Analysis: 3G to use its cost-cutting playbook on Kraft after Heinz merger

Burger Fuel

26/03/2015 01:59

By Anjali Athavaley 
    NEW YORK, March 25 (Reuters) - When Kraft Foods Group merges 
with H.J. Heinz Co, they will share a name, a central place in 
the American kitchen and two headquarters near Chicago and 
Pittsburgh. 
    But that dual office structure may soon change, according to 
some industry watchers. If history is any guide, their new 
owners will wrest an expected $1.5 billion in annual cost 
savings by 2017 by removing duplicate operations, slashing perks 
such as the use of private jets, while scrutinizing even the 
most mundane expenses. 
    "There is going to be a lot of headcount reduction," said 
Bob Goldin, executive vice president of food consultancy 
Technomic. "You will see some portfolio pruning. They aren't 
going to have two headquarters for long." 
    Heinz's backer, Brazilian private equity firm 3G Capital 
Partners, has made a name for itself by aggressively trimming 
the fat from food and beer companies struggling for growth.  
    3G is considered "the most aggressive in the industry in 
terms of running businesses on a very lean basis and maximizing 
margins and cash flow," said Kevin Dreyer, a portfolio manager 
at Gabelli Funds, which owns roughly a million shares of Kraft. 
"It's certainly a good thing for holders." 
     3G Managing Partner Alex Behring made clear on Wednesday, 
when the $46 billion deal was announced [ID: nL2N0WR2GF], that 
it would implement a strategy of zero-based budgeting at Kraft 
Heinz Co when it comes to the company's cost of goods sold and 
selling, general and administrative expenses. The concept 
requires management to start each new budget year by justifying 
all costs from scratch, rather than the  traditional method of 
basing their new budget on the previous year's figures and then 
only having to justify any changes. 
    Some analysts say it is likely that 3G will exceed its 
savings target. It represents 6 percent of the cost base of 
Heinz and Kraft combined, according to Dave Novosel, senior 
analyst who covers both Heinz and Kraft for Gimme Credit, which 
provides independent research on corporate bonds. 
  
    EXPENSES LARGE AND SMALL     
    When 3G teamed up with billionaire investor Warren Buffet to 
buy Heinz in 2013, the cuts quickly followed. They included 
cutting 7,000 jobs in an 18-month period, closing six factories 
and many smaller curbs on spending - including limiting employee 
use of company printers to 200 pages per month.  
     At the time, Pittsburgh-based Heinz had separate offices to 
serve as its North American headquarters and its global 
headquarters. Those two operations were quickly consolidated 
into one, smaller office, according to a person close to Heinz. 
The copier restrictions extended to requiring printing on two 
sides of a page, and a reduction in the use of color printing, 
the person said. 
    Investors and analysts have generally cheered the results. 
3G says that Heinz is now the most profitable food company in 
the industry.  
    The changes are typical of 3G's playbook. When 3G-backed 
Belgian brewer InBev NV acquired the largest U.S. beer producer, 
Anheuser-Busch Cos Inc, to form Anheuser-Busch InBev  ABI.BR  in 
2008, aggressive cost cutting soon followed. And after it took 
control of Burger King in 2010, 3G slashed hundreds of jobs at 
the fast-food chain's Miami headquarters, got rid of  swanky 
offices and sold the corporate jet. It also took labor and 
operational costs off its books by franchising more than 1,300 
restaurants.       
    "When they see something that isn't working, they eliminate 
it," said Gary Stibel, founder of the New England Consulting 
Group, whose clients have included both Kraft and Heinz. "It's a 
very healthy diet for the company, whether it's in food, 
beverage or otherwise, and it does work." 
    He added, "It's taken the food industry a long time to 
consolidate to this degree. It isn't over. Others will learn 
from what they're doing." 
    To be sure, 3G and Kraft highlighted on Wednesday the growth 
potential for the combined entity as well. Heinz gets access to 
Kraft's well-known brands like Oscar Mayer and Velveeta, while 
the mac and cheese maker can use Heinz's distribution network to 
broaden its reach internationally.  
    But in the United States, where packaged food makers have 
struggled to increase sales in the face of changing eating 
habits, boosting sales will be challenging.  
    "It's much more of a margin story than a top line story," 
Dreyer said. 
 
 (Reporting by Anjali Athavaley; Additional reporting by Olivia 
Oran and Lisa Baertlein; Editing by Michele Gershberg and Martin 
Howell) 
 ((anjali.athavaley@thomsonreuters.com; 646-223-4416;)) 
 
Keywords: KRAFT DEALS/