Business

Cheung: Heinz-Kraft merger shows pre-packaged food industry troubles

If you love your mac and cheese with ketchup, you’ve probably already heard about the blockbuster news: Heinz and Kraft are merging. Last week, Brazilian investment group 3G Capital worked with Warren Buffett, who is a co-owner of Heinz, to strike a deal that would acquire Kraft Foods and merge the company with Heinz. The new company would become the world’s fifth largest food and beverage company.

But before you break out the celebratory Oscar Mayer hot dogs with Heinz mustard, you might want to take a look at the numbers. The consolidation of the two massive companies is actually a reflection of a weakening packaged foods industry.

Prior to the merger, Kraft had been struggling to bring in the cheddar.

The company had gone through several deals to restructure and reorganize the company to improve profits. The latest move came in 2012, when Kraft decided to split itself into two companies: one called Kraft Foods Group focusing on packaged foods — like Jell-O and Planters — and one called Mondelez International — focusing on snack foods, like Oreos and Chips Ahoy.

But despite isolating its portfolio of grocery products, Kraft Food Groups continued to struggle. Campbell Soup said its sales of condensed soup in the U.S. fell 11 percent in the most recent quarter, while Kellogg reported its morning foods sales in the U.S. fell 7.7 percent.



The packaged food industry is on the losing side of new American consumer trends. American eaters are no longer shopping for convenient, familiar brand names; they’ve started ditching processed and pre-packaged Velveeta cheese for fresh cheese sliced at the Cheese Shop at Wegmans. Although packaged foods are often the cheapest option, Americans are becoming obsessed with foods labeled as organic, free-trade, locally-sourced and/or healthy.

Need examples? People are choosing to eat Chobani over Dannon yogurt and Kashi cereal over Frosted Flakes. Whole Foods, a company that prides itself for its organic food selection, has steady increased in share price over the last five years. Chipotle, which readily advertises its locally sourced ingredients, is sitting a stock price six times as large as it was five years ago.

This makes sense when considering the link between consumer tastes and the state of the economy. The pressure of the 2008 recession forced consumers to think budget for all their food purchases, increasing sales of canned foods. Of the 500 companies listed in Standard & Poor’s 500 Index, 499 fell when Wall Street suffered the worst points fall in its history on September 29, 2008. Only one company saw gains that day: Campbell Soup Company.

More than six years later, the recession has passed and consumers are feeling better about spending their money on more expensive foods. The University of Michigan conducts a monthly consumer confidence survey, and consumers are more optimistic about the economy than they’ve ever been since the recession in 2008. Thus, companies whose core businesses are cheap, packaged food options are feeling the pain.

According to The Economist, Kraft generates 98.5 percent of its sales in America and Canada, which is exactly where these trends are catching steam. The result has been Kraft’s poor performance in the last year. This then allowed Warren Buffett and 3G Capital to scoop up the company while its stock price was low.

The decision to merge Heinz and Kraft is actually a great business move. By combining two companies with complimenting brands, there will be a larger company with more resources to weather the new consumer trends.

So if you’d like to invest in the new Heinz-Kraft, go ahead and mix your mac and cheese with your ketchup. Just remember that there are healthier options out there.

Brian Cheung is a senior broadcast and digital journalism and finance dual major. His column appears weekly. He can be reached at bkcheung@syr.edu and followed on Twitter @bcheungz.





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