(FROM THE WALL STREET JOURNAL 3/26/15)
By Annie Gasparro
Fancy some Heinz ketchup with your Kraft Cheez Whiz?
H.J. Heinz Co.'s planned acquisition of Kraft Foods Group Inc.
unites brands that have been commonplace in American kitchens for
decades but are, in many cases, struggling to keep pace with
changing palates and healthier diets.
The success of the deal, valued at roughly $49 billion, will
hinge not only on Heinz owner 3G Capital Partners LP's ability to
cut costs but whether the brands in combination can rekindle
healthy growth.
"Despite being quite iconic, these brands are losing their
resonance with consumers -- they like the brands, but they don't
actually want to eat them," said Euromonitor International analyst
Raphael Moreau.
Many Americans look nostalgically at Kraft's and Heinz's brands.
Warren Buffett, whose Berkshire Hathaway Inc. is helping fund the
deal, said Wednesday on CNBC that "the tastes of Kraft-Heinz are
enduring" and added he liked many of the Kraft brands as long as
"30 years ago" and "still liked them."
But the 84-year-old investor, famously fond of Cherry Coke,
isn't necessarily in sync with the growing numbers of consumers
trading Kraft's Miracle Whip, Lunchables and Cheez Whiz for
more-natural or less-processed alternatives.
At Heinz, while its namesake ketchup has kept growing, its Smart
Ones frozen dinners and Ore-Ida frozen foods are faring less
well.
U.S. retail sales of Cheez Whiz have dropped 10% since 2010 to
$34.3 million, while those of Ore-Ida Bagel Bites have fallen 20%
to $51.5 million, according to Euromonitor. Kraft has said it lost
market share last year in 40% of its U.S. businesses.
Kraft and Heinz face the same tough competition from
small-but-fast-growing natural and organic brands, and both have
scaled back production in recent years to address slowing demand.
Some analysts questioned the wisdom of a company struggling with
waning consumer interest in its food buying a similar company with
similar problems.
"For all our talk of healthy and less-processed food, none of
them really speak to those trends, so I'm really interested to see
how 3G is going to respond to that," said Billy Roberts, an analyst
at market-research firm Mintel.
Despite their issues, the two companies still generate some $28
billion in revenue and billions in profit each year. Between them,
Kraft and Heinz say they have eight brands that generate more than
$1 billion each in annual sales. Kraft alone says its products are
found in 98% of American households.
Together, they would be fifth-largest food seller in the world,
behind Nestle SA, Mondelez International Inc., PepsiCo Inc. and
Unilever Group, according to Euromonitor International Inc.
Kraft investors cheered the deal, sending those shares up 36% to
$83.17.
Executives at Heinz, its parent 3G Capital, and Kraft said
Wednesday morning that combining forces will allow them to leverage
relationships each company has with grocery stores.
For instance, if Heinz has more pull in the dressing and
condiments aisle, Kraft could use that to get better placement for
its salad dressings.
"I can't think of a part of the grocery store they don't cover,"
Mr. Roberts said.
Kraft Chief Executive John Cahill, who will become vice chairman
of the new Kraft Heinz Co., said together the brands can
potentially revive the center aisles of supermarkets that have
grown stale in recent years. The merger will help them "navigate a
fast-changing marketplace . . . and grow faster than we could on
our own," he said.
It is possible that combining various products to make new ones
could help -- the way Kraft did with its P3 protein-oriented snacks
last year, using Planters nuts, Oscar Mayer meats and Kraft
cheese.
Still, even with extraordinary size and scale, it could be hard
for Kraft to make Kool-Aid and Cool Whip cool again. The items are
filled with ingredients that some advocacy groups, such as the
Center for Science in the Public Interest, claim are unhealthy.
The top ingredient in Kool-Aid Cherry drink mix is sugar, with
Red 40 and artificial flavor not far behind. Two of Cool Whip's top
components are hydrogenated vegetable oil and high fructose corn
syrup.
Heinz has launched new products, like Sriracha Ketchup, to stay
on trend. And Kraft took the artificial coloring out of some of its
mac-and-cheese. But adapting to changing tastes will take a lot
more than that, Mr. Roberts said.
"You're really asking a lot of a brand that seems to have
overextended itself in the first place," he said.
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