely be broadening discussions with other private equity or activist firms for M&A opportunities that can match the industry shadow and bottom-line returns of 3G.
Beyond the current ebullient lens of Wall Street are the longer-term realities for both addressing the market challenges of Kraft as well as the fusing the synergies of two very large consumer goods entities.
From a supply chain perspective, Heinz garners nearly 60 percent of current revenues from international markets. Thus its supply chain capabilities are grounded in global customer fulfillment nuances. Heinz further has a keen focus on food and restaurant channels and services, especially in the light of 3G Capital’s other investments. Kraft on the other hand has been completed focused on North American customers. That strategy was cemented with the prior split-off in 2012 that created Mondelez International, which was created and resourced to be the global growth entity. An area to keep an eye on is the how the merged company focuses on core channels and customers, whether they are supermarket, food services or convenience store. As noted in our prior commentary, how suppliers are treated under the merged entity will be another area to watch, particularly concerning efforts directed at product and process innovation.
Today, Mondelez holds product licensing agreements to distribute certain Kraft brands globally, which promises to be very interesting in the months to come when 3G begins its consolidation and global growth efforts for Kraft. The Heinz and Kraft supply chain resources are likely to be brought together very quickly with additional consolidation and collapsing of organizations.
To be balanced, some Wall Street influencers praise 3G for its willingness to sustain its investments and management of the companies it has acquired, far more than other private equity firms. However, the difference with Kraft is that it is a far larger and far more complex entity with lots of moving parts. If 3G proves successful in its efforts over the long term, then so be it.
One thing is certain, throw away all of the prior notions of consumer product goods historic industry indices, managed transformation or continuous improvement. This week marks a considerable change and a new playbook for CPG focused supply chain teams. What appears today and what the industry ends up to be in two or three years can well be dramatically changed.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.