Five Things You Should Know About Heinz-Kraft Merger

Ad Spending Will Come Under Microscope, Global Outlay Will Expand

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The Kraft-Heinz merger announced Wednesday might be the strongest signal yet of the new world order shaping the packaged food industry. It begins with cost-cutting and ends with a strategy of only spending on marketing that is proven to work.

By joining forces, Kraft and Heinz executives expect to squeeze out $1.5 billion in annual cost savings by the end of 2017. The merger, orchestrated by 3G Capital and Berkshire Hathaway, comes as consumers increasingly shun big brands sold at the center-of-store in favor of fresh foods.

That shift has forced CPG stalwarts to evolve rapidly by streamlining operations to increase profits. Marketing spending that has long been on autopilot is getting more scrutiny as more companies adopt the so-called zero-based budgeting approach embraced by 3G in which every dollar spent must be justified.

Gary Stibel, CEO of the New England Consulting Group, summarized 3G's marketing approach this way: "In God we trust, but after that, they want to see the results. They don't want to rely on any superficial evidence. They want facts."

Here is a closer look at what the deal could mean for marketing spending and ad agencies:

There Will Be a Vigilant Approach to Advertising
While 3G has a reputation for streamlining operations and cutting headcount, executives have proven they will spend money on marketing, if they have faith it will work. For instance, months after 3G acquired Heinz in 2013, the ketchup king paid for a 2014 Super Bowl spot. Bernardo Hees, the Heinz CEO who will take over as CEO for Kraft-Heinz, told reporters Wednesday that "we actually expect to grow over time our total expenditures in working dollars in marketing," adding that "we believe in supporting our brands."

Global Markets Will Become More Important
Still, analysts expect ad spending will be uneven. "What they are going to do is spend less in the U.S. and spend more internationally. Because they are going to try and drive international expansion," said Rick Shea, a former packaged-food marketing executive and president of Shea Marketing.

Agencies Must Prove Their Worth
In the U.S., Heinz uses Cramer-Krasselt on its namesake brand as well as Smart Ones, Classico and Ore-Ida. Kraft recently consolidated its creative roster to include Leo Burnett, McGarryBowen, Taxi and CP&B. For media, Kraft uses Starcom USA. Heinz last year selected Omnicom Media Group to handle its global business and Interpublic's UM for U.S. and Canada.

It's too early to tell if the new company will do any agency consolidating. But one thing seems certain: Agencies should be prepared to back their ideas with ROI analysis: "Any service organization -- whether its an agency, a consulting form or somebody else -- ought to be focused on quantifying their contribution," Mr. Stibel said. "If they can do that, they are golden and they are likely to get the benefit. If they can't, then they are at risk."

Jell-O Could Be a Casualty
For Kraft-Heinz, "a fair amount of brand pruning could be in the cards," Morningstar analyst Erin Lash said in a report. She noted that after 3G bought Heinz, the company shed Shanghai Long Fong Foods in China and the U.S. foodservice dessert business in 2013. The new company might take a close look at Kraft's Jell-O "which continues to falter despite multiple stabs at putting it on more stable ground," she stated. It could be "axed in favor of allocating more capital to faster-growing categories such as organics."

Buffett and 3G Are Teaming Up More
3G and Warren Buffett's Berkshire Hathaway have a burgeoning alliance. The two firms worked together on acquiring Heinz and taking it private in June 2013. They also partnered on a December 2014 merger between 3G Capital-backed Burger King Worldwide and Canadian restaurant chain Tim Horton's, creating Restaurant Brands International.

While 3G has a well-earned reputation as a cost-cutter, Mr. Buffett has proven he will spend big on advertising. Look no further than Berkshire-owned Geico. While 3G has a "Brazilian, operationally focused, hatchet-men background," Berkshire has an "ability to reinvigorate classic American brands," said Hugh Tallents, a partner at management consultancy Cg42. With the two firms working together, "I see a balance, I really do," he said.

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