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By: Hope Lee

The forthcoming merger between Kraft Foods Group Inc and Heinz Co HJ has naturally generated widespread interest as well as discussions as to the huge impact the new entity, Kraft-Heinz, might possibly have on the overall packaged food and beverage market. How the new company can move Kraft’s flagging foods businesses forward is being discussed intently, for example. In the press release, the aim of the merger is said to look for, “Significant synergy opportunities with [a] strong platform for organic growth in North America, as well as global expansion, by combining Kraft’s brands with Heinz’s international platform.” This article takes a quick look at Kraft-Heinz’s potential impact on the health and wellness (HW) market, with a focus on what Heinz can perhaps offer to the new entity in Australia, India and Italy, as examples.

Major HW Market Sales, US$ mn RSP, 2014, Heinz vs Kraft

HeinzUS$ mnKraftUS$ mn
Australia251USA3,200
India191Canada465
Italy145Saudi Arabia131
Venezuela121Venezuela98
United Kingdom70Philippines52
Netherlands63Indonesia49
Canada21Australia26
New Zealand20Hong Kong, China15
Indonesia16Malaysia14
United Arab Emirates5Singapore10

Source: Euromonitor International

HW market overview

The global HW market is highly complex and fragmented, with the top 10 companies controlling some 26% of total retail value sales. Euromonitor International’s HW database shows that both Kraft and Heinz are second-to-third-tier players in the global market, trailing far behind first-tier players such as The Coca-Cola Company (TCCC), Nestlé, PepsiCo and Danone. While TCCC has a sharp focus on HW soft drinks, especially low-calorie carbonates and juices, Nestlé, PepsiCo and Danone have a much wider HW platform, with both HW beverages (hot drinks and soft drinks) and HW packaged foods. The top four companies have a very good geographical spread, which secures their global status.

Turning the clock back a few years, it is noted that the split between Mondelez and Kraft in 2012 largely weakened both companies’ standing in the global HW market, as the post-split businesses had different areas of focus; subsequently, they both “consciously lost” some markets and categories in which they used to operate. The two separate companies were meant to be more flexible and agile in responding to market demands than the previous single Kraft Foods Inc incarnation. With the separate Kraft Foods Group Inc meant to focus on North America and Mondelez meant to handle the global snacks and beverages operations, it is therefore of no surprise that some analysts are sceptical about the current merger plan. Nevertheless, some analysts are cautiously optimistic about the possibility of leveraging Heinz’s international platform for the future entity.

Looking at HW, the combined Kraft-Heinz HW sales were around US$5.4 billion in 2014, with the joint force lifting the new entity’s rank to 16th. Prior to the merger, Kraft ranks 20th and Heinz 65th. Kraft-Heinz would compete at a similar level to Abbot Laboratories Inc, Grupo Bimbo SAB de CV, Ito En Ltd and Monster Beverage Corp. That said, the merger may create a powerhouse (first-tier) in the overall food and beverage market in the US, or even globally; however, from the HW perspective, Heinz’s HW contribution to the new entity is significant, but Kraft-Heinz would still remain a secondary HW player. In summary, the top four companies’ HW positions are unlikely to be impacted by Kraft-Heinz.

Highlights of Heinz’s HW performance in some markets

In the global HW market, Kraft registered shares in about 14 markets, compared to Heinz’s 11, according to Euromonitor International’s HW database. Australia is Heinz’s most important HW market, with total sales amounting to US$250 million (mainly from juice brand Golden Circle); in comparison, Kraft’s HW sales in Australia were only US$26 million in 2014. Kraft could tentatively leverage Heinz’s relatively stronger position in Australia to expand. However, it should be noted that Heinz does not have a good presence in HW food in Australia; so, the room for potential leveraging in this area may be limited. Mondelez ranks number one in HW cheese in Australia with a 17% share, with private label products and local players also holding strong positions. It would therefore be a difficult proposition for Kraft-Heinz if it wanted to introduce its own HW cheese to this major dairy consumption and producing country.

India can perhaps offer a promising HW market for Kraft-Heinz to explore in light of the large population and improving living standards overall. Multinationals’ presence is still limited in Indian HW food, with Cargill Inc holding a share of around 5%, Nestlé on 3% and Heinz 2%. In recent years, Heinz achieved good growth, underpinned by its brand Complan. HW cheese is dominated by Britannia Industries Ltd, indicating plenty of growth room for one of Kraft’s HW cheese brands to explore. However, consumers’ tastes and palates tend to be very specific. HW powder concentrates in India is predicted to see a net increase of US$10 million in 2014-2019, offering some business opportunities for Kraft’s Kool-Aid. Currently, Pioma Industries Ltd dominates this category, while Mondelez ranks second. In view of the highly consolidated market and reasonably good growth potential, it would not be impossible for Kraft-Heinz to break through.

Italy is Heinz’s largest HW market in Europe. Heinz’s organic dairy brand Fattoria Scaldasole managed to increase sales and market share, while Kraft has no visible market share. Italy is still experiencing financial problems and consumer confidence remains weak. As in every other Western European country, dairy is a mature market in Italy.

Overall, it is plausible for Kraft and Heinz to work together and grow globally. However, the selection of product categories and targeted geographies has to be well researched before embarking on any large-scale involvement. From a management point of view, Kraft employees, suppliers and various collaborations may experience short-term disruption and confusion as they might have just settled down again after the aftershock of the Mondelez episode. On a side note, some investors’ hot pursuit of a PepsiCo snacks and beverage split continues. And while Kraft-Heinz may not have an earthquake-style impact on the world’s HW market, the PepsiCo one, if it were to happen, would.

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