Assignment Task
Kraft Heinz Merger and Outcomes
The $62.6 billion merger between Kraft and Heinz was formalized in 2015 and made the newborn Kraft Heinz Company the fifth largest company in the food and beverage industry globally. Supporters of the merger strongly believed that the two giants could create more value cooperating together than separated and could potentially increase their bargaining power and competitiveness.
Before the merger, the companies had similar business models as they both transformed raw materials into pre packaged and processed food. Particularly, Kraft Foods focused on dairy products, desserts, and meals, and almost 98% of its goods were consumed in North America. Even if the global penetration was limited, Kraft was still able to reach geographical areas not covered by its distribution channels shipping its products directly to the stores bypassing traditional distributors.
On the other hand, Heinz, whose core products included ketchup, sauces, meals, snacks, and baby food, has developed an international product sales network that Kraft Foods desired. Heinz’s operation system was different from Krafts as it relied on local distributors to deliver their goods to the store.
The complementary advantages of both companies were clear; Kraft Foods could use Heinz’s sales network to expand markets internationally and Heinz could rely on Kraft’s trucks to reach the stores.
Additionally, both companies were aiming at achieving cost efficiency, gaining other synergies and winning more space on shelves exploiting increased scale.
Despite all the benefits that the cooperation between the two could have created, the merger was not successful as many believed it would have been.
As the company chose to aggressively compete on costs, it did not improve its ability to innovate to keep up with the environmental changes and failed in detecting consumer needs. Instead, many budget cuts have influenced advertising, promotion, and R&D expenses.
Nowadays, the demand for organic and healthy diets has increased dramatically and the old product line can no longer satisfy customers.
Since the merger, Kraft Heinz has lost about 60% of its value suffering from share-price and EBITDA decline, slow revenue growth, and numerous layoffs. In particular, sales are down from peak levels probably because of the lack of brand investments. Also considering the company’s $30 billion debt, the concern of investors regarding Kraft Heinz’s future keeps increasing.
Political: as an American multinational food and beverage company, Kraft Heinz operates in more than 70 countries and its products are sold in 150 countries around the world, which exposes the company to various types of political and legal influences such as price policy, tax policy, government intervention, employee wages, and food regulations. Adapting to different standards in various countries having different legal supervision has been a huge challenge for the company.
Economical: the increase of inflation, tax rate, cost of sugarcane, corn, and other main raw materials coupled with the economic recession caused by the global epidemic, has brought a lot of pressure to the food industry. In contrast, emerging markets such as China have strong GDP growth and steady growth of the food industry due to their good defense against the epidemic.
Social? due to the change of lifestyle, people pay more attention to medical treatment and health. Twitter, Facebook, and Tiktok are the new media that magnify people’s pursuit of a healthy life. The demand for green and healthy food in the FMCG (Fast Moving Consumer Goods) industry is rapidly increasing and this represents an excellent opportunity for Kraft Heinz to further develop and expand.
The tastes of the new generations are changing and they expect to meet their health needs with a few clicks on a smartphone. According to data collected by Nielsen last year, 49% of U.S. consumers shopped for consumer packaged goods products online and bought many of the food products and boxed food services that compete directly with Kraft Heinz for consumers’ “share of stomach.”
Technological? the progress of science and technology is helping the FMCG industry to develop safer, healthier, and greener new products. It also helps product lines realize automation. In fact, to quickly sell the product inventory with a short life cycle is one of the key factors for the success of a FMCG company, which needs to achieve the best demand and supply balance in the operation process.
Kraft Heinz cooperates with FourKites, a leading supply chain visibility and prediction analysis platform, to enable it to implement real-time freight tracking and monitoring throughout the supply chain. By connecting the analysis platform with a network of more than 4 million GPS linked assets, Kraft Heinz can track and predict arrival times in real time around the world.
SWOT Analysis
Strengths
After the merger in 2015, Kraft Heinz has a leading worldwide product portfolio due to strong brands with pricing power and efficient operations. As a result, it has a competitive advantage as well as significant bargaining power. Meanwhile, the well-known brand name in the global market is helpful for Kraft Heniz to promote new products or expand to new markets.
Besides, Kraft Heinz has an efficient distribution network, which helps to reduce operational costs. For example, they distribute their products through large supermarket chains such as Wal-Mart as their key account, which helps to ensure their product access and sales amount. Moreover, we discovered that Kraft Heinz’s main source of profit is condiments and sauces. They need to consider which kind of product they should put more effort on for creating greater profit and saving costs.
In addition, Kraft Heinz has had an acceptable return on expenditure in the past 2 years. By creating new revenue sources, Kraft Heinz has been generally effective in executing new projects and generating decent returns on capital expenditure. These returns can be used to support firms’ new business activities.
Weaknesses
While food safety is an important issue for food companies and consumers, Kraft Heinz has faced constant controversy over product recalls in recent years. In 2021, Chef Francisco Minestrone Condensed Soup was required by the U.S. FSIS to recall the product because the label did not declare allergens. These events may affect corporate reputation and consumer trust.
Aggressive cost management over the past few years has eroded Kraft Heinz innovation. Traditional brands are slow to add value to their products, causing them to fall into depreciation. There is no denying that brand premiums are serious at the time of mergers and acquisitions, but the continued cost compression is more damaging to brand value and leads to asset write-downs.
Kraft Heinz lacks innovation, due to the cost-cutting strategy. After merger and acquisition, Kraft Heinz faced brand premium, which caused huge impairment of goodwill and intangible assets. In its 2020 financial report (Figure3), its debt-assets ratio amounted to 50%, but the portion of goodwill and intangible assets in total assets is $80.1 billion (81.9% of total assets), so the debt-assets ratio is high. As a leading food company, relying on the traditional influence of the brand without investing in R & D does not retain customers, and Product competitive advantage will continue to recede.
Opportunities
Which found that the demand for sauces and spices of the Asia market is larger than the Americas market, and China is the largest consumer in this segment(Fig.4). The financial report of Kraft Heinz also shows that the North American market is facing saturation or even decline, expanding into the Chinese market is an opportunity to strengthen the market position. In fact, Kraft Heinz already has a good reputation for its Chinese product- Master (soy sauce) – in China. Kraft Heinz could strengthen Chinese product innovation to penetrate the Chinese market.
On the other hand, as individuals become more conscious of their health, there is a growing demand for nutritious and healthy foods. The development of new healthy food products such as “less oil, less salt and less sugar” will gain more popularity among consumers.
Threats
Food safety regulations have become more strict across the world in recent years, and a food firm must now comply with a variety of standards set by food regulatory bodies in various nations. As a result, the company’s compliance costs rise.
Besides, world food prices reached a 10-year high in September, driven by a rise in cereals and vegetable oils, the UN Food Programme said recently. Kraft Heinz is facing shortages of supplies, supply chain woes, labour issues, rising energy costs and higher agricultural prices, all of which will continue to drive further increases in food inflation. They therefore need to consider how to squeeze their own production costs or pass them on to consumers.
Across product categories and geographies, Kraft Heinz faces a variety of competitors. With the increasing competition pushes a firm to spend more on promotions and price wars, both of which have an impact on revenue and profitability. In addition, the expansion of the Chinese market may face obstacles in strong competitors, especially in the sauce and condiments as well as cheese and dairy categories.
Recommendations
Innovation
Innovation in the Kraft Heinz business can be generated in the following two main ways:
I. Green and healthy food
When people buy food today they pay attention to the content of various substances contained in the ingredients. When the content of sugar, fat or some other substances that people consider unhealthy is too high, people tend not to choose such food. Therefore, for a company that makes a profit mainly from condiments and sauces, it is important for them to innovate their products in order to reduce the amount of unhealthy substances in their products while improving their taste.
The company has now announced a gradual reduction in the total sugar and sodium content of most of its products by 2025, bringing 85% of its products (weighted by sales) into line with global nutrition targets and more in line with today’s world demand for a healthy and green diet.
II. Sustainable Packaging
Nowadays, people are not only impressed by the quality and quantity of the products offered by a company, but also by its corporate image and culture. Many countries and regions are now advocating that companies should pay attention to whether the pollution and waste generated by the production process will cause serious damage to the environment, and in the past two years, due to extreme weather and epidemics, people are increasingly concerned about whether companies will pay attention to this aspect of environmental friendliness. Therefore, if Kraft Heinz can bring the image of an environmentally friendly company, it will attract the attention of a large part of environmentalists.
In the past few years, Kraft Heinz has indeed been exploring this aspect. In designing their packaging, they focus not only on the appearance, functionality, cost and environmental impact of the packaging design, but also on the integrity of the product during production, distribution, shelf life and end-of-life. Globally, they replaced 770 tonnes of plastic PVC packaging with PET (which is easier to recycle) and removed 90 tonnes of plastic from the company’s bottle packaging. In partnership with environmental consultancy group Lorax EPI, they plan to make our packaging 100% recyclable, reusable or compostable globally by 2025.
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