The Kraft -Heinz merger bodes ill for everyone — except for lawyers, bankers and stockholders. They’ll be getting fatter than ever (and not just from eating the stuff the new company makes).
The recently announced proposal to merge Kraft Foods Group and the H.J. Heinz Co. is troubling, and if approved — and there’s no reason to think it won’t be — will create a ripple effect that’s almost entirely negative.
Unless you happen to be one of the phalanx of attorneys and financiers involved in structuring the deal, that is; they’ll make multi-millions for shuffling a mountain of paper and several hard drives’ worth of e-files between the principals and the regulators. Or if you happen to own stock in any of the companies involved; Wall Street loves the “rationalization” and cost-cutting (read, “layoffs by the thousands”) that follow any mega-merger as surely as mud follows rain.
This deal involves 3G Capital, a Brazilian investment group that already owns Heinz, a fact most people would be surprised to learn. Along with Warren Buffett’s Berkshire Hathaway company, 3G would take control of Kraft Foods and its portfolio of food and consumer brands.
Combined, a Kraft Heinz Company would be one of the largest food and beverage corporations in the world, with about $28 billion in annual revenues and a market capitalization of more than $80 billion.
And that’s bad.
The goal of all these mega-mergers is pretty apparent after decades of such activity: Take ownership of a stable of iconic brands, weed out the weaker ones via profitable spin-offs, then aggressively cut costs, consolidate operations, shut down plants and use the resulting marketing muscle to drive competing brands off the shelves and out of the case, both here and abroad.
From the strict standpoint of how the business community can create maximum economic value, this kind of acquisition makes all the sense in the world. But for anyone who’s not directly profiting from the deal, it’s nothing but bad news.
How so? Let me count the ways.
A multitude of problems
First of all, mega-mergers make it much harder for smaller businesses to thrive. Oh, maybe not the occasional entrepreneur with a bright idea or a new product concept so compelling the big boys are salivating as they make plans to buy them out. But when a limited number of companies dominate a market sector, you can kiss most of their former competitors goodbye. Just look at meat and poultry processing. When I started covering that industry back when Morning in American was dawning, there were (literally) thousands of small and mid-sized companies that competed regionally or even locally.
Now, not so much.
Second, these big mergers always result in less consumer choice. In retailing, there’s a euphemism called “category management,” and executives of supermarket chains and big-box superstores love to position the process as good for their customers’ wallets. But the net result is that most categories end up with but two choices: A premium brand and a (slightly) lower cost alternative.
That’s it. If they happen to be brands you know and trust, great. If not, tough.
And what’s even more sinister is that many of the behemoths buy up competitors’ brands and then maintain the illusion that they’re still competing. You see two different choices for sale, and you think, I’m going to support that other guy. Only, that “other guy” is actually owned by the leading brand!
Pick A or B isn’t what consumer choice is supposed to be all about. We, as shoppers and purchasers, are supposed to decide the winners and losers in the marketplace, not the financial industry that can leverage deals to consolidate production and distribution until there’s no real choice left.
Finally, this proposed deal in flat-out un-American. I know that’s a controversial charge to make, especially in this era of free enterprise über alles, the world is flat, the marketplace is global, etc., etc.
But truth is, when foreign owners buy up American enterprises, even if the jobs stay put (and they often don’t), the profits get repatriated to the home country. As The New York Times phrased it in discussing the Kraft-Heinz deal, “First it was Budweiser beer. Then came Burger King Whoppers. Next up was Heinz ketchup.”
And now, it will be Kraft cheese, Oscar Mayer, Planter’s, Capri Sun, Maxwell House, Kool-Aid, Jell-O and Velveeta.
Are you kidding me? Kool-Aid, Jell-O and Velveeta? They’re more American than motherhood, apple pie and Chevrolet.
Only now they’ll belong to the boys from Brazil.
Dan Murphy is a food-industry journalist and commentator.