Backed by Berkshire Hathaway and 3G Capital, the Kraft Heinz Company made an offer to buy European-based Unilever for $143 billion that was quickly rebuffed. The prize was not a specific brand, but a foothold into the emerging markets driving growth for many consumer packaged goods (CPG) companies that Kraft Heinz desperately lacks.
Emerging markets have recently been the source of most sales growth for many CPG companies. Kraft Heinz will not be deterred by this setback as it eyes other companies to gain access to South America, Africa, southeast Asia, and the Middle East. That strategy could include a reunion of sorts between Kraft and Mondelez International, formerly Kraft Foods Inc.
Recent mergers and acquisitions in the food space have mostly centered around bigger companies acquiring smaller, more innovative brands with high growth rates in an effort to better capitalize on consumer trends. This includes the incorporation of more natural ingredients and better sourcing transparency—think Kellogg’s and Kashi, General Mills and Annie’s Organics, or Danone and WhiteWave Foods, best known for its assortment of dairy-free brands.
When it comes to mega-mergers though, motivations are multifaceted. Sometimes they’re driven by prospective cost savings or the potential for expanding market access, while other times it’s a combination of the two. In fact, these were two of the main drivers of Kraft’s merger with Heinz in 2015.
This latest merger attempt by Kraft Heinz featured a little bit of everything. Kraft Heinz was rumored to expand its international impact, which was supported by reports of funds being raised by 3G in January. The news of the merger spread Feb. 17 along with Unilever’s rejection of the proposal due to what it deemed an undervaluation from Kraft Heinz. Unilever has attempted to establish itself as an ethical company, even as it faces challenges regarding its use of palm oil, while simultaneously expanding its brand portfolio to include clean living brands like Seventh Generation. Even though only about half of Unilever’s sales come from food products, the two companies would have many synergistic brands.
A merger between the two behemoths would also offer strategic benefits for improved commodity sourcing. For example, dairy—which is heavily used by both Kraft Heinz and Unilever in everything from Unilever’s Ben & Jerry’s ice cream to Philadelphia cream cheese from Kraft Heinz—may be able to be sourced even more efficiently by a combined entity. Back in 2007, average milk prices soared to the highest on record at that time, and Kraft had to raise prices 5 to 12 percent. Since then, milk prices have become even more volatile. Having even more leverage on the dairy market could help both companies better weather market fluctuations.
Emerging markets are increasingly becoming attractive drivers of growth, especially as the business climate for major CPG companies in more developed markets become tougher to weather. Denise Morrison, CEO of Campbell’s Soup, expects emerging markets to deliver 70 percent of the food industry’s growth over the next decade. It’s a projection that doesn’t seem so far fetched when one considers Latin America, southeast Asia, Africa, and the Middle East with their rising populations and wealth are growing markets with increasing demand for processed products.
Over the last 15 years, all four markets have at least tripled their imports of processed products. It’s an increase that was accompanied by a correspondingly steep rise in GDP.
Some CPG conglomerates have done a better job than others at capitalizing on this trend. Nestlé drove double digit sales growth in emerging markets for years, and last year more than 40 percent of their revenues were derived from emerging markets. Unilever does more than half of its business, 58 percent, in emerging markets. Conversely, just 10 percent of Kraft Heinz revenues can be attributed to emerging makerts. Although emerging markets' sales growth for Unilever and Nestlé has been slowing, rates in these markets were more than quintuple and triple, respectively, that of their developed market sales growth in 2016.
Major international CPG companies like Procter & Gamble, Nestlé, and Unilever have succeeded in emerging markets by employing a myriad of unique strategies. For starters, they choose their entry markets carefully, in many cases targeting major cities across these regions instead of whole countries. When they do attempt to penetrate more rural regions, these companies adjust their product offerings to be at an accessible price point, often selling products in single-servings, be it food or laundry detergent.
To really dominate in emerging markets, even as a new entrant, CPG firms will conduct intensive market research and adapt their products’ formulations to better suit distinct markets. Lastly, to drive profitability in emerging markets, conglomerates will invest in local production and sourcing where it is feasible.
Kraft has built an impressive reputation and brand loyalty—North American household penetration is at 98 percent. but its popularity is centralized. Whether it’s Oscar Mayer, Kraft Singles, Jell-o, or Heinz Ketchup, the company’s offerings have become staples in the vast majority of homes. After Mondelez International was spun off from Kraft Food Group, with the former retaining Ritz, Oreo, Nabisco, and Cadbury, the latter’s international presence is weak.
Prior to its merger with Heinz in 2014, Kraft derived just 2 percent of its sales revenue from outside of North America. This was one of the more attractive points of Kraft’s merger with Heinz, with the latter’s stronger global brand recognition. Nearly two-thirds, 61 percent, of Heinz’s sales revenue comes from outside of North America and between 2005 and 2014, Heinz was able to grow revenue from emerging markets from 9 percent to 25 percent of total sales.
Despite many of the United State’s CPG conglomerates focusing on the domestic market, the United States has actually already established a strong foothold within the export market of prepared food products. The category is one of the country’s top five exports by value.
Processed and prepared food, as a category, has been growing rapidly, with the value of US exports more than tripling between 2000 and 2016. The last four years have seen a leveling off of sorts, with growth down to less than 10 percent. Solid growth to be sure, but nothing like what was experienced just a few years earlier.
On the other hand, Europe, with historically better access to emerging markets, has seen even steeper growth with exports of prepared foods quadrupling over the same sixteen-year period. In contrast to the US, their export growth doesn’t appear to be leveling off. Unilever, with its main operations situated in Europe has been able to capitalize on this growth, in 2016 their turnover in emerging markets was up, while sales in developed markets were down. Conversely, Kraft-Heinz sales growth has been much flatter and even declined, but their profits continue to rise due in significant part to strict budget management under 3G.
As of 2014, global retail sales of packaged foods was estimated at $2.4 trillion. That figure is expected to rise to over $3 trillion by 2020 with emerging markets being the primary driver. In many of these countries, a declining food deficit has been accompanied by a steep increase in imports of processed products, particularly prepared foods. For instance, throughout many countries in southeast Asia, food deficits have been shrinking steadily over the past 25 years, which has been accompanied by rapid growth in imports of prepared foods. This is a trend that Unilever has been capitalizing on with annual sales growth of over 10 percent between 2009 and 2014—a figure more than double that of the company’s average annual sales growth. Currently, southeast Asia alone makes up more than 10 percent of Unilever’s revenues. This success has likely been observed by Kraft Heinz, which comparably, derives less than 10 percent of its total sales revenue from all of Asia and the Pacific (including major markets, such as China and Australia). It’s not surprising that they would target companies that have already done much of the leg work to enter these emerging markets.
While emerging markets are expanding, more traditional developed markets are contracting. Worldwide, consumers are passing on traditional processed foods and are doing so more rapidly in places like the US, Canada, and Europe. It’s not that processed foods are being shunned completely, but, globally, markets are demanding more wholesome and nutritious products. A whopping 77 percent of global respondents in a Nielsen survey said that all natural ingredients were a very or moderately important factor in their snacking choices. While Kraft Heinz has been adapting—late in 2015, Kraft covertly reformulated their famous mac & cheese to exclude all preservatives, artificial flavors, and synthetic dyes—they’re still losing market share to competitors that have crafted more authenticity in the burgeoning natural food space.
The slowing revenue growth in these developed markets, is a big reason why emerging markets have become so attractive. In 2014, Nielsen estimated that nearly $375 billion was spent on snack foods globally each year. Even though Europe and North America made up more than three quarters of that figure, Latin America and Middle East/Africa were the fastest growing markets, with sales up 9 and 5 percent respectively.
Unilever, with its sights set on making emerging markets 75 percent of its revenue stream by 2020, has also buoyed its sales in developed markets by better embracing new consumer preferences, even ones that transcend food. While corporate CSR has become increasingly trendy, Unilever has gone above and beyond to increase the integrity of their agricultural supply chains. They released their first human rights report in 2015 and have pledged to halve their environmental footprint by 2020. This is not to say these efforts were completely altruistic, they’re strategically used as a marketing tactic.
Some of the buzz behind the attempted Unilever - Kraft Heinz partnership was that the hypothetical conglomerate would outsize even Nestlé as the world’s largest food company. About 40 percent of Nestle’s sales come from emerging markets with a target to hit 45 percent of sales from these regions by 2020. A hypothetical Unilever - Kraft Heinz would almost hit that benchmark.
While Kraft Heinz may have backed away from an acquisition for now, it’s likely they’ll soon be after another CPG acquisition. Mondelez International has been discussed as a potential target along with Kellogg and General Mills. We’re willing to bet it’ll be one that is already deriving a substantial part of its revenues from the lucrative emerging markets.
Receive our research in your inbox
Thank you for subscribing to our newsletter!
What Information Do We Collect?
The information we gather enables us to personalize, improve and continue to operate the Services. We collect the following types of information from our users.
IP Address Information and Other Information Collected Automatically:
· We automatically receive and record information from your web browser when you interact with the Services, including your IP address and cookie information. This information is used for fighting spam/malware and also to facilitate collection of data concerning your interaction with the Services (e.g., what links you have clicked on).
· Generally, the Services automatically collect usage information, such as the number and frequency of visitors to the Site. We may use this data in aggregate form, that is, as a statistical measure, but not in a manner that would identify you personally. This type of aggregate data enables us and third parties authorized by us to figure out how often individuals use parts of the Services so that we can analyze and improve them.
Information Collected Using Cookies:
· Most browsers have an option for turning off the cookie feature, which will prevent your browser from accepting new cookies, as well as (depending on the sophistication of your browser software) allowing you to decide on acceptance of each new cookie in a variety of ways.
We collect statistical information about how users collectively use the Services (“Aggregate Information”). Some of this information may be derived from Personal Information. This statistical information is not Personal Information and cannot be tied back to you or your web browser.
How, and With Whom, Is My Information Shared?
IP Address Information:
Information You Elect to Share:
We share Aggregate Information with our partners, service providers and other persons with whom we conduct business. We share this type of statistical data so that our partners can understand how and how often people use our Services and their services or websites, which facilitates improving both their services and how our Services interface with them. In addition, these third parties may share with us non-private, aggregated or otherwise non Personal Information about you that they have independently developed or acquired.
Information Shared with Our Agents:
We employ and contract with people and other entities that perform certain tasks on our behalf and who are under our control (our “Agents”). We may need to share Personal Information with our Agents in order to provide products or services to you. Unless we tell you differently, our Agents do not have any right to use Personal Information or other information we share with them beyond what is necessary to assist us. You hereby consent to our sharing of Personal Information with our Agents.
Information Disclosed Pursuant to Business Transfers:
In some cases, we may choose to buy or sell assets. In these types of transactions, user information is typically one of the transferred business assets. Moreover, if we, or substantially all of our assets, were acquired, or if we go out of business or enter bankruptcy, user information would be one of the assets that is transferred or acquired by a third party. You acknowledge that such transfers may occur, and that any acquirer of us or our assets may continue to use your Personal Information as set forth in this policy.
Information Disclosed for Our Protection and the Protection of Others:
Information We Share With Your Consent:
Except as set forth above, you will be notified when your Personal Information may be shared with third parties, and will be able to prevent the sharing of this information.
Is Information About Me Secure?
We store all of our information, including your IP address information, using industry-standard techniques. We do not guarantee or warrant that such techniques will prevent unauthorized access to information about you that we store, Personal Information or otherwise.
What Information of Mine Can I Access?
You can access and delete cookies through your web browser settings.
California Privacy Rights: Under California Civil Code sections 1798.83-1798.84, California residents are entitled to ask us for a notice identifying the categories of personal customer information which we share with our affiliates and/or third parties for marketing purposes, and providing contact information for such affiliates and/or third parties. If you are a California resident and would like a copy of this notice, please submit a written request to the following address: 12 E 49th Street, 11th Floor, New York, NY 10017
What If I Have Questions or Concerns?
If you have any questions or concerns regarding privacy using the Services, please send us a detailed message to firstname.lastname@example.org. We will make every effort to resolve your concerns.
Effective Date: March 11, 2014
b. You shall not (directly or indirectly):i. take any action that imposes or may impose (as determined by us in our sole discretion) an unreasonable or disproportionately large load on our (or our third party providers’) infrastructure;ii. interfere or attempt to interfere with the proper working of the Services or any activities conducted on the Services;iii. bypass, circumvent or attempt to bypass or circumvent any measures we may use to prevent or restrict access to the Services (or other accounts, computer systems or networks connected to the Services);iv. use manual or automated software, devices, or other processes to “crawl” or “spider” any page of the Site;
v. harvest or scrape any Content from the Services;
vi. otherwise take any action in violation of our guidelines and policies;vii. decipher, decompile, disassemble, reverse engineer or otherwise attempt to derive any source code or underlying ideas or algorithms of any part of the Services (including without limitation any application), except to the limited extent applicable laws specifically prohibit such restriction;viii. modify, translate, or otherwise create derivative works of any part of the Services; orix. copy, rent, lease, distribute, or otherwise transfer any of the rights that you receive hereunder.c. We also reserve the right to access, read, preserve, and disclose any information as we reasonably believe is necessary to:i. satisfy any applicable law, regulation, legal process or governmental request;ii. enforce these Terms of Service, including investigation of potential violations hereof;
iii. detect, prevent, or otherwise address fraud, security or technical issues;
iv. respond to user support requests; or
v. protect the rights, property or safety of us, our users and the public.4. Third Party Services. The Services may permit you to link to other websites, services or resources on the Internet, and other websites, services or resources may contain links to the Services. When you access third party resources on the Internet, you do so at your own risk. These other resources are not under our control, and you acknowledge that we are not responsible or liable for the content, functions, accuracy, legality, appropriateness or any other aspect of such websites or resources. The inclusion of any such link does not imply our endorsement or any association between us and their operators. You further acknowledge and agree that we shall not be responsible or liable, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any such content, goods or services available on or through any such website or resource.5. Termination. We may terminate your access to all or any part of the Services at any time, with or without cause, with or without notice, effective immediately. All provisions of these Terms of Service which by their nature should survive termination shall survive termination, including, without limitation, ownership provisions, warranty disclaimers, indemnity and limitations of liability.6. Warranty Disclaimer.a. You release us from all liability for you having acquired or not acquired Content through the Services. We make no representations concerning any Content contained in or accessed through the Services, and we will not be responsible or liable for the accuracy, copyright compliance, or legality of material or Content contained in or accessed through the Services.b. THE SERVICES AND CONTENT ARE PROVIDED “AS IS”, “AS AVAILABLE” AND WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND ANY WARRANTIES IMPLIED BY ANY COURSE OF PERFORMANCE OR USAGE OF TRADE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED. WE, AND OUR DIRECTORS, EMPLOYEES, AGENTS, SUPPLIERS, PARTNERS AND CONTENT PROVIDERS DO NOT WARRANT THAT: (I) THE SERVICES WILL BE SECURE OR AVAILABLE AT ANY PARTICULAR TIME OR LOCATION; (II) ANY DEFECTS OR ERRORS WILL BE CORRECTED; (III) ANY CONTENT AVAILABLE AT OR THROUGH THE SERVICES IS FREE OF VIRUSES OR OTHER HARMFUL COMPONENTS; OR (IV) THE RESULTS OF USING THE SERVICES WILL MEET YOUR REQUIREMENTS.7. Limitation of Liability. IN NO EVENT SHALL WE, NOR OUR DIRECTORS, EMPLOYEES, AGENTS, PARTNERS, SUPPLIERS OR CONTENT PROVIDERS, BE LIABLE UNDER CONTRACT, TORT, STRICT LIABILITY, NEGLIGENCE OR ANY OTHER LEGAL OR EQUITABLE THEORY WITH RESPECT TO THE SERVICES FOR ANY (I) LOST PROFITS, DATA LOSS, COST OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, COMPENSATORY OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER, SUBSTITUTE GOODS OR SERVICES (HOWEVER ARISING), (II) BUGS, VIRUSES, TROJAN HORSES, OR THE LIKE (REGARDLESS OF THE SOURCE OF ORIGINATION), OR (III) DIRECT DAMAGES IN EXCESS OF $50.00.8. Governing Law and Jurisdiction. These Terms of Service shall be governed by and construed in accordance with the laws of the State of New York, including its conflicts of law rules, and the United States of America. You agree that any dispute arising from or relating to the subject matter of these Terms of Service shall be governed by the exclusive jurisdiction and venue of the state and Federal courts of New York County, New York.9. Miscellaneous.a. Modification. We reserve the right, in our sole discretion, to modify or replace any of these Terms of Service, or change, suspend, or discontinue the Services at any time. Your continued use of the Services following notification of any changes to these Terms of Service constitutes acceptance of those changes.b. Entire Agreement and Severability. These Terms of Service are the entire agreement between you and us with respect to the Services, including use of the Site, and supersede all prior or contemporaneous communications and proposals (whether oral, written or electronic) between you and us with respect to the Services. If any provision of these Terms of Service is found to be unenforceable or invalid, that provision will be limited or eliminated to the minimum extent necessary so that these Terms of Service will otherwise remain in full force and effect and enforceable. The failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any further rights hereunderc. Force Majeure. We shall not be liable for any failure to perform our obligations hereunder where such failure results from any cause beyond our reasonable control, including, without limitation, mechanical, electronic or communications failure or degradation.d. Assignment. These Terms of Service are personal to you, and are not assignable, transferable or sublicensable by you except with our prior written consent. We may assign, transfer or delegate any of our rights and obligations hereunder without consent.e. Agency. No agency, partnership, joint venture, or employment relationship is created as a result of these Terms of Service and neither party has any authority of any kind to bind the other in any respect.f. Notices. Unless otherwise specified in these Term of Service, all notices under these Terms of Service will be in writing and will be deemed to have been duly given when received, if personally delivered or sent by certified or registered mail, return receipt requested; when receipt is electronically confirmed, if transmitted by facsimile or e-mail; or the day after it is sent, if sent for next day delivery by recognized overnight delivery service. Electronic notices should be sent to email@example.com. No Waiver. Our failure to enforce any part of these Terms of Service shall not constitute a waiver of our right to later enforce that or any other part of these Terms of Service. Waiver of compliance in any particular instance does not mean that we will waive compliance in the future. In order for any waiver of compliance with these Terms of Service to be binding, we must provide you with written notice of such waiver through one of our authorized representatives.h. Headings. The section and paragraph headings in these Terms of Service are for convenience only and shall not affect their interpretation.Contact. You may contact us at the following address: 12 E 49th Street, 11th Floor, New York, NY 10017.