Kraft and Heinz Marriage: A Profitable Union for Fast Meal Products?

(3BL Media/Justmeans) - Kraft Food Group's (KRFT) stocks continue to show improvement   after its announcement that it has accepted a merger with H.J. Heinz Co. The buyout by Brazilian corporation 3G Capital Partners sets the groundwork for the world's third-largest food company, Kraft Heinz Co. The $35 billion is expected to have annual revenue of more than $28 billion.

Kraft is best known for its buffet of instant-style macaroni, nuts and cheese products. Many of those products have continued to show strong sales despite the increased success of organic and "healthier" products from niche producers.

It's also weathered some recalls and one investigation by the Commodity Futures Commission concerning wheat futures trading while the company was still part of Mondelez International Inc.  Still, analysts say, it is Kraft's "disciplined approach" that has given it steady footing at a time when food companies have been challenged by changing consumer interests.

Heinz is privately traded, so speculation about the impact has been a bit more circumspect by analysts. Still, the details of the deal, which was engineered through Warren Buffet's Berkshire Hathaway Inc., were fairly quickly accepted by the boards of both companies. Kraft investors will receive stock and a dividend of $10 billion ($16.50 per share). Kraft investors will own a total of 49 percent of the new company, while Heinz investors will retain 51 percent.

The struggles experienced by other fast-meal product companies leave room for speculation about whether a merger that largely trades on fast-meal and packaged food products will do well. Simply put, will the Kraft Heinz Co. be able to weather shifting consumer interest to organic and less-mainstream products?

Kellogg's CEO has admitted to analysts that "the consumer in the U.S. is changing the perception of food," a trend that suggests ominous results for companies attempting to sustain the attention of consumers who, as Devon Leonard of Bloomberg Business Week put it, no longer want "breakfast out of the box with a character on it."

But is that the model that Kraft and Heinz have promoted? While some analysts suggest that consumers' changing tastes may be bad news for America's fast-meal product producers, Kraft and Heinz have both distinguished most of their product lines from the likes of one-stop breakfast cereals that some nutritionists have complained about. The everyday staples of Kraft's broad product selection and Heinz's quintessential brand of ketchups, Lea & Perrins and Classico pasta sauces  fit a niche that is still part of the meal preparation of many American homes.

In short, while many of Kraft and Heinz products may suffer from the same nutritional complexities that nutritionists squirm about when it comes to breakfast cereals (namely, high sugar, high salt and/or a dearth of fiber), they aren't the end-all product that consumers use to replace a balanced meal; they are part of the quotient that makes up the meal.

But that's not to say that Kraft and Heinz don't face challenges when it comes to consumer perceptions. Rising voices like Food Babe, a former managerial consultant with a bent to reform the way iconic American foods are processed, may have a broader impact on the future success of mergers like Kraft and Heinz.

And the recent backing of a study on genetically modified organisms by the World Health Organization may give healthy eating advocates more fuel as well. Kraft has acknowledged that GMO foods are a staple at the Northfield IL company. The ongoing debate about the safety of foods with GMO strains may have some additional impact on fast-meal product sales—and the success of healthy-eating advocates like Food Babe.

Still, where Heinz excels as a corporate model is in its management process, and its ability to weather the increasing costs of supply chain infrastructure. Cuts to Kraft's overhead are expected to be around $15 billion, and it won't all come from staff reductions. 3G is known for its ability to operate its businesses "on a very lean basis [that maximizes] margins and cash flow," says Kevin Dreyer, a portfolio manager at Gabelli Funds. "It is certainly a good thing for shareholders."

Whether it is or not will likely be determined by how consumers perceive the merger and how it stands up to the pushback against fast-meal technology and GMO foods. It will be interesting to see whether this new meld of iconic American favorites can remake itself to show consumers that America's tried-and-true fast meal products aren't just reliable, but are just what healthy eating advocates would recommend. With each year's bounty of more and more research suggesting lower fat, lower salt and lower sugar options that don't rely on fast alternatives are better for health, that will certainly be will be a tall order.

Image: Mike Mozart