Kraft Heinz: Zero-Based-Budgeting its way into the hearts of consumers?
Big Food is falling out of favor, but is 3G's aggressive cost slashing model the way to redeem this CPG giant?
As business professionals, we are constantly searching for opportunities to grow the bottom line. In industries with increasing competitive pressure, thoughtful action must be taken to mitigate margin erosion, either in the form of value-added differentiation or cost cutting. The latter is a key play in the private equity playbook, and it is proudly displayed by 3G capital in its relentless focus on “Zero-Based-Budgeting”, where all costs are questioned and any “fat” is systematically trimmed from the organization. We can all agree that margin enhancement is positive, but only if you have top line sales to convert these mythical margin percentages into tangible profit dollars. There seems to be a clear disconnect between 3G’s rhetoric and Kraft Heinz’s inherent business mission as a CPG, which is why I nominate Kraft Heinz for the “biggest loser” list of companies with disconnected business and operating models.
For a CPG, sales growth calls for a relentless focus on the customer and the market trends that fuel demand. Brands are the heart of the business, and their success is contingent on their resonance with the consumer. Large CPGs have faced significant challenges as processed food has lost favor and the emphasis on “better for you” options has opened the door for smaller organizations focused on healthier alternatives to steal share. In response, many leading Big Food firms such as PepsiCo and General Mills have significantly expanded their product lines and social enterprise platforms through acquisition or R&D to address the consumer need for socially conscious, healthier, and less processed food alternatives. A glance at the Heinz Mission Statement and Values supports the theory that products and consumers are theoretically at the center of the CPG business model with core values of “quality, integrity, consumer first, ownership/meritocracy, and innovation”. Additionally, the long list of beloved Kraft Heinz brands, including Jell-O and Planters, suggests a business model that relies on resonance with food that’s fun and enjoyable.
Herein lie Kraft Heinz riddle: where, oh where, is the emphasis on the all-important consumer and brand value? No apparent forward-looking strategies or recent actions by the new management team appear to support the business model, but instead seem to contradict it. The singular focus of 3G has been on cost cutting, such as the reduction of 2,600 jobs and the closure of 7 plants. Plants were not the only items that didn’t make the zero-based-budget cut. A recent moratorium on free office snacks and budgeting of office supplies has left employees stealing hotel pens and devoid of complimentary cheese sticks. Clearly the era of fun associated with Kraft Heinz culture has ended as 3G ushers in a new era of “no nonsense” packaged food. While 3G has considerable expertise in acquiring organizations and increasing profitability through aggressive cost reforms, it risks further alienating the customers so key to its success. For an organization purportedly focused on “customer first” and “innovation”, the new focus should include strategic initiatives that will carry out these core values and address the response to shifting consumer preference. While EBITDA has recently benefited from the dramatic cost extractions, it is questionable how a CPG can deliver long-term value when the focus on consumers, employees, and products are secondary to searching the proverbial couch cushions for spare change.
Has the 3G acquisition created an identity crisis for Kraft Heinz?
Resources:
“Slimming Down.” The Economist. The Economist Newspaper Limited 2015, 7 Dec. 2015. Web. 2 May 2015.
“A Big Bite.” The Economist. The Economist Newspaper Limited 2015, 7 Dec. 2015. Web. 28 Mar. 2015.
Gasparro, Annie. “Kraft Heinz Revenue, Profit Dip Despite Cost Cuts.” The Wall Street Journal. Dow Jones and Company, 7 Dec. 2015. Web. 5 Nov. 2015.
Jargon, Julie. “Kraft to Slash 2,600 More Jobs, Close 7 Plants.” The Wall Street Journal. Dow Jones and Company, 7 Dec. 2015. Web. 4 Nov. 2015.
Reingold, Jennifer. “Kraft Heinz: When 2 + 2 = 3.” Fortune. Time, Inc., 7 Dec. 2015. Web. 8 July 2015.
Kowitt, Beth. “Special Report: The War on Big Food.” Fortune. Time, Inc., 7 Dec. 2015. Web. 21 May 2015.
Buhayar, Noah. “No More Free Cheese Sticks for Kraft Employees in Cost Crackdown.” Bloomberg Business. Bloomberg L.P., 7 Dec. 2015. Web. 30 July 2015.
The Kraft Hines Family of Sites. The Kraft Heinz Company, 2015. Web. 7 Dec. 2015.
I see it a bit differently. 3G’s business model as a private equity firm of profitably investing in large companies relies on thier operating model of aggressive cost cutting at large companies. Specifically, where they have had success has been consumer facing food companies like Burger King, Tim Hortons, and ABInBev, where they have cut costs while still keeping the consumer base engaged. Their KraftHeinz behavior looks to be in line with both their business model and operating model.
On the KraftHeinz front, the cuts described do seem drastic, but none of them seem to have a direct impact on consumers in the short term. I will be very concerned if the cuts do extend to facets of the company that reduce the described resonance with food that has driven the operating success at KraftHeinz in the past. In the mean time I think the operational slimming will result in a more nimble company, laser focused on delivering value to their investors.