What's ahead for Kraft Heinz?
KNIGHT RIDDER/TRIBUNE 8:02 AM ET 4/17/2017
Symbol Last Price Change
KHC 91.5down 0 (0%)
BRK/A 245000down 0 (0%)
GIS 57.17down 0 (0%)
GPDNF 66.77down 0 (0%)
CPB 56.14down 0 (0%)
PG 90.03down 0 (0%)
PNRA 315.44up 0 (0%)
PEP 112.68down 0 (0%)
MDLZ 44.04down 0 (0%)
QUOTES AS OF 04:00:00 PM ET 04/13/2017
April 17--Somewhere in the vicinity of 169,000 Unilever employees were jolted by the news earlier this year that Kraft Heinz Co.(KHC) had turned up in London with a $143 billion offer to buy their employer.
No, no, said executives at the Anglo-Dutch consumer packaged goods giant, politely ushering the would-be buyers out the door. Thanks, but no thanks.
Kraft Heinz (KHC) -- backed by funding and strategy from the food giant's majority owners 3G Capital and Berkshire Hathaway(BRK/A) -- now may be casting its eyes across the aisles of the world's grocery stores, looking for another tasty business that owns great brands but also has identifiable places to cut costs.
General Mills (GIS) with its 39,000 workers? Hershey and its 16,000 employees? Maybe Danone(GPDNF) (99,000 workers), Campbell Soup(CPB) (16,500), General Mills(GIS) (39,000), Kellogg (37,000), Procter & Gamble(PG) (105,000) or Mars (80,000)?
Shares of Panera Bread(PNRA) (50,800 employees) rose briefly last week after a report that 3G Capital and Warren Buffett might try to buy it out from under an investment firm that announced a plan to acquire the restaurant chain.
Later in the week, Susquehanna Financial Group analyst Pablo Zuanic put out a report saying that PepsiCo(PEP) (264,000 employees) would be more vulnerable to a Kraft Heinz(KHC) bid than Mondelez International(MDLZ) (90,000 employees), the former Kraft sibling widely seen as a potential acquisition target.
There sure are a lot of jobs tied up with the consumer packaged goods companies that stock the world's shelves with condiments, soups, shampoos, cereals, yogurt, pet food and other products used by the masses.
It's an easy call that some of those positions could be on the block, if Kraft Heinz(KHC) CEO Bernardo Hees and his team merge their 41,000-employee company with another icon of the industry.
"They know how to run a business more efficiently than anyone else," said Brittany E. Weissman, a consumer analyst with Edward Jones in St. Louis.
Whether you think that's good or bad depends on whether you're getting a paycheck from a food company or a dividend check from investing in one.
As Kraft Heinz(KHC) prepares for its annual shareholder meeting in the Pittsburgh offices of law firm Reed Smith on Fifth Avenue this week, Ms. Weissman seems inclined to believe that most of the company's investors are impressed by their management and are hungry for more.
Earnings at the company that makes Ore-Ida french fries and Oscar Mayer hot dogs rose almost 50 percent in the last year, she said, and the company has improved profit margins at a level that outpaces competitors and peers.
"I think they've definitely made their presence known in the food space," Ms. Weissman said.
A new headquarters city?
Another acquisition -- wherever and whenever it gets done -- could spell the end of one of Kraft Heinz's(KHC) two headquarters locations, if the negotiators need to sweeten potential bids with offers to keep a significant presence in the next company's hometown.
The 3G Capital and Berkshire Hathaway(BRK/A) partnership acquired hometown food company H.J. Heinz Co. in 2013, keeping the family name on the NFL football stadium and inhabiting its headquarters office at PPG Place, Downtown, but moving to shutter plants and streamline the production system.
Two years later, the owners merged Heinz with Kraft Foods Group and created the two-headed Kraft Heinz(KHC), with offices in Pittsburgh and Chicago. More jobs were trimmed, more production streamlined.
In February 2013, the company had about 1,200 employees in the Pittsburgh region. Heinz CEO Bill Johnson, at the time, said keeping the headquarters in the city was in the contract. "I told them Pittsburgh was nonnegotiable," he said.
As of last May, Kraft Heinz(KHC) had about 800 workers in the region. The company now uses 22,000 square feet of office space in its PPG Place headquarters, down from 95,000 square feet when it moved in back in 2008.
Michael Mullen, senior vice president of corporate and government affairs for Heinz, last week reiterated the Kraft Heinz company's(KHC) ties to Pittsburgh. "We have 41,000 employees globally as of our annual 10-K filing but are not disclosing head counts by office or location. Kraft Heinz(KHC) remains committed to our co-headquarter locations in Pittsburgh and Chicago."
He added that the food company remains committed to its partnership with the Steelers, who play at Heinz Field, and noted the company continues to give to local organizations such as the Greater Pittsburgh Community Food Bank, the Pittsburgh Symphony, Carnegie Museums and others.
Pressure for results
Few in the food business are unaware that they might draw the eye of Kraft Heinz(KHC), Ms. Weissman said.
Management at many companies has been trying to step up the pace of growth -- not easy in an industry that has plateaued and is facing incursions by small rivals promising less processed, more natural food products.
Bernstein analyst Alexia Howard last week issued a report on the U.S. packaged food industry noting that sales volumes at packaged food companies fell in the 2015-16 period, as consumers chose fresher foods. Margins could face more pressure as retailers and manufacturers battle over price and promotional expenses, she said.
Borrowing a page from the competition, food companies have embraced the zero-based budgeting technique practiced by 3G Capital, which requires that every new budget start from scratch and every expense be justified.
That looks good to investors, whose interests don't necessarily align with those of the employees who might be shed along with the expenses.
Unilever announced recently that it had reviewed its portfolio after the near miss with Kraft Heinz(KHC) and plans to sell or spin off its margarine and spreads business. The company's effort to maximize shareholder value also included paying a higher dividend and seeking "greater efficiency in our cost base through zero-based budgeting."
Looking for new business models
Where Kraft Heinz(KHC) hasn't separated itself from the pack is in invigorating sales. Last year it reported a 0.3 percent rise in organic net sales, excluding the impact of currency rates and divestitures.
Ms. Weissman notes that while management may not have gotten the sales spike it had hoped for from the pantry of iconic products it bought, she does count some of its efforts as successful, citing the introduction of Heinz mustard to the consumer market as an example. "They've done a decent job renovating some of their portfolio," she said.
The marketing team has had some wins, too, garnering attention with stunts such as a low-cost campaign for a national day off to recover from the Super Bowl and the production of some ads that executed a pitch offered by a character in the hit cable TV show "Mad Men."
In Ms. Howard's view, the surviving U.S. packaged-food companies will be those that can shift from their legacy businesses into more profitable spots. That might include moving into new geographic areas, buying up challenger brands and getting more products into the perimeter of grocery stores.
Short term, Ms. Weissman expects Kraft Heinz(KHC) to look for an acquisition target like Unilever that has extensive international operations, allowing ways to leverage North American brands into new markets worldwide.
That issue also played a role in Mr. Zuanic's focus on PepsiCo(PEP) as a possible merger partner. "From the Unilever bid, we learned Kraft Heinz(KHC) wants size (no news really) and international exposure (which should rule out General Mills(GIS)) ...," he wrote in a report last week.
Kraft Heinz (KHC) in February said it expects its integration program to deliver $1.7 billion in pretax savings by the end of 2017. After that, big rewards coming from the cost-cutting programs may start to dry up, and Ms. Weissman sees that as helping drive the push for another significant acquisition.
The Unilever setback may have slowed the process, but the company's managers will regroup, she said. "I think these guys are smart. They have a list of candidates."
For his part, Mr. Mullen said Kraft Heinz(KHC) doesn't need to do another deal.
"Our combination of iconic brands and global platforms puts us in a great position to drive profitable growth in markets around the world. As such, we don't need another acquisition to drive profitable growth for the long term," he said. "Kraft Heinz(KHC) will continue to drive profitable growth and meet consumer needs around the world -- with or without another acquisition."
Teresa F. Lindeman: tlindeman@post-gazette.com or 412-263-2018.
