The recent Kraft-Heinz merger, worth roughly $40 billion, got the attention of food processors everywhere. It’s got implications galore for the new competitive processing environment.
Kraft-Heinz will have annual combined revenues of about $28 billion. It will be North America’s third largest and the world’s fifth largest food manufacturer. And it will clearly impact the future of the .
Two major trends in food consumption
- about what they eat. Millennials and high-income consumers are particularly focused on healthy food.
- Lower-income consumers appear to spend less on name brands. Which, in the United States, isn’t surprising: the median U.S. household income (adjusted for inflation) was still lower at the end of 2014 than at the beginning of 2007.
Merger forces efficiency in large-scale food processing
So, with such consumer shifts, why would investors bet on the future of name brands like Heinz-Kraft? Should we expect the newly-formed company to launch major innovations and move away from processed food, and into more promising segments such as natural or fresh foods?
That would underestimate the strength of the buyers.
The deal is financed by 3G Capital, with the support of Warren Buffet’s conglomerate. It’s the same parent group that acquired Burger King in 2010 and merged it with Tim Hortons in 2014. They also bought Heinz two years ago.
The new Heinz-Kraft majority owners have a strong track record of cutting costs and finding efficiencies. The results were quick to follow the purchase of Heinz. They managed to raise operating margins to 26 percent from 18 percent (relative to net sales). For the current deal, it’s estimated that savings of $1.7 billion annually will be found by the end of 2017.
All of this will bring even more fierce competition to market segments in processed foods that are highly “commoditized” (eg., pasta). The large food processor with recognizable brands will be able to exercise its market power and lower costs of production.
High value processing will be another win
Smaller food processors won’t be left out however. Their future seems to be brighter in the segments offering higher value food products. This is perhaps where many Canadian food companies possess a natural competitive advantage. Being lean and innovative allows businesses to listen to consumer needs and tailor products accordingly.
Even still, the success of niche or high-value markets isn’t a slam dunk. For one thing, competition at one level of the market always finds a way to force efficiencies in the entire supply chain.
And of special note to those in niche or high-value markets, it’s good to remember that while the market for Canadian food processors continues to grow, so does the global competition.
J.P. Gervais, Chief Agricultural Economist