Heinz Kraft merger: Synergies and cost cutting

26-Mar-2015 - Last updated on 26-Mar-2015 at 12:39 GMT

The merger does not mean competition within the industry as a whole has been reduced, says Frost & Sullivan analyst Tosin Jack

The super-merger of Heinz and Kraft is less about synergies and more about cutting costs, analysts have said.

In an estimated $49bn deal, the merger creates a food and drink giant, set to be ranked as the fifth biggest in the world. Heinz is the more internationally focused of the two, with North America representing only 25% of packaged food sales and its largest market in Western Europe. Meanwhile, Kraft Foods’ share price skyrocketed following the announcement, and was up 35% by market close on Wednesday – a record one-day rise for the company.

“What we can probably see with the nature of the deal is that the priority for the group is not to make synergies between the two groups but instead to cut costs,” said Euromonitor packaged foods research analyst Raphael Moreau in a podcast on the market researcher's blog.

Moreau said the involvement of 3G Capital – which bought Heinz along with Warren Buffet in 2013 – suggested cuts would be made within the new structure, given that 3G had been closing factories and cutting costs “quite aggressively” with Heinz.

“In terms of synergies between these two groups, they are not really obvious because they operate in very different categories,” he said.

Cobranding

“However there might be some kind of cobranding opportunities, particularly for the ready meals and the sauces brands, with both companies having an interest in these categories and Heinz being obviously a major sauce brand that can be used with ready meal brands.”

Moreau said Heinz also had growth potential in Latin America and the Asia Pacific region, particularly in Asia with its baby foods.

Growth despite industry challenges

Tosin Jack, Frost & Sullivan senior industry analyst for Chemicals, Materials & Food, said she was unsurprised by the merger, considering the increasingly competitive nature of the food industry – and predicted more such deals in the future to increase companies’ revenue growth and market share.

“For these two companies it is no longer about how do we perform better than each other but now about how do we make our brands work together to achieve our objectives as a company,” she said. “It does not mean competition within the whole industry has been reduced but it means two companies can now experience growth despite industry challenges.”

She added: “It is expected that there will be improved efficiency across brands, as the company now has the prospect of seeing how its various brands complement each other, thus generating sales.”